Alarm.com (NASDAQ:ALRM) is leveraging technology to provide services that stretch beyond traditional home and business security. The company's distribution model provides a low-cost, high-touch relationship with consumers, and as more home devices connect to the Internet, it stands to benefit by selling add-on solutions to consumers that increase the value of those devices.

The business

Alarm.com is a cloud-based security company that markets software and equipment to consumers through more than 6,000 local home and business security firms.

A computer, tablet, and smart phone displaying Alarm.com's software dashboard.

IMAGE SOURCE: ALARM.COM.

While Alarm.com sells its own IoT equipment, its software can integrate with other manufacturers equipment, and as a result, Alarm.com's service can be customized based on the needs of the home or business owner.

The company's platform allows more than 5 million customers to connect heating and air conditioning systems, lighting, cameras, shades, door locks, and garage doors to Alarm.com's software. Those devices can then be controlled by the customer's smartphone, tablet, virtual assistant, or PC. As consumers outfit their homes with more Internet-connected devices, I expect that the list of equipment controlled by Alarm.com's software will increase.

Initially, Alarm.com sold its solution directly to consumers; however, it's since switched to selling through intermediaries, such as local security firms, and that has accelerated its growth.

The company's revenue has more than doubled since 2014, and sales continue to increase at a double-digit rate. In the third quarter, software as a service and license revenue increased 39% to $61.9 million from $44.6 million one year ago, and total revenue increased 33% to $90 million.

Leveraging sales growth against fixed costs is translating into significant profit growth, too.

Sales and marketing costs fell to 12% of total revenue in Q3 2017 from 16% of total revenue last year, and as a result, Alarm.com's operating income improved to 11.6% of revenue last quarter from 4.2% one year ago. Net income increased to 16.8% of revenue in the quarter, up from 3.8% last year.

Striving for stickiness

A key part of Alarm.com's strategy is to maintain customer stickiness through innovation. It employs 443 people in R&D, up from 304 people last year, and spending on R&D increased to $19.3 million in Q3 2017 from $11.5 million last year.

Since the company's got a 93% customer retention rate, it appears those investments are paying off. Among its recent innovations is two-way audio communication for cameras. This lets consumers remotely see and speak to visitors and then disarm the alarm and unlock the door when necessary. It's also added humidity control to its thermostats. By expanding the capabilities of its solution, the company helped drive a 17% increase in the number of devices connected to its platform in the past year.

The company's also creating stickiness with its distributors by offering new solutions that make installation simpler and faster. It runs a learning academy that offers certification that security firms can use in marketing to win more business, too. Thanks to these investments in training, there's also been a profit-friendly 20% drop-off in support call volume. 

Fuel for future growth

Alarm.com has made big headway in terms of residential market share, but in its third-quarter conference call with investors, management still says it's only in the third or fourth inning of penetrating that current addressable market. The company expects the smart home market will double to 16 million households by 2021.

The company's got a big opportunity ahead of it to secure and control more business properties, too. Currently, businesses represent between 5% to 6% of its subscribers, yet there are more than 4 million small commercial buildings that Alarm.com could help protect and control. Since commercial accounts' average revenue per user is historically twice that of residential users, winning over more small businesses could boost Alarm.com's financials substantially.

International expansion could provide a lot of new sales and income as well. Only about 5% of the planet's 1.4 billion households are smart homes, but that figure should continue increasing alongside global wealth and technology innovation. The company already operates overseas, and while that business is profitable, it doesn't yet represent a large chunk of the company's bottom-line growth.

Things to watch

The company upped its outlook for the rest of the year following its Q3 results, and it also offered up an outlook for 2018 that implies double-digit revenue growth. Its 2017 guidance is for revenue of between $332.8 million to $334 million, which is above the consensus industry watcher outlook for $328.4 million. In 2018, it thinks it can deliver between $375 million to $385 million in revenue.

However, there are a couple of things investors will want to keep their eyes on in the short term. The Financial Accounting Standards Board (FASB) ASC 606 and IFRS 15 guidance mandates that public companies review contracts and possibly restate the timing of their revenue and commissions beginning next year. While Alarm.com doesn't expect material changes on the revenue front, it may have to capitalize some commissions. They're still working on the figures, so there could be some changes that boost short-term volatility in its shares.

Investors will also want to keep close eyes on Washington lawmakers. The company's modeling for a 35% tax rate in 2018, so tax reform that includes a significant cut to its tax rate could provide a nice tailwind for investors.

Overall, Alarm.com is a fast-growing and profitable company with a lot of irons in the fire that could fuel future growth, and for that reason, I think it deserves consideration as a top Internet of Things stock to consider owning.

Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool recommends Alarm.com Holdings. The Motley Fool has a disclosure policy.