Alarm.com (ALRM)

Home security and automation software provider Alarm.com (NASDAQ:ALRM) reported Q1 CY2025 results beating Wall Street’s revenue expectations, with sales up 7% year on year to $238.8 million. The company expects the full year’s revenue to be around $983.5 million, close to analysts’ estimates. Its non-GAAP profit of $0.54 per share was 13.8% above analysts’ consensus estimates.

Company Overview

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.

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.

A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last three years, Alarm.com grew its sales at a weak 6.9% compounded annual growth rate. This fell short of our benchmark for the software sector and is a poor baseline for our analysis.

This quarter, Alarm.com reported year-on-year revenue growth of 7%, and its $238.8 million of revenue exceeded Wall Street’s estimates by 1.9%.

Looking ahead, sell-side analysts expect revenue to grow 3.6% over the next 12 months, a deceleration versus the last three years. This projection doesn't excite us and indicates its products and services will face some demand challenges.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Alarm.com’s billings came in at $239.8 million in Q1, and over the last four quarters, its growth was underwhelming as it averaged 6.6% year-on-year increases. This performance mirrored its total sales and suggests that increasing competition is causing challenges in acquiring/retaining customers.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

Alarm.com is extremely efficient at acquiring new customers, and its CAC payback period checked in at 15.3 months this quarter. The company’s rapid recovery of its customer acquisition costs means it can attempt to spur growth by increasing its sales and marketing investments.

For software companies like Alarm.com, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Alarm.com’s gross margin is worse than the software industry average, giving it less room than its competitors to hire new talent that can expand its products and services. As you can see below, it averaged a 65.7% gross margin over the last year. That means Alarm.com paid its providers a lot of money ($34.32 for every $100 in revenue) to run its business.

Alarm.com’s gross profit margin came in at 67.2% this quarter, up 1.5 percentage points year on year. Alarm.com’s full-year margin has also been trending up over the past 12 months, increasing by 2 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as servers).

Alarm.com has been a well-oiled machine over the last year. It demonstrated elite profitability for a software business, boasting an average operating margin of 12.5%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Looking at the trend in its profitability, Alarm.com’s operating margin rose by 3.9 percentage points over the last year, as its sales growth gave it operating leverage.

In Q1, Alarm.com generated an operating profit margin of 12.4%, up 4 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Alarm.com has shown impressive cash profitability, driven by its cost-effective customer acquisition strategy that gives it the option to invest in new products and services rather than sales and marketing. The company’s free cash flow margin averaged 17.5% over the last year, better than the broader software sector.

Alarm.com’s free cash flow clocked in at $17.94 million in Q1, equivalent to a 7.5% margin. The company’s cash profitability regressed as it was 13.4 percentage points lower than in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

Alarm.com is a profitable, well-capitalized company with $1.19 billion of cash and $565.9 million of debt on its balance sheet. This $620.3 million net cash position is 23.4% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly Alarm.com blew past analysts’ EBITDA expectations this quarter. We were also glad its full-year EBITDA guidance slightly exceeded Wall Street’s estimates. Overall, we think this was a solid quarter with some key areas of upside. The stock remained flat at $55 immediately after reporting.

Updated: May 16, 2025 at 10:27 PM EDT

When considering an investment in Alarm.com, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

Alarm.com’s business quality ultimately falls short of our standards. To begin with, its revenue growth was weak over the last three years, and analysts expect its demand to deteriorate over the next 12 months. And while Alarm.com’s efficient sales strategy allows it to target and onboard new users at scale, its gross margins show its business model is much less lucrative than other companies.

Alarm.com’s price-to-sales ratio based on the next 12 months is 3.6x. Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $69.38 on the company (compared to the current share price of $60.28).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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