Alarm.com Holdings Inc (ALRM) 2016 Q3 法說會逐字稿

Good day ladies and gentlemen, and thank you for your patience. You have joined Alarm.com's third-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference may be recorded. I would now like to turn the call over to your host, Mr. Jonathan Schaffer with The Blue Shirt Group. Sir, you may begin.

Thank you. Good afternoon everyone, and welcome to Alarm.com's 2016 third-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 interim Chief 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. 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 turn the call over to Steve. You may begin.

Thanks Jonathan, and welcome to everyone joining us today. We are pleased to (technical difficulties) quarter of solid financial results this afternoon. We are also pleased to announce the appointment of Steve Valenzuela as our new Chief Financial Officer.

Steve will begin with us tomorrow. And we're delighted to welcome him to the team. I'll come back to that in a moment, but let me begin with a brief recap of our quarterly numbers.

SaaS and license revenue for the third quarter was $44.6 million, an increase of 23% year over year. Adjusted EBITDA margin was a bit over 17%. And non-GAAP diluted EPS of $0.19 was up from $0.14 in the third quarter of 2015.

During the quarter we maintained focus on our strategic priorities. And I would like to talk about a couple of areas of focus today. First, we are constantly striving to deepen our 6,000-plus service provider relationships.

Security remains the primary buying criteria for consumers interested in smartphone capabilities and many prefer to hire professionals to design, install, service and monitor their system. Our service providers look to Alarm.com for our market-leading technology, which begins with interactive home security but also includes video, automation and energy management. Our team continues to work hard to deliver innovation and new capabilities that are ahead of the curve in these emerging areas.

At this point our service providers have deployed one or more smart home features beyond interactive security into 53% of the properties serviced by Alarm.com. If we look at new installations over just the last 12 months, this figure is closer to 66%. We are pleased with this metric, it demonstrates the progress that we and our service providers are making to activate new accounts that include more capable and compelling services.

During the third quarter we saw a healthy uptick in this trend as our video doorbell and outdoor camera sales accelerated. Outdoor video cameras, including the video doorbell, allow the consumer to extend security beyond the perimeter of a building. A video-centric perimeter coupled with internal motion, fire, water and carbon monoxide detection, along with key automation elements enables our service providers to deliver a more secure and engaging solution.

The combination of our focus on innovation and the entrepreneurial energy that our service providers bring to customer acquisition and customer service represents a winning combination in the smartphone market. Our success with this model reinforces our belief that we are well-positioned to capitalize on growing consumer interest in the connected home. The market is still young and we have significant runway, both domestically and internationally.

At the same time we look opportunistically for acquisition opportunities that can accelerate growth as this secular trend unfolds. In June we announced we had entered into a definitive agreement to acquire two business units, Connect and Piper from Icontrol Networks. We remain excited about this transaction, as it will allow us to increase our R&D capabilities and accelerate our participation in the broad Internet of Things market.

Recently we received a request for additional information from the Federal Trade Commission, who is reviewing the proposed transaction. We are working to comply with their information request and address all outstanding issues. However as a result of this additional request, we now believe that the deal may be delayed until the first quarter of 2017.

We are unable to predict the schedule or other elements of the HSR process with certainty. We will continue to work this process and will update when there are material developments.

During the third quarter of 2016 we also amended our existing master services agreement with ADT. The amended agreement provides that following the closing of the proposed acquisition, and in exchange for certain incentives and service obligations provided to ADT, Alarm.com will serve as the exclusive provider of services for ADT's professionally installed residential interactive security, automation and video offerings for a period of up to five years.

The agreement is subject to Alarm.com achieving certain performance conditions, and allows for certain exclusions. This agreement is an important component of our Icontrol acquisition strategy, but also serves to provide a foundation for Alarm.com's overall longer-term service relationship with ADT. Let me turn next to a few takeaways from our annual Partner Summit which we held in mid-October.

