Good day, and thank you for standing by, and welcome to the Alarm.com Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to the Vice President of Investor Relations, Matthew Zartman. Please proceed.

Good afternoon. Welcome to Alarm.com's Fourth Quarter and Full Year 2022 Earnings Conference Call. This call is being recorded. Joining us today from Alarm.com are Steve Trundle, our CEO; and Steve Valenzuela, our CFO. Before we begin, a quick reminder. Management's discussion during today's call will include forward-looking statements, which include, among others, projected financial performance and key assumptions related thereto, including with respect to the Vivint dispute, potential legal spend and cost rationalization strategies, the impact of emerging market dynamics, trends and anticipated market demand, the impact of the COVID pandemic, challenging global supply chain dynamics and adverse macroeconomic conditions. Our business strategies, plans and objectives and the integration of recent acquisitions and anticipated growth prospects of our Noonlight acquisition, continued enhancements to our platform and offerings; opportunities for growth and expansion in our current and new markets. 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 quarterly report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2022, and in subsequent reports that we file with the SEC from time to time, including our annual report on Form 10-K for the year ended December 31, 2022, that we intend to file with the SEC 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 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. However, 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 to 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 replay will be available on our website. Let's now turn the call over to Steve Trundle. You may begin.

Thank you, Matt. Good afternoon, and welcome to everyone. We are pleased to report fourth quarter and full year results that exceeded our expectations. Our full year 2022 SaaS and license revenue was $520.4 million, up 13% over the last year. Our adjusted EBITDA for the full year was $146.8 million. During the year, we continued to execute on our long-term growth strategy. We expanded our platform and continued to build diversity into our revenue streams. We ended 2022 with more than 11,000 service provider partners who deliver Alarm.com solutions to more than 9.1 million connected property subscribers in over 60 countries around the globe. We now also have hundreds of thousands of Noonlight personal safety subscribers. I want to thank our service provider partners and our employees for their contributions to our 2022 performance. I will use today's call to discuss our long-term strategy, focusing on 4 of our key growth areas. The commercial markets, our video software initiatives, our growing international business and our new venture businesses. These business areas collectively represented nearly 30% of our total SaaS revenue in the fourth quarter. I'll begin with the commercial markets. We have made solid progress in advancing our platform so that we can further target the nearly 6 million properties that make up the commercial market in the U.S. and Canada. The Alarm.com for Business platform addresses small- and medium-sized businesses or the SMB commercial segment. And our commercial video subsidiary, OpenEye is a leading provider of video surveillance as a service for the large-scale enterprise segment. In 2022, OpenEye's SaaS revenue more than doubled as compared to 2021, and they increased total new video channel activations by over 30% over the same period. Our overall commercial account base has grown to well over 0.5 million accounts. Our commercial…

Thanks, Steve. I'll begin with a review of our fourth quarter and full year 2022 financial results and then provide guidance for 2023 before opening the call for questions. Fourth quarter SaaS and license revenue of $134.6 million grew 10.5% from the same quarter last year. Excluding Vivint license revenue, Q4 non-GAAP SaaS and license revenue grew 15.6% year-over-year. SaaS and license revenue includes Connect software license revenue of approximately $6.3 million for the fourth quarter, down as expected from $7.4 million in the year ago quarter. For the full year of 2022, SaaS and license revenue of $520.4 million grew 13% over 2021. Non-GAAP SaaS and license revenue, excluding Vivint license revenue, grew 14.4% in 2022 year-over-year. Our SaaS and license revenue visibility remains high with a revenue renewal rate of 94% in the fourth quarter. Hardware and other revenue grew 11.6% in 2022 to $322.2 million, mainly driven by sales of cameras. Total revenue of $208.1 million for the fourth quarter grew 6.6% from Q4 2021. For the full year of 2022, total revenue grew 12.5% year-over-year to $842.6 million. SaaS and license gross margin for the fourth quarter remained solid at 85.2%. Hardware gross margin was 18.9% for the fourth quarter compared to 11.1% for Q4 2021 due primarily to price increases that we put forth in early 2022. Total gross margin was 61.8% for the fourth quarter, up from 57.8% for Q4 2021, mainly due to the improvement in hardware margins. Turning to operating expenses. R&D expenses in the fourth quarter were $57.4 million compared to $47.6 million in the fourth quarter of 2021, mainly due to an increase in headcount and related compensation expenses. We ended 2022 with 1,004 employees in R&D, up from 837 employees at the end of 2021. Total headcount increased to…

