Summary
Alarm.com's third quarter update arrived with a legal fight attached. Vivint notified the company that it will stop paying license fees under the Patent Cross License Agreement the two signed in November 2013, an agreement under which Vivint has paid the required fees since execution. Alarm.com disputes the refusal, filed a demand for arbitration on October 27, 2022, and is seeking continued license payments plus interest and declaratory relief. Management expects the standoff to cut quarterly SaaS and license revenue and total revenue by approximately $6 million beginning in the fourth quarter of 2022, which the company puts at 2.8% of total revenue for that quarter. Earnings and cash flow absorb the same $6 million plus additional legal fees. The financial results in the release were preliminary and still subject to the company's quarter-end review.
Growth in the reported quarter stayed in double digits. Total revenue rose 12.4% to $216.1 million from $192.3 million in the prior-year quarter, and revenue for the nine months ended September 30, 2022 climbed 14.6% to $634.4 million. Profitability split along a different line. Net income attributable to the company increased 35.4% to $18.3 million, and diluted earnings per share rose to $0.35 from $0.26. Operating income moved the other way, falling 14.5% to $16.3 million, and operating margin slipped 2.4 percentage points to 7.5%. The nine-month comparison is harsher still: operating income of $36.6 million, down 28.0%, operating margin of 5.8%, down 3.4 percentage points, and diluted earnings per share down to $0.73.
The cost side explains the operating squeeze, and it is mostly people. Headcount grew from 1,482 employees at September 30, 2021 to 1,699 a year later, with the largest additions in research and development and general and administrative functions. Research and development spending grew at a double-digit rate as the company kept funding new platform features. General and administrative costs rose on higher personnel costs and more spending on intellectual property litigation. Stock-based compensation increased across all three expense categories. The trailing 12-month SaaS and license revenue renewal rate slipped to 94% from 96%, a reminder that even a subscription-heavy base is not immune to churn. Management also flagged that hardware margins, though improved in the quarter on price increases taken during the first six months of 2022, remain exposed to freight and component costs.
Cash conversion is the weakest part of the story. Operating cash flow fell 73.1% to $10.2 million in the quarter from $37.9 million in the prior-year quarter, and it fell 73.0% to $22.5 million for the nine months from $83.2 million. Inventories rose as management stocked up against supply chain risk, and Section 174 of the tax code now forces research and development spending to be capitalized and amortized, which management says could reduce 2022 operating cash flow by an estimated $35.0 million to $45.0 million unless Congress defers, modifies or repeals the provision. Capital expenditures went the other way, up 214.2% to $28.1 million for the nine months, reflecting land and office space build out. Deferred revenue of $18.4 million finished 14.7% above the prior-year quarter.
Guidance is thin. Management expects capital expenditures of $1.0 million to $3.0 million over the final three months of fiscal year 2022, tied to leased and owned office space and to computer software and equipment. The Vivint arbitration is the largest open question and could take time to resolve. Other risks named in the filings include Chinese tariffs that touch roughly one-fifth to one-half of the hardware products the company sells, freight and component cost inflation, and the Macroeconomic Conditions the company describes, including COVID-19 and Russia's incursion into Ukraine, which could slow hardware demand and disrupt the supply chain. Alarm.com also closed the purchase of 85% of Noonlight on September 23, 2022 for $31.9 million in cash, a deal aimed at expanding its emergency response offerings.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2022 | Q2 FY2022 | QoQ | Q3 FY2021 | YoY |
|---|---|---|---|---|---|
| Revenue | $216.1M | $212.8M | +1.5% | $192.3M | +12.4% |
| Gross profit | $130.6M | $125.5M | +4.0% | $111.9M | +16.6% |
| Gross margin | 60.4% | 59.0% | +1.4 pp | 58.2% | +2.2 pp |
| Research & development | $55.6M | $54.2M | +2.6% | $44.1M | +25.9% |
| Sales & marketing | $23.1M | $22.9M | +0.5% | $22.6M | +2.2% |
| General & administrative | $28.0M | $29.3M | -4.4% | $18.7M | +49.9% |
| Total operating expenses | $114.2M | $114.2M | +0.1% | $92.9M | +23.0% |
| Operating income (loss) | $16.3M | $11.3M | +43.9% | $19.1M | -14.5% |
| Operating margin | 7.5% | 5.3% | +2.2 pp | 9.9% | -2.4 pp |
| Net income (loss) | $18.3M | $10.8M | +69.1% | $13.5M | +35.4% |
| Net margin | 8.5% | 5.1% | +3.4 pp | 7.0% | +1.4 pp |
| Diluted EPS | $0.35 | $0.21 | +$0.14 | $0.26 | +$0.09 |
Risks
On October 27, 2022 the company filed a demand for arbitration after Vivint notified it will stop paying license fees under the Patent Cross License agreement. Beginning with the fourth quarter of 2022, quarterly SaaS and license revenue and total revenue will be impacted by approximately $6.0 million, and quarterly earnings and cash flow will be impacted by that amount plus additional legal fees.
The company cites Macroeconomic Conditions including COVID-19, inflation, energy prices, and geopolitical upheaval such as Russia's incursion into Ukraine as creating supply chain disruptions, inventory disruptions, and fluctuations in economic growth and consumer sentiment. A prolonged economic slowdown could reduce demand for connected property solutions and the SaaS and license revenue growth rate may be lower in future periods.
Global supply chain shortages have caused limited inventory availability, increased lead times, and shipping delays, and service providers may be unable to source hardware such as security control panels. The company had a $24.4 million change in inventory in the nine months ended September 30, 2022, driven by an increase in purchased inventory to reduce supply chain risks, and operating cash flow decreased $60.7 million for that period.
The company receives a substantial portion of its revenue from a limited number of service provider partners. The loss of, or a significant reduction in, orders from one or more major service provider partners would result in decreased revenue and profitability.
The SaaS and license revenue renewal rate declined to 94% for the twelve months ended September 30, 2022 from 96% for the twelve months ended September 30, 2021. A lower renewal rate could reduce the lifetime value of the subscriber base and pressure future recurring revenue.
On September 23, 2022 the company acquired 85% of Noonlight, Inc. for $31.9 million in cash. The risk factors state that acquisitions may be difficult to integrate and could harm financial results, and the purchase price allocation for Noonlight was not finalized as of the filing date.
Up to 25% import duties apply to certain Alarm.com products manufactured overseas, and approximately one-fifth to one-half of the hardware products sold to service provider partners are imported from China. Increased or expanded tariffs could raise the cost of hardware revenue and reduce hardware revenue margins.
The company faces patent infringement lawsuits from EcoFactor and Causam, including a Causam complaint with the U.S. International Trade Commission, and has indemnity obligations to certain service provider partners for intellectual property claims. Negative outcomes could require costly licenses, damages, or management time.
The connected property market is highly competitive, with large technology companies including Amazon (Ring), Google (Nest), Apple, and Samsung offering competing or bundled solutions. Aggressive tactics such as selling at a discount or bundling products at no charge could reduce the company's revenue and market share.
SaaS KPIs
All quarters →SaaS and license revenue
Adjusted EBITDA
Summary, forecast, risks and KPIs are extracted from Alarm.com Holdings, Inc.'s SEC filings for Q3 FY2022 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Oct 2, 2026.