Alarm.com (ALRM) Q3 2026 earnings review
Alarm.com raises its hardware plan, but software growth slows
Alarm.com, the maker of cloud software and cameras for smart homes and businesses, leaned on a hardware rebound while its software subscription growth slowed. Total sales and subscription revenue both rose 9% from a year ago, and profit per share excluding one-offs jumped 27% on lower research costs and share buybacks. The company raised its full-year sales plan by $22 million, but by our math the outlook has subscription growth slowing to 8% in the fourth quarter.
| Software subscription and license revenue | $191.2M +9.0% from a year ago |
|---|---|
| Hardware and other revenue | $88.3M +8.9% from a year ago |
| Profit per share, excluding one-offs | $0.90 +26.8% from a year ago |
| Full-year total revenue outlook | Raised $22M middle of the range: 9.4% growth |
⚖️ Verdict: 🟢 Bullish
The story got better because the expected second-half hardware slump turned into a $20 million outlook raise and free cash flow caught up to the 90% full-year conversion goal. One caution: the software subscription beat was the smallest in seven quarters, and legal bills of $6 million plus lower interest income pushed standard accounting profit down 3%.
The question now is how fast software subscriptions grow on their own once last year's utility software acquisitions pass their one-year mark in November. Either new commercial video and grid programs keep underlying growth near 9%, or the expiring acquisition boost exposes slower residential demand. First-quarter 2027 subscription revenue targets will settle it.
🐂 Bull Case
Hardware Sales Rebound Lifts the Full-Year Plan
Alarm.com sells cameras, thermostats and security panels along with the software that runs them. Management had warned that removing tariff surcharges and facing higher memory chip prices could hurt hardware demand in the second half. Three months ago, the full-year outlook pointed to flat or shrinking hardware sales for the rest of the year.
Instead, hardware and other revenue rose 8.9% from a year ago to $88.3 million, and the company raised its full-year hardware forecast by $20 million at the middle of the range. By our math, the new target points to 9.4% hardware growth in the fourth quarter.
- Hardware and other revenue: $88.3 million, up 8.9% from a year ago
- Hardware gross margin (profit after product costs): 28.4%, up 6.5 percentage points from a year ago
- Full-year hardware outlook: $345 million to $355 million, raised from $325 million to $335 million
What to watch: the quarterly filing's breakdown of hardware product costs. It will show how much of the 6.5-point margin jump came from commercial camera sales versus one-time tariff refund credits.
Working Capital Turnaround Restores Cash Conversion
In the first half of the year, free cash flow — operating cash after equipment purchases — trailed profit growth, converting only 81% of adjusted EBITDA (operating profit before non-cash charges and one-offs). That left the connected-property group needing a big second half to hit its 90% full-year cash conversion target.
Third-quarter free cash flow reached $69.5 million, or 105% of adjusted EBITDA, as slower bill payments added $25.5 million to nine-month operating cash. For the first nine months, free cash flow rose 53.2% to $156.3 million, bringing conversion to 90.1% by our math and putting the full-year goal back on track.
What to watch: fourth-quarter free cash flow against the ~$48 million left to hit the 90% full-year mark. Holding that level will show whether the payable timing gain sticks through year-end.
Buybacks and Debt Payoff Boost Per-Share Profit
Alarm.com paid off $500 million of convertible notes in January and has spent $58.5 million buying back its own stock over the first nine months of 2026, including $13.5 million in the third quarter by our math. Those steps cut the diluted share count by 4.2% from a year ago to 56.0 million shares.
Combined with a 2.1-point rise in adjusted EBITDA margin to 23.7%, the smaller share count turned 9.0% revenue growth into 26.8% growth in diluted profit per share excluding one-offs, which reached $0.90. Newer growth areas such as EnergyHub, its utility grid software unit, also remained a tailwind, though the release did not update their exact revenue share.
What to watch: fourth-quarter share repurchases and the diluted share count against the 56.3 million full-year assumption. Further buying would keep per-share profit growing faster than operating income.
