Alarm.com Holdings Inc (ALRM) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Alarm.Com second-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

Now I'll turn the conference over to your host, Jonathan Schaffer with The Blue Shirt Group. Please begin.

Thank you. Good afternoon, everyone, and welcome to Yes's 2016 second-quarter earnings conference call.

As a reminder, this call is being recorded.

Joining us today from Alarm.Com are Steve Trundle, President and CEO, and AJ Gollinger, Corporate Controller and Principal Accounting Officer.

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 in 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.

Steve, you may begin.

Thanks, Jonathan, and thank you, everyone, for joining us today.

I'm pleased to report that Q2 of 2016 was another solid quarter for Alarm.Com. SaaS and license revenue of $42 million increased 23% from a year ago, exceeding the high end of our guidance range. Adjusted EBITDA margin improved 300 basis points year-over-year to approximately 18%, as we realized leverage in our model, while also continuing to invest in our stated growth initiatives. Non-GAAP earnings per diluted share was $0.15.

Let me now highlight some areas of progress in the second quarter. In June, we announced the definitive agreement to acquire the Connect and Piper business units from privately held Icontrol networks for $140 million in cash and debt. The Connect business unit develops and sells a custom on-premise software platform used by industry leader, ADT, to power its pulse home security and automation offering. Piper sells a Wi-Fi enabled video and home automation hub.

We believe this deal is appealing for our shareholders as it will allow us to increase our R&D capabilities and will provide us with a clear path to greater participation in the internet of things secular trend. We are subject to confidentiality obligations until this transaction closes, but I did want to share a few high level points on the deal.

First, Connect is a growing business, as evidenced by the close to 100% increase in ADT Pulse subscribers from Q3 of 2014 to Q1 of 2016. Shortly before ADT was taken private, Pulse had over 1.6 million subscribers which represented approximately 25% of the Company's 6.6 million residential and business customers. New Pulse installs reached 59% of ADT's total gross subscriber additions in Q1 of 2016. If this level holds, Pulse penetration rates should continue to move higher, which should benefit our new Connect business unit and Alarm.Com.

Second, Connect has high gross margins due to its traditional on-premise software deployment model. Connect is sold and invoiced on a per subscriber, per month basis, but the software is deployed on the customer's site. Alarm.Com's operating model is completely different. We deliver and manage cellular connectivity to the property, we host and operate the software, we support the field technicians of our dealers, we provide ready to deploy marketing programs with a brand overlay and we provide business intelligence software services.

All of this is included in the price that we charge our service providers. Connect only provides software without all of these other services and this results in lower monthly subscription fees, but higher gross margins.

Third, we are excited to add R&D talent from both the Connect and Piper organizations to our roster and we expect our overall pace of innovation to accelerate after closing. At this point, we've met with nearly all the members of the Connect and Piper development teams and we believe that they have the potential to be strong technical leaders at Alarm.Com.

The combined R&D organization should deliver platform enhancements and new features at a faster rate. This should help our existing service providers succeed in an increasingly competitive environment as cable and telecommunication companies, large technology brands and many new entrants all jockey for position.

Finally, while we have been engaged with ADT through existing relationships with Protection 1 and ADT Canada, this transaction should accelerate our efforts to grow and scale our business as we deliver new solutions to ADT. Upon closing, our plan is to operate Connect in its current form for the foreseeable future with customer satisfaction being our highest priority.

So to conclude on this, we think that this is a good deal for our existing service providers, our partners, the existing customers of Icontrol Connect and Piper and for our shareholders. We're anxious to share more details on our strategy and the transaction's pro forma contribution to Alarm.Com upon closing.

Now let me move on to the rest of our business. During the second quarter, we made further progress on our strategic product road map, reinforcing our position as an innovation leader for both connected homes and businesses. Product innovation remains a cornerstone of Alarm.Com's strategy. Many developments, such as our video announcements during Q1, are visible externally, but a lot of progress is also being made behind the scenes through software.

One such effort that I want to highlight on today's call is a new capability we refer to as the Insights Engine. Let me start by providing a little context on the vision behind Insights Engine. From our earliest days, we architected the Alarm.Com platform to capture and analyze a broad range of data from sensors. One of our foundational innovations was to leverage data generated by security sensors all of the time, not just when the security system was armed.

