Good day, ladies and gentlemen, and welcome to the Alarm.com Q2 2015 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Jonathan Schaffer with Blueshirt. Sir, please go ahead.

Thank you. Good afternoon, everyone, and welcome to the Alarm.com 2015 Second Quarter Earnings Conference Call. Joining me today are Steve Trundle, President and CEO; and Jennifer Moyer, CFO. During today's call, management may make forward-looking statements which may include projected financial results or operating metrics, business strategies, anticipated future products and services, anticipated investment and expansion, anticipated market demand or opportunities, and other forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward-looking statements, and reported results should not be considered as an indication of future performance. Please note that these forward-looking statements made during this conference call speak only as of today's date, and the company undertakes no obligation to update them to reflect subsequent events or circumstances. Please refer to our SEC filings as well as our financial results press release for a more detailed description of the risk factors that may affect our results. Also, during this call, our commentary will include non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in the tables of our earnings press release, which we have posted to our Investor Relations website at investors.alarm.com. This conference call is being webcast and is also available through the Investor Relations section of our website. So with these formalities out of the way, I'd now like to turn the call over to Steve.

Good afternoon. Thank you, and welcome to Alarm.com's Second Quarter 2015 Financial Results Conference Call. I want to start by thanking our new investors for their confidence in our company. We enjoyed meeting many of you on our IPO roadshow, and it was very exciting for us to see that you've chosen to join us as partners in our business. I also want to thank our more than 5,000 service providers for their support and for their service to our customers, which has enabled us to reach this milestone in the company's development. On today's call, I'd like to discuss background on our business and the market in which we operate, our growth strategy and some of the key initiatives to extend our leadership position. And before turning it over to Jen Moyer, I'd also like to touch upon a few operational highlights. So let's begin. Since most of you are new to the Alarm.com story, let me begin with a brief overview of the company. We have a mission to deploy a cloud-connected sensor or controller in every property in the world. We do this with our partners and our dealers. It's a very big goal. And it's a goal that I established many years ago because it gives our team a long-term perspective on how we want to manage our business, build partnerships and develop our technology. We've been working towards this goal for some time, and in that time, we've been pioneers in the connected home market. Today, we scaled our cloud platform and data analytics engine to actively communicate with 25 million devices that generated 20 billion data points in the last year alone. Our platform provides customers with simple and reliable interactive home security and automation solutions through a dedicated cellular connection. We integrate into…

Thanks, Steve, and thank you to everyone for joining us on our very first earnings call as a public company. Before I walk you through the details of the quarter, I'm going to take a couple minutes to review our business model for those of you who are new to the Alarm.com story. As Steve mentioned, we go to market primarily through our service provider partners. Today, we partner with thousands of security dealers in the U.S., and we refer to them as service providers who sell Alarm.com's products and services to consumers and businesses. We generate 2 primary sources of revenue. The majority of our revenue is SaaS and license revenue, which contributes about 66% of our total revenue today at about an 80% gross margin. The remaining 34% of our revenue is hardware and other revenue, principally comprised of hardware that we very selectively choose to design and produce which enables the Alarm.com services. However, most of the hardware for the average installation is provided by our hardware and device ecosystem partners. Hardware and other revenue generates about a 20% gross margin for us. Over time, as we continue to grow our customer base, we expect SaaS and license revenue to comprise an increasing percentage of total revenue as evidenced by the growth in the quarter to nearly 66% versus 64% last year. And in general, our business goals emphasize maximizing SaaS revenue, and to that extent, we may sacrifice margin on hardware sales with that goal in mind. Both our subscribers as well as our service provider partners tend to be very sticky as represented by our SaaS and license revenue renewal rate, which has consistently been above 90%. Our business model has allowed us to grow our customer base and revenue in a profitable fashion, generating…

[Operator Instructions] And our first question comes from Michael Nemeroff from Crédit Suisse.

Steve, maybe for you first. Since the roadshow was a couple of weeks ago, maybe if you could spend a minute just -- because we got the question a lot, why Alarm.com is not like the traditional security vendors such as ADT or not like the traditional home automation vendors like Control4. And then the follow-up for Jen, if I may, is how should we think about the average revenue per subscriber when we calculate it on a go-forward basis both on a seasonal basis as well as for the year annually?

