Home security and automation software provider Alarm.com (NASDAQ:ALRM) reported Q1 CY2024 results exceeding Wall Street analysts' expectations, with revenue up 6.5% year on year to $223.3 million. The company expects the full year's revenue to be around $922.8 million, in line with analysts' estimates. It made a GAAP profit of $0.44 per share, improving from its profit of $0.28 per share in the same quarter last year.
Alarm.com (ALRM) Q1 CY2024 Highlights:
- Revenue: $223.3 million vs analyst estimates of $219.7 million (1.6% beat)
- EPS: $0.44 vs analyst estimates of $0.35 (24.3% beat)
- The company reconfirmed its revenue guidance for the full year of $922.8 million at the midpoint
- Gross Margin (GAAP): 65.7%, up from 63.7% in the same quarter last year
- Free Cash Flow of $46.79 million, up 24.1% from the previous quarter
- Market Capitalization: $3.44 billion
Founded in 2000 as a business unit within MicroStrategy, Alarm.com (NASDAQ:ALRM) is a software-as-a-service platform that enables users to control their security systems and smart home appliances from a single app.
Alarm.com's platform is a response to the proliferation of smart or connected consumer devices and electronics. The company's current flagship product is its cloud-based platform that enables users to control a range of connected devices such as door locks, thermostats, and security cameras through a single digital interface. After leaving home to head to the office, for example, a homeowner can lower the blinds, turn down the heat, and monitor external cameras to see that packages have been delivered.
The key customers of Alarm.com are homeowners, property managers, and business owners who are looking for a reliable and secure solution to manage their properties remotely. Alarm.com generates revenue primarily through service provider partners, who are experts at selling, installing, and supporting the company’s products. In turn, these service provider partners pay Alarm.com monthly fees. For example, Alarm.com partners with leading security companies such as ADT, which sells and installs Alarm.com’s hardware. ADT also sells Alarm.com’s software solutions and may cross-sell ADT products and services as well. Alarm.com in turn receives recurring payments from ADT.
Vertical Software
Software is eating the world, and while a large number of solutions such as project management or video conferencing software can be useful to a wide array of industries, some have very specific needs. As a result, vertical software, which addresses industry-specific workflows, is growing and fueled by the pressures to improve productivity, whether it be for a life sciences, education, or banking company.
Competitors in home automation and security services include ADT (NYSE:ADT) and private companies Vivint and SimpliSafe.Sales Growth
As you can see below, Alarm.com's revenue growth has been unremarkable over the last three years, growing from $172.5 million in Q1 2021 to $223.3 million this quarter.
Alarm.com's quarterly revenue was only up 6.5% year on year, which might disappoint some shareholders. On top of that, the company's revenue actually decreased by $2.95 million in Q1 compared to the $4.38 million increase in Q4 CY2023.
Looking ahead, analysts covering the company were expecting sales to grow 5.5% over the next 12 months before the earnings results announcement.
Profitability
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Alarm.com's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 65.7% in Q1.
That means that for every $1 in revenue the company had $0.66 left to spend on developing new products, sales and marketing, and general administrative overhead. While its gross margin has improved significantly since the previous quarter, Alarm.com's gross margin is still poor for a SaaS business. It's vital that the company continues to improve this key metric.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Alarm.com's free cash flow came in at $46.79 million in Q1, turning positive over the last year.
Alarm.com has generated $181.2 million in free cash flow over the last 12 months, an impressive 20.2% of revenue. This high FCF margin stems from its asset-lite business model and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a cash cushion.
Key Takeaways from Alarm.com's Q1 Results
It was good to see Alarm.com beat analysts' billings, revenue, and EPS expectations this quarter. We were also glad its gross margin improved. On the other hand, its full-year revenue guidance missed Wall Street's estimates. Overall, this quarter's results seemed fairly positive and shareholders should feel optimistic. The stock is up 1.9% after reporting and currently trades at $69.99 per share.
Is Now The Time?
When considering an investment in Alarm.com, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
We cheer for everyone who's making the lives of others easier through technology, but in case of Alarm.com, we'll be cheering from the sidelines. Its revenue growth has been uninspiring over the last three years, and analysts expect growth to deteriorate from here. And while its bountiful generation of free cash flow empowers it to invest in growth initiatives, the downside is its customer acquisition is less efficient than many comparable companies. On top of that, its gross margins show its business model is much less lucrative than the best software businesses.
Alarm.com's price-to-sales ratio based on the next 12 months is 4.0x, suggesting the market has lower expectations for the business relative to the hottest tech stocks. While there are some things to like about Alarm.com and its valuation is reasonable, we think there are better opportunities elsewhere in the market right now.
Wall Street analysts covering the company had a one-year price target of $80.57 right before these results (compared to the current share price of $69.99).
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