Alarm.com Holdings, Inc. Aktie

Good day, and thank you for standing by. Welcome to the Alarm.com First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please 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. Good afternoon, everyone, and welcome to Alarm.com's First 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 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'll turn the call over to Steve Trundle. Steve?

Thank you, Matt. Good afternoon, and welcome to everyone. We're pleased to report first quarter results that exceeded our expectations. Our SaaS and license revenue in the first quarter was $181.5 million, up 10.8% year-over-year. Our adjusted EBITDA in the quarter was $49.6 million. Our results continue to reflect contributions from across our businesses with nearly every area running at or slightly above the plan we set out for the year. We had a bit of revenue in the EnergyHub business move forward from the third quarter. But aside from this modest anomaly, the results are broad-based reflection of how our various business units performed.

While our results are more than solid, there were a few bumps along the way in the quarter. First, in January and February, we saw new homebuilding and other business activity impacted by the long spell of snow and ice due to the extreme cold weather that impacted much of the U.S. Installation activity was greatly reduced for about 3 weeks and then bounced back strong and accelerated through March, reflecting the durability of demand.

Toward the end of the first quarter, we also began to deal with supply chain volatility related to standard memory availability as manufacturers shifted more production to sell into the HBM category for AI data centers. This has led to the widely reported substantial cost increases for the memory we use in cameras and other products.

We're actively working to manage both supply chain availability of memory and the cost expansion caused by this market dynamic and expect these challenges to continue until the memory market corrects.

As a reminder to investors, the portfolio of businesses that we consolidate into our quarterly results spans multiple markets at different stages of development. Our commercial business includes Alarm.com for Business, OpenEye, CHeKT and Shooter Detection Systems. These commercial businesses are all growing as the security and access control markets evolve towards integrated cloud-based AI-driven solutions. Our energy business, EnergyHub, continues to be a meaningful growth contributor and represents a growing share of our overall revenue mix.

The EnergyHub platform provides mission-critical distributed IoT management solutions that help utilities address long-term structural pressures on grid reliability and infrastructure. Our core residential business provides a large durable foundation with a large TAM and a highly productive service provider channel.

Structurally high revenue retention is due to the wide range of physically installed devices that subscribers interact with through our application every day. In each business, we deliver software that orchestrates connected devices at scale. This enables us to leverage AI to improve ease of use, unlock new use cases and make our solutions increasingly essential to both security and operational workflows.

In our commercial offerings, where an enterprise may have dozens or even hundreds of video cameras installed, AI-driven use cases are particularly valuable. OpenEye, our enterprise commercial video business, released several capabilities during the quarter that fit this profile. One is a powerful new capability called AI Visual Check. AI visual check can detect and issue real-time notifications when a fire exit is blocked, a shelf needs restocking or a security post is unattended.

Customers managing large properties or multisite environments can use AI visual check to reduce reliance on manual safety protocol oversight, enabling faster responses to operational issues and improving security compliance across geographically disparate locations.

OpenEye also introduced AI visual search. This allows security personnel to describe what they're looking for using natural language and retrieve relevant forensic results. They can quickly locate specific moments, objects or activities across their broad video environment. Both capabilities are included in OpenEye's premium video subscription service and end customer adoption of that service is rapidly growing.

Before I hand things over to Kevin, I want to discuss our share repurchase program. During the last two quarters, we purchased over 800,000 shares of our common stock, including over 400,000 shares during the first quarter. Last week, our Board authorized the purchase of up to an aggregate of $150 million of our outstanding common stock over the next 2 years. As I expressed on last quarter's call, we believe that AI is primarily an opportunity for Alarm.com, and we will, therefore, seek to take advantage of any SaaS universe dislocations in the market while still maintaining balance sheet capacity to also pursue acquisitions opportunistically as we have done over the last several years.

In summary, I'm pleased with our first quarter results. We remain focused on creating long-term value for our service providers and their customers across residential, commercial and energy markets and in the process, creating value for our long-term shareholders. I want to thank our service provider partners and our team for their hard work and our investors for their continued trust in our business.

With that, I'll turn things over to Kevin Bradley to review our detailed financials for the quarter and our updated guidance. Kevin?

Thanks, Steve. I'll begin by reviewing highlights from our first quarter financial results and then close with our updated guidance for the second quarter and full year 2026, including several moving parts in our hardware outlook. A few months into the year, I'm pleased to report results that continue to demonstrate the durability and resilience of our target markets and business model. We're fortunate to have partnerships with thousands of talented operators who time and again prove their ability to navigate complex and dynamic market environments while delivering mission-critical IoT-based services across the globe.

SaaS and license revenue grew 10.8% year-over-year to $181.5 million during the quarter, exceeding the midpoint of our guide by $5.6 million. A driving factor here is our revenue retention rate of over 95% for the quarter, one of the highest readings on this metric in the past 10 years.

Another factor contributing to the SaaS beat is the continued outperformance at EnergyHub. As a reminder, EnergyHub revenue recurs on an annual basis and seasonality can vary based on utility program activity and other factors. Hardware and other revenue totaled $83.7 million, up 11.5% year-over-year, and total revenue grew 11% year-over-year to $265.2 million. As you'll recall, on January 1, we began passing through the higher tariff rates that had been implemented under the International Emergency Economic Powers Act. Approximately $5 million of our Q1 hardware revenue is from those pass-throughs. We continue to charge those fees today, consistent with the rates we pay to U.S. Customs and Border Protection upon import for the inventory we're currently selling. I'll address the expected impact of the February Supreme Court ruling on hardware revenue when I provide our updated guidance for full year 2026.

Hardware gross margin came in the upside at 25.2%, which can be attributed to the mix of products sold skewing towards commercial products generally and in particular, in the commercial video business. Total operating expenses, excluding depreciation and amortization as well as stock-based compensation and other items we adjust from G&A for non-GAAP purposes were $125.1 million, a 9.3% increase year-over-year.

Note that sales and marketing expense in the quarter includes our presence at ISC West, our largest trade show presence of the year. The event moved from the second quarter last year into the first quarter this year. R&D expense in the quarter, inclusive of stock-based compensation, was $72.1 million, a 5.4% increase year-over-year. The total number of employees we have in R&D functions at the end of Q1 2026 was 1,140, up 1% year-over-year.

Non-GAAP adjusted EBITDA was $49.6 million, slightly higher than we anticipated due to the revenue outperformance we saw during the quarter. GAAP net income was $23.6 million in the first quarter, down from $28 million in the prior year. The primary driver here is lower interest income because we're holding less excess cash after retiring $500 million of convertible notes in January 2026.

Non-GAAP adjusted net income was $34.7 million in the quarter, an increase from $32.2 million in the year ago quarter. We produced $0.65 of earnings per diluted share, which is up 14% year-over-year. We ended the quarter with $497.4 million of cash on the balance sheet and produced $49.7 million of free cash flow.

We repurchased 428,000 shares of stock during the quarter for $20 million, bringing our total share repurchases since the beginning of 2025 to 1.2 million shares. As Steve mentioned, our Board recently authorized $150 million of repurchases over the next 2 years.

Before turning to our financial outlook, I wanted to comment on an improvement that we've made to the definition of our non-GAAP profitability metrics. Several times in the past year, you've heard us refer to results being impacted by mark-to-market gains or losses on equity positions included in our treasury portfolio. Because we're not in the business of active investing, we've determined that the fluctuations in market value of these securities do not relate to the operating performance of the business from period to period. As such, we'll be excluding these fluctuations from our non-GAAP profitability metrics prospectively, including any reference to comparable periods in the past.

Under this new definition, for example, our non-GAAP adjusted EBITDA during fiscal year 2025 would have been $201.3 million rather than $206 million. Our non-GAAP adjusted net income would have been $142 million versus $145.7 million, and our non-GAAP earnings per diluted share would have been $2.55 versus $2.62. I will reiterate that we clearly articulated this $4.7 million non-GAAP adjusted EBITDA tailwind for 2025 on our last earnings call and have been disclosing it in our quarterly filings as well, and we currently plan to continue providing similar disclosures in our filings. I'll turn now to our financial outlook.

For the second quarter of 2026, we expect SaaS and license revenue of between $185.5 million and $185.7 million. For the full year of 2026, we are raising our SaaS and license revenue outlook to between $749.5 million and $750.5 million. This is an increase from prior guidance of $6 million at the midpoint. We're raising our total revenue outlook for 2026 to be between $1.0595 billion and $1.0705 billion, which includes hardware and other revenue of between $310 million and $320 million. The modest reduction at the midpoint on the hardware line since our February update reflects a couple of exogenous dynamics.

The primary factor in our updated hardware outlook follows the Supreme Court ruling in late February 2026 that tariffs implemented using the International Emergency Economic Powers Act were unauthorized. While it doesn't change the fact that we paid those tariffs on products imported through that date, it does mean that once we've sold that product subjected to those tariffs, we'll be lowering our tariff pass-through fees to reflect the new lower tariffs that the administration put into place immediately following that ruling.

As a general rule of thumb, those new tariffs are about half of what the old ones were as of right now. We anticipate that change occurring towards the end of Q2. So if we were running at $5 million of tariff pass-through fees per quarter in Q1, then this represents approximately $5 million less in tariff pass-through fees during the second half of the year relative to our prior outlook.

The second factor is something that Steve just mentioned, and that is that we are monitoring the turbulence in the memory market and evaluating the impact to our hardware business. The cost impacts that we are seeing there will require that we increase prices for our products that use memory, and we do not yet know if or how these price increases will affect demand. As such, our outlook on the hardware revenue line is cautious at this point in the year despite the outperformance in Q1. We are raising our non-GAAP adjusted EBITDA outlook for 2026 to between $215 million and $216 million, a $1.5 million increase at the midpoint. The 20.2% adjusted EBITDA margin implied by the midpoint is consistent with our prior guide and represents 30 basis points of margin expansion year-over-year.

Non-GAAP adjusted net income for 2026 is projected to be between $151.5 million and $152 million or $2.81 to $2.82 per diluted share, a 10% year-over-year increase. EPS is based on approximately 56.9 million weighted average diluted shares outstanding for the year. We currently project our non-GAAP tax rate for 2026 to remain at 21% under current tax rules. We expect full year 2026 stock-based compensation expense of between $35 million and $37 million.

In closing, I'm pleased with the broad-based momentum in the business that we've seen 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 while investing to expand our long-term growth opportunities. With that, operator, please open the call for Q&A.

[Operator Instructions] Our first question comes from Adam Hotchkiss with Goldman Sachs.

I guess, Steve, with the widest beat, I think, at least that I can remember on the SaaS and license line in at least a number of years. What would you say drove that? It's particularly interesting to see that line reaccelerate. When I know historically, we had been talking about ADT being a couple of hundred basis point headwind. It doesn't really seem like that's showing up in your numbers. So maybe just walk us through the moving pieces and what's driving the maintenance of that 10%-ish growth rate here?

Sure, Adam. I'll start, and then I'll probably hand it to Kevin to fill in the blanks a little bit. But at a high level, everything was slightly above plan. So we had a little bit of a tailwind against the plan. We -- but the big drivers really were the revenue retention rate and then -- which is sort of unusually high versus our traditional range. I believe we're at like 95.4% on the rev retention line. And then we had a little bit -- I think I mentioned that we had a little bit of revenue move from the third quarter on the EnergyHub side into the first quarter as we had sort of one meaningful agreement adjusted in the way it's structured. But those are the off the top of my head, I think those are the primary drivers. Kevin, anything that I missed there?

Yes. I think those are the two primary drivers. If I add some numbers behind that, the difference between running at 95.4% revenue retention and sort of 94% at the high end of our historical range is $2 million to $2.5 million per quarter. So that's by far the biggest chunk. The EnergyHub component of that beat was another couple of million dollars. And as Steve said, about half of that pulled forward from Q3. I think in retrospect, we probably had a slightly too conservative posture on the modeling around our rev retention going into the year. We were anticipating 94%, but we've accounted for that in our guide somewhat.

Okay. Great. Both of those are really helpful. And then how should we think about the competitive environment for the OpenEye business in the commercial space? I'm just trying to understand a little bit how fast the broader market is moving on software and hardware with AI use cases versus what OpenEye is doing? And then when you're talking to customers, what does the demand look like from them around AI capabilities? Are they generally pretty patient and willing to wait for advancements in technology? Or are they generally going to go with the first mover? Just any details around that would be helpful.

No, it's a good question, Adam, because the purchasing behavior has changed a bit where on the OpenEye side now, the -- first, the pipeline looks solid to us, very, very good. So actually, if anything, we're seeing a broader awareness of what a commercial customer can do with AI to enhance not only their security, but really their -- the operations of their business, where they can get sort of business value in addition to security value when we're able to take rich video content and from that glean insights. So demand looks solid.

The customer is definitely looking at products through an AI lens, which product is going to solve a problem best with AI. We had an example of a large specialty retailer, grocery store actually in the quarter where traditionally, we would have sold them a security solution. But in their case, they wanted to know their highest margin item is actually -- of all things is actually sushi. And you have to have fresh prepared sushi and the refrigerator between 4:00 p.m. and 7:00 p.m. every day if you want to sell that product.

Well, Visual Check is being used now anytime there's -- and you want to constantly refreshing that cabinet. So -- in that case, they're using a security camera that also has a picture of what's going on in the sushi fridge to monitor stockouts of that product during those three hours every day. And it's just an example of how customers are thinking now more and more about the device and what type of business insight they can glean from it. I think we're pretty solidly positioned vis-a-vis any competitor in terms of our capabilities with AI in that domain.

