ALRM - Alarm.com Seeks International Commercial Growth As Consumer Confidence Sags

2023-08-31 13:48:37 ET

Summary

• Alarm.com Holdings, Inc. has reported its Q2 2023 financial results, beating revenue and EPS estimates.
• The company sells cloud-based security products and services to residential and commercial customers.
• Alarm.com's forward revenue guidance indicates reduced growth in 2023.
• U.S. consumer confidence appears to be weakening.
• I remain Neutral [Hold] on Alarm.com Holdings, Inc. shares for the near term.

A Quick Take On Alarm.com

Alarm.com Holdings, Inc. ( ALRM ) reported its Q2 2023 financial results on August 9, 2023, beating both revenue and EPS consensus estimates.

The company sells cloud-based security products and services as well as automation solutions to residential and commercial customers.

I previously wrote about ALRM with a Hold outlook on lower forward revenue guidance.

Alarm.com Holdings, Inc.'s tepid growth outlook is not surprising, given weakening consumer confidence.

I remain Neutral [Hold] on ALRM for the near term.

Alarm.com Overview And Market

Tysons, Virginia-based Alarm.com was founded in 2000 and offers a suite of security and "intelligent building services" in the U.S. and internationally.

The firm is headed by CEO Stephen Trundle, who was previously CTO at MicroStrategy and MDI at Bath Iron Works.

The company’s primary offerings include:

• Security & Safety

• Video Monitoring

• Home Management

• Wellness

• Access Control

• Energy Management & Temperature Monitoring

• Multi-location Management

The firm pursues customers from its direct marketing and sales efforts for large accounts, through partners and resellers and via its website for smaller customers.

According to a 2023 market research report by Grand View Research, the global market for burglar alarm monitoring was an estimated $4.16 billion in 202 and is forecast to reach $6.8 billion by 2030.

This represents a forecast CAGR (Compound Annual Growth Rate) of 6.3% from 2023 to 2030.

The main drivers for this expected growth are a growing adoption of AI- and Internet of Things-enabled systems that provide increased capabilities for users.

Also, intelligent sensors and video analytics are becoming more adept at communication with a variety of software systems as they become more integrated.

Also, the monitoring market is becoming more fragmented, with newer service providers such as Google and Amazon entering the market and other smaller players doing so as well.

The global burglar alarm monitoring market pie chart is shown here:

Alarm.com’s Recent Financial Trends

• Total revenue by quarter has trended higher; Operating income by quarter has fluctuated within a range:

• Gross profit margin by quarter has trended higher in recent quarters; Selling and G&A expenses as a percentage of total revenue by quarter have also moved higher recently, suggesting reduced efficiency in generating revenue.

• Earnings per share (Diluted) have varied materially by quarter but appear to be trending higher: more recently:

(All data in the above charts is GAAP.)

In the past 12 months, ALRM’s stock price has fallen 12.06% vs. that of ADT Inc.’s ( ADT ) drop of 12.3%:

For balance sheet results, the firm ended the quarter with $627.0 million in cash, equivalents and trading asset securities and $491.9 million in long-term debt, with no current maturities.

Over the trailing twelve months, free cash flow was approximately $72.2 million, during which capital expenditures were $5.7 million. The company paid $52.4 million in stock-based compensation, or SBC, in the last four quarters.

Valuation And Other Metrics For Alarm.com

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

As a reference, a relevant partial public comparable would be ADT; shown below is a comparison of their primary valuation metrics:

(Source - Seeking Alpha.)

Sentiment Analysis

I produced a word count sentiment analysis of management’s most recent earnings call commentary:

The chart above references several negative terms, including Uncertain, Challenge, Macro and Drop.

A website traffic chart over the past two years indicates a trend lower in traffic to the company's website in recent quarters, although the most recent has seen an uptick, as provided by SEMRush:

Commentary On Alarm.com

In its last earnings call (Source - Seeking Alpha ), covering Q2 2023’s results , management highlighted the growth in SaaS and license revenue of 13.3% year over year (Non-GAAP).

Leadership also noted continued focus on its growth strategies in "commercial, international video and our venture businesses."

The company recently launched what it calls the lowest maintenance video doorbell product, with a much wider temperature performance range than major competitors, per management.

The company’s customer renewal retention rate has been in the range of 92% - 94% and is somewhat dependent on the overall user moving rate.

Total revenue for Q2 2023 rose by 5.2% year over year and gross profit margin increased by 2.4%.

Selling and G&A expenses as a percentage of revenue increased only 0.7% YoY and operating income grew by 6.0%.

The company's financial position is reasonably good, with substantial liquidity in excess of its long-term debt. Free cash flow was strong at $72.2 million for the quarter.

Looking ahead, 2023 full-year consensus revenue growth is expected to be 4.3% over 2022.

If achieved, this would represent a material drop in revenue growth rate versus 2022’s growth rate of 12.47% over 2021.

Regarding valuation, in the past twelve months, the firm's EV/EBITDA valuation multiple has fallen a net of 11.1%, as the chart from Seeking Alpha shows below:

A potential upside catalyst to the stock could include increased revenue per management’s guidance increase, perhaps due to improved international results or the higher ARPU from its commercial segment efforts.

While the stock’s EV/EBITDA multiple may have bottomed, I’m concerned about forward revenue growth prospects at only 4.3%, especially in light of worsening consumer confidence.

The Conference Board’s most recent gauge of U.S. consumer confidence fell, continuing its downward trend in recent months, as the chart shows below:

With dropping consumer confidence and management’s guidance for only a tepid 4.3% revenue growth in 2023, I remain Neutral [Hold] on Alarm.com Holdings, Inc. stock for the near term.

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