Good day and thank you for standing by. Welcome to the Alarm.com First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Matt Zartman. Please go ahead.

Good afternoon, everyone and welcome to Alarm.com’s first quarter 2023 earnings conference call. Please note that this call is being recorded. Joining us today from Alarm.com are Steve Trundle, our CEO; Steve Valenzuela, our CFO; and Jeff Bedell, President of our Ventures Business and Corporate Strategy. During today’s call, we will be making forward-looking statements, which are predictions, projections, estimates or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. We refer you to the risk factors discussed in our quarterly report on Form 10-Q and our Form 8-K, which will be filed shortly after this call with the SEC, along with the associated press release. This call is subject to these risk factors, and we encourage you to review them. Alarm.com assumes no obligation to update any forward-looking statements or information, which speaks as of their respective dates. In addition, several non-GAAP financial measures will be used in this call. A reconciliation of the GAAP and non-GAAP measures can be found in today’s press release on our Investor Relations website. I will 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 first quarter results that exceeded our expectations. SaaS and license revenue in the first quarter was $135.4 million, resulting in a non-GAAP growth rate of 14.9% over the last year, excluding Vivint. Our adjusted EBITDA in the first quarter was $30.6 million. I am going to touch on a couple of things in the core Alarm.com business and then I am excited to have Jeff Bedell, the President of our Ventures Business and Corporate Strategy, joining the call today. I will be looking to include Jeff or Dan Kerzner, the President of our Platforms business, in future quarterly updates so that we can provide a deeper review of some areas of the business. I’ll start things off with a few takeaways from our recent presence at ISC West, the largest trade show for the physical security industry. Alarm.com’s presence this year reflected our increasingly diversified business profile with Alarm.com, OpenEye and Shooter Detection Systems each having a dedicated presence. Overall, attendance at the show returned to pre-pandemic levels. The commercial market was a significant theme during ISC West. Most of the Alarm.com service provider partners that I met were expanding their use of our commercial services. Recently released products have also helped our partners become better at targeting our platform as specific verticals where they are developing expertise. One of the things we highlighted was our expanded range of third-party camera support. Our video solution will be able to support 80% to 90% of third-party cameras that have been installed in midsized and large commercial settings since 2018. With a more flexible video solution, our service providers can support businesses that want the benefits of our integrated video solution without the cost of replacing existing installed…

Thanks, Steve. It’s great to speak with everyone today, and I look forward to getting to know many of you. I’ll start with an update on OpenEye and their cloud managed video surveillance solution for the commercial market. Video surveillance is a critical system for commercial businesses. Today, many businesses have deployed video systems, but using legacy analog devices. A major technology shift is underway, moving from these older on-premises analog systems to digital devices at the edge, coupled with cloud-based solutions that form the foundation for delivering robust AI-powered video analytics. We continue to invest in the expansion of OpenEye’s platform and business to capture share as this technology shift unfolds. Our recent acquisition of Vintra expands our AI program and will accelerate the development of video analytics capabilities across our platforms, beginning with delivering innovative models to the OpenEye platform. This quarter, OpenEye launched a few new solutions enabled through its open ecosystem architecture. The OpenEye platform allows data from third-party devices to be married to OpenEye video data to generate alerts and enable forensic search capabilities. This allows users to find video content based on external data inputs. The first new offering is OpenEye’s point-of-sale solution called Sales Connect, which integrates transaction data from leading suppliers of point-of-sale systems. Sales Connect triggers real-time alerts for point-of-sales exceptions such as voids, refunds and overrides, and retrieves the corresponding video of the transaction. Sales Connect is sold as an additional SaaS module and significantly strengthens OpenEye’s position in the retail, grocery, and quick serve restaurant verticals. Next, OpenEye launched an integration with third-party environmental sensors, which detects smoke from cigarettes and vapes, monitor temperature, humidity and air quality, and detect sound anomalies. This integration enables OpenEye to associate video with more environmental events, generating as an example vape alerts…

Thanks, Jeff. I’ll begin with a review of our first quarter 2023 financial results and then provide our updated guidance before opening the call for questions. First quarter SaaS and license revenue of $135.4 million grew 9.9% from the same quarter last year. Excluding Vivint license revenue, first quarter 2023 non-GAAP SaaS and license revenue grew 14.9% year-over-year on a comparable basis. SaaS and license revenue includes Connect software license revenue of approximately $6.2 million for the first quarter, down as expected from $7.1 million in the year ago quarter. Our SaaS and license revenue visibility remains high with a revenue renewal rate of 93% in the first quarter, in the middle of our long-term range. Hardware and other revenue in the first quarter was $74.3 million, down from $82.2 million in Q1 2022, mainly due to fewer cellular module sales from the end of the 3G upgrade cycle and fewer camera sales as service providers work down their inventory levels. Total revenue of $209.7 million for the first quarter grew 2.1% year-over-year. SaaS and license gross margin for the first quarter was 85.5%, down slightly from 86.3% in the year ago quarter. Hardware gross margin was 23.9% for the first quarter, consistent with historical trends and up from 11% in Q1 2022, mainly due to improving supply chain dynamics and favorable product mix with more commercial offerings. Total gross margin was 63.7% for the first quarter, up from 56.1% for Q1 2022, mainly due to the improvement in hardware margins and a mix shift to SaaS revenue. Turning to operating expenses, R&D expenses in the first quarter were $61.9 million compared to $51.5 million for the first quarter of 2022, mainly due to an increase in headcount and related compensation expenses and reflecting the cost of acquired teams. We…

