Alarm.com Holdings, Inc. ($ALRM)

Good day, and thank you for standing by. Welcome to the Alarm.com First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Matthew Zartman. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to Alarm.com's First Quarter 2026 Earnings Conference Call. Please note that this call is being recorded. Joining us today are Steve Trundle, our CEO; and Kevin Bradley, our CFO. During today's call, we will be making forward-looking statements, which are predictions, projections, estimates and other statements about future events. These statements are based on current expectations and assumptions that are subject to and uncertainties that may cause actual results to differ materially from our current expectations. We refer you to the risk factors discussed in our Form 8-K and the associated press release, which were filed with the SEC earlier today. The call is subject to these risk factors, and we encourage you to review them. Alarm.com assumes no obligation to update forward-looking statements or other information that speak as of their respective dates. In addition, several non-GAAP financial measures will be discussed on the call. A reconciliation of GAAP to non-GAAP measures can be found in today's press release on our Investor Relations website. I'll turn the call over to Steve Trundle. Steve?

Thank you, Matt. Good afternoon, and welcome to everyone. We're pleased to report first quarter results that exceeded our expectations. Our SaaS and license revenue in the first quarter was $181.5 million, up 10.8% year-over-year. Our adjusted EBITDA in the quarter was $49.6 million. Our results continue to reflect contributions from across our businesses with nearly every area running at or slightly above the plan we set out for the year. We had a bit of revenue in the EnergyHub business move forward from the third quarter. But aside from this modest anomaly, the results are broad-based reflection of how our various business units performed. While our results are more than solid, there were a few bumps along the way in the quarter. First, in January and February, we saw new homebuilding and other business activity impacted by the long spell of snow and ice due to the extreme cold weather that impacted much of the U.S. Installation activity was greatly reduced for about 3 weeks and then bounced back strong and accelerated through March, reflecting the durability of demand. Toward the end of the first quarter, we also began to deal with supply chain volatility related to standard memory availability as manufacturers shifted more production to sell into the HBM category for AI data centers. This has led to the widely reported substantial cost increases for the memory we use in cameras and other products. We're actively working to manage both supply chain availability of memory and the cost expansion caused by this market dynamic and expect these challenges to continue until the memory market corrects. As a reminder to investors, the portfolio of businesses that we consolidate into our quarterly results spans multiple markets at different stages of development. Our commercial business includes Alarm.com for Business, OpenEye, CHeKT and Shooter Detection Systems. These commercial businesses are all growing as the security and access control markets evolve towards integrated cloud-based AI-driven solutions. Our energy business, EnergyHub, continues to be a meaningful growth contributor and represents a growing share of our overall revenue mix. The EnergyHub platform provides mission-critical distributed IoT management solutions that help utilities address long-term structural pressures on grid reliability and infrastructure. Our core residential business provides a large durable foundation with a large TAM and a highly productive service provider channel. Structurally high revenue retention is due to the wide range of physically installed devices that subscribers interact with through our application every day. In each business, we deliver software that orchestrates connected devices at scale. This enables us to leverage AI to improve ease of use, unlock new use cases and make our solutions increasingly essential to both security and operational workflows. In our commercial offerings, where an enterprise may have dozens or even hundreds of video cameras installed, AI-driven use cases are particularly valuable. OpenEye, our enterprise commercial video business, released several capabilities during the quarter that fit this profile. One is a powerful new capability called AI Visual Check. AI visual check can detect and issue real-time notifications when a fire exit is blocked, a shelf needs restocking or a security post is unattended. Customers managing large properties or multisite environments can use AI visual check to reduce reliance on manual safety protocol oversight, enabling faster responses to operational issues and improving security compliance across geographically disparate locations. OpenEye also introduced AI visual search. This allows security personnel to describe what they're looking for using natural language and retrieve relevant forensic results. They can quickly locate specific moments, objects or activities across their broad video environment. Both capabilities are included in OpenEye's premium video subscription service and end customer adoption of that service is rapidly growing. Before I hand things over to Kevin, I want to discuss our share repurchase program. During the last two quarters, we purchased over 800,000 shares of our common stock, including over 400,000 shares during the first quarter. Last week, our Board authorized the purchase of up to an aggregate of $150 million of our outstanding common stock over the next 2 years. As I expressed on last quarter's call, we believe that AI is primarily an opportunity for Alarm.com, and we will, therefore, seek to take advantage of any SaaS universe dislocations in the market while still maintaining balance sheet capacity to also pursue acquisitions opportunistically as we have done over the last several years. In summary, I'm pleased with our first quarter results. We remain focused on creating long-term value for our service providers and their customers across residential, commercial and energy markets and in the process, creating value for our long-term shareholders. I want to thank our service provider partners and our team for their hard work and our investors for their continued trust in our business. With that, I'll turn things over to Kevin Bradley to review our detailed financials for the quarter and our updated guidance. Kevin?