Our next question comes from Stephen Sheldon with William Blair.

Kevin, you have Matt Filek on for Stephen Sheldon. Can you talk a little bit about the gross margin profiles across your growth segments and how those compare to consolidated gross margins? Just trying to get a sense of what continued growth that EnergyHub and the others could mean for consolidated gross margins over the mid- to long term as the revenue mix continues to shift toward those faster-growing parts of the business.

Yes, sure. Matt, it's Kevin. I think if you look at where we disclosed the two segments, our two public reporting segments, you'll see at least in Q1, at the SaaS gross margins in the Alarm.com segment are about 88%, 87%, 88%. And the other segment, which is where EnergyHub currently sits, they're closer to 60% for Q1 --that's probably a little bit on the low side, meaning the EnergyHub gross margins were temporarily depressed related to the RGS acquisition. I think you're more likely to see gross margins sort of in the other segment closer to 65% to 70% long term and that you'll see gross margins in the Alarm.com segment sort of stay in the 87% to 88% range.

So as you model sort of those two primary components of the business going forward, it's probably how I'd think about the gross margin profiles for those two.

That's very helpful color, Kevin. And then for R&D, do you still expect it to remain roughly flat as a percentage of revenue in 2026? And then thinking out over the next couple of years, where do you see the biggest opportunities for operating leverage across the business?

Sure. I guess on the first question, Matt, yes, we see it roughly flat as a percentage of revenue for the remainder of this year, I think, is what we have in the plan. I think everyone right now is sort of attempting to figure out, are we going to do a heck of a lot more with the same people? Or are we going to do the same amount of work with fewer people as the full AI story unfolds. Our view is we want to remain positioned to be very competitive and be able to do as much as possible to continue to take advantage of evolving market opportunities.

So we don't, at the moment, we're not betting on a massive R&D leverage driver. I think as these businesses mature, so especially some of our growth initiatives, as they reach a level of maturity and scale, we begin to get some natural operating leverage contribution out of areas that currently in the consolidated picture drag down the operating margin picture. So that's the primary place we're looking for operating margin expansion.

[Operator Instructions] Our next question comes from Jack Vander Aarde with Maxim Group.

Congrats on the solid results, guys and strong retention rate. So Steve, maybe just on the EnergyHub side, that obviously continues to ramp nicely. I think you have over 80 utility partners. First question there is just how do you see the number of utility partners and kind of your wallet share of them growing over the next couple of years? It sounds like you have pretty much a lot of blue sky left there. And then I'll have a follow-up on the PointCentral business. Just looking for any updates on that end as well.

Sure. So on the EnergyHub side, after completing the RGS acquisition and then also a little bit of the way we label utilities, we actually now say we have over 155 utilities in the program, and we define those to be entities with more than 100,000 meters in their territory. So we've made good progress in terms of capturing utilities. I believe we're now working with utilities that service roughly 75 million, 77 million meters, and that's out of about 130 million total meters we'd like to get to. So things generally trending in the right direction there with utility pickups.

And we -- the next game is can you drive up enrollment within a given territory? What percentage of the consumers actually have connected thermostats and of those who have connected thermostats or any connected device, whether it be an EV or battery charger or whatever, can we get that device enrolled and move that number up? We feel like we're in a pretty good position in terms of TAM coverage now and in terms of sort of the completeness of the software solution such that we really can focus a bit more on driving up with our utility partners, the attachment rate of a lot of devices that are out there. So that's a meaningful focus now. Does that answer that question? I think it was a two-part question. One was EnergyHub, the other was PointCentral.

Yes. And then yes, PointCentral, just I haven't heard an update there for a little bit. So just wondering if that business is ramping or kind of what you're focused on there?

Yes, it continues to ramp. It's ramping at a level that's sort of, I believe, double digit on the growth side, but not a massive driver of consolidated growth at the moment. It's a nice business that's running with positive contribution to the overall consolidated EBITDA picture as well. And we continue to see nice growth there. I mean it's -- I believe that we're probably #2 at the moment in the multifamily space, and we're well into the 6 digits in terms of number of apartments and/or multifamily housing that we're servicing. So still committed to that, still making progress. I think probably taking a bit of share, but not at sort of -- we're not at sort of a 30% growth rate there.

Got it. Okay. I appreciate the color there. And then maybe just one more question for Kevin. Kevin, I believe a couple of quarters ago, you provided some exit year 2027 targets for hardware margin and EBITDA -- adjusted EBITDA margins. Just wondering if there's any update and thoughts on those. I think we're looking at running the business around 21% adjusted EBITDA margin. Just any changes there would be helpful to note.

Yes, Jack, no changes on that. We're still anticipating and working towards being able to exit 2027 at about 21% adjusted EBITDA margins. Hardware margins are a little bit harder to pin down. I suspect that of those two things, the adjusted EBITDA margin is probably the easier thing to anchor on. Where hardware margins go will be a factor of what happens with tariffs and obviously, what happens with memory prices as well. But we're going to manage through sort of that volatility and still target the 21% adjusted EBITDA margins.

[Operator Instructions] Our next question comes from Ella Smith with JPMorgan.

So first, I was hoping to ask something on EnergyHub. As you think about your internal projections for EnergyHub, what does that growth look like as you think about expanding within existing customers, cross-selling new products and expanding to new logos?

Sure. I think we don't break out EnergyHub specifically with a given growth rate, I don't believe, right? Like -- but you can kind of deduce that it's a strong contributor to what we describe as the growth initiatives in the business where we -- we've commented that we expect growth to be in the 25% to 30% range this year, including any inorganic activity. As far as the -- drilling down a level and looking inside of the EnergyHub business itself and our internal projections, it is a mix as you kind of hit all of the categories. It's a mix of picking up logos. That's still a growth opportunity for us. There's more interest than ever. It's also expanding programs, though, within existing logos.

So when we started when that business started, it was very focused on connected thermostats and most of the VPP capability came from our ability to make modest adjustments in residential thermostats. At this point, it's -- the capabilities of the software are much broader. So we're bringing to bear batteries. We're bringing to bear EV chargers, solar inverters. And at the same time, the supply that the utility is having to rely upon is much more variable. So there's more demand at each individual level to see program expansion into these other categories of edge resources, and that's a meaningful driver of the growth, which is you're already working, you establish yourself with the customer and then you continue to grow the program. and then into other categories. And the last is just driving up enrollment of devices. And this is where you have to do the work of getting the end consumer aware of the opportunity.

When someone buys a Model Y, if they're -- Tesla Model Y, if they're in a utility service area and they buy the wall charger, do they take the time to enroll in the program and get the benefits of the program. Those are the types of things that sort of also drive growth. The more people that do enroll, the better. So those are the three growth drivers. I don't have a breakdown of which ones the majority, and I'm not sure we go into that, but that gives you a little bit of a picture of what we see.

That's very clear. And for a follow-up, what do you think are the synergies, if any, between EnergyHub and your security business? And to what extent do you think you've tapped into those cross-sell synergies?

Yes, that's a very good question. So two part again. I think -- so we define our core business, not just as security, but especially on the residential side as smart security or smart home, which means quite a few properties are getting today getting connected thermostats through our service provider. And each one of those creates an opportunity for the customer to become an EnergyHub participant. And that drives by itself, a natural synergy. We sort of have a sandbox as well where we can play with different things that may drive increasing levels of engagement or even play with different innovative technology approaches at the thermostat level to create additional downstream value for the utility. So there's a lot of synergy on the R&D side. there's some synergy on the channel side. It helps our service provider, our dealer or partner offset some of the cost of offering all the other services we bring to bear for the consumer. So we really like that. And the second part of that question was...

How far along are we in capturing that?

How far along are we? I'd say we're probably -- if I were to use the baseball analogy, we're probably third inning. There's still more we can do. We're seeing now security itself being defined to include what we call energy security, which is certainty of your energy supply and knowing that if your utility is struggling with variable conditions that your home or your small business is going to continue to have energy. Some of our security partners are beginning to bring to bear. They've always sort of played with generators, but now they're bringing to bear batteries. So I think that we'll see more synergy develop through time.

[Operator Instructions] I'm not showing any further questions at this time. And as such, this does conclude today's presentation. You may now disconnect, and have a wonderful day.

Thank you.

Good day, and thank you for standing by. Welcome to the Alarm.com Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Matthew Zartman, Vice President, Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to Alarm.com's fourth quarter and full year 2025 earnings conference call. Please note, 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 annual report on Form 10-K and our Form 8-K both of which will be filed shortly with the SEC, along with the associated press release.

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'll now turn the call over to Steve Trundle. Steve?

Thank you, Matt. Good afternoon, and welcome to everyone. We are pleased to report fourth quarter and full year results that exceeded our expectations. Our SaaS and license revenue in the fourth quarter was $180 million, up 8.8% over the last year. Our adjusted EBITDA in the quarter was $55 million. I want to thank our service provider partners and our employees for their contributions to our performance in 2025.

During the year, we reached a significant growth milestone generating more than $1 billion in annual total revenue. Achieving this scale reflects the strength of our technology and the business model that we have engineered. Our business is grounded in the long-term partnerships we have with our service providers. Those partnerships are based on our commitment to both innovation and strategic alignment, where our growth is predicated on our partner success with our technology.

Our service providers integrate our technology platform across their business to deliver the best possible residential and commercial security solutions to their end customers.

During the year, we continue to execute on our long-term growth strategy. We are leveraging our R&D program and delivery channels to expand into additional markets. As a result of these efforts, we have created a more diversified and durable business. Today, we provide mission-critical IoT-based solutions anchored by physical products that protect homes, businesses, enterprises, multifamily properties and critical grid infrastructure worldwide.

I want to spend a moment reminding our investors of how our business model and value creation engine are unique compared to most other SaaS companies. The equity markets have recently become fearful that all SaaS businesses will be pressured by AI, impacting seat-based pricing models and performing tasks that could relegate incumbents.

Alarm.com's SaaS software is priced around a different set of value drivers. Our service providers already use our back-end software essentially for free if they install our customer sites with IoT devices in our ecosystem that enable our software. We have no material seat-based pricing models.

Instead, our SaaS revenue is driven by each connected device that is installed by our service provider partners. And once these connected devices are installed at a customer site, they typically remain in service for nearly a decade. Our service providers benefit from efficiencies that are gained by having a single management platform for servicing all of their connected devices.

The value drivers in our business are the number of connected devices that we enroll on our platform and at some level, particularly in the case of video, the data that these IoT devices generate. We produce insights from these rich proprietary data streams to benefit the subscriber and the service providers. Additionally, in many cases, we create value by offering and managing cellular and tightly supervised Internet connectivity to the devices and locations we serve.

We will continue to leverage AI for both internal productivity gains, and to augment our capabilities with products like the AI-based deterrents and monitoring capabilities we already have in market. However, we do not see AI driving a change to our fundamental business model structure.

Next, I want to walk through the major components of our business and discuss the strategic drivers that support their continued growth. I'll start with our core residential business. which serves the smart home security market in the U.S. and Canada. We have a strong market share for professionally installed smart home security solutions in these markets.

Our leading position is built on the scale of our platform, the breadth and quality of our solutions and our trusted service provider relationships. We have consistently invested more in this market than our competitors. Revenue growth in our core residential business continues to be driven primarily by ARPU expansion. Our service providers are particularly effective with our residential video solutions, including menu analytics, and increasingly remote video monitoring that is augmented by the central station.

Our residential customer tends to be the person who wants real and serious security with everything done right by a professional, delivered and regularly serviced in a manner that protects the subscribers' privacy. We recently introduced a new premium video doorbell, which allows customers to enable 24/7 continuous onboard recording via SD card. It's also designed to enable our full suite of advanced analytics and drive adoption of our higher-tier video subscriptions.

We launched our first battery-powered camera the 731. It's flexible, completely wireless installation enables video coverage in locations that are difficult to wire. The 731 can be installed with automatic solar-based battery charging. It also supports premium video capabilities, including AI deterrents, perimeter guard and remote video monitoring.

On the software side, we recently released new AI capabilities that improve automation and personalization for subscribers. These enhancements make it easier to identify and respond to important events. Over time, we believe it will help support increased retention and adoption of premium video subscriptions.

We have also continued to diversify the business. I'll start by focusing on our expansion into adjacent markets through our commercial security and energy businesses. These 2 businesses alone contributed 25% of our SaaS revenue for the full year of 2025 and grew about 25% year-over-year. Our commercial business serves small- and medium-sized businesses and enterprise customers with integrated intrusion, video and access control solutions. Growth remains solid in 2025 despite some economic uncertainty that slowed some larger scale deployments.

We believe that the underlying demand environment in the commercial market remains solid. With the range of functional advantages our platform offers the market, we believe that we can drive increased adoption of the Alarm.com and OpenEye commercial platforms amongst both our existing and new service providers.

We have continued to enhance the platform to fully integrate video, access control and intrusion protection to enable our service providers to standardize on Alarm.com for the full range of commercial subscribers that they serve. A recent platform enhancement is the introduction of a new lineup of commercially targeted Alarm.com video cameras called the Prism Series.

The new product line is designed to give our service providers a more robust offering for SMB and mid-market installations. The series offers high-resolution imaging, clear color video at night and 2-way audio. It also supports our premium video analytics services, including AI-driven proactive deterrence and integrated central station remote video monitoring.

