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Ladies and gentlemen, thank you for standing by and welcome to the Vivint Smart Home, Inc. Second Quarter 2020 Earnings Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Nate Stubbs, Head of Investor Relations. Thank you. Please go ahead, sir.

Good afternoon, everyone. Thank you for joining us this afternoon to discuss the results of Vivint Smart Home for the three- and six-month period ending June 30, 2020. Joining me on the conference call this afternoon are Todd Peterson, Vivint Smart Homes Chief Executive Officer, and Dale R. Gerard, Vivint's CFO. I would like to begin by reminding everyone that the discussion today may contain forward-looking statements, including with regards to the company's future performance and prospects. Forward-looking statements are inherently subject to risks, uncertainties, and assumptions, and are not guarantees of performance. You should not put undue reliance on these statements, you should understand that the following important factors in addition to those discussed in the risk factors section in our annual report on form 10 K. For fiscal year 2019 and in our quarterly reports on form 10 Q issued in fiscal year 2020. Including for the quarterly period ended June 30 2020 which is expected to be filed on or about the date of this earnings call. As such factors may be updated from time to time in the company's periodic filings with the securities and exchange Commission could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in our forward looking statements. The company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. In today's remarks, we will also refer to certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures for historical periods to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings release and accompanying presentation. which are available on the investor relations section of our website. I will now turn the call over to Todd.

Thanks, Nate, and good afternoon to everyone joining the call. I hope everyone continues to be healthy and safe in the current environment. Today we will cover three main topics. One, discuss our strong financial and operating results for the second quarter. Two, review our success in optimizing our portfolio economics and the resilient performance of our recurring revenue platform. And three, talk about the strong demand for our services as homeowners have spent more time focused on reconnecting with their homes. We've done a great job as an organization navigating the challenges and uncertainties encountered during the first half of 2020. And we are very pleased with the significant improvements across all our key metrics in Q2. Revenue and total subscribers continue to grow at a steady pace, reflecting healthy demand for our smart home and security solutions despite a pause in our direct-to-home sales efforts for the first six weeks of the quarter. Adjusted EBITDA margins continue to expand meaningfully, and we now expect to be cash flow positive in 2020. Dale will dive into more specifics on the financial results in his remarks, and he will also share updated thoughts on the full-year outlook, which we are revising upward given recent momentum in the business. Vivint now delivers smart home and security services to more than 1.6 million customers across North America. Our incredible results during what has been an extremely challenging time supports what we've said all along. that customers value the peace of mind that our fully integrated services offer, and that our high-margin recurring revenue model is built not only to be resilient, but also to thrive in the current environment. This is a time when people are reconnecting with their homes, and we believe that Vivint is perfectly positioned for what could be a lasting change. In fact, live video views through the Vivint app and panel increased by 19%, and the views of recorded video increased by 15% from Q1 to Q2. Although our customer value proposition is clear, our ability to add nearly 108,000 new smart home subscribers during the quarter is remarkable given the fact that we paused all direct home sales from mid-March to early May. We discontinued all direct home sales activities in Canada, and we mostly eliminated the number of new customers we generate from retail installment contracts. Despite these self-imposed limitations, new subscribers were off by just 3% from a year ago when no constraints were in place. Our national inside sales team, on the other hand, hasn't missed a beat and continue to see strong demand in the quarter. generating 25% year-over-year growth in new subscribers. We resumed direct-to-home sales in early May as states around the country began reopening their economies. Aside from the delayed start, our summer sales program is proceeding well, and we're actually seeing productivity gains versus the prior year. Another powerful tailwind is that we're funding virtually all new customers through our paid-in-full or third-party financing with Vivint FlexPay. This allows us to bring on new subscribers in a much more capital-efficient way. Our external financing partners have remained committed to underwriting high volumes of high credit quality smart home customers, and we believe we have a significant edge versus our competitors by providing customers with options to easily finance a full smart home experience while also dramatically improving our unit economics and cash flow dynamics. The nearly half-point decrease in attrition this quarter is another standout result and, frankly, beat our internal plan by a significant margin. This speaks to the fact that our core value proposition, proven over two decades of taking care of our customers and their families, is as relevant as ever as people are reconnecting with their homes in the current environment. Today, we have well over 20 million connected devices on our proprietary cloud-based platform that enables customers to seamlessly manage and protect their homes. We believe we are uniquely qualified to help our customers deal with the current environment across the various smart home devices we support, from door locks, outdoor and indoor cameras, thermostats, lighting controls, smart speakers, garage doors, and many other connected devices. We recently announced a partnership with Chamberlain, the leading garage door manufacturer, to integrate MyQ smart garage technology into our platform. Vivint customers with a MyQ smart garage can now control, secure, and monitor their garage anytime from anywhere using the Vivint Smart Home app. All these innovative products are designed to work together seamlessly through our elegant platform that homeowners can control from their in-home touchscreen hub through a single app on their phone or by simply using their voice. Our improved guidance for the full year underscores the confidence we have in our high-margin recurring revenue model. We are seeing healthy demand across all our sales channels for our smart home and security offerings, and we are fully prepared to meet that demand. We continue to be judicious around overhead spend, budget, and projects, and we now believe that we will be cash flow positive in 2020. To that point, we generated $111 million in cash from operating activities in the second quarter alone. We're excited to continue reporting our progress on this front. Before concluding my remarks, in light of recent events nationwide, I believe it's important to express how much we value diversity and inclusion at Vivint. The issues of racial inequity and injustice are significant, and we must all take ownership of these issues. We can start by simply listening to each other, engaging in productive conversations, reexamining our own views and actions, and ultimately being part of the positive change. I will now turn the call over to Dale to go through specifics of our strong second quarter results, as well as provide our updated guidance for 2020.