[Operator Instructions]. And it comes from the line of Adam Tindle with Raymond James.

Okay. Congrats on a strong close to the year. Steve Trundle, I wanted to maybe start with you on the new organizational structure. It's really interesting. I was just curious if you can maybe dig deeper into what this perhaps enables from both an operational and maybe even a capital allocation standpoint in each of these 2 businesses, the core and the ventures that could perhaps accelerate trends versus how it was structured previously? I'm curious, Steve, if this is an indication that we may get a breakout of growth or profitability of each of those businesses from a reporting perspective at some point.

Sure. This is Steve Trundle starting. And with the organizational upgrade, I think we'll be better -- first is what decisions to be made more quickly, and you want to try contain the decision at a level where they can be made more quickly. So for example, on the core business side, traditionally, it's been difficult sometimes to arbitrage whether capital in marketing versus R&D that different people in charge ultimately and they in charge their own set of goals. With Dan, now kind of firmly in control of the P&L for North America as well as the investments we're making in R&D and the investments we make in sales and marketing. I'm hopeful that we can ratchet up the capital allocation efficiency a bit and be a level more judicious or more clever in how we choose to deploy capital. All, of course, continue to be involved. And I guess in some ways that the old guy wasn't doing a very good job of it. But the reality is the business has grown. There are a lot of different teams to in a lot of different directions. So really narrowing or trying to drive all of that scope through one person . On the other side of the business, I think if you've been following us for a while, each quarter, I have attempted to give you an update on one of the growth initiatives, whether it be what we're doing on PointCentral or EnergyHub or whatever it may be. Each of those businesses have their own strategies, their own goals and their own P&Ls. They each have their own leader. And it was becoming and it has become progressively more difficult for me to keep track of exactly what the nuts and bolts of each business were. Jeff…

And then Adam, this is Steve Valenzuela. Your question on the breakout of additional breakout of segments. We're going to continue for the time being to continue to show Alarm.com and the other segment of public reporting. For example, for Q4, the SaaS revenue for the Other segment was $13.4 million and hardware revenue was $2.1 million. And this is interesting. This is the first quarter the Other segment SaaS represented 10% of our SaaS revenue. So that's quite an achievement for the Other segment, and that's headed up by Jeff Bedell. And of course, the core in the filings we call Alarm.com. For the year, the Other segment generated $42.2 million of SaaS revenue, 8.3% of hardware revenue, and that grew 26% year-over-year.

Got it. That's helpful, Steve. And maybe just as a follow-up for Steve. You did a nice job kind of covering the rationale for the hardware guidance for 2023. I did think that the SaaS guidance was fairly healthy. On the adjusted numbers, I think 14.4% growth is what you're guiding to in the coming up on a year of 15.6% adjusted growth for the dividend piece. So the point would be not implying a lot of deceleration in the SaaS growth, despite everything going on in the macro environment. I also know that you tend to be conservative with these numbers, but the minimal deceleration and just has me kind of wondering the puts and takes to what looks like a very healthy outlook in the SaaS growth piece. And also what's assumed in ADT, I understand the dividend taken out, you assume some ADT headwind in the hardware was there ADT headwind assumed in the SaaS piece?

