Alarm.com Holdings Inc (ALRM) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Alarm.com 2015 fourth quarter and year-end earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the call over to your host for today's conference, Jonathan Schaffer with The Blueshirt Group. Sir, you may begin.

Thank you. Good afternoon, everyone, and welcome to Alarm.com's 2015 fourth quarter and year-end earnings conference call. As a reminder, this call is being recorded. Joining us today are from Alarm.com are Steve Trundle, President and CEO, and Jennifer Moyer, CFO.

Before we begin, a quick reminder to our listeners. During today's call, management may make forward-looking statements which may include projected financial results or operating metrics, business strategies, anticipated future products and services, anticipated investment and expansion, anticipated market demand or opportunities, and other forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements.

Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward-looking statements, and reported results should not be considered as an indication of future performance. Please note that these forward-looking statements made during this conference call speak only as of today's date, and the Company undertakes no obligation to update them to reflect subsequent events or circumstances other than to the extent required by law. Please refer to our SEC filings, as well as our financial results press release, for a more detailed description of the risk factors that may affect our results.

Also during this call, management's commentary will include non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in the tables of our earnings press release, which we have posted to our investor relations website at investors.alarm.com. This conference call is being webcast and is also available through the investor relations website. So with these formalities out of the way, I'd now like to turn the call over to Steve. You may begin.

Thanks, Jonathan, and thanks, everyone, for joining our call this afternoon. We were pleased to end 2015 with higher fourth-quarter revenues than anticipated on both the SaaS and hardware lines. Our core SaaS and license revenue grew 25% year-over-year. This upside, combined with better than expected operating leverage, translated into solid adjusted EBITDA performance for the quarter and the year. I want to thank our service providers for their enthusiastic and growing support, as well as my Alarm.com teammates for their many contributions as we continued to execute our plan.

For today's call, I'd like to spend a few minutes talking about what we achieved in 2015 and our outlook for 2016. We began 2015 with a plan to take the Company public. And with the successful offering in June, we added about $100 million to our balance sheet, and we adjusted to the cadence of operating as a public company. Our service providers continued to expand the use of our platform throughout the year, and we worked hard to make ourselves more valuable to them. Throughout 2015, we broadened our product portfolio with new software and user interface capabilities and the addition of new devices to our ecosystem.

Some notable highlights include releasing the industry's first LT-based offering; integration with Apple's watch and TV; as well as Amazon's Fire TV and Echo products. We also added support for control panels relevant to the SMB market like Tyco's DSC Neo, and we introduced a new 7 by 24 commercial-grade video solution, and we launched our own award-winning smart thermostat, which leverages both security sensor data and remote temperature sensor data to deliver a superior user experience.

We also continued to see favorable trends in the market. Early in the year, we saw a lot of hype around the loosely-defined Internet of Things theme. Every week, it seemed like there was a new consumer gadget tethered to a single-purpose mobile app that had sleek marketing but narrow use cases. As the year progressed, and some of these faded into the background, it became more clear that the consumer doesn't really want a set of disparate devices that they have to install and maintain themselves.

Today's smart home consumers are increasingly looking for a holistic home control system that is easy to use with robust security at its core. The recent survey conducted by TNS on behalf of Intel indicated that 82% of Americans agree that integrated security is a priority for living in a smart home, and that all smart devices should be secured through a single integrated security package. This is consistent with what we are seeing in the market today and hearing from our service providers.

It's becoming more apparent to us that Alarm.com and our service provider partners are in a position to lead the market, as consumer interest and smart home technology continues to grow. We also believe our scale today, and the corresponding volume of data generated on our platform, is an important differentiator for us and an advantage for our service providers. Alarm.com is now in over 2.6 million different properties, and the data generated by tens of millions of connected devices informs our roadmap. This provides us insights that nobody else enjoys and allows us to continually enhance the value of our platform to both our service providers and the end consumer.

