10-Q 1 alrm-20240331.htm 10-Q ALARM.COM HOLDINGS, INC. MARCH 31, 2024 alrm-20240331
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2024
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-37461
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ALARM.COM HOLDINGS, INC.

(Exact name of registrant as specified in its charter)
 
Delaware26-4247032
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
8281 Greensboro DriveSuite 100TysonsVirginia
22102
(Address of principal executive offices)
(Zip Code)
Tel: (877) 389-4033
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, $0.01 par value per shareALRMThe Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þ Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated FilerþAccelerated Filer¨
Non-Accelerated Filer¨
Smaller Reporting Company
¨
Emerging Growth Company
¨




If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ¨ Yes þ No

As of May 2, 2024, there were 50,188,716 outstanding shares of the registrant's common stock, par value $0.01 per share.



ALARM.COM HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDED MARCH 31, 2024

TABLE OF CONTENTS
 Page
1


PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS (unaudited)

ALARM.COM HOLDINGS, INC.
Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
(unaudited)
 Three Months Ended
March 31,
 20242023
Revenue:
SaaS and license revenue$150,344 $135,394 
Hardware and other revenue72,939 74,322 
Total revenue223,283 209,716 
Cost of revenue(1):
Cost of SaaS and license revenue20,428 19,583 
Cost of hardware and other revenue56,087 56,589 
Total cost of revenue76,515 76,172 
Operating expenses:
Sales and marketing25,454 26,645 
General and administrative29,296 28,499 
Research and development65,956 61,908 
Amortization and depreciation7,337 7,673 
Total operating expenses128,043 124,725 
Operating income18,725 8,819 
Interest expense(796)(868)
Interest income8,540 5,182 
Other expense, net(318)(148)
Income before income taxes26,151 12,985 
Provision for / (benefit from) income taxes2,747 (1,222)
Net income23,404 14,207 
Net loss attributable to redeemable noncontrolling interests191 209 
Net income attributable to common stockholders$23,595 $14,416 
Per share information attributable to common stockholders:
Net income per share:
Basic$0.47 $0.29 
Diluted$0.44 $0.28 
Weighted average common shares outstanding:
Basic49,963,265 49,584,890 
Diluted55,047,087 54,296,321 
_______________
(1)Exclusive of amortization and depreciation shown in operating expenses below.


See accompanying notes to the condensed consolidated financial statements.





2



ALARM.COM HOLDINGS, INC.
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)
 Three Months Ended
March 31,
 20242023
Net income$23,404 $14,207 
Other comprehensive (loss) / income
Foreign currency translation adjustment(147)170 
Total other comprehensive (loss) / income(147)170 
Comprehensive income23,257 14,377 
Comprehensive loss attributable to redeemable noncontrolling interests191 209 
Comprehensive income attributable to common stockholders$23,448 $14,586 

See accompanying notes to the condensed consolidated financial statements.
3

ALARM.COM HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
(unaudited)

March 31,
2024
December 31,
2023
Assets
Current assets:
Cash and cash equivalents$747,877 $696,983 
Accounts receivable, net of allowance for credit losses of $4,054 and $3,864, and net of allowance for product returns of $2,595 and $2,279 as of March 31, 2024 and December 31, 2023, respectively
128,451 130,626 
Inventory85,723 96,140 
Other current assets, net35,812 33,031 
Total current assets997,863 956,780 
Property and equipment, net55,365 54,164 
Intangible assets, net74,358 78,564 
Goodwill154,433 154,498 
Deferred tax assets145,258 131,815 
Operating lease right-of-use assets24,324 24,242 
Other assets, net of allowance for credit losses of $4,003 and $5 as of March 31, 2024 and December 31, 2023, respectively
35,381 39,500 
Total assets$1,486,982 $1,439,563 
Liabilities, redeemable noncontrolling interests and stockholders’ equity
Current liabilities:
Accounts payable, accrued expenses and other current liabilities$137,551 $124,475 
Accrued compensation20,418 28,626 
Deferred revenue11,125 10,193 
Operating lease liabilities12,101 12,043 
Total current liabilities181,195 175,337 
Deferred revenue13,087 12,692 
Convertible senior notes, net494,305 493,515 
Operating lease liabilities20,886 20,468 
Other liabilities11,703 12,697 
Total liabilities721,176 714,709 
Commitments and contingencies (Note 12)
Redeemable noncontrolling interests37,712 36,308 
Stockholders’ equity
Preferred stock, $0.001 par value, 10,000,000 shares authorized; no shares issued and outstanding as of March 31, 2024 and December 31, 2023
  
Common stock, $0.01 par value, 300,000,000 shares authorized; 52,113,344 and 51,888,838 shares issued; and 50,092,681 and 49,868,175 shares outstanding as of March 31, 2024 and December 31, 2023, respectively
521 519 
Additional paid-in capital547,832 531,734 
Treasury stock, at cost; 2,020,663 shares as of March 31, 2024 and December 31, 2023
(111,291)(111,291)
Accumulated other comprehensive income1,251 1,398 
Retained earnings289,781 266,186 
Total stockholders’ equity728,094 688,546 
Total liabilities, redeemable noncontrolling interests and stockholders’ equity$1,486,982 $1,439,563 

See accompanying notes to the condensed consolidated financial statements.
4

ALARM.COM HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

 Three Months Ended
March 31,
Cash flows from / (used in) operating activities:20242023
Net income$23,404 $14,207 
Adjustments to reconcile net income to net cash flows from / (used in) operating activities:
Provision for credit losses on accounts receivable254 540 
Reserve for product returns1,149 1,151 
Provision for credit losses on notes receivable3,998  
Amortization on patents and tooling220 316 
Amortization and depreciation7,337 7,673 
Amortization of debt issuance costs790 784 
Amortization of operating leases2,976 2,750 
Deferred income taxes(13,443)(26,895)
Change in fair value of contingent liability31 13 
Stock-based compensation11,268 12,686 
Changes in operating assets and liabilities (net of business acquisitions):
Accounts receivable826 (1,843)
Inventory10,382 377 
Other current and non-current assets(962)(689)
Accounts payable, accrued expenses and other current liabilities4,524 (9,617)
Deferred revenue1,327 1,899 
Operating lease liabilities(3,221)(3,362)
Other liabilities(1,007)(3,511)
Cash flows from / (used in) operating activities49,853 (3,521)
Cash flows used in investing activities:
Business acquisition, net of cash acquired (9,696)
Additions to property and equipment(3,066)(2,398)
Issuances of notes receivable(500)(300)
Receipt of payments on notes receivable13 13 
Capitalized software development costs(408)(362)
Purchase of investment in unconsolidated entity (200)
Cash flows used in investing activities(3,961)(12,943)
Cash flows from financing activities:
Payments of acquired debt  (469)
Issuances of common stock from equity-based plans6,356 1,311 
Cash flows from financing activities6,356 842 
Effect of exchange rate changes on cash, cash equivalents and restricted cash (180)13 
Net increase / (decrease) in cash, cash equivalents and restricted cash52,068 (15,609)
Cash, cash equivalents and restricted cash at beginning of the period701,079 622,879 
Cash, cash equivalents and restricted cash at end of the period$753,147 $607,270 
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents$747,877 $606,428 
Restricted cash included in other current assets and other assets5,270 842 
Total cash, cash equivalents and restricted cash$753,147 $607,270 

See accompanying notes to the condensed consolidated financial statements.
5

ALARM.COM HOLDINGS, INC.
Condensed Consolidated Statements of Equity
(in thousands)
(unaudited)

Redeemable Noncontrolling InterestsAdditional Paid-In CapitalAccumulated Other Comprehensive Income / (Loss)Retained EarningsTotal Stockholders’ Equity
Common StockTreasury Stock
 SharesAmountSharesAmount
Balance as of December 31, 2023$36,308 51,889 $519 $531,734 2,021 $(111,291)$1,398 $266,186 $688,546 
Common stock issued in connection with equity-based plans— 224 2 6,354 — — — — 6,356 
Stock-based compensation expense— — — 11,339 — — — — 11,339 
Accretion adjustments of redeemable noncontrolling interest to redemption value1,595 — — (1,595)— — — — (1,595)
Net income / (loss) attributable to common stockholders(191)— — — — — — 23,595 23,595 
Other comprehensive loss— — — — — — (147)— (147)
Balance as of March 31, 2024$37,712 52,113 $521 $547,832 2,021 $(111,291)$1,251 $289,781 $728,094 


Redeemable Noncontrolling InterestsCommon StockAdditional Paid-In CapitalTreasury StockAccumulated Other Comprehensive IncomeRetained EarningsTotal Stockholders’ Equity
 SharesAmountSharesAmount
Balance as of December 31, 2022$23,988 50,985 $510 $497,199 1,533 $(83,993)$ $185,143 $598,859 
Common stock issued in connection with equity-based plans— 270 3 1,308 — — — — 1,311 
Stock-based compensation expense— — — 12,686 — — — — 12,686 
Accretion adjustments of redeemable noncontrolling interest to redemption value2,061 — — (2,061)— — — — (2,061)
Net income / (loss) attributable to common stockholders(209)— — — — — — 14,416 14,416 
Other comprehensive income— — — — — — 170 — 170 
Balance as of March 31, 2023$25,840 51,255 $513 $509,132 1,533 $(83,993)$170 $199,559 $625,381 

See accompanying notes to the condensed consolidated financial statements.
6

ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
March 31, 2024 and 2023

Note 1. Organization

Alarm.com Holdings, Inc. (referred to herein as Alarm.com, the Company, or we) is the leading platform for the intelligently connected property. Our cloud-based platform offers an expansive suite of Internet of Things, or IoT, solutions addressing opportunities in the residential, multi-family, small business and enterprise commercial markets. Alarm.com’s solutions include security, video and video analytics, energy management, access control, electric utility grid management, indoor gunshot detection, water management, health and wellness and data-rich emergency response. Our solutions are delivered through an established network of trusted service provider partners, who are experts at selling, installing and supporting our solutions. We derive revenue from the sale of our cloud-based Software-as-a-Service, or SaaS, services, license fees, software, hardware, activation fees and other revenue. Our fiscal year ends on December 31.

Note 2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include our accounts and those of our majority-owned and controlled subsidiaries after elimination of intercompany accounts and transactions.