Sure. Thanks, Michael. Yes, so in terms of how we compare ourself to the traditional security dealer, we really think of the traditional security dealer as a -- oftentimes, they are customers. Sometimes, they're a potential customer. We have sort of a codependency where our service providers are out there every day installing technology that leverages our software. And so we're sort of in different businesses. We're the software provider, the technology provider. We operate the managed network services that provide the connectivity down to the home. And really, our service providers are out there doing a ton of sales and marketing, visiting the customer's home, helping them specify the system, helping get that installed, and then they're handling all of the -- when we detect an emergency on a property, they're handling the actual emergency response and the coordination with the first responders. So that's kind of how we differentiate there. And to us, someone like an ADT is really more of -- I mean, they're already a partner and, potentially, a growing partner. So we think of them as a service provider much like we think of our other service providers. So that's that one. In contrast with kind of a Control4, there are a set of entities that have really focused on high-end home automation really for sort of the top of the market, and we're much more focused on the broad market. We like to think we have a solution for every type of property owner. We're probably also more focused on really technology that improves the security experience the consumer has. So we don't really run into Control4 very often because they're in there selling, if they're there first, I think in terms of actual breadth, they're servicing a smaller market. But occasionally, you'll see a Control4, and they're selling a high-end automation system that typically starts at a much higher price point than where we are. So we want to be really right squarely in the middle of the market, able to service everyone with price points that work for everyone. Jen, you want to take the second one?

On -- yes. Before -- Michael, before I answer your second question, let me clarify one thing. I think when I was talking about the tax rate, I guided to 45% for the full year. I meant to say 40.5%. I missed a decimal point there. So I wanted...

I was going to ask about that.

I blew a gasket when she said that.

Trust me, I -- nobody hates paying taxes more than me. But just to make sure I understand your question, you were asking about average revenue per subscriber and how we see that playing out?

Over time, both on a seasonal basis and annually over time.

Yes. So ARPU is not one of the key metrics that we look at, really. What we're focused on is maximizing the growth of our SaaS revenue over time. Our ARPU has ticked up a little bit over time. I would say, looking forward, that I would not project that our ARPU is going to continue to increase further. We've got new entrants coming into the market. We do, today, command a premium price over many of our competitors in the marketplace. But the way that we think about it is that we want to gain as much market share as possible. We want to grow our subscriber base as quickly as possible. So driving up ARPU is not one of our primary strategic objectives. So I think about it as flat maybe in the short term and even trending down a little bit over time.

And our next question comes from Heather Bellini from Goldman Sachs.

Congrats on your entry into the public market. I just wanted to focus a little bit on the international opportunity, and I know you had a couple comments in your remarks, but can you share with us how you expect progress on this to kind of prevail over the course of the next few years? And can you share with us kind of the opportunity on the dealer side, kind of where you stand in terms of the pipeline of getting some of those large MSOs that kind of dominate the European landscape?

Yes. This is Steve. I'll hit that with a little more color, and thanks, Heather. The -- so we're pretty pleased with how -- where we saw this quarter kind of come in on the international front. I mean, there's a ton of technology. There's a big technology stack to sort of get ready to really make progress in a non-U.S. market. We have to fight through all the certifications, deal with the supply chain issues, make sure we have our partners ready to go to market and localize, of course, on the software side. And so, then, your first installation is one property, and it doesn't generate a lot of real meaningful revenue. But when you get up to sort of a $1,000 per month, that means that a lot of things are starting -- begin to fire, and it gives you some credibility with some of those larger MSOs and service providers that, I think, you're probably referencing. So we're looking at a pipeline now that we're pretty pleased with. Our international team was in a number of mid-stage, I would call them, discussions with either large traditional service providers or MSOs in the markets we're targeting but also in some markets that we think may come on maybe when 1 year out like -- or even little sooner than I suppose, maybe Western Europe in the first half of next year. So I think we're feeling pretty good. I think as a very long-term goal, we would say that we think international is going to become a fairly meaningful contributor, and we would benchmark other companies that are in similar businesses and note that it's not uncommon to see 30% to 50% of their revenues over a long period of time come from rest of world segments.

If I can just add to that briefly. I think an interesting metric, when you compare where Alarm.com was in its early life in terms of the number of subscribers that they've put on, if you look at that same time frame in which we've been attacking the -- or investing in the international market, we actually have more subscribers in the international market right now than we did in the North American market with Alarm.com comparing similar time periods. So just -- again, an early proof point that, that market is one that we think is going to provide growth in the future.

Our next question comes from Nikolay Beliov from Bank of America.

Congrats on being a public company and good result in the quarter. Want to ask you about the commercial opportunity, if you can maybe discuss the market size here, competitive dynamics and there out [ph] to market. And when can we expect commercial to begin to move the needle and impact the numbers?

