Alarm.com Holdings Inc (ALRM) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Alarm.com fourth-quarter and full-year 2016 financial results conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to hand the floor over to Jonathan Schaffer with The Blue Shirt Group. Please go ahead, sir.

Thank you. Good afternoon, everyone, and welcome to Alarm.com's fourth-quarter and full-year 2016 earnings conference call. As a reminder, this call is being recorded. Joining us today from Alarm.com are Steve Trundle, President and CEO, and Steve Valenzuela, CFO.

Before we begin, a quick reminder to our listeners: During today's call, Management may make forward-looking statements, which may include projected financial results or operating metrics, business strategies, anticipated future products and services, anticipated investment and expansion, anticipated market demand or opportunities, and other forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward-looking statements, and reported results should not be considered as an indication of future performance.

Please note that these forward-looking statements made during this conference call speak only as of today's date, and the Company undertakes no obligation to update them to reflect subsequent events or circumstances, other than to the extent required by law. Please refer to our SEC filings, as well as our financial results press release, for a more detailed description of the risk factors that may affect our results.

Also during this call, Management's commentary will include non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in the tables of our earnings press release, which we have posted to our investor relations website at investors.alarm.com.

This conference call is being webcast, and is also available through the investor relations website. With these formalities out of the way, I'd now like to turn the call over to Steve Trundle. You may begin.

Thanks, Jonathan, and welcome to everyone joining our call today. We are pleased to report that the fourth quarter exceeded our expectations, closing out a solid 2016. Our SaaS and license revenue in the fourth quarter was $46.9 million, increasing 21% over last year. Our adjusted EBITDA in the fourth quarter was $14.3 million, increasing 47% over last year.

Throughout the year, we drove growth and improved profitability. At the same time, we introduced innovative new technology and invested strategically in long-term growth opportunities. I want to thank our service provider partners, as well as our Alarm.com team, for their dedication and many contributions in 2016.

On today's call, I would like to spend a few minutes discussing our very recent acquisition of Icontrol's Connect and Piper businesses. I will also discuss key areas of our Business, and the progress we made in 2016 on several growth initiatives. Steve Valenzuela, our recently appointed CFO, will then review our financials and guidance for 2017.

Let me start with Icontrol. We are obviously pleased to have completed the acquisition. After a lengthy and very thorough regulatory review, we closed the deal last Wednesday, and are now able to welcome the Connect and Piper teams to Alarm.com. We are already hard at work to integrate these businesses into the Alarm.com operations.

Simultaneous to the closing, we settled the recent lawsuit brought against Alarm.com by Honeywell. As a reminder, Connect provides an interactive security and home automation platform that powers several service provider solutions, including ADT Pulse. As I noted when we announced the acquisition, the Connect business model differs from Alarm.com's.

The Connect software is deployed and operated by the service provider in their own network operations center. This requires the service provider to purchase their own server capacity, network operations bandwidth, and cellular end-to-end services. The service provider must also manage the deployment with their own network operations personnel. Like Alarm.com, Connect charges a monthly per-subscriber fee for their software, but Alarm.com includes in its fee all of the services I just mentioned on a turnkey basis.

Piper designs, produces, and sells an all-in-one video and home automation hub. Piper currently operates both a retail DIY product business and a channel-oriented business that has achieved some international successes. We believe the acquisition will increase our R&D capabilities, and accelerate our pace of technology innovation. This enhanced capacity will also help us extend the breadth of services we offer, open new growth opportunities for our service provider partners, and further increase our participation in the Internet of Things secular trend.

The acquisition also expands our relationship with 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, subject to certain performance conditions and carve-outs. This enhanced relationship with ADT widens our access to the domestic security and home automation market.

In conclusion, I expect that our acquisition of the Connect and Piper business units will be accretive to our Business on both the R&D and distribution dimensions. Alarm.com now services approximately 5 million residential and commercial subscribers around the globe. We are excited about our prospects to build off that solid base, and grow the Business into the future.

Next, I would like to spend a few minutes talking about the progress we made in 2016 to expand our platform and develop various growth initiatives. I will highlight three strategic areas of focus: enhancing our core business in the North American security channel, expanding our international presence, and developing complementary opportunities in adjacent markets.

Beginning with our core business, we introduced new technology to help our service provider partners drive growth, and deliver differentiated and highly engaging services. For example, we launched a capability we call Insights Engine at the Consumer Electronics Show earlier this year. Insights Engine uses proprietary machine learning algorithms to automatically detect and alert subscribers about unexpected activity at their property. This new capability further differentiates our core security service, and facilitates subscriber engagement with their system.

