Alarm.com to Receive IP Licensing Fee After ADT-Google Effort Expands in 2023
Alarm.com will continue to support ADT “if they need us longer than 2023 to activate new subscribers,” said Chief Financial Officer Steve Valenzuela on a Monday investor call, responding to a question on the company’s future relationship with ADT after the August announcement Google invested $450 million in the security company. “We’re excited to continue to work with ADT,” he said, noting Alarm.com and ADT extended their relationship until 2023.
Google’s investment left questions about the impact on ADT vendors Alarm.com -- ADT’s platform services provider -- and its hardware supplier Resideo, Parks Associates analyst Brad Russell told us at the time of the announcement (see 2008040064). Valenzuela said recently that it has other opportunities to work with ADT on the commercial side “and eventually in other areas as well” as part of their “long-term relationship.” ADT is Alarm.com’s largest customer, representing about 15% of revenue.
On a November investor call, ADT CEO James DeVries said ADT plans to go to market with a professionally installed residential security offering -- co-branded with Google and integrating Google Maps and its video analytics platform -- in second half 2021. Discussions with Alarm.com to accelerate the road map for the offering “resulted in a great outcome for both parties and included the launch of a first-generation ADT+Google offering” that was developed via a commitment with Alarm.com, he said.
ADT decided it “will own our next-generation platform,” which will be developed entirely within Google Cloud, said DeVries. The decision allows ADT to have full control of its road map and will enable ADT+Google to deliver operational and efficiency benefits and “better long-term economics.” After 2023, as ADT and Google add their own subscribers, Alarm.com will be paid a license fee for intellectual property, said Valenzuela. ADT's Pulse and Command customers will continue to be Alarm.com customers, he said.
On the impact of COVID-19 on Alarm.com this year, Valenzuela commended residential dealers for learning to work around obstacles after a March-April lag due to lockdown restrictions. Installations and activations have returned to pre-pandemic levels, he said. The company benefited from a pandemic-influenced exodus of residents from cities to suburbs, bringing new customers who may not have had a security system before, he said. Valenzuela tempered expectations for 2021, saying it’s too early to tell if positive trends will hold; additional national or regional shutdowns could tamp down new activations.
The executive credited video analytics with keeping retention levels steady. Before video analytics, having a security system was a more passive experience for customers. Now they can see what’s happening through the app, “interacting with the smart home system every single day.” The dynamic of the security system becoming smarter “really changed the usage.” Alarm.com introduced video analytics about two years ago, charging dealers an additional 80 cents to $1 for each subscriber to the service, said Valenzuela. “We’ve been able to inch up our ARPU [average revenue per user] by providing more features for our service providers to be able to offer it to their end customers.”
Valenzuela touted Alarm.com’s artificial intelligence engineering that “can distinguish between an animal, a person and a vehicle.” Analytics customers get an email alert detailing whether a triggered event was caused by a person or an animal. That’s “really hard to do,” he said, saying engineers were able to develop the intelligence by feeding in video clips from employees and customers who had opted in to provide data. Ultimately, they hope to be able to detect if someone goes into a swimming pool. Customers with the service have gone from 50 alerts a day to seven because of the ability to differentiate trigger events, he said.
On revenue mix, Valenzuela said cameras and video doorbells generate 60%-65% of hardware sales, noting resolution improvements to cameras along with addition of video analytics as compelling features. The company prices its hardware to make a “little bit of money,” but it’s really going after the monthly recurring revenue from attached service contracts. Alarm.com's software-as-a-service business has an 86% gross margin rate vs. 20% for hardware. The goal is to cut the upfront cost for customers to fast-track subscriptions: “We believe once they become a subscriber, the value add with video and video analytics makes it so compelling that they’ll be a long-time subscriber,” he said. Average subscription life is 8-10 years.