Opinions expressed herein are those of Brett Ewing and S. Lance Mitchell and do not represent those of Centaurus Financial, Inc.
Alarm.com (Ticker: ALRM) posted another strong quarter after the closing bell rang on Thursday. The self-purported “leading platform solution for the connected home” saw double digit revenue growth on a year over year basis for each quarter of the 2015 fiscal year including the most recent, which jumped 25%.
The company is relatively new to the trading world. They completed their IPO about a year ago and trading volumes are still relatively light. Since the company’s market capitalization is still less than a billion dollars, the investment community doesn’t seem to have paid much attention to their incredible business opportunity and growth runway.
Alarm.com’s software not only allows automation features for the items above, but it is the only software that allows you to seamlessly connect multiple devices from different manufacturers on one platform so they all work smarter together. Many individual manufacturers have their own smart individual product, but who wants to flip back and forth between apps to control them? Recent feedback shows consumers want a holistic home control solution that is professionally managed and Alarm.com integrates all.One of the biggest problems with the company has to be in the name. Alarm.com implies that the company does alarms. Since it has a “.com” on the end, one would think they may even be a connected alarm company. In reality however, alarms are just one of the many things this company does. Below is an excerpt from a slide out of the November investor presentation showing all of the categories Alarm.com’s software allows you to automate.
The growth runway for the automation business is truly spectacular. The alarm industry is the perfect business model to bring real automation to consumers, as they have the bodies in the streets to professionally install and maintain the devices. Parks Associates and Juniper Research estimate that the global spend on automation will nearly triple in the years 2014-2018 and Alarm.com controls just 10% of the households in the U.S. who have monitored alarm systems, with only minimal penetration internationally.
All that is changing and changing and it is changing very quickly. After having essentially no market share in 2010 and just hitting the 1 million subscriber mark midway through 2012, Alarm.com has more than doubled its subscriber base and blown down the doors off the dinosaurs in the alarm market by stealing market share left and right. On the international front, they recently signed Securitas, a large security service company based in Sweden, to gain access to the large European market. Asia should be next as a targeted expansion into India is expected sometime in 2016. On the conference call last night management said they ended 2015 turning on an average of 1000 properties a month. They expect to be at 4000 per month by the end of 2016.
The financials are pristine as well. Alarm.com carries almost no debt and still has a large amount of cash on the balance sheet. The company receives around 2/3rds of their revenue from sticky SaaS (software as a service) agreements which are typically long term and carry a 93% retention rate. Because of their strong independent dealer network they have low customer acquisition cost and high SaaS and license revenue gross margins (over 80%). The chart below is taken from their November Investor Presentation and shows the astounding and consistent growth rates for their revenue.Industry professionals tout Alarm.com’s cutting edge software, strong R&D spending, and refusal to be married to one single distributor as the reasons. They are the pioneer of the smart home through alarm monitoring and clear market leader. One of the biggest advantages is the patent they hold for using a secure cellular connection to provide uninterrupted service. The system communicates even when the power is out and the internet is down. This has proven to be a differentiator as more and more distributors and device manufacturers see the value in a cellular based service versus broadband.
To start competing in the higher margin commercial market, Alarm.com acquired Secure-i in late 2014. Secure-i is a provider of professional cloud based video surveillance services and offers solutions to large commercial installations requiring high-end cameras, multi-site management and a flexible range of secure streaming and recording options. Alarm.com rolled this service out in 2015 and ramped up exposure late in the year. This should add commercial market penetration to the already strong household penetration they are experiencing and extend yet another runway of growth for the company.
With the leading platform and miles of differentiation between the closest competitor, Alarm.com seems poised to become the most widely held security to gain access to the automation boom. Continued strong earnings and management executing on the runways of growth opportunities should create a stable and profitable ride for shareholders in the years to come.
Brett Ewing and S. Lance Mitchell may own shares of ALRM personally and also may manage discretionary accounts which include ALRM shares in the portfolio. The views and opinions expressed herein are those of Brett Ewing and S. Lance Mitchell alone and do not reflect the views of Centaurus Financial, Inc., its affiliates, agents or employees. The information set forth herein has been obtained from sources believed to be reliable; however no guarantee is made or implied with respect to its accuracy or completeness, nor does the author recommend that the attached information serve as the basis of any investment decision. This information has been provided solely for informational and educational purposes only and should not be construed as an offer to sell or the solicitation of an offer to buy or sell any securities.
Any equity ideas noted herein are not and should not be construed as a recommendation or rating to buy, hold or sell any security. The information and content herein are subject to change without notice and Centaurus Financial, Inc., its affiliates, subsidiaries, employees, officers, agents or representatives may from time to time have positions or may acquire a direct or indirect beneficial interest in securities mentioned in this communication. As with any investment, the past performance of ALRM is not an indication of future performance.