Alarm.com Holdings, Inc. (ALRM) Earnings Call Transcript & Summary

Thanks, everyone, for joining us. My name is Sterling Auty, software analyst here at JPMorgan. Very happy to have with us for our next session at the 48th Annual TMC Conference here at JPMorgan Mr. Steve Valenzuela who is CFO of Alarm.com. Steve, thanks for joining us, we appreciate it.

Feeling great to be here. Thanks for hosting. It's always a great conference.

I really appreciate that. So maybe let start out at a high level, just can you talk to us about how has the pandemic impacted your business, both for the positive and the negative?

Sure, absolutely. So [ once again ] let me just -- investors know and viewers know that we do have a complete presentation on our website under Investors -- Investors section of our website. There is also a safe harbor, which I need to say that this presentation and the [ meeting today ] are all subject to our safe harbor. So with that out of the way, I'm glad to give you some background and some overview. Before I go through kind of the impact of pandemic, I just wanted to give investors and those listening in a little bit overview of the company. [indiscernible] we've really been a pioneer in the interactive smart property market. And we've really been a leader in that market. We have 7.6 million subscribers. We go-to-market through over 10,000, what we call, service provider partners. They're independent businesses, independent [indiscernible], but we call them service provider partners because we really do see it as a partnership. It's a great relationship where Alarm.com is really focused on the technology. We really think we have the best operating system for smart property for both residential and commercial end subscribers. And so the service providers can use -- they use our technology not only to enable the end subscribers to be able to have all the smart home features and security and cameras and video and video analytics, but also for the service providers themselves to operate the back-end of their businesses. So it's a great solution. It's a great arrangement. We're going to be focused on the technology. We have almost 1,600 employees and more than half of those are engineers. And most of those are really software engineers, and a lot of those are [indiscernible] and video analytics as well. And the service providers focus on the customer acquisition, they focus on the marketing, the installation, the -- when an alarm goes off, that could be either [indiscernible]. They have their control center, contact center, where they're the ones that are really contacting the end subscriber to find out what's happening, and that's a lot of our technologies enabling that. So I just want to give a little background there. But what's been interesting, if I go back to March of 2000, which seems like 10 years ago, right, with the pandemic, it's been I would say dog years or something because it's been such a crazy time. But March of [indiscernible] we did see a slowdown in terms of new activations. And in fact, we indicated in our first quarter results that in March we had about -- an activation rate of about 70% of pre-COVID for new subscribers. And we had more than [indiscernible] international because international was shut down more. And of course, more of an impact with commercial, but overall, it was about 70% -- 70% of pre-COVID levels of new subscriber adds. Now because of our high revenue, it really didn't affect us that much. And in fact, when we started [indiscernible] about May was we started to see a large jump in activations. And I think part of that was our service provider partners really figured out how to deal with residential customers safely by using safety devices, obviously, mask and being able to go into them. And then we saw that big spike in demand, especially in North America, starting about May of last year, where people have started to move out of cities like Boston, New York, San Francisco, where we don't have a lot of customers. [indiscernible] and that really drove a big increase of subscriber base increases. New activations from [indiscernible] especially in the U.S. and Canada, and to the point where we actually surpassed pre-COVID levels about the third quarter of last year for residential. And we had a very good performance last year with SaaS revenue growth of about 17%. We started the year with guidance thinking we would do 13% pre-COVID and ended up growing our SaaS business 17%. But that's still under the same situation where the international markets were still impacted. It continues to still be impacted because you've got Europe and Asia. South America, I should say, still shut down, although that's starting to improve now. But those are still on pre-COVID levels. And commercial also has been, as you can imagine, with commercial businesses, restaurants and even schools, who we do some business with, impacted by COVID, that held back their business [indiscernible] see an improvement in the fourth quarter of last year in our commercial business, that continued in Q1. So we're very encouraged with the progress we're seeing in the commercial. And then even with international, Q1 represented about 4% of our total revenue, which is small, but a year ago, it was 2% of our revenue. So both international and commercial have been growing, and they've actually been growing at a faster rate than North America, but not at the same level of growth rate as pre-COVID. So we're really hopeful and we're -- we think we see indications that international and commercial will ramp up as COVID starts to subside both for [indiscernible] they start to reopen up and then also internationally has these [indiscernible] especially in Europe open up more of their -- more of the economies open up in geographies.

