Welcome to day one of the Barclays Tech Conference. My name is Saket Kalia. I cover software here. Honored to have with us Steve Valenzuela, Chief Financial Officer of Alarm.com. I was going to say we have Matt in the audience, but we, I, It's great to be here. Always a great conference. Oh, well, we Yeah. It wouldn't be a conference without you here, Steve, so. Yeah. Well, maybe just to frame the time that we've got here, we've got about 30 minutes together. Yep. Maybe we could take the first 20 or 25 minutes, just go through some fireside chat. Yeah. Which I know is going to be fun. Yeah. And I would love to make this interactive. Any questions from the audience, don't be shy, just pop up your hand and we've got a mic runner on the, in the back. So, again, Steve, thanks so much for being with us here today. Yeah, great to be here. You know, Steve, I just want to just level set for everyone. It was a great Q3 all around. I mean, there were some really fun things to talk about. But just to make sure that we're all on the same page, can you just walk us through some of the highlights that maybe you're really proud of? Yeah. Yeah, well, as Chief Financial Officer, I was very proud of our working capital and our cash flow. Yeah. We generated $60 million in cash bonuses. We have $8 million now, $180 million. We have a $500 million convertible, and zero coupon that's going to mature in January 2026, so we're not in a hurry to do anything with that. We're making good money on that. I wouldn't be honest. But, we're also very happy with the quarter in terms of the growth. So SaaS grew 13.9% year-over-year, adjusted for Vivint on a comparable basis. You know, so if you look at 18.6%. So we're a rule of 30 company plus really based upon that. Hardware was a little bit less than we expected, but we're fine with that because hardware is not recurring, and it's actually a low-margin business, 20% to 25% gross margin business. We make the margin on the SaaS, and that's really our focus. You're a SaaS company, right? We're a SaaS company, and that's where some investors get confused when they look at the overall growth of the revenue. Really have to look at just it at SaaS. The SaaS is highly predictable, highly recurring. I like to say- Absolutely. Especially with the renewal rate of 93%. Yeah. Yeah, for sure. It's been consistent the last couple of years. Absolutely. Absolutely. You know, maybe on your point about around EBITDA, just in the margin, but, you know, what, what I found really impressive was the EBITDA dollars, if I'm not mistaken, are roughly unchanged year-over-year, despite, you know, not having Vivint in there from a revenue perspective. It's based on the expenses. It really showed some of the operating leverage in business. Yeah. Yeah, there is a lot of operating leverage in this business. We've been investing over the last couple of years very heavily in R&D. You know, about 20% of our revenue has been invested in R&D. Now, at some point in particular, that's going to come down, right? But we've diversified the business from North American residential security to international, to commercial, to energy, and so we've built a very diversified business, HVAC, water. And so, those investments are really paying off, as you've noted. We're now 30% of our SaaS are the growth rates that are growing faster than 25% year-over-year. North American residential, which is our, you know, beginning of the company, our core market, if you will, is growing slower. But the growth businesses are really kicking in, if you will, with based on the investments we make. We will continue to see that growth going forward. Yeah, absolutely. A lot of fun topics in there- Yeah I'm gonna dig in a little bit deeper, but maybe just to, maybe just to step back. I want to talk about just interactive security markets a little bit. Yeah. How do you think about the market for professional monitor, right? Because I think it's one component of it. And then how many of them are going to have interactive security, which I'll just define as, you know, something that you can sort of manage with your, with your mobile device here as well. So any sort of thoughts on that, TAM? I'm trying to... You know, I know that there was some numbers that we put out, you know, years ago, but I was just wondering- Yeah If you kind of had those, those numbers handy. Yes. So for North America, there's about 140 to 150 million homes. About 30 million of those have professionally monitored security, meaning that there's a control center, central station that's monitoring. About half of those are interactive. Yeah. The other half are plain old landline, you can't use... You know, you come home, and you punch in your keypad, that's all you can do. Alarm.com innovated the interactive security system many years ago. We converted it to cellular-based. So if you look at that 30 million homes that have professionally monitored security, about half of those have interactive security, and at the end of last year, we announced we had 9.1 million subscribers. So of course, now we have more. We only update that once a year. Yep. You know, we're certainly the market leader by far. Pretty darn