This event was once again oversubscribed, with partner executives attending from 32 states and eight countries. We showcase a number of new products and services that will enable our service providers to capture new growth opportunities, operate more efficiently and deliver more value to their customers in 2017 and beyond. Through numerous short conversations and one-on-one partner meetings, I receive feedback that our development roadmap is checking all the right boxes and is properly focused on real market needs and opportunities that our service providers are seeing.

As importantly, I came away from the event more convinced than ever that we are building productive, long-lasting relationships with our service providers. Building these relationships has required many years of hard work and created a solid foundation for us. We are as excited as ever about our service providers' prospects in both the smart home and smarter business markets.

A second ongoing strategic focus that we have is to develop complementary businesses and channels that will expand our addressable market over time. We've discussed several initiatives in recent quarters, including international, commercial and our solution for short-term vacation property rentals. While still early stage opportunities, we will continue to highlight these kinds of initiatives to facilitate a broader understanding of how we are working to extend the reach of our platform.

One example I wanted to spend a little more time on today is residential energy management. In 2013 we acquired a company called EnergyHub that pioneered a bring your own device, or BYOD, model to help utilities efficiently managed periods of peak demand. Consumers are purchasing connected thermostats from a variety of sources and manufacturers.

This pool of connected devices can be a valuable asset for utilities. But it remains largely untapped due to the complexity of orchestrating a program across such a diverse set of devices. EnergyHub offers a single platform for utilities to remotely manage all energy-consuming devices so they can curtail demand and dramatically reduce the cost of supplying energy during peak periods.

While this is an early stage market, connected thermostat installations are steadily growing and increasing the potential value of BYOD programs for utilities. We estimate that approximately 100,000 homes have an energy-saving device currently enrolled in a BYOD program. Navigant Research believes this figure could increase to 20 million homes over time.

EnergyHub has successfully established itself as the leader in this burgeoning area, having secured nine program wins as the sole BYOD platform provider for an electric utility over the past 18 months. Three of these wins came in Q3 alone. So we like what we're seeing at EnergyHub, an innovative, dynamic company that has leveraged its early mover advantage to establish a strong competitive position in a burgeoning space.

We are also exploring ways for our service provider channel to utilize EnergyHub's service to further differentiate their offering to consumers. We look forward to sharing periodic updates on EnergyHub and some of our other developing businesses as they reach worthy milestones.

Lastly, at the outset of our call I mentioned that we have hired a new Chief Financial Officer. His name is Steve Valenzuela and he comes to us with a strong track record in the technology industry, with his most recent experiences being at SugarCRM, Apogee and Citrix. His experience ranges from fast-growing startups to multi billion-dollar enterprises, and includes public company CFO roles.

Steve brings extensive experience in M&A and international operations. Steve will begin with us tomorrow, and will move his family from California to our area over the holiday break. We welcome Steve to our team, and he will be reaching out to many of you in the weeks ahead.

To conclude my review of Q3, it was another quarter of solid growth and accomplishments. As we move forward, we remain focused on areas that we believe will result in long-term sustainable growth, profitability and shareholder returns. The market opportunity remains significant and our strategy remains sound.

Before I turn the call over to AJ, I also want to take this opportunity to thank AJ for all of his hard work during this transition period. Our confidence in our entire finance team with AJ at the helm allowed us to be very deliberate in filling our CFO position without missing a beat in the management of our business. AJ has done a great job stepping up and he will continue to play a very key leadership role in our finance organization going forward.

And with that, I'll now turn the call over to AJ who will provide you with the details on our financial results and our guidance for the remainder of the year. AJ?

Thank you, Steve, for the kind words. I'll start with a summary of our third-quarter results and then discuss guidance for the fourth quarter and our raised outlook for the full year 2016. Total revenue for the third quarter of 2016 increased 26% over the third quarter of the prior year to $67.8 million.

SaaS and license revenue grew 23% over the same period to $44.6 million. As we noted in the press release, approximately $400,000 of SaaS and license revenue in the third quarter was attributable to nonrecurring revenue in our Other segment. After adjusting for this one-time impact, SaaS and license revenue increased 22% versus the prior-year period.

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 399% over the same quarter of the prior year.

