Alarm.com Holdings, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of operations together with (1) our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q, or Quarterly Report, and (2) the audited consolidated financial statements and the related notes and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended December 31, 2023 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed on February 22, 2024, or Annual Report, with the Securities and Exchange Commission, or SEC. This Quarterly Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “objective,” “ongoing,” “plan,” “predict,” “project,” “potential,” “should,” “will,” “would,” or the negative or plural of these words or similar expressions or variations and such forward-looking statements include, but are not limited to, statements with respect to the anticipated impact of the global economic uncertainty and financial market conditions caused by significant worldwide events, including public health crises, and geopolitical upheaval, such as Russia’s incursion into Ukraine and the conflict between Israel and regional adversaries, disruptions to global supply chains, rising interest rates, risk of recession and inflation (collectively, the Macroeconomic Conditions) on our business, results of operations and financial condition, including on our hardware sales and our Software-as-a-Service, or SaaS, and license revenue growth rate; our business strategy, plans and objectives for future operations; continued enhancements of our platform and offerings; the potential impact of trade policies and related tariffs on our cost of hardware revenue and hardware revenue margins; and our future financial and business performance. The events described in these forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified in the section titled “Risk Factors” set forth in Part II, Item 1A of this Quarterly Report and elsewhere in this and in our other SEC filings. You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Overview Alarm.com is the leading platform for the intelligently connected property. Our cloud-based platform offers an expansive suite of Internet of Things, or IoT, solutions a ddressing opportunities in the residential, multi-family, small business and enterprise commercial markets. Alarm.com’s solutions include security, video and video analytics, energy management, access control, electric utility grid management, indoor gunshot detection, water management, health and wellness and data-rich emergency response. During 2023, our platforms processed more than 325 billion data points generated by over 150 million connected devices. We believe this scale of subscribers, connected devices and data operations makes us the leader in the connected property market. Our solutions are delivered through an established network of trusted service providers, who are experts at selling, installing and supporting our solutions. We primarily generate SaaS and license revenue through our service provider partners, who resell these services and pay us monthly fees. These service provider contracts typically have an initial term of one year, with subsequent renewal terms of one year. O ur service provider partners have indicated that they typically have three to five -year service contracts with residential and commercial property owners who use our solutions. We also generate hardware and other revenue, primarily from our service provider partners and distributors. Our hardware sales include connected devices that enable our services, such as video cameras, video recorders, gunshot detection sensors, gateway modules and smart thermostats. We believe our network of service providers and the length of our service relationships with residential and commercial property owners, combined with our robust SaaS platforms and over 20 years of operating experience, contribute to a compelling business model. Our solutions are designed to make both residential and commercial properties safer, smarter and more efficient. Our technology platforms support property owners who subscribe to our services, the hardware partners who manufacture devices that integrate with our platforms and the service provider partners who install and maintain our solutions. The Alarm.com platform enables our service provider partners to deploy our interactive security, video monitoring, intelligent automation, access control, energy management and wellness solutions as stand-alone offerings or as combined solutions to address the needs of a broad range of customers. Highlights of First Quarter Results We primarily generate SaaS and license revenue, our largest source of revenue, through our service provider partners who resell our services and pay us monthly fees. Our service provider partners sell, install and support Alarm.com solutions that enable residential and commercial property owners to intelligently secure, connect, control and automate their properties. Our subscribers consist of all of the properties maintained by those residential and commercial property owners to which we are delivering at least one of our solutions. We derive a portion of our revenue from licensing our intellectual property to third parties 23 on a per customer basis. SaaS and license revenue represented 67% of our revenue during the three months ended March 31, 2024, as compared to 65% in the same period in the prior year. We also generate SaaS and license revenue from monthly fees charged to service providers on a per subscriber basis for access to our non-hosted software platform, or Software platform. The non-hosted software for interactive security, automation and related solutions is typically deployed and operated by the service provider in its own network operations center. Software license revenue represented 2% of our revenue during the three months ended March 31, 2024, as compared to 3% in the same period in the prior year. We also generate revenue from the sale of many types of hardware, including video cameras, video recorders, cellular radio modules, smart thermostats, image sensors, gunshot detection sensors and other peripherals, that enable our solutions. Our hardware and other revenue also includes our revenue from the sale of perpetual licenses that provide our customers in the commercial market the right to use our video surveillance software for an indefinite period of time in exchange for a one-time license fee. Additionally, our hardware and other revenue includes our revenue from the sale of licenses that provide our customers the right to use our gunshot detection solution in exchange for license fees. Hardware and other revenue represented 33% of our revenue during the three months ended March 31, 2024, as compared to 35% in the same period in the prior year. We typically expect hardware and other revenue to fluctuate as a percentage of total revenue. Highlights of our financial performance for the periods covered in this Quarterly Report include: • SaaS and license revenue increased 11% to $150.3 million during the three months ended March 31, 2024 from $135.4 million during the three months ended March 31, 2023. Included in SaaS and license revenue was software license revenue, which decreased to $5.2 million during the three months ended March 31, 2024 from $6.2 million during the three months ended March 31, 2023. • Total revenue increased 6% to $223.3 million during the three months ended March 31, 2024 from $209.7 million during the three months ended March 31, 2023. • Net income increased to $23.4 million during the three months ended March 31, 2024, as compared to $14.2 million during the three months ended March 31, 2023. Net income attributable to common stockholders increased to $23.6 million during the three months ended March 31, 2024, as compared to $14.4 million during the three months ended March 31, 2023. • Non-GAAP adjusted EBITDA, a non-GAAP measurement of operating performance, increased to $37.0 million during the three months ended March 31, 2024 from $30.6 million during the three months ended March 31, 2023. Please see Non-GAAP Measures below in this section of this Quarterly Report for a discussion of the limitations of non-GAAP adjusted EBITDA (a non-GAAP measure) and a