00:04 Good day and thank you for standing by. Welcome to the Alarm.com First Quarter 2022 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] Please be advised that today’s conference is being recorded. 00:25 I would now like to hand the conference over to your speaker today Matt Zartman, Vice President of Investor Relations. Please go ahead.

00:42 Thank you. Good afternoon, everyone and welcome to Alarm.com's first quarter 2022 earnings conference call. I want to remind you that this call is being recorded. Joining us today from Alarm.com are Steve Trundle, President and CEO; and Steve Valenzuela, our CFO. 00:57 Before we begin, a quick reminder. Management's discussion during today's call will include forward-looking statements, which include among other projected financial performance, the impact of emerging market dynamics, trends and on anticipated market demand, the impact of the COVID pandemic and challenging global supply chain dynamics. Our business strategies, plans and objectives and integration of recent acquisitions, continued enhancements to our platform and offerings, opportunities for growth and expansion in our current and new markets. 01:28 These forward-looking statements are based on our current expectations and beliefs, and on information currently available to us. These statements are subject to risks and uncertainties, including those contained in today’s earnings press release and in the Risk Factors section of our most recent annual report on Form 10-K filed with the SEC on February 24, 2022 and in subsequent reports that we file with the SEC from time to time, including our quarterly report on Form 10-Q for the quarter ended March 31, 2022 that we intend to file with the SEC shortly after this call, that could cause actual results to differ materially from those contained in the forward-looking statements. 02:11 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 note 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. 02:54 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. 03:18 Let's now turn the call over to Steve Trundle. You may begin.

03:23 Thank you, Matt. Good afternoon and welcome to everyone. We are pleased to report solid Q1 results to begin the year. Our SaaS and license revenue in the first quarter was $123.2 million, up 14.8% over last year. Our adjusted EBITDA in the first quarter was $29.9 million. In the first quarter, demand remained steady for Alarm.com products and services and we saw a stronger sales than expected, but we also absorbed increased component and freight cost that pressured our hardware gross margins. As a result, we are currently phasing a second price increase of the year on select products. We expect hardware margins to strengthen from Q1 levels as the year progresses, but not to reach our historical levels during 2022. 04:18 On today's call, I want to update you on several new commercial product initiatives that are good examples of the ongoing collaboration between our OpenEye and Alarm.com R&D teams. I will also share some takeaways from my time at ISC West, the largest security industry trade show of the year, which was held in late March. 04:40 Starting with our new commercial products. We recently introduced the Pro Series commercial stream video recorder or SVR. It's designed for small and medium-sized commercial installations with support for up to 16 cameras on a single recording device. The SVR is accessible from anywhere through an intelligent interface that includes a timeline view of all video feeds in the property. The timeline displays an overlay of activity detected by video analytics, security and access control systems, and other sensor-based events. This functionality streamlines forensic video searches and provides a unified interface for subscribers to monitor their property and view important activity. 05:28 Importantly, the Pro Series SVR was developed via collaboration between the OpenEye and Alarm.com product teams. The…

10:15 Thanks, Steve. I will begin with a review of our first quarter 2022 financial results and then provide our updated guidance before opening the call for questions. SaaS and license revenue in the first quarter grew 14.8% from the same quarter last year to $123.2 million. This includes Connect software license revenue of approximately $7.1 million for the first quarter, down as expected from $8.7 million in the year ago quarter. 10:47 Our SaaS and license revenue visibility remains high, with a revenue renewal rate of 94% in the first quarter, which is at the high end of our historical range of 92% to 94%. Hardware and other revenue in the first quarter was $82.2 million, up 26.3% over Q1 2021. We continue to see strong sales of our video cameras, driven by increased adoption of our industry-leading video solutions and video analytics capabilities for both our residential and commercial subscribers. 11:23 Total revenue of $205.4 million for the first quarter grew 19.1% year-over-year. SaaS and license gross margin for the first quarter was 86.3% up approximately 20 basis points quarter-over-quarter, mainly due to product mix. Hardware gross margin was 11% for the first quarter, which was flat quarter-over-quarter and down from 22.3% during the same quarter last year. Hardware gross margins were lower than expected due to additional cost increases for components and higher shipping costs. 12:00 We continue to ship more products by air freight to meet demand and shipping costs increased due in part to increasing fuel prices. As a result of these additional costs, we announced our second price increase this year on some of our hardware products. The pricing changes will mostly take effect later in the second quarter. Barring any additional economic impacts or supply chain disruptions, we expect hardware gross margins to…

17:15 Thank you. [Operator Instructions] Our first question comes from Adam Tindle with Raymond James. Your line is open.