Sure. So I think this -- that commercial was something we highlighted this quarter, but as of -- a meaningful milestone in delivering support for the Tyco Neo commercial security control panel, which gets us into a hardware configuration that does enable commercial UL certification. So I think we've shored up the product quite a bit with that partnership. We also did the acquisition of Secure-i, which allows us to take a commercial-grade camera set provided by Axis. Axis is a very reputable, high-end commercial video company, and we've now got the video as a service back end assembled around that commercial-grade camera set. So what I would say is, we now have a, what I consider -- I mean, our focus, we've been growing. Our focus has been to focus on residential today. And I think we've made some moves to most of our dealers. What I would say is, most of our dealers don't just sell residentially. They have a commercial arm, and they have a residential arm. So it's pretty natural for us. In fact, they've been asking us to help them get to a common platform for both their commercial and residential users. And I think we're sort of getting there at this moment. So long term in terms of size of market, it's not as big as the residential market. I think you can benchmark the data from several sources, but I could see it over time contributing as much as 20% of our production as we get that segment really firing on all cylinders.

As a follow-up to Jen, maybe. When you look at the additional growth drivers and initiatives you have, international, commercial, retail and some of the other initiatives you have, how should we think about them impacting the numbers over time? If you can still grind [ph] them, I guess.

Yes. So I mean, look, all of those initiatives are in their very, very early stages. And because of that, as you know, we are conservative in our modeling, so we don't include a lot of revenue or much revenue at all from these growth initiatives, although in the guidance that I gave you, we fully loaded the cost investment in those initiatives. So what I would say is, some are going to take longer than others. International, what we're trying to do is take a proven business model that I think we've -- perfected may be too strong of a word, but we found a very efficient business model and channel in the United States domestically, and we're trying to deploy that internationally. So that is something that I would think will materialize faster. And then some of these other areas where we're trying to develop new channels into the home and the commercial space perhaps, et cetera, some of those areas we're trying to kind of develop a whole new business model and they -- that may take longer. So I can't really give you specifics around when we expect to see that revenue materialize. What I will say is that we're very, I think, prudent investors, and none of these initiatives have indefinite lifespans in which we'll continue to invest. So if we don't start seeing material revenue or we don't see a path to profitability in a reasonable time frame, then we'll pull back on that investment and drive up our EBITDA.

Our next question comes from the line of Tavis McCourt from Raymond James.

Congratulations on the IPO. Couple of questions. Steve, you've talked a bit about the international markets. I wonder if I could talk to you in terms of like which specific countries are you focused on. I assume this is not kind of a broadbrushed effort. And then, Jen, on a financial question. I know historically the hardware and other revenues have been a little volatile quarter-to-quarter, but as a way to set Q3 expectations after a stronger quarter like you just had in Q2, would that normally, necessarily mean kind of a below-trend quarter in hardware in Q3? Or can you not even make that level of estimate?

Hey, Tavis. Yes, I'll start with the first one, and I'll give Jen a chance to direct our thoughts on the second part. So with international, in terms of the initial target, I noted that we have customers now in 10 different countries. The target at the moment -- and by targets, I really mean where have we done all of the work to really be in market and be able to provide highly reliable service to the consumer and where we signed on the dealers and gotten everything under contract. At the moment, it's most of LatAm, so Mexico, Panama, Colombia, Brazil, Chile. And Turkey has been a strong market for us. We have a very healthy service provider relationship there with an entity called Pronet that has been performing very, very well. And then New Zealand is just coming on, and I think we'll see Australia come on during the coming quarter as well as South Africa. So that's sort of where we are at the moment, and we'll see that footprint grow as we continue to contract with service providers and sort of meet the requirements on the product side to really effectively serve each market. Jen, do you want to take the second part there?

Sure, absolutely. So Tavis, we used to see much more seasonality in the business as more of our service provider base deployed what we call kind of a summer model where they installed the majority of their accounts over the second and third quarter. Therefore, our hardware revenues were much higher in the second and third quarter. As we've diversified our service provider base overall, we're less reliant on those summer models and some of them are kind of this -- moved away from that model. So there is definitely less seasonality. So if you go back and look at our historical financials, Q2 and Q3, obviously, were the highest hardware revenue producer -- producing quarters during the course of the year, but that's definitely flattening out. As a policy, we're not going to give guidance on Q3 or Q4 because it is somewhat unpredictable when a large service provider or distributor may place an order for a large hardware order. But so I guess what I would say is that you see the seasonality, you look back at our historical results, see the seasonality in Q2 and Q3, that's leveling out, and that's the way we think about it.