We also extended our platform by integrating new categories of connected devices into our hardware ecosystem. Providing a seamless user experience across a growing ecosystem of IoT devices offers a more valued solution than stand-alone products.

It also enables our service providers to respond to market innovation and address consumer demand for emerging smart home products. For example, our Amazon Echo integration enables voice controls for the security system, lights, locks, thermostats, and garage doors. We also launched our video doorbell suite last year. Integrating the home's lights and locks with the video doorbell seamlessly extends security beyond the perimeter of a building. Both of these examples have been very well received by our service providers and their customers.

Video is a strategic area of growth in both the residential and commercial sectors. To that end, in January of this year we acquired substantially all of ObjectVideo's business. ObjectVideo is a pioneering company in the growing field of computer vision and video analytics. This team has extensive experience working on sophisticated video analytics projects to support the mission of the US Defense and Intelligence communities. They have already begun to contribute to Alarm.com's video development initiatives.

I also want to cover the opportunity for our service providers to address small- and medium-sized businesses. We tailored our Smarter Business Security service to deliver differentiated value. Many of our service providers already address this market segment, and we estimate that approximately 4 million commercial properties in the US fit the profile of our target subscriber. Similar to the residential market today, we see an opportunity to transition these businesses to Alarm.com services over the coming years.

We have already seen some signs of momentum with our commercial service. In 2016, our service providers created nearly 2.5 times the number of commercial accounts, as we did in 2015. This was from a relatively small base, but we are nonetheless pleased with how our service providers have responded to this opportunity. We expect continued momentum as our channel further adopts this new offering.

Let's now turn to our international business. In 2016, we more than tripled our number of total paying international subscribers. We ended the year adding new installations at a rate of approximately 3,500 per month, up from about 1,000 per month at the beginning of the year. While this fell just short of our ambitious goal to quadruple monthly installations by year end, we are still pleased with the growth, and expect to continue building off of this momentum in 2017.

Finally, our initiatives to develop complementary businesses and channels to broaden our market opportunity continued to show solid progress during the last year. One of these businesses, PointCentral, offers a property management and unattended access solution. Their market includes vacation rental properties, residential REITs, and businesses requiring an unattended delivery solution. PointCentral's customers can securely grant access to a property even when they cannot be on site. They can also manage energy more efficiently, and maintain property control and awareness through automation.

As we have indicated in the past, we are also developing businesses in the HVAC channel with Building 36 and in the electric utility channel with EnergyHub. While PointCentral, Building 36, and EnergyHub represent early-stage opportunities, they collectively showed positive signs that include more than 100% growth in SaaS and license revenue in 2016. We expect further growth in 2017.

To conclude, in 2016 we extended our leadership position, and enhanced our services platform, while delivering increased profitability. With expanded R&D capacity, we will continue to invest in new technology for our service providers, as well as initiatives to drive long-term growth, while also continuing to drive profitability and shareholder value. With that, I will now turn the call over to Steve Valenzuela for a review of our financial results and outlook for 2017. Steve?

Thank you, Steve, and good afternoon, everyone. This is my first earnings conference call since joining in November, and I am excited to be on board as part of the Alarm.com team. The pace of innovation here is very impressive, and the opportunities in the markets we serve are large.

We are well positioned as a leader in this dynamic industry. I look forward to working with the team to drive continued growth and profitability. I also plan to reach out to our investors to expand on our investor relations practice going forward.

With that, let me begin with a review of our Q4 and 2016 financial results, before turning to our guidance for 2017, which includes our expectations for the Connect and Piper business units we acquired last week from Icontrol. In the fourth quarter, SaaS and license revenue grew 21% over the same period last year to $46.9 million. Total revenue for the fourth quarter of 2016 increased 23% to $69.8 million. For all of 2016, SaaS and license revenue grew 23% to $173.5 million, with total revenue of $261.1 million, up 25% over 2015.

Our SaaS and license revenue visibility remains high, as evidenced by our revenue and renewal rate of 94% in the fourth quarter of 2016. However, we did start to see some impact from AT&T's 2G sunset program, which will likely continue into this year. Taking this into consideration, we still expect our revenue renewal rate to stay within our long-term expectation of 92% to 94%.