reconciliation of non-GAAP adjusted EBITDA from net income, the most directly comparable measurement in accordance with accounting principles generally accepted in the United States, or GAAP, for the three months ended March 31, 2024 and 2023. Recent Developments The global economy, credit markets and financial markets have and may continue to experience significant volatility as a result of the Macroeconomic Conditions. These Macroeconomic Conditions have and may continue to create supply chain disruptions, inventory disruptions, and fluctuations in economic growth, including fluctuations in employment rates, inflation, energy prices and consumer sentiment. It remains difficult to assess or predict the ultimate duration and economic impact of the Macroeconomic Conditions. The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results that can be expected for our entire fiscal year ending December 31, 2024, which is increasingly true in periods of extreme uncertainty, such as the uncertainty caused by the Macroeconomic Conditions. Prolonged uncertainty with respect to the Macroeconomic Conditions could cause further economic slowdown or cause other unpredictable events, each of which could adversely affect our business, results of operations or financial condition. Other Business Metrics We regularly monitor a number of financial and operating metrics in order to measure our current performance and estimate our future performance. Our other business metrics may be calculated in a manner different from the way similar business metrics used by other companies are calculated and include the following (dollars in thousands): 24 Three Months Ended March 31, 2024 2023 SaaS and license revenue $ 150,344 $ 135,394 Non-GAAP adjusted EBITDA 37,046 30,575 Twelve Months Ended March 31, 2024 2023 SaaS and license revenue renewal rate 94 % 93 % SaaS and License Revenue SaaS and license revenue is a GAAP measure that we use to measure our current performance and estimate our future performance. We believe SaaS and license revenue is an indicator of the productivity of our existing service provider partner s and their ability to activate and maintain subscribers using our intelligently connected property solutions, our ability to add new service provider partners reselling our solutions, the demand for our intelligently connected property solutions and the pace at which the market for these solutions is growing. Non-GAAP Adjusted EBITDA Non-GAAP adjusted EBITDA is a non-GAAP measure that represents our net income before interest expense, interest income, certain activity within other expense, net, provision for / (benefit from) income taxes, amortization and depreciation expense, stock-based compensation expense, acquisition-related expense, legal costs and settlement fees incurred and received in connection with non-ordinary course litigation and other disputes, particularly costs involved in ongoing intellectual property litigation. We do not consider these items to be indicative of our core operating performance. The non-cash items include amortization and depreciation expense, amortization of debt issuance costs for the January 20, 2021 issuance of $500.0 million aggregate principal amount of 0% convertible senior notes due January 15, 2026, or the 2026 Notes, included in interest expense and stock-based compensation expense related to restricted stock units and other forms of equity compensation, including, but not limited to, the sale of common stock. We do not adjust for ordinary course legal expenses resulting from maintaining and enforcing our intellectual property portfolio and license agreements. We record interest expense primarily related to our 2026 Notes. We exclude interest expense in calculating non-GAAP adjusted EBITDA because we believe the exclusion of interest expense will provide for more meaningful information about our financial performance. We exclude interest income and certain activity within other expense, net including gains, losses or impairments on investments and other assets, gains on settlement fees and losses on the early extinguishment of debt, when applicable, from non-GAAP adjusted EBITDA because we do not consider it part of our ongoing results of operations. We exclude the impact related to our provision for / (benefit from) income taxes from non-GAAP adjusted EBITDA because we do not consider this tax adjustment to be part of our ongoing results of operations. GAAP requires that operating expenses include the amortization of acquired intangible assets, which principally include acquired customer relationships, developed technology and trade names. We exclude amortization of intangibles from non-GAAP adjusted EBITDA because we do not consider amortization expense when we evaluate our ongoing business operations, nor do we factor amortization expense into our evaluation of potential acquisitions, or our measurement of the performance of those acquisitions. We believe the exclusion of amortization expense enables the comparison of our performance to other companies in our industry as other companies may be more or less acquisitive than we are, and therefore, amortization expense may vary significantly by company based on their acquisition history. Although we exclude amortization of acquired intangible assets from non-GAAP adjusted EBITDA, management believes that it is important for investors to understand that such intangible assets were recorded as part of purchase accounting and contribute to revenue generation. We record depreciation primarily for investments in property and equipment. We exclude depreciation in calculating non-GAAP adjusted EBITDA because we do not consider depreciation when we evaluate our ongoing business operations. We exclude stock-based compensation expense, which relates to restricted stock units and other forms of equity incentives primarily awarded to employees of Alarm.com, because they are non-cash charges that we do not consider when assessing the operating performance of our business. Additionally, the determination of stock-based compensation expense can be calculated using various methodologies and is dependent upon subjective assumptions and other factors that vary on a company-by-company basis. Therefore, we believe excluding stock-based compensation expense from non-GAAP adjusted EBITDA improves the comparability of our results to the results of other companies in our industry. 25 Included in operating expenses are incremental costs directly related to business and asset acquisitions as well as changes in the fair value of contingent consideration liabilities, when applicable. We exclude acquisition-related expense from non-GAAP adjusted EBITDA because we believe the exclusion of this expense allows us to better provide meaningful information about our operating performance, facilitates comparisons to our historical operating results, improves the comparability of our results to the results of other companies in our industry, and ultimately, we believe helps investors better understand the acquisition-related expense and the effects of the transaction on our results of operations. We exclude non-ordinary course litigation expense because we do not consider legal costs and settlement fees incurred and received in litigation and litigation-related matters of non-ordinary course lawsuits and other disputes, particularly costs incurred in ongoing intellectual property litigation, to be indicative of our core operating performance. We do not adjust for ordinary course legal expenses, including those expenses resulting from maintaining and enforcing our intellectual property portfolio and license agreements. Non-GAAP adjusted EBITDA is a key measure our management uses to understand and evaluate our core operating performance and trends to generate future operating plans, to make strategic decisions regarding the allocation of capital, and to make investments in initiatives that are focused on cultivating new markets for our solutions. In particular, the exclusion of certain expenses in calculating non-GAAP adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis and, in the case of exclusion of acquisition-related adjustments and certain historical legal