So, Adam, yes, again, Steve Valenzuela. So just to clarify, the SaaS growth for 2023 that we're projecting, not counting dividend is about 9.6% year-over-year growth. And what we did achieve for 2022, if you adjust for Vivint is 14.4% year-over growth. And so typically, when we report the first quarter of the year, we do tend to be, of course, conservative and need to be conservative given that we have a lot going on in various different segments of the business. If you look at like 2022, when we initially guided -- when we initially guided the year for -- in this quarter, we guided for 10.5% growth for SaaS, and we came at 14.4% growth. So that being said, there is still a lot going on in terms of a lot of move puts and takes, and you've also got the whole interest rate environment, which could result in fewer moves. The good news there is that there's less attrition when you have fewer moves, but there may be less hardware purchases too, right? There may be fewer installs of new systems. So we've kind of factored that into our guide for 2023. Yes. So a summary there, Adam, I think is if you look back at last year, I think you made the point, but I'll reiterate we guided 10.5% growth. We usually at this juncture in the year, I want to make sure we hit and beat what we guide. We can't guarantee that. This year, we're less than 100 basis points off of that at 9.6% at this juncture. And hopefully, you have some upside in that.

Got it. And sorry, I missed out -- miss to read that in the press release here, but that makes a lot more sense. But the ADT assumption built into that, if you can tell us?

Sure. I can give you a little on that. We have modeled them a tapering of new account origination, same as we have, I think, probably the same commentary as we've shared in prior quarters, but in Q2 of this year and have accounted for that and the guide that we're providing. We don't -- we obviously don't know ADTs exact plan. I think they're having a lot of success with command and control as evidenced by the phenomenal attrition number they put out last quarter and they're driving down their cost to serve with other services and things like that. So I think things are going relatively well for them, and we're not sure exactly what their deployment plan will be. But we have to anticipate something for the purposes of our model, and we've tapered that business in Q2. With the note that we expect to continue to collaborate and partner in certain areas such as commercial, large custom homes areas where we expect to basically just continue to collaborate on an ongoing basis longer term.

[Operator Instructions]. It comes from the line of Darren Aftahi of ROTH.

Two, if I may, follow up on the commentary about the interest rate environment and maybe less news and hence, lower hardware. I guess one of the things that we didn't hear is just general backdrop year-to-date in the Residential and Enterprise segments. And I guess on residential, I'm more curious, in the past, you guys have talked about educating service providers on kind of upgrade cycles. Like how much of an emphasis are you putting on that? And then my second question, maybe for Steve V. It looks like there's a 340 basis point drop on EBITDA margins from '22 versus your '23 guide. I'm more curious how much of that is from revenue in the business versus reinvestment for growth?

So I'll start on the general backdrop residentially and then in the Enterprise segment. I'd say the general backdrop right now is residential North America is not quite as hot as it was during '21 and '22. We're seeing some moderation of builder activities. And just generally, consumers being a little more careful with their pocketbook right now. That said, our Q4 results indicate that there hasn't been a significant or a massive move off at all. And I think historically, we've always indicated and want to remind investors that typically smart home or security businesses actually held up pretty well even if the economy or the economic backdrop changes because people become oftentimes even more concerned about their security and safety. And then when there are fewer moves, there also tends to be less attrition. So you get a nice sort of counterbalance there. In terms of our focus right now with service providers on the residential side, I'd say we're still focused on conditioning them and collaborating with them to expand the ecosystem of products that are going into the home, that's been happening. So continue to drive video attachment rate, thermostat attachment rates and the range of things where we can provide value. We launched a product recently called Water Dragon that I spoke about last quarter, which again is sort of an expansion of the ecosystem. So that tends to be the focus there. And then on the enterprise side, it's probably -- the macro trends are a little different, that it's still more early days in terms of being from on-premise video servers to cloud-based video services from on-premise access control to cloud-based access control from archaic kind of command centers to command centers that fit in your hand on your -- on a mobile app. So there I think the focus is a bit more on helping the partners market to those commercial customers that are ready and willing to take upgrades and then capturing share as people make this transition.

