Good day and welcome to Alarm.com Q3 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to David Trone, Vice President, Investor Relations.

Thank you. Good afternoon, everyone, and welcome to Alarm.com’s third quarter 2021 earnings conference call. As a reminder, this call is being recorded. Joining us today from Alarm.com are Steve Trundle, President and CEO; and Steve Valenzuela, CFO. Before we begin, a quick reminder to our listeners. Management’s discussion during the call today will include forward-looking statements, which include projected financial performance for the fourth quarter 2021, and full year 2021 and 2022, the impact of emerging market dynamics and trends on our business and on anticipated market demand for our offerings, including new product offerings, the impact of the COVID pandemic on our global supply-chain and the global economy, our business strategies, plans and objectives for future operations, and integration of recent acquisitions, continued enhancements to our platform and offerings, opportunities for growth in our current markets, and our plans to expand into new markets, and other forward-looking statements. These forward-looking statements are based on our current expectations and beliefs, and on information currently available to us. Statements containing words such as anticipate, began, believe, continue, could, estimate, expect, forecast, may, plan, project, trend, will, and other similar words are intended to identify such forward-looking statements. These statements are subject to risks and uncertainties, including those contained in the Risk Factors section of our most recent quarterly report on Form 10-Q filed with the Securities and Exchange Commission on August 5, 2021, and in the subsequent reports that we filed with the Securities and Exchange Commission from time to time, including our quarterly report on Form 10-Q for the quarter ended September 30, 2021 that we intend to file with the Securities and Exchange Commission shortly after this call, that could cause actual results to differ materially from those contained in the forward-looking statements. Please note that the forward-looking statements made during this conference call speak only as of today’s date and Alarm.com undertakes no obligation to update these statements to reflect subsequent events or circumstances except to the extent required by law. Also during this call, management’s commentary will include non-GAAP financial measures and provide non-GAAP guidance. Management believes that the use of these non-GAAP financial measures provides an additional tool for investors to use in understanding the company’s performance and trends, but notes that the presentation of non-GAAP financial information is not meant to be considered in isolation or as a substitute for the directly comparable financial measures prepared in accordance with GAAP. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in the financial statement 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 on our Investor Relations website. The webcast of this call will be archived and a telephone replay will also be available on our website. With these formalities out of the way, I’d now like to turn the call over to Steve Trundle. You may begin.

Thank you, David. Good afternoon and welcome to everyone. We are pleased to report another quarter of strong results. Our SaaS and license revenue in the third quarter was $118.1 million, up 17.9% over the same period last year. Our adjusted EBITDA in the third quarter was $37.6 million. I want to thank our service provider partners and the Alarm.com team for their continued strong performance. I’ll start by updating you on several new products that we recently introduced, and discuss how they support our long-term goals. During the third quarter, we introduced a new outdoor camera that we call the 724. And a new capability powered by our video analytics engine that we call Perimeter Guard. The new 724 camera offers premium image quality and field of view. It also includes the addition of an onboard microphone, and a powerful speaker and LED light. We married these new hardware capabilities with our advanced video analytics software to enable a new set of customer experiences. Perimeter Guard identifies people anywhere around the perimeter of a property and triggers the 724 camera to respond with both audible alerts and a flashing red LED light. This capability immediately puts any potential intruder on notice that they’re being actively watched. Subscribers can easily configure the conditions that trigger Perimeter Guard. For example, it can be instructed to respond based on a person’s direction of travel, or only when they loiter in a specific location for a specific period. It can also be set to respond based on various parameters and rules. For example, it can be configured to trigger both while the system is armed and the subscriber is home for the night or when they are out during the day. The uptake and engagement with Perimeter Guard among existing subscribers is running…

