An “Internet of Things” IPO From Alarm.com

A few years ago we wrote about an interesting “Internet of Things” (IoT) company called Nest with their “smart thermostat” which provided you with connectivity to your house’s temperature through your smartphone. A few months later, Google acquired Nest for $3.2 billion leaving everyone wondering just what Google might be up to next. Some would speculate that Google is designing a fully connected IoT house where you could combine security alarms, energy management, video monitoring, and even intelligent automation into one single smartphone app. While Google might be designing a system just like that, one company is already providing this service to 2.3 million subscribers and just announced that their IPO is scheduled to price next week. That company is Alarm.com (ALRM).

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Founded in 2000, Virginia based Alarm.com has taken in $163 million in funding so far from a single investor; Technology Crossover Ventures. Alarm.com’s planned IPO will raise $98 million giving the company a market cap of around $670 million. The Company offers subscribers a “fully connected home or business” through 5,000 trusted service providers who design, sell, install and support their solutions. These solutions include all aspects of home automation as seen below:

Connected_Home

A user of the system can monitor and control any of the above touchpoints from their smartphone giving them complete control over their home or business at any given time. It not hard to think up a few use cases where this system might come in extremely handy such as the peace of mind you would have while on vacation knowing that your home was secure while you were away. The appeal of such a product offering has led to 2.3 million subscribers purchasing the solution with over 25 million connected sensors and devices. As of the fourth quarter of 2014, Alarm.com claimed to have “significantly more subscribers than the next largest platform provider in North America“.

Alarm.com has two business lines:

  • SaaS and License Revenue comes from recurring fees charged to their service providers sold on a per-subscriber basis for access to their cloud-based connected home platform. For example, a provider of home automation hardware like Nest could pay Alarm.com for access to their software (software as a service of SaaS) without having to use hardware from Alarm.com. Revenues from this business line were 69% of total revenues in Q1-2015 up from 58% in 2012.
  • Hardware and Other Revenue comes from the sale of cellular radio modules that provide access to their cloud platform, video cameras and the sale of other devices, including image sensors and other peripherals. In Q1-2015 this business line made up 31% of total revenues.

Revenues for Alarm.com have grown quickly with 2014 revenues of $167.3 million, representing year-over-year revenue growth of +28%. Over the past five years, revenue growth has been strong and steady. The SaaS and License Revenue renewal rate is at 92%, a number that has remained steady over the past 5 years showing that Alarm.com can keep the customers they have signed up. The company is profitable and with $39 million in cash on hand already, may look to grow through acquisition with the funds they raise from their IPO.

One thing to note is that the growth in SaaS revenues seems to be outpacing hardware revenues. The IoT play to be had here is the software or “cloud” platform of Alarm.com. If all home automation devices begin to use this cloud, Alarm.com doesn’t have to worry if a competitor has a better piece of hardware. They still receive revenues from licensing their cloud platform on a per-seat basis. We saw an example here with Vivint, a private company who is also competing in this space with 800,000 customers. Vivint used to sell Alarm.com’s SaaS offering directly to their customers but has now developed their own home automation system to sell. However, Vivint still pays Alarm.com for access to their cloud platform. In this case, Alarm.com receives less revenue than before but is still capturing a piece of revenue from a competitor’s customers.

While the solutions sound like a must-have for homeowners, they aren’t. It would be interesting to see what happens to the renewal rates should we experience a recession. In a future article, we’ll take a look at another publicly traded home automation company that has lost over -50% of its value since its IPO in 2013.

Pure-play disruptive tech stocks are not only hard to find, but investing in them is risky business. That's why we created “The Nanalyze Disruptive Tech Portfolio Report,” which lists 20 disruptive tech stocks we love so much we’ve invested in them ourselves. Find out which tech stocks we love, like, and avoid in this special report, now available for all Nanalyze Premium annual subscribers.

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