expenses, excludes items that we do not consider to be indicative of our core operating performance. Non-GAAP adjusted EBITDA is not a measure calculated in accordance with GAAP and should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Please see Non-GAAP Measures in this section for a discussion of the limitations of non-GAAP adjusted EBITDA and a reconciliation of non-GAAP adjusted EBITDA from net income, the most directly comparable GAAP measurement, for the three months ended March 31, 2024 and 2023. SaaS and License Revenue Renewal Rate Our SaaS and license revenue renewal rate is an operating metric. We measure our SaaS and license revenue renewal rate on a trailing 12-month basis by dividing (a) the total SaaS and license revenue recognized during the trailing 12-month period from our subscribers on our Alarm.com platform who were subscribers on the first day of the period, by (b) total SaaS and license revenue we would have recognized during the period from those same subscribers assuming no terminations, or service level upgrades or downgrades. The SaaS and license revenue renewal rate represents both residential and commercial properties. Our SaaS and license revenue renewal rate is expressed as an annualized percentage and it is calculated across our entire subscriber base on the Alarm.com platform excluding subscribers of service providers that may use one of our other platforms as a substitute for the Alarm.com platform. O ur service provider partners have indicated that they typically have three to five -year service contracts with residential and commercial property owners who use our solutions. Our SaaS and license revenue renewal rate includes subscribers whose contract with their service provider reached the end of its contractual term during the measurement period, as well as subscribers whose contract with their service provider has not reached the end of its contractual term during the measurement period, and is not intended to estimate the rate at which our subscribers renew their contracts with our service provider partners. We believe our SaaS and license revenue renewal rate allows us to measure our ability to retain and grow our SaaS and license revenue and serves as an indicator of the lifetime value of our subscriber base. Components of Operating Results Our fiscal year ends on December 31. The key elements of our operating results include: Revenue We derive our revenue from three primary sources: the sale of cloud-based SaaS services on our integrated Alarm.com platform, the sale of licenses and services on the Software platform and the sale of hardware products. We sell our platform and hardware solutions to service provider partners that resell our solutions and hardware to residential and commercial property owners, who are the service provider partners’ customers. SaaS and License Revenue . We generate the majority of our SaaS and license revenue primarily from monthly fees charged to our service provider partners on a per subscriber basis for access to our cloud-based intelligently connected property platform and related solutions. Our fees per subscriber vary based upon the service plan and features utilized. We offer multiple service level packages for our platform solutions including a range of solutions and a range of a la carte add-ons for additional features. The fee paid by our service provider partners each month for the delivery of our solutions is based on the combination of packages and add-ons enabled for each subscriber. We utilize tiered pricing plans where our service provider partners may receive prospective pricing discounts driven by volume. We also generate SaaS and license revenue from the fees paid to us when we license our intellectual property to third parties for use of our patents. In addition, in certain markets, our EnergyHub subsidiary sells its demand response service for an annual service fee, with pricing based on the number of subscribers or amount of aggregate electricity demand made available for a utility’s or market’s control. 26 Software License Revenue . Our SaaS and license revenue also includes our software license revenue from monthly fees charged to service providers on a per subscriber basis for access to our Software platform. The non-hosted software for interactive security, automation and related solutions is typically deployed and operated by the service provider in its own network operations center. Our agreements for the Software platform solution typically include software and services, such as post-contract customer support, or PCS. Software license revenue included in SaaS and license revenue is expected to continue to decline over time as we transition subscribers to our cloud-based hosted platform. Hardware and Other Revenue. We generate hardware and other revenue primarily from the sale of video cameras, video recorders, smart thermostats and cellular radio modules that provide access to our cloud-based platforms and, to a lesser extent, the sale of other devices, including image sensors, gunshot detection sensors and peripherals. We primarily transfer hardware to our customers upon delivery to the customer, which corresponds with the time at which the customer obtains control of the hardware. We record a reserve against revenue for hardware returns based on historical returns. Our hardware and other revenue also includes our revenue from the sale of perpetual licenses that provide our customers in the commercial market the right to use our video surveillance software for an indefinite period of time in exchange for a one-time license fee. Additionally, our hardware and other revenue includes our revenue from the sale of licenses that provide our customers the right to use our indoor gunshot detection solution in exchange for license fees. Hardware and other revenue may also include activation fees charged to some of our service provider partners for activation of a new subscriber account on our platforms, as well as fees paid by service provider partners for our marketing services. The decision whether to charge an activation fee is based in part on the expected number of subscribers to be added by our service provider partners and as a result, many of our largest service provider partners do not pay an activation fee. Our revenue, and in particular our hardware revenue, has in the past and may in the future be negatively affected by the Macroeconomic Conditions and their related impacts. It remains difficult to assess or predict the ultimate duration and economic impact of the Macroeconomic Conditions. Cost of Revenue Our cost of SaaS and license revenue primarily includes the amounts paid to wireless network providers and, to a lesser extent, the costs of running our network operations centers which are expensed as incurred, as well as patent and royalty costs in connection with technology licensed from third-party providers and amounts paid to distributed energy resource providers. Our cost of SaaS and license revenue also includes our cost of software license revenue, which primarily includes the payroll and payroll-related costs of the department dedicated to providing service exclusively to those service providers that host the Software platform. As of March 31, 2024 and 2023, we had 75 and 99 employees who manufacture hardware for our suite of IoT solutions, respectively . Our cost of hardware and other revenue primarily includes cost of raw materials, tooling, freight shipments and amounts paid to our third-party manufacturer for production and fulfillment of our cellular radio modules and image sensors, and procurement costs for our video cameras, video recorders, smart thermostats and gunshot detection sensors, which we purchase from an original equipment manufacturer, and other devices. Cost of hardware and other revenue also includes material costs and labor cost related to our employees who manufacture hardware for our suite of IoT solutions . Additionally, our cost of hardware and other revenue includes royalty costs in connection with technology licensed from third-party providers. We record the cost of SaaS and license revenue as expenses are incurred, which corresponds to the delivery period of our services to our