After adjusting for the previously mentioned one-time impact SaaS revenue in our Other segment group 259% year over year. Our SaaS license and revenue visibility remains high, as evidenced by our revenue renewal rate of 94% in the third quarter of 2016. This was at the high end of our historical range of 92% to 94%.

SaaS and license revenue gross margin increased to 83% during the third quarter, up 200 basis points over the prior year and consistent with Q2 2016. The improvement year over year was largely due to our increased scale.

Hardware and Other revenue was $23.2 million in the third quarter, an increase of 30% year over year. This was driven by a 51% increase in video camera and video doorbell sales, as well as a 149% increase in total hardware revenue in our Other segment. We were encouraged to see another solid quarter in video related sales, as these customers tend to invest and engage more with their systems.

We expect video related hardware sales to moderate in Q4 as attach rates normalize following strong shipments in the second and third quarters. Hardware and Other revenue gross margin was 20% for the third quarter of 2016. This was flat sequentially, but down from 26% in Q3 2015 due to the larger contribution from video products.

Our emphasis remains on driving SaaS and license revenue and increasing engagement, not on maximizing hardware gross margins. Total gross margin was 61% for the third quarter of 2016 compared to 63% for the third quarter of 2015 due to hardware mix.

Before turning to operating expenses, I wanted to note that during the first three quarters of 2016 we incurred $5.8 million of acquisition-related expense principally attributed to legal, accounting, investment banking fees and other activities in connection with the acquisition that Steve referenced. We expect to continue to incur expenses related to this transaction, which is currently pending regulatory approval. These expenses are excluded from our calculation of adjusted EBITDA.

Shifting back to operating expense. Total sales and marketing expenses for the third quarter of 2016 was $10.7 million, an increase of 27% over the year-ago period. This increase was to help support the growth of our domestic and international businesses, particularly in our service provider support function due to the growth of our service provider channel and the increased range of devices being installed and integrated.

Total headcount in sales and marketing increased to $211 million at the end of the third quarter 2016, up from $186 million a year ago. On a percentage of revenue basis total sales and marketing expenses represented [16%] of total revenue in the third quarter of 2016 and 2015. We expect to continue to add headcount to support growth in our domestic and international businesses and launch marketing programs in concert with our service provider partners.

General and administrative costs for the third quarter of 2016 was $14.8 million, an increase of 42% over the year-ago period. Excluding $2.9 billion of legal expenses and $3.2 million of acquisition-related expenses which we exclude from adjusted EBITDA, G&A expenses were $8.7 million in the third quarter of 2016. This increase was due to legal expenses from other IP-related matters, including licensing IP from others, and an increase in headcount compared to the third quarter of 2015.

Headcount and G&A related functions increased to [$64 million] at the end of the third quarter of 2016, up from [$58 million] a year ago. The increase in our Other segment G&A expense was due to the increase in the fair value of a stock repurchase agreement with an executive in our subsidiary that provides a remote access management solution. Net of the effect of IP litigation expenses and acquisition-related expenses which we exclude from adjusted EBITDA, G&A expense represented 13% of total revenue in the third quarter of 2016 as compared to 14% in the third quarter of 2015.

R&D expense for the third quarter of 2016 was $11.5 million, an increase of 17% 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 about $2.5 million over the third 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 304 at the end of the third quarter of 2016, up from 247 a year ago. Approximately 65% of new employees hired over the last 12 months went into research and development. R&D costs represented 17% of total revenue in the third quarter of 2016 compared to 18% for the comparable period of the prior year. (Technical difficulties) deliver on our product road map and enhance our platforms capabilities for both our residential and commercial subscribers, as well as for our suite of enterprise tools to help our service provider partners grow their businesses.

Net income was $2.6 million and adjusted net income was $9.1 million in Q3 2016. Adjusted EBITDA improved to $11.7 million in the third quarter of 2016 as compared to $9.7 million in the same period of the prior year. Our adjusted EBITDA margin was 17% in the third quarter of 2016 as compared to 18% in the third quarter of 2015, due primarily to the addition of new hires and other resources to support our growth.