sure. The next, next competitor, if you will, is Resideo, which I think last they reported of 2 million subscribers. So you know, clearly, the market leader, we're continuing to innovate, continuing to invest, and we're expanding that, of course, to international, which, by the way, international is as large as North America. Mm-hmm. We've only tapped a very small portion of international. It's only 4% of our revenue, but we acquired a company, this year, actually, EBS in Poland, that has a communicator that actually helps us get into various markets. When you go international, there's some complexities. You've got to connect with different cellular carriers, and then you also have to connect with different control panels. We don't make the control panel. The control panel that is part of the brains that goes with the security system, we interact with Resideo, with Qolsys, with 2GIG. These are control panel manufacturers, JCI. You have to integrate with those various different countries, and that's going to help us accelerate the growth internationally. Yeah. Really interesting that international is just as big as North America. It is. Interesting tidbit. It is. Yeah, I didn't realize that. We haven't even touched the surface. We've done well in Europe, we've done well in Australia, New Zealand, South America. We haven't done much in Asia yet, but there's a number of opportunities in that could be quite significant. Interesting. Interesting... You know, I think that sometimes we see the do-it-yourself products out there, right? Or the DIY products like a Ring- Yes. For example, right? Maybe the question is, how do you think about the DIY market versus sort of the do it for me type of Alarm.com customers, Alarm.com, like myself, by the way, right? Yeah. I want to see the Alarm.com that choose to have something that's professionally installed. How do you sort of think about that, you know, that contrasting, those contrasting with it? Yeah, that's a very good point, 'cause we go to market through our service providers. We have over 11,000 service providers. These are independent dealers who actually are the ones that are marketing to the end subscribers. They're installing the system, they're basically providing the central station and also providing the renewals. We provide the technology, the hosted SaaS technology, for them to be able to operate both their commercial and residential security systems to their customers, as well as the back end. So there's a lot of technology that we provide that the end subscriber doesn't see, the service provider sees. When you look at a DIY basis, DIY has basically been the bear case for Alarm.com for the last 10 years. You know, Ring, Ring acquired, Nest... I'm sorry, Amazon acquired, Google acquired Nest, Ring was acquired by Amazon many years ago, and there was all this about DIY. We continued to grow during that period of time, because the reality is that the DIY customer is different than yourself, you know, who's busy, who you want it professionally installed, you're traveling. You want to make sure that security system is going to work when it's needed, right? The one time. Are you going to trust yourself, your family, you know, with your, with your own doing it yourself? Yep. There is a market for DIY. Arlo with their battery-powered cameras, but it's not a competitive offer, if you will, against Alarm.com. It's interesting, too, if you think about the history here, look at Amazon. Amazon acquired Ring like five years ago, right? They came out with basically their own security system, you know, a couple of years ago, and they've done well with the doorbell, but they've not actually penetrated at all the do it for me market. Google came out with Nest Secure in September 2007. We know that because they partnered with one of our service providers, Ring, to do the monitoring. That was a failure. Matter of fact, Google canceled that product, and they were trying to get into the do it for me market. Now, three years ago, they invested $500 million into ADT. We'll talk about it. Yep. The do it for me market is definitely the preferred market for commercial. There's no, you know, DIY for commercial, of course. Sure. And more for residential as well, for high-end homes or second properties. It's really where the growth is. Now, there's companies out there like Ring. Some of our subscribers actually have a Ring doorbell. They've done a good job with the doorbell, but the subscriber still wants a complete security system that they can trust from the service provider that they can actually reach out to, touch. You know, they can have them service their property, not this big conglomerate where you can't even get a hold of anybody like an Amazon or Google, who are good companies, but, you know, they do a lot of other things. Yeah. Our service providers are focused on providing the security. We go to market, basically, security first, and we've added more features to make it more, interactive, make it a smart property. And in fact, a lot of new subscribers use the security, what's happening around their property, to see when their kids get from school. Yep. Right? Yeah. To see the animals. I always