These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission, or SEC. Accordingly, they do not include all the information and footnotes required by GAAP for annual financial statements. They should be read together with our audited consolidated financial statements and related notes thereto for the year ended December 31, 2023 included in our Annual Report on Form 10-K filed with the SEC on February 22, 2024, or the Annual Report. The condensed consolidated balance sheet as of December 31, 2023 was derived from our audited financial statements but does not include all disclosures required by GAAP for annual financial statements.

In the opinion of management, these condensed consolidated financial statements include all normal recurring adjustments necessary for a fair statement of the results of operations, financial position and cash flows for the periods presented. However, the global economy, credit markets and financial markets have and may continue to experience significant volatility as a result of significant worldwide events, including public health crises, and geopolitical upheaval, such as Russia’s incursion into Ukraine and the conflict between Israel and regional adversaries, disruptions to global supply chains, rising interest rates, risk of recession and inflation (collectively, the Macroeconomic Conditions). These Macroeconomic Conditions have and may continue to create supply chain disruptions, inventory disruptions, and fluctuations in economic growth, including fluctuations in employment rates, inflation, energy prices and consumer sentiment. It remains difficult to assess or predict the ultimate duration and economic impact of the Macroeconomic Conditions. The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results that can be expected for our entire fiscal year ending December 31, 2024, which is increasingly true in periods of extreme uncertainty, such as the uncertainty caused by the Macroeconomic Conditions. Prolonged uncertainties could cause further economic slowdown or cause other unpredictable events, each of which could adversely affect our business, results of operations or financial condition.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. As of the date of issuance of these financial statements, we are not aware of any specific event or circumstance that would require us to update our estimates, assumptions and judgments or revise the carrying value of our assets or liabilities. However, our estimates, judgments and assumptions are continually evaluated based on available information and experience and may change as new events occur and additional information is obtained. Because of the use of estimates inherent in the financial reporting process and in light of the continuing uncertainty arising from the Macroeconomic Conditions, actual results could differ from those estimates and any such differences may be material. Estimates are used when accounting for revenue recognition, allowances for credit losses, allowance for hardware returns, estimates of obsolete inventory, long-term incentive compensation, the lease term and incremental borrowing rates for leases, stock-based compensation, income taxes, legal reserves, goodwill, intangible assets and other long-lived assets.

Significant Accounting Policies

There have been no material changes to our significant accounting policies during the three months ended March 31, 2024 from those disclosed in our Annual Report.

7


ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
March 31, 2024 and 2023
Recent Accounting Pronouncements

Adopted

During the three months ended March 31, 2024, we did not adopt any new accounting pronouncements.

Not Yet Adopted

On November 27, 2023, the Financial Accounting Standards Board, or FASB, issued ASU 2023-07, "Segment Reporting (Topic 280),” which revises the disclosure requirements about a public entity’s reportable segments and a reportable segment’s expenses. This amendment requires a public entity to (i) disclose significant segment expense that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss, (ii) disclose an amount for other segment items by reportable segment and a description of its composition and (iii) provide annual disclosures about a reportable segment’s profit or loss and assets currently required by Topic 280 in interim periods. The amendment is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. This amendment is required to be applied retrospectively to all prior periods presented. We are currently assessing the impact this pronouncement will have on our consolidated financial statement disclosures.

On December 14, 2023, the FASB issued ASU 2023-09, "Income Taxes (Topic 740)," which requires additional annual disclosures regarding specific categories in the income tax rate reconciliation as well additional information for reconciling items that meet a quantitative threshold. This amendment also requires annual disclosures regarding the amount of income taxes paid, including income taxes paid disaggregated by (i) federal, state and foreign taxes as well as (ii) individual jurisdictions in which income taxes paid is equal to or greater than five percent of total income taxes paid. Additionally, this amendment requires annual disclosures for income from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign as well as income tax expense (or benefit) disaggregated between federal, state and foreign. The amendment is effective for annual periods beginning after December 15, 2024, and early adoption is permitted. This amendment should be applied on a prospective basis, but retrospective application is permitted. We are currently assessing the impact this pronouncement will have on our consolidated financial statement disclosures.

Note 3. Revenue from Contracts with Customers

Contract Assets

The changes in our contract assets are as follows (in thousands):
Three Months Ended
March 31,
20242023
Beginning of period balance$9,099 $13,975 
Commission costs and upfront payments to a customer capitalized in period3,112 1,673 
Amortization of contract assets(1,745)(1,769)
End of period balance$10,466 $13,879 

Contract Liabilities

The changes in our contract liabilities are as follows (in thousands):
Three Months Ended
March 31,
20242023
Beginning of period balance$22,885 $18,332 
Revenue deferred in period6,424 5,940 
Revenue recognized from amounts included in contract liabilities(5,097)(4,041)
End of period balance$24,212 $20,231 
8


ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
March 31, 2024 and 2023

Note 4. Accounts Receivable, Net

The components of accounts receivable, net are as follows (in thousands):
March 31,
2024
December 31,
2023
Accounts receivable$135,100 $136,769 
Allowance for credit losses(4,054)(3,864)
Allowance for product returns(2,595)(2,279)
Accounts receivable, net$128,451 $130,626 

For the three months ended March 31, 2024, we recorded a provision for credit losses of $0.3 million, as compared to $0.5 million for the same period in the prior year.

For the three months ended March 31, 2024, we recorded a reserve for product returns of $1.1 million in our hardware and other revenue, as compared to $1.2 million for the same period in the prior year. Historically, we have not experienced write-offs for uncollectible accounts or sales returns that have differed significantly from our estimates.

Allowance for Credit Losses - Accounts Receivable

The allowance for credit losses is a valuation account that is deducted from the accounts receivable and notes receivable amortized cost basis (see Note 8) to present the net amount expected to be collected. We estimate the allowance balance by applying the loss-rate method using relevant available information from internal and external sources, including historical write-off activity, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for changes in economic conditions, such as changes in unemployment rates. We use projected economic conditions over a period no more than twelve months based on data from external sources. For periods beyond the twelve-month reasonable and supportable forecast period, we revert to historical loss information immediately.

The allowance for credit losses is measured on a pooled basis when similar risk characteristics exist. When assessing whether to measure certain financial assets on a pooled basis, we considered various risk characteristics, including the financial asset type, size and the historical or expected credit loss pattern. We identified the following two portfolio segments for our accounts receivable: (i) outstanding accounts receivable balances within Alarm.com and certain subsidiaries and (ii) outstanding accounts receivable balances within all other subsidiaries. There were no changes to our portfolio segments for our accounts receivable during the three months ended March 31, 2024, and no changes to our policies or practices that influenced our estimate of expected credit losses for accounts receivable. Additionally, there were no significant changes in the amount of accounts receivable write-offs during the three months ended March 31, 2024, as compared to historical periods.

Expected credit losses are estimated over the contractual term of the financial assets and we adjust the term for expected prepayments when appropriate. For the three months ended March 31, 2024 and 2023, we recorded credit loss expense for accounts receivable and notes receivable of $4.0 million and $0.5 million, respectively, in general and administrative expense in our condensed consolidated statements of operations. The contractual term excludes expected extensions, renewals and modifications because extension and renewal options are unconditionally cancelable by us. Write-offs of the amortized cost basis are recorded to the allowance for credit losses. Any subsequent recoveries of previously written off balances are recorded as a reduction to credit loss expense.

The changes in our allowance for credit losses for accounts receivable are as follows (in thousands):
Three Months Ended
March 31, 2024
Three Months Ended
March 31, 2023
 Alarm.com
and Certain
Subsidiaries
All Other
Subsidiaries
 Alarm.com
and Certain
Subsidiaries
All Other
Subsidiaries
Beginning of period balance$(3,723)$(141)$(2,755)$(80)
(Provision for) / recovery of expected credit losses(287)33 (506)(34)
Write-offs44 20 159 17 
End of period balance$(3,966)$(88)$(3,102)$(97)
9


ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
March 31, 2024 and 2023

Note 5. Inventory

The components of inventory are as follows (in thousands):
March 31,
2024
December 31,
2023
Raw materials$28,237 $30,452 
Work-in-process699 275 
Finished goods56,787 65,413 
Total inventory$85,723 $96,140 

Inventory values are net of a write-down of $1.4 million during the year ended December 31, 2023, which is reflected in cost of hardware and other revenue within our condensed consolidated statements of operations. The inventory write-down was the result of a lower of cost or net realizable value adjustment for finished goods.

Note 6. Acquisitions

Asset Acquisition

On April 21, 2023, Alarm.com Incorporated, one of our wholly-owned subsidiaries, acquired certain assets of Vintra, Inc., or Vintra. Substantially all of the acquired assets consisted of developed technology. We believe the acquisition of the developed technology will expand Alarm.com's learning program and accelerate deployment of advanced video analytics solutions for the Alarm.com and OpenEye platforms.

In consideration for the purchase of the acquired assets, we paid $5.5 million in cash on April 21, 2023, after deducting $0.3 million related to the settlement of an outstanding loan issued to Vintra during March 2023 and $1.0 million related to an agreed holdback provision. The holdback is expected to be paid by the third quarter of 2024, subject to offset for any indemnification obligations. Additionally, we incurred $0.4 million in direct transaction costs related to legal fees during 2023 that were capitalized as a component of the consideration transferred. The $7.1 million purchase price consideration allocated to developed technology was recorded as an intangible asset at the time of the asset acquisition and is being amortized on a straight-line basis over an estimated useful life of five years. The remaining $0.1 million purchase price consideration was allocated to property and equipment.

Acquisition of a Business - EBS

On January 18, 2023, one of our wholly-owned subsidiaries acquired 100% of the issued and outstanding shares of capital stock of EBS Spółka z ograniczoną odpowiedzialnością, or EBS, an international producer of universal smart communicator devices, headquartered in Warsaw, Poland. We believe this acquisition will assist in the continued expansion of our international operations as well as benefit our supply chain operations.

In consideration for the purchase of EBS, we paid $9.8 million in cash on January 18, 2023, after deducting $2.2 million related to agreed holdback provisions. An earn-out up to an additional $2.5 million is payable if certain performance targets are met, which was initially recorded at the acquisition date fair value of $2.0 million. The acquisition was accounted for as a business combination within our Alarm.com segment. The purchase price allocation was finalized during the third quarter of 2023. The overall impacts to our condensed consolidated financial statements were not considered material during the year of the acquisition.