Hardware and other revenue was $22.9 million in the fourth quarter, an increase of 26% year over year. This was driven by a doubling in video camera and video doorbell sales, as well as a 67% 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.

Total gross margin was 62% for the fourth quarter of 2016 compared to 65% for the fourth quarter of 2015, due to a higher mix of hardware sales. Gross margin for our SaaS and license revenue was 82% during the fourth quarter, comparable to prior periods. Hardware and other gross margin was 20% for the fourth quarter of 2016. This is consistent sequentially with the prior two quarters in 2016, but down from 26% in Q4 2015, due to a larger contribution from video products. Our emphasis remains on driving SaaS and license revenue, and increasing engagement, not on maximizing hardware gross margins.

Turning to operating expenses, we have a strong commitment to innovation, given the large market opportunity ahead of us. In the fourth quarter, we invested $12 million in research and development, or 17% of revenue, an increase of 32% over the same quarter last year, after excluding a $4.2 million charge in the fourth quarter of 2015. Our R&D headcount grew to 320 employees at the end of 2016, up from 261 a year ago. Our total Company headcount at the end of 2016 was 607 employees, up 100 employees from 2015. And with the acquisitions of Connect, Piper, and ObjectVideo, we are pleased to welcome 120 new employees to Alarm.com.

In the fourth quarter of 2016, we incurred $5.3 million of acquisition-related expenses, principally attributed to legal and accounting fees. Additionally, legal expense from non-ordinary-course litigation was $2.1 million in the fourth quarter. These expenses are excluded from our calculation of adjusted EBITDA. Excluding these expenses, G&A expenses were $8.4 million in the fourth quarter of 2016, representing 12% of total revenue, as compared to $6.5 million, or 11% of fourth-quarter 2015 revenue. This increase in G&A was mainly due to personnel-related costs, consulting, insurance, and ordinary-course legal expenses to support our operational growth and intellectual property portfolio.

Non-GAAP adjusted EBITDA increased to $14.3 million in the fourth quarter of 2016, up 47% from the fourth quarter of 2015. For 2016, non-GAAP adjusted EBITDA was $49 million, up from $34.4 million in 2015. For all of 2016, non-GAAP adjusted EBITDA margin improved about 200 basis points from 2015 to nearly 19%. GAAP net income in Q4 2016 was $3 million, and $10.2 million for all of 2016. Non-GAAP adjusted net income was $9.1 million in the fourth quarter of 2016 and $31.1 million for 2016.

Turning to our balance sheet, we ended 2016 with cash and cash equivalents of $140.6 million, up $12.3 million for the year. This does not reflect the cash we used for the completion of our recent acquisitions of Connect, Piper, and ObjectVideo, which I will discuss in a moment. In the fourth quarter of 2016, we generated approximately $8.7 million in cash flow from operations, and invested $2.9 million in capital expenditures. For all of 2016, we generated cash flow from operations of $17.5 million and used $9 million for capital expenditures.

Before I turn to our guidance for 2017, I would like to add a few financial details regarding our recent acquisitions of the Connect and Piper business units from Icontrol, and our acquisition of ObjectVideo. We paid $148.5 million in cash for the acquisition of the Connect and Piper business units. This includes $8.5 million in working capital, consisting mostly of accounts receivable we expect to collect in the next 60 days.

We used $81.5 million of our cash on hand, and drew $67 million from our line of credit with Silicon Valley Bank and a syndicate of lenders to fund the acquisition. We expect our ending cash balance at the end of March after using the cash to close the acquisitions to be approximately $50 million to $55 million, and our bank debt to be $73.7 million, which includes $6.7 million of bank loans we had drawn in the past. For ObjectVideo, we paid $6 million in cash.

Next I will discuss our guidance for the first-quarter and full-year 2017, which includes Connect and Piper, as well as a very small and immaterial contribution from ObjectVideo. For Connect and Piper, we issued an 8-K on March 8 when we closed the acquisition with our expectations for their contributions to our financial performance over the following 12 months. Our guidance today reflects their partial-year contribution from the closing date of the acquisition.

Turning to our financial outlook, for the first quarter of 2017 we expect SaaS and license revenue to be in the range of $49.3 million to $49.5 million. For the full year of 2017, we expect SaaS and license revenue to be between $231 million to $232.5 million, representing year-over-year growth of 34% at the mid-point of this range. Total revenue for 2017 is expected to be in the range of $322 million to $325.5 million, which includes hardware and other revenue of $91 million to $93 million.