A growing array of connected internet of things devices have also introduced new sources of data to our platform. With our architecture, we've pioneered increasingly intelligent and adapted solutions. Insights Engine is another step in that evolution and applies machine learning to create a more personalized and responsive experience.

The first application for Insights Engine is to automatically detect and alert the property owner about unexpected activity. By analyzing data from security sensors, Insights Engine detects significant deviations in activity and occupancy patterns and automatically triggers an alert to the property owner. A simple example might be a door to the backyard that is used frequently from Friday afternoon to Sunday evening, but that is only used in the afternoon after 3.30 PM on weekdays. The Insights Engine would recognize this pattern. Deviations like, for example, this door being accessed at 11:15 AM on a weekday would automatically trigger an alert to the property owner.

You can imagine a wide range of examples of how this technology can help keep the properties more secure. But the point is that you don't really have to. Insight's Engine surfaces the unusual activity on behalf of the property owner and the algorithm learns and adapts over time so that the user does not have to preconsider all the different activities that might be worthy of an alert.

The property owner can further train the algorithm by providing feedback on specific alerts as either being useful or not and can also adjust the overall sensitivity of the learning algorithms. We've been working hard to perfect this capability and expect to gradually roll it out during the next three to four months. So far, the feedback from our service providers that have tested it has been positive.

We believe this capability will serve to reinforce the differentiated value of Alarm.Com powered systems and will help drive additional user engagement. As we have highlighted during previous calls, Alarm.Com's comprehensive set of business management tools also continue to be a strong source of differentiation.

One example that we have discussed previously that I want to elaborate on a bit further is Security Tracks. Security Tracks is a cloud-based customer relationship, management and enterprise resource planning solution designed specifically for security dealers. We acquired the business in 2014 and have been steadily expanding the solution to connect it to many more disaggregated business processes that cause friction in our service providers' operations.

We recently announced a Security Tracks integration with Monitronics, a large dealer program partner which allows their dealers to automatically sync customer information into their dealer portal, to run credit checks, generate contracts and activate customers. We've also announced similar integrations with distributors so that our dealers can generate paperless purchase orders for new equipment. We believe that integrating and automating back office processes represents an opportunity for us to help our partners increase their efficiency and productivity, which in turn benefits Alarm.Com over time.

So to conclude, we're pleased to report another solid quarter and we expect our current momentum to continue into the back half of the year. We believe adding Connect and Piper from Icontrol will allow us to deliver even better products, customer service and financial performance as the internet of things market unfolds.

I'll now turn the call over to AJ Gollinger, our Corporate Controller and Interim Chief Accounting Officer, who will provide you with details on our financial results and our guidance for the remainder of the year. AJ?

Thank you, Steve.

I'll start with a summary of our second-quarter results and then provide updated guidance for the third quarter and full year 2016. Total revenue for the second quarter of 2016 increased 24% over the second quarter of the prior year to $64 million. SaaS and license revenue grew 23% over the same period to $42 million.

The vast majority of the growth in SaaS and license revenue was from our core interactive security business, which is comprised primarily of recurring monthly fees, paid by service providers for platform access and services and, to a lesser extent, licenses to our intellectual property paid on a recurring monthly basis. We also continued to experience healthy SaaS revenue growth, albeit off a small base, from non-security markets like energy, HVAC and remote access management.

SaaS revenue from these businesses, which we report in our Other segment, increased 108% over the same quarter of the prior year. Our SaaS and license revenue visibility remains high, as evidenced by our 93% renewal rate in the second quarter of 2016. This was right at the midpoint of our historical range of 92% to 94%.

SaaS and license revenue gross margin increased to 83% during the second quarter of 2016, up 100 basis points over the prior year. This improvement was largely due to our increased scale. Hardware and other revenue for the second quarter of 2016 increased 26% over the prior year to $22 million. Camera and video doorbell sales were up 86% year-over-year.

We were pleased to see that our efforts to help drive video related hardware sales through our service provider channel were successful as these customers tend to invest and engage more with their systems. Total hardware revenue in our Other segment also increased 177% over the prior year. Hardware and Other revenue gross margin was 20% for the second quarter of 2016, and roughly flat year-over-year.