We ended the quarter with cash and cash equivalents of $135.1 million, up from $128.4 million as of December 31, 2015. We generated approximately $8.8 million in cash flow from operations and spent $1.5 million on capital expenditures during the third quarter of 2016. We continue to expect full-year 2016 capital expenditures to be around $10 million.

I want to conclude by initiating SaaS and license revenue guidance for the fourth quarter 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 of 2016. For the fourth quarter of 2016 we expect SaaS and license revenue to be in the range of $45.8 million to $46.1 million. For the full year 2016 we are raising our SaaS and license revenue guidance to be in the range of $172.5 million to $172.8 million as compared to our prior guidance of $171.3 million to $171.8 million.

Total revenue for 2016 is now expected to be in the range of $254 million to $256.3 million, an increase over our previous guidance of $242.3 million to $245.8 million. Hardware and Other revenue is expected to be in the range of $81.5 million to $83.5 million as compared to our prior guidance of $71 million to $74 million. We also now expect full-year 2016 adjusted EBITDA to be in the range of $45.3 million to $45.8 million versus previous guidance of $42.2 million to $43.7 million.

Non-GAAP adjusted net income for the full year is now projected to be $28 million to $28.5 million, or $0.58 to $0.59 per diluted share, as compared to our prior guidance of $23.5 million to $24.5 million, or $0.49 to $0.51 per diluted share. This is based on an estimate of 48.3 million weighted average diluted shares outstanding. We now expect full-year 2016 stock-based compensation expense of $4.3 million, down from $5 million previously.

We also expect a full-year tax rate of approximately 32%, down from prior guidance of 37% due to a benefit from an R&D tax credit. In summary, we're pleased with our third-quarter results and continue to maintain 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.

(Operator Instructions)

Michael Nemeroff, Credit Suisse.

Congratulations on a nice quarter. Thanks for taking my question. Steve, I just wanted to ask a question about -- or actually one for you and then maybe one for AJ, or you, Steve. You mentioned that there was a slight delay from a review of the FTC. I'm curious, have they given you any idea of what aspect of the proposed acquisition they are reviewing further?

We can't really comment on exactly on what their -- the questions they are asking and the things where they're looking for some additional information. I think our view is they have a charter to review transactions like this. We think the market is highly competitive with competitors like Honeywell and Numerex and Telular and SecureNet and others inside the provider space.

And then more at a larger or higher level you have Apple, Google, others that are participating in the DIY market. So we have that perspective. I think they are doing the responsible thing and digging into the internals of the market right now. And that's probably about all we can say on it.

And the contract that you just signed with ADT for five years, is that independent of whatever happens with the acquisition? Is that still in effect, regardless of whether the transaction moves forward or not?

The contract as I stated, it has a contingency upon the close of the acquisition. There are elements that may be applicable to other parts of the business. But we went out and did that -- revised our agreement with ADT to make sure we're well prepared for the way we expect next year to unfold.

Okay. And then on the hardware outperformance, it's been quite extraordinary over the last couple of quarters. I'm just curious, is the upside in hardware coming from new dealers that you are signing on to Alarm.com? Or are they coming from your top 40 dealers, which represent a pretty healthy amount of your business? And I'm curious, do you have any idea of sell-through from all this hardware that you have seen over the last couple of quarters?

Yes. Good questions. As far as where it's coming from, new dealers alone wouldn't really cause the outperformance that we are seeing on that metric. So what we're seeing is an uptick in the attachment of video, particularly around the doorbell cameras as well as the outdoor video cameras.

We are seeing some contribution by new dealers. But it's being driven by, by and large, customers electing to have a more complete system installed through their home. And I think we're seeing the trend throughout the partner base. But probably even more so in the carriage trade component of the partner base, which are the smaller, more local operators. So that's really what's driving that.

As far as the attachment or the sell-through, I think this is one reason we noted that we expect some moderation in Q4 of the hardware trend, just in that we're seeing a lag of 3 to 6 months between when product is put out the door to distributors or to a service provider directly and when it gets installed. So looking at our numbers, on certain products we see plenty of product in their inventory for them to install during the fourth quarter.

That's very helpful. Thanks for taking my questions.