As further indicators of scale and reliability, we have now processed over 1 billion central station monitoring events and 1 billion video clips. These numbers seem large, until you consider that our platform is much broader than just alarm signals and video clips. By the end of 2015 we were processing more than 475 million events per week, and 40 million notifications per week, from a range of devices including panels, smart phones, video cameras, thermostats, door locks, garage door openers, and lights. Looking at 2016, I believe we are in a good position to continue to benefit from broad consumer interest and interactive connected services.

We have grown our headcount from 400 to 507 during 2015, and our team members are another year more experienced in our business. We have grown our active base of service providers from about 5,100 at the end of 2014, to about 6,100 at the end of 2015, and our service providers are also more experienced and confident in selling our platform than ever.

Throughout 2015, we worked to design, test, and deliver a product we call our System Enhancement Module, or STEM for short. The System Enhancement Module allows our service providers to upgrade many properties to Alarm.com's services, without replacing the customer's legacy equipment. In 2016, many of our service providers will be visiting homes and businesses that have cellular 2G communicators. STEM provides them with a cost-effective upgrade pass to LT connectivity, and also enables the consumer to experience Alarm.com services.

Because many of our products are associated with life safety, we are intentionally deliberate in how quickly we deploy a new product to the market. We expect to steadily increase distribution of STEM as 2016 progresses, and this should expand our addressable market. We have also continued to invest in our enterprise services platform. Traditionally, a service provider installed devices into a home or business, and then never knew when those devices failed to operate as intended. With our platform, the service provider can now remotely monitor the progress of installation, program devices as needed, and service the customer to repair common problems without rolling a truck.

We hear directly from our service providers that this suite of capabilities significantly differentiates us from competing platforms and improves their operational efficiency. We believe that enterprise services will increase the loyalty of our service providers and their confidence in taking our full set of solutions to market in 2016. We also heavily invested in creating the foundational elements for our international business in 2015. As examples of our progress there, we announced significant wins with Pronet in Turkey, Spark in New Zealand, and Securitas in Europe, and we have an encouraging pipeline.

Our team worked hard to integrate with different flavors of hardware that meet various non-US market requirements, and we have integrated network connectivity from 10 different international cellular carriers into our network operations centers. By the middle of 2015, we had seen some early success, and we reported that our international service providers had reached an installation rate of over 1,000 new installations per month. By the end of 2016, we expect our international service providers will be installing more than 4,000 systems per month.

Lastly, as we begin 2016, we have seen some M&A activity in the security industry. Earlier this month, a deal was announced in which Apollo Management Group, who already owns Protection One, would acquire ADT. We think this deal reinforces our belief that service providers who can combine robust security services with innovative smart home features will be key enablers behind the Internet of Things movement. We look forward to continuing to serve both Production One and ADT Canada, where we already have productive partnerships, and we hope to have the opportunity to expand our relationship in the combined entity over time.

Taking a moment now to look at our full-year 2016 outlook, we are targeting SaaS and license revenues of $169 million to $169.5 million. We expect total revenues to be in the range of $236 million to $239.5 million. We anticipate continued investment in our core technology, the development of our international business, and several other initiatives that will drive future growth. And we are targeting between $40 million to $42 million of adjusted EBITDA as we start to see some leverage flow through the model.

So in conclusion, we think that 2016 will be an exciting year for Alarm.com, and we look forward to updating you on the progress that we are making on many fronts as the year unfolds. With that, I will turn things over to Jen. Jen?

Thank you, Steve, and to everyone participating on this afternoon's call. I will start with a summary of our fourth quarter results and then provide guidance for the first quarter and full-year 2016, before opening the call to questions. We are pleased with our fourth-quarter results, which exceeded all of the guidance metrics we provided on our third-quarter conference call.

Total revenue for the fourth quarter increased 25% over the fourth quarter of the prior year to $56.9 million. SaaS and license revenue also grew 25% over the same period to $38.7 million. The vast majority of the growth in SaaS and license revenue was from our core security business, which is comprised of recurring monthly fees paid by service providers for both platform access and for the services they provide to their customers, and to a lesser extent, licenses to our intellectual property paid on a recurring monthly basis.