subscribers. We record the cost of hardware and other revenue primarily when the hardware and other services are delivered to the service provider partner, which occurs when control of the hardware and other services transfers to the service provider partner. Our cost of revenue excludes amortization and depreciation shown in operating expenses. Since 2019, the U.S. government has implemented and imposed significant changes to U.S. trade policy with respect to China. Tariffs have subjected certain Alarm.com products manufactured overseas to additional import duties of up to 25%. The amount of the import tariff and the number of products subject to tariffs have changed numerous times based on action by the U.S. government. Approximately one-fifth to one-half of the hardware products that we sell to our service provider partners are imported from China and could be subject to increased tariffs. While the additional import duties resulted in an increase to our cost of hardware revenue, these import duties had a modest impact on hardware revenue margins. If tariffs are increased or are expanded to apply to more of our products, such actions may increase our cost of hardware revenue and reduce our hardware revenue margins in the future. We continue to monitor the changes in tariffs. We currently expect our hardware revenue margins in 2024 to approximate the hardware revenue margins from 2023. 27 Operating Expenses Our operating expenses consist of sales and marketing, general and administrative, research and development and amortization and depreciation expenses. Salaries, bonuses, stock-based compensation, benefits and other personnel related costs are the most significant components of each of these expense categories, excluding amortization and depreciation. We include stock-based compensation expense in connection with the grant of restricted stock units and other forms of equity compensation, including equity compensation with performance conditions, in the applicable operating expense category based on the respective equity award recipient’s function (sales and marketing, general and administrative or research and development). We grew from 1,858 employees as of March 31, 2023 to 2,002 employees as of March 31, 2024 , and grew from 1,989 employees as of December 31, 2023. We expect to continue to hire new employees to support the projected future growth of our business. Sales and Marketing Expense. Sales and marketing expense consists primarily of personnel and related expenses for our sales and marketing teams, including salaries, bonuses, stock-based compensation, benefits, travel, and commissions. Our sales and marketing teams engage in sales, account management, service provider partner support, advertising, promotion of our products and services and marketing. The number of employees in sales and marketing functions increased from 519 as of March 31, 2023 to 564 as of March 31, 2024 and decreased from 565 as of December 31, 2023. We expect to continue to invest in our sales and marketing activities to expand our business both domestically and internationally and we expect to increase our marketing expense in 2024 as compared to 2023. We intend to increase the size of our sales force and our service provider partner support team to provide additional support to our existing service provider partner base to drive their productivity in selling our solutions as well as to enroll new service provider partners in North America and in international markets. General and Administrative Expense. General and administrative expense consists primarily of personnel and related expenses for our administrative, legal, human resources, finance and accounting personnel, including salaries, bonuses, stock-based compensation, benefits and other personnel costs. Additional expenses included in this category are legal costs, including those that are incurred to defend and license our intellectual property, as well as non-personnel costs, such as travel related expenses, rent, subcontracting and professional fees, audit fees, tax services, and insurance expenses. Also included in general and administrative expenses are credit losses and acquisition-related expenses, which consist primarily of legal, accounting and professional service fees directly related to acquisitions and valuation gains or losses on acquisition-related contingent liabilities. The number of employees in general and administrative functions increased from 198 as of March 31, 2023 to 224 as of March 31, 2024 and decreased from 229 as of December 31, 2023. Excluding intellectual property litigation and acquisition-related expense, we expect general and administrative costs to increase prospectively as our business grows. This includes cost increases related to human resources, accounting, finance, and legal personnel, additional external legal, audit fees and other expenses associated with regulations governing public companies. While somewhat unpredictable, we also expect to continue to incur costs related to litigation involving intellectual property. See the section of this Quarterly Report titled "Legal Proceedings" for additional information regarding litigation matters. Research and Development Expense . Research and development expense consists primarily of personnel and related expenses for our employees working on our product development and software and device engineering teams, including salaries, bonuses, stock-based compensation, benefits and other personnel costs. Also included are non-personnel costs such as consulting and professional fees paid to third-party development resources. The number of employees in research and development functions increased from 1,042 as of March 31, 2023 to 1,139 as of March 31, 2024 and increased from 1,118 as of December 31, 2023. Our research and development efforts are focused on innovating new features and enhancing the functionality of our platforms and the solutions we offer to our service provider partners and subscribers. We will also continue to invest in efforts to extend our platforms to adjacent markets and internationally to maintain our leadership position in the development of intelligently connected property technology, and continued enhancement of our Partner Services Platform, a comprehensive suite of enterprise-grade business management solutions for our service provider partners. Amortization and Depreciation . Amortization and depreciation consists of amortization of intangible assets originating from our acquisitions as well as our internally-developed capitalized software. Our depreciation expense is related to investments in property and equipment. Acquired intangible assets include developed technology, customer related intangibles, trademarks and trade names. We expect in the near term that amortization and depreciation may fluctuate based on our acquisition activity, development of our platforms and capitalized expenditures. Interest Expense We record interest expense associated with our 2026 Notes and acquired debt. Interest expense in 2024 is expected to remain relatively consistent with the interest expense in 2023. 28 Interest Income Interest income consists of interest income earned on our cash and cash equivalents, our notes receivable and our restricted cash. Interest income in 2024 will depend, in part, on our use of cash and fluctuations in interest rates. Other Expense, Net Other expense, net primarily consists of non-operating and miscellaneous expense and income. Provision for / (Benefit from) Income Taxes We are subject to U.S. federal, state and local income taxes as well as foreign income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. As a result, we recognize tax liabilities based on estimates of whether additional taxes will be due. For the three months ended March 31, 2024, our effective tax rate was below the 21.0% statutory rate primarily due to research and development tax credits claimed, the foreign derived intangible income deduction, the release of an unrecognized tax benefit liability due to the closure of the 2018 and 2019 Internal Revenue Service federal income tax return examination and tax windfall benefits from employee stock-based compensation, partially offset by the impact of state taxes, federal estimated tax payment interest expense and other nondeductible expenses. We recognize stock-based compensation tax shortfalls and excess tax windfall benefits on a discrete basis during the quarter in which they occur, and we anticipate our effective tax rate will vary from quarter to quarter depending on our stock price as well as the vesting and exercises of various forms of equity compensation under our equity incentive plans each period, including restricted stock units and stock options. 