Thank you. [Operator Instructions] Our first question comes from Michael Funk with Bank of America. Your line is open.

Hi, yes. This is Matt Bullock on for Mike Funk. Thanks for taking the questions. It was great to hear all that detail about some of your AI products. I was hoping you could give us a little bit more color on how we should think about the artificial intelligence roadmap. And then any additional detail on future monetization in terms of whether or not you’re going to leverage it as primarily a product enhancement or as a vector for new logo additions.

Michael, this is Steve speaking. Well, I think it’s one of the reasons we actually did the, just as evidence of our commitment to that arena, the Vintra acquisition during the quarter that was recently announced where we picked up basically an expansion on our AI video analytics team of about 35% in terms of headcount. So in terms of the overall roadmap, I think any company that’s not sort of looking universally at everything they are doing, both from an operating standpoint, but also from the perspective of user interfaces that they provide to the customer, would be sort of not looking at things the correct way. We’re looking at essentially everything we do, both internally in terms of processes, but also in terms of the way we present UIs to the customer. And of course, we’ve got a pretty long history though on the video analytics side of using AI to improve the insight that we deliver to the customer, and we would expect to continue to expand that. Obviously, the more insight, the more intelligence we can deliver to the consumer, the more valuable the experience, and so it’s sort of right in our crosshairs I would say.

That’s helpful. Thanks. And then just one quick follow-up. Have you noticed any material changes or subtle changes in the competitive environment following some of the M&A activity of competitors?

I haven’t really noticed any changes in the competitive environment. I’m imagining probably what you’re referring to is one of the recent more significant acquisitions where a utility or an energy company acquired a service provider that competes with many of our dealers. I haven’t heard yet that there is been any sort of change though in the overall competitive dynamic and it is sort of business as usual so far.

Excellent. Thanks very much. I will pass it on.

Yes.

Thank you. Our next question comes from Saket Kalia from Barclays. Your line is open.

Okay. Great. Hey, good afternoon, guys. Thanks for taking my questions here. Steve Trundle, maybe for you, just always appreciate kind of just updated thinking that you have on ADP and them as a customer and how things are changing there. And so maybe the question for you is, can we just talk a little bit about any revised thinking on how you’re thinking about commanding control and ADT subscribers kind of starting to roll in? Anything that you can give us just on how that’s sort of rolling into the model, if at all?

Sure. Yes, Saket. Good question. And first, just at a macro level, we continue to collaborate with ADT on multiple fronts. We have I think a great relationship there. I’m very pleased with the record sort of attrition levels that they are getting as a higher and higher percentage of their base are on a smart platform like command control. Things are generally going I think relatively well. We watch, of course, exactly what they are – as much as we can, what they are presenting to the public markets about their internal plans related to their work with Google. And I think we commented publicly at the end of Q4 that we anticipated an increased use by ADT of their new platform. At the end of Q2, that was based on what Jim and the team had presented and maybe we’re being a little conservative in the model, but they have had a couple of reports since then. And I’d say we’re probably now looking really more for that to be something that maybe happens towards the end of the year in Q4. And I want to remind people of course that there will be lots of areas, but the partnership with ADT is pretty broad. There is commercial, there is SMB, there is something called custom home. There are lots of different areas and no single solution is a fit for every area. But we expect, based on their most recent report that we’d begin to see some transition there in the Q4 timeframe, and we’ve updated our models accordingly.

Got it. That’s super helpful. Steve Valenzuela, maybe for you. Great to hear just the operational rigor, right, of the company. I think there was a reference made just to some cost savings. I was just wondering if you could just talk about some of the cost savings that you folks started this quarter, how much do you sort of expect to save annually, and whether we should think about those being reinvested or maybe falling to the bottom line?

Yes, Saket, good point. I mean we did a little cost rationalization really. And if you think about it, most companies actually look at their cost structure, look at their headcount every year and kind of make adjustments. It was fairly minor on our side, and we’re continuing to invest, so we’re continuing to hire employees. The savings from that small reduction really is going to translate into continual hiring. We’ve reflected that into our guidance. We’re going to continue to hire, especially in the R&D area, and so that’s really factored into the guidance we provided for the quarter, for the year.