Understood. And in terms of -- you mentioned in the guidance you've kind of fully baked the expenses from the investments into the guidance but not much in terms of revenues. Are any of the business initiatives that you are pursuing with these investments, are the nature of these initiatives where you would even be able to see a material revenue uptick this year? Or are they longer term in nature like you've talked about your international business?

I'll start this and then maybe throw it back to you. So I mean, international is beginning to contribute. At the installation rate we're at now, there's a hardware contribution coming from that. There's a recurring SaaS contribution coming from that, and we think that'll grow some and give us a few tailwinds. I think most of the other things we're focused on, whether that be the utility channel or some of the energy management initiatives, we're not quite at the point where we're comfortable really modeling in a ton of contribution in the second part of this year. It's still early days. We want to get things right, see those businesses mature a bit, finish products in some cases. I think, we may see -- we alluded, when we talked about growth, to a initiative and a market really to go back and upgrade a larger portion of the existing North American customer base, those who don't have Alarm.com that may have a legacy old-fashioned security system and who need services like what we offer. I think we could see some contribution at the very back end of the year from that initiative into the first half of next year, really throughout 2016. But where we're most comfortable is really saying, at this point, it's early stages. There are things that we're investing in that we're excited about, and we expect to see them mature and begin to produce end of '16.

And just to add on to that. We are -- some of these businesses in the Other segment are certainly starting to produce a little bit of revenue. And international is in the Alarm.com segment. It's just not in the Other segment. But for the first 6 months of the year, the Other segment produced just under 3% of the total revenue of the company. So we're starting to see some revenue being produced.

[Operator Instructions] And our next question comes from Brad Reback from Stifel.

Great. Steve, could you potentially review for us what the ARPU looks like for an international customer compared to a domestic customer?

Well, as Jen was sort of noting earlier, we're not really reporting details of ARPU as sort of a key metric, but I would -- I can kind of talk in generalities and say that, for the most part, non-U.S. looks the same as U.S. We're not seeing any tremendous variability there. It looks to us like the value of what we offer is perceived similarly in the rest of world markets we're in. I think the -- in some cases, to get to the really broad chunk of some of these markets, the upfront expense to the consumer may need -- sort of may not bear quite as much of the upfront expense as a high-end consumer would here. So we're working on that with our service providers. But generally, the service rates are very, very similar. And there may be 1 or 2 exceptions where, if we're partnering with an MSO or a large carrier, potentially say a cellular carrier, and they are -- we're running the services on the back of that cellular carrier's network, then in that case, we're not incurring the cost to operate the managed network connection all the way to the property. And in those cases, we obviously, if we're not incurring those costs, we obviously would not charge back to the carrier the cost of managing the network. So there'll be a few cases in some markets where a primary partnership really is one that we have with the carrier and the carrier is going to incur its own cost to operate the connectivity that we depend upon. And in that case, you may see a little lower ARPU. But if I were modeling it out at this point, I would be thinking very similar to what we've seen in North America.

And from an expense standpoint, should we take away the belief that the gross margin for the international business at scale should be the same as the domestic business?

Yes.

Yes. We don't see any reason why that -- no indication that it would vary.

Our next question comes from Bhavan Suri from William Blair.

Just a couple quick ones from me. One, just as you look at the dealer penetration in their existing base, meaning the guys, Steve, you're referring to, that you could go back to and sell, what's the -- what does that opportunity look like as a percentage of what the dealers have today in terms of subscribers?

Well, I guess, the way we look at it is, we say, look, we use round numbers and these are estimates in round numbers. But when we look at North America and we look at the residential market for monitored security, we see a world where that market, and again, in round numbers, is sort of 20 million subscribers. And it's our belief that at the moment, somewhere around 4 million, 4.5 million of those subscribers actually have benefited from Alarm.com or some service that gives them at least rudimentary interactive security or home automation. So what that really does is that leaves you sort of a market of folks that are paying for something that's just not as good anymore, and that's sort of 15 million properties. And the way that stratifies across each individual dealer will vary. We have some dealers, they adopted us very, very early in the cycle, and they're to the point that 30%, 40%, maybe even 50% of their customers are interactive. We have others where they adopted us last year, and there's more of an opportunity to help them go back, but that's kind of how we look at it.

Yes. And then just a quick follow-up on the DIY market. Obviously, with Apple, an integration with Nest and all the rest of it, that's becoming interesting. How are you guys sort of attacking that opportunity today?