29 Results of Operations The following table sets forth our unaudited selected condensed consolidated statements of operations (in thousands) and data as a percentage of revenue for the periods presented: Three Months Ended March 31, 2024 2023 Revenue: SaaS and license revenue $ 150,344 67 % $ 135,394 65 % Hardware and other revenue 72,939 33 74,322 35 Total revenue 223,283 100 209,716 100 Cost of revenue (1) : Cost of SaaS and license revenue 20,428 9 19,583 9 Cost of hardware and other revenue 56,087 25 56,589 27 Total cost of revenue 76,515 34 76,172 36 Operating expenses: Sales and marketing (2) 25,454 12 26,645 13 General and administrative (2) 29,296 13 28,499 14 Research and development (2) 65,956 30 61,908 29 Amortization and depreciation 7,337 3 7,673 4 Total operating expenses 128,043 58 124,725 60 Operating income 18,725 8 8,819 4 Interest expense (796) — (868) — Interest income 8,540 4 5,182 2 Other expense, net (318) — (148) — Income before income taxes 26,151 12 12,985 6 Provision for / (benefit from) income taxes 2,747 2 (1,222) (1) Net income $ 23,404 10 % $ 14,207 7 % _______________ (1) Excludes amortization and depreciation shown in operating expenses below. (2) Operating expenses include stock-based compensation expense as follows (in thousands): Three Months Ended March 31, Stock-based compensation expense data: 2024 2023 Cost of hardware and other revenue $ 1 $ — Sales and marketing 755 1,032 General and administrative 3,181 3,145 Research and development 7,331 8,509 Total stock-based compensation expense $ 11,268 $ 12,686 The following table sets forth the components of cost of revenue as a percentage of revenue: Three Months Ended March 31, 2024 2023 Components of cost of revenue as a percentage of revenue: Cost of SaaS and license revenue as a percentage of SaaS and license revenue 14 % 14 % Cost of hardware and other revenue as a percentage of hardware and other revenue 77 76 Total cost of revenue as a percentage of total revenue 34 % 36 % 30 Comparison of the Three Months Ended March 31, 2024 to March 31, 2023 The following tables in this section set forth our selected condensed consolidated statements of operations (in thousands), data for the percentage change and data as a percentage of revenue for the three months ended March 31, 2024 and March 31, 2023. Revenue Three Months Ended March 31, % Change 2024 2023 Revenue SaaS and license revenue $ 150,344 $ 135,394 11 % Hardware and other revenue 72,939 74,322 (2) Total revenue $ 223,283 $ 209,716 6 % The $13.6 million increase in total revenue for the three months ended March 31, 2024 as compared to the same period in the prior year was primarily the result of a $15.0 million, or 11%, increase in our SaaS and license revenue, partially offset by a $1.4 million, or 2%, decrease in our hardware and other revenue. Our software license revenue included within SaaS and license revenue decreased $1.0 million to $5.2 million during the three months ended March 31, 2024 as compared to $6.2 million during the same period in the prior year primarily due to the result of the continuing transition of customers from non-hosted software to our cloud based hosted platform. The SaaS and license revenue for the Alarm.com segment increased $12.2 million for the three months ended March 31, 2024 as compared to the same period in the prior year primarily due to growth in our subscriber base, including the revenue impact from subscribers we added in 2023. The SaaS and license revenue for our Other segment increased $2.7 million for the three months ended March 31, 2024 as compared to the same period in the prior year primarily due to an increase in sales of our energy management and demand response solutions as well as our property management solution. The decrease in hardware and other revenue for the three months ended March 31, 2024 as compared to the same period in the prior year was primarily from the $1.0 million decrease in hardware and other revenue, net of intersegment eliminations, in the Alarm.com segment arising from a decrease in the volume of thermostats sold. Hardware and other revenue, net of intersegment eliminations, in our Other segment decreased $0.3 million for the three months ended March 31, 2024 as compared to the same period in the prior year primarily due to decreased sales related to our property management and Heating, Ventilation and Air Conditioning solutions. Cost of Revenue Three Months Ended March 31, % Change 2024 2023 Cost of revenue (1) Cost of SaaS and license revenue $ 20,428 $ 19,583 4 % Cost of hardware and other revenue 56,087 56,589 (1) Total cost of revenue $ 76,515 $ 76,172 — % % of total revenue 34 % 36 % _____________ (1) Excludes amortization and depreciation shown in operating expenses. The $0.3 million increase in cost of revenue for the three months ended March 31, 2024 as compared to the same period in the prior year was the result of a $0.8 million, or 4%, increase in cost of SaaS and license revenue, partially offset by a $0.5 million, or 1%, decrease in cost of hardware and other revenue. Our cost of software license revenue included within cost of SaaS and license revenue was $0.2 million for the three months ended March 31, 2024 as compared to $0.1 million during the same period in the prior year. The cost of SaaS and license revenue for the Alarm.com segment increased $0.1 million during the three months ended March 31, 2024 as compared to the same period in the prior year primarily due to the growth in our subscriber base, which drove a corresponding increase in amounts paid to wireless network providers. The cost of hardware and other revenue for the Alarm.com segment decreased $0.2 million during the three months ended March 31, 2024 as compared to the same period in the prior year primarily due to a decrease in the number of hardware units shipped and a decrease in costs for freight shipments. The cost of SaaS and license revenue for the Other segment increased $0.7 million during the three months ended March 31, 2024 as compared to the same period in the prior year primarily due to an increase in sales of our energy management and demand response solutions, which drove a corresponding increase in amounts paid to distributed energy resource providers. The cost of hardware and other revenue for the Other segment decreased $0.3 million during the three months ended March 31, 2024 as compared to the same period in the prior year primarily due to a decrease in the number of hardware units shipped and a decrease in costs for freight shipments. 