17:30 Okay. Thanks. Good afternoon. I want to start with Steve Trundle just kind of an observation that a lot of consumer subscription companies are seeing major challenges right now, whether it's Netflix, et cetera., yet your subscription metrics are still solid mid-teens growth. I know your B2B but end consumer is the ultimate customer. Wondering why you think this is, is there some sort of lag effect because your B2B2C or are you not expecting impact, and any metrics that you can give us to kind of support your view on why this business seems to be a lot more durable than some of those other consumer subscription models out there?

18:05 Hey, Adam. Yeah. Good question. I think a lot of it is our -- the market we serve and that security and safety are sort of fundamental consumer needs. We're not selling entertainment service and we're not competing with a variety of other sources of new entertainment, whether it'd be TikTok or otherwise. So I think in our case, fortunately, we're going after a market that is -- it's sort of fundamental to the consumer and they don't want to part with safety and security and our service providers have a long, long history of knowing how to address the needs of each locality. 18:55 So perhaps the B2B2C thing, gives us a little bit of a shield, but I think it's probably more basic than that, which is that the market is generally growing, we're delivering the technology that renders what we believe to be the best Smart Home and security experience. And the consumer need is not going away even during recessionary periods. We normally see that security holds up very well. People are moving less and there is usually a heightened concerned about property protection. So I think it's probably a trend that's not going away. I think we'll hold up fine.

19:38 Got it. That makes sense. Just a follow-up for Steve V, on EBITDA margin, obviously a really challenging environment, but you're executing well in Q1. Just under, I think 15% this quarter, but if I look at the full year guidance. I think it's closer to 18%, so sort of this lift as the year progresses. Wondering if you could maybe unpack some of the key factors that you're considering in that assumption to kind of climb up EBITDA margin and the timing for those margins to normalize? Thank you.

20:07 Yeah. Adam, good point. Certainly, the hardware margins, we expect to improve with the price increases. So, Q1 hardware margin 11%. We expect Q2 to probably be around 13% and then Q3 could closer to 17% to 18%. So that's certainly a big factor. Also keep in mind, seasonality wise typically Q4 is our seasonally strongest quarter, especially with Energy Hub contributing that incremental amount of revenue. So those are really the main factors I would point you for the improvement in EBITDA margins.

20:41 Okay. And just a really quickly clarify, since we're just in such an uncertain supply environment, hardware for Q2, I mean we typically see summer months, you got a sequential uptick, but I'm just not sure if we've got kind of a different type of a year and would hate to be missing something on how to think about hardware revenue for Q2?

21:01 I think, Adam, this is Steve T speaking, I think, yeah, it's a little bit of an odd year, so we can’t absolutely be certain that we're going to see that sequential uptick in Q2. We also, as Steve V mentioned in his prepared remarks, we put forth or put through a second cost increase on the price increase on the hardware. So while we don't expect that to dampen demand much. There hasn't really played out yet, it comes into effect May 1. So I wouldn't go crazy with the second quarter hardware. I think I'd anticipate sort of a flat quarter-over-quarter hardware number.

21:40 Very helpful. Thank you.

21:44 Thanks.

21:44 Thank you. Our next question comes from Michael Funk with Bank of America. Your line is open.

21:50 Yeah. Thank you all for taking the questions, really, really appreciate it. So first on the commercial side. I know in the past you've given us some quantitative commentary about the quarterly additions, I think last quarter you said you're kind of running around 25,000 a quarter if I remember correctly. So I hope you just update there, if you're seeing any kind of acceleration and then I've a follow-up after if I could.

22:14 Hey, Michael. This is Steve. Just to make sure I've got it right. You're referencing, on the 25K per quarter you're referencing, which part of the business?

22:26 I believe it was commercial, you said last quarter was 25K, if I remember correctly.

22:31 Yeah. So commercial momentum to continue to be good, it's becoming an increasingly larger and larger component of our SaaS revenue. I believe last quarter, I indicated that we commercial account base was over 400,000 active subscriptions that numbers continue to grow and is growing at a level -- at a percentage level that's faster than our overall SaaS growth. So, I spent a fair amount of time in my prepared remarks talking also about the OpenEye business and the recent integrations we've done there to drive deeper video analytic opportunities into the enterprise space. And I think, in the first quarter, as an example, I believe our OpenEye team alone activated over 50,000 new connection points, which basically means new cameras in the commercial space. So, business is going well and I think we'll barring any sort of major recession. I think we'll continue to see good solid commercial momentum.