Note 7. Goodwill and Intangible Assets, Net

The changes in goodwill by reportable segment are outlined below (in thousands):
Alarm.comOtherTotal
Balance as of January 1, 2024
$154,498 $ $154,498 
Foreign currency translation adjustment (65) (65)
Balance as of March 31, 2024$154,433 $ $154,433 

10


ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
March 31, 2024 and 2023
The following table reflects changes in the net carrying amount of the components of intangible assets (in thousands):
Customer
Relationships
Developed
Technology
Trade NameCapitalized Software Development CostsTotal
Balance as of January 1, 2024
$39,294 $37,174 $1,217 $879 $78,564 
Intangible assets acquired     
Capitalized software development costs    479 479 
Amortization(2,417)(2,053)(207)(8)(4,685)
Balance as of March 31, 2024$36,877 $35,121 $1,010 $1,350 $74,358 

We recorded $4.7 million of amortization related to our intangible assets for the three months ended March 31, 2024, as compared to $4.6 million for the same period in the prior year. There were no impairments of long-lived intangible assets during the three months ended March 31, 2024 and 2023. During the three months ended March 31, 2024, $0.3 million of fully amortized developed technology intangible assets previously acquired were written-off in the Alarm.com segment as the technology was no longer in use.

The following tables reflect the weighted average remaining life and carrying value of finite-lived intangible assets (in thousands, except weighted-average remaining life):
 March 31, 2024
 Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Value
Weighted-
Average
Remaining Life
(in years)
Customer relationships$128,280 $(91,403)$36,877 5.9
Developed technology69,731 (34,610)35,121 4.5
Trade name4,474 (3,464)1,010 2.6
Capitalized software development costs1,361 (11)1,350 3.2
Total intangible assets$203,846 $(129,488)$74,358 5.2
 December 31, 2023
 Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Value
Weighted-
Average
Remaining Life
(in years)
Customer relationships$128,280 $(88,986)$39,294 6.2
Developed technology70,061 (32,887)37,174 4.7
Trade name4,474 (3,257)1,217 2.6
Capitalized software development costs882 (3)879 3.3
Total intangible assets$203,697 $(125,133)$78,564 5.4
Note 8. Other Assets

Loan to a Distribution Partner

In December 2022, we amended a subordinated credit agreement with the affiliated entity of one of our distribution partners, or the Affiliate. The amended subordinated credit agreement with the Affiliate matures on June 18, 2027 and interest on the outstanding principal balance accrues at a rate of 12.0% per annum and is payable in kind. In March 2024, the Affiliate was in default on a loan arrangement with one of its third party secured lenders. Based on this information from the Affiliate, during the three months ended March 31, 2024, we recorded a credit loss expense of $4.0 million in general and administrative expense and recorded a reduction to our interest income of $0.5 million related to the reversal of payable in kind interest associated with the subordinated credit agreement. We placed this loan in nonaccrual status as of March 31, 2024. As of March 31, 2024, the $4.0 million outstanding notes receivable balance had a full allowance for credit losses. As of December 31, 2023, $4.5 million of the notes receivable balance related to the subordinated credit agreement was included in other assets in our condensed consolidated balance sheet.
11


ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
March 31, 2024 and 2023

For the three months ended March 31, 2024, we recognized $0.7 million of revenue from the distribution partner associated with this loan, as compared to $0.8 million for the same period in the prior year.

Loan to a Service Provider Partner

In July 2020, we entered into a loan agreement with a service provider partner, under which we agreed to loan the service provider partner up to $2.5 million, collateralized by the assets of the service provider partner. Interest on the outstanding principal accrues at a rate per annum equal to 9.0% and monthly interest and principal payments began in April 2021. The maturity date of the loan is July 24, 2025. As of March 31, 2024 and December 31, 2023, $1.0 million of principal was outstanding from the service provider partner under the loan agreement.

For the three months ended March 31, 2024 and 2023, we recognized less than $0.1 million of revenue from the service provider partner associated with this loan.

Loan to a Technology Partner

In June 2022, we entered into a convertible promissory note with a technology partner, under which we agreed to loan the technology partner $1.5 million. Interest on the outstanding principal accrues at a rate per annum equal to 6.5%, starting one year from the effective date of the loan. Interest and principal payments are due on the maturity date of the loan, which is June 27, 2029, unless the loan is converted prior to the maturity date, which may occur upon a qualified financing event, as defined in the convertible promissory note, upon a sale of the technology partner or upon our election on the maturity date of the loan. As of March 31, 2024 and December 31, 2023, $1.5 million of principal was outstanding from the technology partner under the convertible promissory note.

For the three months ended March 31, 2024 and 2023, we did not record any revenue from the technology partner associated with this convertible promissory note.

Investment in a Hardware Supplier

In October 2018, we entered into a subordinate convertible promissory note with one of our hardware suppliers. In July 2019, we converted the outstanding notes receivable balance of $5.6 million into 9,520,832 shares of Series B preferred stock in the hardware supplier. We concluded that the $5.6 million equity investment, which is included in the Alarm.com segment, does not meet the criteria for consolidation and will be accounted for using the measurement alternative. Under the alternative, we measure investments without readily determinable fair values at cost, less impairment, adjusted for observable price changes from orderly transactions for identical or similar investments. As of March 31, 2024 and December 31, 2023, our investment in the hardware supplier was $5.6 million.

Investments in Technology Partners

In February 2021, we paid $5.0 million in cash to purchase 1,000,000 shares of Series B-2 Preferred Stock from a technology partner as part of a financing round that included other investors. The $5.0 million equity investment, which is included in the Alarm.com segment, does not meet the criteria for consolidation and is accounted for using the measurement alternative. Under the measurement alternative, we measure investments without readily determinable fair values at cost, less impairment, adjusted for observable price changes from orderly transactions for identical or similar investments. As of March 31, 2024 and December 31, 2023, our investment in the technology partner was $5.7 million.

In December 2022, we paid $5.1 million in cash to another technology partner to purchase 4,231,717 shares of its Series A Preferred Stock. The $5.1 million equity investment, which is included in the Alarm.com segment, does not meet the criteria for consolidation and is accounted for using the measurement alternative. As of March 31, 2024 and December 31, 2023, our investment in the technology partner was $5.1 million.

Allowance for Credit Losses - Notes Receivable

We identified one portfolio segment, loan receivables, for our notes receivable. We previously disclosed a hardware financing receivable portfolio segment; however, there has been no activity within that portfolio segment since 2022. There were no changes to our policies or practices involving the issuance of notes receivable, customer acquisitions or any other factors that influenced our estimate of expected credit losses for notes receivable during the three months ended March 31, 2024.

We do not accrue interest on notes receivable that are considered impaired or are 90 days or greater past due based on their contractual payment terms. Notes receivable that are 90 days or greater past due are placed on nonaccrual status. Notes receivable may be placed on nonaccrual status earlier if, in management’s opinion, a timely collection of the full principal and interest becomes uncertain. After a note receivable has been placed on nonaccrual status, interest will be recognized when cash
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ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
March 31, 2024 and 2023
is received. A note receivable may be returned to accrual status after all of the customer’s delinquent balances of principal and interest have been settled, and collection of all remaining contractual amounts due is reasonably assured. We have elected not to measure an allowance for credit losses for accrued interest receivables. We write-off any accrued interest on notes receivable that are considered impaired or are 90 days or greater past due based on their contractual payment terms by reversing interest income. The accrued interest receivable as of March 31, 2024 and December 31, 2023 was $0.1 million, and is reflected in other current assets and other assets within our condensed consolidated balance sheets and excluded from the amortized cost basis of the notes receivable. During the three months ended March 31, 2024, we recorded a reduction to our interest income of $0.5 million related to the reversal of payable in kind interest associated with a subordinated credit agreement with the Affiliate. We did not write-off any accrued interest receivable during the three months ended March 31, 2023.

There were no purchases or sales of financial assets during the three months ended March 31, 2024 and 2023. There were no significant changes in the amount of note receivable write-offs during the three months ended March 31, 2024, as compared to historical periods.

The changes in our allowance for credit losses for notes receivable are as follows (in thousands):
Three Months Ended
March 31, 2024
Three Months Ended
March 31, 2023
Beginning of period balance$(5)$(2)
Provision for expected credit losses
(3,998) 
Write-offs  
End of period balance$(4,003)$(2)

We manage our notes receivables using delinquency as a key credit quality indicator. The following tables reflect the current and delinquent notes receivable by class of financing receivables and by year of origination (in thousands):
March 31, 2024
Loan Receivables:20242023202220212020PriorTotal
Current$500 $150 $1,500 $ $1,027 $4,000 $7,177 
30-59 days past due       
60-89 days past due       
90-119 days past due       
120+ days past due       
Total$500 $150 $1,500 $ $1,027 $4,000 $7,177 

December 31, 2023
Loan Receivables:20232022202120202019PriorTotal
Current$150 $1,500 $ $1,039 $ $4,524 $7,213 
30-59 days past due       
60-89 days past due       
90-119 days past due       
120+ days past due       
Total$150 $1,500 $ $1,039 $ $4,524 $7,213 

There was one note receivable placed on nonaccrual status as of March 31, 2024 in the amount of $4.0 million. There were no notes receivable placed on nonaccrual status as of December 31, 2023. During the three months ended March 31, 2024 and 2023, there was no interest income recognized related to notes receivable that were in nonaccrual status.

As of March 31, 2024 and December 31, 2023, there were no notes receivable placed in nonaccrual status for which there was not a related allowance for credit losses. As of March 31, 2024 and December 31, 2023, there were no notes receivable that were 90 days or greater past due for which we continued to accrue interest income.

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ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
March 31, 2024 and 2023
Prepaid Expenses

As of March 31, 2024 and December 31, 2023, $16.9 million and $14.6 million of prepaid expenses were included in other current assets, respectively, primarily related to software licenses, long lead-time parts related to our inventory and insurance.

Note 9. Fair Value Measurements

The following tables present our assets and liabilities measured at fair value on a recurring basis (in thousands):
Fair Value Measurements on a Recurring Basis
Assets:Level 1Level 2Level 3Total
Money market accounts as of March 31, 2024
$723,877 $ $ $723,877 
Money market accounts as of December 31, 2023
679,734   679,734 
Liabilities:
Contingent consideration liability from acquisition as of March 31, 2024
$ $ $2,092 $2,092 
Contingent consideration liability from acquisition as of December 31, 2023
  2,061 2,061 

The following table summarizes the change in fair value of the Level 3 contingent consideration liability with significant unobservable inputs (in thousands):
Three Months Ended
March 31,
20242023
Beginning of period balance$2,061 $ 
Acquired liabilities 1,993 
Changes in fair value included in earnings31 13 
End of period balance$2,092 $2,006 
    
As of March 31, 2024, $718.7 million of our money market accounts was included in cash and cash equivalents, $4.0 million was included in other assets and $1.2 million was included in other current assets in our condensed consolidated balance sheets. As of December 31, 2023, $675.6 million was included in cash and cash equivalents and $4.1 million was included in other assets in our condensed consolidated balance sheets. Our assets from money market accounts are valued using quoted prices in active markets. See Note 12 for the carrying amount and estimated fair value of our convertible senior notes as of March 31, 2024 and December 31, 2023.