In terms of the impact, in terms of adjusted EBITDA '23 compared to '22, I would say it's about 300 basis points impact from accommodation of less Vivint revenue in '23 and additional legal spend, as we talked about regarding the Vivint matter. Those are really the main drivers of the decel, if you will, or the 300-plus basis point drop in adjusted EBITDA in '23, Darren.

It comes from the line of Brian Ruttenbur with Imperial Capital.

Yes. First of all, housekeeping. Interest income was up in the fourth quarter. Can you help us out for what you're looking for, for first quarter and then for the full year of 2023?

Yes, Brian, it's Steve Valenzuela. So we have been investing very conservatively, of course. But luckily, we've been able to take advantage of our strong cash position and invest our money in 4% plus funds. And so that's the main reason for the increase. And depending upon what happens with the interest rate environment, we would expect interest income to continue to call out the debt in '23.

Okay. So modeling at this 4.7% or higher going forward, seems to like the logical move. And then you also mentioned other housekeeping apologies, but the tax rate on the year was how much you went over that very quickly.

So yes, so we obviously use a fixed tax rate of 21% for non-GAAP. The actual tax rate varies, of course, on a GAAP basis, given the puts and takes with what occurs with stock compensation expense. So it's 21% tax rate, the same as 2022 for non-GAAP.

Okay. And then one other macro question. Given that some of the competitors on the hardware side have reported, like Allegion, Verisure internationally as an operator, they're all calling for weakness on the residential side, but at the same time, they're talking about real deep strength in the commercial. Can you talk a little bit about how much of your business currently is commercial? And are you still seeing strong drivers on the commercial side?

Brian, it's Steve Valenzuela. So commercial continues to do really well. Commercial is now about 8% of our SaaS revenue and it grew over 25% year-over-year in the fourth quarter. And we have over 500,000 commercial accounts now.

So you're seeing continued growth at that 20-plus percent rate?

In the commercial side, yes. Yes, that's correct. We see growth rates there. And I don't think we're quite as bearish on the residential side, maybe as [indiscernible]. Obviously, we have a more mature business there, but we still think we can find attractive health on the residential side.

And we're seeing growth in international to international is now 4% of our revenue, and international total revenue was up 27% year-over-year. So I think international is really helping us out on the residential side as well.

And it comes from Jack Aarde with Maxim Group.

Yes. A couple of housekeeping questions for me as well. Just what was the -- maybe for Steve Valenzuela, what was the former Connect or software license revenue in the fourth quarter?

So the number was $6.4 million, I believe, I mentioned on the call. Let me confirm that. Yes, the former was -- sorry, in Q4 '22, Connect software revenue was $6.3 million, in the year ago quarter in '21, Q4 '21 was $7.4 million.

Got you. Okay. I appreciate that. And then just another clarity question. Can you remind me which businesses combined for, I think, in Steve Trundle's prepared remarks, approximately almost 30% of your fourth quarter SaaS revenue. It sounds like the increased commercial, which Steve V, I think you said 8%. What else include -- what else is included nearly 30% of SaaS revenue?

Sure. Yes, I can outline that in terms of what we include in sort of the faster growing initiatives. They are international, commercial, including small business. And the other segment businesses like EnergyHub. And then lastly would be the video business overall, excluding video to ADT actually.

Got you. Okay. So I guess it sounds like commercial is kind of the bulk of that then, but healthy contribution from all those growth drivers. That's great to hear. And then just one other, I guess, topic to dive a little bit deeper in that, that was encouraging as Steve Valenzuela, you said the Other segment SaaS revenue was $13.4 million for the quarter, and that was 10% or more of the overall in the first time ever. So is that -- I mean, is this now -- where do you see this trending? Is this acceleration a onetime kind of blip? Do you think this is going to continue? When do you think you're going hit 20%? Anything you could provide there?