23:40 And then one more, if I could. So at a higher level you commented on the second price increase on the equipment side earlier, that's understood obviously, passing on some of your own increase in pricing, but how are you thinking about increase in your subscription pricing and we're seeing pretty broad-based price increases walk to convenient store today, got with increasing prices and everything I kind of struck my shoulders like we're all seeing it, kind of condition to that at this point, we would expect it not that you're trying to push it out to your customer but everyone else is doing it. How you thought about the ability to increase pricing on the subscription side in the current market environment? It might help to offset some of the other pricing pressure, kind of, cost pressure that you're seeing?

24:30 Yeah. That's a great question. And one, we spend time on historically we have really want it to be stable on the pricing of the subscription services that we offer through our service providers. Everyone's planning their business around a certain amount of cost on each subscription and our service providers are oftentimes funding account creation cost using debt making assumptions about certain levels of margin on each account. So a stable environment requires that you not be too quick, I would say to drive up the subscription cost. That said, the reflections you just sort of made in terms of what we are experiencing in day-to-day create a dynamic where at some point you simply have to be ready to increase the cost of the subscription. And our service providers will have also increased the cost of the subscription. So we're not saying that we absolutely will never increase subscription cost. I think at some point that becomes a necessary part of our business model. If we don't see some tampering down of kind of a current inflationary pressures, but we're not going to be quick on it is, what I would say. We're probably the last to move in that direction.

25:56 I want to start AT&T increased price in wireless has been deflationary, cyclone for the last 20 years. Nobody wanted to be connected wireless price increases, just a data point that the company that should have been last, just raise their prices on the [indiscernible]?

26:14 Anyway, hardware, I mean even hardware, we expected a couple of years ago. I think our view was hardware cost would always be, we always be driving those costs down and just not happening right now. So yeah, the world is a little different right now. I think I like the old way better, but we'll react to the world we live in.

26:37 Understood. I really appreciate the time. I'll yield the floor back to the next participant.

26:42 Thanks, Mike.

26:45 Thank you. Our next question comes from Matt Pfau with William Blair. Your line is open.

26:53 Hey, guys. Thanks for questions. Wanted to follow up on the discussion around higher prices and inflation. And I think in terms of a new customer, probably the bigger impact from a pricing perspective would be increased hardware prices and also most likely labor cost for the installers which I assume would be getting passed back to the homeowner to some extent, but you're demand environment has remained robust. So it doesn't really seem like that price increases around the sort of initial install and set up are impacting demand. Maybe if you could just sort of comment on that and how price sensitive consumers have been historically to changes in the initial install?

27:42 I would say, we haven't seen a drop in demand thus far, I think that -- and we don't really anticipate a drop in demand. I think that, still on a relative basis, the cost of what our service provider is offering, in terms of security and Smart Home experience is, it's not the most sort of expensive thing and the budget for most folks. I mean we're talking $50 a month type of service plans for safety and security by P60 depending on the amount of video services. It might be $40, if there's not a ton of services. But in any case, it's a fundamental sort of need people have for safety and security. And I don't think we're sort of the biggest target when people are sort of looking to potentially reduce expense. 28:40 On new account creations. I think what's happening there some is the technology is just continuously getting better. So the value we provide is offsetting some of the increase in cost and a big driver of that is the video analytics services that are now pretty rich and pretty developed on a residential grade camera. So I do think we've packed quite a bit more value in and then on the actual financing side, we've seen a movement over the last two, three years that's still underway towards a dynamic whereby a lot of the cost that's being incurred to originate a new customer is being financed through some type of consumer financing mechanism where the consumers' credit itself is being used to finance the creation cost instead of the service providers balance sheet. So that also take some of the pressure off when you -- and you're seeing this in other consumer markets with companies like a firm and otherwise. But when you can spread out the incremental cost over a five-year period it eases the burden on both the service provider and the consumer, I think that's helping.

29:57 Got it. And just one more on the commercial video analytics functionality that you have released. You've had some out there for a while obviously making improvements. What are your expectations in terms of attach of video analytics to commercial customers relative to residential. I assume the percentage of commercial customers with video would be higher, so would you also then expect the analytics to be higher as well?

30:25 Well, I would say absolutely yes, except that, on the residential side, we have seen very, very high attach of analytics. At this point 75% of the customers who are activated with analytic capable cameras are being activated with analytics on the residential side. So that's a pretty high attach rate, which is great. That means we're rendering the most sort of value and the most functionality we can to the consumer. I would expect on the commercial side through time as the offering becomes well adopted by the service providers that will see at least that level and perhaps a bit higher, but it's not as if we have -- but we're starting with sort of a 75 numbers is not that much higher, we can go on attached to analytics in the commercial side. Does that makes sense.