The contingent consideration liability consists of the potential earn-out payment related to our acquisition of 100% of the issued and outstanding capital stock of EBS on January 18, 2023. The earn-out payment is contingent on the satisfaction of certain performance targets related to the integration of EBS's hardware into the Alarm.com platform by December 31, 2025 and has a maximum potential payment of up to $2.5 million. We account for the contingent consideration using fair value and established a liability for the future earn-out payment based on an estimation of the probability of the future achievement of the performance targets. The contingent consideration liability was valued with Level 3 unobservable inputs, including the probability of expected achievement of the performance targets. At January 18, 2023, the fair value of the liability was $2.0 million. At each reporting date until December 31, 2025, or the achievement of the performance targets, we will remeasure the liability, using the same valuation approach. The fair value of the contingent consideration liability is included within accounts payable, accrued expenses and other current liabilities as well as other liabilities within our condensed consolidated balance sheets. Changes in fair value resulting from information that existed subsequent to the acquisition date are recorded in general and administrative expense in the condensed consolidated statements of operations. During the three months ended March 31, 2024, the contingent consideration liability did not materially change from the acquisition date fair value of $2.0 million as there were minor changes in the expected probability of achievement for the performance targets. The unobservable inputs used in the valuation as of March 31, 2024 included a weighted average expected achievement percentage of 89.5%, weighted by the potential payout of the performance targets, including a range of 80.0% to 99.0%. The valuation also included a weighted average discount rate of 5.5%, weighted by the probability of achievement of the performance targets at various dates, including a range of 5.4% to 5.7%. Selecting another probability of expected achievement or discount rate within an acceptable range would not result in a significant change to the fair value of the contingent consideration liability.

We monitor the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of
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ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
March 31, 2024 and 2023
financial instruments from one fair value level to another. There were no transfers into or out of Level 3 or reclassifications between levels of the fair value hierarchy during the three months ended March 31, 2024 and 2023. No other-than-temporary impairments occurred during the three months ended March 31, 2024 and 2023.

Note 10. Leases

As of March 31, 2024, we leased office space, data centers and office equipment under non-cancelable operating leases with various expiration dates through 2030. In August 2014, we signed a lease for office space in Tysons, Virginia, where we relocated our headquarters to in February 2016. We have subsequently entered into amendments to this lease to provide us with additional office space. The lease term ends in 2026, includes a five-year renewal option and a cumulative tenant improvement allowance of $12.1 million.

Supplemental information related to leases is presented in the table below (in thousands, except weighted-average term and discount rate):
Three Months Ended
March 31,
20242023
Operating lease cost$2,976 $2,750 
Cash paid for amounts included in the measurement of operating lease liabilities3,221 3,362 
Operating lease right-of-use assets obtained in exchange for new operating lease liabilities2,643 3,927 
March 31,
2024
December 31,
2023
Weighted-average remaining lease term — operating leases3.1 years3.0 years
Weighted-average discount rate — operating leases5.2 %4.9 %

Maturities of lease liabilities are as follows (in thousands):
Year Ended December 31,
Operating Leases(1)
Remainder of 2024$10,561 
202512,454 
20267,827 
20272,500 
20281,841 
2029 and thereafter1,904 
Total lease payments37,087 
Less: imputed interest(2)
4,100 
Present value of lease liabilities$32,987 
_______________
(1)Excludes $3.6 million of legally binding minimum lease payments for leases executed but not yet commenced. There are no options to extend lease terms that were reasonably certain of being exercised included in these balances.
(2)Imputed interest was calculated using the incremental borrowing rate applicable for each lease.

We did not have any finance leases or subleases as of March 31, 2024 or December 31, 2023. Our lease agreements do not contain any material residual value guarantees, restrictive covenants or variable lease payments. Short-term lease costs were immaterial for the three months ended March 31, 2024 and 2023.
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ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
March 31, 2024 and 2023

Note 11. Liabilities

The components of accounts payable, accrued expenses and other current liabilities are as follows (in thousands):
March 31,
2024
December 31,
2023
Accounts payable$42,458 $39,038 
Accrued expenses16,563 21,559 
Income taxes payable 60,133 42,501 
Holdback liability from business combinations and asset acquisitions7,340 7,340 
Contingent consideration liability from acquisition
1,181  
Other current liabilities9,876 14,037 
Accounts payable, accrued expenses and other current liabilities$137,551 $124,475 

The components of other liabilities are as follows (in thousands):
March 31,
2024
December 31,
2023
Contingent consideration liability from acquisition$911 $2,061 
Other liabilities10,792 10,636 
Other liabilities$11,703 $12,697 

Note 12. Debt, Commitments and Contingencies

The debt, commitments and contingencies described below would require us, or our subsidiaries, to make payments to third parties under certain circumstances.

Convertible Senior Notes

On January 20, 2021, we issued $500.0 million aggregate principal amount of 0% convertible senior notes due January 15, 2026 in a private placement to qualified institutional buyers, or the 2026 Notes. The terms of the 2026 Notes are governed by an Indenture, or the Indenture, by and between Alarm.com Holdings, Inc. and U.S. Bank National Association, as trustee. The 2026 Notes are senior unsecured obligations that do not bear regular interest and the principal amount of the 2026 Notes will not accrete. The 2026 Notes may bear special interest under specified circumstances related to our failure to comply with our reporting obligations under the Indenture. Special interest, if any, will be payable semiannually in arrears on January 15 and July 15 of each year, beginning on July 15, 2021. We received proceeds from the issuance of the 2026 Notes of $484.3 million, net of $15.7 million of transaction fees and other debt issuance costs.

We may redeem for cash, all or any portion of the 2026 Notes, at our option, on or after January 20, 2024, at a redemption price equal to 100% of the principal amount of the 2026 Notes to be redeemed, plus accrued and unpaid special interest, if any, to, but excluding, the redemption date, if the last reported sale price of our common stock has been at least 130% of the conversion price for the 2026 Notes then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption. No sinking fund is provided for the 2026 Notes.

The 2026 Notes will be convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding August 15, 2025, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2021 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price for the 2026 Notes on each applicable trading day; (2) during the five business day period immediately after any 10 consecutive trading day period in which, for each trading day of that period, the trading price per $1,000 principal amount of 2026 Notes for such trading day was less than 98% of the product of the last reported sale price of our common stock and the conversion rate for the 2026 Notes on each such trading day; (3) if we call any or all of the 2026 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date, but only with respect to the 2026 Notes called (or deemed called) for redemption; or (4) upon the occurrence of specified corporate events as set forth in the Indenture.

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ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
March 31, 2024 and 2023
On or after August 15, 2025, until the close of business on the second scheduled trading day immediately preceding the maturity date of the 2026 Notes, holders of the 2026 Notes may convert all or any portion of their 2026 Notes at any time, regardless of the foregoing conditions. Upon conversion, we may satisfy our conversion obligation by paying or delivering, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. It is our current intent to settle the principal amount of the 2026 Notes with cash. The initial conversion rate for the 2026 Notes is 6.7939 shares of our common stock per $1,000 principal amount of 2026 Notes, which is equivalent to an initial conversion price of $147.19 per share of our common stock, subject to adjustment under certain circumstances in accordance with the terms of the Indenture. In addition, following certain corporate events that occur prior to the maturity date of the 2026 Notes or if we deliver a notice of redemption in respect of the 2026 Notes, we will, under certain circumstances, increase the conversion rate of the 2026 Notes for a holder who elects to convert its 2026 Notes (or any portion thereof) in connection with such a corporate event or convert its 2026 Notes called (or deemed called) for redemption during the related redemption period (as defined in the Indenture), as the case may be.

If we undergo a fundamental change (as defined in the Indenture), subject to certain exceptions and except as described in the Indenture, holders may require us to repurchase for cash all or any portion of their 2026 Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 2026 Notes to be repurchased, plus accrued and unpaid special interest, if any, to, but excluding, the fundamental change repurchase date.

The Indenture includes customary covenants and sets forth certain events of default after which the 2026 Notes may be declared immediately due and payable and sets forth certain types of bankruptcy or insolvency events of default involving us after which the 2026 Notes become automatically due and payable.

We used some of the proceeds to repay the $110.0 million outstanding principal balance under our credit facility and also used some of the proceeds to pay accrued interest, fees and expenses related to our credit facility, which was terminated effective January 20, 2021. We are using the remaining net proceeds from the issuance of the 2026 Notes for working capital and other general corporate purposes, which may include acquisitions or strategic investments in complementary businesses or technologies.

We account for the 2026 Notes as a liability. The debt issuance costs are presented as a deduction from the outstanding principal balance of the 2026 Notes and are amortized to interest expense using the effective interest method over the contractual term of the 2026 Notes at a rate of 0.6%.

As of March 31, 2024 and December 31, 2023, the fair value of our 2026 Notes was $461.2 million and $444.8 million, respectively. The fair value was determined based on the quoted price of the 2026 Notes in an inactive market on the last traded day of the quarter and has been classified as Level 2 in the fair value hierarchy. Based on the closing price of our common stock of $72.47 on the last trading day of the quarter, the if-converted value of the 2026 Notes did not exceed the principal amount of $500.0 million as of March 31, 2024.

The net carrying amount of the liability component of the 2026 Notes is as follows (in thousands):
March 31,
2024
December 31,
2023
Principal$500,000 $500,000 
Unamortized debt issuance costs(5,695)(6,485)
Net carrying amount$494,305 $493,515 

Interest expense related to the 2026 Notes is as follows (in thousands):
Three Months Ended
March 31,
20242023
Amortization of debt issuance costs$790 $784 
Total interest expense$790 $784 

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ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
March 31, 2024 and 2023
Commitments and Contingencies

Indemnification Agreements

We have various agreements that may obligate us to indemnify the other party to the agreement with respect to certain matters. Generally, these indemnification provisions are included in contracts arising in the normal course of business. Although we cannot predict the maximum potential amount of future payments that may become due under these indemnification agreements, we do not believe any potential liability that might arise from such indemnity provisions is probable or material.