Hardware and Other revenue gross margin decreased 5 percentage points sequentially due to the larger contribution from video hardware. As we've stated in the past, Hardware and Other revenue gross margin generally fluctuate from quarter-to-quarter based on product mix. Our focus remains on growing SaaS and license revenue and increasing market share. We do not manage the business to maximize Hardware revenue growth or Hardware margin performance. Total gross margin was unchanged at 61% for the second quarters of 2016 and 2015, but down sequentially from 64% in the first quarter due to the previously mentioned Hardware product mix.

Before turning to operating expenses, I wanted to note that during the first and second quarter of 2016, we incurred $2.6 million of acquisition-related expense, principally attributed to legal, accounting and investment banking fees in relation to due diligence and completing the asset purchase agreement for two business units of Icontrol Networks, Inc. We expect to continue to incur expenses in relation to this transaction as we complete the activities to close the acquisition, which is subject to regulatory approval. These expenses are excluded from our calculation of adjusted EBITDA.

Total sales and marketing expense for the second quarter of 2016 increased 22% to $9.9 million over the year-ago period. This increase was driven by higher headcount in consultants to support the growth of our domestic and international businesses, particularly in our dealer support function due to the growth of our service provider channel. Total headcount in sales and marketing functions increased to 209 at the end of second quarter 2016, up from 182 a year ago.

On a percentage of revenue basis, total sales and marketing expenses represented 15% of total revenue in the second quarter of 2016, as compared to 16% in the second quarter of 2015. Looking ahead to the remainder of 2016, we expect to continue to add headcount to support growth in our domestic and international businesses and launch marketing programs and lead generation activities for our service provider partners.

General and administrative costs for the second quarter of 2016 increased 67% to $14 million over the year-ago period. Excluding $4.5 million of legal expenses related to IP litigation, and $2 million of acquisition-related expenses which we exclude from adjusted EBITDA, G&A expenses were $7.7 million in the second quarter of 2016, or a 4% decrease compared to the same quarter of the prior year.

This decrease was due to a decline in stock-based compensation, partially offset by an increase in legal expenses from other IP-related matters, including licensing IP from others and an increase in headcount compared to the second quarter of 2015. Headcount and G&A related functions increased to 59 at the end of the second quarter of 2016, up from 55 a year ago.

Net of the effect of IP litigation expenses and acquisition-related expenses, which we exclude from adjusted EBITDA, G&A expense represented 12% of total revenue in the second quarter of 2016 as compared to 15% in the second quarter of 2015. We expect to continue realizing leverage in G&A expenses excluding IP litigation costs and acquisition-related expenses over the course of 2016.

R&D for the second quarter of 2016 increased 19% to $11 million over the year-ago period. The increase in R&D expense is almost entirely due to growth in headcount in our core business. Personnel-related expenses in our core segment increased approximately $2.8 million over the second quarter of 2015, which was partially offset by an $800,000 reduction in personnel expenses in our other segment as we reallocated certain employees back to our core business.

Total headcount in R&D grew to 290 at the end of the second quarter of 2016, up from 242 a year ago. Approximately 61% of new employees hired over the last 12 months went into research and development. R&D costs represented 17% of total revenue in the second quarter of 2016, consistent with the comparable period of the prior year.

Looking ahead to the remainder of 2016, we plan to continue to increase our investments in R&D, both in absolute dollars as well as on a percent of revenue basis. We are making these additional investments to deliver on our product road map and enhance our platform's capabilities for both our residential and commercial subscribers, as well as for our suite of enterprise tools that help our service provider partners grow their businesses.

As Steve noted, we also expect the Icontrol transaction will further strengthen our R&D capabilities. Adjusted EBITDA improved to $11.9 million in the second quarter of 2016, as compared to $7.9 million in the same period of the prior year. This 50% increase was driven by higher gross profit, partially offset by growth in R&D and sales and marketing expenses.

Our adjusted EBITDA margin was 18% in the second quarter of 2016, as compared to 15% in the second quarter of 2015. Net income was $1.9 million and adjusted net income was $7 million in the second quarter of 2016. We ended the quarter with cash and cash equivalents of $134.2 million, up from $128.4 million as of December 31, 2015.

We generated approximately $600,000 in cash flow from operations during the second quarter of 2016. The sequential decrease in cash flow was primarily due to fluctuations in working capital, with the largest drivers being a $1.9 million increase in inventory due to our aforementioned video hardware ramp and receivables timing.