Given that the service provider is so important in terms of your route to market, how did the pandemic impact them specifically, both in the U.S. and internationally?

Yes. So for the U.S., especially, [indiscernible] we kind of say international is everything inside North America. So U.S. and Canada, the service providers initially were certainly impacted in their business. And certainly, commercial, a number of our service providers actually also service commercial businesses. So that continued to be [indiscernible]. What they were able to do, and you have to give them credit, these are a lot of times, small businesses, and they were very inventive, and they really figured out how to provide assurances to the end subscribers that they could operate in a home, making sure there's proper precautions. And then they also were able [indiscernible] the small business, were able to get PPP funds and they were considered essential services, which makes sense given they've protected homes from both fire, carbon oxide. And so most of the service providers were able to operate just at the same level as prior to COVID given that they were considered an essential service and given that they really were smart. And actually, some of them really [indiscernible] being able to get PPP loans. So net-net, they've performed really well. Now internationally, we have a number of new service providers. Some of these are large companies that are replacing their legacy interactive system. And you think about [indiscernible] the legacy system. Some people may still have these, where you cover when you punch in the keypad, and that's the way -- only way you operate with your alarm system. Of course, Alarm.com, use your smartphone, use your iPad, you can use your computer up inside of the home. And you're in your app and that's why we call it an Indian Interactive System. And you could just add [indiscernible], you can set your alarm [indiscernible]. And so a lot of these new service providers internationally are replacing their legacy systems with Alarm.com, but of course, that's been slowed down because of the COVID situation, especially in Europe. But we're very encouraged by their continued perseverance. They believe strongly in the opportunity. And you might ask, why are they going to spend the time and money to do that? And part of it is that with a system like ours, the retention rates are very high because not only do you have an alarm system, but you -- you interact now on a daily basis. We have people who use their cameras and their smartphone to see analysis, to see who's in their driveway to let the housekeeper change the locks. And so it's almost a necessity for the service providers nowadays upgrade to a system like Alarm.com because the retention rates are so much better with a system like this and the value-add and [indiscernible] get and all the third parties we interact with and integrate with make it so compelling that it's really -- once you have a system like this, you don't want to go without it.

Yes, makes sense. Let's shift to the strength that you saw in the March quarter, especially here in the U.S.. First on the residential side, what were the primary drivers that really led to the growth that you saw here in March?

Yes. So there's a number of factors. One certainly is the continued growth of new subscriber adds. That's certainly the majority of the drive in terms of our overall performance in Q3, almost 17% year-over-year SaaS growth. But also we introduced video analytics about 2 years ago in video. And now we're to the point where the attachment rate for video, whereas a year ago, it was around 30%, now it's over 40%. So that means for new subscribers, they're adding video and about 70% of them are adding video analytics. And what that does to our economics is from the point of view of both for us and our service providers, we're able to charge more. So if I look at a traditional interactive system, let's say, without video analytics, we might charge the service provider, let's say, $5 to $5.50 per month per subscriber. They would charge the end subscriber [indiscernible] customer perhaps $35 to $40 a month with another $0.50 or so, and then they're able to charge $5 more or so. With video analytics, we charge another $1 to $2. And so our ARPU, average revenue per user, actually goes up the more video and video analytics attachment we get from new subscribers. And we have a large installed base, 7.6 million subscribers. A number of those are upgrading every quarter, about 20% to 25% of cameras every quarter, existing subscribers who are increasing their attachment rate, and we have less than 30% of our total subscribers that have video. So there's still a lot of opportunity both for new subscribers coming in as well as existing subscribers to upgrade, which is increasing our ARPU.

So actually, on that point, so less than 30% of that 7.6 million actually have video at this point. What is the catalyst? Is it just at the time of renewal? Is it when people move? What's the catalyst that drives that?