We also saw healthy SaaS revenue growth, while off a small base, from non-security markets like energy, HVAC, and remote access management. Total revenue from these businesses, which we report in our other segment, more than doubled over the fourth quarter of the prior year. Our SaaS and license revenue visibility remained healthy, as evidenced by our 93% renewal rate in the fourth quarters of 2015, consistent with the prior year. This growth in visibility contributed additional economies of scale.

Our SaaS and license revenue gross margin increased to 83% during the fourth quarter, up 300 basis points over the prior year. Hardware and other revenue of $18.2 million in the fourth quarter increased 24% over the same period of the prior year, resulting from higher sales volumes in most product categories. Video camera sales in our core business contributed approximately 45% of the overall increase, and hardware revenue in our other segment contributed approximately 37%.

Hardware revenue in the quarter substantially exceeded our expectations, although, as we've stated in the past, hardware revenues can be unpredictable from quarter to quarter. And it should be noted that not all the hardware sold in the quarter has yet to be installed by our service providers. Hardware and other gross margin increased to 26% during the fourth quarter, a 290 basis point increase over the same period of the prior year. Hardware and other revenue gross margins generally fluctuate from quarter to quarter, based on product mix.

Though as we mentioned last quarter, in 2015 we implemented changes to our supply chain logistics, which reduced the carrying costs of some of our products on a persistent basis. Our overall strategy is to continue to add third party devices to the ecosystem to provide the most complete and seamless smart home experience for our customers. Our strategy is not to maximize profitability into hardware revenue, and we expect some fluctuation in hardware margins in 2016, as we bring new products to market and enable a wider range of devices.

The breadth of our hardware ecosystem differentiates the Alarm.com platform and delivers more value to our service provider partners and end-user customers. These devices include both proprietary hardware that we design and manufacture, like the Alarm.com Smart Thermostat, as well as hardware produced by third parties. Total gross margin increased to 65% for the fourth quarter, a 330 basis point increase over the same period in the prior year.

Turning to operating expenses, we continued to invest heavily in research and development, to give our service providers a growing advantage in the market, as well as to support future growth in adjacent areas. We also continue to invest in the sales and support infrastructure necessary to expand our international operations.

Total sales and marketing expenses incurred during the quarter were $7.8 million, an increase of 31% over the same period of the prior year. This increase was partially driven by higher headcount to support the growth of our domestic and international businesses. Headcount in sales and marketing functions increased to 188 at the end of 2015, from 159 at the end of 2014. Additionally, during 2015 we expanded investments in marketing programs on behalf of our service providers. These included a new co-advertising program and the continued expansion of the Alarm.com Academy training program.

Looking ahead to 2016, we expect sales and marketing expenses to increase in absolute dollars, as well as on a percent-of-revenue basis. We plan to add headcount to support our international expansion and other growth initiatives, and increase investment in our core business, with the marketing programs I just mentioned. General and administrative costs increased 37% to $9.5 million over the same period of the prior year. In the fourth quarter of 2015, G&A included $2.8 million of legal expenses related to intellectual property litigation, which we exclude from adjusted EBITDA.

The fourth quarter of 2014 included no comparable litigation fees. G&A was also impacted by the addition of costs related to becoming a public company, including professional fees incurred to assist in the implementation of Sarbanes-Oxley compliance. These increases were partially offset by a $650,000 non-cash gain recorded to reduce a contingent liability related to the purchase accounting for an acquisition.

None of the effect of legal expenses in stock-based compensation, both of which are excluded from adjusted EBITDA, and net of the non-cash gain recorded -- G&A would've been $6.6 million in the quarter, an increase of 10% over the same period in the prior year on an adjusted basis. This would have represented a 100 basis point decline in G&A expense as a percent of revenue.

Looking ahead to 2016, we expect additional leverage in G&A expenses, excluding IP litigation costs. Research and development expense was $13.3 million in the fourth quarter, which represents a 98% increase over the same period in the prior year. R&D expense in Q4 2015 was impacted by charges we recorded related to the renegotiation of a contract with a manufacturer. The manufacturer was working with one of our other segment businesses focused on the retail channel, and we reduced the scale of that initiative and reallocated much of those resources to the core business.