have, like, a fox that comes around my house pretty much every night, and I can see the fox coming around. Make sure it's not going to touch my dog. Yeah. But, Yep. Yep. Yep. So it's amazing. And we haven't talked about AI yet, but we actually acquired a company in 2007, ObjectVideo, that was doing work for the government, based in Reston, Virginia, that we took that team of about 20 PhDs in software analytics and redirected them to AI for video. And then we supplemented that team, and in fact, this year we acquired a company called Vintra, that actually had was based in Silicon Valley, had about 20 PhDs in AI. And what they've been able to do is actually enhance the AI system, not only provide smart alerts, but also for commercial. One thing we've recently come out with is for commercial, think about big enterprises, right? Being able to see whether there's bad actors. The technology that Vintra gave us basically allows us to track a bad actor across thousands of cameras. Not using facial recognition, because there's some bad kind of tactics with that. So not using facial recognition, but actually just being able to classify that person and being able to track them across multiple cameras. You can see what's happening with that person and where they might be going. And so AI is a big part of our solution, and we think it's going to be a game changer as well, not just for residential, but also for commercial. Yeah, absolutely. You know, maybe just to the last couple of questions here on the residential security, because I want to talk about some of the other areas- Yep. -that you, you touched on as well. I often get questions about new home sales. Yep. Right? And so I want to address this head-on. Maybe the first question is: How significant of a business is new home builds for Alarm.com? And then secondly, in this sort of environment, mortgage rates where they are, of course, what did you see model when it comes to things like new retention rates out there? Does that make sense? Yeah, no, absolutely. It's a new home retention rate. So first of all, we do have Beazer Homes, and most of the builders as customers. That said, new home is over the years, it's not that large, and it does add, you know, maybe, you know, 100 basis points or so various, depending upon if the new homes are increasing or not, but it's not that large of an impact on our growth plus or minus. Yeah. Because what's happening is people are hearing from the neighbors, they're, you know, remodeling their homes, they're putting in a security system. The world is not getting any safer, right? And so, homeowners are putting in cameras, they're putting in security systems, not because they bought a new home, but because they want to be secure. The other thing that's really interesting about our model is during challenging times, during slow times and during high mortgage rates, people are not moving. Moves account for about 60% to 70% of our churn. So fewer people moving actually helps the retention, and we have a very high, very predictable retention, 93%, net retention that's been consistent over the last couple of years. So it's actually contra-cyclical, if you will- Yeah -for business. And also when things get difficult in a difficult economy, there's more crime, and people are buying the security system. When you think about a residential customer yourself, you know, you're probably paying—you don't have to tell me the exact amount, but you're probably paying the service provider- Yeah A nywhere from $45 to $65 a month. Right in the mid, right there. That's right. And a streaming service is gonna cost you more than that. What are you gonna get more value out of? What are you gonna turn off first? You'll turn off your streaming service, but are you gonna turn off your security system to your property- It's two mission critical. and your home? Yeah. And you put in all the cameras, and you put in all the equipment? No, you're not. So it's very high retention. The lifetime, the LTV to CAC of our subscribers is probably, we haven't looked at it recently, but probably seven to eight years. And the lifetime is typically eight to 10 years, sometimes even longer, because once you have the security system, you're gonna keep it. The other thing that happens, too, is when people move, the new homeowner has already a lot of the equipment in there, and so it's very easy for the new homeowner to simply call the service provider and turn on the security system, maybe add a few more cameras. Yeah. I have to do that myself, actually. I've got a blind spot in my, my side yard. We have a new camera coming out, a floodlight camera. Oh, interesting. That is really cool. Oh. V729. What that's gonna do, it obviously have the floodlight, but it's also gonna have two-way talk. So if there is somebody that's loitering in your property, the central station could actually tell that person, "You are being monitored," and it'll flash red and blue, and it'll put out an audible alarm. That's coming out. Oh. I'm actually getting one myself. Interesting. Yeah, there you go. That's interesting. You should wait for that. Yeah, I might. I might, I might. Steve, let me just sort of put a bow on- Yeah