Yes. Definitely. Well, we have a number of -- so we have an app that we provide, and we actually have an in-app capability where providers are able to offer -- give offers to their existing subscribers. And we encourage our service providers to do best -- to follow best practices to actually give promotions, 2 for 1 on cameras, because you need a certain type of camera with a certain chip been released in the couple of years to work with video analytics because there's a lot of processing power that occurs with that camera. So there's promotions we do, both with the service provider as well as we continue to drive down the hardware cost as much as possible to drive down the cost of the cameras and because the hardwares really just didn't enable [indiscernible] but what's really compelling is certainly, when people move, that is a great opportunity. It's also a challenge for us. One of the main reasons for people and they may move to another city or they may move to -- they may not move. And so that's one of the main reasons for churn, but it is a great opportunity when we make the connections between dealers, service providers to add that new subscriber -- renew that new subscriber in a different city. A lot of it is word of mouth. It's -- what's really driving this is the applications just like the iPhone did better than the BlackBerry. It wasn't necessarily that the iPhone was a better phone. I actually like the BlackBerry, but it's all the applications at the app store. And so we got that and Alarm.com got that. Many years ago, we first, I think, apps on the app store. It's really the applications, the end subscriber usage of the features. And so for example, with video analytics, the video analytics system will tell you if you have an animal in your yard, if you have a car in your neighborhood -- driving by in your driveway or if there's a person at your door. So it's a very powerful system. It reduces the number of false alerts you get. And we're continuing to develop that system to be able to tell you, there's a car you drive and it happens to be a car it recognizers or it doesn't recognize the car. And there's a lot of features for commercial that we have developed for video analytics. And let's think about commercial [indiscernible] for commercial customers [indiscernible] whereas residential is in the $5.50 range, commercial is in $10 to $10-plus range. And then we have the capability of having access control, which adds another $3 to $4. So the commercial business can provide access to their place through the keys using your phone, your iPhone to provide electronic key to unlock doors. So there's a lot of capabilities that we've developed and integrated with so many different third parties with LiftMaster garage door, where you can use your phone to open and close your garage door if you left. I used to do this, by the way. When I lived in Palo Alto, I would leave the house and, I think, oh, my god, I left the garage door open. Now, I just look at my app, and I say, "Oh, as a matter of fact, I said it's my garage door left open, which is awesome. And now we've got the Smart Water Valve+Meter, which is a great feature where it will tell you how much water per day, and importantly, is like we are, right, where you have all these basements. It will act -- you can actually set it up to shut off your water main if there's a break in your water. It will detect a large flow of water, and you could have it -- you obviously, self-select this to shut off your water main to protect your house. So there's -- we continue to add more and more features to the capability of the system. We came out with Flex IO recently, which is a -- it's a wireless cellular-based system, battery operated. You could put that on your gate if you don't have that power there, you don't have Wi-Fi, and it's a sensor that [indiscernible] open or not. We have people put it on their lawn mowers to make sure nobody is moving their lawn mowers. So there's the continued capabilities we're coming out with. So really, at the end of the day, [indiscernible] many features as we can for the service provider to provide the end subscriber, both the commercial business as well as the residential customer to continue to both retain their system, but also to add more features which allows us to try more. For example, Flex IO, we charged couple of dollars per month per Flex IO device to the service provider. They're able to charge more to the end subscriber. And it's just continual value add to the end subscriber.

I think when are you going to change the name of the company from Alarm.com to IoT.com? Because really, you continue to expand well beyond just the idea of alarm.