Thanks, Todd. I'll walk through the financial slide portion of the presentation that we posted today in conjunction with our earnings release. Overall results were very strong across the board. And this outperformance informs our decision to raise our guidance range for the full year, which I'll cover later. But first, on slide seven, we highlight our revenue for the second quarter six-month period ended June 30th. For the second quarter 2020, revenue grew by 8.9% to $306 million. The growth in revenue is attributable to a 6.8% increase in total subscribers, as well as a 2.1% increase in the average monthly revenue per user. Our average monthly revenue per user was up $1.31 in the quarter versus last year. Moving to slide eight, Adjust EBITDA has scaled significantly in the second quarter and six-month periods. The drivers were lower selling expenses and net service costs and continued scaling over GNA. For the quarter, we are proud to have expanded adjustable margins by 2,000 basis points to 49.9% of revenue compared to 31.4% in the second quarter of 2019. This is clearly a great result overall and a function of a lot of hard work by our entire organization. Due to some seasonality inherent in our business, we wouldn't necessarily anticipate sustained full-year margins at that high level. It should be noted, for example, that the lower service costs we saw in the second quarter was due in part to fewer service calls and truck rolls due to concerns over COVID-19. What we do believe to be sustainable are a number of cost reduction issues that we completed during the first quarter and that are expected to meaningfully reduce G&A and overhead costs by streamlining our operations, focusing engineering and innovation, and driving better customer satisfaction. In addition to these actions, and because analyzing how we operate more efficiently is a continuous exercise of VIVIT, we initiated another round of focused cost-cutting during the second quarter to further reduce our discretionary spend. As a result of these actions, we have achieved greater than $30 million in permanent annualized fixed-cost reductions. Meanwhile, Covenant Adjustibida, which is the calculation used for our debt covenants, was $200.5 million in the period, scaling by $45 million compared to $155.3 million in the second quarter of 2019. As you look on slide 9, we highlight a few data points for the subscriber portfolio, which were strong across the board. Total subscribers at quarter end grew from 1.51 million to 1.61 million year-over-year, or 6.8%. Average monthly revenue per user, or AMRU, also increased to $64.66, up 2.1% year over year. AMRU is benefiting from the recognition of deferred revenue and effective cost selling of new products, such as our newest generation of outdoor and doorbell cameras. On the next slide, slide 10, we highlight a few points on new subscribers. New subscriber originations were 107,980 for the second quarter, which was quite resilient considering that direct-to-home sales were paused. in the U.S. for the early part of the quarter. We discontinued all direct-to-home sales in Canada during the quarter, and we reduced the number of retail installment contracts, or RICs, by over 89%. One last point. By shifting a greater portion of our subscribers away from RICs and towards our third-party financing partners and pay in full, we are able to grow the point-of-sale revenue, thus reducing our net subscriber acquisition costs and significantly improving our cash flow dynamics. As we look to the future, we will continue to align the organization on delivering a true smart home experience to millions of homes in a profitable and cash-efficient way. Moving to slide 11, we will cover our net service cost per subscriber and net subscriber acquisition cost per new subscriber. The reduction across both these key metrics continued to be a significant driver of our earnings improvement during the second quarter of 2020. We've continued our trend of year-over-year improvements in net service costs per subscriber, moving from $16.71 in the second quarter of 2018 to $13.13 in the second quarter of 2019, and now to $9.93 in the most recent quarter, a $6.78 improvement versus 2018. This represents the lowest service cost per subscriber in the last 10 years by a significant margin, and it demonstrates the advantage of Vivint's fully integrated smart home cloud platform, which encompasses the software, the hardware, the installation, and ongoing customer support. The result is that our net service margin continued its increasing trend, moving from 68.6% in the second quarter of 2018 to 75.2% in the second quarter of 2019, and now to 80.2% in their most recent quarter. These efforts contributed greatly to the improvements seen in our adjusted EBITDA. It's important to note here that given the seasonality of how we generally put on new customers, particularly in the summer, we tend to see service costs increase in the back half of the year. Additionally, as mentioned before, we believe service calls were abnormally low in the second quarter due to concerns over the coronavirus. So while we're really excited and encouraged by the current trends and the corresponding benefits to the margins that we are seeing, we wouldn't anticipate