Prepared remarks
Good day, and thank you for standing by. Welcome to the Alarm.com Second Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you need to press *11 on your telephone. You will then hear an automated message indicating your hand is raised. To withdraw your question, please press *11 again. Be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Matthew Zartman. Please go ahead.
Thank you, operator. Good afternoon, everyone, and welcome to Alarm.com's second quarter 2026 earnings conference call. Please note that this call is being recorded. Joining us today are Steve Trundle, our CEO, and Kevin Bradley, our CFO. During today's call, we will be making forward-looking statements, which are predictions, projections, estimates, and other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. We refer you to the risk factors discussed in our Form 8-K and the associated press release, which were filed with the SEC earlier today. The call is subject to these risk factors, and we encourage you to review them. Alarm.com assumes no obligation to update forward-looking statements or other information that speak as of their respective dates. In addition, several non-GAAP financial measures will be discussed on the call. A reconciliation of GAAP to non-GAAP measures can be found in today's press release on our Investor Relations website. I will now turn the call over to Steve Trundle. Steve?
Thank you, Matthew. Good afternoon, and welcome to everyone. We are pleased to report second quarter results that exceeded our expectations. Our SaaS and license revenue in the quarter was $188.8 million, up 11% year over year. Our adjusted EBITDA in the quarter was $57.7 million. Our Q2 performance reflects execution by our service provider partners and our employees. I want to thank them for their contributions during the quarter. Today, I will review the key drivers of our performance, discuss a recent expansion of our commercial platform, and provide an update on the continued growth we see in our EnergyHub utility programs. Generally speaking, we saw most areas of the business perform above plan. Our residential business was steady as revenue retention continued to provide a modest tailwind. In our commercial business, OpenEye delivered strong SaaS and hardware revenue results as enterprise customers continued to expand their video surveillance deployments, and they often did so with increased adoption of our more powerful AI-enabled services. EnergyHub also delivered healthy SaaS growth as utility customers expanded the scale and capabilities of their distributed energy resource programs. During the quarter, our international business also surpassed 1 million active subscriber accounts. This milestone is only possible because of the work we have invested in localizing our platform and developing a productive network of international service provider partners in over 70 countries. The commercial business continues to progress as our service provider partners and commercial integrators adopt more components of our unified video, access control, and commercial intrusion platform. We recently expanded into an additional commercial category with the launch of our fire communicator. Our new offering transmits alarm signals to a monitoring station while simultaneously delivering notifications to designated users through the Alarm.com applications and services. Many of our existing partners already service a number of commercial fire monitoring installations and use fire communicators routinely, just not ours. Fire communicators are typically replaced independently of the fire alarm control panel. This tends to occur when legacy communicators fail regular test or lose network support as other networks evolve. Our new fire communicator leverages our cellular communication infrastructure and our back-end platform to deliver a more efficient product for our service providers to manage at scale. We designed our fire communicator to be compatible with most new and existing fire panels which are widely required in commercial buildings. We estimate that the addressable market for our new product consists of 4 million to 5 million fire panels in the US and Canada. As with any newly launched product, driving adoption through our service provider channel will take some work, but we see a long-term opportunity to build a position in the commercial fire space and are excited to now have this product and service in the market. Turning to EnergyHub. Utilities continue to grow their flexibility programs that increasingly rely upon EnergyHub to maintain grid reliability, particularly during periods of high demand. The leverage from EnergyHub's technology was evident earlier this summer during periods of extreme heat. Over the July 4th weekend, utilities dispatched more than 300 demand response events across more than 30 states and Ontario through EnergyHub. Collectively, these events shifted 17.5 gigawatt hours of electricity, roughly equal to New York City's total electricity consumption for more than 2 hours. Switching to the security side, I also want to share a couple of recent examples of how our technology and service provider partners protect lives and property. A few weeks ago, I was made aware of an incident where one of our remote video monitoring deployments spotted an individual attempting to set fire to an occupied home by dousing it with what appeared to be gasoline and then igniting it. Using our technology, a central station operator was alerted to the arsonist's presence, verified what was happening, and quickly contacted authorities. The family inside the home escaped without injury. In a separate recent incident, one of our outdoor gunshot detection sensors detected gunfire directly at a busy outdoor area. Authorities quickly responded to the gunshot signal and secured the area. They were able to apprehend a suspect before there was any loss of life. We do not often report on these incidents, but just as EnergyHub is enabling a more reliable grid in the heat of the summer, our life safety solutions are operating all the time protecting communities while providing a durable foundation for our business. We are thankful to have established partnerships with many service providers through the years that treat this life safety mission as importantly as we do and then do a great job on the ground every day. We believe deeply in our mission and in the enduring value of security. In summary, I am pleased with our strong second quarter results. Our performance reflects the diversity of our business, and we are excited to continue our progress in the second half of the year. I will now turn the call over to Kevin Bradley, our CFO, to review our financial results. Kevin?