Very helpful, guys. Thanks so much.

Thank you.

Our next question comes from Matthew Pfau with William Blair. Your line is open.

Hey, great. Thanks for taking my questions. First wanted to you ask on the commentary around access control and that 45% year-over-year growth rate of door installations in the first quarter. I’m guessing that’s higher than what you’ve been seeing, and that’s why you called it out. But maybe if you could just give us some context around that number? And then if so, you’ve been clearly improving that product for some time. If you’re seeing an inflection there, what’s helping to drive that? Thanks.

[27:23]CellConnect:

Great. And then on the commercial opportunity more broadly, you mentioned at ISC West that partners were expanding the use and partly you’ve released new services that help target specific verticals, some of the ones you called out with OpenEye. Is that an important piece of the strategy going forward to gain more traction in commercial? Is that maybe something you feel you’ve been missing as some of those vertical-specific functionality to help drive adoption in that market?

I think so. And Jeff spoke about it a little bit when we talked specifically about OpenEye, but I feel like the closer you get to a ready to install sort of vertical solution that has a set of key integrations with it, the more sort of differentiated your service provider can be in the sales process. We’ve seen that in the MDU business. For example, PointCentral. We have an integration with an entity called UTour, and that helps create some pull-through there where we can do self-guided tours day 1. On the OpenEye side, they made some strides during the quarter to add certain retail analytic integrations that – really not just retail, quick-serve restaurant integrations that really make the solution sort of a better fit for that segment of the market and give them a story they can talk to. There was an earlier question about AI, and as we move forward, I think the more we can leverage some of the capabilities that we’re developing to tailor solutions for specific use cases and be more relevant to a given vertical. A, it’s a great problem for it to be if you’re in the software business. You want to have really solutions that are vertically inclined. And B, I think it will just make the offering more relevant, so it is a focus.

Great. Thank you.

Thanks.

Thank you. One moment, our next question comes from Mark Cash with Raymond James. Your line is open.

This is Mark on for Adam. Thanks for taking our questions. Maybe first starting with Steve T., and if Jeff wants to weigh in on this, but considering the macro and the growth opportunities, first, how are you allocating resources across the four key growth areas of commercial, video, software international and new venture? And as part of that question, you had plans to expand the support for security control panels internationally this year, so how is that coming along? And would you say you have integrated the ones that really open up the opportunity at this point?

Yes. Good question. You said, Steve. There is one Steve that tends to speak probably too much, but I will take it. In terms of the allocation of resources across the different growth areas, I mean we are basically looking at the long-term SaaS growth potential in each domain, modeling that out, looking at what we need to do to either compete or to remain more sticky with our service providers and allocating resources accordingly. In terms of some of the efficiency shaping we did earlier this year, I would say there was generally a move to taper some of the investment we are making in some of the areas that aren’t growing as fast and reallocate some of that investment to commercial, to video, to international, and then to our other segment businesses, especially EnergyHub. So, we are favoring these growth areas. We are willing to live with negative cash contribution for a meaningful period of time so long as we are getting or we can see daylight on 25% plus growth rates in these domains, and that’s what we are seeing so far. So, as they come to scale, we would expect them to continue to contribute to the overall company’s growth. And therefore, they warrant sort of excessive, if you will, excessive resource allocations. With regard to the international piece specifically and the comments I made last quarter about a desire to support a wider array of equipment there, we did complete in the first quarter an acquisition of a company called EBS based in Europe that has been in the business for some time of building universal communicators that work with a lot of the legacy control panels that are already installed by our international dealers. That’s always been a soft spot for Alarm.com. We come in, they love the solution, but they may have a base of 100,000, 200,000, whatever number of customers that are working on older equipment. So, what we are doing there is really taking that universal communicator technology and integrating that into the platform so that we can get back to some of those legacy customers where the cost to replace all their hardware would be prohibitive. So, I think that’s – we are not, in terms of timeframe for that, we just finished that in Q1, finished sort of the deal. And now there is a lot of wood to chop, and we are probably into the third quarter before we are actually able to go to market and say we are supporting all the controls that we would like to. That was the purpose.

Okay. Great. And as a follow-up, last week ADT pointed out seeing impacts from customers not paying. So, I guess first, are you seeing that through your partners? And secondly, could you just comment on the makeup of the business today versus previous macro spinning pullbacks like say in ‘08 and the resiliency that you see now in the business?

Sure. The first part of the question is, are we seeing an impact from customers not paying. So, obviously our customer is the service provider, not the end consumer. Most of our service providers are pretty robust, and I don’t think we have seen any kind of uptick in bad debt. Have we – at least not at a meaningful level.

Not on a meaningful level.

