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, 2024 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024 filed on February 20, 2025, 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 (including the ongoing conflicts in Ukraine and in the Middle East and surrounding areas), disruptions to global supply chains, fluctuations in interest rates, tariffs, 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 new or increased 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 global opportunities in the residential, multi-family, small business and enterprise commercial markets. Alarm.com’s solution suite includes security, video and video analytics, energy management, access control, electric utility grid management, indoor gunshot detection, water management, health and wellness, personal safety and data-rich emergency response. During 2024, our platforms processed more than 345 billion data points generated by over 160 million connected devices. We believe this scale of subscribers, connected devices and data operations makes us the leader in the connected property market. Alarm.com has established a global network of trusted service provider partners who distribute our solutions to their customers. Our service provider partners represent a wide range of independent businesses, and are experts at selling, installing and supporting our technology. They depend on the Alarm.com platform for connected property technology and to operate and manage their businesses efficiently. Alarm.com primarily generates SaaS and license revenue through our service provider partners, who resell our services and pay us monthly fees. Contracts with our service provider partners 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 and Integrated Platforms 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 address the needs of a broad range of residential and commercial customers. They can deploy interactive security, video monitoring, property automation, access control, energy management, gunshot detection, water management, vehicle and fleet management, and wellness and personal safety solutions as stand-alone offerings or as integrated solutions. 29 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 on a per customer basis. SaaS and license revenue represented 69% of our revenue during the three months ended March 31, 2025, as compared to 67% 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 each of the three months ended March 31, 2025 and 2024. 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 31% of our revenue during the three months ended March 31, 2025, as compared to 33% 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 9% to $163.8 million during the three months ended March 31, 2025 from $150.3 million during the three months ended March 31, 2024. Included in SaaS and license revenue was software license revenue, which decreased to $4.7 million during the three months ended March 31, 2025 from $5.2 million during the three months ended March 31, 2024. • Total revenue increased 7% to $238.8 million during the three months ended March 31, 2025 from $223.3 million during the three months ended March 31, 2024. • Net income increased to $27.7 million during the three months ended March 31, 2025, as compared to $23.4 million during the three months ended March 31, 2024. Net income attributable to common stockholders increased to $28.0 million during the three months ended March 31, 2025, as compared to $23.6 million during the three months ended March 31, 2024. • Non-GAAP adjusted EBITDA, a non-GAAP measurement of operating performance, increased to $43.5 million during the three months ended March 31, 2025 from $37.0 million during the three months ended March 31, 2024. 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, 2025 and 2024. 30 Recent Developments On January 30, 2025, we entered into a senior secured loan agreement with a service provider partner, under which a term loan was provided to the service provider partner in the original principal amount of $21.5 million, which loan is collateralized by the assets of the service provider partner. Quarterly principal payments begin in the second quarter of 2027. Interest on the outstanding principal accrues at a rate per annum equal to the overnight financing rate published by the Federal Reserve Bank of New York for a period of three months, plus 3.0%. For the first two years of the loan, monthly interest payments can be payable in kind at the election of the borrower. The maturity date of the loan is January 30, 2030. On February 10, 2025, Alarm.com Incorporated, one of our wholly-owned subsidiaries, acquired 81% of the issued and outstanding shares of capital stock of CHeKT, Inc., or CHeKT. CHeKT provides a remote video monitoring service for central station operators that is compatible with a variety of cameras. We believe the acquisition of CHeKT will help to expand our opportunity to provide remote video monitoring solutions in the commercial and residential markets. In consideration for the purchase of 81% of the issued and outstanding shares of capital stock of CHeKT, we paid $23.6 million in cash on February 10, 2025, after deducting $3.7 million related to agreed holdback provisions. Pursuant to the terms of the stock purchase agreement, following the preliminary determination of the working capital of CHeKT as of the closing date, the purchase price decreased by $0.2 million. The purchase price allocation was not finalized as of the filing date of this Quarterly Report on Form 10-Q and is pending the final determination of the working capital adjustment as well as tax adjustments, including the assessment of any net operating losses acquired and the related limitations on any identified net operating losses. On April 28, 2025, we paid $29.1 million in cash to purchase 24.7% of the outstanding shares of Safe Streets USA, LLC. We are still evaluating the accounting treatment for this investment, which will be finalized during the second quarter of 2025. 