Thanks, Steve. I'll begin by reviewing highlights from our first quarter financial results and then close with our updated guidance for the second quarter and full year 2026, including several moving parts in our hardware outlook. A few months into the year, I'm pleased to report results that continue to demonstrate the durability and resilience of our target markets and business model. We're fortunate to have partnerships with thousands of talented operators who time and again prove their ability to navigate complex and dynamic market environments while delivering mission-critical IoT-based services across the globe. SaaS and license revenue grew 10.8% year-over-year to $181.5 million during the quarter, exceeding the midpoint of our guide by $5.6 million. A driving factor here is our revenue retention rate of over 95% for the quarter, one of the highest readings on this metric in the past 10 years. Another factor contributing to the SaaS beat is the continued outperformance at EnergyHub. As a reminder, EnergyHub revenue recurs on an annual basis and seasonality can vary based on utility program activity and other factors. Hardware and other revenue totaled $83.7 million, up 11.5% year-over-year, and total revenue grew 11% year-over-year to $265.2 million. As you'll recall, on January 1, we began passing through the higher tariff rates that had been implemented under the International Emergency Economic Powers Act. Approximately $5 million of our Q1 hardware revenue is from those pass-throughs. We continue to charge those fees today, consistent with the rates we pay to U.S. Customs and Border Protection upon import for the inventory we're currently selling. I'll address the expected impact of the February Supreme Court ruling on hardware revenue when I provide our updated guidance for full year 2026. Hardware gross margin came in the upside at 25.2%, which can be attributed to the mix of products sold skewing towards commercial products generally and in particular, in the commercial video business. Total operating expenses, excluding depreciation and amortization as well as stock-based compensation and other items we adjust from G&A for non-GAAP purposes were $125.1 million, a 9.3% increase year-over-year. Note that sales and marketing expense in the quarter includes our presence at ISC West, our largest trade show presence of the year. The event moved from the second quarter last year into the first quarter this year. R&D expense in the quarter, inclusive of stock-based compensation, was $72.1 million, a 5.4% increase year-over-year. The total number of employees we have in R&D functions at the end of Q1 2026 was 1,140, up 1% year-over-year. Non-GAAP adjusted EBITDA was $49.6 million, slightly higher than we anticipated due to the revenue outperformance we saw during the quarter. GAAP net income was $23.6 million in the first quarter, down from $28 million in the prior year. The primary driver here is lower interest income because we're holding less excess cash after retiring $500 million of convertible notes in January 2026. Non-GAAP adjusted net income was $34.7 million in the quarter, an increase from $32.2 million in the year ago quarter. We produced $0.65 of earnings per diluted share, which is up 14% year-over-year. We ended the quarter with $497.4 million of cash on the balance sheet and produced $49.7 million of free cash flow. We repurchased 428,000 shares of stock during the quarter for $20 million, bringing our total share repurchases since the beginning of 2025 to 1.2 million shares. As Steve mentioned, our Board recently authorized $150 million of repurchases over the next 2 years. Before turning to our financial outlook, I wanted to comment on an improvement that we've made to the definition of our non-GAAP profitability metrics. Several times in the past year, you've heard us refer to results being impacted by mark-to-market gains or losses on equity positions included in our treasury portfolio. Because we're not in the business of active investing, we've determined that the fluctuations in market value of these securities do not relate to the operating performance of the business from period to period. As such, we'll be excluding these fluctuations from our non-GAAP profitability metrics prospectively, including any reference to comparable periods in the past. Under this new definition, for example, our non-GAAP adjusted EBITDA during fiscal year 2025 would have been $201.3 million rather than $206 million. Our non-GAAP adjusted net income would have been $142 million versus $145.7 million, and our non-GAAP earnings per diluted share would have been $2.55 versus $2.62. I will reiterate that we clearly articulated this $4.7 million non-GAAP adjusted EBITDA tailwind for 2025 on our last earnings call and have been disclosing it in our quarterly filings as well, and we currently plan to continue providing similar disclosures in our filings. I'll turn now to our financial outlook. For the second quarter of 2026, we expect SaaS and license revenue of between $185.5 million and $185.7 million. For the full year of 2026, we are raising our SaaS and license revenue outlook to between $749.5 million and $750.5 million. This is an increase from prior guidance of $6 million at the midpoint. We're raising our total revenue outlook for 2026 to be between $1.0595 billion and $1.0705 billion, which includes hardware and other revenue of between $310 million and $320 million. The modest reduction at the midpoint on the hardware line since our February update reflects a couple of exogenous dynamics. The primary factor in our updated hardware outlook follows the Supreme Court ruling in late February 2026 that tariffs implemented using the International Emergency Economic Powers Act were unauthorized. While it doesn't change the fact that we paid those tariffs on products imported through that date, it does mean that once we've sold that product subjected to those tariffs, we'll be lowering our tariff pass-through fees to reflect the new lower tariffs that the administration put into place immediately following that ruling. As a general rule of thumb, those new tariffs are about half of what the old ones were as of right now. We anticipate that change occurring towards the end of Q2. So if we were running at $5 million of tariff pass-through fees per quarter in Q1, then this represents approximately $5 million less in tariff pass-through fees during the second half of the year relative to our prior outlook. The second factor is something that Steve just mentioned, and that is that we are monitoring the turbulence in the memory market and evaluating the impact to our hardware business. The cost impacts that we are seeing there will require that we increase prices for our products that use memory, and we do not yet know if or how these price increases will affect demand. As such, our outlook on the hardware revenue line is cautious at this point in the year despite the outperformance in Q1. We are raising our non-GAAP adjusted EBITDA outlook for 2026 to between $215 million and $216 million, a $1.5 million increase at the midpoint. The 20.2% adjusted EBITDA margin implied by the midpoint is consistent with our prior guide and represents 30 basis points of margin expansion year-over-year. Non-GAAP adjusted net income for 2026 is projected to be between $151.5 million and $152 million or $2.81 to $2.82 per diluted share, a 10% year-over-year increase. EPS is based on approximately 56.9 million weighted average diluted shares outstanding for the year. We currently project our non-GAAP tax rate for 2026 to remain at 21% under current tax rules. We expect full year 2026 stock-based compensation expense of between $35 million and $37 million. In closing, I'm pleased with the broad-based momentum in the business that we've seen so far this year. We delivered a solid quarter against our plan, and we believe we are well positioned to deliver continued revenue growth and profitability while investing to expand our long-term growth opportunities. With that, operator, please open the call for Q&A.