Legal Proceedings

On January 10, 2022, EcoFactor, Inc., or EcoFactor, filed a lawsuit against us in U.S. District Court, District of Oregon, alleging Alarm.com’s products and services directly and indirectly infringe five U.S. patents owned by EcoFactor. EcoFactor is seeking a permanent injunction, enhanced damages and attorneys' fees. EcoFactor had previously asserted two of the same patents against us in an October 2019 complaint with the U.S. International Trade Commission, or ITC. In July 2021, the ITC found in favor of Alarm.com. EcoFactor appealed the decision but withdrew its appeal in December 2021. We moved to dismiss the Oregon case for failure to state a claim on March 28, 2022. Three of the asserted patents are in ex parte reexamination proceedings at the PTO, and ex parte reexamination of a fourth patent concluded on August 23, 2023 after the claims were amended. On April 18, 2022, all claims of a fifth patent were found unpatentable by the U.S. Patent Trial and Appeal Board, or PTAB, in an inter partes review, and all claims were canceled on February 1, 2024. On April 18, 2022, the district court stayed the case at the request of the parties pending the disposition of PTAB and other proceedings involving the asserted patents.

Should EcoFactor prevail in its lawsuit we could be required to pay damages and/or a reasonable royalty for sales of our solution, we could be enjoined from making, using and selling our solution if a license or other right to continue selling such elements is not made available to us, and we could be required to pay ongoing royalties and comply with unfavorable terms if such a license is made available to us. While we believe we have valid defenses to EcoFactor’s claims, the outcome of these legal claims cannot be predicted with certainty and any of these outcomes could result in an adverse effect on our business. Based on currently available information, we have determined a loss is not probable or reasonably estimable at this time.

On July 22, 2021, Causam Enterprises, Inc., or Causam, filed a lawsuit against us in U.S. District Court, Western District of Texas, alleging that Alarm.com’s smart thermostats infringe four U.S. patents owned by Causam. Causam is seeking preliminary and permanent injunctions, enhanced damages and attorneys’ fees. We have not yet responded to the complaint. On September 3, 2021, the court issued an order staying the lawsuit until the ITC investigation described below is finally resolved.

On July 28, 2021, Causam filed a complaint with the ITC naming Alarm.com Incorporated, Alarm.com Holdings, Inc., and EnergyHub, Inc., among others, as proposed respondents. The complaint alleges infringement of the same four patents Causam asserted in district court. Causam is seeking a permanent limited exclusion order and permanent cease and desist order. On August 27, 2021, the ITC instituted an investigation into Causam’s allegations naming Alarm.com Incorporated, Alarm.com Holdings, Inc., EnergyHub Inc. and others as respondents. We answered the complaint on October 4, 2021. Among other things, we asserted defenses based on non-infringement and invalidity of the patents in question. An evidentiary hearing in the investigation was held from June 28, 2022 through July 1, 2022. On February 16, 2023, the ITC issued a final decision in favor of Alarm.com and EnergyHub. Causam filed an appeal of the ITC decision on April 14, 2023. Causam did not appeal the ITC decision with respect to Alarm.com and EnergyHub.

Should Causam prevail in its district court lawsuit we could be required to pay damages and/or a reasonable royalty for sales of our solution, we could be enjoined from making, using and selling our solution if a license or other right to continue selling such elements is not made available to us, and we could be required to pay ongoing royalties and comply with unfavorable terms if such a license is made available to us. While we believe we have valid defenses to Causam’s claims, the outcome of these legal claims cannot be predicted with certainty, and any of these outcomes could result in an adverse effect on our business. Based on currently available information, we have determined a loss is not probable or reasonably estimable at this time.

In addition to the matters described above, we may be required to provide indemnification to certain of our service provider partners for certain claims regarding our solutions. For example, we incur costs associated with the indemnification of our service provider Central Security Group – Nationwide, Inc. (d/b/a Alert 360), or CSG, in an ongoing patent litigation. In 2018, Ubiquitous Connectivity, LP, or Ubiquitous, brought suit against CSG in U.S. District Court, Northern District of Oklahoma, alleging infringement of two U.S. patents. The case was stayed by agreement of the parties for several years while the patents in suit were challenged before the PTAB. In January 2021, the PTAB deemed 42 out of 46 claims of the two asserted patents unpatentable. Ubiquitous appealed a portion of the PTAB’s findings to the United States Court of Appeals for the Federal Circuit. The Federal Circuit affirmed the PTAB’s ruling on August 8, 2023. As a result, only four patent claims remain at issue and the Northern District of Oklahoma case is no longer stayed. The case is currently in the discovery phase. A claim construction hearing is scheduled for December 12, 2024. A hearing on dispositive motions, including for summary judgment, is scheduled for April 15, 2026. A trial is scheduled for June 22, 2026.
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ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
March 31, 2024 and 2023

Should Ubiquitous prevail on its infringement claims, we could be required to indemnify CSG for damages in the form of a reasonable royalty or of Ubiquitous’s lost profits. CSG could be enjoined from making, using, and selling our solution if a license or other right to continue selling our technology is not made available or if we are unable to design around such patents, and we could be required to pay ongoing royalties and comply with unfavorable terms if such a license is made available to us. The outcome of these legal claims cannot be predicted with certainty. Based on currently available information, we have determined a loss is not probable or reasonably estimable at this time.

We may also be a party to litigation and subject to claims incident to the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business.

Other than the preceding matters, we are not a party to any lawsuit or proceeding that, in the opinion of management, is reasonably possible or probable of having a material adverse effect on our financial position, results of operations or cash flows. We reserve for contingent liabilities based on ASC 450, "Contingencies," when it is determined that a liability, inclusive of defense costs, is probable and reasonably estimable. Litigation is subject to many factors that are difficult to predict, so there can be no assurance that, in the event of a material unfavorable result in one or more claims, we will not incur material costs.

Note 13. Stockholders' Equity

Stock Repurchase Programs

On February 15, 2023, our board of directors authorized a stock repurchase program, effective February 23, 2023, under which we are authorized to purchase up to an aggregate of $100.0 million of our outstanding common stock during the two-year period ending February 23, 2025. No shares were repurchased under this program during the three months ended March 31, 2024 and 2023. Beginning January 1, 2023, we are subject to a 1.0% excise tax on the value of net corporate stock repurchases under the Inflation Reduction Act of 2022. When applicable, the excise tax will be included as part of the cost basis of shares acquired and is presented within stockholders’ equity in the condensed consolidated balance sheets.

Note 14. Stock-Based Compensation

Stock-based compensation expense is included in the following line items in the condensed consolidated statements of operations (in thousands):
 Three Months Ended
March 31,
 20242023
Cost of hardware and other revenue
$1 $ 
Sales and marketing755 1,032 
General and administrative3,181 3,145 
Research and development7,331 8,509 
Total stock-based compensation expense$11,268 $12,686 

The following table summarizes the components of non-cash stock-based compensation expense (in thousands):
 Three Months Ended
March 31,
 20242023
Stock options$987 $912 
Restricted stock units10,230 11,722 
Employee stock purchase plan51 52 
Total stock-based compensation expense$11,268 $12,686 
Tax windfall benefit / (shortfall) from stock-based awards
$486 $(22)

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ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
March 31, 2024 and 2023
We granted 6,000 and 21,400 stock options pursuant to our 2015 Equity Incentive Plan during the three months ended March 31, 2024 and 2023, respectively. There were 128,526 stock options exercised during the three months ended March 31, 2024, as compared to 70,951 stock options for the same period in the prior year. There was an aggregate of 88,150 restricted stock units without performance conditions granted to certain of our employees during the three months ended March 31, 2024, as compared to an aggregate of 82,875 restricted stock units without performance conditions for the same period in the prior year. There were no restricted stock units with performance conditions granted to our employees during the three months ended March 31, 2024 and 2023. There were 81,696 restricted stock units without performance conditions that vested during the three months ended March 31, 2024, as compared to 167,085 restricted stock units without performance conditions vested during the same period in the prior year. There were no restricted stock units with performance conditions that vested during the three months ended March 31, 2024, as compared to 9,000 restricted stock units with performance conditions vested for the same period in the prior year.

Note 15. Earnings Per Share

Basic and Diluted Earnings Per Share

The components of basic and diluted earnings per share are as follows (in thousands, except share and per share amounts):
 Three Months Ended
March 31,
Numerator: 20242023
Net income$23,404 $14,207 
Net loss attributable to redeemable noncontrolling interests191 209 
Net income attributable to common stockholders - basic (A)23,595 14,416 
Add back interest expense, net of tax, attributable to convertible senior notes594 590 
Net income attributable to common stockholders - diluted (B)$24,189 $15,006 
Denominator:
Weighted average common shares outstanding — basic (C)49,963,265 49,584,890 
Dilutive effect of convertible senior notes, stock options and restricted stock units5,083,822 4,711,431 
Weighted average common shares outstanding — diluted (D)55,047,087 54,296,321 
Net income per share:
Basic (A/C)$0.47 $0.29 
Diluted (B/D)$0.44 $0.28 

The following securities have been excluded from the calculation of diluted weighted average common shares outstanding as the inclusion of these securities would have an anti-dilutive effect:
 Three Months Ended
March 31,
 20242023
Stock options329,749 431,052 
Restricted stock units61,150 355,047 

Our redeemable noncontrolling interests are related to our 86% equity ownership interests in OpenEye, and our 85% equity ownership interest in Noonlight.

We use the if-converted method when calculating the dilutive impact of the 2026 Notes on net income per share. As a result, we included 3,396,950 shares related to the 2026 Notes within the weighted average shares outstanding when calculating the diluted net income per share for each of the three months ended March 31, 2024 and 2023. Additionally, we included $0.6 million of debt issuance cost amortization, net of tax, within the numerator of the diluted net income per share for the three months ended March 31, 2024 and 2023. We use the treasury stock method when calculating the dilutive impact of the stock options and restricted stock units on net income per share.
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ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
March 31, 2024 and 2023

Note 16. Significant Service Providers and Distributors

During the three months ended March 31, 2024, our 10 largest revenue service provider partners or distributors accounted for 48% of our consolidated revenue, as compared to 50% for the same period in the prior year. One of our service provider partners within the Alarm.com segment individually represented greater than 15% but not more than 20% of our revenue for the three months ended March 31, 2024 and 2023.