It has also been encouraging to see that many of our commercial end subscribers continue to add to their systems with more components of our platform well after the initial installation. Today, more than 2 million active video cameras and devices are deployed across our commercial property base. This base has grown consistently driven by increasing attach rates as more of our service providers incorporate our video solutions into their standard offerings.

Shifting to our Energy business. EnergyHub remains a strong contributor to our growth. The EnergyHub platform provides mission-critical distributed IoT management solutions that help utilities address long-term structural pressures on grid reliability and infrastructure. Forecasts point to the strongest sustained growth in U.S. electricity demand in more than 2 decades. Electrification and the growing footprint of data centers are among the primary drivers of demand-side pressure.

At the same time, electricity generation is also becoming increasingly diversified and thus more variable. EnergyHub orchestrates large networks of connected devices, including thermostats, electric vehicles, batteries and water heaters, to provide on-demand virtual power plants, also called VPPs, utilities call on VPPs to reduce peak demand and to increasingly manage load more dynamically across the grid.

EnergyHub can stand up a VPP far faster and more cost effectively than building new generation infrastructure. EnergyHub is the clear market leader in this space. In 2025, the number of connected devices under management increased by more than 50%. During the year, utilities increased the number of times they called on EnergyHub VPPs by 25%, reflecting the growing importance of its programs to grid stability.

To accelerate EnergyHub scale, we acquired Resideo Grid Services, or RGS, late in 2025. Similar to EnergyHub, RGS provides demand response aggregation and program management solutions for utilities, but it has been primarily focused on supporting smart thermostats. With the acquisition, EnergyHub can introduce its multi-device platform to RGS clients, enabling them to manage a broad ecosystem of distributed energy resources and deploy VPPs with greater capacity and capability.

Looking ahead, EnergyHub will remain focused on growing its base of utility clients, expanding the diversity of devices enrolled in programs and increasingly applying AI to provide load shaping solutions that address a growing range of grid challenges.

Lastly, we continue to develop international markets as a natural extension of our platform strategy. We are deploying our core residential video and increasingly commercial technology into these new markets to leverage our core R&D investments and drive scale. As we've expanded our core video offering, our solutions, including remote video monitoring, are being increasingly introduced and adopted by our international partners. In 2025, we saw a continued uptick in the video attachment rates to 33%.

In summary, I'm pleased with our 2025 results, and the continued growth we see across the business as we roll into 2026. I want to thank our service provider partners and our team for their hard work and our investors for their continued trust in our business.

I'll now turn things over to Kevin Bradley, our CFO, to review our financials. Kevin?

Thanks, Steve. I'll begin by reviewing highlights from our fourth quarter and full year 2025 financial results, then cover key elements of our capital allocation framework and conclude with our guidance for the first quarter and full year 2026.

I'm pleased to report another quarter of execution against our financial plan. Our quarterly and annual performance reflects continued broad-based contributions across the business's diverse components. As Steve just mentioned, one of the areas that outperformed was EnergyHub. EnergyHub's results were driven by higher-than-expected program participation as well as a modest contribution in the latter part of the quarter from the RGS acquisition.

Growing the number of programs and increasing the number of enrolled devices in each program are among the multiple long-duration levers supporting EnergyHub's growth. There are network effects in the business that accrue with scale. The more programs and DERs that EnergyHub manages on behalf of utility clients, the more valuable they become to ecosystem device partners. And the more ecosystem device partners EnergyHub works with the more capacity the virtual power plants can provide utility clients.

The acquisition of RGS expands our number of managed programs and enrolled devices and deepens our relationships with ecosystem device partners, accelerating these effects.

For full year 2025, SaaS and license revenue for the overall consolidated business grew 9.2% year-over-year to $689.4 million. Total revenue grew 8% year-over-year in the fourth quarter, and as Steve discussed, exceeded $1 billion for the full year. Total gross profit in the quarter was $172.6 million, an increase of 8.8% year-over-year, including 13.4% year-over-year growth in hardware gross profit to $19.1 million.

Higher-than-expected hardware revenue and gross profit were driven by OpenEye's sales of enterprise-grade video cameras and devices as well as a favorable product mix of Alarm.com residential cameras.

As Steve described, the physical installation of hardware plays a critical role in value creation across the business. regardless of whether it's one of our products or those of an ecosystem partner. But when it is one of our products, as is the case with substantially all video cameras that connect to our cloud that sale contributes to our highly efficient subscriber acquisition model.

In the fourth quarter, gross profit from hardware sales offset approximately 55% of GAAP sales and marketing expense and more than 60% for the full year. That leverage allows us to direct more capital toward organic R&D and innovation, enabling our service providers to deploy a wider array of solutions across our mutual customer base.

During the fourth quarter, total operating expenses, including depreciation and amortization, were $137.7 million, excluding depreciation and amortization as well as stock-based compensation and other items we address from G&A for non-GAAP purposes, total operating expenses were $121.7 million, a 9.5% increase year-over-year.

R&D expense in the quarter, inclusive of stock-based compensation, was $66.2 million, up 6.8% year-over-year. For the full year R&D expense increased 5.6%. GAAP net income in the fourth quarter was $34.7 million or $0.66 per diluted share. Non-GAAP adjusted net income grew 19.2% year-over-year to $38.9 million and non-GAAP EPS increased 24.1% to $0.72 per diluted share.

Adjusted EBITDA for the quarter grew 18.3% year-over-year to $54.9 million. For the full year, adjusted EBITDA increased to $206 million, representing 16.9% year-over-year growth. I do want to point out that our adjusted EBITDA number was a tad inflated by a $4.7 million mark-to-market gain on a security in our treasury portfolio. While substantially all of our balance sheet cash is held in money market funds our policy allows for a small allocation to other marketable securities.

The business generated $35.1 million of non-GAAP free cash flow in the quarter and $137 million for the full year. As we previously indicated, free cash flow declined year-over-year as the exceptionally favorable working capital dynamics we saw in 2024 normalized.

Turning to the balance sheet. We recently retired the $500 million of convertible notes that matured in January 2026. These bonds carried 3.4 million shares of potential dilution that we began removing from our diluted share counts midway through Q3 2025. They will not be in our diluted share counts for the entirety of 2026. Our operations fully fund their own capital requirements, which allows for a higher degree of opportunism and flexibility as it relates to capital allocation, further supported by the 3-year time line remaining on our $500 million of outstanding convertible notes due May 2029.

In 2025, the business generated returns on invested capital from its ongoing operations well in excess of that capital's cost reflecting the durability of our competitive positioning and the discipline with which we allocate capital. We have historically and will continue to primarily allocate capital to organic R&D with an emphasis on long-term value creation.

Our commitment to domestic product development has contributed to some meaningful tax efficiencies in the form of ongoing R&D tax credits. Our cash tax liability for 2025 was $12.1 million, which reflects the benefit of those R&D tax credits as well as changes to Section 174 of the tax code that restored the full deduction of domestic R&D expenses in the year incurred, which will provide us with a multiyear tailwind to net returns on invested capital.

We also leverage our strong balance sheet to supplement organic investment, whether in the form of M&A such as the $113 million we spent in 2025, acquiring businesses that support our commercial and energy initiatives, returning cash to shareholders via opportunistic buybacks, we're investing strategically into the ecosystem in the form of nonoperating assets.

Looking ahead, we will continue to deploy capital to reinforce our competitive position and leverage our scale. We will prioritize high-return organic investments and selective acquisitions that support growth opportunities, while maintaining the financial flexibility to act opportunistically elsewhere.

I'll switch gears now to providing our 2026 financial outlook. For the first quarter of 2026, we expect SaaS and license revenue of between $175.8 million and $176 million. As a reminder, the sequential decline in SaaS revenue from Q4 reflects EnergyHub's normal seasonal dynamics. EnergyHub revenue is typically annual in nature and weighted towards the second half of the year. The fourth quarter represents the largest contribution. This pattern is reflected in our guidance.

For the full year 2026, we expect SaaS and license revenue between $743 million and $745 million. This is a bit higher than previously expected and reflects contributions from RGS as well as continued healthy expectations for organic growth. We now expect total revenue between $1.058 billion and $1.065 billion, implying hardware and other revenue of $315 million to $320 million, which includes the assumption that we pass through the current tariff cost dollar for dollar and that tariffs don't become incrementally larger from here.

We are also implementing non-GAAP adjusted EBITDA guidance above our first look of between $213 million and $215 million, implying margins of 20.2% at the midpoint. This outlook reflects the inclusion of RGS, which we don't anticipate will contribute to adjusted EBITDA this year. Over time, we expect to realize more synergies from the acquisition, and we continue to expect to exit 2027 with a 21% adjusted EBITDA run rate margin, as I discussed in more detail on our last call.

Non-GAAP adjusted net income for 2026 is expected to be between $150.5 million and $151 million or $2.78 to $2.79 per diluted share. This is based on approximately 57.2 million weighted average diluted shares outstanding, down from 60 million weighted shares outstanding during Q4 2024.

We expect our non-GAAP tax rate to remain approximately 21% under current tax rules, and we project full year 2026 stock-based compensation expense of approximately $40 million to $43 million.

In closing, we're pleased with the broad-based momentum in the business that we saw throughout the year. We believe we're well positioned to deliver continued revenue growth and profitability while investing to expand our long-term opportunities.

With that, operator, please open the call for Q&A.

[Operator Instructions] Our first question comes from Adam Tindle with Raymond James.

Okay. And congrats on 2025. Kevin, I wanted to maybe just start with the raise of SaaS guidance. It's a little bit more meaningful than in the past. I know you guys tend to kind of outperform over time and inch that up. But this is a little bit of a bigger bump than we've seen in the past.

I understand there might be some RGS contribution. And if you could maybe just break that out a little bit. And then also the organic assumption sounded like you were still expecting healthy organic growth. What are you seeing in the business to underpin that? I think that's obviously not consistent with what the stock has been doing, what kind of the general view on software that Steve outlined. So what's underpinning the organic assumption improvement as well.

Sure. Adam. Yes, as you noted, we -- since our first look, the SaaS guide at the midpoint went up by about $21 million. There's 2 components of that. Obviously, that we included RGS in late Q4 of last year. So most of the revenue from that is going to show up from a year-over-year perspective, obviously, in 2026.

And then we outperformed excluding that during Q4. So I think the best way to think about it is we had some implied year-over-year SaaS growth rate embedded in our first look. I'd say things are maybe slightly better than that. If you excluded RGS, maybe about 10 basis points or so, 10, 20 basis points or so better than that growth rate that we projected. And the rest of the absolute dollar stack on there is really from RGS.

Got it. Okay. Maybe just a follow-up on RGS and EnergyHub in general, since I think it's becoming even more topical for Steve.

You described some of the network effects that essentially that are kind of going on in that business. Wonder if you might just take a step back for investors that might be a little newer to this and talk about the competitive environment and EnergyHub's position with RGS, and have you taken a look at like sizing that total market? How big could that be over time? Sort of your vision for that business, especially now with the RGS acquisition?

Adam, good question. Yes, in terms of the network effects, I mean, essentially, we want to be the most appealing partner to various folks who may make a device that can play in the ecosystem. So hypothetically, if you're a thermostat maker and you decide to partner with a company that can enable VPPs, you want your thermostat to be used for that purpose in as many places as possible.

And with the acquisition that we announced, we get to a wider array of utilities. And that, of course, makes the value of each device higher. Longer term, the thing we're really in terms of size of market, there are around 100 -- I believe, 130 million meters in North America. Currently, we're transacting business with electric utilities that cover around 50 million of those meters. But we're still in the very early days of enrollment against those meters.

So we're getting about a 5% level of enrollment today on those 50 million meters that we're passing with the EnergyHub offering. And of course, we grow in a couple of different ways -- 3 different ways actually. First is to drive up that level of enrollment with our utility partners. Second is to continue to add utilities. We believe we're the share leader at the moment, but we'll continue to add utilities. And then third would be to add more devices and to add categories that are energy consumption categories.

So -- that's what we're attempting to do. That's sort of the -- those are the growth drivers in the business. In terms of the competitive framework, there are some smaller competitors in this space, but it's pretty hard to sort of cover off all the different areas that a utility partner would want their VPP provider to cover off.

So if I jumped into the business today and I'm an upstart, I might attack just, for example, EV charging stations or I might have tried to attack just, for example, swimming pool pumps or hot water heaters or whatever. The problem is it's almost too late to do that today. So we think that the utility wants to basically have one partner that can stabilize supply across a wide array of devices, and we think we're pretty well positioned to do that.

Our next question comes from Samad Samana with Jefferies.

This is Jordan on for Samad. Congrats on the strong quarter. Steve, you touched on kind of the primary concern we're hearing from investors around AI and software, which is the risk that software poses. Obviously, your business model seems to be in a position of strength relative to many others.

I wanted to just double-click on how you're pivoting R&D internally to capture the opportunity here with AI and the strong SaaS guide you guys gave, how does that embed either a material demand or monetization that might come from the newer AI features that you're layering into the product?

Yes. Good question. Yes, Jordan, I think really 2 fronts there. So first, internally, we think about what are the capabilities that we can render that make the solution more accessible or that create more intelligence from each stream of data. So we've done some things already. We've been in market with what we call AI-based deterrence now for well over a year. We've been in the analytics business, leveraging AI for half a decade anyway.