Thanks, Steve. I’ll begin with a review of our third quarter 2021 financial results and net provider updated guidance before opening the call for questions. SaaS and license revenue in the third quarter grew 17.9% from the same quarter last year to $118.1 million. We saw solid growth in new subscribers and continue to increase in video attachment rates based on the strength of our video and video analytics offering. Connect software license revenue in the third quarter was approximately $7.9 million, down as expected from $9.5 million in the year-ago quarter. Our SaaS and license revenue visibility remains high with a revenue renewal rate of 96% in the third quarter, which is above our historical range of 92% to 94%. It’s encouraging to see our renewal rate continue to increase, however, some of the increase could be the result of fewer people moving homes at the start of the pandemic, and we continue to anticipate that this measure could revert to our long-term historical range. Hardware and other revenue in the third quarter was $74.3 million, up 26.5% over Q3 2020. Strong hardware sales were driven by increased adoption of our video cameras in the residential segment and improvement in our North American commercial business with OpenEye and Alarm.com for business, continuing to show good momentum coming out of the pandemic. Total revenue of $192.3 million for the third quarter, grew 21.1% year-over-year. SaaS and license gross margin for the third quarter was 85.2%, up slightly by 40 basis points quarter-over-quarter. Hardware gross margin was 15.2% for the third quarter, down from 20.5% in Q2 2021 due to higher prices and increased shipping costs. The global supply chain continues to present challenges, which required us to expedite shipments and incur higher air freight costs. Total gross margin in the…

[Operator Instructions] Our first question comes from Adam Tindle with Raymond James. Your line is open.

Hi, this is Alex on for Adam. Thanks for taking our question. So I understand the model centers around software, but hardware enabled software. And I was just curious how you think your supply looks relative to demand as we get closer to the end of the year here.

Well, this is Steve Trundle speaking. Our team has pulled out as many stops as we can to keep our supply chain as healthy as it can be. So I think as we look through the end of this year, we’re not sounding any alarms at this point. We feel pretty good about where we are for the most part. Could there be one or two skews in one particular category where we’re suffering a backlog? Yeah, there are. But overall right now, looking throughout the rest of 2021, we feel good. And then we’re working hard, so that hopefully by the next time we update you, we feel that way about 2022 as well. But most of the work right now is going into the 2022 supply chain.

Perfect thanks. And then, just how should we think about EnergyHub? Given macro developments, so you’d imagine that demand would be increasing materials for that offering? What can you do to accelerate that business to become even more meaningful and more of a driver going forward?

Yeah, it’s a great question. And you’re correct. Yeah, the macro trends are favorable to EnergyHub. The business has continued to grow nicely in the sort of year-over-year mid-30% range, maybe a tad higher than that. And, we’ve lined up, they’ve got kind of a marquee list of partners, so lined up 16 of the top 50 utilities already in the U.S. and are getting to a wider number of homes in terms of where we execute distributed energy resource management programs. So in terms of going further, it’s I think primarily going to be driven by our ability to make them believe that we have in terms of product capability by investing more in R&D to expand the range and the capabilities of the product in a number of different types of solutions and the range of solutions that we can provide. So, as you probably remember, we started or they started with, demand response on, primarily on thermostats. We’ve been working to drive that out to really sort of be an overall edge resource management platform, managing batteries, solar inverters, pool pumps, anything that’s consuming energy, and then advancing the algorithms that we use to allow the utility to see exactly where they are at any given point in time, in terms of managing the grid. We also will work and we’ll continue to work to increase the number of actual consumers who enroll their devices in an EnergyHub program. So there is some marketing. They’re usually done in tandem with our partner. But I would say overall, it’s a business that’s confirming nice growth. And, when they do that, that gives us confidence that we should increase investment in the platform that they take out to their partners. So that’s our primary objective at the moment.

Fantastic. Thank you so much.

Our next question comes from Sterling Auty with J.P. Morgan. Your line is open.

Hi, this is Rachit on for Sterling. Can you give colors on like how, if your office opening up, and how the business on international front is?

Sure, was the first part, was it just international? Or were you asking about something else before international?

I think it was international.

