For access to our 10/12 ALRM | Best Idea Short call replay and materials, CLICK HERE (& see below for Call Topic Timestamps).
We want to first thank ALRM’s IR team for reaching out and engaging us in debate on our thesis points. We applaud their confidence in the open exchange of ideas and sincerely appreciate their openness to our thoughts and perspectives.
HERE’S SOME OF WHAT WE LEARNED FROM THE CALL:
- Management: (Re – ADT contribution) ADT will begin transitioning from Pulse to the full ALRM platform by year-end.
- Our take: we thought this process was more up-in-the-air than a definitive transition. That said, it should help topline but the company itself says that it won’t change cash flow dynamics in any significant way.
- Management: (Re – Platform Engagement) we didn’t update the slides, but the actual number of data points processed in 2017 is well over 100B.
- Our take: While we don’t doubt that engagement on the Alarm.com platform overall is increasing, it still doesn’t explain why both data points (50B and 100B) were attributed to the 2017 year and it doesn’t reconcile with the y/y declines on engagement from the ADT Pulse disclosure we showed in the Black Book on slide 26 (remember, ADT Pulse is the primary reason why ALRM data points processed would have increased from 2016 to 2017 anyway).
- Management: (Re – ADT contribution) Amazon Home Services doesn’t have anywhere near the >10K technicians maintained by ALRM’s SPs.
- Our take: Agreed, and it will take them time to get there. However, Ring (acquired by Amazon) is already offering nationwide professional monitoring, and Amazon is currently ramping home services installation availability both on a product and geographical basis.
- Management: (Re – Litigation) there was another TCPA violation complaint brought in March 2017 which was dropped by the plaintiff in May 2018, so that is more the norm than the $28MM the company is paying to settle the December 2015 TCPA violation case.
- Our take: Fair, except another TCPA violation complaint was filed in March 2018, and now that ALRM has shown willingness to pay up big $ for this type of case, we don’t see why the risk of copy-cat cases, let alone the cost to continue fighting this type of litigation in court would be reduced.
- To hear more about what we learned hit “reply” to this email or send an email to: .
TOPIC TIMESTAMPS (REPLAY HERE):
- How Our Process Led us to ALRM, Intro, & Thesis Overview (1:13 – 5:44)
- How ALRM is Positioned in The Market, Some Positives (5:44 – 8:08)
- Problems Begin: Market Pain, Mounting Pressure On Old (ALRM) Models (8:08 – 15:05)
- Why ALRM’s Growth Has Been Okay In Spite of the Negatives (15:05 – 23:45)
- Why This Hasn’t Been a Pretty Penetration Story (23:45 – 33:15)
- Competitive Landscape, Cross-Pollination from DIY and AMZN’s Increasing Role (33:15 – 38:18)
- Business Model Problems: Sleepy R&D, Importance of SP Adds, Cellular Tax, Not a Cash Rich SW Model (38:18 – 54:40)
- Litigation: Open Season and Why It Recurs (54:40 – 59:50)
- Conclusion: One of the Most Expensive Stocks We See (59:50 – 62:15)
- Q & A (62:15 – 76:50)
Our Perspective:
Our perspective is that there are major changes happening in the home security monitoring industry, some of which are good for ALRM in the short term, but most of which are disruptive to ALRM's customer base such as changing business model to contractless or contract-lite, a totally different scale for SAC efficiency, and service elements more dependent on software than labor. We see a mismatch between ALRM's expensive valuation and a circumscribed market that is facing headwinds, in addition to our concerns that a low profit/cash model mixed with recurring and growing litigation expense doesn't make for a great way to see cash growth and return for shareholders.
Final note: There will be a time when we will be best friends with ALRM IR…we just think the stock will be closer to $20-25 when that happens.
Please call or e-mail with any questions.
Ami Joseph
Managing Director
Yosef Vaitsblit
Analyst