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, tariffs, 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, 2025 are not necessarily indicative of the results that can be expected for our entire fiscal year ending December 31, 2025, 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): Three Months Ended March 31, 2025 2024 SaaS and license revenue $ 163,800 $ 150,344 Non-GAAP adjusted EBITDA 43,540 37,046 Twelve Months Ended March 31, 2025 2024 SaaS and license revenue renewal rate 95 % 94 % 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. 31 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 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; amortization of debt issuance costs for the May 31, 2024 issuance of $500.0 million aggregate principal amount of 2.25% convertible senior notes due June 1, 2029, or the 2029 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 and 2029 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 without readily determinable fair values and other assets, gains and losses from equity method investments, 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 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. 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. 32 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, 2025 and 2024. 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. 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. 33 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, 2025 and 2024, we had 76 and 75 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. In April 2025, the U.S. government announced a baseline tariff of 10% on all products imported into the United States (with certain limited exceptions) and additional individualized tariffs based on country of origin at different rates per country. Certain of these tariffs have been subsequently paused or modified, and the situation remains fluid. The United States and/or countries into which we import products may, in the future, adjust and/or impose new quotas, duties, tariffs or reciprocal tariffs or other restrictions. A significant portion of our hardware is produced outside the United States, including in Vietnam, Thailand and Taiwan. The ultimate impact of any tariffs will depend on various factors, including how long such tariffs remain in place, the ultimate levels of such tariffs and how other countries respond to the U.S. tariffs. Given these tariffs did not become effective until April 2025, there was no impact to our cost of hardware revenue for these new tariffs during the three months ended March 31, 2025. As we look forward, we continue to monitor the changes in tariffs and consider whether we will pass through some or all of the cost of the tariffs to our customers consistent with our contractual rights. Depending on how much, if any, of the cost of tariffs we pass through to our customers, our hardware revenue margins may be impacted. If tariffs are increased through reinstatement of the previously announced tariffs 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 further. We continue to closely monitor changes in tariff policy and retain flexibility in response. 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 2,002 employees as of March 31, 2024 to 2,020 employees as of March 31, 2025 , and grew from 2,010 employees as of December 31, 2024. 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 34 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 564 as of March 31, 2024 to 579 as of March 31, 2025 and increased from 572 as of December 31, 2024. 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 2025 as compared to 2024. 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 224 as of March 31, 2024 to 236 as of March 31, 2025 and decreased from 237 as of December 31, 2024. 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 decreased from 1,139 as of March 31, 2024 to 1,129 as of March 31, 2025 and increased from 1,127 as of December 31, 2024. 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 2029 Notes. Interest expense in 2025 is expected to increase as compared to 2024 due to the issuance of the 2029 Notes. 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 2025 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. 35 Provision for 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, 2025, our effective tax rate was below the 21.0% statutory rate primarily due to 2025 research and development tax credits claimed and the foreign derived intangible income deduction, partially offset by the impact of state taxes, foreign withholding taxes 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. 