Excluding these charges, R&D expense increased 36% over the same period of the prior year, which was largely driven by compensation expense, as we hired into engineering and other R&D-related functions. The total number of employees in research and development grew to 261 at the end of 2015, as compared to 187 at the end of 2014. Looking ahead to 2016, we plan to continue to increase our investment in R&D, both in absolute dollars, as well as on a percent-of-revenue basis, to further extend our leadership position in the market.

Adjusted EBITDA improved to $9.7 million in the fourth quarter of 2015 as compared to $9.2 million in the same period of the prior year, with the increase driven by growth in SaaS and license revenue. We ended the quarter with cash and cash equivalents of $128.4 million, up from $42.6 million as of December 31, 2014. The Company raised $98 million in net proceeds from its initial public offering, which closed in July 2015.

We generated $6 million in cash flow from operations during the quarter, a decrease from $9.1 million in the fourth quarter of 2014. The decline in cash flow was driven by higher IP litigation expenses, and an increase in the non-cash items impacting net income, including deferred income tax assets. Capital expenditures of $3.8 million during in the quarter increased from $700,000 during the same quarter of 2014. Over 63% of our capital expenditures in the quarter were subsidized by tenant improvement incentives related to the buildout of new office space, which we relocated to this January.

I want to conclude by initiating SaaS and license revenue guidance for the first quarter of 2016, as well as for the full year, and total revenue adjusted EBITDA and non-GAAP earnings per share guidance for the full year 2016. For the first quarter of 2016, we expect SaaS and license revenue in the range of $39.3 million to $39.5 million. For the full year 2016, we expect SaaS and license revenue in the range of $169 million to $169.5 million. Total revenue for 2016 is expected to be in the range of $236 million to $239.5 million, with hardware and other revenue projected to be $67 million to $70 million.

Our expectations for full-year 2016 adjusted EBITDA are in the range of $40 million to $42 million, which reflects an adjusted EBITDA portion of 17% versus 16% in 2015. Non-GAAP adjusted net income for the full year is projected to be $22.2 million to $23.3 million, or $0.46 to $0.48 per diluted share, based on an estimate of 48.3 million weighted average diluted shares outstanding. We project full-year 2016 stock-based compensation expense of about $6.9 million.

Our full-year tax rate is expected to be approximately 37%, with the increase in the effective tax rate as compared to 2015 related to additional R&D credits realized in 2015, which reduced the 2015 tax rate by 400 basis points. In summary, we are pleased with our fourth quarter and full-year 2015 results. We have a positive outlook for 2016. It is driven by ongoing strength in our core business as well as encouraging progress in our international and other initiatives. We will now turn the call over to the Operator for Q&A.

Thank you.

(Operator Instructions)

Michael Nemeroff, Credit Suisse.

This is Chris Rochester on for Michael. Thanks for taking my question and congratulations, a strong quarter. Just one quick thing. The hardware revenue has been a lot stronger than we have expected, and stronger than has been forecast. But is there any way we should think about that as a stream for future subscription revenue, or how should we look at that? What are the puts and takes there?

Hi, Chris. Steve speaking. The hardware revenue has come in strong a couple quarters in a row now. I think we're seeing dealers installing a few more devices in each of the properties than what we were seeing in the early part of the year. The average consumer, instead of getting them one video camera, is opting for two. Some of that is because we've actually driven down the COGs on some of those components, and therefore, the dealer with the similar level of creation cost can afford to put in another device or two. I think that is the trend we are seeing. I don't think I would use it as a leading indicator of SaaS growth because the reality is, we're going to see the same revenue per property. Not always, but for the most part, regardless of the number of different peripherals that may be installed. Two cameras doesn't necessarily generate more revenue than one camera, for example, on the SaaS line. I don't think I would go to the extent of making it and trying to tie that exactly to the SaaS growth line.

Okay. Thanks. That's helpful. Along those lines, thinking about attach rate of home automations within the dealer base. If adding cameras isn't really going to add too much to the SaaS line, what should we think about as adding to that SaaS line going forward? And what sort of trends are you seeing in adoption?