We expect non-GAAP adjusted EBITDA for 2017 to be between $65 million to $66 million. This excludes acquisition-related costs such as accounting, tax, legal, and integration costs. Non-GAAP adjusted net income for 2017 is projected to be $36 million to $37 million, or $0.73 to $0.75 per diluted share. This is based on an estimate of 49.4 million weighted average diluted shares outstanding.

We expect full-year 2017 stock-based compensation expense of $5.5 million to $6 million. Capital expenditures for 2017 are expected to be approximately $10 million.

We expect a full-year tax rate of approximately 37% for 2017, as compared to our tax rate of 29% for 2016. We realized R&D tax credits in 2016 that reduced our effective tax rate. While we expect additional R&D tax credits in 2017, their contribution will be proportionally less compared to our pre-tax profit in 2017. Also, our projected tax rate for 2017 does not consider our adoption of the new accounting standard for employee share-based payments.

In conclusion, we are pleased with our results in 2016, and are looking forward to the year ahead, after a very busy last couple of months. With that, operator, please open the call for Q&A.

(Operator Instructions)

Gabriela Borges, Goldman Sachs.

Good afternoon. Thank you for taking my question. Steve, I was hoping you could give a little more detail on the contributions that you are expecting for Icontrol over the course of the year. What I am trying to get at is any kind of trajectory on the underlying organic Alarm.com business versus some of the contributions that you are expecting from Icontrol.

Hi, Gabriela. This is Steve Trundle. We now have two Steves. I'll take this one.

With the contribution from Icontrol, I think the first thing to keep in mind here is that Icontrol, the Connect business, that is, really has one customer and that is ADT. The mix of product use at ADT may shift over time, meaning we're going to take our direction from the customer and if they decide to put more of their new business on the Alarm.com platform, that's fine with us. If they decide to put more of it on the legacy Connect product that is installed that's called ADT Pulse, that is fine.

It is a little bit challenging for us to anticipate exactly where the revenue will come from in the Icontrol business; will it be in Connect or will it be on Alarm.com? But I think directionally, if you penciled in 75% of what we put out in the 8-K as the contribution this year, you would be in about the right spot. That would be a good estimate.

That is very helpful. Thank you. Then maybe for Steve Valenzuela, if I could. Same sort of question, but on the cost profile. Could you discuss the opportunities for cost synergies with Icontrol and as we as we go through the year how we should think about that EBITDA number ramping?

Hi, Gabriela. It's Steve Valenzuela. If you look at the cost structure of Alarm.com last year and going forward, it's going to be very similar. And we are going to be looking for synergies, but really our focus is really on integrating the teams. It is really only been one week since we've closed the acquisition. We have started the integration process. We have teams already there.

But in terms of the actual structure, a very good heavy R&D concentration there. As you'd see with us in the past, we make a good amount of investment in R&D and if you look at the guidance we've provided for the combined companies now with the acquisition, we are looking at adjusted EBITDA of $65 million to $66 million, which is a little bit over 20% adjusted EBITDA margin.

That's helpful. Thank you.

Thanks.

Michael Nemeroff, Credit Suisse.

Can you hear me, guys?

Yes.

Hi, Michael.

Congratulations on many different fronts and for closing the Icontrol acquisition. I want to build a little bit on the previous questions around Icontrol. First I would love to understand how you settled the lawsuit with Honeywell. It looked pretty serious by my reading. I did not expect them to just go away lightly.

Then the second one is on the number of subs that you are taking on from Icontrol. I don't know if this is for Trundle our Valenzuela, but if I look at the margin profile of Icontrol, it was a little bit higher than Alarm and I am curious, as you seek to migrate or -- that is part of the question -- as you seek to migrate the Icontrol subs over to the Alarm.com platform over time, are you going to see some margin decreation or margin dilution from taking on those subs? Thanks.

Okay. Michael, this is Steve Trundle. With regard to the litigation, I think people are a little bit surprised by that. You have a company that is a $93 billion company going after a $1 billion company on the grounds of antitrust. We felt pretty strong going into that situation and I think we were fortunately able to resolve it in a way that is just fine for us. Unfortunately the exact terms of how we settled it are under seal and I can't communicate those, but suffice it to say we are comfortable with the resolution.

With regard to the sub counts, I think the number that I provided was we are at 5 million total subs now. You can probably piece together where those come from. The majority are still Alarm.com subs. I think we last put out a $2.6 million number at the end of last year. At this point we're going to report combined subs but not including any licensees other than those that are running on our software. That is what we are going to do there.