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, 2025 2024 Revenue: SaaS and license revenue $ 163,800 69 % $ 150,344 67 % Hardware and other revenue 75,022 31 72,939 33 Total revenue 238,822 100 223,283 100 Cost of revenue (1) : Cost of SaaS and license revenue 21,568 9 20,428 9 Cost of hardware and other revenue (2) 56,666 24 56,087 25 Total cost of revenue 78,234 33 76,515 34 Operating expenses: Sales and marketing (2) 28,549 12 25,454 12 General and administrative (2) 27,001 11 29,296 13 Research and development (2) 68,367 28 65,956 30 Amortization and depreciation 7,024 3 7,337 3 Total operating expenses 130,941 54 128,043 58 Operating income 29,647 13 18,725 8 Interest expense (4,314) (2) (796) — Interest income 12,371 5 8,540 4 Other expense, net (2,685) (1) (318) — Income before income taxes 35,019 15 26,151 12 Provision for income taxes 7,307 3 2,747 2 Net income $ 27,712 12 % $ 23,404 10 % _______________ (1) Excludes amortization and depreciation shown in operating expenses below. (2) Expenses include stock-based compensation expense as follows (in thousands): Three Months Ended March 31, Stock-based compensation expense data: 2025 2024 Cost of hardware and other revenue $ — $ 1 Sales and marketing 480 755 General and administrative 2,972 3,181 Research and development 6,006 7,331 Total stock-based compensation expense $ 9,458 $ 11,268 36 The following table sets forth the components of cost of revenue as a percentage of revenue: Three Months Ended March 31, 2025 2024 Components of cost of revenue as a percentage of revenue: Cost of SaaS and license revenue as a percentage of SaaS and license revenue 13 % 14 % Cost of hardware and other revenue as a percentage of hardware and other revenue 76 77 Total cost of revenue as a percentage of total revenue 33 % 34 % Comparison of the Three Months Ended March 31, 2025 to March 31, 2024 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, 2025 and March 31, 2024. Revenue Three Months Ended March 31, % Change 2025 2024 Revenue SaaS and license revenue $ 163,800 $ 150,344 9 % Hardware and other revenue 75,022 72,939 3 Total revenue $ 238,822 $ 223,283 7 % The $15.5 million increase in total revenue for the three months ended March 31, 2025 as compared to the same period in the prior year was primarily the result of a $13.5 million, or 9%, increase in our SaaS and license revenue, and a $2.1 million, or 3%, increase in our hardware and other revenue. Our software license revenue included within SaaS and license revenue decreased $0.5 million to $4.7 million during the three months ended March 31, 2025 as compared to $5.2 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 $9.8 million for the three months ended March 31, 2025 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 2024. The SaaS and license revenue for our Other segment increased $3.7 million for the three months ended March 31, 2025 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 increase in hardware and other revenue for the three months ended March 31, 2025 as compared to the same period in the prior year was primarily from the $1.7 million increase in hardware and other revenue, net of intersegment eliminations, in the Alarm.com segment arising from an increase in the average selling price of cameras sold. Hardware and other revenue, net of intersegment eliminations, in our Other segment increased $0.4 million for the three months ended March 31, 2025 as compared to the same period in the prior year primarily due to increased sales related to our property management solution. Cost of Revenue Three Months Ended March 31, % Change 2025 2024 Cost of revenue (1) Cost of SaaS and license revenue $ 21,568 $ 20,428 6 % Cost of hardware and other revenue 56,666 56,087 1 Total cost of revenue $ 78,234 $ 76,515 2 % % of total revenue 33 % 34 % _____________ (1) Excludes amortization and depreciation shown in operating expenses. The $1.7 million increase in cost of revenue for the three months ended March 31, 2025 as compared to the same period in the prior year was the result of a $1.1 million, or 6%, increase in cost of SaaS and license revenue, and a $0.6 million, or 1%, increase in cost of hardware and other revenue. Our cost of software license revenue included within cost of SaaS and 37 license revenue was $0.1 million and $0.2 million for the three months ended March 31, 2025 and 2024, respectively. The cost of SaaS and license revenue for the Other segment increased $0.8 million during the three months ended March 31, 2025 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 SaaS and license revenue for the Alarm.com segment increased $0.3 million during the three months ended March 31, 2025 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 increased $0.3 million during the three months ended March 31, 2025 as compared to the same period in the prior year primarily due to a change in the mix of product sales to more hardware with higher costs. The cost of hardware and other revenue for the Other segment increased $0.3 million during the three months ended March 31, 2025 as compared to the same period in the prior year primarily due to an increase