Just international, okay. Got you. International sort of, I would say, still in a steady state at the moment, meaning we sort of entered COVID at a certain production level international. And we’ve continued to execute at that level of production for most of this year, then sort of holding our breath, waiting for some of the clouds to part in rest-of-world markets, so that we can go back to accelerating. Now, that said, the way things work, if you’re installing hypothetically 15,000 properties a month in a market, and you continue to do that forever, you keep growing. So international is growing as a percentage of revenues, and in terms of its contribution to Alarm.com. But we see an opportunity to sort of have it grow, or we expect it to actually grow at a faster clip than we’ve seen thus far in 2021. And we’re hoping to see that some kind of a positive inflection there, so not be talking about steady state, but instead sort of accelerated pace of deployment, sometime in the middle part of next year, probably.

Okay.

International in the quarter was a little bit over 4% of our revenue and a year ago was around 3%. So it is growing, as Steve said, but being held back by COVID.

Yeah. And then just a quick follow-up on that. And how does Europe compare on that front, like how is the business on the Europe front? Europe opening up and…

We have a – obviously, we have a number of service providers in Europe, and we have some in Asia, South America. I would say, Europe is representative of international. I mean, we probably have a very strong presence relative to the international base in Europe. But, we also have South America, we have Australia, New Zealand. Europe has been certainly a growth engine for us. But again, that’s also been held back given the issues you see in London, in England, I should say and then also on the continental Europe. I would say is representative of what Steve talked about for international in total.

Yeah. Thanks, guys.

Yeah, thank you.

Our next question comes from Brian Ruttenbur with Imperial Capital. Your line is open.

Yes, thank you very much. First [Technical Difficulty] gross margins, they were down year-over-year and sequentially. Can we expect stabilization from this quarter to fourth quarter and then into 2022?

Brian, your line broke up a bit at the very beginning, we missed the beginning part of your question. Would you mind repeating that?

Yes, I need to pay my cell phone, I apologize. Hardware gross margins, they were down both year-over-year and sequentially. Can we talk a little bit about what you expect sequentially going forward?

I think your dog has the same view as I do right now. He’s not happy about the [indiscernible]. But, yeah, we will try to improve there. We have been dealing, I think I had a call at moment ago about the supply chain, our question. And supply chain activities – our first goal is to make sure we’re maintaining a stable supply product to our service providers, and any disruption there impacts our long-term SaaS revenue growth. So when we have a choice to make, in terms of whether to incur some additional cost to expedite things, we typically will choose to incur those costs and execute different types of expediting activity, whether that be securing long-term parts and inflated rates or whether it means air freighting product, and all of that activity has compounded to drive down hardware margins in the second half of this year, especially in the last quarter. But, I think, we’ll kind of see an ongoing – what you saw in third quarters, what you likely will see in the fourth quarter. And then, we’ll revisit some of our strategies around hardware margins as we come into the new year, and if we see a need to correct course and we’ll do so.

Okay. I apologize about working from home. So the next question I have is the deal with Brinks. Can you talk a little bit about that? What is that add incrementally on, probably, what you had before with Brinks relationships you talked a little bit about…

Yeah, sure. Yeah, it’s a great new endorsement of our long-term relationship. First, Brinks had done a nice job to secure a big win for them. And partnership with AT&T to provide an upgrade path to the AT&T Digital Life subscribers that sort of represented a business is coming to an end for AT&T, but Brinks is right there to actually take those existing subs and move them to a Brinks Home offering, of course, powered by Alarm.com. So we were excited to be able to participate in that and to help identify the product and the capabilities that those subscribers will receive. And, this renewal captures that opportunity. And it also created a path for Brinks to continue to drive that they’re very focused on customer sat overall, and actually really driving in, I’d say, more of the smart home and video capabilities into the subscriber base than maybe what has been the case historically. And the reason for that, of course is the trends and the positive results, they’re seeing both in terms of upfront willingness by the consumer to pay for a system, but also in terms of attrition dynamics on systems when a consumer’s invested in a bigger system. So we worked with them for some time to identify different ways we could collaborate to help them in their programs over the next few years drive in sort of deeper adoption of the full range of smart home capabilities, and all of that’s captured in this new 3-year agreement.