With regard to the margin profile, that is a good question. Couple things going on in there. One is, the Icontrol business has less of a hardware revenue component in it currently than the Alarm.com business, so naturally there is some margin improvement there.

Secondly, the software is actually hosted by the customer. The customer is incurring almost all of the costs associated with hosting, so that drives higher margin as well.

In terms of what will happen or might happen if the subs or if ADT begins to shift some of the subs to the Alarm.com platform, you are correct. The Alarm.com platform offers a richer, or a more comprehensive suite of services where we are incurring any [M2M] costs. We're running it with our own operations personnel, absorbing all the bandwidth cost, the servers, et cetera. So over time you could see the potential for that shift to generate either more revenue and some that revenue, though, would be at slightly decreased margins.

At this point though, saying that, that's going to occur would be speculative. We are just getting started and we will take the direction really from our customer, but that is what opportunity we do see.

Great. Thanks for taking my questions. Nice quarter, nice year.

Thanks.

Nikolay Beliov, Bank of America.

Thanks for taking my questions and adding my congratulations, too. Steve Trundle, a question for you. When you look at the strategic direction of the Company right now after all the changes, Icontrol, Video acquisitions, where do you think the platform goes in the next two to five years? Does Alarm.com go into tracking people, mobile outfits like cars and maybe pets, just becoming a more comprehensive IoT platform both for residential customers and commercial businesses?

Nikolay, yes, I think we are attempting to put in place the platform and the infrastructure that is capable of a steadily broadening platform footprint, if you will. Meaning even some of the businesses we are in now like the EnergyHub business or like the PointCentral business are examples of taking technology we developed for a core purpose of security and then finding interesting way to redeploy that technology to do more things that value either businesses are homeowners or in some cases landlords. The ObjectVideo acquisition I am particularly excited about in terms of what it does for us on the platform and some of the types of applications it opens up in the future. This is a team that does have the ability to track objects, to make determinations about license plates, to make determinations about flow of either people or vehicles through a given location.

Fortunately with our service provider footprint, quite a few of them are already selling into the commercial and sometimes what is called the integrators space already and we see an opportunity to significantly upgrade our platform to make it suitable for a wider range of applications through time like that.

Got it. My second question for you, Steve Trundle, is in terms of international traction, you came in slightly below plans for last year. What contributed to that? What are you doing to fix that and improve execution internationally and if you can give us an update on the Securitas relationship?

Sure. Last year, I think in the middle part of the year, I indicated that we had hit a few choppy waters internationally. We had a coup attempt in Turkey that I don't want to point at any source -- single excuse, but we had some challenges for a month or two there. We had some challenges actually really getting the hardware dialed in, in terms of getting the right partners in place, getting what is called the EN grade 2 certification on a set of control panels that our European customers could use.

So stumbled our way through some of those obstacles in the middle part of the year and I think lost a couple months on our plan. The number that I put out at the beginning of the year was a bit of a leap. We were doing 1,000 and I said by the end of the year we will do 4,000. If I had a do-over, I probably would not have put that out. But nonetheless we got to 3,500 and rolling into this year, I think we have dealt with most of those obstacles and are seeing a clear path to continued growth internationally.

Regarding Securitas specifically, they continue to be a great partner. We have been working through a set of pilots in a number of the difference individual European markets. In the second quarter we will begin full launch in the Netherlands and Belgium. I think we have wrapped up more or less getting in place the right hardware portfolio for them, so I think especially in the back half of the year we will start to see further contribution from them and we are still as excited as ever about their role in our international business.

Thank you.

Bhavan Suri, William Blair & Company.

Hello, guys. Can you hear me okay?

Yes.

Great. Nice job. I'll just jump in with a first one for Steve Trundle. When you look at the Piper business and you think about that DIY space, do you think that is something that you're going to continue to partner around where you're integrated with Echo and things like that or do you start actually offering a full DIY competitive offering to Apple Home and Google and things like that? How should we think about what you are going to do with that part of the business?

Yes, Bhavan, that's a good question and we are still thinking through that right now. We have had -- we've been in a hands-off mode with both of these businesses for the last six months and now have had five days to begin to get into what they are doing and what the outlooks are as teams. I think our experience is DIY, we love our current set of DIY service providers that are already selling Alarm.com every day. That has been a good business for us.

