Tariffs Prompt Caution from Alarm.com

Connected-home software provider Alarm.com (ALRM -1.45%) reported its first-quarter results after the market closed on May 9. The bottom line was flat on an adjusted basis despite revenue growth above 20%, and GAAP net income slumped on a lower gross margin and higher costs. The company boosted its revenue outlook for the year, but it left its earnings guidance unchanged because of tariffs on Chinese goods.

Alarm.com results: The raw numbers

Data source: Alarm.com.

What happened with Alarm.com this quarter?

• Software-as-a-service and license revenue was $80.1 million, up 17.7% year over year. This number includes software license revenue of $11.0 million, up 11.1% from the prior-year period.
• Hardware and other revenue was $32.3 million, up 30.3% year over year.
• On a GAAP basis, gross margin was 65.3%, down from 69.4% in the prior-year period. Operating expenses rose 22.5% year over year, growing a bit faster than revenue. Those two factors led to the decline in net income.
• Adjusted earnings before interest, taxes, depreciation, and amortization was $24.3 million, up from $23.0 million in the prior-year period.
• Total cash and cash equivalents were $122.4 million at the end of the first quarter, down from $146.1 million at the end of 2018. The decline was mostly due to payments on a senior promissory note, as well as an initial payment as part of the settlement of a class action lawsuit. Another $29 million is expected to be paid out later this year related to those two items.
• Operating cash flow was a loss of $1.2 million, down from a profit of $3.5 million in the prior-year period. Free cash flow was a loss of $4.1 million, down from a profit of $0.5 million in the prior-year period. The initial payment related to the class action lawsuit was the reason for the decline.

Image source: Alarm.com.

What management had to say

Alarm.com CEO Stephen Trundle gave an update on the expected impact of tariffs during the earnings call:

Approximately one-third of the finished goods hardware products that we offer our service providers are imported from China. To-date, the tariffs have had a modest impact on Alarm.com, but given the amount of activity in this area, we will remain diligent in watching the developments and will make appropriate adjustments if and when we have greater visibility into the outcome of the trade negotiations. Until that time, we believe it makes sense to be somewhat cautious as we think about hardware sales and hardware gross margins for the remainder of the year.

CFO Steve Valenzuela provided some details on the company's progress in international markets:

So international, we typically don't break out every quarter, but what we can say is year-over-year we've seen good growth. And in terms of the actual accounts have been created, the creation is up over 50% year-over-year. And so we're seeing progress.

Looking forward

For the second quarter, Alarm.com expects software-as-a-service and license revenue between $80.6 million and $80.9 million. The company raised its revenue guidance for the full year, but it kept earnings guidance the same due to the tariff situation. For the full year, it expects:

• Software-as-a-service and license revenue between $331.3 million and $332.2 million, up from a previous guidance range of $328 million to $332 million.
• Total revenue between $447.3 million and $454.2 million, which includes hardware and other revenue between $116 million and $122 million. Previous guidance called for total revenue between $440 million and $450 million, and hardware revenue between $112 million and $118 million.
• Adjusted EBITDA between $101 million and $103 million, unchanged from the previous outlook.
• Non-GAAP earnings per share between $1.37 and $1.41, unchanged from the previous outlook.

If the tariff situation improves, Alarm.com may be able to outperform its earnings guidance. But for the time being, the company is taking a cautious approach.