We spent $2 million on capital expenditures during the second quarter of 2016. This was largely driven by the continued buildout of our new office space, which we moved into in late January. We now expect full-year 2016 capital expenditures to be around $10 million, which is at the lower end of our prior expectation of $10 million to $12 million.

I want to conclude by initiating SaaS and license revenue guidance for the third quarter of 2016. Additionally, I will update our guidance for SaaS and License revenue, Hardware and Other revenue, total revenue, adjusted EBITDA, and non-GAAP earnings per share for the full year 2016.

For the third quarter of 2016, we expect SaaS and License revenue to be in the range of $43.8 million to $44 million. For the full year 2016, we are raising our SaaS and License revenue guidance to be in the range of $171.3 million to $171.8 million, as compared to our prior guidance of $170 million to $170.5 million. Total revenue for 2016 is now expected to be in the range of $242.3 million to $245.8 million, an increase over our previous guidance of $239 million to $242.5 million.

Hardware and Other revenue is expected to be in the range of $71 million to $74 million, as compared to our prior guidance of $69 million to $72 million. We also now expect full-year 2016 adjusted EBITDA to be in the range of $42.2 million to $43.7 million, versus $40.4 million to $42.4 million previously. Non-GAAP adjusted net income for the full year is now projected to be $23.5 million to $24.5 million, or $0.49 to $0.51 per diluted share, as compared to our prior guidance of $22.5 million to $23.7 million, or $0.47 to $0.49 per diluted share.

This is based on an estimate of 48.3 million weighted average diluted shares outstanding. Our full-year 2016 stock-based compensation expense is expected to be about $5 million. We also reiterate our full-year tax rate expectations of approximately 37%.

In summary, we are pleased with our second-quarter results and continue to have a positive outlook for the rest of 2016 that is driven by ongoing strength in our core business as well as encouraging progress across a number of our growth initiatives. We will now turn the call over to the operator for Q&A.

Thank you.

(Operator Instructions)

First question is from Heather Bellini of Goldman Sachs. Your line is open.

Hello. This is Jack Kilgallen filling in for Heather. Thanks for taking the question. Steve, in your prepared remarks, you mentioned increasing competition from the telecom and cable companies. Just curious I guess what you've been seeing from this category of competitors and if there are any specifically that you would call out as being particularly aggressive? And then I had a follow-up.

Sure. Yes, I think we continue to see the cable and telco operators compete in the marketplace. I think probably the best evidence of that actually in the second quarter was, you'd have to look at the move that Comcast made to acquire the Converge businesses and then sort of an aggressive move, if you will, they intend to not only deploy the technology but also operate it and advance that technology.

I don't think they would do that if they weren't seeing some success and committed to the space. So I think we, obviously, we're excited to help all of our partners compete against those inputs from the MSO space, but we're definitely seeing them continue to have a presence in the marketplace and I would say Comcast has probably, at this moment, been the most successful.

Great. And then I guess just as a follow-up, you'd been targeting the 4,000 sub adds per month exit rate in terms of the international growth. I guess, can you share an update there? Do you remain on track? And then can you give us a sense of when we should think about international being sort of a material revenue and EBITDA driver?

Yes, I think we're roughly on track with the international segment and we put out a number earlier in the year that you restated, which is 4,000 subs per month by the end of the year. We're tracking towards that. There will be some bumps along the way, little chop in the water at times, but I think generally we think that's still an attainable goal. And in terms of, even at that level, will it be an absolute dollar mover on our business? It will begin to make a difference.

But I think we're treating international as really a long-term initiative. We've seen evidence that peer companies are producing as much as half of their revenue, meaning well-established peer companies that participate in the automation or in the security space, can produce almost half their revenue, if not more, from the global markets. So with that as the target long-term, we intend to continue to invest in the space. And I think in terms of updates, probably the place where we've seen the most progress in the last quarter has been in the Australian market.

We brought on, I believe we announced in the first quarter, that we brought on ADT Australia as well as Chubb. So we began to see contribution there. Saw a little more contribution from New Zealand. We, of course, had some geopolitical events in Turkey, but didn't really see that wreck our business in that market. So continue to do okay there. And then we're working through the pilot with a large customer in Europe, that being Securitas, and would hope towards the backside of the year, that we begin to see more and more contribution there.