One service provider partner in the Alarm.com segment represented more than 10% of accounts receivable as of March 31, 2024 and December 31, 2023.

Note 17. Income Taxes

For purposes of interim reporting, our annual effective income tax rate is estimated in accordance with ASC 740-270, "Interim Reporting." This rate is applied to the pre-tax book income of the entities expected to be benefited during the year. Discrete items that impact the tax provision are recorded in the period incurred.

For the three months ended March 31, 2024, we recorded a provision for income taxes of $2.7 million, resulting in an effective income tax rate of 10.5%. For the three months ended March 31, 2023, we recorded a benefit from income taxes of $1.2 million, resulting in an effective income tax rate of (9.4)%. For the three months ended March 31, 2024, our effective tax rate was below the 21.0% statutory rate primarily due to research and development tax credits claimed, the foreign derived intangible income deduction, the release of an unrecognized tax benefit liability due to the closure of the 2018 and 2019 Internal Revenue Service federal income tax examination and tax windfall benefits from employee stock-based compensation, partially offset by the impact of state taxes, federal estimated tax payment interest expense and other nondeductible expenses. For the three months ended March 31, 2023, our effective tax rate was below the 21.0% statutory rate primarily due to research and development tax credits claimed and the foreign derived intangible income deduction, partially offset by the impact of state income taxes and other nondeductible expenses.

We recognize a valuation allowance if, based on the weight of available evidence, both positive and negative, it is more likely than not that some portion, or all, of net deferred tax assets will not be realized. Our valuation allowance for state research and development tax credit carryforwards and net deferred tax assets of our EBS subsidiary was $3.8 million as of December 31, 2023 and decreased to $3.7 million as of March 31, 2024.

We apply guidance for uncertainty in income taxes that requires the application of a more likely than not threshold to the recognition and de-recognition of uncertain tax positions. If the recognition threshold is met, this guidance permits us to recognize a tax benefit measured at the largest amount of the tax benefit that, in our judgment, is more likely than not to be realized upon settlement. We recorded a net decrease to the unrecognized tax benefits liability of $1.9 million primarily due to the closure of the 2018 and 2019 Internal Revenue Service federal income tax return examination, partially offset by a liability for research and development tax credits claimed during the three months ended March 31, 2024. We recorded an increase to the unrecognized tax benefits liability of $0.7 million primarily for research and development tax credits claimed during the three months ended March 31, 2023.

Our condensed consolidated balance sheets included an accrual for total interest expense related to unrecognized tax benefits of $0.8 million as of December 31, 2023, which decreased to $0.6 million as of March 31, 2024. We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense.

Our tax returns are subject to on-going review and examination by various tax authorities. Tax authorities may not agree with the treatment of items reported in our tax returns, and therefore the outcome of tax reviews and examinations can be unpredictable. On October 13, 2021, the Internal Revenue Service commenced an examination of our federal income tax return for 2018 and on August 12, 2022, the Internal Revenue Service expanded the examination to include our federal income tax return for 2019. On January 25, 2024, the Internal Revenue Service notified us that the income tax examination of our 2018 and 2019 federal income tax returns has been closed. As a result, we owe $0.6 million in additional federal taxes, including interest, and recognized a net income tax benefit of $1.7 million during the three months ended March 31, 2024.

As of March 31, 2024, we did not have material undistributed foreign earnings. We have not recorded a deferred tax liability on the undistributed earnings from our foreign subsidiaries, as such earnings are considered to be indefinitely reinvested.

In August 2022, the Inflation Reduction Act of 2022 was enacted in the United States which, among other provisions, includes a minimum 15.0% tax on companies that have a three-year average annual adjusted financial statement income of more than $1.0 billion and a 1.0% excise tax on the value of net corporate stock repurchases. Both provisions became effective on January 1, 2023 and the provisions did not have a material impact on our financial condition or results of operations for the periods presented.

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ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
March 31, 2024 and 2023
Note 18. Segment Information

We have two reportable segments:

Alarm.com segment

Other segment

Our chief operating decision maker is our chief executive officer. Management determined the operational data used by the chief operating decision maker is that of the two reportable segments. Management bases strategic goals and decisions on these segments and the data presented below is used to measure financial results.

Our Alarm.com segment represents our cloud-based and Software platforms for the intelligently connected property and related solutions that contributed 94% of our revenue, net of intersegment eliminations, for the three months ended March 31, 2024, as compared to 95% for the same period in the prior year. Our Other segment is focused on researching, developing and offering residential and commercial automation solutions and energy management products and services in adjacent markets. Inter-segment revenue includes sales of hardware between our segments.

Management evaluates the performance of its segments and allocates resources to them based on operating income / (loss) as compared to prior periods and current performance levels. The reportable segment operational data is presented in the tables below (in thousands):
Three Months Ended March 31, 2024
Alarm.comOtherIntersegment Alarm.comIntersegment OtherTotal
SaaS and license revenue$137,859 $12,485 $ $ $150,344 
Hardware and other revenue
72,364 1,398 (686)(137)72,939 
Total revenue
210,223 13,883 (686)(137)223,283 
Operating income / (loss)
23,574 (4,742)(135)28 18,725 
Three Months Ended March 31, 2023
Alarm.comOtherIntersegment Alarm.comIntersegment OtherTotal
SaaS and license revenue$125,652 $9,742 $ $ $135,394 
Hardware and other revenue
73,496 1,718 (777)(115)74,322 
Total revenue
199,148 11,460 (777)(115)209,716 
Operating income / (loss)
13,931 (5,192)5 75 8,819 
Alarm.comOtherIntersegment Alarm.comIntersegment OtherTotal
Assets as of March 31, 2024$1,538,429 $64,350 $(115,786)$(11)$1,486,982 
Assets as of December 31, 20231,477,674 73,621 (111,725)(7)1,439,563 

Our SaaS and license revenue for the Alarm.com segment included software license revenue of $5.2 million for the three months ended March 31, 2024, as compared to $6.2 million for the same period in the prior year. There was no software license revenue recorded for the Other segment during the three months ended March 31, 2024 and 2023.

Amortization and depreciation expense was $7.1 million for the Alarm.com segment for the three months ended March 31, 2024, as compared to $7.4 million for the same period in the prior year. Amortization and depreciation expense was $0.2 million for the Other segment for the three months ended March 31, 2024, as compared to $0.3 million for the same period in the prior year. Additions to property and equipment were $3.9 million for the Alarm.com segment for the three months ended March 31, 2024, as compared to $3.0 million the same period in the prior year. Additions to property and equipment were less than $0.1 million for the Other segment for each of the three months ended March 31, 2024 and 2023.

We derived substantially all revenue from North America for the three months ended March 31, 2024 and 2023. Substantially all of our long-lived assets were in North America as of March 31, 2024 and December 31, 2023.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with (1) our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q, or Quarterly Report, and (2) the audited consolidated financial statements and the related notes and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended December 31, 2023 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed on February 22, 2024, or Annual Report, with the Securities and Exchange Commission, or SEC. This Quarterly Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “objective,” “ongoing,” “plan,” “predict,” “project,” “potential,” “should,” “will,” “would,” or the negative or plural of these words or similar expressions or variations and such forward-looking statements include, but are not limited to, statements with respect to the anticipated impact of the global economic uncertainty and financial market conditions caused by significant worldwide events, including public health crises, and geopolitical upheaval, such as Russia’s incursion into Ukraine and the conflict between Israel and regional adversaries, disruptions to global supply chains, rising interest rates, risk of recession and inflation (collectively, the Macroeconomic Conditions) on our business, results of operations and financial condition, including on our hardware sales and our Software-as-a-Service, or SaaS, and license revenue growth rate; our business strategy, plans and objectives for future operations; continued enhancements of our platform and offerings; the potential impact of trade policies and related tariffs on our cost of hardware revenue and hardware revenue margins; and our future financial and business performance. The events described in these forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified in the section titled “Risk Factors” set forth in Part II, Item 1A of this Quarterly Report and elsewhere in this and in our other SEC filings. You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

Alarm.com is the leading platform for the intelligently connected property. Our cloud-based platform offers an expansive suite of Internet of Things, or IoT, solutions addressing opportunities in the residential, multi-family, small business and enterprise commercial markets. Alarm.com’s solutions include security, video and video analytics, energy management, access control, electric utility grid management, indoor gunshot detection, water management, health and wellness and data-rich emergency response. During 2023, our platforms processed more than 325 billion data points generated by over 150 million connected devices. We believe this scale of subscribers, connected devices and data operations makes us the leader in the connected property market.

Our solutions are delivered through an established network of trusted service providers, who are experts at selling, installing and supporting our solutions. We primarily generate SaaS and license revenue through our service provider partners, who resell these services and pay us monthly fees. These service provider contracts typically have an initial term of one year, with subsequent renewal terms of one year. Our service provider partners have indicated that they typically have three to five-year service contracts with residential and commercial property owners who use our solutions. We also generate hardware and other revenue, primarily from our service provider partners and distributors. Our hardware sales include connected devices that enable our services, such as video cameras, video recorders, gunshot detection sensors, gateway modules and smart thermostats. We believe our network of service providers and the length of our service relationships with residential and commercial property owners, combined with our robust SaaS platforms and over 20 years of operating experience, contribute to a compelling business model.

Our solutions are designed to make both residential and commercial properties safer, smarter and more efficient. Our technology platforms support property owners who subscribe to our services, the hardware partners who manufacture devices that integrate with our platforms and the service provider partners who install and maintain our solutions.

The Alarm.com platform enables our service provider partners to deploy our interactive security, video monitoring, intelligent automation, access control, energy management and wellness solutions as stand-alone offerings or as combined solutions to address the needs of a broad range of customers.

Highlights of First Quarter Results

We primarily generate SaaS and license revenue, our largest source of revenue, through our service provider partners who resell our services and pay us monthly fees. Our service provider partners sell, install and support Alarm.com solutions that enable residential and commercial property owners to intelligently secure, connect, control and automate their properties. Our subscribers consist of all of the properties maintained by those residential and commercial property owners to which we are delivering at least one of our solutions. We derive a portion of our revenue from licensing our intellectual property to third parties
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on a per customer basis. SaaS and license revenue represented 67% of our revenue during the three months ended March 31, 2024, as compared to 65% in the same period in the prior year.