in the number of hardware units shipped related to our property management solution. Cost of hardware and other revenue as a percentage of hardware and other revenue was 76% for the three months ended March 31, 2025 and 77% for the same period in the prior year. The decrease in cost of hardware and other revenue as a percentage of hardware and other revenue for the three months ended March 31, 2025 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 13% for three months ended March 31, 2025 as compared to 14% for the same period in the prior year. Cost of software license revenue as a percentage of software license revenue was 3% for each of the three months ended March 31, 2025 and 2024. Sales and Marketing Expense Three Months Ended March 31, % Change 2025 2024 Sales and marketing $ 28,549 $ 25,454 12 % % of total revenue 12 % 12 % The $3.1 million increase in sales and marketing expense for the three months ended March 31, 2025 as compared to the same period in the prior year was primarily due to a $1.5 million increase in personnel and related costs for our Alarm.com segment, attributable in part to increases in the headcount for our sales team to support our growth, and a $0.6 million increase in marketing expense for our Alarm.com segment. Personnel and related costs includes salary, benefits, stock-based compensation and travel expenses. Sales and marketing expense from our Other segment increased $1.0 million for the three months ended March 31, 2025 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 number of employees in sales and marketing functions increased from 564 as of March 31, 2024 to 579 as of March 31, 2025. General and Administrative Expense Three Months Ended March 31, % Change 2025 2024 General and administrative $ 27,001 $ 29,296 (8) % % of total revenue 11 % 13 % The $2.3 million decrease in general and administrative expense for the three months ended March 31, 2025 as compared to the same period in the prior year was primarily due to a $4.3 million decrease in the provision for credit losses for our Alarm.com segment, driven by a $4.0 million loan we provided to an affiliated entity of one of our distribution partners. This decrease in general and administrative expense was partially offset by a $1.0 million increase in consulting costs. General and administrative expenses from our Other segment increased by $1.2 million for the three months ended March 31, 2025 as compared to the same period in the prior year, primarily due to an increase in the provision for credit losses. The number of employees in general and administrative functions increased from 224 as of March 31, 2024 to 236 as of March 31, 2025. 38 Research and Development Expense Three Months Ended March 31, % Change 2025 2024 Research and development $ 68,367 $ 65,956 4 % % of total revenue 28 % 30 % The $2.4 million increase in research and development expense for the three months ended March 31, 2025 as compared to the same period in the prior year was primarily due to a $0.7 million increase in our expenses for external consultants, a $0.7 million increase in expenses for software licenses and a $0.2 million increase in personnel and related costs for our Alarm.com segment. Research and development expense from our Other segment increased by $0.6 million for the three months ended March 31, 2025 as compared to the same period in the prior year, primarily due to an increase in personnel and related costs attributable in part to an increase in headcount of employees in research and development functions. The overall number of employees in research and development functions decreased from 1,139 as of March 31, 2024 to 1,129 as of March 31, 2025. Amortization and Depreciation Three Months Ended March 31, % Change 2025 2024 Amortization and depreciation $ 7,024 $ 7,337 (4) % % of total revenue 3 % 3 % Amortization and depreciation decreased $0.3 million for the three months ended March 31, 2025, 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, partially offset by the intangible assets that were acquired in connection with the purchase of 81% of the issued and outstanding shares of capital stock of CHeKT on February 10, 2025. Interest Expense Three Months Ended March 31, % Change 2025 2024 Interest expense $ (4,314) $ (796) 442 % % of total revenue (2) % — % Interest expense increased $3.5 million for the three months ended March 31, 2025, as compared to the same period in the prior year, primarily due to the interest expense and amortization of the debt issuance costs related to the 2029 Notes. Interest Income Three Months Ended March 31, % Change 2025 2024 Interest income $ 12,371 $ 8,540 45 % % of total revenue 5 % 4 % Interest income increased $3.8 million for the three months ended March 31, 2025, 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 amounts of cash and cash equivalents during the three months ended March 31, 2025 as compared to the same period in the prior year. 39 Other Expense, Net Three Months Ended March 31, % Change 2025 2024 Other expense, net $ (2,685) $ (318) 744 % % of total revenue (1) % — % Other expense, net increased $2.4 million for the three months ended March 31, 2025, as compared to the same period in the prior year, primarily due to a $2.3 million unrealized loss