Very helpful. Thank you.

Our next question is from Michael Nomura with Credit Suisse. Your line is open.

Hey, guys, thanks for taking my questions and nice results. Steve, I wanted to maybe pick your brain on the Hardware revenue. I know it's something that you're very conservative in how you're guiding it, but for the last couple of quarters, you've noted that the video components are really performing particularly well and it's also driving a lot of engagement on the platform.

So I'm curious, are there any number of video units per sub, something that you're tracking, that you're seeing this notable uptick from and is there any reason why you shouldn't continue to see an uptick in the number of video units that subscribers are buying initially that's continue to trend up?

So in the second quarter -- thanks, Michael. I think last call, we announced that we were excited to be shipping the doorbell camera in partnership with SkyBell. When we made the announcement, of course, it's a new product, new category for our partners. You don't know exactly how the product's going to do in the market, how quickly the dealers will adopt it, that sort of thing.

It was adopted pretty quickly in the second quarter. We were pleasantly surprised by the rate. Ballpark, 20,000 or so units came out and were activated in the second quarter, which was higher than we expected. So that drove the Hardware sales and really the video category a little -- to be a little more frothy than we anticipated.

I'd say at a macro level, we're going to continue to see increases in the attachment of video at as a percentage of the subscribers. At the same time, remember that our goal is to drive down the creation cost for our dealers and our partners as much as we can. So we're not particularly motivated to maintain average sale price on the video units and in fact would be working to, as much as we can, drive down average sale cost so that the product becomes accessible to an even wider audience.

So I think that the macro -- and that will, of course, dampen the Hardware revenue a bit. Those two together, the goal being really to drive better attachment and to help us sort of maintain our SaaS and License revenue rate by -- as well as customer engagement and the low turn by getting that product out there, or those products out there more broadly. So that's more or less what we saw in the second quarter and I think the trend towards higher attachment will likely continue.

That's great. And then also I'm curious if you're seeing -- if you can maybe talk about the impact you're seeing from the SEM module or is it still too early? It's been a couple of quarters now. Has that given you any material contribution to the new subscriber additions in the quarter?

Yes, so we brought the SEM on in the first quarter, late I believe as well, and have been training dealers, getting them up to speed. I think at this point, we have more than 250 service providers that are installing SEM. There was some contribution during the quarter, more than $0.5 million in Hardware revenue I believe came from SEM. So we're starting to see that ramp. Each month's a little better than the last month.

We're imminently going to put out a version of SEM that supports an additional panel family and that's the DSC power series panel family. So expect to see that hit the market in the third quarter. I think SEM's going about as expected. I think it's neither radically above our expectations, nor below our expectations. It's going about as expected and will seemingly continue to ramp up through time.

Okay. Great. Thanks for taking my questions.

Thank you. Our next question is from Nikolay Beliov from Bank of America. Your line is open.

Hello. Thanks for taking my questions and nice performance in the quarter. Steve, the Insight Engine that you did such a great job telling us what it's going to be, what it's going to do, is there an incremental monetization opportunity for you guys or is it going to be embedded in the broad platform?

Yes, I think in the case of Insight Engine, the incremental monetization will be that one of those sort of things that puts some wind in the sails long-term in that we'll have more service providers that opt to use our more advanced service plans for their customers if they find the feature to be exciting for the consumer.

I don't think we'll go out and try to charge an incremental couple bucks for that feature alone because what we're really trying to drive there is -- the beauty of that capability is that even if a customer never takes the time to set up triggers and alerts for their home, they'll begin to get triggers and alerts. And the Insight Engine will anticipate things that the consumer might want to be aware of. And then the algorithm is sophisticated enough that if the consumer doesn't like something they're getting, they can essentially retrain the algorithm.

And so our goal really is to, of course if you're a consumer, the more points of engagement you have with your system and the more you see the value of getting Insight from your home or business, the more devices you want to have in your home or business to produce data because the more data we have, the more insight we can generate in some ways. I guess the long-term trend you might see is, is a bit more, a few more devices per property going in.

The consumer would seem to want those. And then I think we will get some benefits on engagement, maybe a little bit of a shift to the higher service plans. But it's not a capability -- I think it's a really cool and important capability where we're leading the industry, but not something where we're going to imminently anticipate a monetization strategy that would be dial moving.

