Connected-home software provider Alarm.com (NASDAQ:ALRM) reported its third-quarter results after the market closed on Nov. 7. Revenue growth accelerated a bit from the second quarter, and earnings soared excluding one-time legal expenses. The company raised its full-year guidance once again, although its initial 2019 revenue guidance calls for much slower growth.

Alarm.com results: The raw numbers

Metric

Q3 2018

Q3 2017

Year-Over-Year Change

Revenue

$111.8 million

$90.0 million

24.3%

Net income

($7.7 million)

$15.1 million

N/A

Non-GAAP earnings per share

$0.36

$0.27

33.3%

Data source: Alarm.com.

What happened with Alarm.com this quarter?

  • Software-as-a-service (SaaS) and license revenue was $74.3 million, up 20% year over year. This number includes $10.5 million in software license revenue, which increased 12.9% year over year.
  • GAAP net income was negatively affected by litigation-related expenses. Alarm.com booked a $28 million expense related to an agreement to settle a putative class-action lawsuit.
  • Adjusted earnings before interest, taxes, depreciation, and amortization came in at $25.8 million, up 32.3% year over year.
  • Operating cash flow was $19.8 million in the third quarter, an increase from $13.8 million in the prior-year period. Free cash flow was $16.6 million, up from $11.9 million.
  • Cash and cash equivalents totaled $124.2 million, up from $106 million at the end of the second quarter.
  • Recent product and feature launches include a video analytics service for residential and business subscribers and in-app severe weather messaging capability for service providers.

Alarm.com provided the following guidance:

  • Fourth-quarter SaaS and license revenue is expected to be between $76.3 million and $76.5 million.
  • Full-year SaaS and license revenue is expected to be between $289.5 million and $289.7 million, an increase of about $3 million from previous guidance. Hardware and other revenue between $118 million and $120 million is expected, up from a previous guidance range of $102 million to $104 million.
  • Full-year adjusted EBITDA is expected between $91.0 million and $91.5 million, up from a previous guidance range of $85.1 million to $85.9 million.
  • Full-year non-GAAP earnings per share of $1.28 is expected, up from a previous guidance range of $1.19 to $1.20.
Alarm.com's platform on various devices.

Image source: Alarm.com.

What management had to say

CEO Stephen Trundle reiterated the company's strategy and goals during the earnings call:

I want to spend a moment reminding investors of our high-level strategic framework as we focused on wrapping up 2018 and look into 2019. We remain committed to an adjusted EBITDA margin target range of 20% to 25%, and to driving SaaS recurring revenue. We view hardware as a key enabler of our services, but we are not overly focused on either the amount of hardware sales or the margins of our hardware business.

CFO Steve Valenzuela laid out some initial guidance for 2019:

At this time, we are comfortable with total revenue of $430 million to $440 million for 2019 in line with current consensus. While we considerably outperformed our own expectations for sales of hardware during Q3, it can take several months for those sales to work through the channel. We anticipate that some of the behavior that led us to raise the 2018 guidance is indicative of future sales pattern, but until we're able to fully track the sell-through of these incremental sales, we will remain conservative in estimating hardware revenue.

Looking forward

Alarm.com once again raised its full-year guidance, calling for revenue growth of about 20.6% at the midpoint. Its initial 2019 guidance calls for much slower revenue growth of just 6.5%, assuming the company hits its 2018 guidance. But if 2019 is anything like 2018, the company may end up raising that outlook throughout the year.

Excluding one-time legal expenses, Alarm.com's bottom line continues to improve as the company scales. That's good news for investors.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool recommends Alarm.com Holdings. The Motley Fool has a disclosure policy.