🐻 Bear Case
Subscription Growth Slows as Past Acquisitions Lap
Software-as-a-Service (SaaS) and license revenue — the monthly fees home and business subscribers pay — grew 11.1% in the second quarter, boosted by last year's acquisitions of Bridge to Renewables (BTR) in August and Resideo Grid Services (RGS) in November. As BTR passed its one-year mark in August, subscription growth stepped down to 9.0%, or $191.2 million.
The company beat the middle of its own third-quarter outlook by $1.3 million, or 0.7%, smaller than the $2.9 million to $5.6 million beats it posted over the prior six quarters. Management's fourth-quarter forecast calls for 8.0% subscription growth at the middle of the range as the larger RGS deal passes its anniversary.
What to watch: first-quarter 2027 subscription revenue outlook on the next call, which will be the first full quarter after both energy acquisitions have lapped. A forecast below 8% would show underlying subscription growth is slower than recent double-digit headlines.
Software Costs Outpace Revenue as Energy Mix Grows
While hardware profitability improved, the gross margin on software subscriptions and licenses fell for a third straight quarter. The cost of delivering software and license services rose 21.5% from a year ago to $29.4 million, more than double the 9.0% pace of subscription revenue growth.
By our math, that pushed software gross margin down 1.6 percentage points from a year ago to 84.6%, and up 1.0 point as a share of total revenue. In prior quarters, fast growth at EnergyHub — which pays fees to thermostat and battery partners and carries roughly 60% gross margin versus nearly 89% in core security — drove this dilution.
What to watch: the segment table in the third-quarter filing. It will show whether EnergyHub's software gross margin has started moving back toward management's 65% to 70% long-term target.
Legal Bills and Lost Interest Drag Reported Profit
Alarm.com highlights profit excluding one-offs, where net income attributable to common stockholders rose 22.3% to $48.3 million. Under standard accounting rules (GAAP), however, profit attributable to common stockholders fell 2.6% from a year ago to $34.4 million, and fell 15.9% over the first nine months.
- Non-ordinary course litigation expense: $6.3 million in Q3, up from $1.8 million a year ago ($16.4 million year-to-date)
- General and administrative overhead: 11.2% of revenue, up 0.4 percentage points from a year ago on legal bills
- Interest income: $4.9 million in Q3, down from $11.3 million a year ago after paying off $500 million of notes
The company strips these intellectual property lawsuit costs out of its headline profit metrics, calling them non-ordinary. Yet legal charges have exceeded $6 million for two straight quarters across multiple patent and copyright disputes, representing a real and recurring cash drain.
What to watch: the legal proceedings footnote in the quarterly filing and fourth-quarter litigation expense. Another multi-million-dollar charge will confirm that high legal bills remain a multi-quarter fixture.
Risks this quarter didn't answer
Several standing risks and watch items live in the quarterly filing or conference call remarks and were not readable in the earnings release.
- Subscription revenue renewal rate: at 95% for three quarters through Q2; the 10-Q filing will show if retention held near decade highs despite a slow housing market.
- EnergyHub and Other-segment growth split: the 10-Q segment footnote will show Other-segment SaaS growth and how much came from acquisitions.
- Dealer concentration and ADT transition: one partner accounts for 15% to 20% of sales; any shift in ADT volume awaits call commentary.
- Related-party dealer loans and sales: the 10-Q footnotes will update revenue and loan balances with partly owned installation dealers.
👓 Other Themes
CellGate Purchase and New AI Video Cameras
Alarm.com acquired CellGate, which provides "cellular-powered gate access control and video intercom solutions for commercial, small business, multifamily, ranches and estate properties". The company expects the deal to "add a growing recurring revenue business with established distributor relationships". It also released AI Video Clip Summaries that send "concise, plain-language descriptions of recorded video content", alongside a battery doorbell and two indoor cameras.