We are probably not as conditioned to believe that retail DIY is a great place for us to be, so we're going to look at that carefully and look at the capabilities of the product on the Piper side and see if there is a fit for that product that is more synergistic with our traditional channel strategy. That said, we are going to look at things open-minded and we have not yet made a decision, but our general bias is to find a way to support our service provider partners with most of the development that we are doing, so that is where we would look first.

Got it. Fair enough. Then one more for you then I'll have a quick one for Steve V in a second. When you look at now you have Monitronics and ADT and some of these large guys, when you look at the security space, is not like everyone is going after ADT, as it's a very large, behemoth player.

Any color from your dealer channel, your customers, your actual customers about what they think of ADT now be the biggest customer for you, or a very large customer for you guys? Have they given you any feedback? Do they worry about that? How should we think about that?

I think there has been a bit of a shift over the last three years, really, in that three years ago it was a we versus ADT type of mentality in the channel. But then we saw the entry of cable and with Comcast, with Time Warner, with Cox, with AT&T and we also saw the entry of a number of point products such as Dropcam, Nest and others that are competing for the customer's attention as well.

I think there result of that is in the eyes of most of our service providers now, ADT is really not the bad guy. They are a part of the family, if you will, and folks are conditioned to believe that what makes sense is for us to scale up our R&D capacity so that we can deliver capabilities that keep them competitive with all of these emerging channels. That's what we're trying to do and I think that is a reasonable position for most of our partners to take.

Great. Then a couple quick ones for Steve V here, quickly, and welcome. The first one, is just on the sales and marketing side for the business, the Icontrol business. Obviously, that's a licensed-based business. You might add subs there but you're not going to go sell that product. It doesn't feel like you're going to go sell that product to net new dealers, so can we expect some material sales and marketing leverage, maybe over 12 to 18 months there?

And the inverse question on R&D, you're going to have to support that platform while you've got stuff. You obviously doing a ton of development on the core Alarm.com platform integration. Do you keep adding R&D on the Icontrol side to support that and all the new integrations that may happen, say Amazon comes up with something different than Alexa or Echo and you have to integrate that? Is that [a plan so] would you have to double up -- or not double up, but have extra R&D just because you have got now two platforms? How should we think about those two pieces of the businesses you bought? Thank you.

Bhavan, I'm going to take the piece on the R&D strategy a bit. The first part of the question I think was on sales and marketing leverage, which I will shift back at the end to Steve V for him to answer that one.

On R&D leverage, I think the reality is that the IoT is getting broader every day, and we are in a race to keep up. Each month I wake up and there is another device that we need to integrate, we need to support. It is either the Apple Watch or it's the Amazon Echo device or the Dot or new types of light switches or light bulbs, whatever it might be. We know the consumer wants to buy all of this stuff from one service provider if possible and for us to be that technology engine for the service provider, we have to scale up and be able to quickly integrate and do so cleanly an ever-broadening number of devices.

I think that when we think about synergy it is not that we are thinking we are going to absorb this team and cut the team. We also have an obligation to continue to support ADT with the platform and they continue to be excited about the existing Pulse platform, so we will do that. I think we will see opportunities for us to get synergy in the form of more breadth on the R&D side, but I don't think we will necessarily be looking for heavy cost type of synergies on the R&D side.

I will let Steve comment on the sales and marketing side.

Thanks, Steve. In terms of sales and marketing, if you look at -- even in 2016 sales and marketing was 14%. In the past it has been 15%. We have a very good model where we sell to dealers and to the end subscribers. If you look at the Connect and Piper, you are talking a few customers. There's not a lot of investment in sales and marketing.

Again, a lot of the investment really is in R&D and what we are acquiring here, if you look at the 120 employees we are acquiring, most of those folks are in R&D. As we move forward, in the guidance we provided, we've factored in the teams coming together. We factor that into our EBITDA margin of 20% for 2017, which we are very comfortable with. Again, we are focused right now on the integration.

Will there be synergies, will there be additional opportunities? We think so, but I think right now it has been a week. We want to make sure we bring the teams together, make sure we are focused on the right customer satisfaction. That's really our primary focus right now.

Great. Thanks for the color, guys. Thanks for taking my questions. Nice job.

Thank you.

Tavis McCourt, Raymond James.

