Alarm.com (ALRM) is a Hedgeye Technology Best Idea Short.
KEY UPDATE POINTS:
- Ongoing deceleration in App Data should translate to slower organic growth of subscribers
- Some KPI dropped in the conference season:
- 8MM current Subscribers, up from 6MM+ one year ago
- 9k dealers, up from 8k one year ago
- International grew 50% in 2019, should grow faster in 2020
- 350 dealers for OpenEye with only 5% overlap
- OpenEye is a license/maintenance model that ALRM will convert to subscription
- At the Dealer level, our notes from the last ~100 days indicate that anxiety about USA Residential remains high due to DiY with an increasing number of dealers trying to participate in that market and offer monitoring upsell + professional installation, but also offering more flexibility at less egregious upsell charges
- Dealers are also trying to fill in holes from USA Residential with Commercial or Education systems sales
Please note that we highlighted new & refreshed data on our ALRM Short in late November 2019: SLIDES HERE.
TAKEAWAYS FROM THE UPDATES ABOVE:
We can’t really get to ‘8 million’ year-end subscribers for ALRM unless the starting point one year ago was revised much higher. The combination of accelerated capture of subscribers plus decelerated SaaS growth (with International + non-Resi Other accelerating) would imply much lower ARPU year over year, which doesn’t make sense in terms of the flow through from video hardware upsell. Aside from that single data point, the rest of it reads like deceleration.
ON THE #S:
As in previous quarters, we are ~$2MM above 4Q and 1Q SaaS revenue, as the deceleration continues to be linear and the sell-side is modeling closer to guidance. We think the risk remains for non-linear declines in the core in 2H20. However, we expect ALRM to begin to shift OpenEye’s ~$40-50MM of revenue from an on-premise based recognition to a SaaS based model, which will create some offsetting lift for the software SaaS line starting in 2H20. We estimate that management will guide SaaS growth in the 11.5-12% range and aim to deliver 13% or a bit better depending on how fast they can convert the OpenEye model.
ON THE STOCK:
ALRM remains heavily shorted, and in today’s market, that factor plus our slightly above-Street estimates could imply a short squeeze. Here is why we are sticking with the Short: in spite of adjacent accelerants in International, Commercial, EnergyHub, and now the artifice of converting OpenEye to SaaS, the core software revenue line continues to decelerate towards the 2-3% average growth for the underlying industry plus some several hundred bps of ARPU per year thanks to upselling innovation. With the overall USA Residential industry stuck in low growth and facing an existential threat, the Interactive sub-industry slowing, ALRM’s core go-to-market stuck uniquely to the traditional market, and ALRM delivering ~$65MM in FCF per year, who wants to pay more than ~20-25x for this asset?
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Ami Joseph
Managing Director
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