It's actually a good point. I guess, Google did that right, they changed the name. And it is actually an interesting point. It's just that the legacy of Alarm.com, we actually got that URL many, many years ago, and there's quite a history there. It is actually an interesting point because you think Alarm.com really is a -- if you think it's certainly part of our business, but I like the IoT.com. I like that. I'll talk to Steve Trundle about that. Because if you think about what we have, it's not just and it's also energy hub, right? It's -- our other segment is [indiscernible] SaaS revenue, but it's growing at 35% to 45% per year. EnergyHub [indiscernible] for residential utilities. And so they're able to provide the system that utilities can then meter, if you will, the demand from energy companies. And now with the electrical vehicle growth, they're seeing a lot of increase in demand because if somebody brings [indiscernible], they charge it up. It takes about -- it puts about a blocks worth of energy usage on the grid. And so with demand response, the electric utility can offload and not have to go into the open market and buy energy, it takes them a lot of money. So they now have, I think, over 50 utilities that are under EnergyHub. So there's 5 bit of features we have, you're absolutely right. It's a broad offering. It's not just alarm. And that's really -- but I have to say, every day we waking up, we operate on our own NOC, network operation center. Every day we wake up and make sure that we are protecting people's [indiscernible] at that point. Even though we have all these smart features, we're always making sure that the system has to operate 24/7 and so we've had the capability of having like upgrades, hot upgrades, I guess, they call it, where we never take the system down. Obviously, there's periods where we might have to take the system down. But for the most part, we don't have to take the system down. We have multiple NOCs, and we're obviously making sure that the homes are protected. We're making sure that the end subscribers and commercial businesses are covered. But you're right, I mean all these different features we've added, we've the Smart Water Valve, the Flex IO, commercial, now we have Shooter Detection Systems. I could see Alarm.com being a division in IoT.com, I like that.

So a couple of questions in from investors. The first one, can you just kind of walk through your competitive landscape differentiation. So how your platform would compete versus some of the DIY, the Rings, the [ Mess ], et cetera, that are starting to pop up?

Yes. No, I would say that certainly, if you look at kind of the -- look at the residential market, there's about 140 million homes in North America, about 24 million homes have professionally monitored security. And of those 24 million homes, I think last I saw, it was about 10 million or 11 million had interactive security. Alarm.com has 7.6 million subscribers. So we certainly are the leader. The competitive landscape, I would say, next would be Resideo, who was spun out of Honeywell. And then there's Comcast, who is an MSO that actually has -- I think both Resideo and Comcast have, last I heard, around 1 million or so subscribers. But the DIY really has been overblown in terms of a competitive threat. DIY's purpose in terms of point solutions, even with Ring and Amazon. Simply say, most of those take a different market. The analogy I give, if you want to buy a car, you buy a car. If you want to buy a motorcycle, you buy a motorcycle. You can imagine, which one is the motorcycle. It's not Alarm.com, it's the DIY system right. The one that be protected. And so the question that our subscribers really look at this as -- and for commercial, obviously, there's no DIY. Our subscribers really look [indiscernible], I want to be protected. I'm not going to spend my weekend hooking up things and making sure -- hoping they work when the onetime I need it, right, in an emergency. People look at this, certainly, price is a factor, but it's not the number one. Number one factor really is quality and [indiscernible] going to work? And we've developed a reputation with our customers, the service providers who provide great support. We have a great support center in Minneapolis, where we answer the phone very quickly [indiscernible] service providers, [indiscernible] the technicians are in their homes. We've also added a lot of features for our service provider. This is -- a lot of investors don't know this. There's a lot of capability we provide to service provider to be able to do remote diagnostics, to be able to do troubleshooting, to be able to [indiscernible] the commercial business very quickly and validate that everything is working. So these are features that are kind of operating in the background that the [indiscernible] that really makes the system differentiated. But the reputation in the industry of one is really of the end subscribers providing great quality. And the company has always had a focus on quality first. And we're not trying to necessarily optimize every single dollar. We try to really optimize our quality relationship with our service providers, making sure that they're protected. We do a lot of training for them. We spend quite a bit of money on training for the service providers. We have a number of trade shows. And we have a conference where we go through a number of training programs. We talk about our road map. So I think the reputation in the industry really is that Alarm.com, if you're looking at a smart home system and you want it to work well, you really should go with Alarm.com.

Absolutely. So another question that came in is, in the past, you've discussed the data monetization opportunity. Can you update us on that? And if there is meaningful revenue there, what's the breakdown between that and the rest of the core business?