31:22 Yeah, it does. So you can't go past the 100 so. Got it.

31:33 Thank you. Our next question comes from Brian Ruttenbur with Imperial Capital. Your line is open.

31:40 Yes. Thank you very much. First of all, I want to go to a macro question, a lot of the nuts and bolts already been asked about margins and things, but recessionary environment, let's just play that out, let's hope that doesn't happen, but you guys have been doing this 22 years. Can you talk a little bit about your business and what you anticipate happening, if there is a downturn? And then what your plans are for the cash if that changes at all, if there is a downturn in the economy?

32:13 All right. Yeah. I can spend a moment on that. I think obviously depends on the severity of the downturn, but our expectation would be that revenue retention would probably increase some. We know that when people are not moving that we see, we generally see less, our dealers see less attrition. So that tends to be a positive. We also know from prior experience that during a recessionary period that people are more concerned, particularly if they're layoffs, they are more concerned about the safety and security of their property. They begin to wonder about folks wandering through the neighborhoods during the middle of the day and that sort of thing. So, there is probably even a heightened desire for safety and security that again I think supports customer retention. Those are the positives. 33:05 On new sales, some of those same positives will drive new sales activity. At the same time, you see a slowdown typically in new home construction. Now you have probably fewer new homes being initiated, so that creates a bit of a headwind right now about 10% of home sales and the U.S. are coming from the builder trade our new home. So I have a little bit less there. And so a little bit of a headwind, perhaps on new account origination offset some by greater retention. In terms of what it means, in terms of way we think about our cash position. Yeah. I think that in a recessionary period that softens the point in time when you're cash takes on more value, you can find more opportunities to deploy your cash efficiently and with reasonable expectations for returns. So in some ways, if we saw a recessionary period, I think you would see us maybe a little bit more active on the Corp Dev (ph) front thinking about how to leverage our cash position most effectively.

34:32 Great. Thank you very much.

34:35 Sure. Thanks.

34:37 We have a question from Darren Aftahi with ROTH Capital. Your line is open.

34:44 Hi. Thank you. This is Austin (ph) on for Darren. Thanks for taking my questions. Just had two, if I may. The first one, I think it's been asked. I'll try to rephrase it a little bit differently. But with again on the theme of inflation and rising interest rates. I'm just curious what kind of changes you have seen or would anticipate to see on the residential side, with regard to the new home builder program as well as second homebuyers?

35:13 Good question. Yeah. On the residential side, new home buyers I mean I think we watch the national data there to get a feeling for what's happening with new home purchases, my recollection, so this -- memory is not perfect, but I seem to remember that we've seen sort of a 10%, 11% drop in new home sales over the prior quarter. So a little bit of a tapering there. At the same time, we're not like super heavily penetrated and while we have the majority of the builders in partnership some place. We haven’t completely penetrated all of the builder opportunities that we see and therefore, we've got some room for expansion in terms of greater attachment to the number of new homes being constructed. So I would hope that even as new homes declined potentially. First, you got to remember, that's not, most it's sort of 10% of home sales. But as new home construction declined. We can hopefully further penetrate that town some. And I think that's what we would be attempting to do. We might see that more homes are kind of come in a slightly different price point that maybe some compression on what folks are willing to buy with higher interest rates. But generally speaking, I don't think we see any sort of avalanche coming even if new home sales declined further. 36:52 With regard to second home sales that's the data point, I actually don't have. I'm not sure what's been going on with second home sales in the general market right now. What I would say is, from our perspective, there is a favorable trend towards. So we are seeing is towards increasing rental and second homes, and when you have people going through places and renting a home, that's good for our PointCentral business and that we're driving the technology there that allows the property manager to quickly turn a rental from one guest to the next. So if that continues, if that trend continues, as people continue to sort of favor vacations better and the United States over a ton of international travel or if we're just seeing sort of the emergence of a new habit, do you want to go to the beach or the lake instead of necessarily New York City, then that's a good trend for us, so far that appears to be trending in the right direction.

38:00 Great. I appreciate that. And then just last one from me, just curious how you're Flex IO initiative is going?

38:10 Sure. A little color on that. So Flex is underway. We've got some dealers that are beginning to deploy that in various situations, probably the most common is use right now would be four gates that are remote from the home, whether that be driveway gates or swing toll gates we're not at the point where Flex is by itself driving any sort of material change in our numbers. It's still fairly early days. So we are still working out a few feature request that [indiscernible] service providers have had, so it's moving, but it's not a dial-mover at the moment.

38:56 Got it. All right. Appreciate it and congrats again.