Yes. In terms of are we hearing anything anecdotally? I mean ADT is really the only company that reports publicly on a routine basis. So, we obviously would look to what they say, but I have not been hearing from our other service providers that that’s been a material issue. And everyone goes to market differently, so it can be where you are geographically or what type of customers you serve, whatever. With regard to the second question, I am trying to remember, it was…

Kind of the makeup of the business today versus like an ‘08 when the big pullback happened.

The housing prices. Yes, good question. I don’t think we have seen kind of things being quite as dire as maybe they seemed in 2008. I will just remind folks that generally in a bad market or in a bad macro environment, security tends to be pretty resilient. People tend to get more focused on protecting their assets and protecting their home. They become worried about strangers wandering through the neighborhood and maybe unemployed. So, we didn’t see a huge problem in ‘08 or ‘09 either. You generally get fewer moves, and that results in less attrition, you just get fewer – you may get a slight headwind in terms of new accounts created at the same time. I would say we are seeing about the same. I mean we were pleasantly surprised. The housing market is very hard to figure out how bright now and that there is a shortage of housing stocks. So, builders continue to do relatively well in our universe. I have commented on that. And things look, generally, I would say less at the moment, a little less compressed than ‘08 or ‘09.

Alright. Thanks very much for taking our questions. Appreciate it.

Thank you.

Thank you. Our next question looks like it comes from Darren Aftahi with ROTH. Your line is open.

Hey guys. Thanks for taking my questions. First one, I don’t know if you mentioned, what were the growth rates on the commercial business and international in the quarter? And I guess, Steve, your comments about ISC West, like are you more positive, neutral sort of coming out of that conference as it relates to commercial business?

Darren, it’s Steve Valenzuela. I will take the first question. The growth rates, both for international and commercial, continue to do really well in the mid-25% range. Last quarter, we gave those metrics. We don’t typically give it every quarter, but they are still running at about both at around 25% growth year-over-year, doing quite well.

Yes. And the second question, coming out of ISC West, how do we feel about commercial. I think we have been feeling – there is definitely a sentiment now where a wider and wider array of service providers have at least a portion of their business allocated to commercial and small business. There seems to be a bit more of a greenfield there. Those – a lot of those entities I would say we brought sort of the mobile and smart experience to the residential world 3 years, 4 years, 5 years before it really hit in the commercial world. A lot of the stuff we have been doing for a while, putting control of your home, or now in the case of commercial, control of the enterprise in your hand with the mobile app, is a little bit newer in the commercial space. So, there are more folks looking to be in the market, be upgrading commercial customers, be upgrading SMB customers. And then I am enthusiastic because I thought our teams executed pretty well at the show or had good things to show, had good booth traffic. So, I am not – I would say I was on overall just pleased with the sentiment and the momentum on the commercial side and the feedback that we were getting from service providers there.

Thanks.

Sure.

Our next question comes from Jack Codera from Maxim Group. Your line is open.

Hi. Thanks for taking my questions. This is Jack Codera calling in for Jack Vander Aarde. Lot of great color on the commercial side of the business, last quarter you guys mentioned how ARPUs are a lot higher. I was wondering if you could give any color longer term for expectations of revenue mix between residential and commercial? And then I have one follow-up.

The commercial this quarter was about 8.5% of total SaaS. It was about 7% a year ago. Commercial certainly is growing faster than residential. We haven’t really given a longer term projection. But if you continue to see the trend, certainly commercial is growing at a faster rate, will be a larger and larger percentage of our SaaS revenue going forward. We haven’t really broken out what that would be though.

Okay. Understood. That’s helpful. And then given the macroeconomic effects, I think the explanation you guys have given makes sense, although a little jarring. But I was wondering if you could share any other anecdotal evidence. Is there any effect on residential attachments or any regions that you are seeing different products or different changes in the market dynamics being affected by macro at all? Thank you.

Yes. I mean regionally, there are definitely areas of strength, those being Texas and Florida. I mean you visit – as examples, there are probably more, but those are two where when I go visit a service provider, they are basically as busy as we can be in these markets. So, they are continuing to sort of see robust – good robust macro conditions. We have also seen strength in the last quarter in Canada. We are not exactly sure yet why, but Canada has performed well. Some of the markets you might expect, where you have either declining population or whatnot or maybe not quite as strong, but we haven’t seen any really dramatic macro level impacts thus far. I would say probably the biggest thing is a slightly smaller footprint in terms of the number of devices that the consumer is choosing to purchase at the time of new account installation. Where maybe they are watching sort of their – we haven’t seen a decline in activations, but we have seen them put slightly less hardware on each installation than what we were seeing a year ago. And that’s probably the biggest takeaway on the residential side that I think we have noticed.

Thank you. That’s helpful color.

Sure.

[Operator Instructions] I am showing no other questions in the queue. This does conclude today’s conference call. Thank you for participating. You may now disconnect.

Thank you.