[Operator Instructions] Our first question comes from Adam Hotchkiss with Goldman Sachs.

I guess, Steve, with the widest beat, I think, at least that I can remember on the SaaS and license line in at least a number of years. What would you say drove that? It's particularly interesting to see that line reaccelerate. When I know historically, we had been talking about ADT being a couple of hundred basis point headwind. It doesn't really seem like that's showing up in your numbers. So maybe just walk us through the moving pieces and what's driving the maintenance of that 10%-ish growth rate here?

Sure, Adam. I'll start, and then I'll probably hand it to Kevin to fill in the blanks a little bit. But at a high level, everything was slightly above plan. So we had a little bit of a tailwind against the plan. We -- but the big drivers really were the revenue retention rate and then -- which is sort of unusually high versus our traditional range. I believe we're at like 95.4% on the rev retention line. And then we had a little bit -- I think I mentioned that we had a little bit of revenue move from the third quarter on the EnergyHub side into the first quarter as we had sort of one meaningful agreement adjusted in the way it's structured. But those are the off the top of my head, I think those are the primary drivers. Kevin, anything that I missed there?

Yes. I think those are the two primary drivers. If I add some numbers behind that, the difference between running at 95.4% revenue retention and sort of 94% at the high end of our historical range is $2 million to $2.5 million per quarter. So that's by far the biggest chunk. The EnergyHub component of that beat was another couple of million dollars. And as Steve said, about half of that pulled forward from Q3. I think in retrospect, we probably had a slightly too conservative posture on the modeling around our rev retention going into the year. We were anticipating 94%, but we've accounted for that in our guide somewhat.

Okay. Great. Both of those are really helpful. And then how should we think about the competitive environment for the OpenEye business in the commercial space? I'm just trying to understand a little bit how fast the broader market is moving on software and hardware with AI use cases versus what OpenEye is doing? And then when you're talking to customers, what does the demand look like from them around AI capabilities? Are they generally pretty patient and willing to wait for advancements in technology? Or are they generally going to go with the first mover? Just any details around that would be helpful.