Hey, guys. Thanks for taking my question. I've got a couple and I'll ask them and then get on mute, because I'm in an airport. Steve, I wonder can you give us a sense of on the Icontrol annual revenue estimate you gave in the 8-K, how much of that is perpetual license versus term license versus maintenance? What I am getting at is, if ADT decided not to add anyone theoretically to ADT Pulse this year, would that base of revenues churn off at just the average churn rate of the industry or would be down meaningfully because you are selling less perpetual licenses into that customer?

Then the second question is on the video success in hardware and I suspect probably a bit of an AFP uplift on the services as well. You've mentioned strong demand the last several quarters, so maybe an update on how penetrated that traditional Alarm.com base is on video would be helpful. Thanks.

Let me take the first part of the question. This is Steve Valenzuela. In terms of the Connect revenue, it is also a subscription. Even though it is an on-premises software and it is not hosted in the cloud, it is accounted for in very much the same way. In terms of the 12-month guidance we provided, we provided guidance for the next 12 months, our indications for Connect and Piper are $38 million to $42 million. If you break out hardware portion, the SaaS piece of that is $33 million to $37 million.

Again, that is for 12 months. As Steve Trundle discussed earlier, we want to make sure you understand that is for a partial year, so looking more at 75% contribution within the guidance we provided for 2017. I'll Steve Trundle take the second part or third part of those questions.

I would just add to what Steve V said, which is that if they were to stop adding Pulse accounts to the Connect platform tomorrow, they would in all likelihood be adding new customers to the Alarm.com platform, so it sort of washes out unless of business stops entirely. And then these are subscription fee driven licenses that are monthly per-subscriber fees.

The video piece, so yes, video has continued to be a contributor. In terms of overall penetration in the base, it is still early. I think we are right around 15% right now in terms of new accounts coming on to video so we see a lot of upside there over time. Some of that upside will require the consumer to continue to get comfortable with video in the home. Some will be driven by our increased commercial footprint, but we do see more opportunity there through time.

Great. Thanks for the added color. Very helpful and congratulations on closing the transactions.

Thank you.

Saliq Khan, Imperial Capital.

Hi, Steves. There's a (inaudible) questions on my end, the first one being is over the last several quarters you have been able to very quickly enhance the analytics capabilities that you have, but how are the market dynamics changing now, leading you to one ramp up but also to be able to implement these solutions dramatically faster than you historically have?

Yes, I think one of the features you are referencing is we rolled out the Insights Engine during Consumer Electronic Show this year, and it may have seemed like that was something we did very quickly, but that capability was two and half years in the making. There was just a ton of testing to make sure that when we generate something we allege is an insight that in fact it is an insight and not an interruption or distraction for the consumer. Quite a bit of work went into that.

Then we've been shifting now a lot of our focus to what we call HVAC analytics and then also video analytics. This acquisition we just completed on the ObjectVideo side I think strengthens our play in the video analytics space. You now look at -- pile on the Connect acquisition, the Connect and Piper acquisition, and there we are getting fuel that we can use to invest further in analytics of all types. And we do believe, if you think about our background, our background for the most part is in data mining. We tend to have a belief that accumulating data and then generating insight from it is a core mission of the business. I think you will continue to see us try to drive differentiation and real value that -- from the delivery of more analytics capabilities.

Steve, a few years ago, if you remember, ObjectVideo sold a portion of its IP to Canadian-based Avigilon. How does that impact your current acquisition and your ability to maximize the team's capabilities?

Right. That's a good question. That's a good memory. (laughter) (multiple speakers). Right, so clearly something we needed to deal with coincident with that acquisition. I would say that we did deal with it and we don't anticipate being hampered at all in our capabilities for deploying video analytics to our service providers.

Just based off of that, is it a fair assessment that (inaudible) have been a point of conversation during the deal making? But not just that you were able to go ahead and bring on the people that were behind the IP, so even if Avigilon has the IP, you have the brains behind IP? So theoretically you can utilize the brain power to come out with newer and better solutions. Is that right? I assume that was --

Yes, that is a reasonable way to look at it is they're -- we inherited or absorbed and we are excited to have the people who had created that body of IP over the past 12, 14 years and then we of course have to make sure that we are capable and able to offer our service providers new capabilities without regard or concern for whether they have the rights to practices those capabilities so we had to take care of that as well and we took care of both items. But the people are now part of our team and are integrating quickly with our video development group.

Thanks, Steve.

Thank you.

Howard Smith, First Analysis.