Yes, so just to be clear on cameras, adding the video service does improve our revenue per property. A customer that has no video would not generate the same yield as one who does have video. But if the customer ops for four video cameras instead of three, that doesn't necessarily change things for us. We don't charge per camera, we charge for the service as a whole.

I think we will see increasing attachment, for example, of video. The consumer -- commercial's been comfortable with video for some time. The residential consumer is increasingly comfortable with video as a part of their security apparatus. The quality of the outdoor cameras and the price points on outdoor cameras, both are moving in the right direction. So it's a purchase that is now within reach a growing part of the market. There, I think, that is probably a good driver in our business. As we look at more on the automation side, things like a connected light, connected thermostat, shades, some of the automation features are a bit more table stakes. Where a consumer wants automation, they are excited to have it, it may push them over the top and cause them to want an overall Alarm.com system. But if you try to tell the consumer, to control you light through your mobile app, you're going to pay an extra couple dollars per month, that doesn't float very well.

There, I think our strategy really is to use the desirability of the automation features to continue to drive adoption of the overall platform and then to drive stickiness within the consumer base.

Great. Thanks, and maybe if I can squeeze one more in for Jen. Just looking at the international growth that you had and looking at the guidance, what assumptions are you baking in? Maybe 4,000 a month in new subs from international, lower, higher? Can you give any kind of color around that?

Sure. Right now we're putting on about 2,000 accounts every 30 days internationally. I think we see by the end of the year we should be able to scale that growth rate up to about 4,000 accounts per month as we get to the end up 2016. We are seeing progress there, we are seeing momentum, and that is essentially what we expect.

Great. Thank you for taking my questions.

Nikolay Beliov, Bank of America.

Thanks for taking my questions, and I wanted to add my congratulations on the nice performance. Jen, just wanted talk about the EBITDA leverage you showed in the quarter and the guidance relative to the (inaudible). Can you talk to us about the puts and takes here? Is what's happening the emphasizing of the [retail] business is flowing through the margin structure or just what is going on here? I just want to understand better.

Nikolay, are you talking about the Q4 2014 EBITDA or 2016 outlook?

I'm talking about the actual EBITDA performance in Q4 2016 and the EBITDA outlook for 2016.

Sure. Our Q4 2015 adjusted EBITDA was certainly higher than we had anticipated. A lot of that came from our overperformance in revenue in the fourth quarter as well as the fact that we did spend less in certain expense categories which fell through to the bottom line.

Looking forward to 2016, as we issued in our guidance, we are expanding our EBITDA margins. That is coming from growth in revenue, which is increasing our gross profit and also it's coming from some leverage in general administration expenses. We do expect some leverage in G&A in 2016. But I would also say that at the same time, we very much remain in an investment mode. And as we also discussed -- articulated in our guidance, we do expect R&D expenses to increase as a percent of revenue in 2016, as well as sales and marketing expenses in 2016. As we both invest in marketing in our core business domestically and some of the comarketing programs that I mentioned on the call as well as internationally in the support in markets where we already have strategic relationships in play like Securitas in Europe, as well as entering new markets internationally.

Got it. Thank you, and Steve, one for you. Can you update us, please, on the Securitas deal, where you are now, when they going to start the deploying. You mentioned already have 1 million homes under management, and what could possibly the penetration be there over time?

Right. I think we noted we signed the Securitas deal after a fair amount of evaluation by them in the late part of last year. I believe I've indicated at that time that we expect to begin to see some traction in terms of production from that in the middle part of this year. And that still holds true. Things have been roughly proceeding as we expected. They are a large company and they service 13 different markets with 13 different central stations in Europe alone.

So, there is a fair amount of legwork that each of the parties needs to do. They are very, very focused on quality of service as well. To get everything in place in terms of hardware support, language support, and whatnot. I think what you'll see there is we will begin -- I think we've baked that in, some initial production into our model. And Jim talked about an exit velocity of 4,000 per month, and that'll be a contributor in the second half of the year. And then in terms of penetration, you have got 1 million customers out there, it is one of the reasons that we like the product, so we think that it going to give us a vehicle to help them go back over time and upgrade some of those customers. But I think their initial focus will be just getting to market with a great full-fledged interactive service.

