Home security and automation software provider Alarm.com (NASDAQ:ALRM) beat analyst expectations in Q1 FY2023 quarter, with revenue up 2.08% year on year to $209.7 million. Alarm.com made a GAAP profit of $14.2 million, improving on its profit of $8.9 million, in the same quarter last year.
Alarm.com (ALRM) Q1 FY2023 Highlights:
- Revenue: $209.7 million vs analyst estimates of $207.3 million (1.17% beat)
- EPS: $0.28 vs analyst estimates of $0.04 ($0.24 beat)
- The company reconfirmed revenue guidance for the full year, at $868.7 million at the midpoint
- Free cash flow was negative $5.92 million, down from positive free cash flow of $33.9 million in previous quarter
- Gross Margin (GAAP): 63.7%, up from 56.1% 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.
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, there are industries that have very specific needs. Whether it is life-sciences, education or banking, the demand for so called vertical software, addressing industry specific workflows, is growing, fueled by the pressures on improving productivity and quality of offerings.Competitors in home automation and security services include ADT (NYSE:ADT) and private companies Vivint and SimpliSafe.
As you can see below, Alarm.com's revenue growth has been mediocre over the last two years, growing from quarterly revenue of $172.5 million in Q1 FY2021, to $209.7 million.
Alarm.com's quarterly revenue was only up 2.08% year on year, which might disappoint some shareholders. But at least the revenue increased $1.58 million quarter on quarter, a strong improvement on the $8 million decrease in Q4 2022, and a sign of acceleration of growth, which is very nice to see indeed.
Ahead of the earnings results the analysts covering the company were estimating sales to grow 4% over the next twelve months.
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 is left after paying for servers, licenses, technical support and other necessary running expenses was at 63.7% in Q1.
That means that for every $1 in revenue the company had $0.64 left to spend on developing new products, marketing & sales and the general administrative overhead. While it improved significantly from the previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements continue.
Cash Is King
If you have followed StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Alarm.com burned through $5.92 million in Q1, reducing the cash burn by 63.3% year on year.
Alarm.com has generated $38.5 million in free cash flow over the last twelve months, a decent 4.54% of revenues. This FCF margin is a result of Alarm.com asset lite business model, and provides it with optionality and decent amount of cash to invest in the business.
Key Takeaways from Alarm.com's Q1 Results
With a market capitalization of $2.36 billion Alarm.com is among smaller companies, but its more than $606.4 million in cash and positive free cash flow over the last twelve months give us confidence that Alarm.com has the resources it needs to pursue a high growth business strategy.
We enjoyed seeing Alarm.com’s improve their gross margin materially this quarter. And we were also happy to see it topped analysts’ revenue expectations, even if just narrowly. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is up 2.55% on the results and currently trades at $49.08 per share.
Is Now The Time?
When considering Alarm.com, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in case of Alarm.com we will be cheering from the sidelines. Its revenue growth has been weak, and analysts expect growth rates to deteriorate from there. And while its ability to generate free cash flow avoids a dependency on capital markets, unfortunately 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 twelve months is 3.0x, 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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