Well, just to clarify, so it was 10% of total SaaS revenue in the fourth quarter, up 31% year-over-year. For the year, the Other segment SaaS was 8% of total SaaS. So typically, in the fourth quarter, we do get a benefit from energy out from the energy savings in the summer programs. So we'll probably see in the near future of between 8% to 10% for the Other segment. But over a period of time, we do expect to see continued growth from the Other segment as we see energy out in PointCentral, Building 36 contribute going forward. But I don't think I would want to project when we would hit 20%. I think it's great to see for the first time to hit double digits. So that's a good achievement by the team.

And there was a little outperformance there in the fourth quarter because net supplemented [indiscernible] renewed program, which is being powered by EnergyHub and there were a lot of folks signed up to that. So we've got a little better performance there [indiscernible] than we expected.

Got it. And then just one more for me. It's good to see the connected property total. I think it's the first time we reported it since last year, or so. I think that was like 700,000 new properties net since last year. Do you think going forward now, are we going to see a pickup in international contribute to that number? I guess what drove that 700,000 incremental homes or connected properties? And then are those drivers changing now going forward? It sounds like it's going to be more commercial and international loaded maybe, but just sharing your thoughts would be helpful.

Yes. I think there will be some changes. I mean, starting with -- I think on one of the prior questions, I indicated we're modeling in a taper from ADT in the second quarter. And that will be meaningful in terms of numbers. Those accounts typically are at the lowest end of the ARPU range. So what you'll probably see is a higher mix of commercial accounts, international accounts. And I would think -- I mean I think somewhere else, we've indicated that ARPU on the commercial side is at least 2x, but we hope to grow to sort of a 6x level versus residential. So you may see a slight -- a bit of a decline in the overall net subscriber growth year-over-year unless we start cooking other things into that number. And -- but hopefully, we will see some offsetting growth in the ARPU level as the business transitions to continue to sort of be getting more impact from what was going on commercial side.

Okay. Great. That's helpful color. Great quarter, guys. I appreciate the added commentary.

Well, I don't see any further questions in the queue. With this, I will -- I'm sorry, ladies and gentlemen, one moment for our next question. And it comes from the line of Mike Latimore with Northland Capital.

This is Aditya on behalf of Mike Latimore. Could you give some color on if you're seeing any effects of inflation on your business? Like you're seeing any demand dampening among customers? Or are you seeing the longer sales cycle with your service providers?

I'd say we're seeing a little bit of impact. I think we've mentioned that there are 2 places we would look for impact. One is on the pace of new build activity being new home construction. The other is on the pace of sort of existing home sales, which is a proxy for moves, as moves decline, we tend to get a favorable tailwind on attrition. But as new builds decline, then there can be some impact, particularly on the hardware number, if we're not being installed in as many new places. So those are the things we're beginning to see some evidence. We also -- credit is tighter, so the consumer's willingness to make hypothetically a $3,000 purchase is not as high today. They may be more comfortable with a $2,000 purchase if credit is tighter. Do you see a little bit of that? And I think we are seeing some early indications that, that is occurring. You see all these layoffs that are occurring, how meaningfully we don't know, but obviously, when someone unemployed, that tends to be a time that they're not looking to make material new purchases. I'm not sure we have evidence that that's causing any impact today. But there are some modest indications that inflation is impacted.

All right. And what percentage of new subscribers are taking video and what percentage of those are analytics?

So yes, the video attachment rate in the fourth quarter continued to be strong at around 47%. Upper 40% is typically what we've seen. And then those eligible cameras that can take analytics over 95% of those subscribers are taking video analytics. It really goes together really well with the advanced video capabilities we have, combining every video analytics, gives the subscribers the best experience.

And ladies and gentlemen, with that, I will close Q&A and conclude today's program. Thank you for your participation, and you may now disconnect. Good day.

Thank you.