No, it's a good question, Adam, because the purchasing behavior has changed a bit where on the OpenEye side now, the -- first, the pipeline looks solid to us, very, very good. So actually, if anything, we're seeing a broader awareness of what a commercial customer can do with AI to enhance not only their security, but really their -- the operations of their business, where they can get sort of business value in addition to security value when we're able to take rich video content and from that glean insights. So demand looks solid. The customer is definitely looking at products through an AI lens, which product is going to solve a problem best with AI. We had an example of a large specialty retailer, grocery store actually in the quarter where traditionally, we would have sold them a security solution. But in their case, they wanted to know their highest margin item is actually -- of all things is actually sushi. And you have to have fresh prepared sushi and the refrigerator between 4:00 p.m. and 7:00 p.m. every day if you want to sell that product. Well, Visual Check is being used now anytime there's -- and you want to constantly refreshing that cabinet. So -- in that case, they're using a security camera that also has a picture of what's going on in the sushi fridge to monitor stockouts of that product during those three hours every day. And it's just an example of how customers are thinking now more and more about the device and what type of business insight they can glean from it. I think we're pretty solidly positioned vis-a-vis any competitor in terms of our capabilities with AI in that domain.

Our next question comes from Stephen Sheldon with William Blair.

Kevin, you have Matt Filek on for Stephen Sheldon. Can you talk a little bit about the gross margin profiles across your growth segments and how those compare to consolidated gross margins? Just trying to get a sense of what continued growth that EnergyHub and the others could mean for consolidated gross margins over the mid- to long term as the revenue mix continues to shift toward those faster-growing parts of the business.

Yes, sure. Matt, it's Kevin. I think if you look at where we disclosed the two segments, our two public reporting segments, you'll see at least in Q1, at the SaaS gross margins in the Alarm.com segment are about 88%, 87%, 88%. And the other segment, which is where EnergyHub currently sits, they're closer to 60% for Q1 --that's probably a little bit on the low side, meaning the EnergyHub gross margins were temporarily depressed related to the RGS acquisition. I think you're more likely to see gross margins sort of in the other segment closer to 65% to 70% long term and that you'll see gross margins in the Alarm.com segment sort of stay in the 87% to 88% range. So as you model sort of those two primary components of the business going forward, it's probably how I'd think about the gross margin profiles for those two.

That's very helpful color, Kevin. And then for R&D, do you still expect it to remain roughly flat as a percentage of revenue in 2026? And then thinking out over the next couple of years, where do you see the biggest opportunities for operating leverage across the business?

Sure. I guess on the first question, Matt, yes, we see it roughly flat as a percentage of revenue for the remainder of this year, I think, is what we have in the plan. I think everyone right now is sort of attempting to figure out, are we going to do a heck of a lot more with the same people? Or are we going to do the same amount of work with fewer people as the full AI story unfolds. Our view is we want to remain positioned to be very competitive and be able to do as much as possible to continue to take advantage of evolving market opportunities. So we don't, at the moment, we're not betting on a massive R&D leverage driver. I think as these businesses mature, so especially some of our growth initiatives, as they reach a level of maturity and scale, we begin to get some natural operating leverage contribution out of areas that currently in the consolidated picture drag down the operating margin picture. So that's the primary place we're looking for operating margin expansion.

[Operator Instructions] Our next question comes from Jack Vander Aarde with Maxim Group.

Congrats on the solid results, guys and strong retention rate. So Steve, maybe just on the EnergyHub side, that obviously continues to ramp nicely. I think you have over 80 utility partners. First question there is just how do you see the number of utility partners and kind of your wallet share of them growing over the next couple of years? It sounds like you have pretty much a lot of blue sky left there. And then I'll have a follow-up on the PointCentral business. Just looking for any updates on that end as well.

Sure. So on the EnergyHub side, after completing the RGS acquisition and then also a little bit of the way we label utilities, we actually now say we have over 155 utilities in the program, and we define those to be entities with more than 100,000 meters in their territory. So we've made good progress in terms of capturing utilities. I believe we're now working with utilities that service roughly 75 million, 77 million meters, and that's out of about 130 million total meters we'd like to get to. So things generally trending in the right direction there with utility pickups. And we -- the next game is can you drive up enrollment within a given territory? What percentage of the consumers actually have connected thermostats and of those who have connected thermostats or any connected device, whether it be an EV or battery charger or whatever, can we get that device enrolled and move that number up? We feel like we're in a pretty good position in terms of TAM coverage now and in terms of sort of the completeness of the software solution such that we really can focus a bit more on driving up with our utility partners, the attachment rate of a lot of devices that are out there. So that's a meaningful focus now. Does that answer that question? I think it was a two-part question. One was EnergyHub, the other was PointCentral.

Yes. And then yes, PointCentral, just I haven't heard an update there for a little bit. So just wondering if that business is ramping or kind of what you're focused on there?