sustained full-year results at that level. On the right-hand side of slide 11, we highlight the recent trend on our average net new subscriber acquisition cost. For the LTM period into June 30, 2020, net subscriber acquisition cost per new subscriber decreased to $630. That's 40.8% lower compared to the prior LTM period. as we have nearly eliminated the number of new subscribers that are financed on a Vivint retail installment contract and shifted to a higher mix of customers utilizing our financing partners or paying in full for the purchase of their smart home products. During the quarter, we also benefited from pricing leverage on the point of sale purchase and installation of equipment. Moving on to slide 12, Select 12 is a normal subscriber walk that illustrates the changes in total subscribers at quarter end. The biggest and most pleasant surprise was the reversal in attrition, which was lower sequentially for the first time in nine quarters. It is worth reiterating that our attrition has trended higher than our historical averages given the higher percentage of customers that are in the end-of-term lifecycle phase. First, the attrition rate for a customer cohort changes as it progresses through different phases of the lifecycle. We define these phases as interim, end of term, and post-initial term. Each phase carries with it a corresponding expected attrition rate. With attrition at its highest during the end of term phase, As we have shared in the past earnings calls, the cohort attrition curves remain fairly steady. The second factor that affects attrition is the percent of total customers in each stage of their life cycle. The percent of customers in the end-of-term phase rose in 2019 and will stay elevated in 2020 before beginning to fall in 2021. In the second quarter, attrition reversed course and was lower sequentially by 40 basis points to 13.7%. This still remains higher than our long-term trend for attrition, but was much better than our expectations given the higher percentage of customers that are in the end-of-term phase. And for what it's worth, our portfolio has continued to perform better than expectations in terms of attrition and other leading indicators through the end of July. Now, we know there is a lot of curiosity out there regarding how we think our attrition curve may change as a result of the pandemic. The news on this front is all positive, at least thus far. as to the potential drivers our past experience through severe economic downturns combined with the unique effects the current pandemic and leading more people to reconnect with their homes and place tremendous value on our smart home solutions as well as the general propensity for customers to focus inward and prioritize home security during times of crisis are some of the main factors that come to mind. Before we move to our updated outlook for the year, I'll point out that several factors tied to our strong second quarter performance leave us feeling very good about our overall liquidity position, which stood at approximately $478 million as of June 30th. Our second quarter was strong from an operating cash flow perspective. For the three months into June 30th, we generated $111 million in net cash from operating activities compared to a use of $88 million for the same period in 2019. The strength in cash generation has carried through the end of July and we have repaid all of the outstanding amounts on our revolving credit facility. During the quarter, we also saw approximately $6.6 million of warrants exercised. which has a positive impact on our cash position and increased our public float as well. Finally, let's move to slide 13, where I will address our updated financial outlook for the year. Over 95% of our revenue is recurring, which provides long-term visibility and predictability to our business. Most of our new subscribers that finance their smart home chooses to enter into a five-year contract and remain on the platform for approximately eight years, driving significant lifetime margin dollars. Despite the many uncertainties pertaining to the COVID-19 pandemic, our reoccurring revenue model has proven resilient to any of the major downsides. and we are comfortable with essentially restoring our original guidance for subscribers and revenue that we provided in early March before the country went on lockdown. Meanwhile, our strong unit economics and scale have contributed to our ability to drive significant adjusted EBITDA improvement, and that is reflected in our updated range. In terms of revised guidance based on our stronger-than-expected second quarter performance, solid demand for our products and services, and having the full complement of sales channels available to acquire new event customers. We expect to end 2020 with 1.62 to 1.68 million total subscribers versus previous guidance of 1.55 to 1.62 million. Our estimate for 2020 revenue is 1.23 to 1.28 billion total. versus previous guidance of $1.20 to $1.25 billion. And finally, we are raising our adjusted EBITDA guidance to between $555 and $565 million, versus previous guidance of between $525 and $535 million. Operator, please open the line for Q&A.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Paul Koster with J.P. Morgan. Your line is open.