We also generate SaaS and license revenue from monthly fees charged to service providers on a per subscriber basis for access to our non-hosted software platform, or Software platform. The non-hosted software for interactive security, automation and related solutions is typically deployed and operated by the service provider in its own network operations center. Software license revenue represented 2% of our revenue during the three months ended March 31, 2024, as compared to 3% in the same period in the prior year.

We also generate revenue from the sale of many types of hardware, including video cameras, video recorders, cellular radio modules, smart thermostats, image sensors, gunshot detection sensors and other peripherals, that enable our solutions. Our hardware and other revenue also includes our revenue from the sale of perpetual licenses that provide our customers in the commercial market the right to use our video surveillance software for an indefinite period of time in exchange for a one-time license fee. Additionally, our hardware and other revenue includes our revenue from the sale of licenses that provide our customers the right to use our gunshot detection solution in exchange for license fees. Hardware and other revenue represented 33% of our revenue during the three months ended March 31, 2024, as compared to 35% in the same period in the prior year. We typically expect hardware and other revenue to fluctuate as a percentage of total revenue.

Highlights of our financial performance for the periods covered in this Quarterly Report include:

SaaS and license revenue increased 11% to $150.3 million during the three months ended March 31, 2024 from $135.4 million during the three months ended March 31, 2023. Included in SaaS and license revenue was software license revenue, which decreased to $5.2 million during the three months ended March 31, 2024 from $6.2 million during the three months ended March 31, 2023.

Total revenue increased 6% to $223.3 million during the three months ended March 31, 2024 from $209.7 million during the three months ended March 31, 2023.

Net income increased to $23.4 million during the three months ended March 31, 2024, as compared to $14.2 million during the three months ended March 31, 2023. Net income attributable to common stockholders increased to $23.6 million during the three months ended March 31, 2024, as compared to $14.4 million during the three months ended March 31, 2023.

Non-GAAP adjusted EBITDA, a non-GAAP measurement of operating performance, increased to $37.0 million during the three months ended March 31, 2024 from $30.6 million during the three months ended March 31, 2023.

Please see Non-GAAP Measures below in this section of this Quarterly Report for a discussion of the limitations of non-GAAP adjusted EBITDA (a non-GAAP measure) and a reconciliation of non-GAAP adjusted EBITDA from net income, the most directly comparable measurement in accordance with accounting principles generally accepted in the United States, or GAAP, for the three months ended March 31, 2024 and 2023.

Recent Developments

The global economy, credit markets and financial markets have and may continue to experience significant volatility as a result of the Macroeconomic Conditions. These Macroeconomic Conditions have and may continue to create supply chain disruptions, inventory disruptions, and fluctuations in economic growth, including fluctuations in employment rates, inflation, energy prices and consumer sentiment. It remains difficult to assess or predict the ultimate duration and economic impact of the Macroeconomic Conditions. The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results that can be expected for our entire fiscal year ending December 31, 2024, which is increasingly true in periods of extreme uncertainty, such as the uncertainty caused by the Macroeconomic Conditions. Prolonged uncertainty with respect to the Macroeconomic Conditions could cause further economic slowdown or cause other unpredictable events, each of which could adversely affect our business, results of operations or financial condition.

Other Business Metrics

We regularly monitor a number of financial and operating metrics in order to measure our current performance and estimate our future performance. Our other business metrics may be calculated in a manner different from the way similar business metrics used by other companies are calculated and include the following (dollars in thousands):
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 Three Months Ended
March 31,
 20242023
SaaS and license revenue$150,344 $135,394 
Non-GAAP adjusted EBITDA
37,046 30,575 
Twelve Months Ended
March 31,
20242023
SaaS and license revenue renewal rate94 %93 %

SaaS and License Revenue

SaaS and license revenue is a GAAP measure that we use to measure our current performance and estimate our future performance. We believe SaaS and license revenue is an indicator of the productivity of our existing service provider partners and their ability to activate and maintain subscribers using our intelligently connected property solutions, our ability to add new service provider partners reselling our solutions, the demand for our intelligently connected property solutions and the pace at which the market for these solutions is growing.

Non-GAAP Adjusted EBITDA

Non-GAAP adjusted EBITDA is a non-GAAP measure that represents our net income before interest expense, interest income, certain activity within other expense, net, provision for / (benefit from) income taxes, amortization and depreciation expense, stock-based compensation expense, acquisition-related expense, legal costs and settlement fees incurred and received in connection with non-ordinary course litigation and other disputes, particularly costs involved in ongoing intellectual property litigation. We do not consider these items to be indicative of our core operating performance. The non-cash items include amortization and depreciation expense, amortization of debt issuance costs for the January 20, 2021 issuance of $500.0 million aggregate principal amount of 0% convertible senior notes due January 15, 2026, or the 2026 Notes, included in interest expense and stock-based compensation expense related to restricted stock units and other forms of equity compensation, including, but not limited to, the sale of common stock. We do not adjust for ordinary course legal expenses resulting from maintaining and enforcing our intellectual property portfolio and license agreements.

We record interest expense primarily related to our 2026 Notes. We exclude interest expense in calculating non-GAAP adjusted EBITDA because we believe the exclusion of interest expense will provide for more meaningful information about our financial performance. We exclude interest income and certain activity within other expense, net including gains, losses or impairments on investments and other assets, gains on settlement fees and losses on the early extinguishment of debt, when applicable, from non-GAAP adjusted EBITDA because we do not consider it part of our ongoing results of operations. We exclude the impact related to our provision for / (benefit from) income taxes from non-GAAP adjusted EBITDA because we do not consider this tax adjustment to be part of our ongoing results of operations.

GAAP requires that operating expenses include the amortization of acquired intangible assets, which principally include acquired customer relationships, developed technology and trade names. We exclude amortization of intangibles from non-GAAP adjusted EBITDA because we do not consider amortization expense when we evaluate our ongoing business operations, nor do we factor amortization expense into our evaluation of potential acquisitions, or our measurement of the performance of those acquisitions. We believe the exclusion of amortization expense enables the comparison of our performance to other companies in our industry as other companies may be more or less acquisitive than we are, and therefore, amortization expense may vary significantly by company based on their acquisition history. Although we exclude amortization of acquired intangible assets from non-GAAP adjusted EBITDA, management believes that it is important for investors to understand that such intangible assets were recorded as part of purchase accounting and contribute to revenue generation.

We record depreciation primarily for investments in property and equipment. We exclude depreciation in calculating non-GAAP adjusted EBITDA because we do not consider depreciation when we evaluate our ongoing business operations.

We exclude stock-based compensation expense, which relates to restricted stock units and other forms of equity incentives primarily awarded to employees of Alarm.com, because they are non-cash charges that we do not consider when assessing the operating performance of our business. Additionally, the determination of stock-based compensation expense can be calculated using various methodologies and is dependent upon subjective assumptions and other factors that vary on a company-by-company basis. Therefore, we believe excluding stock-based compensation expense from non-GAAP adjusted EBITDA improves the comparability of our results to the results of other companies in our industry.

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Included in operating expenses are incremental costs directly related to business and asset acquisitions as well as changes in the fair value of contingent consideration liabilities, when applicable. We exclude acquisition-related expense from non-GAAP adjusted EBITDA because we believe the exclusion of this expense allows us to better provide meaningful information about our operating performance, facilitates comparisons to our historical operating results, improves the comparability of our results to the results of other companies in our industry, and ultimately, we believe helps investors better understand the acquisition-related expense and the effects of the transaction on our results of operations.

We exclude non-ordinary course litigation expense because we do not consider legal costs and settlement fees incurred and received in litigation and litigation-related matters of non-ordinary course lawsuits and other disputes, particularly costs incurred in ongoing intellectual property litigation, to be indicative of our core operating performance. We do not adjust for ordinary course legal expenses, including those expenses resulting from maintaining and enforcing our intellectual property portfolio and license agreements.

Non-GAAP adjusted EBITDA is a key measure our management uses to understand and evaluate our core operating performance and trends to generate future operating plans, to make strategic decisions regarding the allocation of capital, and to make investments in initiatives that are focused on cultivating new markets for our solutions. In particular, the exclusion of certain expenses in calculating non-GAAP adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis and, in the case of exclusion of acquisition-related adjustments and certain historical legal expenses, excludes items that we do not consider to be indicative of our core operating performance. Non-GAAP adjusted EBITDA is not a measure calculated in accordance with GAAP and should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Please see Non-GAAP Measures in this section for a discussion of the limitations of non-GAAP adjusted EBITDA and a reconciliation of non-GAAP adjusted EBITDA from net income, the most directly comparable GAAP measurement, for the three months ended March 31, 2024 and 2023.

SaaS and License Revenue Renewal Rate

Our SaaS and license revenue renewal rate is an operating metric. We measure our SaaS and license revenue renewal rate on a trailing 12-month basis by dividing (a) the total SaaS and license revenue recognized during the trailing 12-month period from our subscribers on our Alarm.com platform who were subscribers on the first day of the period, by (b) total SaaS and license revenue we would have recognized during the period from those same subscribers assuming no terminations, or service level upgrades or downgrades. The SaaS and license revenue renewal rate represents both residential and commercial properties. Our SaaS and license revenue renewal rate is expressed as an annualized percentage and it is calculated across our entire subscriber base on the Alarm.com platform excluding subscribers of service providers that may use one of our other platforms as a substitute for the Alarm.com platform. Our service provider partners have indicated that they typically have three to five-year service contracts with residential and commercial property owners who use our solutions. Our SaaS and license revenue renewal rate includes subscribers whose contract with their service provider reached the end of its contractual term during the measurement period, as well as subscribers whose contract with their service provider has not reached the end of its contractual term during the measurement period, and is not intended to estimate the rate at which our subscribers renew their contracts with our service provider partners. We believe our SaaS and license revenue renewal rate allows us to measure our ability to retain and grow our SaaS and license revenue and serves as an indicator of the lifetime value of our subscriber base.

Components of Operating Results

Our fiscal year ends on December 31. The key elements of our operating results include:

Revenue

We derive our revenue from three primary sources: the sale of cloud-based SaaS services on our integrated Alarm.com platform, the sale of licenses and services on the Software platform and the sale of hardware products. We sell our platform and hardware solutions to service provider partners that resell our solutions and hardware to residential and commercial property owners, who are the service provider partners’ customers.

SaaS and License Revenue. We generate the majority of our SaaS and license revenue primarily from monthly fees charged to our service provider partners on a per subscriber basis for access to our cloud-based intelligently connected property platform and related solutions. Our fees per subscriber vary based upon the service plan and features utilized.