Got it. Thanks so much, and congratulations again.

Thank you.

Heather Bellini, Goldman Sachs.

Hello, this is [Jack Nogales] filling in for Heather. I had a couple, just firstly, you mentioned the STEM initiative and the traction you are seeing there. Are you starting to see -- are the service partners starting to have an acceleration in converting some of their legacy security systems to a [larger] platform? And if not, what is holding that opportunity back at this point?

Jack, just can you repeat, which initiative are you referring to?

The STEM.

The STEM, got it. The update there is we began to put the product in market at the very tail end of the fourth quarter. As I noted, we are somewhat deliberate about how quickly we push something out, how broadly we push it out. It's a life safety product. And so we worked with a set of pilot dealers, in the fourth quarter, we will continue to work with them. And I think as the year unfolds, we get into the April timeframe, we will begin to open up the gates a little more on that. But so far, so good. Folks are having a good experience with it. We will add support for an additional control panel in the -- which would be the power series control panel in the second quarter and let it flow as the year progresses.

Great. And then you mentioned the 2.6 million properties. Could you give any color on ARPU trends? Is the growth being driven by customers adding on the cloud-based video, anything else you can share?

Sure. That's a good question. We did see throughout 2015 an uptick in ARPU over the course of the year. Much of that is coming from the fact that, as you just said and Steve mentioned, more dealers are attaching more devices and using more services in subscribers' homes. As well as, frankly, we have got a tranche of lower quality accounts with a prior service provider that were put on at lower ARPUs, and those are trading off at a faster rate than the remainder of our dealer base. And because of that, that impacted our blended ARPU and drifted it up a little bit. But our expectations for ARPU in 2015 were in-line with our expectations.

Great. Thank you.

Bhavan Suri, William Blair.

Congratulations, and can you hear me okay?

Yes thanks, Bhavan.

So just to dive into the dealers a little bit here. The first question is, you had a nice growth in dealers, but you've always also given us some sort of penetration idea. And I know it is hard, it's not easy, given each dealer is running (inaudible). But what sort of penetration within those dealers that you have today, any sense on that would be great.

Sure. Yes, you hit the nail on the head. It's hard for us to know exactly what our penetration rates are within our existing partner base because they don't report to us the full spectrum of their production. So we have to rely upon our gut feel and our anecdotal feel at some level. What we generally see are new dealers, where we are typically only getting 10%, 15%, maybe 20% of their production at best. As they begin to get comfortable, the typical guy will basically start installing the product and then sit back and wait for three or four months and make sure everything goes well. And then once we've had a year under our belt, we get to half and then we begin to really optimize. And some of our best partners, we are getting 90% of their new account production.

Most of our growth really didn't come from those 1,000 new dealers that I noted. I think it came primarily from increasing penetration in the existing partner base. And those 1,000 additional new dealers really just give us, as they move through that pipeline of becoming new to Alarm.com to becoming experienced installers. They give us some additional tailwinds and confidence about the future.

Got it. Got it. And then just maybe turning it over to Jen a little bit here. When you give guidance, you typically look at the dealers you have today, and that doesn't assume any net new dealer additions. Can we assume that, that is true for the forward outlook of 2016 too? Maintain that guidance approach?

Yes, I think that's right. We have a large pool of existing dealers, we put on about 1,000 dealers in 2015. And we will continue to add dealers in 2016 and beyond. But given the size of our subscriber base today and the scale of our dealer base, the majority of our growth is going to come from the dealer base that we have in place today. Our forward growth is not dependent upon us continuing to add a material amount of new dealers in 2016 and beyond.

That's helpful, and then maybe just a last one if I can squeeze it in. You guys certainly touched on international, but obviously some of the investments that are called correctly in 2015 were also in the SMB opportunity. And again, I suspect it is very early, but an update on how that is progressing would be helpful too. Thank you.