So we are very protective of our data. We actually don't mine the data [indiscernible] best practice at aggregating data to tell our service providers, if you do these best practices, you have a higher rate. You can imagine, having been in the business now, gosh, 21 years almost and having all the data we have, we're very protective of the data. Even I can't see who the subscribers are. There are very few people in the company. We operate our own NOC. We're not in Amazon AWS. We actually operate our own NOC. We have our own people monitoring the data center. So we actually don't have a plan to optimize and monetize the data. What we do is not directly, but indirectly by providing the best practices to our service providers because we've seen it they do, for example, these 6 practices and they enforce those or they reinforce those, if they will, with their end subscribers, they're going to have a higher renewal rate.

Got it. That makes sense. And there's a question about kind of the channel itself. And I think maybe there's a little confusion. Can the channel partner work on Alarm.com and another platform at the same time? Or are they solely exclusive to Alarm.com?

No, that's a good point. They're not exclusive to Alarm.com, except ADT, we have a relationship where there is some exclusive provisions in there. But they're not exclusive to Alarm.com. Alarm.com is not exclusive to them. We might have in a city 500 service providers competing for the -- and they're all Alarm.com service providers. Now the history here is that some of the service providers started out supporting Honeywell many, many years ago, maybe their [indiscernible] businesses, by the way, some of them started 20, 30, 40 years ago, and they had the legacy systems. And what's happened is they converted to Alarm.com over the years based upon the IoT system we have, which is known for having the best IoT system and then also our support. And some of them still support legacy systems. They still support some of our competitors. And so they're not obligated to be exclusive to Alarm.com, and we're not obligated to be exclusive to them.

So how do you motivate?

Generally they do standardize because there is a high switching cost here because you can imagine, a lot of the technology is proprietary and there's a lot of training involved. We spend a lot of [indiscernible] on service providers, even existing ones and new technology, new service providers. And so they do tend to standardize, they may [indiscernible] support existing systems from like a Honeywell. For example, a service provider that I talked recently in Salt Lake City still has like 25 Honeywell accounts, but -- and I asked them, why did you move to Alarm.com, obviously, that was a big investment? He said, look, I was losing to your other dealers in the neighborhood. And so I was tired of losing and what he's planning to do over time is converting those end subscribers to Alarm.com as their agreements come up because the system that Alarm.com has is much more capable, has much more features than other systems out there, including Resideo.

Talking about video, you recently announced video doorbells. How big of an opportunity does that represent?

Yes. So we came out with a touchless Video Doorbell. We've actually been offering video doorbells for many, many, many years, actually been a good driver of growth in terms of the -- certainly, hardware revenue, but also it's a great enabler for the SaaS revenue, but we introduced it as part of the -- during COVID, we introduced 2 quarters ago, the touchless doorbell, which we're getting pretty good traction on where somebody comes to your door, they don't need to even touch the door or as a matter of fact, there is not even a ringer there. They step up on a map and it's senses that somebody is at the front door and then actually automatically rings the doorbell. So that's a new feature, but we've had Video Doorbell for, I think, gosh, 4 or 5 years now. But it's been doing very well. So that along with cameras have done really well. So we've continued to make advancements on 4K, 1080p, better resolution, better capabilities, more of a vertical. So you have not all -- the vision field now covers more and the viewing field is better. So those enhancements continue to drive the adoption of the video in general and video doorbells as well.

I think last quarter, you said 1,200 service providers actually installed the solution. Is that correct?

Yes, that's the touchless doorbell, the new one. But I would say that all of our 10,000 providers over time have installed video doorbells because it's such a -- it is a large category for us.

Does touchless give add-on economics versus a traditional video doorbell? Or is it just the same, just there's the differentiation?

It's a little bit more. We charge a little bit more for that, not much. I would say, a little bit more of charge, yes.

Let's switch over to commercial for a bit and just talk about commercial. Just remind us how much is commercial within the mix of the business? And what's the driving force there?