on equity securities during the three months ended March 31, 2025, which did not occur during the three months ended March 31, 2024. Provision for Income Taxes Three Months Ended March 31, % Change 2025 2024 Provision for income taxes $ 7,307 $ 2,747 166 % % of total revenue 3 % 2 % The provision for income taxes increased by $4.6 million for the three months ended March 31, 2025, as compared to the same period in the prior year. Our effective tax rate was 20.9% for the three months ended March 31, 2025, as compared to 10.5% for the same period in the prior year. The increase in the provision for income taxes for the three months ended March 31, 2025 as compared to the same period in the prior year was primarily due to the increase in income before income taxes, an increase in foreign withholding taxes, a tax shortfall in employee stock-based compensation during the three months ended March 31, 2025 as opposed to a windfall tax benefit recognized during the three months ended March 31, 2024 and an increase in other nondeductible expenses, partially offset by an increase in our research and development income tax credits. Further, the net $1.7 million tax benefit recognized during the three months ended March 31, 2024 from the closure of the 2018 and 2019 Internal Revenue Service examination did not recur during the three months ended March 31, 2025. 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 93% of our revenue, net of intersegment eliminations, for the three months ended March 31, 2025, as compared to 94% 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 decreased from 1,780 employees as of March 31, 2024 to 1,774 employees as of March 31, 2025 and increased from 1,773 employees as of December 31, 2024. Our Other segment increased from 222 employees as of March 31, 2024 to 246 employees as of March 31, 2025 and increased from 237 employees as of December 31, 2024. Inter-segment revenue includes sales of hardware between our segments. 40 Management evaluates the performance of its segments and allocates resources to them based on operating income / (loss) as compared to prior periods and current performance levels. The reportable segment operational data is presented in the tables below (in thousands): Three Months Ended March 31, 2025 Alarm.com Other Intersegment Alarm.com Intersegment Other Total SaaS and license revenue $ 147,647 $ 16,153 $ — $ — $ 163,800 Hardware and other revenue 74,050 1,889 (674) (243) 75,022 Total revenue 221,697 18,042 (674) (243) 238,822 Cost of SaaS and license revenue 16,784 4,784 83 (83) 21,568 Cost of hardware and other revenue 55,885 1,766 (658) (327) 56,666 Total cost of revenue 72,669 6,550 (575) (410) 78,234 Selling and marketing expense 22,467 6,082 — — 28,549 General and administrative expense 24,837 2,164 — — 27,001 Research and development expense 60,684 7,683 — — 68,367 Amortization and depreciation expense 6,728 296 — — 7,024 Total operating expenses 114,716 16,225 — — 130,941 Operating income / (loss) $ 34,312 $ (4,733) $ (99) $ 167 $ 29,647 Assets $ 2,133,644 $ 73,148 $ (129,250) $ (111) $ 2,077,431 Reconciliation of operating income to income before income taxes Operating income $ 29,647 Interest expense (4,314) Interest income 12,371 Other expense, net (2,685) Income before income taxes $ 35,019 41 Three Months Ended March 31, 2024 Alarm.com Other Intersegment Alarm.com Intersegment Other Total SaaS and license revenue $ 137,859 $ 12,485 $ — $ — $ 150,344 Hardware and other revenue 72,364 1,398 (686) (137) 72,939 Total revenue 210,223 13,883 (686) (137) 223,283 Cost of SaaS and license revenue 16,458 3,933 104 (67) 20,428 Cost of hardware and other revenue 55,570 1,270 (655) (98) 56,087 Total cost of revenue 72,028 5,203 (551) (165) 76,515 Selling and marketing expense 20,410 5,044 — — 25,454 General and administrative expense 28,285 1,011 — — 29,296 Research and development expense 58,842 7,114 — — 65,956 Amortization and depreciation expense 7,084 253 — — 7,337 Total operating expenses 114,621 13,422 — — 128,043 Operating income / (loss) $ 23,574 $ (4,742) $ (135) $ 28 $ 18,725 Assets $ 1,538,429 $ 64,350 $ (115,786) $ (11) $ 1,486,982 Reconciliation of operating income to income before income taxes Operating income $ 18,725 Interest expense (796) Interest income 8,540 Other expense, net (318) Income before income taxes $ 26,151 Our SaaS and license revenue for the Alarm.com segment included software license revenue of $4.7 million for the three months ended March 31, 2025, as compared to $5.2 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, 2025 and 2024. Additions to property and equipment were $8.0 million for the Alarm.com segment for the three months ended March 31, 2025, as compared to $3.9 million for the same period in the prior year. Additions to property and equipment were less than $0.1 million for the Other segment for each of the three months ended March 31, 2025 and 2024. 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, 2024 filed with the SEC on February 20, 2025. Recent Accounting Pronouncements See Note 2 of our condensed consolidated financial statements for information related to recently issued accounting standards. 