Got I. And when you look at your subscription revenues for the quarter, the 23% growth there, what were the puts and takes between unit growth and output dynamics?

The puts and takes there were we saw that sort of increased growth came from solid sub creations, positive quarter there, nice contribution from our other segment as well and some increases in the license revenue. ARPU was trending slightly up. I think we've commented in the past that we're seeing a slightly different mix of units, meaning our more traditional service providers and those that use all of our services are creating more units and a legacy dealer, Vivint, is creating fewer units.

As that mix evolves, the ARPU has a little bit of a trend upwards. But most of the outsized growth in the second quarter came from just core sub count from our traditional service providers and then as I said, a little bit of contribution from the other segment and from license revenues.

Got it. Thanks so much.

The next question is from Tavis McCourt of Raymond James. Your line is open.

Hello. Thanks for taking my question. Steve, a couple. First, I wonder if you could update us on timing on a new CFO? And then secondly, on the Connect and Piper acquisitions, can you remind us, on the financing front, how much debt credit line/will you draw down on for that deal?

And then just a clarification on your comments in your prepared script. When you indicated that gross margins were better than Alarm.Com's, is that corporate gross margins or Alarm.Com's SaaS and license gross margins? Thanks.

Got it. Okay, so I've got three there. Let me start with the CFO. We've been recruiting and interviewing a lot of candidates for the CFO position. I'd say maybe towards the back end of the second quarter, we got pretty focused on completing the Icontrol acquisition, so I took a few weeks off from interviewing at that point. But I think I start again later this week and the process is moving along.

We're talking to a lot of candidates. Obviously, are excited to fill that position at the right point in time as quickly as possible. At the same time, we're fairly choosey. So we're going to continue to meet folks and would hope to have that position filled by the end of the year, if not substantially sooner.

With regard to the next question, which was the balance of cash and debt on the Icontrol transaction, I think I've commented in the past that roughly what we're thinking is half and half. So we would use a fair amount, some cash and if you think of the deal as sort of a $140 million deal, use cash for about half of that, use debt for the other half. It may not be exactly that ratio, but in that sort of ballpark is what we're expecting. And then, Tavis, remind me of that third question.

The third question was just a clarification. In your prepared remarks you mentioned --

Oh, right, right. Gross, the margin (multiple speakers).

Yes, the gross margin.

Yes, I was referring to gross margins on the actual service revenue stream itself. And what I was attempting to point out is in the Alarm.Com world, we embed a lot of service with what we charge for. So we're embedding the cost of M2M communications. We're embedding the cost of training, of service to the technicians, that sort of thing.

And in the Icontrol world, the model is what is closer to sort of a pure software model and the software is actually installed, for the most part, on the customer's premise so there's not a hosting cost associated with that and so, therefore, we expect somewhat higher gross margins there. And at the same time, expect -- are kind of advising folks that, given that model, the ARPU would also be lower.

But it is, even though it's on-premise, it is a recurring monthly revenue stream that you get from the customer?

That's correct, yes.

All right. Great. Thanks very much.

Thank you.

The next question is from Matt Pfau of William Blair. Your line is open.

Hello, guys. Thanks for taking my questions. Steve, just wondered if you could update us on the competitive environment now that Icontrol's up for sale, when you go in for deals with new dealers, who are you typically competing against, has that changed at all?

Secondly, along the same lines, does the Icontrol acquisition or being pieced apart between you and Comcast, does that potentially open any new doors in terms of customers that you maybe potentially couldn't have gotten previously, now you might have a shot with some of those customers?

Sure. Let me start with the competitive landscape. I think our world really hasn't changed that much, meaning when we go out and we're recruiting a new service provider, we bump in -- we weren't really ever bumping into Icontrol other than at ADT.

And so everywhere else, the entity that we typically run into is going to be Honeywell in our little world and then the pressure, the competitive pressure comes at some level from some of the Hero products and DIY products that are being sold through retail, and our service provider needs to be able to articulate and deliver a service proposition that is better than what the consumer may be able to obtain if they go acquire a Nest or some other type of automation product on their own and install it and that sort of thing.

So that itself creates some competitive pressure. We talk to our service providers routinely about how we fulfill a value proposition that allows them to continue to be successful in the market. And then on the MSO side, yes, we'll continue to see some pressure there as well. Nothing that we're particularly intimidated by, but I don't think that the acquisition itself will really change the day-to-day dynamics that we see when we're out in the field, attempting to market, sell to dealers and/or to consumers.