Heather Bellini, Goldman Sachs.

Hi. Thank you. I was wondering if you could talk a little bit about international expansion, and specifically the Securitas pilot? And how do we think about that starting to impact subscription growth?

Sure. Thanks, Heather. So international has been chugging along this year, on the rise. The markets I would say that we're getting the most traction in at the moment are Latin America, Australia and Turkey. And I would say that Europe, which I would associate with Securitas, is more at a starting point.

We had some delays during the second quarter, or maybe third quarter, when we were working hard to get new control panels certified for their markets. We cut through that. So now we're in the process of running pilots with them. They are actually testing different pricing paradigms, different installation paradigms in several markets. Don't really expect to see them contribute much this year. But I think they are making the right preparations to become one of the -- sort of the fourth key market for us next year.

Great. Thank you.

Sure.

Nikolay Beliov, Bank of America.

Thanks for taking my questions. Steve, maybe if you can help us unpack the subscription revenue growth number of 22% in terms of what is driven by units, maybe ARPU increase? And within the Other segment, what's main driver there?

I'll start at the Other segment. I think in the Other segment we saw some outperformance, particularly during the second quarter, that has carried over. The Other segment is performing well. We were effective in getting more product out, particularly in the vacation rental property space. So that's contributing there, as well as EnergyHub, which I alluded to in my comments earlier.

EnergyHub is getting comfortable now with the repeatable business model. And we're starting to see some results from that. So that's why I wanted to highlight that one this quarter. If we look back at the rest of the partner base in the core business, the trends are more or less as we expected. I would say that subscriber growth is about where we expected it.

I think this quarter churn, or as we present it, revenue retention was on the high side of the range we typically state. So we usually say a range between 92% and 94%. I think we reported 94%. So a little more retention this quarter than normal.

ARPU is holding steady. Positives on ARPU are the increased attachment, particularly of video and doorbell that I mentioned. And that's sort of -- an offset to that is just the constantly competitive market we operate in. I would say that's been steady.

And Steve my second question is around competition, Amazon Echo and other people entering the smart home from different angles. What are you seeing at a high level in the competition front, and how do you think it checks out going forward?

With Amazon, we ourselves have integrated tightly with Alexa. Other companies have, too. We continue to see more new entrants coming in particularly focused on the self-installation space. But some of them making at least comments that would suggest that they intend to compete elsewhere.

We haven't seen any, if we think about Amazon for example, I don't think they are at the point yet of being a viable solution for our average customer. We do think that our average customer is still someone that wants to do business with one of our local service providers, wants to have a full array of support and installation services when they get their system installed. So I wouldn't say we've seen any impact yet, but we are mindful of the new entrants that are excited about the same space we are excited about.

Tavis McCourt, Raymond James.

Hey, guys. Thanks for taking my question. Steve, first a follow-up on the ADT contract. Should we think about that as a traditional Alarm.com contract with wireless airtime included as well, or is it something different than that?

Does it also include wind-down of the traditional Icontrol software and cost associated with that? And then AJ, a financial one for you. It looked like you're guiding for hardware revenues to be down next quarter. The inventory was up a couple million in the quarter. Is that just the seasonal factor, or is there something else driving that? Thanks.

I'll start and then I'll hand it off to AJ. With regard to the contract, it's a five-year agreement. We have dealt with their use of Alarm.com services. In fact, had most of that element dealt with in prior contracts. But they have been deploying Alarm.com in Canada. And then the Protection 1 business, when merged with ADT, has continue to deploy aggressively with Alarm.com. So that element of the agreement, of course, we do deal with airtime and we manage the cellular component of that deployment. And the part of the agreement that deals with the Icontrol software, that software today does not include airtime.

It's sold as sort of enterprise software. So we wanted to make sure we dealt with how we would accommodate that software in the commercial relationship as well. And we really try to deal with -- make sure that we had an agreement in place that dealt with both. And we got that done in the third quarter. So it's a mix of both. And then AJ, do you want to take the question on -- the second question?