Steve and Steve, thank you for taking my question. First question has to do with a new enhanced functionality, specifically on the Insights Engine. Is that an upsell similar to Video Doorbell or is that something that is offered just to create more stickiness and loyalty? More broadly, as add more video components with the acquisition and things in video analytics, how do you think about what is a product itself versus an enhancement of the core platform for that purpose?

Both good questions and it gets a little murky sometimes. With Insights Engine, so Insights Engine gets better the more devices you actually have, so in a way, even if we include the capability with one of our existing service plans, it drives some upsell activity because the value derived from the capability increases the more things you have that are producing data. What we're really at some level trying to do there is more and more people are getting lots of devices installed on their properties and the types of alerts that they are now able to get sometimes go beyond their patience for actually manually setting up those alerts.

If I have to ask someone to go into a mobile app or a website and predetermine all the things that might be of interest to them, they may never get around to doing it. So now we are doing it for them in many cases and as you do that, I think it makes each of the devices themselves more valuable. Now, it does require that a customer be on one of our -- in this case, the Insights Engine capability be on one of our fully interactive plans, which are slightly higher value plans than, say, a wireless signal porting plan.

With regard to the second part of the question, I'm trying to remember. Was it --

Just more broadly, how you think about when it is an upsell (inaudible) versus, just like you said, enhances the ecosystem and just drives stickiness and perhaps more revenue?

I think -- we look at each one individually. I think Insights Engine is likely to be more of an upgrade to the existing plans that will drive some ancillary upsell. Contrast that with maybe higher end video analytics. If we are doing vehicle recognition or something like that, that is a little nichier, but -- and maybe not broadly applicable to every single customer, but particularly valuable to a subset of the customer base, then we would treat that as an item that has its own value and would not be included as an enhancement of an existing plan.

Helpful color. Maybe for Steve V, although you can take it as well, the litigation, the non-ordinary course litigation expense, remained relatively high. I was expecting a little bit of a retreat due to the Patent Office review. Was that just due to the timing of when that kicked in, in the quarter or is this the -- still the pace right now of the expense?

We really can't talk about forward-looking litigation expense. That is something that is difficult to predict. All I can say is in the fourth quarter we did have -- litigation expense was $2.1 million. It was down from $3 million the prior quarter and down from $4.7 million the prior quarter before that.

But I would not necessarily imply that is a trend. Again, we don't predict litigation expense. That's something that's difficult to determine. The good news, of course, is that we are through the FTC review with this acquisition, so that is behind us and now we are focusing on integration and now we are excited to welcome the teams to Alarm.com and get working on bringing the business together and really looking forward to the future.

Okay, great. Thank you.

Thank you.

Nehal Chokshi, Maxim Group.

Thank you for taking my questions. Congratulations on a good quarter and congratulations on closing the acquisition. That is really great.

On the SaaS guidance for the first quarter, presumably there is still some contribution from Icontrol, since it did close on March 7. I back that out to be about $2 million contribution. Is that about right?

We didn't actually break that out, Nehal, but that is a pretty good estimate. We actually closed the acquisition on March 8, so you are correct. You would take from March 8 to the end of March 31. You would take the contribution and that would be part of the guidance we've given for the quarter, the $49.3 million to $49.5 million SaaS and license revenue for Q1.

Okay. Then adding in effectively another $24 million for the next -- for the June, September and December quarter, that would then imply that your calendar [2017] guidance for SaaS, excluding the Connect portion, is just a little bit north of $201 million, or about 17% year-over-year organic growth, which is consistent with the 400 basis points of year-over-year deceleration of the SaaS growth that you have been seeing.

The question I'm trying to drive at, A, is -- one, is that correct? Two, how comfortable are you with that level of deceleration? Do feel like you can confidently beat that, basically?

Nehal, I am glad you asked this question, because it's a very important one. If you look at the guidance we have given for the year for SaaS and license, the $231 million to $232.5 million, that includes a partial year contribution from the SaaS and license for the 12 months and you just can't take the 296 days remaining in 2017, which ends up being about 81% of the year. Again, you have got to take into consideration that, that revenue from the Connect and Piper is growing over the next nine months effectively.

So again, you need to look at the $33 million to $37 million of SaaS and license revenue for the next 12 months. Take about 75% of that and I think when you do that, you will find that the contribution from the Alarm.com, if you will, prior to the acquisition is more higher to, closer to historical levels or closer to around in the upper teens, which is a very good growth rate.

Got it. Thank you very much.

You bet.

Thank you and that concludes our conference call for today. We thank you for your participation and you may now disconnect. Everyone, have a great day.