Wow, that was pretty awesome. It's hard to pick this one apart. It all seems such good news under the circumstances, really interesting. Quite impressive. So, Todd, you said you're going to be cash flow positive in 2020. It's a year ahead of expectations. Is it sustainable, or does this feel like sort of just, for instance, the RIC number was also just so low? And I'm just wondering, do you think all of this is sustainable?

Yes, we actually do believe it's sustainable. And, you know, as Dale mentioned, the reduction of RICs led to that number. And by the way, side note to the reduction of RICs, we should see over time an improvement in attrition number on this pool of accounts that we put on the show. The underwriting on this year's book of business is outstanding. But yes, it is sustainable. We've made some very good changes to the business. And I think, you know, when that's listened to us, this is not this didn't just happen. We've been working on the changes to the business model to the company, the cost structure for quite some time now. And this is just kind of a revelation of what we've been intending to do. So that the answer is yes, it's sustainable.

Right, got it. And then, of course, I mean, is it a competition or is it a validation? But Google seems to be, you know, trying to help ADT catch up with you a bit. What does that mean to you?

Well, I think you hit it on the head. It's absolutely a validation of the model that Vivint delivers in the market, smart home as a service. It absolutely requires great technology. But the need for install ongoing service and providing both of those is critically important to delivering a really elegant situation. And so, you know, yeah, when I read the news, honestly, I woke up in the morning, I'm like, no, this is great. We've been saying this all along. This is a huge TAM, huge opportunity. And someone with the likes of Google investing into the space that you're in, that's got to be a good day for you.

Yeah. Okay, great. Thanks so much.

Thank you. Your next question comes from the line of Rod Hall with Goldman Sachs. Your line is open.

Yeah, hi, guys. Thanks for the question. Likewise, nice job in a tough environment. A couple of questions for you. I wanted to start off with the new subscriber linearity and see if you could give us some idea of how that flows through the quarter. And then secondly, just wondering if you could give us any ideas what attrition is

might look like as you look forward um through the rest of the year if you can give us any kind of idea for what you're thinking on attrition the next couple of quarters that'd be useful thank you yeah this is dale thanks for joining um i think in terms of subscribers as we said we had uh direct to home was really paused for the first six weeks of the uh of the quarter so we really started rolling out direct home to the different locations around the second week of May. And, you know, we saw a very quick ramp from those teams and continue to see really good production for those teams across all offices, across all states that we're in. And we're in most states that we wanted to be in. There's not like areas that we didn't go to. We rolled the teams out to where we expected to go out to, and those teams were performing well. And then when you look at inside sales, inside sales was really strong in the first quarter, and that carried right into the second quarter. That's a more kind of ratable in terms of those are leads coming in from SEO and different referrals and so forth. And that volume and that demand has been very, very strong across the you know, the full quarter. So, we're seeing that demand continue into the third quarter here. And then, go ahead, Todd.

Well, the one thing I want to note, and this is very important, and, you know, it's been mentioned already, but the fact that we've put the numbers up that we have proves very substantial demand from consumers for the Vivint smart home offering. We are not onboarding new customers in Canada, which was a decent percentage of our overall business in the past. And then the elimination of RICS and also the pause on direct-to-home you know, when you look at it on the whole and you don't know the past, it looks good, you know, considering, like you said, the environment. But when you really add it up together, the performance of Vivint and Q2 was outstanding. It's hard to describe how happy we are about, you know, how we're positioned, the consumer view on the product and services that we offer, the value provided, and really the demand coming into the company. So...

And then just to touch quickly on your question around attrition, I mean, attrition, again, we were very, very happy with how the attrition performed in the second quarter. We, again, think that's how people are really reconnecting with their homes, really valuing the services that we offer. And we're seeing the engagement with the platform. Even though people are at home, the engagement is as high or higher than what we've seen in previous quarters because people are using it just a different way. They're using the cameras more. They're engaging more throughout their home with that, with the system. For example, it's like having deliveries to your front door, being able to use your doorbell camera to talk to those people, see what packages are dropped off. Those type of interactions with the system, we're seeing more and more now that people are actually kind of in their homes and wanting to understand who's coming to that front door or what's being left at that front door. But we're also cautious about attrition in terms of we still have a higher percentage of customers in their kind of end-of-term life cycle. That's still about 20% of our portfolio. And we know those customers normally perform or have higher attrition when they're in that kind of phase of their life cycle. And then we're also cautious about the economy in the second half. And so, you know, what I would tell you from attrition is, you know, we think it's performing really, really well right now, you know, but we're also cautious as to what it will look like for the rest of the year. But we're feeling, you know, rather confident that we're seeing good performance out of it will continue through the rest of the year.