Thanks, Steve. I will begin by reviewing highlights from our second quarter financial results and then close with our updated guidance for the third quarter and full year of 2026. Midway through the year, I am pleased to report another quarter of execution against our financial plan. SaaS and license revenue grew 11.1% year-over-year to approximately $188.8 million during the quarter, exceeding the midpoint of our guidance by approximately $3.2 million. For the third consecutive quarter, revenue retention remained in the 95% range. Our commercial initiatives and EnergyHub also contributed nicely, collectively growing more than 30% year-over-year. Hardware and other revenue totaled approximately $89 million, an increase of 5.5% year-over-year. During the second quarter, we saw particularly strong demand from enterprise buyers in our commercial video segment. We also benefited from increased activity in EnergyHub's low carbon and renewable fuel credit business. Through this business, EnergyHub uses charging data from its electric vehicle manufacturing partners to facilitate the generation and sale of low carbon transportation credits to obligated fuel suppliers in certain states, retaining a portion of the value generated as revenue. This mix of enterprise hardware sales drove a 180 basis point expansion in hardware gross margin year over year, allowing us to fund just over 70% of our sales and marketing costs in the quarter from hardware gross profit. During the second quarter, total operating expenses, including depreciation and amortization, were $149.6 million. Total operating expenses, excluding depreciation and amortization, stock-based compensation, and other items we adjust from G&A for non-GAAP purposes, were approximately $123.7 million, a 4.6% increase year-over-year. R&D expense in the quarter, inclusive of stock-based compensation, was approximately $71 million, a 2.8% increase year-over-year. We ended Q2 with 1,150 employees in R&D functions. For those newer to our story, research and development is by design our largest area of investment. Our predominantly indirect business models allow us to sustain a high level of R&D investment while remaining capital efficient. Our symbiotic relationships with our service provider partners are primarily responsible for customer acquisition and support, so our sales and marketing expense is well below most other SaaS businesses. At the same time, our R&D investments support high margin, durable recurring revenue tied to connected devices that typically remain in service for nearly a decade. The result is a model that has averaged north of a 20% return on operating invested capital over the past eight years. Non-GAAP adjusted EBITDA grew 15.7% year-over-year to $57.7 million. This comparison reflects the revised definition of our non-GAAP profitability metrics that we adopted last quarter, which removes the effect of mark-to-market gains and losses on equity securities in our treasury portfolio applied to both periods. Adjusted EBITDA margin was 20.8%, approximately 115 basis points higher than in the year-ago quarter. GAAP net income attributable to common stockholders was approximately $24.2 million in the quarter, or $0.48 per diluted share, down from approximately $34.6 million a year ago. A key driver of the decline was lower interest income on excess cash following the retirement of $500 million of convertible notes in January. Non-GAAP adjusted net income increased approximately 17% from the year-ago quarter to $41.1 million. We produced $0.77 of non-GAAP earnings per diluted share, a 24% increase year-over-year. We ended the quarter with $479.4 million of cash on the balance sheet and produced $37 million of free cash flow. Free cash flow in the quarter was affected in part by working capital timing. We continue to expect adjusted EBITDA to free cash flow conversion of 90% for the year. We repurchased approximately 570,000 shares for $25 million during the quarter, bringing our total share repurchases since the beginning of 2025 to 1.8 million shares. We continue to operate under the $150 million buyback authorization our board approved earlier this year. I will turn now to our financial outlook. For the third quarter of 2026, we expect SaaS and license revenue of between $189.8 million and $190 million, representing approximately 8.3% growth at the midpoint. For the full year of 2026, we are raising our SaaS and license revenue outlook to between $754 million and $754.4 million. This is an increase of approximately $4.2 million from our May guidance and represents approximately 9.4% growth for the year at the midpoint. We are raising our total revenue outlook for 2026 to between $1.079 billion and $1.089 billion, which includes hardware and other revenue of between $325 million and $335 million. This increases our hardware outlook by approximately $15 million at the midpoint from our previous guidance provided in May. We are raising our non-GAAP adjusted EBITDA outlook for 2026 to between $221 million and $223 million, an increase of approximately $6.5 million at the midpoint. The increase flows our second quarter outperformance through to the full year and keeps us on a steady path toward our previously established target of a 21% adjusted EBITDA margin exiting 2027. Non-GAAP adjusted net income for 2026 is projected to be between $156 million and $157 million, or approximately $2.92 to $2.94 per diluted share, an increase of approximately $0.11 from our prior guidance. EPS is based on approximately 56.3 million weighted average diluted shares outstanding for the year, down modestly from our prior estimate given our buyback activity. We currently project our non-GAAP tax rate for 2026 to remain at approximately 21% under current tax rules. We expect full year 2026 stock-based compensation expense of between $34 million and $35 million. In closing, I am pleased with the broad-based momentum we have seen across the business so far this year. We delivered a solid quarter against our plan, and we believe we are well positioned to deliver continued revenue growth and profitability in the second half while investing to expand our long-term opportunities. With that, operator, please open the call for Q&A.