Sure. Talk a little bit about Apple and Nest. With Apple, it's a much more of a partnering relationship. I think the home kit protocol will give us more ways to get to more devices. It creates some gravity so that additional manufacturers will say, hey, if I'm going to build something and that device can potentially be connected, there's a robust company behind the protocol that will allow that device to be integrated into a home kit world. Now it is, at the moment, more limited to the iOS community. iOS 9 is going to enable some additional profiles, but we're excited about what we see there and plan to take advantage of home kit and are actively working to do that with products that can fit one of the existing home kit protocols. When we look at Nest, I mean, in some cases, for certain customers, meaning certain service providers, we've integrated Nest in the ecosystem. We view it really as more sort of one of several thermostats. If we're in a market where we're more focused on demand response with an electric utility, then we need to be able to provide support for a wide range of thermostats. But on the thermostat front, we're probably more focused on the thermostat we just launched, the Alarm.com Smart Thermostat, because we believe that you can render better services if the data that, that device is aware of comes from the full range of security sensors that are in the property. And that's really what our thermostat's able to do. We know when the doors are opening, when they're closing. We're not really sort of just looking at data from a single sensor. So we're pretty focused there with our service providers and making sure that we're able to help them go to market with that product.

Our final question comes from Jeff Kessler from Imperial Capital.

The biggest problem that we are seeing with your potential, with your dealers and the MSOs as well as the security side over the next couple of years is the growing service drag on RMR on the EBITDA line. There may be more service, but because of all the technology that's going into these homes, they -- the amount of truck runs and the amount of service that has to go into fixing some problems because of technology drag, so to speak, on part of the people putting them in is creating a situation in which there's less EBITDA that might meet the eye on these -- on your dealer side. What can you do on your end to help enable these folks to reduce and improve their service, improve their technology capability, reduce that service drag on EBITDA, and create a higher value proposition, so when they come up and tell you that you're not -- they don't -- that your value proposition to them is not as high as it was 5 years ago, you can point right to this?

Yes, sure. I'll talk to that for a minute. I mean, I guess I would start with before we existed, the average RMR per property was in the mid-30s. And as a result of our offering, most of our service providers and I think if you even benchmark other publicly traded companies, they've moved that into the mid- to high 40s and are driving more gross profit per month out of each subscriber. The other component would, of course, be what's happening to their overall IRR calculation, and it's our contention that if customers are engaged with their systems, like their systems, use them every day, they're less prone to a trip, and I think we're seeing some evidence of that. And if you benefit from lower attrition through time, then you can afford to capitalize account creation for -- because you're creating a better customer. So generally, what we see, is the metrics are, for our industry, the industry we serve, are improving, not getting -- not degrading. And I think there'll be some variability in that, potentially, and not all service providers are created equal, and some of them are very focused on the adoption of technology and how to do that well and how to train their people and how to get out there and make sure you get it installed correctly. And others are maybe a little more resistant to change and kind of have a -- it takes a little longer, and they might sort of wish for the days of yesteryear when the world was a little simpler and only one device in the home was connected, and that was the security control panel. So I think we see a lot of variability there. I think if -- one of the great things about…

One quick follow-up, and that is, in the last 6 to 9 months, probably, they've been developed for more time. It happened the last 6 to 9 months. You've seen a spate of really great new sensors and panels coming out for the industry. How do you make the choice as to -- and how deep you get integrated with each one of these providers? And some of them are semi-proprietary; some of them are open completely. And you have to make that choice as to some of them are very large, some are small. How do you choose as to who you're going to get into bed with?

That's your phrase, yes. I will...

That is my phrase. I'm sorry.

I -- in terms of who we choose to partner with, we, first, are somewhat deferential to the relationship we have that may already exist with the manufacture created through time. But second, we say what is the consumer really asking for? What does the consumer market need? And we rely very heavily upon our service providers, our dealers to tell us, hey, this is what I'm seeing in the market. This is where I have a gap in my portfolio. I really need you guys. You'll often hear this. I really need you guys to work harder on filling this gap, work with a certain manufacturing partner, et cetera. And we'll take that insight and go back and decide to make an investment in an additional control panel. I think that's one of the reasons we highlighted the Neo in this particular quarter is, we did get some feedback that more of our service providers were looking for an ability to take us into their commercial segment and needed a UL-grade commercial panel. They like the PowerG Wireless there and also wanted the versatility to do a hardwire, so we supported it. So I think we take each case -- we want to be open to partner with a variety of manufacturers. At the same time, we don't want to do a ton of duplicative work just because, and the way we kind of assess that is by listening to our dealers and looking at what the market is telling us.

This concludes today's question-and-answer session. Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.