31 Cost of hardware and other revenue as a percentage of hardware and other revenue was 77% for the three months ended March 31, 2024 and 76% for the same period in the prior year. The increase in cost of hardware and other revenue as a percentage of hardware and other revenue for the three months ended March 31, 2024 as compared to the same period in the prior year is primarily a reflection of the mix of product sales during the periods. Cost of SaaS and license revenue as a percentage of SaaS and license revenue was 14% for each of the three months ended March 31, 2024 and 2023. Cost of software license revenue as a percentage of software license revenue was 3% for the three months ended March 31, 2024 and 2% for the same period in the prior year. Sales and Marketing Expense Three Months Ended March 31, % Change 2024 2023 Sales and marketing $ 25,454 $ 26,645 (4) % % of total revenue 12 % 13 % The $1.2 million decrease in sales and marketing expense for the three months ended March 31, 2024 as compared to the same period in the prior year was primarily due to a $1.4 million decrease in marketing expense and a $0.8 million decrease in personnel and related costs for our Alarm.com segment. Personnel and related costs includes salary, benefits, stock-based compensation and travel expenses. These decreases in sales and marketing expense for our Alarm.com segment were partially offset by a $0.1 million increase in our expenses for external consultants for the three months ended March 31, 2024 as compared to the same period in the prior year. Sales and marketing expense from our Other segment increased $0.8 million for the three months ended March 31, 2024 as compared to the same period in the prior year, primarily due to an increase in personnel and related costs, attributable in part to increases in the headcount for our sales team. The overall number of employees in our sales and marketing teams increased from 519 as of March 31, 2023 to 564 as of March 31, 2024. General and Administrative Expense Three Months Ended March 31, % Change 2024 2023 General and administrative $ 29,296 $ 28,499 3 % % of total revenue 13 % 14 % The $0.8 million increase in general and administrative expense for the three months ended March 31, 2024 as compared to the same period in the prior year was primarily due to a $4.0 million increase in the provision for credit losses related to a loan we provided to an affiliated entity of one of our distribution partners, partially offset by a $3.0 million decrease in legal costs for our Alarm.com segment related to intellectual property litigation. General and administrative expenses from our Other segment decreased by $0.3 million for the three months ended March 31, 2024 as compared to the same period in the prior year, primarily due to a $0.5 million decrease in the provision for credit losses, partially offset by a $0.2 million increase in personnel and related costs. The overall number of employees in general and administrative functions increased from 198 as of March 31, 2023 to 224 as of March 31, 2024. Research and Development Expense Three Months Ended March 31, % Change 2024 2023 Research and development $ 65,956 $ 61,908 7 % % of total revenue 30 % 29 % The $4.0 million increase in research and development expense for the three months ended March 31, 2024 as compared to the same period in the prior year was primarily due to a $2.5 million increase in personnel and related costs for our Alarm.com segment, attributable in part to an increase in headcount of employees in research and development functions as well as a $0.8 million increase in our expenses for external consultants. Research and development expense from our Other segment increased by $1.0 million for the three months ended March 31, 2024 as compared to the same period in the prior year, primarily due to an increase in personnel and related costs. The overall number of employees in research and development functions increased from 1,042 as of March 31, 2023 to 1,139 as of March 31, 2024. 32 Amortization and Depreciation Three Months Ended March 31, % Change 2024 2023 Amortization and depreciation $ 7,337 $ 7,673 (4) % % of total revenue 3 % 4 % Amortization and depreciation decreased $0.3 million for each of the three months ended March 31, 2024 as compared to the same period in the prior year, primarily due to changes in amortization expense related to the intangible assets we previously acquired. Interest Expense Three Months Ended March 31, % Change 2024 2023 Interest expense $ (796) $ (868) (8) % % of total revenue — % — % Interest expense remained relatively consistent for the three months ended March 31, 2024, as compared to the same period in the prior year. Interest Income Three Months Ended March 31, % Change 2024 2023 Interest income $ 8,540 $ 5,182 65 % % of total revenue 4 % 2 % Interest income increased $3.4 million for the three months ended March 31, 2024, as compared to the same period in the prior year, primarily due to an increase in interest income earned on cash and cash equivalents from higher interest rates and higher amounts of cash and cash equivalents. The increase in interest income was partially offset by a $0.5 million reduction to interest income for the reversal of payable in kind interest associated with a subordinated credit agreement with an affiliated entity of one of our distribution partners during the three months ended March 31, 2024, which did not occur during the three months ended March 31, 2023. Other Expense, Net Three Months Ended March 31, % Change 2024 2023 Other expense, net $ (318) $ (148) 115 % % of total revenue — % — % Other expense, net increased $0.2 million for the three months ended March 31, 2024, as compared to the same period in the prior year, primarily due to an increase in non-operating and miscellaneous expenses. Provision for / (Benefit from) Income Taxes Three Months Ended March 31, % Change 2024 2023 Provision for / (benefit from) income taxes $ 2,747 $ (1,222) (325) % % of total revenue 2 % (1) % The provision for income taxes increased $4.0 million for the three months ended March 31, 2024, as compared to the same period in the prior year. Our effective tax rate was 10.5% for the three months ended March 31, 2024, as compared to (9.4)% for the same period in the prior year. The increase in the provision for income taxes for the three months ended March 31, 2024 as 33 compared to the same period in the prior year was primarily due to an increase in income before income taxes and a decrease in the estimated research and development tax credits. Segment Information We have two reportable segm ents: Alarm.com and Other. Our Alarm.com segment represents our cloud-based and Software platforms for the intelligently connected property and related solutions that c ontributed 94% of our revenue, net of intersegment eliminations, for the three months ended March 31, 2024, as compared to 95% for the same period in the prior year. Our Other segment is focused on researching, developing and offering residential and commercial automation solutions and energy management products and services in adjacent markets. The consolidated subsidiaries that make up our Other segment are in the investment stage and have incurred significant operating expenses relative to their revenue. Our Alarm.com segment increased from 1,672 employees as of March 31, 2023 to 1,780 employees as of March 31, 2024 and increased from 1,776 employees as of December 31, 2023. Our Other segment increased from 186 employees as of March 31, 2023 to 222 employees as of March 31, 2024 and increased from 213 employees as of December 31, 2023 . Inter-segment revenue includes sales of hardware between our segments. The following table presents our revenue, inter-segment revenue and operating expenses by segment (in thousands): Three Months Ended March 31, 2024 2023 SaaS and license revenue Hardware and other revenue Operating expenses SaaS and license revenue Hardware and other revenue Operating expenses Alarm.com $ 137,859 $ 72,364 $ 114,621 $ 125,652 $ 73,496 $ 112,941 Other 12,485 1,398 13,422 9,742 1,718 11,904 Intersegment Alarm.com — (686) — — (777) (120) Intersegment Other — (137) — — (115) — Total $ 150,344 $ 72,939 $ 128,043 $ 135,394 $ 74,322 $ 124,725 Our SaaS and license revenue for the Alarm.com segment included software license revenue of $5.2 million for the three months ended March 31, 2024, as compared to $6.2 million for the same period in the prior year. There was no software license revenue recorded for the Other segment during the three months ended March 31, 2024 and 2023. Critical Accounting Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue, costs and expenses during the reported period. In accordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Because of the use of estimates inherent in the financial reporting process in light of the continuing uncertainty arising from the Macroeconomic Conditions, actual results could differ from those estimates and any such differences may be material. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. Except as disclosed in Note 2 of our notes to the condensed consolidated financial statements, there were no other material changes to our use of estimates or other critical accounting policies from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the SEC on February 22, 2024. Recent Accounting Pronouncements See Note 2 of our condensed consolidated financial statements for information related to recently issued accounting standards. 