O n kind of the North American residential part of the business. How big is that, roughly? And you touched on this a little bit, but how fast is it? The North American residential is not growing that fast. It's probably in the single teens, you know, in terms of the actual residential growth. But what's happening, though, is when you think about the 140 million homes, every year, more homes are converting to a security system, and then the 15 million homes that don't have interactive security are upgrading. Every time they upgrade, let's say, upgrades a customer from a legacy to an interactive, that's a new subscriber for us. It's obviously a, you know, upgrade for ADT. So there is a lot of built-in opportunity there in terms of, the cam expansion. But it, it's a big market, so, you know, the growth per se is not as fast as our overall commercial, international video. Now, video is a game changer, though, and we think that that's gonna drive growth even for North American residential because of the AI capabilities. We were talking about AI before everybody else was talking about AI. But we're not trying to jump on the bandwagon here. We came out with a neural network in 2008. I remember. Yeah. Yeah. Yeah, absolutely. So maybe we'll use that. Maybe that's a good segue just into, you know, what I like to call the growth businesses. Yeah. Right? Like, I think to, you know, to your point, I think we've sized these, and it's about 30% of- Yeah of total SaaS Yeah ... and it's growing, in excess of 25%- Correct on a trailing twelve-month basis. That's right. You correct me if I'm wrong. That's exactly right. Maybe the question here to sort of level set for everyone is, can you just remind us what's included in that? And maybe you could stack rank it, right? Maybe not, you know, not too much sort of color, but sort of stack rank it, you know, by size. Okay. You know? Yeah, that's fair. That's fair. So I would say, commercial is part of that picture. We started commercial and energy business about four years ago. Then we have international, and maybe video would probably be before international. Video and video analytics, and today, to touch on that a bit, about half of new subscribers actually have video, which would surprise us, about 100%, but 98% go with video analytics. The good thing about that is our ARPU goes up when you have video and video analytics. So we typically charge a service provider, you know, $5.50 to $6 per month for a base system. If the customer has video and video analytics, we charge the resident subscribers $7 to $8 per month. So video is part of that, video analytics is part of that, energy is part of that. EnergyHub, which is our subsidiary, part of our other segment, the largest piece, really interesting business. The last quarter, that business grew 30% year-over-year. The other segment was EnergyHub. It actually is almost 10% of our staff now, where a year ago, it was 8%. So it's growing nicely. It's becoming relevant. You know, once it gets past 10%- Yeah ... investors tell me they'll start looking at it. We're cool. We're at 9.9% last quarter. We're all set. Moving the needle. Moving the needle. Maybe just to dig into a couple of those, I'm gonna start with video, because I think it's really powerful, the video I use myself, right, with the doorbell. What's driving that demand? What's sort of that adoption, and what... You know, what's sort of taking that adoption rate up? Yeah, the video is really being driven by both residential and commercial, by the way. So, really the analytics is really powerful, being able to have smart alerts. So if you have, like, an Alarm.com system, either residential or commercial, you can get a lot of alerts. If you don't have, you know, the right AI system built in, you can get too many alerts, you can get overwhelmed. So what's really driving it is being able to have these different use cases other than just for the alarm system itself. Like, to be able to see what's happening around your property, see when your family your kids are coming home from school, to see where your pet is, you know, running around in the backyard. So there's all these use cases, and then second homes is another big factor for us. So second homes, people want to see what's happening around their property as well. So video, video analytics, AI, and today, it's a very big opportunity for us because if you look at our, you know, 99.1 million plus subscribers, only about 30% of those. There's still a lot of room for upgrades, and every quarter, about 15% to 20% of cameras are going to existing subscribers, hopefully like yourself- Who are going to upgrade and add more video capability. Yeah. And that's going to continue to evolve. And so also the investment we made in cameras, now cameras are a lot smarter. They're watching doorbells. We've come up with our own doorbell now, where when somebody walks by your doorbell, it'll have a red and blue light, and it'll set an audible alarm. So there's a lot more features now to make it, you know, much more usable. Yeah. There are many different use cases. Yeah, absolutely. You know, the other kind of growth area that I want to touch on is commercial, and I