The capabilities are getting stronger every day. We're increasingly looking and working on efforts to make the consumers interface to all of our capabilities, much more streamlined leveraging LLM. So you've seen capability, I think we've mentioned called attribute search, which allows someone to interact with a rich amount of video data in a very efficient sort of text-based way. So I think you'll see us continue to drive functionality out, and then there's -- in terms of monetization, there's the other side of it, which is can we become more productive or can we do more things.

And we're certainly -- it's there, I'd say it's a little bit more early days. There's a lot of evidence of amazing things that one will be able to do. And then there's sort of a question of how many of those things can one actually do today. So we continue to kind of walk down that path and we expect through time though, to drive up productivity on.

Got it. That makes a lot of sense. That's great to hear. Maybe a quick call for you, Kevin. You mentioned the implied hardware guidance accounts for tariff cost pass-throughs, obviously, a positive for margins for the business. But I'm curious how you're thinking about how those pass-throughs impact demand broadly? Any feedback from your customers? And then, are you seeing any increase in manufacturing costs related to hardware and how are you thinking about managing those if those are coming up?

Yes. Jordan, thanks. We dealt with a similar type of cost inflation back during COVID on the hardware line. And when last April, when tariffs started being released, went back and examine what happened during that period of time related to demand, and we couldn't really discern any meaningful change in demand.

So our thesis going into this when we first passed through tariffs, it was last June at the base 10% level was that were going into it optimistic that there would be no demand impact. And I think that bore out through most of the year. we obviously outperformed our initial look last year, our guide.

Now that includes about $7 million or $8 million of tariff pass-through revenue. But even excluding that, we would have exceeded it. So no material decrease or discernible decrease in demand yet. Those pass-throughs went up on January 1 to reflect the full tariff. So they went up by about 2x, and we're going into this, assuming that there will be no degradation in demand from that either.

Related to other manufacturing costs, we've been watching the DRAM market, obviously, that impacts us to some degree. We haven't really seen any cost increases come through related to that yet. One thing that we're likely to do is probably extend the number of days of inventory that we have on hand by about 30 or 40 or so, early this year to try and derisk the supply chain a little bit from that.

So we'll have a little bit more of an investment in working capital to start the year that will unfold over the next couple of months. But yes, no cost increases yet related to the memory potential memory shortages. Fortunately, our agreements tend to carry the right to pass through third-party costs. So we feel a little bit insulated from that and we'll just sort of deal with that as it comes.

That makes sense. Congrats.

Our next question comes from Saket Kalia with Barclays.

And great to see the results.

Thanks.

Steve, maybe for you. That was a helpful walk-through earlier on kind of the combined EnergyHub business. And I get the vision in terms of having more devices only makes each other device more valuable to a utility. That makes a lot of sense. Maybe more of a medium-term question. How do you kind of think about synergies there? Whether that's from a revenue or expense perspective, just as we think about that combined EnergyHub business becoming maybe a bigger, more strategic part of Alarm's overall business. Does that make sense?

Yes, it makes sense, Saket. Yes, in terms of synergies. So the way we think about it are -- in the early days, we're -- as of right now, we're managing 2 different platforms that enable the capabilities that RGS and EnergyHub have traditionally rendered. So synergies as of today are not very substantial. We, of course, have some customer synergies already in place.

But our outlook is that over the next 12 to 24 months, working with our customer partners there. We will begin to fuse the capabilities -- any unique capabilities that exist in RGS will roll into the EnergyHub platform. And over time, we would begin to see synergies that come from a fusion of those 2 platforms and to sort of one greater hole, the benefit to the customer, of course, being that the greater hole will be supported by an overall larger R&D engine, a wider array of devices and become more valuable.

So in terms of the way we've modeled it, it's sort of no synergy this year, very little and then on the -- in terms of EBITDA, but over -- as we sort of look into the 12- to 24-month period, we began to see more material synergies emerge there that will help us, by the way, kind of get EnergyHub. And you're seeing us begin to gain some confidence that EnergyHub by itself is a platform company and to gain more confidence there we need to gradually see the cash production capacity become more real. And I think that this will help us -- the synergies here will help us get there.

That makes a lot of sense. Kevin, maybe for my follow-up for you, just on a slightly different topic or a broader topic. I was wondering how you kind of think about the emerging areas growing in 2026. I think Steve Trundle said, the commercial plus energy, I think that's about 25% of SaaS, it grew about 25% in '25, of course, international would be additive on top of that. If we think about those 3 businesses sort of in aggregate, how do you think they kind of growing '26 as we think about the different components next year?

Sure. Thanks, Saket. I would expect that they grow between 25% and 30%. Now that obviously includes a little bit of inorganic growth, but that's how we're thinking about it going forward. And by implication that if they grew at that rate, they'll wind up becoming more like 1/3 of total SaaS revenue, if not maybe slightly more.

Our next question comes from Stephen Sheldon with William Blair.

First, it seems like you're getting a lot of traction with commercial video solutions. I guess, so if you look at that, has there been anything surprising about how your video capabilities are getting utilized across end markets, property types, use cases, et cetera. And specifically, are there any notable pockets of strength to call out on the broader commercial video side.

And then I think you also talked about expansion motion there as one of the factors supporting growth. So yes, I guess, I'd just love some more color on the growth you're seeing in commercial video.

Sure. This is Steve speaking. And yes, we -- the areas that are always best for what we're doing in video tend to be the areas with high crime and high assets. So certainly, strengths are places where those 2 phenomena exists in the same location. So some -- place like L.A., for example, is a great market for our commercial video solution.

The strengths are coming right now. I think -- I wouldn't call them surprising because we saw it coming. But the acquisition we did and the commitment we made to Central Station augmented remote video monitoring is a source of strength in the commercial video market. It really enhances the ability to deter a crime before it occurs as opposed to just doing forensic analysis of what has occurred after it has occurred.

So just a sort of a sea change in the way that we think about the role of a camera and what its value is to society and the shift to deterrent. So that's -- that's been the biggest driver. I would say we saw that coming. We've got the right product lineup. There's been a lesser driver, which is just on the commercial side beginning to get some uptick on the international markets.

International always lags what we're doing in North America a bit. And in the last 6 months, I would say we've made more progress deploying some of the commercial assets, especially in Latin America, but gradually elsewhere.

Got it. That's helpful. And then as a follow-up, I guess, high level on spending plans. Can you talk more about areas where you're stepping up reinvestment across the business in 2026. I know R&D is always a major focus. So I guess, any color on kind of where you're maybe stepping up the investments in R&D in any other parts of the business where or maybe reinvesting more than you have historically?

Yes. I would say in general, our view right now is that R&D as a percentage of revenue is about where we where we want it. So we're not planning to surge R&D spend. We're instead really focused on driving more productivity out of R&D. And in the past, we've talked about kind of where we want to end '27, I guess, in terms of overall operating margins in the business, and we're still committed to that.

In the near term, yes, absorbing a couple of different platforms or a new platform on the EnergyHub side will require some effort and some surge capacity. And then I would say we're at a point in time now where -- and I would imagine other companies in a similar position where you have a set of R&D commitments that you've made 12 to 24 months ago that are in process, and then you're simultaneously doing a lot of work to get all of the goodness of what's going on in AI at the same time.

So if there were a place where there's some surge, it would be attempting to basically spend both of those wheels at the same time. And I'd say that's underway here now.

Our next question comes from Adam Hotchkiss with Goldman Sachs.

I wanted to follow up on EnergyHub and Steve, something you brought up at the beginning of the call. Could you just maybe take a step back and mechanically help investors think about how your EnergyHub business would benefit from the AI-driven data center demand. And then how should investors just more broadly as we track that business through the year? Is there anything in the market that we should be tracking to -- other than quarterly results to try and understand the trajectory of that business?

Adam, yes. So the data center phenomena is a demand driver for EnergyHub. It's a combination of sort of the requirement for more electricity. That's at the moment driven very much by growth in data centers. as well as this phenomenon where the sources of supply on the grid themselves have become a bit more variable. So a smaller percentage of power is coming from, say, a constant rate nuclear facility, a higher percentage of power is coming from more variable sources like solar, wind and others.

So those 2 things together, the data center, plus the increasingly variable sources of supply create more of a need for the utilities to find new sources of power. And I would say they're, therefore, more open to what we do with EnergyHub and the creation of virtual power plants to produce energy at certain points in time when the need is most acute. It's a great driver for us, I guess, I would say.

In terms of the second part of the question, tracking how things are doing. I guess I have to point to sort of our updates as the best way to track what we're doing with EnergyHub and how the business is what its trajectory is. I can't think of another way to sort of easily second -- find a second source of information there.

Okay. Great. Really helpful. And then Kevin, for you, just on the -- just to sort of double click on the margin question. I know we've historically talked about R&D, a big portion of that investment being opportunistic and sort of looking ahead on growth in ROI and opportunities. How should we think about the sort of flat margin trajectory next year? And how you thought about the trade-off between maybe getting some scale on the revenue growth that you're seeing and improving margins a little bit more quickly versus leading in on the investment side. I guess just trying to understand how we're progressing towards a medium-term margin number?

Sure. Thanks, Adam. I think one thing I would point out is that the -- our adjusted EBITDA margins in 2025, for example, contain $4.5 million of unrealized gains on a security in our treasury portfolio. So I think if you were not capturing that and you were focused on sort of more pure operating results, you'd wind up at something just south of a 20% adjusted EBITDA margin, 19.9%.

And so on that basis, there's a little bit of progression embedded in our initial guide here from 2025 to what we've signaled is what we anticipate exiting 2027.

And the second component there, I just would highlight is we did complete an acquisition in the fourth quarter. We're not picking up EBITDA margin there. We're taking up sort of 0% EBITDA margin. So yet we sort of still work to absorb that and show a bit of a trajectory here on the bottom line.

Our next question comes from Jack Vander Aarde with Maxim Group.

Okay. Great. Congrats on the strong finish to the year and a strong outlook as well. A couple of questions. Maybe, Steve, two-part question on the competitive environment within Alarms or North America residential business. Is first in general, any notable trends or changes in the competitive environment that you'd like to speak to? And then two, how has Alarm's core business performed relative to that original like 200 basis point headwind that you guys were initially I think forecasting for ADT. Anything you could speak to there and how the business performed up against that.

Sure. Jack. Yes. I don't think on the -- in the core business, we've seen any dramatic change in kind of the competitive landscape. There are always competitors. But we did a lot of the work over the last 15 years to cement a set of relationships with our service providers. I think the service providers are running meaningful chunks of their business on platform.

And I would never say that we're insulated from a competitive threat. But but we're in a strong position, especially if we continue to make our offering better and deliver on what we say we're going to deliver upon. So feeling relatively good about the competitive environment at the moment.

In terms of the how much or what I can say about the 200 bps headwind. It didn't manifest as fully as expected. We sort of point folks to ADT's own comments about their transition and I think their comment was they had transitioned roughly, I believe, in the third quarter, I think they said 25% of the business or so, so that probably gives you a little bit of a directional input there on how that has gone. It hasn't been as dramatic in '25 as what maybe was initially expected, but is still something that we have modeled in to 2026.

Got it. Okay. That's very helpful. And then maybe just another one for Kevin, maybe on the core business as well. The outperformance in growth sounds like it's been heavily ARPU expansion driven. Certainly, strong video attach rates, can you maybe just touch on anything you're seeing in the installed base for the North American business? Has that performed? Is it up? Or is it kind of in line with your expectations? And then does that play a role at all in your raised SaaS pens for 2026 for the install base lever?

Yes. Jack, thanks. Yes. So as Steve mentioned, a lot of the growth in that segment or the majority of the growth sort of comes through ARPU dynamics. And it's kind of a 70-30, 75-25 kind of thing tilted between sort of pricing and ARPU. Most of that is related to just organic product-led feature adoption as opposed to just sort of pure -- pure pipe pricing increases. There's always a very little bit of that. But for the most part, that's basically just product adoption, led by video for the most part.

And one data point that has consistently been true for the past number of years is that 20% to 25% of the cameras that we sell actually go into the installed base. And so there's a pretty constant movement sort of through the installed base, and that's been there for about 5 years where they start taking video, where they increased the number of video cameras they have, they're buying video cameras that support more capabilities, which leads to basically a package upgrade. That's a pretty consistent hallmark of the model.

Excellent. That's a great data point. I appreciate the time, guys, Solid results.

Our next question comes from Eli Smith with JPMorgan.

This is Bill on for Ella. So first, I wanted to ask, can you frame EnergyHub's growth using a few incremental operating KPIs such as total DER assets under management, gigawatts under control, opt-in or retention rates or the exist?

Yes. I think the main way we portray their growth is probably on the percentage of the market that they are in a position to service. So a moment ago, I mentioned that there are roughly 130 million meters in North America and EnergyHub is now in a position to service those residences on about 50 million of those meters.

That's obviously -- that's a number that we watch closely is how many homes passed can we take advantage of with the EnergyHub offering. And the other one then is, of course, what you're passing that number of homes, what percentage of those are you actually enrolling in a program. There, I mentioned that were enrolling roughly today around 5% of the homes we pass. Obviously, we'd like to drive that number up some. I think it's not inconceivable that we'll see that number move up to 10%.

So as we think about the growth drivers, it's -- what percentage of homes in North America are we in a position to service with the relationships we have with the utilities. And then of those that we're in position for, what percentage are we actually enrolling in our program. Those are the 2 primary things.

The third is really how many different categories of devices that consume power, are we simultaneously servicing. You've got thermostat, you have the EV charger, you have the battery, in some cases, have pull pumps. In some cases, you have water heaters. The wider the number of devices, the better.