We offer multiple service level packages for our platform solutions including a range of solutions and a range of a la carte add-ons for additional features. The fee paid by our service provider partners each month for the delivery of our solutions is based on the combination of packages and add-ons enabled for each subscriber. We utilize tiered pricing plans where our service provider partners may receive prospective pricing discounts driven by volume.

We also generate SaaS and license revenue from the fees paid to us when we license our intellectual property to third parties for use of our patents. In addition, in certain markets, our EnergyHub subsidiary sells its demand response service for an annual service fee, with pricing based on the number of subscribers or amount of aggregate electricity demand made available for a utility’s or market’s control.
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Software License Revenue. Our SaaS and license revenue also includes our software license revenue from monthly fees charged to service providers on a per subscriber basis for access to our Software platform. The non-hosted software for interactive security, automation and related solutions is typically deployed and operated by the service provider in its own network operations center. Our agreements for the Software platform solution typically include software and services, such as post-contract customer support, or PCS. Software license revenue included in SaaS and license revenue is expected to continue to decline over time as we transition subscribers to our cloud-based hosted platform.

Hardware and Other Revenue. We generate hardware and other revenue primarily from the sale of video cameras, video recorders, smart thermostats and cellular radio modules that provide access to our cloud-based platforms and, to a lesser extent, the sale of other devices, including image sensors, gunshot detection sensors and peripherals. We primarily transfer hardware to our customers upon delivery to the customer, which corresponds with the time at which the customer obtains control of the hardware. We record a reserve against revenue for hardware returns based on historical returns.

Our hardware and other revenue also includes our revenue from the sale of perpetual licenses that provide our customers in the commercial market the right to use our video surveillance software for an indefinite period of time in exchange for a one-time license fee. Additionally, our hardware and other revenue includes our revenue from the sale of licenses that provide our customers the right to use our indoor gunshot detection solution in exchange for license fees. Hardware and other revenue may also include activation fees charged to some of our service provider partners for activation of a new subscriber account on our platforms, as well as fees paid by service provider partners for our marketing services. The decision whether to charge an activation fee is based in part on the expected number of subscribers to be added by our service provider partners and as a result, many of our largest service provider partners do not pay an activation fee.

Our revenue, and in particular our hardware revenue, has in the past and may in the future be negatively affected by the Macroeconomic Conditions and their related impacts. It remains difficult to assess or predict the ultimate duration and economic impact of the Macroeconomic Conditions.

Cost of Revenue

Our cost of SaaS and license revenue primarily includes the amounts paid to wireless network providers and, to a lesser extent, the costs of running our network operations centers which are expensed as incurred, as well as patent and royalty costs in connection with technology licensed from third-party providers and amounts paid to distributed energy resource providers. Our cost of SaaS and license revenue also includes our cost of software license revenue, which primarily includes the payroll and payroll-related costs of the department dedicated to providing service exclusively to those service providers that host the Software platform. As of March 31, 2024 and 2023, we had 75 and 99 employees who manufacture hardware for our suite of IoT solutions, respectively. Our cost of hardware and other revenue primarily includes cost of raw materials, tooling, freight shipments and amounts paid to our third-party manufacturer for production and fulfillment of our cellular radio modules and image sensors, and procurement costs for our video cameras, video recorders, smart thermostats and gunshot detection sensors, which we purchase from an original equipment manufacturer, and other devices. Cost of hardware and other revenue also includes material costs and labor cost related to our employees who manufacture hardware for our suite of IoT solutions. Additionally, our cost of hardware and other revenue includes royalty costs in connection with technology licensed from third-party providers.

We record the cost of SaaS and license revenue as expenses are incurred, which corresponds to the delivery period of our services to our subscribers. We record the cost of hardware and other revenue primarily when the hardware and other services are delivered to the service provider partner, which occurs when control of the hardware and other services transfers to the service provider partner. Our cost of revenue excludes amortization and depreciation shown in operating expenses.

Since 2019, the U.S. government has implemented and imposed significant changes to U.S. trade policy with respect to China. Tariffs have subjected certain Alarm.com products manufactured overseas to additional import duties of up to 25%. The amount of the import tariff and the number of products subject to tariffs have changed numerous times based on action by the U.S. government. Approximately one-fifth to one-half of the hardware products that we sell to our service provider partners are imported from China and could be subject to increased tariffs. While the additional import duties resulted in an increase to our cost of hardware revenue, these import duties had a modest impact on hardware revenue margins. If tariffs are increased or are expanded to apply to more of our products, such actions may increase our cost of hardware revenue and reduce our hardware revenue margins in the future. We continue to monitor the changes in tariffs.

We currently expect our hardware revenue margins in 2024 to approximate the hardware revenue margins from 2023.

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Operating Expenses

Our operating expenses consist of sales and marketing, general and administrative, research and development and amortization and depreciation expenses. Salaries, bonuses, stock-based compensation, benefits and other personnel related costs are the most significant components of each of these expense categories, excluding amortization and depreciation. We include stock-based compensation expense in connection with the grant of restricted stock units and other forms of equity compensation, including equity compensation with performance conditions, in the applicable operating expense category based on the respective equity award recipient’s function (sales and marketing, general and administrative or research and development). We grew from 1,858 employees as of March 31, 2023 to 2,002 employees as of March 31, 2024, and grew from 1,989 employees as of December 31, 2023. We expect to continue to hire new employees to support the projected future growth of our business.

Sales and Marketing Expense. Sales and marketing expense consists primarily of personnel and related expenses for our sales and marketing teams, including salaries, bonuses, stock-based compensation, benefits, travel, and commissions. Our sales and marketing teams engage in sales, account management, service provider partner support, advertising, promotion of our products and services and marketing.

The number of employees in sales and marketing functions increased from 519 as of March 31, 2023 to 564 as of March 31, 2024 and decreased from 565 as of December 31, 2023. We expect to continue to invest in our sales and marketing activities to expand our business both domestically and internationally and we expect to increase our marketing expense in 2024 as compared to 2023. We intend to increase the size of our sales force and our service provider partner support team to provide additional support to our existing service provider partner base to drive their productivity in selling our solutions as well as to enroll new service provider partners in North America and in international markets.

General and Administrative Expense. General and administrative expense consists primarily of personnel and related expenses for our administrative, legal, human resources, finance and accounting personnel, including salaries, bonuses, stock-based compensation, benefits and other personnel costs. Additional expenses included in this category are legal costs, including those that are incurred to defend and license our intellectual property, as well as non-personnel costs, such as travel related expenses, rent, subcontracting and professional fees, audit fees, tax services, and insurance expenses. Also included in general and administrative expenses are credit losses and acquisition-related expenses, which consist primarily of legal, accounting and professional service fees directly related to acquisitions and valuation gains or losses on acquisition-related contingent liabilities.

The number of employees in general and administrative functions increased from 198 as of March 31, 2023 to 224 as of March 31, 2024 and decreased from 229 as of December 31, 2023. Excluding intellectual property litigation and acquisition-related expense, we expect general and administrative costs to increase prospectively as our business grows. This includes cost increases related to human resources, accounting, finance, and legal personnel, additional external legal, audit fees and other expenses associated with regulations governing public companies. While somewhat unpredictable, we also expect to continue to incur costs related to litigation involving intellectual property. See the section of this Quarterly Report titled "Legal Proceedings" for additional information regarding litigation matters.

Research and Development Expense. Research and development expense consists primarily of personnel and related expenses for our employees working on our product development and software and device engineering teams, including salaries, bonuses, stock-based compensation, benefits and other personnel costs. Also included are non-personnel costs such as consulting and professional fees paid to third-party development resources.

The number of employees in research and development functions increased from 1,042 as of March 31, 2023 to 1,139 as of March 31, 2024 and increased from 1,118 as of December 31, 2023. Our research and development efforts are focused on innovating new features and enhancing the functionality of our platforms and the solutions we offer to our service provider partners and subscribers. We will also continue to invest in efforts to extend our platforms to adjacent markets and internationally to maintain our leadership position in the development of intelligently connected property technology, and continued enhancement of our Partner Services Platform, a comprehensive suite of enterprise-grade business management solutions for our service provider partners.

Amortization and Depreciation. Amortization and depreciation consists of amortization of intangible assets originating from our acquisitions as well as our internally-developed capitalized software. Our depreciation expense is related to investments in property and equipment. Acquired intangible assets include developed technology, customer related intangibles, trademarks and trade names. We expect in the near term that amortization and depreciation may fluctuate based on our acquisition activity, development of our platforms and capitalized expenditures.

Interest Expense

We record interest expense associated with our 2026 Notes and acquired debt. Interest expense in 2024 is expected to remain relatively consistent with the interest expense in 2023.

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Interest Income

Interest income consists of interest income earned on our cash and cash equivalents, our notes receivable and our restricted cash. Interest income in 2024 will depend, in part, on our use of cash and fluctuations in interest rates.

Other Expense, Net

Other expense, net primarily consists of non-operating and miscellaneous expense and income.

Provision for / (Benefit from) Income Taxes

We are subject to U.S. federal, state and local income taxes as well as foreign income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. As a result, we recognize tax liabilities based on estimates of whether additional taxes will be due. For the three months ended March 31, 2024, our effective tax rate was below the 21.0% statutory rate primarily due to research and development tax credits claimed, the foreign derived intangible income deduction, the release of an unrecognized tax benefit liability due to the closure of the 2018 and 2019 Internal Revenue Service federal income tax return examination and tax windfall benefits from employee stock-based compensation, partially offset by the impact of state taxes, federal estimated tax payment interest expense and other nondeductible expenses. We recognize stock-based compensation tax shortfalls and excess tax windfall benefits on a discrete basis during the quarter in which they occur, and we anticipate our effective tax rate will vary from quarter to quarter depending on our stock price as well as the vesting and exercises of various forms of equity compensation under our equity incentive plans each period, including restricted stock units and stock options.
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Results of Operations

The following table sets forth our unaudited selected condensed consolidated statements of operations (in thousands) and data as a percentage of revenue for the periods presented:
 Three Months Ended
March 31,
 20242023
Revenue:
SaaS and license revenue$150,344 67 %$135,394 65 %
Hardware and other revenue72,939 33 74,322 35 
Total revenue223,283 100 209,716 100 
Cost of revenue(1):
Cost of SaaS and license revenue20,428 19,583 
Cost of hardware and other revenue56,087 25 56,589 27 
Total cost of revenue76,515 34 76,172 36 
Operating expenses:
Sales and marketing(2)