39:02 Thank you.

39:03 Thank you. Our next question comes from Jack Vander Aarde with Maxim Group. Your line is open.

39:10 Great. Hi, Steve, [indiscernible]. I appreciate the update. Thanks for taking my questions. I'll just start with a question, in case you haven't gotten enough on the price increases. Just for clarity, did you say you already rolled out that new round of price increases in hardware products or are these new works?

39:32 Yeah. Jack, we so we rolled out, really didn't want to have to do a second one, but we did a first one that really went in the full effect in late February, early March. And then on the heels of that we announced a second increase that goes into effect beginning on May 1. So it's already been announced and deployed and we'll sort of begin to show up in the second half of this quarter.

40:02 Got it. Okay. And then separate topic, just on the premium services front. So it's fun to kind of hear those patents in an idea what might be coming down the line. So it seems stuff of drone patents filed I think over the last few years. I imagine those big ARPU drivers, but just are we close to something big, big looking ARPU driver that's unique and innovative like that you have the connected car as well that came out recently, but anything like a drone or anything kind of fun you can talk about?

40:42 Fun things we are talking about, other than inflation and price increases, yes that would nice with it. Yes. So the car -- the connected car offering is gaining traction and we're seeing some used on the residential side, we're seeing a lot of demand really from our service providers for it on the SMB and sort of the commercial space. So we're adding some capabilities to better support that arena, that is incremental to the typical installation. So if we can see that continue to pick up some then at some point it begins to push ARPU for us. On the R&D side, yeah, we don't go into great detail about sort of where we are with various projects you've seen -- you've seen some patenting activity around the drone initiative and we continue to work that program. We don't have an exact timeframe for when you would see the results in market, but we're not backing away from what we want to do there. 41:50 And at some point that solution would be a meaningful enhancement I believe to what we're able to offer in both the residential and commercial video experience domain and it would become at that point in our driver, but it's a little bit early to -- for us to. And we don't -- some point you have to do sort of R&D for the purposes of R&D and then you discover how you're going to monetize it once the product is sort of close to being ready for market. So we don't have a firm sort of it, so as we don't have anything in our current year forecast for that new initiative, but we're still excited about the progress being made.

42:33 Okay. Great. And then just one more on the international business. Can you maybe just provide an update on that overall TAM opportunity and where you're at today? It’s clearly still a relatively untapped opportunity? You’re still doing at this massive untapped long term growth driver. Is there anything changed in your plan, or view?

42:57 No, nothing has changed, it's on a relative basis. I think at the end of last year, we talked about overall number of customers around $8.4 million and I said international at that time, we were getting close to 0.5 million. International subscribers during the quarter we blew through that milestone, which is great. So it's a real business, when you're talking about over 0.5 million installations outside of U.S. and Canada and we're crossing new milestones almost every quarter. So we still believe over time that the rest of the world is a fairly large place and that we would at some point, see the number of subscribers globally be a third to half of what we have domestically. So the question is, just sort of when does that curve really begin to pick up and what I will say is, the cost to sort of entry or the cost really playing globally are material to support the different environments in the different types of hardware and components that you need for each market. So we're sort of continuing to work through all of those issues, but -- and they continue to drive product out that will service large of the globe. But we still have enthusiasm about the TAM and the progress that we're making. I don't think we've changed on that at all.

44:29 Okay. Great. Well, I appreciate the time. I'll hop back in the queue.

44:34 Okay. Thank you.

44:36 Thank you. We have a question from Mike Latimore with Northland Capital. Your line is open.

44:44 Hi. This is Adithya (ph) on behalf of Mike Latimore. Could you tell me how much did your largest customer contribute as a percentage of revenue?

44:54 So, largest customer is ADT and they are little bit over 15% of our revenue and there is no other customer that's greater than 10% of our revenue.

45:07 All right. And could you give some color on the gross margins, how should we think about the gross margins in 2Q and for the rest of the year?

45:17 Yes. So obviously, Q1 was 11% for hardware gross margin, 86% for SaaS. SaaS has been very stable as you've probably seen. It's been 86%, 86.2%, 20 or 30 basis points. But in terms of the hardware margins, that's where the price increases of course are taking effect. And so we see probably in Q2 around a 13% gross margin for hardware. Q3 probably going up to let's say 15% to 16%, and then Q4 probably closer to 18% hardware margins and that's of course dependent upon what we know today and no other changes occurring and so we have to caveat that, but that's our current expectation.

46:04 All right. Thank you.

46:06 Sure. Thank you.

46:09 Thank you. And that's all the time we have for questions. This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.