Yes, sure. Thanks, Tavis. To answer your question, in short generally it's a lot to do with seasonality. Also additionally we have some timing issues with getting the equipment across in the boats. So some of that stuff is actually in transit inventory and relates to timing differences, just with the long lead time and the shipping. They are not completely correlated. It's much more around the seasonality.

Great. And a follow-up. Steve, any additional insight into the timing of the litigation expenses? And can you remind us, is that in discovery phase right now? Or any kind of details on that in terms of timing of when these may slow down would be helpful. Thanks.

Sure. We are mindful of the litigation expenses, at the same time whereas I've said before we are committed to making sure that we are protecting our right to practice our intellectual property. It's difficult for me therefore to budget a timeline for the way the courts will work or the way the inter-parties review process may work at the USPTO. I think there was an update at some level, or will be one, in the 10-Q that mentions where we are as of today. And I probably would just refer you out to that to get a little additional color.

Great. Thanks, Steve. Great quarter.

Thanks. Tavis.

Bhavan Suri, William Blair.

Hey, guys. Thanks for taking my question. A nice job, just to reiterate that. Steve, just a little update on the commercial market, where things are? And then on pricing in that market, when you look at the pricing in the residential market, and obviously it's flat and then there's an uptick for video and then it's kind of flat, how does that play out in the commercial market?

Hi, Bhavan. Good question. So commercial is early days for us. But we are seeing a component of the business that's growing at a faster pace for us. It's obviously off a small base. But in the commercial space the opportunity to add value to the business I think is even higher than what you might find with an average homeowner, meaning there is an opportunity to get into specific verticals commercially, there is an opportunity to leverage the data set to the benefit of the business more thoroughly.

So therefore if you are able to present a little bit more value, I think there is an opportunity. And what we are seeing is -- I should also say there are some requirements in commercial that simply dictate a higher level of service. For example, the frequency with which you supervise the connection to a location in a commercial situation tends to be much higher than what you might do in residential, just because the regulatory environment requires that. So given that there is a requirement for a higher degree of service, there's an opportunity to leverage the data that the property is generated in more ways, there's an opportunity to do some integration and perhaps vertical solutions.

We see a higher ARPU coming off of the commercial side than what we see residential. And I think we would probably expect that to continue, because I think we're going to get deeper. We have a good team focused on this. We're going to get deeper into what the requirements are. We will be able to broaden the offering to fulfill all of those requirements.

So I would expect that the commercial space over time will be a healthy contributor. There are some requirements we're already satisfying, for example 24/7 cloud storage of video content is an important feature set for the commercial owner, and they are willing to pay for it.

That's helpful. One for you on acquisitions. And I'll maybe turn to AJ on pricing. But on the acquisition front, obviously you've got the current one there. But you brought it up that you'd be open to those. When you think about acquisitions, is it more consolidation the way you're doing with Icontrol, Piper? Or is it going into a different space like maybe medical or elderly or something like that? How should we think about your thought processes there?

I think over time a little bit of both. In the case of Icontrol, we didn't really set out to consolidate. I think we had a situation there where we had a burgeoning customer relationship with ADT and they had an interest in being able to manage their environment with a single platform. And we saw an opportunity to participate in the transaction that we thought was synergistic with what we were trying to do on behalf of the customer. So that drove a lot of our thinking there.

I think it you look at some of the other things we have done historically, like the one I mentioned, EnergyHub, there what we're seeking is technology stack, as well as domain expertise in a way that would allow us to leverage our platform. The data that we have coming in from lots of different properties and the connectivity we have from lots of different properties gives us an opportunity to leverage some domain expertise, which in that case happen to be in the demand response industry in a way that would benefit our consumer, potentially benefit the environment and benefit our service provider.

So it wasn't squarely in security. It was one that we thought fit well with the platform. And you can imagine there may be others like that through time that may, as you mentioned, come along in health or in other domains. At the moment we are focused on completing the transaction I referenced. We will continue to look generally for, I would say, smaller opportunities that we can use to really bring in either domain expertise or some particular element of the technology stack, whether that be for the commercial space or whether that be for one of the other arenas. It's difficult to predict at the moment. But we are constantly -- normally looking for smaller opportunities that fit nicely into the business.