Okay, great. Well, thanks for that, and congrats again on the numbers. Thank you. Thank you. Thanks, Rob.

Your next question comes from the line of Amit Daryani with Evercore. Your line is open.

I guess a couple for me as well. Maybe to start off with, on the net subscriber acquisition cost, it came in a lot lower than I think we were modeling at least. And it sounds like it really reflected the fact that you were able to raise pricing on the upfront cost. Was there any other factors that were at play as well to drop this number down? And I'm just wondering, if you start to raise the pricing for these starter packs, do you think that impedes demand in your subscriber growth eventually?

Yeah, so obviously we did change the pricing in our starter kit package. And it was incredibly well received from the consumer. And from a consumer's point of view, the dollars they're paying between ourselves and our financing partner really didn't change. It changes the balance of it. But it doesn't change the actual dollars paid on a monthly basis. And then I would just say that our performance spoke for itself when it comes to demand. It was increased demand, elevated numbers, better performance on a per rep average for the direct-to-home program. And, you know, again, Dale spoke to the inside sales group and their performance year over year. So absolutely did not affect demand for consumers. And then this is Dale.

I'll just say the other point of driving down kind of that net sack is the fact that we reduced RICs about almost 90% year over year. kind of, hey, we did that in the second quarter. Our goal, once we started rolling out FlexPay and bringing on the finance partners, was to bring RICS down to essentially zero. We'll probably have some RICS as we go, but that's another big driver in the fact that we're able to take RICS down. And if you recall, RICS, just real quick, those are contracts that have been spent on our balance sheet. We basically get no money up front from those customers. So by being able to lower those substantially and move more of that up front to our financing partners or to the customer actually paying them full out of their own account, that's enabled us also to bring that sack down.

Got it. That's really helpful. And if I could just follow up, when I look at the new subscriber numbers, and I completely understand how difficult Q2 was, right? It was down 3%, I think, or something like that, the new subscriber growth number. I'm curious, if you looked at maybe the month of June or, you know, the six weeks where you were not in a complete shutdown, what did that trend line look like? And then, you know, any indication in terms of how that's looked in the month of July as well?

So, you know, we probably won't get that granular. But, again, I tried to reiterate this. When you look at the numbers on an apples-to-apples basis, if you compared – To the customers we underwrote in 2019 to 2020, the fact that we were only down 3% net subscriber ads is, when I say outstanding, it's beyond outstanding. We eliminated 12% of the customers we would have underwritten last year and did not this year and still attain that. And on a revenue basis, because of the increase in revenue per subscriber per month, We actually were ahead of last year. So, you know, I can't reiterate this enough that it was just a tremendous quarter. And I would say the trend continues. So, you know, we can't get too granular on what's happening currently and going forward. But we feel like we're in a very positive situation. And, you know, it's due to a lot of factors. But really, you know, consumer demand and, you know, increased. Dale mentioned this. People are really reconnecting with their home. And we're seeing the benefits of that. We're one of those companies that really is having a positive effect from the fact that people are home, are looking at their home as their new environment. And we think that might be a lasting change over time.

Got it. Any last one for me, and I'll see you after this. Given the better free cash flow expectations for the year, do we think about the company wanting to de-lever more quickly, or how do you think about capital usage given the fact the free cash flow positivity is getting pulled in a fair amount? That would be great, and congrats on a good quarter, guys.

Yeah, thanks. I think in terms of how we think about the cash flow, I mean, we've said all along we wanted to kind of get to cash flow neutral this year. We're way ahead of our original projections of kind of 12 to 18 months. And then we've also laid out kind of a goal to be kind of three times or less on a leverage ratio, on an EBITDA to debt ratio. So I think we'll look at the cash that we have, continue to generate, and we'll look at how we want to use that cash, whether that's to pay down debt or to make, you know, other investments into the company, whether that's new products, new services. You know, we don't. You know, Todd has talked about this before. We don't really have a brand out there. And so do we want to actually go spend some money on branding the company, which we think would even drive more, you know, customers and growth overall for a long-term vision? So we'll, you know, decide how we go. But, you know, we're very, very excited about the fact we're able to kind of get this cash flow positive in the second quarter. And we believe, you know, that will continue throughout the rest of the year. Yeah, the last thing I just recall, and I said this on the part of my remarks, we did pay down the revolver. We had $105 million out setting a revolver at the end of June, and we did, you know, pay that down in July. And so we were able to kind of pay that revolver fully back, and we're setting, you know, cash on the balance sheet.