Questions and answers
Thank you. One moment for our first question. Our first question comes from Saket Kalia with Barclays. Your line is open.
Okay, great. Hey, guys. Thanks for taking my questions here. Steve, maybe for you — could you talk about the market that EnergyHub competes in a little deeper? Specifically, is this a rising tide market given everything that is happening in utilities, or do you feel like EnergyHub is able to take market share as well?
Hey. Sure. I will be glad to talk about that a bit more. To the last question — is it a rising tide? Yes. We think the overall market is growing. The value from variable supply is going up. There is a well-known shortage of supply in the energy market. Data centers are consuming more energy, we are electrifying cars, and so on. From the utility perspective, you either pursue long-term, expensive build-outs to produce new supply, or you look for solutions like EnergyHub that can harvest supply off the grid and repurpose that. The latter is far less expensive, and the need for that increases as the variability of the supply increases. So, as wind, solar, and other sources become a bigger component of the grid's makeup, the value of the EnergyHub solution goes up. In general, it is a rising market. I do not really know for sure if we are taking share from others. I just know that we are benefiting as the leader in that market, and we have expanded the range of the EnergyHub solution from thermostat demand response types of solutions to a full solution that also includes EVs, EV chargers, batteries, and thermostats. So we are attaching to more devices in the average home now than ever before, and yet we still have a ton of headroom in the TAM. At the moment, we are probably around 2% penetrated in the North American TAM, maybe a little higher in the base of utilities where we have programs, which is more than half of the utilities. Overall, there is a lot of room to grow the attachment to the meters that we already are positioned to service and grow that business nicely, and the market is demanding that we do that.
Got it. Got it. That makes a ton of sense. Kevin, maybe for my follow-up, staying on EnergyHub — it's been a couple of quarters of a little bit of acceleration in that SaaS revenue line. How much of that has come from what sounds like a few good quarters at EnergyHub versus coming from the growing mix of broader emerging solutions?
Yeah, Saket. Thanks. I think the answer is it's a little bit of both, but more so EnergyHub, and also collectively what we call the growth initiatives. Any single thing's contribution to our consolidated growth rates is a function of how much revenue there is in the portfolio and how fast it is growing. The growth initiatives, writ large, are about 35% of revenue now, and second quarter grew a little over 30% year-over-year. So they are collectively contributing about 900 basis points of growth rate this year in the second quarter. Some of that is inorganic, tucked into EnergyHub. Among the three of them, EnergyHub's growth rate impact is accelerating the quickest. Commercial is also a contributor to an accelerating growth rate, a little bit due to that weighting characteristic, and I would characterize international as contributing about steady growth rate over the past several quarters.
Again, ladies and gentlemen, if you have a question, please press *11. One moment for our next question. Our next question comes from Adam Tindle with Raymond James. Your line is open.
Okay. Thanks. Good afternoon, and congrats on a good quarter. Steve, I wanted to start on the commercial side of the business and specifically around the fire communicator, which I thought was interesting. That is a market that, as you mentioned, is fairly sizable and has been around for a while. Twofold question: Why now? And second, what is the advantage that you bring to this versus the big incumbent that plays in this space? Kevin, could you touch on how the business model on that side of the business would be similar or different from traditional residential as that grows? Thanks.