Yes, that's a good question. We were excited last year to announce support for the DSC Neo panal. We also did the acquisition of Securitas to get to a more commercial grade video solution. We have got a full team focused there now. I think we're -- I cannot say that SMB with a material contributor last year. But I think as we get into the middle part of this year, and we really begin to fire on all cylinders with regard to marketing sales and training, around the technology we have for our existing dealers in the SMB space, I think we will begin to see some progress there that gives us a little bit of upside, really. We have made progress. We've got, I think a growing body of technology relevant to that market, and you'll probably see us begin to do some branding work in that market and in the middle part of the year, maybe a little earlier and look for some growth there.

Super. Thanks again for answering my questions, guys, and congrats. Nice job.

Thank you.

Jeff Kessler, Imperial Capital.

Thank you. Could we talk a little bit about what could possibly be the beginning of what you might call a virtuous circle of both branding and dealer affiliation resulting in increased production? Meaning that, some dealers for perhaps taken aback by -- originally by the excess -- the complexity and the cost of installing wireless systems. As you bring them into your education programs, they get a little bit better, and you begin to sell a little bit more to them. They come back to you again for more hardware and perhaps obviously more services later on, which require perhaps some more education on your part, but it also ties them in a little bit more to your system, so to speak. Can you talk a little bit about how you can create this kind of branding, higher penetration circle that could be developing? In other words, it's kind of a self-sustaining growth model.

No, that's a very good question, Jeff. I can tell you about that. It would add that in that virtuous cycle there is an additional component, which is the feedback from our service provider which we -- are really in a great spot and gives us a little bit of mode. It's not just one way where we are training the service provider. We also, by working with 6,000 of them, are at the epicenter of more feedback on how you actually get this stuff sold and installed in the property that anyone else is possibly getting. And we really value that feedback.

So we have that as a benefit. I think the service provider is getting more confident. We are very focused right now on how to make sure that as they expand -- they are very comfortable with us when they go out and install a security system that is interactive. Where we are really focused right now is expanding their view of themselves and to really being in the entity that is capable of deploying a full remote monitoring Internet of Things type of system, in either a small business or a home. And making sure that we're providing all of the tools that they need to be able to supervise that insulation and manage that installation just as easily and effectively as they have been doing for security over the last 10 years with Alarm.com.

I think that gives us a leg up. It's one of the reasons we bought the Trax business to really tie into the CRM and the tech scheduling component that the dealer has to use. And I think you brought up branding as well. Jen noted we are committed to taking the marketing spend up a tad this year. I think most of that investment will be in the core channel. And especially the regional and the mid-sized dealers I think benefit from the brand. If the consumer is aware of what we offer, then it makes it easier for them to sell, it gives them some credibility. And you do get a lot of levels of stickiness and increased penetration as a result. You've hit upon a component of our strategy, and the only thing, I think to add is, again, it's a two way street. We teach, but we also get a lot of feedback and that helps us.

Okay. As a corollary to that, Tim Whall and particularly Don Young over at P1 who obviously use you, have been particularly focused for the last 10, 15 years on the scorecard on feedback from their own service people. Are you able to start plugging in? Is that the goal for you to start plugging into their so-called scorecard as they take over a larger company and get more customer feedback back to you, so again this virtuous circle gets a little bit bigger?

Right. Tim is very focused on quality, very focused on execution, he's got a rock-solid management team there that is focused on really delivering high quality services to the consumer and being able to supervise that process and surprise your organizational efficiency through the entire cycle. So, yes. We think that aligns very nicely with not only our culture, but with the technology that we deliver. And have in the past worked with Don and expect to continue to be able to work with Don to make sure that we are supporting them in that initiative.

Okay. Thank you very much.

Brad Reback, Stifel.

Great. Thanks very much. Can you guys talk to any changes of substance that may have come about with the Monitronics renegotiation?

Brad, I would say that, obviously, when you have a partner that is very significant to us, very important to us like Monitronics and you renew an agreement with them that, that by itself is significant because the alternative would be kind of negative. So we were excited that we were able to really renew our commitment with Monitronics. I think the press release we put out on it described at a high level the terms there where we would remain in a position as a preferred service provider to them and their dealers.