Your next question comes from the line of Jeff Kessler with Imperial Capital. Your line is open.

Thank you, and hello, gentlemen. How are you doing? I'm doing good, doing good, and I'm connecting with my home. I'm wondering if the downtime for your direct-to-home group, both the temporary period in the U.S. and the still ongoing period, I guess, in Canada, Have you spent any of that time, you want to call it tinkering or fine-tuning, what you want out of that group and how that group actually goes to market and how they sell?

That's actually interesting that you would ask that. We actually did. And we actually had some, I'm not going to dig in because I would say they're more, you know, experiments. how they engage and can engage, um, with different types of inbound demand from consumers. But we, we did, um, we had to do it kind of overnight as all companies did when the shutdown happened, but we had positive results. And I would say it's, it's informing us a bit to how we might think about expanding our Salesforce workforce engagement with consumers over time. And as Dale mentioned, You know, we hope to at some point, maybe even this year, start to build a brand and increase the inbound demand and really knowledge of Vivint services. I mean, the reality is on an unaided awareness basis, less than 5% of American households even know who we are or what we do. And so as part of that test, we think there are some really tremendous opportunities to utilize that group if additional demand does come in and be really efficient with those leads or inquiries around the Vivint services. So, yes.

Has there been an app or a set of apps, and I know it's probably going to end up in video, but have you been able to get better sales, particularly on the initial package, by doing anything by stressing or changing the stress of different apps as necessary. As the year has gone on, because this has been a different year effectively than we've seen in a long time, are there types of video applications or are there types of video that have really allowed you to sell a little bit better than you had before? And is it just video? Because there could be some other things. There could be other partners. It's kind of silent helpers in there that would have helped you.

Yeah, so here's what I would say. Definitely video is a major driver in increased demand for what we do, and there's no one that does it like we do it. I mean, with the professional install, our own proprietary hub, platform, technology stack, Kind of a feedback loop, ability to service ongoing with the customer. There isn't anyone, you know, anywhere in the realm of the quality of service delivery that we have, connectivity and otherwise. But we have seen an increased demand in just the general peace of mind of what we provide. um and and that and that's viewed or i guess kind of it displays itself in the engagement from our consumers with their app this isn't us emailing them things that we've seen or we know or data that we're we're showing this is actual engagement user engagement in live video views recorded video views um arm disarm of the system and the different functionality inside of the system so I would say there are no other outside apps that are helping push. I think this is becoming very kind of obvious to us, and we've believed this for a while, that this is a huge market segment. We think that 80-plus percent penetration in U.S. households is very attainable, and we're not going to state how many years we think that is. It would be a guess. but the demand is gaining momentum, and people's interest in having a smart home that's provided by a premium service provider like Vivint is very much in demand and will be a large market.

Okay. And finally, with regard to... With regard to the market itself, it does seem as if young people moving out of the city or moving out of urban areas into the suburbs, getting into homes and larger homes, are beginning to realize that DIY does not necessarily suffice, particularly if they need the monitoring for a larger home with whatever it is, from 15 to 40 zones. Are you finding that there's an attitudinal change as you talk about people getting more in touch with their homes? There's also a movement of people. I would call it a de-urbanization a little bit because of this.

Well, I think that's an interesting observation. Here's a couple of notes. One, we provide a DIY-able product and service. currently. We're not talking about the numbers on that, but we actually do. The amazing thing for our customers or potential customers is that we can also back that up with truck rolls, answering the phone, technical service capabilities on the back. And so we can kind of end to end. However someone wants to take delivery of our service, we can provide that. And for very, very good value with the highest quality of products and services and reliability for that matter. But It's interesting because DIY is brought up quite consistently to us in this space, and yet you see Google, who has DIY-able products that they've had for quite some time, now realizing that in order to really um address the big market that vivint is addressing they need to combine up with a company that has the capabilities to go inside of people's homes and deliver service on an ongoing basis in a professional way it that's to see if they want to compete with us really on a grand scale um and then and then last thing is i'd say about diy that's an interesting thing even in my personal life you know, through COVID, I didn't even, I had never used some of the food delivery services in the past. Now that's all we do. So I don't even go get my own food anymore. It's delivered to me. And so it's an interesting, I don't mow my lawn. I don't wash my car. No, I don't want to sound lazy, but I have other things done for me. And I just don't think that consumers who want a really deep experience with a smart home want to be the CIO or technician of their home to manage 15, 20, 30, 40 devices, which is absolutely happening. People are adding more and more cameras and thermostats and door locks, and the connectivity is going deeper and deeper into the home. And so we couldn't be happier about the position that we're in and the fact that we're a market leader.