34 Liquidity and Capital Resources Working Capital The following table summarizes our cash and cash equivalents, accounts receivable, net and working capital, for the periods indicated (in thousands): March 31, 2024 December 31, 2023 Cash and cash equivalents $ 747,877 $ 696,983 Accounts receivable, net 128,451 130,626 Working capital 816,668 781,443 We define working capital as current assets minus current liabilities. Our cash and cash equivalents as of March 31, 2024 are available for working capital purposes. Our investment policy defines allowable investments and establishes guidelines relating to credit quality, diversification and maturities of our investments to preserve capital, maintain liquidity and limit the amount of credit risk exposure. As of March 31, 2024, our cash and cash equivalents were primarily held in money market accounts. Liquidity and Capital Resources As of March 31, 2024, we had $747.9 million in cash and cash equivalents. We consider all highly liquid instruments purchased with an original maturity from the date of purchase of three months or less to be cash equivalents. To date, we have principally financed our operations through cash generated by operating activities and through private and public equity and debt financings. We mitigate the risk of loss for our cash and cash equivalents by depositing funds with a number of reputable financial institutions and monitoring risk profiles and investment strategies of money market funds. Beginning in 2022, the Tax Cuts and Jobs Act of 2017 amended Internal Revenue Code Section 174, or Section 174, to eliminate the option to immediately deduct research and development expenditures in the year incurred, requiring these expenditures to be capitalized and amortized over five years for domestic expenditures and over 15 years for foreign expenditures. While we calculated the 2022 federal and state cash tax increase from Section 174 to be $38.1 million, we did not pay this additional cash tax liability as part of our 2022 estimated tax payments due to the possible deferral, modification or repeal of Section 174. The additional 2022 federal cash tax liability was included in current income taxes payable as of December 31, 2022, and was paid in February 2023. The increased 2022 state tax liability was paid in April 2023 in the amount of $7.5 million. We calculated the 2023 federal and state cash tax increase from Section 174 to be $43.5 million, which we paid in April 2024. The Section 174 impact on 2024 cash flows from operating activities will depend on, among other factors, our 2024 operating results and the level of 2024 research and development activity. Based on information currently available to us, we estimate the increased 2024 Section 174 federal and state cash tax payable for our 2024 taxable income to be in the range of $35.0 million to $40.0 million if the requirement to capitalize and amortize research and development expenditures is not deferred, modified or repealed. This estimate is based on the limited information that is currently available and is subject to change. While the largest impact will be to cash flow from operating activities, the impact for domestic research and development expenditures would continue over the five-year amortization period, but would decrease over that period and is expected to be immaterial beginning in year six. On January 31, 2024, the U.S. House of Representatives passed H.R. 7024, which, among other provisions, would retroactively change the effective date of the requirement to capitalize Section 174 domestic research and development expenditures from January 1, 2022 to January 1, 2026. Foreign research and development expenditures would continue to be capitalized and amortized over 15 years as of January 1, 2022. If the bill is passed by the Senate and signed into law by the President as currently drafted, the bill would allow us to receive a partial refund of the 2022 and 2023 Section 174 federal income tax paid, the amount and timing of which cannot be estimated at this time. Any state impact would depend on the relevant individual state laws. We believe our existing cash and cash equivalents and our future cash flows from operating activities will be sufficient to meet our anticipated operating cash needs for at least the next 12 months. Over the final nine months of fiscal year 2024, we expect our capital expenditure requirements to be between $4.0 million and $6.0 million, primarily related to the continued build out of our leased and owned office space as well as purchases of computer software and equipment. Maturities of lease liabilities for our various office, data center and equipment leases as of March 31, 2024 are as follows: $10.6 million for the remainder of 2024, $12.5 million in 2025, $7.8 million in 2026, $2.5 million in 2027, $1.8 million in 2028 and $1.9 million in 2029 and thereafter. Our future working capital, capital expenditure and cash requirements will depend on many factors, including the impact of the Macroeconomic Conditions on the economy and our operations, the rate of our revenue growth, the amount and timing of our investments in human resources and capital equipment, future acquisitions and investments, and the timing and extent of our introduction of new solutions and platform and solution enhancements. As the impact of the Macroeconomic Conditions on the economy and our operations evolves, we will continue to assess our liquidity needs. To the extent our cash and cash equivalents 35 and cash flows from operating activities are insufficient to fund our future activities, we may need to borrow additional funds or raise funds from public or private equity or debt financings. If we raise additional funds through the incurrence of indebtedness, such indebtedness would likely have rights that are senior to holders of our equity securities and could contain covenants that restrict our operations. Any additional equity financing would be dilutive to our current stockholders. Material Cash Requirements As of March 31, 2024, there were no material changes in our cash requirements from those disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report. Sources of Liquidity On January 20, 2021, we issued $500.0 million aggregate principal amount of 0% convertible senior notes due January 15, 2026 in a private placement to qualified institutional buyers and received proceeds of $484.3 million, net of $15.7 million of transaction fees and other debt issuance costs. The 2026 Notes are discussed in more detail above in Note 12 to the condensed consolidated financial statements. Dividends We did not declare or pay dividends during the three months ended March 31, 2024 or 2023. We cannot provide any assurance that we will declare or pay cash dividends on our common stock in the future. We currently anticipate that we will retain all of our future earnings, if any, for use in the operation and expansion of our business and we do not anticipate paying cash dividends in the foreseeable future. Payment of future cash dividends, if any, will be at the discretion of the board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, the requirements of current or then-existing debt instruments and other factors the board of directors deems relevant. Stock Repurchase Programs On February 15, 2023, our board of directors authorized a stock repurchase program, effective February 23, 2023, under which we are authorized to purchase up to an aggregate of $100.0 million of our outstanding common stock during the two-year period ending February 23, 2025. During the three months ended March 31, 2024 and 2023, no shares of our common stock were repurchased under this program. As of January 1, 2023, we are subject to a 1.0% excise tax on the value of net corporate stock repurchases under the Inflation Reduction Act of 2022. When applicable, the excise tax will be included as part of the cost basis of shares acquired and is presented within stockholders’ equity in the condensed consolidated balance sheets. Historical Cash Flows The following