Hey, Adam. Good question. Why now? The biggest reason is we listen to our dealers, and we have had demand from our partners to provide a solution in this segment. Over the last three or four years, there has been a shift more toward the commercial side of the intrusion and video surveillance space. The partners we interact with today have a different makeup than five years ago when we were more dominant in residential. As we have seen growth on the commercial side, the cadence of requests for us to bring a commercial fire solution has increased. Additionally, we had the opportunity to take advantage of some of the R&D we put into producing what we call the universal communicator that we launched previously. A lot of that work was foundational and could be used to create the commercial fire product, so the incremental investment was not dramatic. The advantage to the market is that our service providers want to have as much as they can on our back-end platform. It allows them to more efficiently manage their customer base, schedule work, and know what is happening with all of their paying customers. From the customer perspective, you get a single pane of glass where you can see the status of everything in your building in one place. That should help create pull-through for the new product among our existing customers.
Yeah. On the business model, if we split that into the delivery model, the price metrics, and the price level: the delivery model is the same as residential and much of our other offerings — it is channel-based. The price metrics are also the same: we sell a piece of hardware and then we bill on a per-month, per-subscriber basis, per building in this case. The price levels are what change. In this case, we are selling the hardware at more of a gross-profit-neutral or slightly positive level, so it is a little bit lower gross margin than the rest of our blended hardware gross margin portfolio. On the services side, it represents roughly 2x the ARPU of a typical residential account.
That is helpful. Thanks. Maybe a follow-up, Steve, on the international business surpassing 1 million active subscribers — congrats on that. If I think back to the core residential business, the path to the first million subscribers was longer than the next million, which happened faster. Would you reflect on that and apply it to the international business — any opportunities to accelerate that piece?
Right. Good observation. The first million in our core business was a slog. It took a long time — we had to build a lot of infrastructure and find the right partners. It was defining for whether we would make it. I would like to believe the same is true here. We have calluses from our international work, especially localizing the product to work in the 70 markets we service. We've done a lot of work to lay the base of service provider partners. We've had ups and downs and some change-of-control activity in the partner base, which can cause potholes along the way. But we've gotten to where we are now, and I feel like we have the critical infrastructure in place, some momentum, and knowledge of what has worked and what hasn't. I would hope the next million comes more easily and faster than the first million.
Our next question comes from Samad Samana with Jefferies. Your line is open.
This is Jordan on for Samad. Great to see the strong results. Steve, in the prepared remarks, you mentioned that commercial customers are expanding their video surveillance deployments and specifically that this is being driven by AI-enabled products. It seems the salesforce is effectively executing on the opportunity around the growth initiatives you've spoken about over the past few quarters. Could you speak to the market segments where you are seeing outsized strength or success? Is it a specific vertical or company size? And maybe parse out whether it is new versus existing customers. Also, are you enabling the salesforce to best succeed in selling these newer offerings that they may be less familiar with at first?
Right. Good question, Jordan. We generally think of commercial as enterprise and then small business. In the last quarter, more of the strength was on the enterprise side — larger customers doing larger video deployments. What we are seeing is that, first, folks want to future-proof their business with AI-capable products so they can seize opportunities over the next several years. We are well positioned with our AI-powered video camera solution on the OpenEye side. Also, there is a shift from video as a surveillance tool toward video as an operational data-gathering tool. Some interface elements we have added allow people more easily to ask questions of what is happening in their business that are only marginally related to security. That drives demand. We've empowered the sales team and done work to enable cross-selling opportunities and align our go-to-market. On the enterprise side, the mix is a nice combination of new logos and expansions: once you are in at a site and you perform well, there is steady ongoing demand as they add facilities or identify locations where additional cameras are needed. That gives us a positive revenue retention characteristic that has been helpful to our commercial performance.
Appreciate the color. Kevin, quick question: great to see strong EBITDA results. Wanted to dig into margin and specifically sales and marketing expense. It has been held constant as a percentage of revenue in the past few quarters, which is good to see. But as we think about the go-forward, how are you thinking about the cadence of hiring specifically within sales and marketing, and where is there opportunity for leverage as the business continues to scale?
Good question. Our base case is that as a percentage of revenue, sales and marketing will probably stay roughly flat over time. We continue to add employees in sales and marketing, but for the most part it trends with revenue growth. Zooming out, the number of total employees is about flat compared to mid-2024; it has grown at a very low CAGR. That leverage is really coming from other places — from G&A and to a smaller extent R&D. Looking near term over the next year or two, I suspect you'll see a similar story: total employees roughly flat as we do a little bit more, with a slight complexion shift toward sales and marketing spend and possibly employees, and maybe slightly away from other areas.