Okay. Well, I'm sorry, but one quick final question for me, and that is because you brought up an interesting point here, which I deal with with all my coverage here, and that is, you know, you've talked about service a lot, and you've talked about the cost of servicing customers. As you become more complex, and you have become more complex, How are you – what are you doing to make sure that your service levels keep up with the complexity that is demanded of you so that at the other end, at the air end, it's still – it's still an easy integration in their minds to how to use the system and have the, let's just say, have the tech explain to them in an easy-to-use fashion what they can do, what they can't do when you're going from five devices on up to 30 devices.

This is really important, and this is where Vivint really shines. You know, the fact that we own our operating system, that we in-house developed that, our hub system, Our platform, and again, we do integrate. Everyone on the thing knows that we will integrate best-in-class products into our platform. But we take it upon ourselves to make sure that we control that process and that data flow and the connectivity. Because, you know, if you're installing a doorbell camera, for instance, That's not too difficult to install and not too much to manage, but you start adding, as you mentioned, more and more devices. Connectivity becomes more and more of an issue. The demand on your Wi-Fi gets greater and greater and allows for the unfortunate potential for things to go wrong. Now, with our feedback loop and the fact that our engineering team, software, firmware, hardware design, installation platform, service platform, network, we have this incredible feedback loop that's very immediate, by the way. and there's 1.5 billion pieces of data daily coming through our AI system, we are watching every last thing that's happening when it comes to service delivered to the consumer. Because at the end of the day, if it's not great, service levels aren't great, attrition is going to go through the roof. And you could theorize that going from $16, which we have per sub per month in service costs, to $9.93 over a two-year period, our service levels would go down substantially and therefore attrition would go up. The reverse has happened. We've done both, reduced our service costs per sub per month, not a little bit substantially. And then also our service levels are not just maintained well, they're better and they're more enhanced. And that speaks through our attrition numbers that you're seeing, which by the way are better than we had hoped for. And we've done this business for a very, very long time and it's The great thing is it's a very predictable model, but it just so happens that as we continue to release new hubs, new firmware, new software releases, new installation protocols, that we just get better and better and better at that delivery of service and connectivity and quality of service, and it reduces truck rolls and the need to keep up with service demands. If things work, you don't have to answer phones, you don't have to roll trucks. And it just so happens that we are best in class by service. quite a margin when it comes to those sorts of things.

Okay. Well, thanks, Todd, and thanks, Dale, and thanks, Nate. I appreciate it.

Again, if you would like to ask a question, press star 1 on your telephone. Your next question comes from the line of Sweta Kajuria with RBC. Your line is open.

Okay, thank you. Let me try two, please. When we think about service costs, you said that you expect costs to increase in the back half because of dramatic reduction in the quarter from fewer calls due to COVID. Could you talk about sustainability of those costs, not only in the back half, but just generally as we think for the outer years? And then a similar question on EBITDA margins. How should we think about the potential for margin expansion going forward? The margins are already at pretty elevated levels, even barring this quarter. Your guide implies very healthy EBITDA margins. So help us think about the potential for expansion going forward. Thank you.

Yeah, thanks. I think if you think about servicing costs, I think if you looked at the mid to high 70% margins is kind of where we think, you know, I don't really quote a dollar. I give you a service margin based on kind of what we think. But we think in that kind of 75-ish percent range is probably where we'll see service. kind of servicing costs come back in the second half of the year. And the reason why it's a little bit more, as you know, we put on a lot of customers in kind of a 90-day period, and there's always kind of follow-up and service needs. And so there are, you know, more service calls in that kind of third quarter going into the fourth quarter just related to those new installs. And then, again, in the second quarter, I think, you know, we had a lot of times where we had, where the calls into the call center and into for truck rolls were just decreased related around COVID, people not wanting people to come to their homes. And I think it goes back also to Todd's point is we have this fully integrated you know, system that we can help, like we can solve a lot of the problems over the phone. So when somebody does call in, we can actually log into help, log remotely into their panel. We solve a lot of the issues without having to send a truck or sending someone out to the home, which is really, really important.

Okay. And then on the margins, please.

Yeah, on the margins, you know, I think, again, we kind of thought we'd be in that call it low to mid-40% EBITDA margins. And I think that's kind of, again, when you look at the rest of this year, if you look at it on a full-year basis, I think that's kind of where we are. We're continuing, and I think, you know, Todd said this and I've said this, is we're always looking at ways to optimize in the business and optimize the scale, what we have. And so we'll continue to look at that. But, you know, when you look at it kind of quarter over quarter for the time of a full year, we're probably looking in that kind of low to mid-40% range.