It's worth noting that, of course, Monitronics works with about 600 authorized dealers and they essentially act as a strong trade regulator but the dealers have some ability to also make product selections on their own. So they will continue to be a minority of other products that a few dealers use but we are pleased that they're really tying into their operation and talking about how we can both work together to continue driving up customer satisfaction that we were able to renew into something that's hopefully as productive of a relationship as it has been in the past.

Great. And then Jen, just a quick question with respect to the guidance. Besides the conservatism of not adding new dealers into the mix for 2016, the year-over-year sub growth rate decelerates at a fairly healthy clip to get to the $169 million guide that you laid out there; in 2015, it was fairly consistent in the mid-20%s. Are there any other issues we should be aware of that go into the guidance?

No. No particular issues. We're not looking to be overly conservative in our guidance at all. It is early in the year, and as we're publishing guidance right now that we are comfortable publishing, given the fact that it is very early in the year.

Great. Thanks very much.

Tavis McCourt, Raymond James.

Thanks for taking my question and I apologize for the background noise. I'm in the airport. Steve, I wonder if you could talk a little bit and remind us on the 2G end-of-life and the timing on that and the financial implications. Obviously, I assume that the same program is -- helps out quite a bit with that but what are some of the financial implications, both good or not over the next couple of years as your dealers have to deal with that?

And then secondly, on the hardware strategy, in general, when you're developing new products like the thermostat this year, are you looking to come in at a price point that is below the branded third-party players or at a premium? Thanks.

Sure. You sounded fine. So on 2G, we have been out now for a long time with 3G and latter technology. We're actually in the market right now with LTE technology and no other competitors yet is out with LTE. So most of our service providers have, for some time, been using something other than 2G. If you get down into sort of the specifics of 2G, there are two universes. There is the AT&T universe; there's the T-Mobile universe.

With AT&T, in our case, there are around a couple hundred thousand remaining 2G modules out there that will be upgraded throughout the year. The dealer needs to basically move their customer to 3G or latter by the end of 2016. On the T-Mobile side, there isn't nearly the same imperative. It is actually looking like that those units will continue to work just fine for some period of time.

We are being a little bit optimistic with it, meaning we're giving people right now the chance to jump from 2G to LTE and when you get to LTE, you're buying -- you're getting into a decade-plus of network life and it's a pretty compelling message. So I would say, if anything, the financial consequences to us are it gives us a chance to be a little optimistic and spread our wings and talk about why someone should use our module to provide services to a property.

With regard to the hardware strategy and our pricing, that pricing strategy there, I think in the case of thermostat, we felt like there was an opportunity to dramatically drop the price point for a very high-quality connected thermostat by moving most of the logic out of the actual device and into the cloud. So that is what we did.

And therefore, our thermostat is lighter weight in terms of the componentry versus some of the more retail-oriented thermostats that are $200-plus, and I think not as reachable for a decent term for the consumer. So in that case, I think we saw an opportunity, again, to be very cost effective and we want to get a product to our service providers that they can work into the connected home without dramatically increasing their creation cost per customers and that is what we did.

In general, we are motivated to help our service providers control their creation costs by giving them best-in-quality hardware, either occasionally by ourselves but most often through third-party partners, at a price point that allows them really to focus more on the service and not absorb a huge upfront hardware cost. So that is generally our strategy.

Thanks. And then just a housekeeping one, Jen. I didn't get a chance to read the press release but did you give a -- or are you giving a subscriber count metric for year end? And then as part of your guidance, if you gave a capital spending estimate, I missed it so can you repeat that one? Thanks.

Sure. Yes, we did quote our subscribers, of about 2.6 million subscribers. It was a little over 2.6 million subscribers at the end of 2015. We did not give capital expenditure guidance for 2016, but it is generally in line with that on a percentage of revenue basis, as you have seen in the past. 1 point or so of revenue, I think a good number to guide to next year is probably around $10 million.

Great. Thanks a lot, guys, and a good finish to the year.

Thank you, Tavis.

Thank you. This does conclude the Q&A portion of the call. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.