think that's a really interesting one because it really feels like you and Steve Valenzuela have really built the portfolio here much stronger over time, organically and inorganically. How do you think about the size of the TAM there compared to residential? And maybe, you know, it's really helpful to kind of ARPU thoughts that you gave just there on video. Can you just maybe talk similarly, what's the difference in ARPU between sort of commercial and residential as well? Yeah. So TAM, ARPU. So yes, today, commercial is about 9.9% of our total SaaS. It's growing again, faster than overall residential, right? In terms of the ARPU, a typical, like, SMB customer, let's say you have five or six different restaurants in an area, the ARPU there is going to be $10-$40 per month, we're going to charge that customer versus $5 to $7. So the ARPU is definitely higher. The other part about commercial, too, is we have access control, which is something we invested in many years ago, where the property, the business owner can provide access to their employees, delivery personnel, through their smart device, right? So they can activate or deactivate an employee. Matter of fact, we had a recent customer of ours who gave us some feedback, was very happy with our solution. She had five different restaurants. She had to terminate an employee, deactivated his access right away, and that employee tried to come into the store at nighttime- And she was able to prevent that problem. But access control is a small part of our commercial now, but it's growing pretty fast. So that's another component where we charge anywhere from $3 to $4 per door per month for that service, and you can imagine some businesses have a lot of doors, so that can grow, that can scale up pretty quickly. Yeah. So yeah, commercial is a big opportunity. We also acquired OpenEye in September of 2019. That got us into the enterprise segment. This is not SMB. This is, think about large universities, large theme parks with large franchisors, large malls, right? Where you have to protect the property both inside and outside. And so here, what we provide is hundreds of cameras, and we have a control station where the security officer can actually monitor these cameras and see what's happening around their property and be, you know, make sure that there's nothing bad occurring and try to prevent something from bad occurring. And so there's a lot of opportunity there. That now, that enterprise tends to have more cameras, and it's, when we acquired the business, they were actually selling the software as a potential licensed software, not SaaS. We've taken that software, put it into one or another, and we've now been increasing the SaaS offering. Last quarter, that was about $3.1 million in SaaS, whereas when we acquired the company back in 2019, SaaS was $1 million for the full year. It's also growing at a high rate. That's great. That's great. You know, I want to, I want to pivot to some of your, some of your customers that, you know, it's a great model here, right? Yeah. Like, the dealers are your customers, and of course, consumers like me are their end customers, so it's almost like B2B2C. Yep. Right? But, you know, I want to talk about the ADT, right? Who is your largest dealer or customer? Of course, like you mentioned earlier, ADT partnered with Google- Yep ... in residential security. I guess maybe the question is, remind us what you said about the size of this business for Alarm.com and how you've contemplated this in your sort of preliminary 2024 outlook. Yes. So ADT is about 15% of our revenue. As you indicated, about three years ago, Google invested $500 million in ADT. We started our business with ADT back in 2017. We acquired iControl, based in Silicon Valley. And ADT, we worked with ADT for two to three years to come up with their command and control version, which is what we currently have for ADT. When we look at the Google-ADT relationship, when we look at Alarm.com, we have a very good relationship with ADT. We're going to continue to service their subscribers for the natural life of the subscribers. And after ADT announced their agreement with Google, we worked with ADT on this agreement because we have billions of subscribers that we're supporting for ADT, and ADT wants us to continue to support those subscribers. What we've said is that going forward, for 2024, and actually starting in the fourth quarter, ADT announced they're going to start rolling out their ADT Plus solution. So we've baked that into our guidance. Now, going forward, though, there's still going to be many subscribers coming onto Alarm.com that are ADT customers, because it's going to take time to roll that out. Existing subscribers, ADT Command, are going to be staying on the system, and we're going to be managing those for 8-10 years. So there might be 100-200 basis point lower growth, which we baked into our guidance. Coming from maybe new subscribers, but existing subscribers are going to continue to be there. Yeah. For a long time. That's a very long tail, just- Very long tail. Control, right? Very. 93% retention rate. Exactly, yeah. With an 8-10-year life, right? Yes, yes. So that's, that's