Great. Great. That's really helpful color. Then one quick one for AJ. AJ, as you look at the hardware. (Technical difficulties)

We got a little of feedback there.

Brad Reback, Stifel.

Great. Thanks very much. Steve, is there any sort of break-up to you with Icontrol if the government were to get involved here in a greater way?

No.

Got it. And on the revenue retention side of the equation, obviously towards the upper end, is that benefiting from the improving attach that you're seeing across the portfolio, so it should remain at these elevated levels going forward?

I think that can be a positive contributor, probably affected us positively this quarter. I think we have to be mindful -- I'm not yet at the point where I think that revenue retention number is going to stay at the high side of the range we have articulated forever. I think we're in the middle of the fourth quarter.

This happens to also be the period when a lot of the 2G units are being what remains, the final ones are being ideally upgraded. But we are trying to get all the AT&T 2G GSM units off the network and onto some sort of upgraded communication module. So I won't be surprised if we see a little bit of loss from that. I don't think it'll have a material impact, though, on the rev retention metric. I just think that it would be premature to telegraph that we are comfortable going forward that it would on the high side of that range.

Great. Thanks very much.

Sure. Thanks, Brad.

Jeff Kessler, Imperial Capital.

My questions have been answered. I have a couple of quick ones here. First, with regard to your competitive position to integrate, and in some cases unify the capabilities of your service providers. We're hearing a lot of things from various competitors of yours of how good they can do it, either from an open platform type of position or from a proprietary position.

I'm wondering how you view your position in the industry with regard to your service providers being able to have, if you want to call it seamless and ease-of-use and limiting the amount of second service calls that have to come in. Where do you see yourself on the spectrum for, if you want to call it the customer experience, customer satisfaction?

I'm probably a little bit biased, but I believe -- .

I'm sure you are.

I believe we provide the overall best customer experience. We have invested heavily through the years in the quality engineering component required to reduce truck rolls, reduce go-backs, to enable a lot of remote servicing tools. And then to provide a ton of data to our partners that enable them to, I believe, optimize their performance. And then thankfully we get a ton of -- one of the great things about having lots of small dealers is they are oftentimes being run by guys that are actually out in the field every day hanging panels on walls.

And if there is something wrong, they are not afraid to give me a call or someone else here. So I feel like we have a pretty good nervous system where we hear about any type of degradation in the quality of the customer experience pretty quickly. And then we work hard to address it.

As far as what our competitors may be saying, I think that many are -- recognize that's a key component of providing great service and being attractive to dealers. And it wouldn't surprise me if many are therefore trying to communicate that they are making strides in that area. And I think we have heard from others that Honeywell, among others, is focused on improving in that area. If you simply look at some of the trade rags and their advertisements every month, they show an equivalent to what we call our MobileTech application that enables technicians to remotely render service to the home or to the business.

So I think it's a broad trend and the market is big enough, there will be a lot of participants. And I think hopefully we do a better job of it, or a bit more thorough, or a bit more focused on quality than others. But I think you will see others message in a way that is similar to us.

You referenced EnergyHub and beginning to get some traction with various utilities. In addition to the main utilities, there is a whole group of microgrids springing up around the country, either for off-loading or for that matter, adding new service in given areas. Are you having any contact with that part of the market? If you want to call it the -- I don't want to call it the alternative energy utility market, but that part of the market as well?

I would say we are watching and trying to be innovative in those components of the market. So the way that the grid is shaping up is to be one where you have large producers, which are typically today natural gas-fired plants.

You also have a bunch of small producers spread around the grid, whether it be rooftop solar. Some people have generators, smaller generators. And then you have a bunch of devices that are actually able to, in essence, generate by saving energy. And today we're mostly focused on those type of devices.

So things like the thermostat, things in parts of the country pool pumps tend to be a device that eats a lot of energy. And in that case the homeowner or the property owner probably doesn't care what time of day their pool is being vacuumed or being filtered, they just want it cleaned every day. And if we can move some of that demand around to those times when energy doesn't exist on the grid, we can both save the electric utility money and save the consumer money in many cases.