Sure. Commercial is about 8.5% of our SaaS revenue. And commercial includes the Alarm.com for Business we introduced about 2.5 years ago, which is directed really towards small [indiscernible] restaurant chains, some neighborhood chains, coffee shop. And then we OpenEye about 1.5 years ago, which has got us into the enterprise. They were a leader. They're a leader in the enterprise market. Think about a large, like restaurant chains like Olive Garden, Gonzaga University. And so they have the capability of having hundreds and some -- in 1 case, thousands of cameras all connected to a central monitoring station, where the operator and the service -- the customer can monitor all of these different cameras. Now they tend to have more hardware at the current point. Last year, they contributed about $1 million worth of our SaaS revenue. Since we did the acquisition, they've actually come out with more of a SaaS offering because as a private company, they were driving more recurring -- they were driving more cash upfront. And so we, over time, we'll see more SaaS revenue from OpenEye. Right now, it's -- this year, it might be about $2 million of SaaS. So it's pretty small, but over time [indiscernible] contributing quite a bit, and they're actually seeing a good pickup in their business. It's still less than pre-COVID levels, but they've seen a good recovery in Q4 and Q1.

Excellent. And how many -- when you think about the service provider market that goes into commercial, is that the same? Is it different? And how do you expand that?

Yes. That's a very good point. I would say about 10,000 service providers. I don't have exact number, but I would think between 50% and 70% of those are actually also providing commercial solutions to commercial customers. And in some cases might just be -- insurance agency in neighborhood. And in fact, the way we started Alarm.com for Business our [ clients ] actually told us that they were using the residential for commercial customers and encourage us to come [indiscernible] Alarm.com for Business because [indiscernible] some of the different features. And then when you think about OpenEye, one of the attractions of OpenEye when required them, they have about 450 service providers. There's only about a 15% overlap. And so as a result of acquiring OpenEye, we actually got an additional, let's say, 400 new service providers. So these tend to be large integrators that have worked with national accounts, large franchisors or companies like that.

Makes sense. And you talked a little bit about some of the advanced features, I think, heating, cooling, controls, et cetera. What does that do to the economics within a commercial account?

So within a commercial account, it definitely increases, same like for residential. If there's -- think about it like a cellphone plan, where you have a base plan and then you have a medium plan and then you have an advanced plan and a premium plan and a platinum plan. So it's the same kind of idea. As the feature set gets more capabilities, we're able to charge the service provider for commercial more. For example, Access Control is a solution we came out with where the service provider can provide a small business, the Access Control feature. We charge a service provider $3 to $4 per month per door. And then they're able to charge the end commercial business. And that could be on the refrigeration system. It could be on the front door or the back door. Now Access Control is fairly small, although we've seen that growth occur over the last year start to pick up as well. So we think that there's a lot of opportunity for commercial. We're really excited about commercial.

So putting this all together in the context of your guidance, you kind of talked about U.S. fading in terms of growth through the year. International is starting to pick up. I think people understand international will pick up as the economy opens up. But why would the U.S. fade in terms of its growth?

Yes. That's not the case. I mean we provide conservative guidance. And when we provide guidance, we don't factor in upside, like assuming that things are going to improve. We kind of factor in status quo. And so we don't see the U.S. fading at all. If anything, we see it continue to perform very well. It's just that we've been focused now on 5.5 years, I'd say, actually 6 years almost. And we've never missed guidance. And so we do provide conservative guidance. But when we provide guidance, again, we're not assuming that things will improve in commercial and in Europe, even though -- in international, even though that's occurring. And so we don't -- we're not seeing the North American [indiscernible] phase at all. It's just that we're providing conservative guidance. Just like at the beginning of 2020, we provided guidance for SaaS growth of 13% pre-COVID, we actually came in close to 17% with COVID. So I say that will repeat this year, and I don't want people to take up their numbers, but we want to make sure that we never know what can happen. The good thing about our business is highly recurring. So there's not a lot that can really disrupt the SaaS, and there's certainly upside there. But we have to be conservative. We don't want to misguide.

All right. Excellent. Steve, I think with that, we're just about out of time. I just want to take the opportunity to say thank you so much for joining us. We really appreciate it. Stay safe and stay healthy. Thanks again.

Thank you very much and looking forward to doing this in person hopefully next year.

Exactly. I'm with you. Have a good one. Thanks, Steve.

Thank you very much. Thank you. Bye-bye.