Our next question comes from Stephen Sheldon with William Blair. Your line is open.
Hey, guys. You have Matthew Filek on for Stephen Sheldon. Thank you for taking my questions. I wanted to circle back on the commercial fire question. Could you help us frame the addressable market and how meaningful the offering could become to growth over time? I know it is a new offering and will take some time to scale, but any additional color on how you are thinking about that opportunity would be great.
Hey, Matthew. This is Steve. Sure. It is a good thing to drill down on. We look at the addressable market of commercial fire panels in North America to be somewhere around 4 million to 5 million panels in total. We then look at the population of our service providers that we think might be engaged in this part of the business. Our best estimate is that around 3,000 or so of our service providers are at some level engaged in commercial fire and could be candidates to deploy our products — about a third or a little less of our partner base. In the first two to three weeks since launch, we are probably approaching 1,000 that are in the ground, and we'll see how we can build from that with more service providers moving. We will use 2027 to size up steady-state demand for the product, introduce it to all the service providers, and then be in a better position to estimate our long-term capture of that market and the pace of replacement turnover. I cannot provide that long-term capture estimate right now, but that gives you a sense of how we think about the TAM.
Very helpful, Steve. I appreciate the additional detail. Quick follow-up on capital allocation: what does the current M&A pipeline broadly look like? Also, how are you thinking about share repurchases now that shares have rallied off recent lows?
Maybe I will cover the repurchase question first and turn M&A to Steve. We were quite active over the last quarter or two when valuations were attractive; you don't often see a 12x PE in SaaS for a growing business. We were relatively aggressive in repurchases compared to our history. If you rewind to earlier periods last year, prices were similar to current levels. We will still be active in the buyback market at a minimum to offset dilution from stock-based compensation. At these price levels, looking back at what we historically did gives a sense of what you may see us do near term.
On the M&A front, we run an active process and constantly evaluate opportunities. Often, we underwrite one or two specifically to see if we can make them work. We are in the same condition as always and have some things we are working on. None at the moment are things I can announce publicly, but we hope we can move some activity forward. Broadly, we are looking at opportunities that further our position in either the energy market or the commercial security market and will evaluate everything from tuck-ins to something more sizable. Nothing to announce today, just that we are active and considering opportunities.
One moment for our next question. Our next question comes from Jack Vander Aarde with Maxim Group. Your line is open.
Okay. Great. Good evening, Steve and Kevin. Congrats on solid results and another raised outlook. Steve, can you share thoughts and any color on new potential residential and commercial ARPU drivers outside of the commercial fire opportunity? For example, prior questions have touched on potential drone integration and other partnerships. Just any thoughts on expanding partnerships and other ARPU drivers?
Sure. On the residential side, the biggest driver of ARPU gains is what is possible with the video camera and the intelligence you can provide to the consumer, whether on the door or under the eave. Especially with the rollout of remote video monitoring, where a consumer can go to bed knowing that if someone wanders through their backyard, a live operator can review and decide if it deserves attention. I gave the example earlier where a live operator identified an arson attempt before the fire alarm would have been effective. That type of capability is in demand and drives ARPU. Over the longer term, we will continue to explore robotics, including autonomous drones and other technology, but near-term the bigger driver on residential will be remote video monitoring. On the commercial side, it's also remote video monitoring, which can protect property and address incidents proactively, and we're seeing demand for active shooter detection and similar life-safety sensors. These solutions can augment our existing offerings and drive ARPU. Longer term, we'll partner with players that can bring autonomous devices to benefit property security.
And then a follow-up for Kevin: on the growth businesses — international, commercial, and EnergyHub — the past few quarters I believe those in aggregate represent around 33% of total SaaS and were growing between 25% to 30% year-over-year. I think in Q2 those rose to around 35% and were growing 30% plus. It sounds like these businesses are accelerating. Any comments on those numbers and whether that acceleration is across the board?
Yeah, those numbers are correct. For the year, our prior guidance that growth initiatives would be about 35% of revenue growing 25% to 30% is still about right. EnergyHub's revenue is for the most part annual and recurring rather than monthly, so there are seasonal dynamics based on when programs launch and the rate at which they grow. Q2 happens to be one of the faster-growing quarters right now because programs launched earlier in the year are growing faster. That is the main reason you see that acceleration.
I am not showing any further questions at this time. As such, this concludes today's presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.