Got it. That's very helpful. And just as a follow-up, term penetration among large utilities is often cited at about 30% to 40% moving higher over time. So where do you see the next leg of adoption to move that penetration rate higher, and how are sales cycles and integration backlogs trending?

Yes, I would say that penetration today is probably -- sort of becomes a question of what are we actually measuring penetration on? So what's the denominator. But if went back to that number of meters metric at $130 million. And then we said we're today at $50 million, we're getting to a number that's right in sort of the range that you said. So I would probably use that one, 30% to 40%.

I think that the drivers are multifold. First, just the increased need that many utilities have for additional supply that's driven by electrification of vehicles, and it's driven by data centers. So that should be a driver we continue to see. In terms of the sales cycle, it is a very long sales cycle. I mean, oftentimes, it starts with a pilot, you sometimes have a regulatory body that needs to be involved or needs to approve a program.

So the sales cycles can take years in some cases. But I think that the current shortage of supply is allowing us to shorten those sales cycles some and has given us some optimism about latter part of this year and next year.

And I'm not showing any further questions at this time. And as such, this does conclude today's presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.

Good day, and thank you for standing by. Welcome to the Alarm.com Third Quarter 2025 Earnings Conference Call. [Operator Instructions]

Please 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 Third Quarter 2025 Earnings Conference Call. This call is being recorded. Joining us today are Steve Trundle, our CEO; Kevin Bradley, our CFO; and Dan Kerzner, President of our Platforms business.

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 quarterly report on Form 10-Q and our Form 8-K, which will be filed shortly with the SEC, along with the associated press release. 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, which 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'll now turn the call over to Steve Trundle. Steve?

Thank you, Matt. Good afternoon, and welcome to everyone. We are pleased to report financial results for the third quarter that were above our expectations. SaaS and license revenue in the third quarter grew to $175.4 million and adjusted EBITDA was $59.2 million. We saw better-than-expected performance across the business during the quarter, with particular strength in our energy business.

Following my remarks, Dan Kerzner, who is the President of our Platforms business, will walk through several new product releases and how we're increasingly applying AI to our platform and business. And then Kevin Bradley, our CFO, will review our financial results, guidance, and provide our early initial look at next year. I'll begin with our annual Partner Summit, which we held here in Washington, D.C., in early October. We hosted about 200 key service provider partners from around the globe. Our team presented newly released and upcoming products while simultaneously taking the pulse on what our partners are seeing in the markets they serve. In my conversations, partners expressed nice enthusiasm for our overall road map and particularly for our new residential and commercial video products, including our upcoming battery cameras.

Our remote video monitoring capability delivered through our subsidiary, CHeKT, also drew strong partner interest. CHeKT connects central station workflows with AI-driven video analytics to enable central station operators to cost effectively monitor live video feeds, deter crime before it occurs, and seamlessly initiate an emergency response when the situation calls for escalation. I also spoke to a few of our end customers who have large commercial installations. It was good to hear that they are pleased with the direction of our product and the enhancements we have been making to our multisite access control video and intrusion software solutions. We continue to hear from our partners that our unified commercial solutions are winning in the market due to the ease of managing these complex systems through a single integrated interface.

Over the last year, we've seen a healthy uptick in commercial video account creation and our commercial access control subscriber base increased approximately 30%. Our growth initiatives, commercial, international and EnergyHub, collectively continued to drive SaaS revenue growth in the 20% to 25% year-over-year range and accounted for 30% of total SaaS revenue this quarter. I want to highlight EnergyHub's progress with its platform strategy, which is enabling higher-value services for its utility clients and reinforcing its competitive advantage and leading market share in the North American residential market.

As a reminder, EnergyHub's software platform helps utilities match electricity demand and supply in real time. It does this by orchestrating distributed energy resources such as smart thermostats, residential batteries, and EVs to provide load flexibility. Demand for EnergyHub is driven by the long-term grid challenges faced by utilities. These include increasing load from electrification of transportation and the growing footprint of data centers, along with growing variability in generation as the grid decarbonizes. EnergyHub's load flexibility solutions are faster and more cost-effective to deploy than building new infrastructure.

The EnergyHub team is focused on platform expansion to support more classes and manufacturers of edge devices. Last month, EnergyHub announced an expanded partnership with Tesla. Owners of Tesla's Wall Connector EV chargers can enroll their product in EnergyHub programs directly in the Tesla App. A large U.S. utility is already using the integration to accelerate EV program enrollments, and it's being introduced to many of the more than 30 EV-managed charging programs that EnergyHub supports in North America. The goal of EnergyHub's ecosystem expansion is to drive platform adoption by providing a single orchestration layer across device classes. EnergyHub also provides AI-driven dynamic load shaping capabilities that increase flexibility and address a broader range of grid management use cases.

In summary, I'm pleased with our third quarter results and the continued growth we see across the business. Alarm.com has developed strong, durable positions, addressing diverse and dynamic opportunities in residential and commercial security and residential energy management. Our IoT-based software solutions are transforming those markets, and we are well positioned to drive further growth over time. I want to thank our service provider partners and our team for their hard work and our investors for their continued trust in our business.

I'll now turn things over to Dan Kerzner. Dan?

Thanks, Steve. I'm pleased to join our call this quarter and speak with our investors and analysts. For context, the Platforms business that I lead includes product development for our core residential and commercial platforms, shared services for our growth ventures, and sales and marketing for North America, our largest market.

Our team drives profitable growth through innovation, delivering new capabilities that expand our addressable market and strengthen the competitive position of our service providers. I'll begin with an update on several products we released recently and share some examples of how our AI is already intersecting with current elements of our service provider and subscriber offerings and platforms.

Video remains a strategic growth driver across our residential, commercial, and international markets. It's central to our platform strategy because each new video capability extends system utility, both directly and by thoughtfully integrating video with other aspects of the offering. This approach increases SaaS adoption and customer engagement and retention. To share a sense of the scale, the platform uploads roughly 1 million hours of video per day.

This quarter, we introduced a variety of important updates to the lineup. We added to our outdoor video camera lineup with the new 730 spotlight camera. It delivers high-quality video at night through an integrated spotlight and a 4-megapixel sensor. It also includes built-in 2-way audio, so central station operators can communicate directly through the camera and Bluetooth enrollment that simplifies installation. The 730 also supports our intelligent video-based proactive deterrence capabilities. This includes AI Deterrence, an upgraded video solution that identifies individuals and delivers AI-generated verbal warnings dynamically adapted to a person's clothing, behavior, and location. The voice is designed to emulate a security professional and uses our service provider's brand name to add authenticity and authority.

We recently enhanced this feature with a broader library of human-like dynamically generated voices and built-in randomization that automatically varies tone, phrasing, and delivery to create more unpredictable and thus convincing deterrence messages. Capabilities like AI Deterrence and remote video monitoring reflect our strategy to deploy software that evolves video cameras from passive sensors into active, responsive devices that drive higher recurring revenue and subscriber lifetime value. As we continue to embed AI within the core platform, we can derive more insights from the IoT devices in a property and cost effectively deliver unique value to consumers and businesses.

Turning to our commercial solutions. We continue to expand the reach and flexibility of our video platform. Commercial properties often have diverse surveillance requirements, which are met by a wide variety of camera form factors. By extending our software to operate with select third-party cameras, we've made it easier for service providers to bring Alarm.com's video capabilities into these environments without developing proprietary hardware. This approach broadens our market coverage and enables more efficient targeted R&D investment and opens additional SaaS opportunities with existing commercial accounts.

Since launching this capability, we've seen strong engagement. Accounts that leverage our third-party camera support connect roughly twice as many cameras to our video software as accounts without it, revenue streams we may not have otherwise captured. We recently expanded support to include panoramic, multisensor, and pan tilt zoom cameras, form factors widely used in airports, parking facilities, and industrial sites. We also enable 2-way audio and advanced analytics for our leading camera manufacturer partners. These integrations enable us to attach our premium remote video monitoring service to a broad range of widely deployed cameras.

Another focus for our teams is partner enablement. Our service provider relationships are a cornerstone of both our durable market position and our growth strategy. We offer enterprise-grade tools that enable our partners to operate their businesses through our platform, from field installation to ongoing support and management of very large fleets of connected devices. Last year, we launched an initial version of our generative AI chatbot in our technician app to help field teams quickly troubleshoot installation issues. We recently released an upgraded version that can handle more complex questions and multistep workflows. In the 4 months following the upgrade, the average number of inquiries handled by our chatbot increased by 2.5x, while customer satisfaction ratings rose more than 70% over the same period. Our goal is to provide service providers with streamlined, multichannel access to world-class support.

With more technicians using our AI-augmented support offerings, our teams can prioritize more complex challenges and first-time installations. Over time, this facilitates faster adoption of new features and enables our partners to expand their use of our commercial, residential, and video services. Overall, I'm pleased with the progress our R&D team made this quarter and throughout the year. These product introductions demonstrate how our platform strategy scales innovation efficiently across markets while creating tangible growth opportunities for our partners.

With that, I'll hand things over to Kevin to review our financials. Kevin?

Thank you, Dan. I'll begin by reviewing our third quarter financial results, then provide updated guidance for Q4 and full year 2025, and lastly, provide our initial thoughts on 2026. I'm pleased to report another quarter of financial results that exceeded our expectations and consensus estimates. Our performance reflects continued broad-based contributions across the diverse components of the business.

SaaS and license revenue grew 10.1% year-over-year to $175.4 million, exceeding the midpoint of our guide of $171.5 million. As Steve noted, our growth initiatives, which consist of our commercial, EnergyHub, and international efforts, continue to deliver SaaS revenue growth of roughly 20% to 25% year-over-year and represented 30% of total SaaS revenue in the quarter. EnergyHub delivered a particularly strong quarter, with the team both executing on new program launches and driving solid same-store growth. Total revenue grew 6.6% year-over-year to $256.4 million during the quarter, and gross profit increased 8.4% to $168.8 million. Despite some anticipated and temporary headwinds to hardware gross margins, total gross margins increased 100 basis points year-over-year due to the improving quality of SaaS in both the Alarm.com and Other segments, as well as a higher weighting towards SaaS overall.

Hardware gross margins were impacted as we began selling through certain inventory carrying reciprocal tariff costs towards the latter part of the quarter. We expect this to continue into Q4 before returning to a more normal margin range in January 2026 when we modify our tariff pass-through fees to incorporate the higher reciprocal tariff rates. We also chose to selectively use faster and more expensive shipping methods to support the recent launch of 2 of our new video cameras, the V516 and the V730 that Dan discussed. This also contributed to some hardware gross margin compression. But as I noted a moment ago, even with these temporary headwinds, our total gross margin rates were up 100 basis points year-over-year.

During the third quarter, total operating expenses, including depreciation and amortization, were $131.8 million. Excluding depreciation and amortization as well as stock-based compensation and other items we adjust from G&A for non-GAAP purposes, total operating expenses were $113.1 million, a 7% increase year-over-year. R&D expense in the quarter, inclusive of stock-based compensation, was $66.6 million, up 7.1% year-over-year. GAAP net income during the third quarter was $35.3 million, or $0.65 per diluted share. Non-GAAP adjusted net income grew 20.6% year-over-year to $42.4 million, and non-GAAP EPS increased by 22.6% year-over-year to $0.76 per diluted share.

Effective August 15, 2025, the settlement method for our convertible notes that mature in January 2026 became locked into the [indiscernible] in cash. And as such, we began removing the 3.4 million of dilutive shares midway through the third quarter. Adjusted EBITDA grew 18.4% year-over-year to $59.2 million. Our adjusted EBITDA performance includes a $3.6 million benefit derived from a mark-to-market gain on a security in our treasury portfolio. Substantially all of our treasury is held in money market funds, but our policy allows for a small percentage to be held in other marketable securities.

We produced $65.9 million of free cash flow and ended the quarter with $1.1 billion in cash. Our efficient go-to-market model and growing base of durable recurring revenue continues to generate strong cash flow and reinforce a healthy balance sheet. I want to remind investors of the cash flow tailwind that should emerge based on the federal tax bill signed into law in July 2025, which included a provision that allows companies to transition back to immediately and fully deducting all domestic R&D expenses incurred during the year for tax purposes. We continue to estimate that this change eliminates what would have been a little under $200 million in total cash tax payments over the next 5 years under prior law.

I'll turn now to our financial outlook. For the fourth quarter of 2025, we expect SaaS and license revenue of between $176 million and $176.2 million. As a reminder, EnergyHub's revenue recurs annually and is slightly seasonally weighted toward the second half of the year. The fourth quarter is typically its largest revenue quarter in absolute dollars, but also tends to grow at a slower rate than other quarters on a year-over-year basis. Additionally, EnergyHub's strong Q3 performance included some contributions that pulled forward from Q4. Collectively, these factors create a modest seasonal headwind to consolidated SaaS growth.

For full year 2025, we are raising our SaaS and license revenue outlook to between $685.2 million and $685.4 million, an increase from prior guidance of $4.1 million at the midpoint. We now expect total revenue slightly above $1 billion, including $315 million to $316 million of hardware and other revenue. We are also raising our non-GAAP adjusted EBITDA outlook to $199 million, up from the midpoint of $195.8 million in prior guidance. This implies roughly 100 basis points of margin expansion compared to 2024. We are projecting non-GAAP adjusted net income of $140.5 million, or $2.53 per diluted share. This is up from prior guidance of $136 million to $136.5 million, or $2.40 per diluted share. EPS is based on 58.9 million weighted average diluted shares outstanding for the year. Q4's diluted shares will be around 56.7 million as we operate through a full quarter without the 3.4 million dilutive shares associated with the convertible notes due January 2026. We currently project our non-GAAP tax rate for 2025 to remain at 21% under current tax rules. We expect full year 2025 stock-based compensation expense of around $35 million.