table sets forth our cash flows for the periods indicated (in thousands): Three Months Ended March 31, 2024 2023 Cash flows from / (used in) operating activities $ 49,853 $ (3,521) Cash flows used in investing activities (3,961) (12,943) Cash flows from financing activities 6,356 842 Operating Activities Cash flows from operating activities have typically been generated from our net income and by changes in our operating assets and liabilities, particularly from accounts receivable and inventory, adjusted for non-cash expense items such as amortization and depreciation, deferred income taxes and stock-based compensation. For the three months ended March 31, 2024, cash flows from operating activities were $49.9 million, compared to cash flows used in operating activities of $3.5 million for the same period in the prior year. This $53.4 million increase in cash flows from operating activities was due to a $28.6 million increase in cash from operating assets and liabilities, a $15.6 million increase in non-cash and other reconciling items and a $9.2 million increase in net income. The $28.6 million increase in cash from operating assets and liabilities was primarily due to differences in the timing of disbursements and the collection of receipts as well as a $10.0 million change in inventory resulting from a decrease in purchased inventory during the three months ended March 31, 2024 as compared to the same period in the prior year. The $15.6 million increase in non-cash and other reconciling items was primarily due to a $13.5 million change in deferred income taxes, which was primarily driven by the capitalization and amortization of research and development expenditures under Section 174, as well as an increase in the provision for credit losses on notes receivable related to a loan we provided to an affiliated entity of one of our distribution partners. These increases in non-cash and other reconciling items were partially offset by a $1.4 million 36 decrease in stock-based compensation during the three months ended March 31, 2024 as compared to the same period in the prior year. Investing Activities Our investing activities typically include acquisitions, capital expenditures, investments in unconsolidated entities, notes receivable issued to companies with offerings complementary to ours and proceeds from the repayment of those notes receivable. Our capital expenditures have primarily been for general business use, including leasehold improvements as we have expanded our office space to accommodate our growth in headcount, computer equipment used internally and expansion of our network operations centers. For the three months ended March 31, 2024, cash flows used in investing activities were $4.0 million, compared to $12.9 million for the same period in the prior year. The $8.9 million decrease in cash flows used in investing activities was primarily due to $9.7 million paid to purchase 100% of the issued and outstanding shares of capital stock of EBS, net of cash acquired, during the three months ended March 31, 2023, which did not occur during the three months ended March 31, 2024. The decrease in cash flows used in investing activities was partially offset by a $0.7 million increase in purchases of equipment as well as a $0.2 million increase in the issuance of notes receivable during the three months ended March 31, 2024 as compared to the same period in the prior year. Financing Activities Cash generated by financing activities includes proceeds from the 2026 Notes and proceeds from the issuance of common stock from employee stock option exercises and from our employee stock purchase plan. Cash used in financing activities typically includes repurchases of common stock and repayments of debt. For the three months ended March 31, 2024, cash flows from financing activities were $6.4 million, compared to $0.8 million for the same period in the prior year. The $5.6 million increase in cash flows from financing activities was primarily due to a $5.0 million increase in the issuance of common stock during the three months ended March 31, 2024, as compared to the same period in the prior year. The increase in cash flows from financing activities was also due to the $0.5 million in debt payments related to the debt assumed in the acquisition of EBS during the three months ended March 31, 2023, which did not occur during the three months ended March 31, 2024. Non-GAAP Measures We define non-GAAP adjusted EBITDA as our net income before interest expense, interest income, certain activity within other expense, net, provision for / (benefit from) income taxes, amortization and depreciation expense, stock-based compensation expense, acquisition-related expense, legal costs and settlement fees incurred and received in connection with non-ordinary course litigation and other disputes, particularly costs involved in ongoing intellectual property litigation. We do not consider these items to be indicative of our core operating performance. The non-cash items include amortization and depreciation expense, amortization of debt issuance costs for the 2026 Notes included in interest expense, stock-based compensation expense related to restricted stock units and other forms of equity compensation, including, but not limited to, the sale of common stock. We do not adjust for ordinary course legal expenses resulting from maintaining and enforcing our intellectual property portfolio and license agreements. Non-GAAP adjusted EBITDA is not a measure calculated in accordance with GAAP. See the table below for a reconciliation of non-GAAP adjusted EBITDA from net income, the most directly comparable financial measure calculated and presented in accordance with GAAP. We have included non-GAAP adjusted EBITDA in this report because it is a key measure our management uses to understand and evaluate our core operating performance and trends, to generate future operating plans, to make strategic decisions regarding the allocation of capital and to make investments in initiatives that are focused on cultivating new markets for our solutions. We also use non-GAAP adjusted EBITDA, a non-GAAP financial measure, as a performance measure under our executive bonus plan. Further, we believe the exclusion of certain expenses in calculating non-GAAP adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis and, in the case of exclusion of acquisition-related expense and certain historical legal expenses, excludes items that we do not consider to be indicative of our core operating performance. Accordingly, we believe non-GAAP adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. Our use of non-GAAP adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these limitations are: (a) although amortization and depreciation are non-cash charges, the assets being amortized and depreciated may have to be replaced in the future, and non-GAAP adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; (b) non-GAAP adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; (c) non-GAAP adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation; (d) non-GAAP adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and (e) other companies, including companies in our industry, may calculate non-GAAP adjusted EBITDA or similarly titled measures differently, which reduces its usefulness as a comparative measure. 37 Because of these and other limitations, you should consider non-GAAP adjusted EBITDA alongside our other GAAP-based financial performance measures, net income and our other GAAP financial results. The following table presents a reconciliation of non-GAAP adjusted EBITDA from net income, the most directly comparable GAAP measure, for each of the periods indicated (in thousands): Three Months Ended March 31, 2024 2023 Non-GAAP adjusted EBITDA: Net income $ 23,404 $ 14,207 Adjustments: Interest expense, interest income and certain activity within other expense, net (7,744) (4,314) Provision for / (benefit from) income taxes 2,747 (1,222) Amortization and depreciation expense 7,337 7,673 Stock-based compensation expense 11,268 12,686 Acquisition-related expense 31 779 Litigation expense 3 766 Total adjustments 13,642 16,368 Non-GAAP adjusted EBITDA $ 37,046 $ 30,575