So I think we're just generally excited about the need that an electric utility will have to navigate lots of different sources of energy, all of which are potentially able to produce data about themselves. And we want to put EnergyHub in the middle of that spectrum, arbitrating data from different production sources in a way that benefits, like I said, the utility and the consumer. Right now the focus is mostly on the connected thermostat that because it's responsible for so much of the energy demand. But the BYOD, or bring your own device, market is broader than the thermostat.

Okay. We're beginning to see some of the DIY providers who were essentially providing in-home, if you want to call it unconnected service, beginning to offer various types of connection to monitored service as their customers get a little bit older and maybe a little bit wiser. The question is, is are you beginning to see business coming from the more mature area of DIY?

So for us DIY is still primarily about the customer buying a complete system. That purchase being heavily supported by one of our service providers. And we're not seeing much at the moment in terms of people taking a unconnected system, maybe a local-only system and connecting that to a monitoring center.

I am familiar with a lot of different efforts underway in the industry to enable monitoring, either temporarily or on demand or for a specific device like a smoke detector. And I think we will continue to see that play out. But it's not a meaningful part of our Business at the moment.

Okay. Final question, quick one. You've been involved with ADT Canada and the Protection 1 side of the business for some time. As you move up the spectrum with ADT, at what point do you -- essentially does your business end with them, and at what point does their higher-end commercial kick in? In other words, what type of chance or what type of opportunity do you have to move beyond small business with ADT? The very smallest business, because at the moment you were not up in ADT's commercial area.

No. I think we would say that we believe we have an opportunity to move up the food chain through time and be supportive and helpful with technology and innovation for even the larger commercial installations that they are doing. And I wouldn't really limit that discussion to just Canada. We want to leverage a lot of the technology we have built and find ways to deploy it broadly.

So I see it as an opportunity, Jeff. It's in the pipeline. I don't see it as something where we're going to update you next quarter and there will be a big announcement there. But it's certainly something that we discuss and we hope to be competitive in that domain. And in the near term be more competitive in the small business domain, not just for ADT but for all of our service providers.

Okay, great. Thank you very much.

Thanks.

Darren Aftahi, ROTH.

Thanks for taking my questions. And adding my congratulations as well.

Two, if I may. First on, Steve, your commentary about multiple services adoption. I think you said your trailing number was 66% versus 53% of the broader install base of customers. Do you guys have any internal goal for multiple service adoption in that regard? And then secondarily, I know you said outdoor video solution and doorbell solutions have driven a lot of the hardware growth and will taper off in 4Q. As we look out beyond 2016, any reason that tailwind of those two products in hardware won't continue? Thanks.

Sure. So starting with the first, which is yes, we've seen an increase in the attachment of what we call smart home services, and I provided some stats in my commentary. Our goal there is 100%. We don't have any goals short of getting every customer set up with what we would view as a fairly comprehensive system.

It may be that having video and thermostat and locks aren't necessarily appropriate for every single customer. But we tend to believe at least one of these services is generally applicable for almost any homeowner. The cost of these components are coming down steadily. So the devices themselves are getting less expensive. The installation is getting more refined.

Some of the concerns that consumers have historically had about privacy, for example, with video are diminished today. People tend to value the video content and are less concerned about the possibility of there being a camera, particularly on the outside of their home. So I think we want to see that over time move to 100% of new installations. Now, that's a lofty goal and it's probably one of those that you never actually completely achieve. But that is our goal.

With regard to the trend line on video and doorbell, looking into next year I think that next year there will continue to be healthy demand for both of those products. We may see them come back into have more impact than maybe we expect. This next quarter where we are expecting a little bit of moderation on the demand, but we don't see any diminished demand for video and doorbell. In fact, I think as we have more service providers get comfortable with the installation, as we continue to take some of the -- hopefully some of the cost out of the components, we should see demand, if anything, increase into next year.

Ladies and gentlemen, that does conclude your program. Thank you for your participation. And have a wonderful day. You may disconnect your lines at this time.

Thank you.