Before turning to our preliminary view of 2026, I want to comment on our annual planning process, which is well underway. We continue to believe that our strong returns on invested capital and the positions we've established across multiple markets support organic reinvestment as the primary component of our capital allocation framework. As we go through our planning process each year, we begin with an analysis of all our existing initiatives to determine which ones best support ongoing investments in growth. We also identify initiatives that we have been working on for some time, but where progress has not developed as we had expected. That process forms a framework for reallocation within the portfolio.

This year, much like last year, we are seeing that many of the higher growth areas of the business can self-fund a bit more than they did just a few years ago. As we rotated out of a few initiatives and assess productivity, we found ourselves in a position to let go of some existing jobs during October, which is always a difficult but sometimes necessary decision. While we are still focused on closing out 2025, we currently project a preliminary early look estimate of SaaS and license revenue of between $722 million and $724 million in 2026. Total revenue can range between $1.037 billion and $1.044 billion. We currently project our non-GAAP adjusted EBITDA for 2026 to be in the range of $210 million to $212 million.

We will be working to firm up our estimates and we'll provide our formal annual guidance for 2026 when we report our fourth quarter 2025 financial results early next year. As our early look estimates suggest, we are complementing organic reinvestment with some margin expansion. We have a midterm target to exit 2027 with adjusted EBITDA margins in the 21% range, assuming historically typical hardware margins of 22% to 24% and a similar mix of hardware revenue and SaaS revenue that we have today. Our plans beyond this will depend upon the growth profiles and prospects of the various initiatives that we are engaged in at that time.

In the meantime, meaningful operating cash flows continue to contribute to our strong cash position, affording us additional flexibility across our broader capital allocation framework. In closing, we're pleased with the broad-based momentum in the business that we've seen throughout the year. We believe that we're well positioned to deliver continued revenue growth and profitability while investing to expand our long-term opportunities.

With that, operator, please open the call for Q&A.

[Operator Instructions] Our first question comes from Adam Tindle with Raymond James.

Kevin, I just wanted to start on the early framework for 2026. If I was just doing the math here quickly, correctly, it implies that the SaaS revenue growth is about 6%. And I was going back through my notes, and I think that's about where you initially thought 2025 might be, and we're now pushing maybe closer to 9% as we look to close out the year. So I guess the question would be, as you formulated the initial SaaS guidance in particular, what are maybe some of the similarities and differences in moving parts in 2026 versus 2025? And what could be some potential upside drivers?

Adam, thanks for the question. As you noted, when we first looked at 2025, we were first looking about 6.1%, so very similar to what we're first looking 2026 right now. And our updated guide for 2025 is about 8.5%, 8.6%, so about 250 basis points higher. Throughout the course of this year, we've had the growth initiatives contributing a little bit under 30% of SaaS revenue and growing 20%, 25%. I think as we look forward to 2026, the expectation would be roughly similar in terms of growth rate profile, meaning we think it will maintain 20% to 25% growth. So that will be consistent.

When we started 2025, we noted a 200 basis point headwind on the residential side. That has not really come to fruition this year as a combination of a little bit better account creation than we had anticipated at the beginning of the year, as well as a very little bit of currency tailwind, which probably added about 20 basis points of growth this year. So as we look forward, we're basically pushing right some of that growth rate headwind that we had signaled at the beginning of this year on the core residential business to next year. And then we're basically assuming no additional currency headwinds.

Just a follow-up for Steve, if I could. I'm noticing obviously very strong profitability here. And if I'm looking at the implied EBITDA margin for this year, it's looking like it's going to be pushing towards 20%. And the initial guidance for next year suggests another 20%, maybe even a little bit greater with some upside throughout the year. So very healthy profitability levels. I guess the question, Steve, would be your thoughts on the balance of growth and profitability going forward, understand you've managed that well in the past, but you're now reaching new levels of scale, $1 billion business at this point. So those incremental points in EBITDA are very high dollars. So just wonder if you could maybe just opine a little bit on how you're thinking about the balance of growth and profitability.

Thanks, Adam. Yes, I'd say we're still primarily focused on where we can find growth and what type of investment we need to get that growth. So we're still pretty excited about the growth initiatives. Kevin mentioned, we always have a few other skunk works projects that we hope may come to fruition over the coming years. I'd say that's where we start is like let's look at where can we get growth in the, say, 5-to 10-year period. That said, we've been improving the efficiency of the company. We're going to continue to do that. Kevin just telegraphed an exit rate anyway for 2027. That suggests we're going to continue to move the adjusted EBITDA margins up some in the business. But we're getting to a place that I think is a bit more healthy and a nice place where we're generating strong cash flows, refilling the bucket [indiscernible] initiatives and still able to sustain some growth.

Our next question comes from Samad Samana with Jefferies.

This is actually Billy Fitzsimmons on for Samad. I want to double-click on the EnergyHub business. There's obviously a ton going on in the utility market right now. Data center demand is driving record levels of investments and consumers are also contending with higher bills, in many cases, as a result. And so maybe against this backdrop, can you just walk me through how maybe your conversations have progressed with key customers over the course of the year? Curious if you have any anecdotes on specific customer conversations. And then can we just double-click on the commentary around how there was maybe a slight pull forward in that business from 4Q into 3Q?

Billy, I'll start with the higher-level question about the market and then Kevin may have a comment on the pull forward. Yes, the macro trends there are advantageous to us at the moment. As you noted, the data center explosion, the electrification of transportation, all of these things are driving demand for electricity. And it just so happens that what we do in the form of a virtual power plant is one of the least, probably the least, expensive way to add capacity and also something that's actionable and can contribute almost immediately. So the macro framework is great for that business. And as a result, our key customers, I think, are moving much faster and getting more serious about the contribution that VPP can make to their capacity challenge. So we're seeing less piloting trials, test-and-see type of approaches, and much more folks moving towards this type of solution as a committed part of their capacity is what we're seeing in the market. And I'd say -- in terms of the pull forward, Kevin, do you have any comments on that?

Billy, so I would characterize it as being in the hundreds of thousands of dollars, not millions of dollars. But one of the longest running programs at EnergyHub is a market-based program that's run out of Texas. And historically, what happens there is we're performing against that program throughout the year, predominantly in the summer. And then that has settled up in Q4 and the revenue associated with it is booked in Q4. And that's one of the reasons that EnergyHub has always been somewhat seasonally weighted in terms of revenue towards Q4. Some of that settlement happened to occur in Q3 this year, and the rest will occur in Q4. So there's just a little bit of pull forward there.

Our next question comes from Stephen Sheldon with William Blair.

You have Matt Filek on for Stephen Sheldon. On EnergyHub, can you help give us a sense on the current growth rate and how you're thinking about the durability of that growth over the next, call it, 2 to 3 years, especially in light of the strong demand you're seeing and some of the secular themes you're benefiting from?

Just starting with the growth rate. So we don't break out each growth initiative, but we commented the growth rate for our growth initiatives is in the 20% to 25% range overall. EnergyHub is probably the most meaningful contributor to that growth initiative -- growth rate, meaning you can probably guess that they're a tad above that. And then the second part of the question, I guess, was the macro environment, what's driving it, Matt?

Well, really more so, how durable do you think that growth is in light of the secular themes you're benefiting from?

Yes. At the moment, we believe that growth is quite durable. There are a lot of different things going on. First, at the moment, we have about 45 million installed connected thermostats in the U.S. The penetration in terms of participation of those stats in a VPP program with us is around 3% to 5%.

So we've got a lot of headroom in terms of adding more consumers onto the platform in our core thermostat-driven business. At the same time, we're out there building a business around EVs and building a business around batteries. We've had a couple of announcements recently on both of those fronts. So you've got another vector of growth there. Batteries, in particular, are very interesting for us to work with, because they're even more -- we're even more able to control utilization of stored kilowatt-hours there than we are with the thermostat where it may impact actually someone's temperature in their home. So we're seeing growth there.

And then, of course, we have -- the next thing we can do is sign up additional utilities. We're probably 30% share of the largest 150 utilities in North America at the moment, meaning those that are out there with over 100,000 meters. So we've got share opportunity as well. And then because we're the largest in this space, we are the preferred partner for anyone that makes a device. If someone wants to be contributing power to the grid, and they want to participate in the economics associated with that, EnergyHub is the place to go. So I feel like the growth -- putting all that together, the growth story there is durable and compelling, and we feel good about it going into certainly next year and '27.

Sounds like there's plenty of runway there. Maybe shifting gears to the core residential business. I was wondering if you could maybe talk about how much of a focus subscription pricing increases have been there, and how much of a focus do you expect pricing increases maybe to be over the near term.

Yes. I'd say in the history of the company, we've driven growth without much pricing. That changed a couple of years ago. We began to incorporate pricing into the growth picture. That was driven by the hard reality of a core inflation rate that had moved up dramatically. We've continued that practice, and we'll have to continue it. So pricing is part of it, and we're routinely surveying what inflation rates are and moving on price in that ballpark range typically.

[Operator Instructions] Our next question comes from Ella Smith with J.P. Morgan.

So I'm curious, SaaS continues to grow as a percentage of your overall revenue. To what extent do you expect this positive mix dynamic to support your gross profit margins over a multiyear period?

Ella, at the moment, SaaS has been increasingly becoming a bigger chunk of the mix. And that, of course, contributes to gross margin expansion on a percentage basis. Looking into next year, I think we expect that trend to probably continue somewhat. That said, we have a number of things that we're excited about that are coming to market either right now or into next year. Dan spoke at length about some of the new form factors and new capabilities on our video product line. If we're successful in promoting that line and driving demand, obviously, we'll see higher hardware revenues as a result of that, and that mix could shift a little bit. But I don't think you're going to see it shift dramatically from where it is today. I'd say the trend line or where we are today is roughly where we'll be. You might see things move 100 or 200 basis points in terms of mix in the next 12 months or so.

And for a quick follow-up, how would you characterize your current M&A strategy? And do you expect to be acquisitive in 2026?

I would characterize our current strategy as active but deliberate. We are constantly assessing opportunities, different size classifications, and we're well positioned going into 2026. So I would imagine you'll see a pace in '26 that's not dissimilar from what you've seen in the last couple of years. And we can't guarantee that -- we're always opportunistic, and we're not in a race to go do acquisitions. But when we see the right fit, that means great management team, that means synergistic with our channel, synergistic with our technology, and honestly, synergistic at some level with our P&L. When we see those things come together, then we do strike. So I would expect that you'll continue to see some activity next year.

[Operator Instructions] Our next question comes from Saket Kalia with Barclays.

You've got Alyssa Lee on for Saket Kalia. I think you touched on commercial and EnergyHub a little bit out of your growth initiatives. But how are you thinking about the international opportunity into next year? How is EBS progressing? And how do you see that into next year?

Alyssa, so international continues to be one of the 3 legs of the stool in terms of growth initiatives. I would say of the 3 we've talked about, commercial, EnergyHub, and international, international is probably a bit more of the laggard of those 3. We're not making quite as much progress there as I would like to see. So we're continuing to work to build that out. On the positive, you roll the clock back 24 months and international was 4% of revenue. I think when we put the Q out, you'll see it be 6% of revenue at the moment. So we are growing international, and we've got a nice strong foundation there to continue to build off. And I guess the optimist in me says we have a lot of room to drive a little more growth and some acceleration on the international piece, so that it contributes a bit more to that overall range that we articulated, which is 20% to 25% on the growth initiatives.

And maybe as a follow-up, how did renewal rates and gross adds shape up this quarter? And how did macro backdrop influence those?

Yes. So the renewal rate came in right where it was last quarter. They both rounded down to about 94%. They were, I'd say, 10, 20 basis points above that, but rounded to 94%. So that was substantially similar. Gross adds were exactly where we expected them to be. They were neither higher nor lower. I think we attribute most of that to the fact that from a housing market perspective, things basically stayed where they were in Q2. There was incrementally some excitement about potentially a lower rate environment that we thought might unblock that a little bit, but then I think found, based on commentary from builders in the last couple of weeks, that fears about the job market have basically all but offset that. And here we are in about the same place sequentially.

Our next question comes from Jack Vander Aarde with Maxim Group.

I joined a little bit late, so I'll try not to be too redundant. Two questions. Growth businesses continue to ramp well. I caught some of the Q&A on EnergyHub and the focus on utility power grids, batteries, EVs. Maybe just outside of that, can you tie that into just your perspective on the autonomous robotics and delivery and drones? How does this fit into your EnergyHub and just your overall vision? Or does it -- I know you have patents on some stuff, and you guys are a patent machine over there, too. So just would love to get your thoughts, maybe taking the ball a step further of the autonomous delivery.

Jack, yes, wide-ranging question there. So let's start with the relationship to EnergyHub. The devices that -- these autonomous devices that we expect to see around the home, all actually act as little mini -- can be mini batteries on the grid. So I would expect much as we attempt to connect to everything today, anything where there's a store of power, as these devices become more real, those batteries become attractive to us. And certainly, their charging cycles are things we can manage. You don't want to be charging -- if you're in a market where there are peak rates, you don't want to be charging your army of robots during the hour when you'll be paying peak rate. You want to charge them at some other point in time.