With regard to the potential for us to expand the type of service provider that we're able to recruit and maybe go after some new customers, I think it's early days and probably too early to tell. Obviously, in the case of Icontrol, you had an independent company, Icontrol, servicing the entire, or much of the cable world. We have a couple of cable customers we're very pleased with as well, but they had quite a few.

I think as the acquisition completes, we'll be available and we'll talk to some of the other cable entities that may want to evaluate their options. But it's probably a little early to indicate that we have any degree of certainty that we'll be successful in that effort.

Great. And then last one for me, just wanted to know if there's any update on progress that you've made in the commercial market?

Yes, we have made some progress in commercial, I'd say. We're seeing a higher percentage of our service providers actually installing commercial. We've been reviewing the product road map with those who are most successful with commercial and planning out what we're going to deliver later this year and first half of next year.

So is it enough that we can call it out as something that impacted the second quarter? No. But are we seeing meaningful quarter-over-quarter improvement in the percentage of installations going into commercial? I would say the answer is yes. I think that's coming from a couple things.

First, when we added support for the DSE Neo panel last year, one of our ambitions was to access a broader part of the market and be able to go after what we call SMBs. So we really positioned the offering as an SMB offering. Second, we've done a lot of work to allow folks to manage multiple sites through a single interface. Third, the secure acquisition and integration has driven some performance there.

And then frankly just learning how to talk about commercial when we're out in the field, getting our own sales reps conditioned and trained and comfortable to communicate a commercial vision has been something we've worked on during the quarter and really even during the first quarter, we were working on that and I think we're beginning to see some results from that. So that's a bit of a bright spot for us. And we're hopeful that trend will continue.

Great. That's it from me, guys. Thanks for taking my questions.

Our next question is from Brad Reback of Stifel. Your line is open.

Great. Thanks very much. Steve, on the IP litigation costs, should they remain inflated at these levels for the back half of the year?

Brad, that one's a hard one for me to answer. The regular set of excuses for why I can't answer the question apply here, which is it's -- the litigation's active. We're dealing with it in the best manner we know how. I don't know that we could telegraph any sort of change in what that IP expense structure will look like at this moment. So sorry about that.

That's okay. Is there a trial date set for this yet?

I don't believe so, no.

Got it. Okay. Thanks very much.

Sure. Thanks, Brad.

The next question is from Jeff Kessler of Imperial Capital. Your line is open.

Thank you. Hello, Steve. Hello, guys. Good quarter.

Thanks.

I've got a couple questions here. First, when you take a look at the protocols and the back end of what you're using currently and you described it previously for both your essentially SaaS version, the other which is essentially a software version, the other being Icontrol, what are the types of things that you can do to start creating a, if you want to call it a hybrid?

I know you're going to say you're going to keep them separate for a while, but at some point in time, for the benefit of your installers and your trainers and your end user experience, you're going to want to start getting a more common customer experience in terms of both service, installation, and just training for your service people. How do you go about doing that?

Well, I think that probably the thing we're going to look at there, Jeff, and that we're excited about is some of the R&D synergies we see. So for example, if you think about the Z-Wave stack, we have an entire implementation of the Z-Wave stack for hundreds of different devices. Icontrol has the same. Those are not the same.

Have we written the code exactly the way they would have written the code? No. We're finding they have a lot of expertise in that domain. We feel like we have some too.

But I would think something like that is a good example of a place where we're going to look for some synergies and try to work with both the ecosystem partners, meaning the people that make door locks, people that make thermostats, et cetera, to get to a more common, and I'd say we're probably most focused on the installation and service experience, so to get to a more common and reliable and certain installation and service experience for the market.

There will be other places. I think when you look at the way that video is delivered to the consumer and some of the UI paradigms that are used for quickly scanning lots of video to ascertain what's important, there will be places there where we can, again, get some cross-team synergies and really deliver a better offering to the Pulse consumers, but also to the Alarm.Com dealers and the Alarm.Com dealer customers. So that's what we're really thinking about.