Okay, thank you very much.

Thank you.

Your next question comes from the line of Kunal Madakar with DB. Your line is open.

Hi, thanks for taking the question, great quarter. I had a couple, you know, one on the service cost side, wanted to understand, you know, how it is broken down between, you know, truck rolls, the people that are manning the monitoring part, uh and and then the customer service side and then on the attrition uh wanted to get a sense of you know how much of the attrition is from moves versus uh you know uh uh not paying uh bills and what have you uh versus any other reason or switching to competitors yeah so so we actually um don't break the numbers out on the service cost per sub per month

down to the actual action that's happening inside of that structure. We just haven't done that, and that probably wouldn't be detailed that we would dig into. And then, so, you know, we're just really, hopefully, and you are also incredibly happy with the results, but we probably gained some efficiencies across the board in all of those actions. Again, back to Vivint's owning of our operating system and technology and hub development software firmware releases. This is all a result of not just what's happening today in the current environment. These are investments that we've made into our technology, service delivery, installation protocols over the years. And then there's how we answer phones and training down to the individual person. So there's a lot of things that go into the reduction of our service costs. And then when it comes to the attrition numbers with moves, we also don't break that out. I hate giving you that answer on both of those, but we just don't break those out in detail.

That's cool. A follow-up, if I may. How do you think, and maybe this might be just thinking about the landscape, but How do you think Google's partnership with ADT kind of changes, you know, how alarm.com becomes, you know, which is the operating system for a number of your competitors? How does that change, you know, alarm.com and how they operate, especially with, like, Google coming in with its tech stack and everything else?

You know, I, what I would say is you, I'm not sure what the arrangement is. And so you, you would really need to ask them about this, but again, back to Vivint, um, the fact that we own our platform, we developed it and look, we've spent tens and tens and tens of millions of dollars on that alone and do annually on the maintenance and the improvement of that user experience that it, and the fact that it's fully integrated to our hub in our platform. I'm glad that we're Vivint and we own what we own, which is everything end-to-end, and that we don't depend on other hardware developers and providers, other platform or app or operating system providers. I'm very – we've – and look, our investors, Blackstone and others – have been very gracious over the years and allowing us to make sure that we own and control that entire technology stack. And it's proven to be very relevant and not just relevant, it's critical that we do have that and own that. Craig, thank you. Thank you.

Your next question comes from the line of Todd Morgan with Jefferies. Your line is open.

Thank you. Great results. Two things. Number one is a couple of companies have talked about supply chain issues in sourcing materials from overseas. And I know you guys typically would stock up early in the year. I don't know if given the very high subscriber ads that you're getting any kind of shortage or any difficulties in that front. And I guess secondly is if I look at the net subscriber acquisition cost, $630, really great number. I mean, that's down by a third just even sequentially there. If I think about the drivers that you called out, Dale, with the slightly higher package prices and really reduction in the RIC subscribers, should that not continue to sort of rash it down pretty rapidly here as you get into the third quarter, which is another big subscriber ad quarter? Thanks.

Yeah. Yeah. Thanks. So two things. We'll start with the supply chain. You're right. Based upon the way we do our business and preparing for kind of the what I would call the second, third quarter where we put on most of our accounts. We do do a lot of pre-buy and make sure we have our inventory. based on what we think we're going to do or install for that period. And so we've not really seen any disruption in terms of our supply chain. We have a really good chief procurement officer, and we're constantly working with all of our vendors and making sure our contract manufacturers make sure that we have product available to our technicians and to our sales reps so we can install those products. you know, when we need that. In terms of the net subscriber acquisition cost, you are right. Based upon kind of what we said we were going to do in terms of how we structure our current pricing model, the fact that we've reduced RICs and we continue to see that reduction go forward, you should continue to see this kind of, you know, we're at $630. You know, if you kind of run the math out, you would expect that to continue to come down as we roll into as we report, probably third quarter and so forth.

Great. Thanks, Hugh. Thanks.

See you, Todd.

There are no further questions at this time. I will turn the call back over to management for closing remarks.

Yeah, so we appreciate everyone getting on the phone call for our Q2 numbers. We were, you know, happy with the results. We hope all of you are also. And just know that management's very focused on the current economic environment, making sure that we're being cautious about any upcoming, you know, economic continued downturns, impact our individual subscribers, customers, our underwriting, and, you know, and their cost structure and investments. So we look forward to getting on the phone with you all again on PQ3. So thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.