pretty straightforward. Yes. I want to shift to some modeling. Actually, before we shift to modeling, any questions here for Steve from the audience before we start here? Maybe from a modeling perspective here for you, Steve, I want to touch on the hardware business a little bit. Again, we're a SaaS company, right? Yep. It's clearly not the core business, but it has been a decent size from just an absolute dollar perspective. How are you thinking about hardware growth in 2024, and just going forward in general? Yeah, hardware, really, you know, we price hardware basically at the minimum margin, because we think about once we make a sale on a hardware, we sell to the dealer who sells to the end subscriber. It's a one-time sale. We want that to pass. We price our hardware at 20% to 25% margin to minimize the friction on the initial sale because we know we have you for 8-10 years. So hardware is, is really just an enabler for SaaS in some respects. But the way we look at hardware is how we've kind of evolved over the last couple of years. We, we actually came out with the interactive security system based on cellular modules that we developed, so it's not a system. We've now been licensing that cellular technology to the control panel. So before, we used to sell $ millions of control of cellular modules. We don't sell those anymore. So that's actually affected our hardware revenue, which is fine. We're fine not selling, because we want to reduce the upfront cost for the subscriber to get a system. Then when we think about, like on the enterprise segment, the enterprise and large businesses actually have a higher penetration of security systems than residential. About 50% of businesses have a security system. Most of those are legacy systems that are not cellular-based and are on landline. And so what we've done is we've actually now integrated with a number of other camera manufacturers for the enterprise, so that when our enterprise group goes in to make a sale to a large, let's say, a large franchise or, many of those cameras will be retained, meaning we have fewer hardware sales, which we're fine. We get that recurring cost. So that's the way we look at hardware, and I really encourage investors to not look at hardware, look at the SaaS revenue and the SaaS revenue growth. That's really the leading indicator of a business. Let's face it, hardware doesn't have a high valuation, 1x revenue, but the recurring SaaS that we have, that's highly predictable, has a high, high degree of valuation. Yeah. Agreed. Agreed. You know, of course, both those things really filter down to, again, the dollar generation- Right -that we've seen, despite, you know, headwinds, right? Whether it's litigation costs. Right. Right. So I want to touch on that a little bit. You know, and I call that sort of the roughly similar EBITDA dollars year-over-year, like similar. Right. You know, part of the success there, I think, was just driven by... I think Steve Trundle calls it some recent things. That's right. Bell tightening, right? That's right, yeah. Maybe can you just maybe walk us through that sort of high-level exercise that Alarm.com went through there, and more importantly, how you're thinking about EBITDA margins going forward? Yeah. So, very good point about Vivint, who, you know, the history there, they were a service provider back in 2013. They violated their dealer agreement, came up with their own system. Only, only, dealer that's been able to do that in the last 10 years. ADT hasn't done it yet, by the way. So, what we did was we agreed with them that we would not sue them, we would license our technology. We had 200 patents then, now we have 600 patents. September of last year, all of a sudden, we got the emails that they would license about $6 million of revenue a quarter that went right to the bottom line. And so that's $24 million a year that's come off the bottom line. As Saket mentioned, even as a result of that, we actually took some action to reduce some costs because we do have a lot of leverage in the business, but basically 75% of our costs are people, right? So reductions, we decreased increases, and we were able to have the same EBITDA the third quarter this year as we did a year ago, when a year ago, we had $6 million more profitability. Yeah. So we've been able to move quickly, and I think that shows the leverage in the business, how quickly we rebound and EBITDA back up. You know, in the past, we've been able to generate 20% EBITDA margins. When we went public, we gave a goal of 20% to 25%. Recently, it's been 16%to 18%. Trundle's recent goals, and the near term is 18% EBITDA margins, but that's investing 28%to 30% of our revenue in R&D. Right. At some point in the future, that has to come down, right? Right. At some point in the future, we should be able to have 25% to 30% EBITDA margins. Now, I'm not saying that that's going to happen in the next five years, but it shows the leverage in the business. There's a lot of leverage. Right? Right. Well, I couldn't think of a better point to end on there. Steve, thank you so much for the time. Thank you. Really appreciate you taking the trip here. Thank you for having us. Thank you.