💲 Other KPIs
Total deferred revenue — cash collected upfront for services not yet delivered — rose 21.6% from a year ago to $34.0 million by our math, outpacing 9.0% revenue growth. Growth sped up from 16.8% in the second quarter, reflecting upfront annual fees in EnergyHub utility programs.
Uncollected customer bills rose 36.3% from a year ago and 6.7% from December, growing four times faster than third-quarter revenue. The $12.6 million receivables build over the first nine months absorbed cash, though slower payments to suppliers offset the drag in the third quarter.
Engineering and product development spending rose 4.6% from a year ago, half the pace of revenue growth, as stock-based pay in the department fell. That trimmed research costs by 1.0 percentage point of revenue to 25.0%, providing the main lift to GAAP operating margin.
🔮 Guidance
Raised against the $193.7 million to $194.3 million range implied by last quarter's full-year plan. The middle of the range calls for 8.0% growth from a year ago, down from 9.0% in the third quarter as the November 2025 RGS acquisition laps. If the past year's 2.0% average beat holds, fourth-quarter subscription sales would reach $198.6 million by our math.
Raised. The security software group lifted the middle of its full-year subscription target by $2.0 million, to 9.7% growth for the year. That marks the third raise this year, and each step has been smaller than the last: +$6.0 million in May, +$4.2 million in August, and +$2.0 million now.
Raised. Management lifted the middle of its hardware forecast by $20.0 million, to 8.8% full-year growth. By our math, that leaves $89.1 million for the fourth quarter, or 9.4% growth from a year ago, reversing the second-half contraction the prior outlook implied.
Raised. The middle of the total sales plan moved up $22.0 million to $1.1062 billion, or 9.4% growth for the year, driven almost entirely by the $20.0 million hardware increase. By our math, the outlook leaves $283.8 million for the fourth quarter, or 8.5% growth from a year ago.
Raised. The Tysons, Virginia-based company increased the middle of its adjusted EBITDA target by $6.0 million, following raises of $1.5 million in May and $6.5 million in August. By our math, that leaves $54.5 million for the fourth quarter, or a 19.2% margin, down from 23.7% in the third quarter due to seasonal fourth-quarter expenses.
Raised. The middle of the range rose $5.4 million to $161.9 million, assuming a 21.0% tax rate. By our math, the full-year plan leaves $37.8 million of profit excluding one-offs in the fourth quarter, down 2.7% from $38.9 million a year ago.
Raised. The full-year per-share profit target moved up $0.10 at the middle of the range, based on 56.3 million diluted shares. By our math, that leaves $0.71 per share for the fourth quarter, down 1.4% from $0.72 a year ago as lower interest income offsets operating gains.
❓ Key Questions
How much did CellGate and RGS add to subscription outlook?
Alarm.com acquired CellGate this quarter and laps the RGS acquisition in November. Without the dollar contribution from CellGate and the organic growth rate of EnergyHub, investors cannot tell how fast underlying software subscriptions are growing.
Did tariff refund credits boost third-quarter hardware gross margin?
Hardware gross margin jumped 6.5 percentage points from a year ago to 28.4%. In the second quarter, tariff refund accounting drove much of the hardware cost decline, so management should clarify how much of the third-quarter gain came from refunds versus camera sales.
When will intellectual property lawsuit expenses begin to fall?
Non-ordinary litigation costs hit $6.3 million in the third quarter and $16.4 million over nine months, wiping out GAAP earnings growth. Investors need the expected legal spending run-rate and trial timeline for the SkyBell and Causam disputes.
Did subscription revenue retention hold at 95% in the quarter?
Each percentage point of customer retention is worth $2.0 million to $2.5 million of quarterly software revenue. The earnings release does not print the trailing 12-month renewal rate, leaving open whether retention stayed at its decade high of 95%.
Why did uncollected customer bills jump 36% from last year?
Accounts receivable reached $151.3 million, up 36.3% from a year ago against 9.0% revenue growth. Last quarter showed rising credit loss reserves and one partner above 10% of receivables, so management should explain whether payment terms are stretching.