42 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, 2025 December 31, 2024 Cash and cash equivalents $ 1,186,195 $ 1,220,701 Accounts receivable, net 118,757 126,082 Working capital 775,322 1,292,786 We define working capital as current assets minus current liabilities. Our cash and cash equivalents as of March 31, 2025 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, 2025, our cash and cash equivalents were primarily held in money market accounts. Liquidity and Capital Resources As of March 31, 2025, we had $1.19 billion 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 both the 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. We calculated the 2023 federal and state cash tax increase from Section 174 to be $43.5 million, which we paid in April 2024, and we calculated the 2024 federal and state cash tax increase from Section 174 to be $33.5 million, which we paid in April 2025. The Section 174 impact on 2025 cash flows from operating activities will depend on, among other factors, our 2025 operating results and the level of 2025 research and development activity. Based on information currently available to us, we estimate the 2025 Section 174 federal and state cash tax payable for our 2025 taxable income to be in the range of $25.0 million to $30.0 million if the requirement to capitalize and amortize research and development expenditures is not modified or repealed. This estimate is based on the limited information that is currently available and is subject to change. While the largest impact has been to cash flow from operating activities, the impact for domestic research and development expenditures would continue over the five-year amortization period beginning in 2022, but has decreased over that period and is expected to continue to decrease in the upcoming years. There is discussion of prospectively repealing the requirement to capitalize domestic research and development costs, but there is no assurance such legislation will be enacted. 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 2025, we expect our capital expenditure requirements to be between $10.0 million and $13.0 million, primarily related to purchases of computer software and equipment as well as the continued build out of our leased and owned office space, excluding any leasehold improvements related to tenant improvement allowances. Maturities of lease liabilities for our various office, data center and equipment leases as of March 31, 2025 are as follows: $10.2 million for the remainder of 2025, $13.0 million in 2026, $13.2 million in 2027, $12.6 million in 2028, $12.2 million in 2029 and $48.6 million in 2030 and thereafter. 43 On January 30, 2025, we entered into a senior secured loan agreement with a service provider partner, under which a term loan was provided to the service provider partner in the original principal amount of $21.5 million, which loan is collateralized by the assets of the service provider partner. Quarterly principal payments begin in the second quarter of 2027. Interest on the outstanding principal accrues at a rate per annum equal to the overnight financing rate published by the Federal Reserve Bank of New York for a period of three months, plus 3.0%. For the first two years of the loan, monthly interest payments can be payable in kind at the election of the borrower. The maturity date of the loan is January 30, 2030. In consideration for the purchase of 81% of the issued and outstanding shares of capital stock of CHeKT, we paid $23.6 million in cash on February 10, 2025, after deducting $3.7 million related to agreed holdback provisions. Pursuant to the terms of the stock purchase agreement, following the preliminary determination of the working capital of CHeKT as of the closing date, the purchase price decreased by $0.2 million. The working capital adjustment is expected to be finalized by the second quarter of 2025 and $0.5 million of the holdback is expected to be paid to stockholders of CHeKT at that time. The remaining $3.0 million of the holdback is expected to be paid to the stockholders of CHeKT by the end of the second quarter of 2026, subject to offset for any indemnification obligations. On April 28, 2025, we paid $29.1 million in cash to purchase 24.7% of the outstanding shares of Safe Streets USA, LLC. We are still evaluating the accounting treatment for this investment, which will be finalized during the second quarter of 2025. 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 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, 2025, 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. Our 2026 Notes are due January 15, 2026 and are presented as a current liability in the condensed consolidated balance sheets as of March 31, 2025. 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. On May 31, 2024, we issued $500.0 million aggregate principal amount of 2.25% convertible senior notes due June 1, 2029 in a private placement to qualified institutional buyers and received proceeds of $485.2 million, net of $14.8 million of transaction fees and other debt issuance costs. In connection with the offering of the 2029 Notes, we entered into privately negotiated capped call transactions with one of the initial purchasers and certain other financial institutions, at a cost of $63.1 million. The 2026 Notes and 2029 Notes are discussed in more detail in Note 12 of our notes to the condensed consolidated financial statements. Dividends We did not declare or pay dividends during the three months ended March 31, 2025 or 2024. 