Yes, it continues to ramp. It's ramping at a level that's sort of, I believe, double digit on the growth side, but not a massive driver of consolidated growth at the moment. It's a nice business that's running with positive contribution to the overall consolidated EBITDA picture as well. And we continue to see nice growth there. I mean it's -- I believe that we're probably #2 at the moment in the multifamily space, and we're well into the 6 digits in terms of number of apartments and/or multifamily housing that we're servicing. So still committed to that, still making progress. I think probably taking a bit of share, but not at sort of -- we're not at sort of a 30% growth rate there.

Got it. Okay. I appreciate the color there. And then maybe just one more question for Kevin. Kevin, I believe a couple of quarters ago, you provided some exit year 2027 targets for hardware margin and EBITDA -- adjusted EBITDA margins. Just wondering if there's any update and thoughts on those. I think we're looking at running the business around 21% adjusted EBITDA margin. Just any changes there would be helpful to note.

Yes, Jack, no changes on that. We're still anticipating and working towards being able to exit 2027 at about 21% adjusted EBITDA margins. Hardware margins are a little bit harder to pin down. I suspect that of those two things, the adjusted EBITDA margin is probably the easier thing to anchor on. Where hardware margins go will be a factor of what happens with tariffs and obviously, what happens with memory prices as well. But we're going to manage through sort of that volatility and still target the 21% adjusted EBITDA margins.

[Operator Instructions] Our next question comes from Ella Smith with JPMorgan.

So first, I was hoping to ask something on EnergyHub. As you think about your internal projections for EnergyHub, what does that growth look like as you think about expanding within existing customers, cross-selling new products and expanding to new logos?

Sure. I think we don't break out EnergyHub specifically with a given growth rate, I don't believe, right? Like -- but you can kind of deduce that it's a strong contributor to what we describe as the growth initiatives in the business where we -- we've commented that we expect growth to be in the 25% to 30% range this year, including any inorganic activity. As far as the -- drilling down a level and looking inside of the EnergyHub business itself and our internal projections, it is a mix as you kind of hit all of the categories. It's a mix of picking up logos. That's still a growth opportunity for us. There's more interest than ever. It's also expanding programs, though, within existing logos. So when we started when that business started, it was very focused on connected thermostats and most of the VPP capability came from our ability to make modest adjustments in residential thermostats. At this point, it's -- the capabilities of the software are much broader. So we're bringing to bear batteries. We're bringing to bear EV chargers, solar inverters. And at the same time, the supply that the utility is having to rely upon is much more variable. So there's more demand at each individual level to see program expansion into these other categories of edge resources, and that's a meaningful driver of the growth, which is you're already working, you establish yourself with the customer and then you continue to grow the program. and then into other categories. And the last is just driving up enrollment of devices. And this is where you have to do the work of getting the end consumer aware of the opportunity. When someone buys a Model Y, if they're -- Tesla Model Y, if they're in a utility service area and they buy the wall charger, do they take the time to enroll in the program and get the benefits of the program. Those are the types of things that sort of also drive growth. The more people that do enroll, the better. So those are the three growth drivers. I don't have a breakdown of which ones the majority, and I'm not sure we go into that, but that gives you a little bit of a picture of what we see.

That's very clear. And for a follow-up, what do you think are the synergies, if any, between EnergyHub and your security business? And to what extent do you think you've tapped into those cross-sell synergies?

Yes, that's a very good question. So two part again. I think -- so we define our core business, not just as security, but especially on the residential side as smart security or smart home, which means quite a few properties are getting today getting connected thermostats through our service provider. And each one of those creates an opportunity for the customer to become an EnergyHub participant. And that drives by itself, a natural synergy. We sort of have a sandbox as well where we can play with different things that may drive increasing levels of engagement or even play with different innovative technology approaches at the thermostat level to create additional downstream value for the utility. So there's a lot of synergy on the R&D side. there's some synergy on the channel side. It helps our service provider, our dealer or partner offset some of the cost of offering all the other services we bring to bear for the consumer. So we really like that. And the second part of that question was...

How far along are we in capturing that?

How far along are we? I'd say we're probably -- if I were to use the baseball analogy, we're probably third inning. There's still more we can do. We're seeing now security itself being defined to include what we call energy security, which is certainty of your energy supply and knowing that if your utility is struggling with variable conditions that your home or your small business is going to continue to have energy. Some of our security partners are beginning to bring to bear. They've always sort of played with generators, but now they're bringing to bear batteries. So I think that we'll see more synergy develop through time.

[Operator Instructions] I'm not showing any further questions at this time. And as such, this does conclude today's presentation. You may now disconnect, and have a wonderful day.

Thank you.