Great. Thank you very much.

Thanks.

Our next question comes from David Robinson with William Blair. Your line is open.

Hi, guys, thanks for taking my question. The one question I had was on the commercial business. I know, you said you saw some improvement in the Alarm.com for business and OpenEye. I was wondering what was kind of driving that improvement that you saw and kind of what your expectations are for that segment as we close out the year?

Sure. I’d say a couple of drivers. First, for the most part businesses open again. So I think we saw a pause in the commercial market in first and second quarters of this year, began to sort of see in the third quarter, just saw sort of businesses coming back to the table, new businesses opening, willingness by the commercial customer to invest in security and their facilities again. So, I think, there are some macro trends working in our favor, POs loosened up, that sort of thing. The other driver though I would say is that Business Activity Analytics, which I spoke about some is a pretty meaningful feature upgrade and capability upgrade to what a midsize commercial customer has been able to access in the past, especially if you say that you need to have a video offering that’s completely integrated with the intrusion offering, and with the access control offering. What we’re doing on the analytics side now, with the inputs coming from anywhere from 5 to 20, video cameras to do things like identifying people that are too close to each other, monitoring hues and lines, those types of capabilities, OpenEye’s, and get people a little bit more excited about pulling the trigger and making a purchase. If you’re only providing security, that’s great. If you’re providing security, and you’re also driving business value, like metrics that you can use to make a decision to improve your operation and your revenue streams or your customer-set, it’s a little more exciting. I think we’ve seen early signs that the commercial sales-forces for our partners and integrators are having some luck with that message of being able to use the analytics capability for not just security, of course, security is better, but also for driving a lot of improvement or more intel on some of the customer satisfaction and customer service metrics.

Awesome. And then, in regards to the improvement, I guess, has it been pretty broad-based across the customer size? Obviously, you’re focusing on kind of the mid-market, but I am just trying to get a sense of the different size of customers on the commercial side as well.

Yeah, good question. We’re kind of, I mean, the improvement has been across the spectrum. But what I would say is, it’s a bit more sort of early days for us, if you will, in the mid and larger size commercial customer account. So in that pool, we’re growing off a smaller base. And in the small business segment, we’ve got a nice base already. And we’ve been strong there for some time. But if you look at some of the things we’ve done to build out the platform with OpenEye and with SDS, Shooter Detection Systems, we’re attaching to an increasingly larger commercial customer now.

Got it. Thanks for taking my questions.

Sure.

Our next question comes from Darren Aftahi with ROTH Capital Partners. Your line is open.

Hi, guys. Thanks for taking my questions. Nice results. Two, if I may. I think it’s been about 9 months since you guys launched Flex IO. I’m just kind of curious. Traction in the market? And then for, Steve, can you give the other SaaS revenue in the quarter? Thanks.

Sure. I’ll start with the other SaaS. I know that’s your favorite question. So it was $8.9 million in the quarter and it was up 22% year-over-year, and really driven mainly by EnergyHub. Of course, that includes PointCentral, Building36 with the Smart Water Valve+Meter, which has been doing well. But, yeah, so $8.9 million for SaaS revenue for Q3.

Yeah, and coming back to Flex. So we’ve put flex in the market, a number of dealers have begun to introduce that into their – first getting it onto their price sheet, getting their salespeople trained on when to sell it, what types of use-cases deserve a Flex sell. In fairness, this has been a very busy year for residential. I don’t think any of us expected 2021 to be as strong on the residential side as we’ve seen. So some level, a lot of the sales folks have been, more focus, I would say on selling our video analytics and sort of meeting demand that’s for the product that they already know. And, we’re working to get them familiar with the capability that Flex offers, so that we can continue to accelerate that. But we do have, I don’t know, a number of service providers now that are putting that into their offering as an option. And we, of course, want to drive that option, the use of that option higher and higher, because it is sort of greenfield ARPU for us and something we’re working on.

Great. Thank you.

Thank you.

This does conclude the conference. You may now disconnect. Everyone have a great day.

Thank you.

You are welcome.