Home security and automation software provider Alarm.com (NASDAQ:ALRM) missed analysts' expectations in Q3 FY2023, with revenue up 2.6% year on year to $221.9 million. On the other hand, its full-year revenue guidance of $880 million at the midpoint came in slightly above analysts' estimates. Turning to EPS, Alarm.com made a GAAP profit of $0.37 per share, improving from its profit of $0.35 per share in the same quarter last year.
Alarm.com (ALRM) Q3 FY2023 Highlights:
- Revenue: $221.9 million vs analyst estimates of $223.4 million (0.7% miss)
- EPS: $0.37 vs analyst estimates of $0.14 ($0.23 beat)
- The company reconfirmed its revenue guidance for the full year of $880 million at the midpoint
- Free Cash Flow of $60.87 million, up 70.1% from the previous quarter
- Gross Margin (GAAP): 63.3%, up from 60.4% in the same quarter last year
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 two years, growing from $192.3 million in Q3 FY2021 to $221.9 million this quarter.
Alarm.com's quarterly revenue was only up 2.6% year on year, which might disappoint some shareholders. On top of that, the company's revenue actually decreased by $2.02 million in Q3 compared to the $14.16 million increase in Q2 2023.
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 63.3% in Q3.
That means that for every $1 in revenue the company had $0.63 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 $60.87 million in Q3, up 623% year on year.
Alarm.com has generated $124.6 million in free cash flow over the last 12 months, a solid 14.2% of revenue. This strong FCF margin stems from its asset-lite business model, giving it optionality and plenty of cash to reinvest in its business.
Key Takeaways from Alarm.com's Q3 Results
Sporting a market capitalization of $2.60 billion, Alarm.com is among smaller companies, but its more than $680 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.
Although its revenue missed analysts' expectations this quarter, Alarm.com beat analysts' gross margin, adjusted EBITDA, and EPS estimates. Its stronger profitability was driven by better-than-expected results in its SaaS and license segment, which is its highest-margin revenue stream. The company also raised next quarter's SaaS and license revenue, adjusted EBITDA, and EPS guidance for next quarter. Overall, this was a pretty good quarter. The stock is up 8.8% after reporting and currently trades at $55.95 per share.
Is Now The Time?
Alarm.com may have had a bad quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
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 very weak over the last two years, and analysts expect growth to deteriorate from here. And while its very efficient customer acquisition hints at the potential for strong profitability, unfortunately 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 3.1x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
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