Alarm.com (ALRM)

Smart property technology provider Alarm.com (NASDAQ:ALRM) reported Q4 CY2025 results topping the market’s revenue expectations, with sales up 8% year on year to $261.7 million. On the other hand, the company’s full-year revenue guidance of $1.06 million at the midpoint came in 99.9% below analysts’ estimates. Its non-GAAP profit of $0.78 per share was 21.5% above analysts’ consensus estimates.

Company Overview

Processing over 325 billion data points annually from more than 150 million connected devices, Alarm.com (NASDAQ:ALRM) provides cloud-based platforms that enable residential and commercial property owners to remotely monitor and control their security, video, energy, and other connected devices.

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.

Alarm.com competes with other smart property technology platforms including Resideo Technologies (NYSE: RESI), Honeywell (NASDAQ: HON), and privately-held companies like SecureNet and Brivo. The company also faces competition from direct-to-consumer security providers such as SimpliSafe and Ring (owned by Amazon), as well as broader smart home offerings from tech giants like Google's Nest and integrated security services from telecom companies like Comcast (NASDAQ: CMCSA).

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Alarm.com grew its sales at a 10.3% compounded annual growth rate. Though this growth is acceptable on an absolute basis, we need to see more than just topline growth for the software sector, which can display significant earnings volatility. This means our bar for the sector is particularly high, reflecting the non-essential and hit-driven nature of the products and services offered. Additionally, five-year CAGR starts around Covid, when revenue was depressed then rebounded.

Long-term growth is the most important, but within software, a half-decade historical view may miss new innovations or demand cycles. Alarm.com’s recent performance shows its demand has slowed as its annualized revenue growth of 7.1% over the last two years was below its five-year trend. We’re wary when companies in the sector see decelerations in revenue growth, as it could signal changing consumer tastes aided by low switching costs.

This quarter, Alarm.com reported year-on-year revenue growth of 8%, and its $261.7 million of revenue exceeded Wall Street’s estimates by 4.3%.

Looking ahead, sell-side analysts expect revenue to grow 2.9% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and indicates its products and services will see some demand headwinds.

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 $260.5 million in Q4, and over the last four quarters, its growth was underwhelming as it averaged 7.2% 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 substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 66.1% gross margin over the last year. Said differently, Alarm.com had to pay a chunky $33.85 to its service providers for every $100 in revenue.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Alarm.com has seen gross margins improve by 3 percentage points over the last 2 year, which is very good in the software space.

This quarter, Alarm.com’s gross profit margin was 66%, in line with the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Alarm.com has been an efficient company over the last year. It was one of the more profitable businesses in the software sector, boasting an average operating margin of 13.2%. 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 1.7 percentage points over the last two years, as its sales growth gave it operating leverage.

This quarter, Alarm.com generated an operating margin profit margin of 13.4%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

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 mediocre cash profitability over the last year, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 13.6%, subpar for a software business. The divergence from its good operating margin stems from its capital-intensive business model, which requires Alarm.com to make large cash investments in working capital (i.e., stocking inventories) and capital expenditures (i.e., building new facilities).

Alarm.com’s free cash flow clocked in at $35.07 million in Q4, equivalent to a 13.4% margin. The company’s cash profitability regressed as it was 8.9 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.

Over the next year, analysts predict Alarm.com’s cash conversion will improve. Their consensus estimates imply its free cash flow margin of 13.6% for the last 12 months will increase to 19.9%, giving it more flexibility for investments, share buybacks, and dividends.

Companies with more cash than debt have lower bankruptcy risk.

Alarm.com is a profitable, well-capitalized company with $960.6 million of cash and $565.8 million of debt on its balance sheet. This $394.8 million net cash position is 17.5% 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 happy its revenue outperformed Wall Street’s estimates. On the other hand, its full-year revenue guidance fell short of Wall Street’s estimates. Still, this print was mostly positive. The stock traded up 7.9% to $48.74 immediately following the results.

Updated: February 19, 2026 at 9:43 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Alarm.com.

We cheer for all companies solving complex business issues, but in the case of Alarm.com, we’ll be cheering from the sidelines. To kick things off, its revenue growth was uninspiring over the last five years, and analysts expect its demand to deteriorate over the next 12 months. While its efficient sales strategy allows it to target and onboard new users at scale, the downside is its expanding operating margin shows it’s becoming more efficient at building and selling its software. On top of that, 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 2.5x. While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $63.83 on the company (compared to the current share price of $48.55).

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.