I don't think that we're necessarily going to be focused on trying to get a one size fits all type of offering out in the market. In fact, most of our service providers enjoy the differentiation that Alarm.Com provides them today and, likewise, I think if you talk to ADT, they would appreciate the differentiation that they have with Pulse.

And we don't necessarily want to marry those and drive everything to sort of a single user experience. Different markets have slightly different needs. So I think we're going to be more focused on the things that really make the technology reliable and trying to focus there in a way that sort of lifts all boats as opposed to driving to sort of a single consumer experience.

Can you move this toward a more secure, particularly from the home, the monitoring station, a more secure pipe in terms of getting those users who are on Icontrol now on ultimately onto the LTE 4G network?

Yes, that's a good question. That's another one where we really hope that we can see some R&D synergies, meaning we've been out with LTE now for close to two years and you want to be on LTE if you're deploying into M2M communications today.

And so in our early discussions with ADT, that's a place where we think that, with our new friends at Icontrol, we can really hopefully drive some movement pretty quickly, and we're familiar with the chip set manufacturers already, we're familiar with the way the network's deployed and you how you have to interface to it. So that will be a good example of a place where I think where we can get some positive R&D synergies pretty quickly.

Okay. You self-described yourself as an aggregator of very disaggregated both apps and end users to try to put a let's say, a relatively common experience together. Is this something that other companies that are looking at you are saying that that is going to take a long, long time to do and it's very, very hard to do?

Do you see yourself in four or five years as being the aggregator of hundreds, if not perhaps thousands, of different, of not just businesses, but obviously the thousands of sensors that each one of these businesses and homes will be using?

Well, I think we will have an even greater say in what types of devices are delivered to a home or business and what the standards for quality of those devices actually are. If you think about it, roll the clock forward another year or so and our ecosystem will consist of close to 5 million properties that are being serviced with an Internet of Things offering.

If you happen to be someone at that point who is going to make a new window sensor or make a new type of door lock and you want it to gain access to that base of installed customers, you would probably want to come talk to us and we'd want to talk to you about how to make that device in such a way that it's easy to install, it's very reliable and going to meet the consumer's need. So I think we'll continue to be an influencer of those who hope to bring new devices to market or maybe even those that already have some devices in market.

I don't know if we'll be the aggregator of every type of device. I think we remain committed to supporting our service providers deeply and it's difficult to support a service provider if you try to support and integrate every single device under the sun. So I think we'll continue to be an entity that, with the input of our service providers and now with the input of ADT, curates a set of devices that we've chosen to accept and approve and that meet the requirements and then help those devices get to market.

All right. Great. Thank you very much.

Thanks.

Thank you. Our final question is from Howard Smith for First Analysis. Your line is open.

Yes, thank you for getting me in here. And then you spoke of the geographic, international and commercial businesses. I was hoping to get some additional color on some of the other businesses that are early energy, HVAC, obviously, up 100% plus on the SaaS. So maybe a little qualitative color on what you're seeing in some of those businesses over the last quarter?

Right. Well, I think a couple of the places where we saw strong contribution there, two really. First is the, one of our offerings that targets vacation rental management properties as well as rental properties did well in the second quarter. So those, if you're an entity that you rent out lots of vacation homes, we make an offering called Point Central that is used to help the property manager control the flow of housekeeping, of people that clean the hot tub, all those types of things in the property during the one day that it's vacant between renters.

That offering did well and we usually see or we expect to see kind of higher installation rates there in the second quarter. Then you get into summer and most the properties are rented most of the summer. So we would expect a slight ebb in the third quarter and then pick back up in the fourth quarter. But we were pleased with the results there in the second quarter.

The other place I think we were pleasantly surprised was with our demand response offering known as Energy Hub. We've been working to really develop what we call a bring your own thermostat type of category in that space, so that electric utility doesn't, no longer has to worry about getting all the demand response devices installed in a home themselves. Instead, they can come to someone like us who already interfaces to hundreds of thousands of thermostats and subscribe to access to those thermostats.

That business is sort of getting some form now is what I would say, meaning deals that are starting to sort of look the same, one after the other, and we saw a couple in the second quarter that looked good, repeated themselves without a lot of esoteric sort of add-ons or customization and we're pleased with that progress as well. So a little bit of qualitative color, I would say, there on those two items.

Appreciate it. Thank you.

Thank you. This ends the Q&A portion of today's conference. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.

Thank you.

You're welcome.