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. 44 Stock Repurchase Programs On May 24, 2024, our board of directors authorized the repurchase of our common stock in connection with the issuance of the 2029 Notes and also authorized a stock repurchase program, effective May 31, 2024, 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 May 31, 2026. During the three months ended March 31, 2025, we repurchased 86,400 shares of our common stock under this program for $5.1 million, which includes applicable commissions and fees. No shares were repurchased under our stock repurchase programs during the three months ended March 31, 2024. 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, 2025 2024 Cash flows from operating activities $ 24,057 $ 49,853 Cash flows used in investing activities (55,179) (3,961) Cash flows (used in) / from financing activities (3,476) 6,356 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, accounts payable 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, 2025, cash flows from operating activities were $24.1 million, compared to $49.9 million for the same period in the prior year. This $25.8 million decrease in cash flows from operating activities was due to a $32.2 million decrease in cash from operating assets and liabilities, partially offset by a $4.3 million increase in net income and a $2.1 million increase in non-cash and other reconciling items. The $32.2 million decrease in cash from operating assets and liabilities was primarily due to a $12.2 million change in inventory resulting from an increase in purchased inventory during the three months ended March 31, 2025 as compared to the same period in the prior year, as well as differences in the timing of disbursements and the collection of receipts. The $2.1 million increase in non-cash and other reconciling items was primarily due to a $4.7 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 a $2.3 million unrealized loss on equity securities that did not occur during the three months ended March 31, 2025. These increases in non-cash and other reconciling items were partially offset by a $4.0 million decrease 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 during the three months ended March 31, 2024 that did not occur during the three months ended March 31, 2025 as well as a $1.8 million decrease in stock-based compensation during the three months ended March 31, 2025 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, 2025, cash flows used in investing activities were $55.2 million, compared to $4.0 million for the same period in the prior year. The $51.2 million increase in cash flows used in investing activities was primarily due to the $23.6 million paid to purchase 81% of the issued and outstanding shares of capital stock of CHeKT on February 10, 2025 and the $21.5 million note receivable issued to a service provider partner during the three months ended March 31, 2025. Additionally, the increase in cash flows used in investing activities was due to $3.8 million purchases of investments in unconsolidated entities during the three months ended March 31, 2025 that did not occur during the same period in the prior year as well as a $3.0 million increase in purchases of equipment during the three months ended March 31, 2025 as compared to the same period in the prior year. 45 Financing Activities Cash generated by financing activities has historically included proceeds from the 2026 Notes, the 2029 Notes and the issuance of common stock from employee stock option exercises and from our employee stock purchase plan. Cash used in financing activities has historically included repurchases of common stock, repayments of debt, payments of debt issuance costs and purchases of capped calls related to the 2029 Notes. For the three months ended March 31, 2025, cash flows used in financing activities were $3.5 million, compared to cash flows from financing activities of $6.4 million for the same period in the prior year. The $9.9 million decrease in cash flows from financing activities was primarily due to $5.1 million in purchases of shares of our common stock during the three months ended March 31, 2025 that did not occur during the same period in the prior year as well as a $4.8 million decrease in issuances of common stock under our 2015 Equity Incentive Plan during the three months ended March 31, 2025 as compared to the same period in the prior year. 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 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 and 2029 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. 46 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, 2025 2024 Non-GAAP adjusted EBITDA: Net income $ 27,712 $ 23,404 Adjustments: Interest expense, interest income and certain activity within other expense, net (8,032) (7,744) Provision for income taxes 7,307 2,747 Amortization and depreciation expense 7,024 7,337 Stock-based compensation expense 9,458 11,268 Acquisition-related expense 50 31 Litigation expense 21 3 Total adjustments 15,828 13,642 Non-GAAP adjusted EBITDA $ 43,540 $ 37,046