So I think that's all good. Whether there will be that much capacity there in these type of batteries or not, I don't think we fully know yet. It depends on the capability of these autonomous devices. And then the next piece is really are these vehicles for security video cameras, and we continue to believe that they are. We currently go to market with an autonomous drone unit for high-security outdoor applications and are seeing that product deployed in places like shipyards or big-tech parking lots, any place where you have a wide amount of acreage to cover and you have a need for high security and it's not unreasonable to ask a guard to very, very quickly monitor a large property. So we're seeing uptake there.

It's a relatively small part of our business still, but it's a place where we continue to have some energy. And then we're watching for the right partnering opportunities and/or right organic opportunities to build out more in that category. I wouldn't say it's as important to us at the moment as some of the things we're doing with AI and core video, but it's something that we continue to watch.

I appreciate all the color there. I know it was a wide question, but that was a great answer. One more for me. Outside of the M&A, I heard a question on that earlier. I know that's part of the general strategy. But just maybe looking at the balance sheet and the cash that you guys do have, it's very noticeable, obviously. Any other uses for that cash? Another hot topic area is clearly to get around is the digital asset space, treasuries, just integration with blockchain. Is any of this on your guys' radar? Or how do you just view the space in general?

Well, I may toss some of this one to Kevin. But in terms of the balance sheet, balance sheet is, yes, big, as you note right now. We're closing out one of the convertibles in January, but we've got pretty strong cash flow production. So we expect to have a nice amount of capacity on the balance sheet for all of next year. In terms of deployment, certainly, it's primarily about corp dev and having dry powder there. Do we consider other types of assets? We give them some consideration. At the moment, though, we're pretty focused on deploying capital in a way that helps us, for the most part, grow our core business. So we're not looking to deviate too much from that strategy. Anything else, Kevin, do you want to add or...

Yes, sure. Our primary motive, I think, with the balance sheet is for it to be a source of resilience and flexibility for the reasons that Steve mentioned. So the primary reason to have that there is to be able to be opportunistic in the corp dev space. You obviously see us do a little bit of buyback activity as well. It's useful in that domain. We were more active than we had been in several quarters during Q3 as we saw the opportunity to buy at 7.5%-plus cash flow yield on it. Those are the 2 things really that we focus on right now in terms of use of the balance sheet, less so crypto or other assets like that.

[Operator Instructions] I'm not showing any further questions at this time. And as such, this does conclude today's presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.

Good day and thank you for standing by. Welcome to the Alarm.com Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Matthew Zartman, Vice President of Investor Relations. Please go ahead.

Thank you, Kevin. Good afternoon, everyone. Joining us on today's call are Steve Trundle, Alarm.com's CEO; and Kevin Bradley, our CFO.

During today's call, we will be making forward-looking statements, which are predictions, projections, estimates or 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 these risk factors discussed in our quarterly report on Form 10-Q and our Form 8-K, which will be filed shortly with the SEC, along with the associated press release. This call is subject to these factors, and we encourage you to review them. Alarm.com assumes no obligation to update these 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'll now turn the call over to Steve Trundle. Steve?

Thank you, Matt. Good afternoon, and welcome to everyone. We are pleased to report financial results for the second quarter that were above our expectations. SaaS and license revenue in the second quarter grew to $170 million and adjusted EBITDA was $48.4 million. A significant highlight of the second quarter was the celebration of our 10th year anniversary as a publicly traded company. We were invited by NASDAQ to ring in the opening of the market on June 30. A few of our investors have been with us throughout our entire public journey and I am thankful for their continued support.

While going public is a big deal for most tech companies, I'm even more pleased with what the team has achieved in the 10 years since. At the time of our IPO, we forecasted total annual revenues of $195 million, including $139 million in SaaS and $56 million in hardware and nearly all of that was coming from the North American residential security market. We were a good single-line business.

The mission I set for the company early on was to deliver a cloud-based sensor into every property in the world. We decided to go public because we believe that we could continue to build the company and expand the business in pursuit of this mission. We wanted to create more opportunities for our employees, expand into new markets and deliver safety, security and energy efficiency to the world.

Since our IPO, we have saved dozens of lives and have kept millions and millions of people safer than they would be in a world without Alarm.com. And we have grown the business significantly and profitably without any material dilution to our shareholders. As Kevin will present, our current revenue run rate is more than 5x greater than when we went public and places us on an annual pace of $1 billion in revenues.

The diversity of the revenues that we have built across the North American, international, residential, commercial and energy markets provides tremendous durability for the future. But we're here today to report on our quarter, so let me turn back to the business at hand.

The major components of our business performed well during the quarter and all contributed nicely to our better-than-expected results. Revenue outperformance, particularly in hardware revenue, resulted in stronger adjusted EBITDA. Our residential business continued to deliver steady growth and strong cash flow during the second quarter. We remain committed to the large residential market in the United States and Canada.

Millions of potential subscribers have yet to adopt integrated video solutions and security-based use cases continue to be the primary driver of the adoption of smart home products and services. Most consumers in the market for security desire professional services, including a professionally designed, installed and serviced system.

These tend to be the more serious customers and they typically engage with one of our 12,000 professional service provider partners. We are well positioned to serve the continued demand in the residential market as the provider of choice for those who are serious about security.

Our channel partners serve as the sales and marketing engine for the business, enabling a highly efficient customer acquisition model. Our sales and marketing spend has remained around 12% of total revenue in recent years, well below peer averages. At times, we will also invest into our channel to strengthen our national sales and service footprint and enable greater adoption of the full ecosystem of Alarm.com products and services for residential subscribers. We're pleased to have completed a couple of minority investments consistent with this strategy during the second quarter.

Shifting to our growth initiatives. The most prominent drivers of performance continue to be the commercial, international and EnergyHub businesses. Their collective contributions to our consolidated SaaS revenue approached 30% in the second quarter. Their combined year-over-year growth rate held at around 25%, in line with what we have articulated in prior quarters.

The commercial business continues to progress as our service provider partners and commercial integrators adopt increasing components of our unified video access control and commercial intrusion platform. One element of our commercial business is our subsidiary, OpenEye, which provides a cloud-based video surveillance platform designed for multisite commercial and enterprise customers.

OpenEye delivers enterprise video compatibility and integration with many different products in the market. The OpenEye team recently introduced new AI-powered tools to accelerate and simplify forensic video review. Subscribers can now search video footage across multiple locations and multiple cameras by visual characteristics, such as a red jacket or a white pickup truck.

They can also select their reference object in a video feed and the AI software will search for similar matches. These capabilities are designed to help commercial users respond faster and more effectively to security incidents. The new features are included in OpenEye's premium services tier.

I also want to quickly touch on tariffs, which Kevin will cover in more detail when he discusses our financials in a moment. Like other companies, we continue to monitor framework announcements and watch for the details in any form of trade agreements that are reached. Based on the frameworks that we've seen to date, we feel that with our current U.S.-based and in-transit inventory positions, we're able to manage through the rest of 2025 on our plan and provide a predictable environment for our service provider partners.

In closing, I'd like to thank our service provider partners and our Alarm.com team for their dedication and our investors for their ongoing support, particularly as we celebrate our 10th year as a public company.

With that, I'll turn the call over to Kevin Bradley for a review of our financial performance. Kevin?

Thank you, Steve. At the halfway point of the year, we continued to see good momentum during the quarter. New account origination activity during the quarter slightly exceeded our expectations despite uncertainty due to tariffs and economic conditions.

SaaS and license revenue grew 9% year-over-year to $170 million, exceeding the midpoint of our guide for the second quarter of $167.1 million. Broad-based contributions from across the diverse components of the business contributed to our overperformance.

Our growth initiatives, which consist of our commercial, EnergyHub and international businesses continued to deliver year-over-year SaaS revenue growth within the range of our past disclosures. Their contributions to our total SaaS revenue during the quarter approached 30%.

Total revenue grew 8.8% year-over-year to $254.3 million during the quarter. As Steve noted, this marks a milestone as the first quarter with an annual run rate in excess of $1 billion. Total gross profit grew 9.4% year-over-year to $166.8 million and gross margins improved by 40 basis points, while revenue mix was consistent.

I want to spend a moment to frame our hardware business and its financial and strategic value to our business model. As an IoT-based software business, our SaaS revenue is primarily associated with the installation of physical products and our solutions are often based on the integration of software and hardware devices. This model creates higher barriers against end customer defection and technology disruption and distinguishes Alarm.com from typical vertical software companies as it relates to AI replacement risk or otherwise.

Our hardware business can also be thought of as a structural contributor to our highly efficient SaaS revenue acquisition model. Based on our historical financials, gross profits from hardware sales cover over 50% of our sales and marketing customer acquisition costs.

Along with the generally low levels of sales and marketing spending that Steve noted, the sale and installation of physical hardware products adds to the efficiency of our go-to-market model, the quality and capability of the services we enable and the value of our service provider partnerships.

Total operating expenses were $134.8 million during the second quarter. Excluding stock-based compensation and other items we adjust from G&A for non-GAAP purposes, total operating expenses were $118.3 million, a 9.1% increase year-over-year. R&D expense in the quarter, inclusive of stock-based compensation, was $69.1 million, up 5.1% year-over-year. Excluding stock-based comp, it was $63.2 million, up 8% year-over-year.

We saw strong EBITDA and operating leverage performance in the quarter, primarily due to revenue growth and quality. GAAP net income grew 3.1% year-over-year to $34.6 million and our GAAP EPS per diluted share was $0.63. Non-GAAP adjusted EBITDA grew 13% year-over-year to $48.4 million. Non-GAAP adjusted net income grew 6.5% year-over-year to $34.1 million. Non-GAAP adjusted EPS grew 3.4% year-over-year to $0.60 per diluted share.

We ended the quarter with $1.02 billion of cash and cash equivalents and produced $18.2 million of free cash flow during the quarter. This includes what was our final domestic Section 174 cash tax payment of $33.5 million in April.

I want to speak for a moment about tariffs. We implemented a price increase in early June to reflect the 10% baseline tariff. This pass-through will slightly dilute margins, but gross profit dollars will remain roughly unchanged. We have also been closely watching the recent announcements of trade frameworks with various countries and multilateral groups.

As you know, these are simply frameworks for further negotiations. Once trade agreements have been finalized and we understand the fine print, we can fully evaluate potential impacts and our options. In the meantime, we have taken steps to shield ourselves and our service provider partners from the uncertain environment.

The uncertainty around tariffs likely prompted some of our service provider partners to build their product inventories during the quarter and minimize near-term tariff risks. Despite this demand, we were able to maintain our inventory levels. We believe that between our current inventory and products in transit, we have largely insulated our 2025 outlook from further tariff exposure based on the framework agreements we've seen so far.

We also continue to have a healthy balance sheet and strong cash flow from our growing base of durable recurring revenue and efficient go-to-market model. Steve discussed our strategy of deploying capital to support some of our technology and channel partners and the recent minority equity investments we executed during the quarter. These strategic investments are designed to help us solidify our long-term service provider footprint while also delivering strong return characteristics on a stand-alone basis.

As of July, these nonoperating assets are generating just under a 9% cash flow yield on an annualized basis. Given the partnership structure of these businesses, these cash distributions are not characterized as taxable income for tax purposes and when received by us, will simply be net against the new investments line item on our balance sheet.

Medium term, there is another structural tailwind to our cash flow outlook given the recent change to the R&D capitalization and amortization requirements in Section 174 of the U.S. Federal Tax Code that I'd like to mention. The federal budget signed into law in early July includes a provision that allows companies to transition back to immediately and fully deducting all domestic R&D expenses incurred during the year for tax purposes.

Like most companies with intensive R&D business models, we're still evaluating the full benefit and timing, but we currently estimate that this change eliminates what would have been a little under $200 million in total cash tax payments over the next 5 years under prior law. This will provide additional balance sheet strength for our long-term capital allocation planning horizon. More broadly, we believe this change reinforces the long-term attractiveness of capital-efficient R&D businesses like ours.

I'll turn now to our financial outlook. For the third quarter of 2025, we expect SaaS and license revenue of $171.4 million to $171.6 million. For the full year of 2025, we are raising our expectations for SaaS and license revenue to between $681 million and $681.4 million. This is an increase of $5.2 million over our prior guidance at the midpoint. Our raise is also a flow-through of our second quarter beat of 180%, reflecting the confidence we have in our second half outlook.

We are now projecting total revenue for 2025 of between $990 million and $996.4 million, which includes estimated hardware and other revenue of $309 million to $315 million. We are also raising our estimate for non-GAAP adjusted EBITDA for 2025 to between $195 million and $196.5 million, an increase from our prior guidance of between $190 million and $193 million due to the beat from the second quarter.

Non-GAAP adjusted net income for 2025 is projected to be $136 million to $136.5 million or $2.40 per diluted share. This is an increase from our prior guidance of $131.5 million to $132.5 million or $2.32 to $2.33 per diluted share. EPS is based on an estimate of 60.3 million weighted average diluted shares outstanding, down from our estimate last quarter due in part to the buybacks we executed during Q2.

As a reminder, this share count includes a full year of dilution associated with our outstanding convertible notes on an if-converted basis of 9.125 million shares across 2 issuances. We currently project our non-GAAP tax rate for 2025 to remain at 21% under current tax rules. We expect full year 2025 stock-based compensation expense of $37 million to $38 million.

In closing, I'm pleased with the broad-based momentum in the business that we've seen so far this year. We believe that we're well positioned to deliver continued revenue growth and profitability in the second half while investing to expand our long-term growth opportunities.

With that, operator, please open the call for Q&A.[Operator Instructions] Our first question comes from Matt Bullock with Bank of America.

This is Matt Bullock on for Koji Ikeda. I wanted to drill down a little bit more on the growth levers here. Can you just help us understand what's driving the sustainability of the commercial, international and EnergyHub? It feels like we've been chugging along at 25% plus for some time now and particularly choppy software demand environment. So help me understand what's driving the success there and how sustainable that 25% growth rate is for those elements of the business?

Matt, this is Steve speaking. Yes. So there are really 3 different areas. I'm going to touch on each one. I'll start with energy. In the energy category, there's sort of a secular trend underway where the combination of massive build-out of AI data centers with some reshoring of manufacturing underway now is just driving a ton of demand and a need for capacity amongst our large utility customers.

And EnergyHub is benefiting from that secular trend. At the same time, they're expanding the range of devices that we support and the range of sort of the DERMS solution we bring to market. So that appears to be a pretty durable trend at the moment and that's helped us there.

On the commercial side, it's 2 things really. It's us finishing the build-out of the commercial platform. You've seen us do some of that organically, some of it inorganically. The most recent inorganic move was the acquisition of CHeKT and our expansion of our remote video monitoring solution. But it's also at some level, driven by the unfortunate events we see in the news from time to time.

And the last couple of weeks certainly remind us of the need for commercial customers to continue to focus on security and upgrading the things they do to protect both their customers and their employees. So we think that's probably going to continue to be healthy. You've got also a technology trend there that is moving a lot of the tech from on-prem to the cloud and we're a beneficiary of that.

And then on the international side, I would say it's more -- the thing driving growth there is more still much earlier days than the North American market and then our team doing a lot of spade work market by market, developing relationships with service providers, our tech team working through the nuances of what's needed for each market and bringing people sort of online and then conditioning them to go sell really a comprehensive smart security solution as opposed to some of the legacy stuff that they're more familiar with.

So those are the 3 areas. And each one has a little different story, but we feel pretty good. You're right that the growth rates have held on an aggregate basis. And as a result of that as a component of SaaS, they're becoming more meaningful.

Super helpful. And then just one quick follow-up, if I could. Are all 3 of those businesses growing around 25%? Or is there an outlier driving the growth there of the consolidated 25% growth? And given all those tailwinds you just outlined, is there any consideration of accelerating investments in those areas? Or is it really steady as we go in terms of how you're allocating capital?

Right. So yes, the combination is sort of at that 25% growth rate. The individual components are, I would say, plus or minus 500 bps on that is sort of the range I'd say we see. So 1 or 2 a little above, 1 maybe a little below, but right in that range.

In terms of the way we think about investments and can we accelerate their growth, we run sort of with a consolidated number that is our baseline planning tool. And then we make decisions incrementally or individually around each growth area based on what we're seeing with their sort of growth potential and what type of investment or burn in some cases, we think makes sense.

So if we see further opportunities to scale up investment there, then I think we will. We sort of lock in on '25. But at the moment, we're already beginning to examine and evaluate that decision for '26. And we may see opportunities to -- in a couple of cases, to further extend their growth with some additional investment.

Our next question comes from Adam Tindle with Raymond James.

Steve, I just wanted to maybe start with a very high-level question. I've got a more tactical one for Kevin after this. But given we're celebrating sort of the 10-year anniversary on this call and you talked about investors who have stuck with you during that time, it might be an appropriate forum for investors thinking about the next 10 years for you to maybe just touch at a high level as you sort of think about that, how you would describe your vision to the investors today signing up for the next 10 years.

Well, fortunately, I think that the base vision or the base mission of a cloud-connected sensor in every property in the world is still holding up. That's still a lofty goal for us to shoot for. There are lots of ways we can get there. We have to find ways to get there profitably. And -- but I expect that hopefully, we'll be able to look back 10 years from now and say that -- and be sort of as enthusiastic about the prior 10 years as we are sort of now. I would say that we're probably a little bit more set in some tracks that should continue for the next decade.

So if you go back 10 years, we really were a single line of business, had a nice business, but didn't have the diversity of revenues that we enjoy today, didn't have the knowledge and experience with inorganic activity, didn't have the balance sheet. So at this point, I think our markets are probably a little more defined; we're commercial and residential security and energy. And I don't see us dramatically sort of shifting out of those tracks. But I think that we're in just sort of a more -- a better scaled position to further build those out over the next decade.

Got it. That's helpful. And maybe just a follow-up, Kevin. Obviously, hardware is strong. It sounds like you're kind of eyes wide open that there may have been a little bit of pull-forward demand from some of the service providers. Kind of a 2-part question on this. The first one would be, as we think about modeling out hardware for the rest of the year, we would typically expect Q3 to be a little bit better than Q4 just on weather. And -- but I wondered if that pull-forward dynamic makes the split between Q3 and Q4 hardware revenue a little bit different this year.

And then the second part would be, I know you're not guiding to 2026, but just conceptually, we're going to have to model that. And as we think about 2026, you obviously are covered through year-end, as you mentioned wisely. But once that kind of coverage rolls off, how do the economics change as we kind of think beyond year-end?

Yes, sure. Adam. So based on our guide, you can see we're implying somewhere between [ $150 million and $150 million ] of hardware revenue in the second half. I think that's likely to be mostly ratably split between Q3 and Q4. If you were to divide that by 2, I'd probably add a couple of million dollars above that average for Q3 and then put the residual in Q4. So still a little bit of a skew towards Q3, but maybe a little bit less than historical seasonality suggests.

I think as we look forward to 2026, there is the potential for higher tariffs if the framework deals get codified into HTS codes. Putting that aside, I think what you do is you'd probably say, hey, Alarm.com talked about rolling through $7.5 million of higher hardware revenue in the second half of the year related to the baseline tariffs. And if you annualize that, it'd probably be growth in 2026 of about $7.5 million on top of what we guided to for 2025 and assume that besides that, demand and sales are probably roughly equal to what they had been in 2025. So yes, probably somewhere between $5 million and $10 million higher for 2026 than now.

Got it. Just real quick to wrap up on that. In your prepared remarks, you talked about how the hardware and the profit dollars that you get from that help to cover the cost of acquiring a subscriber. And I just wonder if you're kind of thinking about the framework and the current differences in the economics in the hardware business, are there things that you might think about differently from a business model going forward? Perhaps maybe it doesn't make sense to acquire as many subs, for example, just how you're thinking about that impacts the overall business model?

I don't think it's changing really the way that we're thinking about that. I think if we have tariffs come through and it's a pure pass-through, we're going to have the same -- roughly the same amount of gross profit from hardware available to us, we think, next year than this year. I suspect that we'll probably be viewing the way that we budget sales and marketing like we typically do based on that.

There's not -- I don't think we see sweeping structural changes to gross profit contribution from hardware. And so we'll approach revenue planning and sales and marketing budgeting, I think, much like we do historically.

[Operator Instructions] Our next question comes from Samad Samana with Jefferies.

This is Billy Fitzsimmons on for Samad. Maybe I'll ask this. We're midway through the year and it's been a busy week for software earnings and we're hearing very different narratives from different companies where some are citing a weakening consumers, slowdowns and other names are citing strength and improvement for the back half. So can you just level set for us what assumptions and considerations went into the back half guide? Just remind us what you're thinking about around macro deal volume, top of funnel renewals and kind of the visibility over the next couple of quarters?

Sure, Billy. Yes, I guess we don't -- we're not anticipating or modeling a significant change in the macro in the back half of the year. Our experience has been macros haven't been perfect for the first half, but have not been horrible. And part of that is we're a little different probably than a lot of the other companies in that we're engaged in a business that's a visceral need that many people have. I mean it's security.

And whether you're in a good economy or maybe a weaker economy, people in both cases, feel like it's a must-have type of service. And therefore, we tend not to have quite as much volatility in our performance when there are macro level shifts. I'd say the macro backdrop, the one thing we watch very carefully that is still a backdrop to the business is new home sales. And we've seen that metric be weak since 2023.

I haven't seen a dramatic change there lately. As new home sales pick up, then we would expect to see 2 things really occur, and they sort of offset. One, you would see higher demand, the creation of more new subscribers as they move into a home and they begin to shift to protect. This is on the residential side. And then to offset that some, you would see a bit lower revenue retention as people move and sometimes cancel a service when they're no longer occupying their homes. So that's an important macro metric. But generally, we think the outlook, our service providers are doing pretty well. The outlook for the second half is, in our view, about the same as the first half.

Our next question comes from Saket Kalia with Barclays.

This is Alyssa Lee on for Saket at Barclays. Kevin, I think you touched on this briefly, but I was wondering if you could give us any color on retention rates for the quarter and then maybe for the back half of the year, how should we think about the puts and takes here under different scenarios of the housing market? And maybe as a follow-up after that, what does retention look like here for commercial versus residential for the quarter?

Sure. Thanks for the question. Yes, as we noted after our call last quarter, the retention rate for the consolidated company was inching towards 95%. It rounded actually up to 95%. It was 94.7%. We, at the time, noted that we didn't anticipate that perpetuating for each of the rest of the quarters for this year and that we thought it would actually return back down towards our historical range. That for the most part, played out.

We rounded to 94% during the second quarter. It was actually 94.1%. So it came down about 60 basis points. That's still at the high end or slightly above our historical range that we've seen. So a little bit better than we had actually anticipated. And for Q3 and Q4, what we're expecting is that, that will kind of be hovering around that same area, somewhere between 93.7% and 94% is how we're thinking about it.

The things that could shift that from a macro perspective are things that Steve touched on, on the prior question. Obviously, if activation rates fell and the housing market sort of somehow seized up more than it is now, that probably leads to higher retention than what we're modeling and vice versa. They'll probably roughly balance each other out from a revenue perspective over those 2 quarters, but those would be the puts and takes.

[Operator Instructions] Our next question comes from Jack Vander Aarde with Maxim Group.

Okay. Great results, guys, and I appreciate the detailed update. Steve, touching on the core North America residential business, you mentioned new home builds and sales as those pick up eventually, it could drive a pickup in new account activations, maybe a near-term headwind on retention rates.

But just to pick your brain, do you see home sales? Do you see an environment where home sales do end up picking up again in 2026, probably going to be very sensitive to the rate discussion. But is that sort of a fair assumption that you guys are thinking about? And then just also curious how many Alarm residential customers own multiple Alarm connected residential properties?

Okay. Well, let me start with the first one, just macro on the housing market. I mean, we're probably all watching the healthy political debate about what exactly the Fed should be doing, what should be happening to interest rates going forward. That the outcome there might affect what we see with home sales.

I think it's pretty early, but if I were reading the tea leaves, I feel like in talking to our service providers, particularly those that are working with builders is they're probably feeling a little more positive as of now in August about the next 6 months than they were in January about those 6 months. It just feels like there's a couple of things going on perhaps, a bit of pent-up demand.

And then people that have been on the sidelines and afraid. And I think that a lot of people are just sort of getting used to the higher interest rate environment now accepting it and beginning to make their plans around that -- the current set of metrics. So folks are seemingly a tad more, not dramatically more, but just slightly more positive about the next anyway, 6 to 9 months.

And the second question was, I think you asked how many -- or what percentage or do many of our subscribers have multiple properties? Is that correct?

That's right. That's right.

Yes. Yes, that's always been a real source of strength for us. Our subscribers that do have multiple properties, both on the residential side and on the -- especially on the small business side. And so do I know the exact percentage? I would imagine in the commercial world that it's a pretty high percentage of subscribers. I would be guessing, but I would expect that it would be north of 1/3 are commercial accounts that are affiliated with other accounts.

On the residential side, it would be less than that, but still meaningful. People that have second homes, sometimes have multiple rental properties. It is a differentiating capability. It requires more of a back end to provide good service across properties. So it is a fairly high percentage of subscribers. I just don't know the exact percentage.

That's very helpful color. I appreciate that, Steve. And then maybe just a follow-up for Kevin. You mentioned in June, you rolled out a 10% price increase on the hardware. Have you thought about or are you actively thinking about potential general price hikes on the base monthly ARPU rate on the residential or commercial SaaS service side of the business?

Yes. Jack, one slight clarification. So we passed through the 10% -- most of the 10% cost of the tariffs, which given our gross margin profile, wind up being about 7.5% in terms of pricing to service providers. At this point, we don't have any general expectations, whether in the second half of this year or for next year to be visiting broad-based service price increases. That's not currently part of our planning.

And I appreciate the clarification on the gross margin or the cost of the tariffs pass-through on the hardware there. And then maybe just internationally, which countries or regions are the largest installed base of Alarm customers? And are there any just particular regions that are growing faster than others more so now than that might just jump out at you?

You said countries or states, Jack?

Countries and regions outside of the U.S.

Outside of the U.S. Yes. I mean, this year, so far, Lat Am has been a faster-growing region or area than most. And then in the Middle East as well, we've seen some growth and particularly very fast adoption of the remote video monitoring capability that we recently brought to market. So those are 2 areas where we're probably seeing a little more growth than what we expected on the international side.

[Operator Instructions] And I'm not showing any further questions at this time. And as such, this does conclude today's presentation. We thank you for your participation. You may now disconnect and have a wonderful day.