Vivint Smart Home, Inc.

ladies and gentlemen thanks for standing by and welcome to the visit smart home third quarter 2020 earnings conference call at this time all participants are in a 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 the speaker today Thank you. Please go ahead.

Good afternoon, everyone. Thank you for joining us this afternoon to discuss the results of Vivint Smart Home for the three- and nine-month periods ended September 30, 2020. Joining me on the conference call this afternoon are Todd Peterson, Vivint's CEO, 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, are not guarantees of performance, and you should not put undue reliance on these statements. I would direct your attention to the risk factors detailed in our most recent annual report on Form 10-K, and in our quarterly reports on Form 10Q issued in fiscal year 2020, including for our most recent quarterly period ended September 30, 2020, which we expect to file on or about the date of this earnings call. Please be aware that these risk factors may be updated from time to time in the company's periodic filings with the Securities and Exchange Commission, and that the realization of any such risk factors 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 at www.vivint.com. I will now turn the call over to Todd.

Thanks, Nate, and welcome to everyone joining the call this afternoon. We are pleased to report another quarter of very strong performance. Our results underscore the importance of having a proprietary, fully integrated, AI-driven smart home platform, which is the backbone of our predictable and consistent recurring revenue model. Touching briefly on a few financial highlights for the quarter, total revenue and total subscribers grew by nearly 10%, reflecting healthy consumer demand for smart home and security services, along with our ability to retain a higher percentage of our customer portfolio. Our adjusted EBITDA margins continue to build upon previous quarters and expanded to new highs. Finally, we have stated our desire to operate the business in a more cash-efficient way, and we are tracking to be cash flow positive by more than $100 million in 2020. As we continue our focus on optimizing the business, we saw solid improvement across the board in many of our key performance metrics for the quarter. Notably, the last 12-month attrition rate improved by nearly a full point in the quarter and continues to exceed our forecasts. Our LTM attrition rate for Q3 was the lowest in the past seven quarters, and I believe it speaks to the fact that our core value proposition, proven over two decades of reliably taking care of our customers and their families, is as relevant today as ever. Vivint's fully integrated and proprietary platform provides smart security and peace of mind to nearly 1.7 million customers across North America. Our customers interact with their systems on average 12 times every day, which provides our AI-based platform with over 1.5 billion pieces of data daily. This creates a real-time feedback loop which enables us to proactively react to any issues happening in their homes. In many cases, we can identify an issue and are already working on a solution before the customer recognizes that something might be amiss. By controlling the entire customer experience, from the design of the software and hardware to the sales, installation, and service throughout the life of the customer, we're able to provide a robust, reliable, and elegant solution to our customers. We believe that homeowners recognize the value of having increasingly complex systems professionally installed and serviced. In this do it for me age we're living in, we believe we have been the leader in revolutionizing the smart home industry by delivering what consumers demand, a fully integrated smart home and security solution that is professionally installed and seamlessly managed. We believe this consumer demand is proven in our impressive growth. We added nearly 127,000 new subscribers during the quarter, up 14% from a year ago, and driven by positive contributions from each of our major sales channels. In today's environment of uncertainty, homeowners are spending more time thinking about and investing in their homes, which we believe is a very positive sign for Vivint. Our national inside sales channel continued its standout performance, generating 32% year-over-year growth in new subscribers. Meanwhile, our direct-to-home sales channel rebounded nicely from the COVID-related constraints earlier in the year, growing new subscriber ads by 5% versus the prior year period. With coverage over 98% of zip codes in the United States, we believe that Vivint's premier model is in the best position to deliver a full smart home and security solution to virtually every household in the U.S., Consumers continue to expect increasingly complex smart home solutions that include integrated door locks, exterior cameras, interior cameras, lighting controls, and thermostats that are professionally installed, monitored, and serviced. But we're just getting started. Even though we have nearly 1.7 million subscribers, our unaided consumer awareness is in the low signal digits. The fact that we have been a leader in the rapidly developing smart home market, while relying mostly on grassroots efforts by our sales teams, makes us believe there is a tremendous upside if we can increase consumer awareness on a national scale. As we look forward to 2021 and beyond, our focus will be on our key objective of building the Vivint brand and investing in new products, services, and technologies. We want to do a better job of telling consumers who we are, what we do, and how we can enhance their lives by delivering the convenience, security, and peace of mind they desire. In addition, we will look to continue our leadership and differentiation in the smart home industry by increasing our investment in technology and new product development to ensure that we are on the leading edge when it comes to delivering the products and services consumers want. We believe Vivint is the clear leader in the smart home and security solutions market. We are a nationwide, fully integrated smart home and security provider, and we have an opportunity to expand our business and accelerate growth by investing in our brand and technology and helping people understand the incredible value that Vivint brings. I believe the company is ready to take the next step, and we're ready to handle the inevitable growth that will come with it. We have the technology and services that we believe consumers would absolutely want if they just knew about them. So we're excited about getting the message out and we're excited about the possibilities and opportunities that exist for Vivint. I will now turn the call over to Dale to go through the specifics of our strong third quarter results as well as provide our updated guidance for 2020. Thanks, Todd. I will walk through the financial slide portion of the presentation that we posted today in conjunction with our third quarter earnings release. As Todd mentioned during his remarks, our results for the third quarter were very strong across the board. First, on slide six, we highlight a couple of the key data points related to our subscriber portfolio. Total subscribers at quarter end grew from 1.56 million to 1.69 million year over year, or 8.2%. Total monthly revenue increased by 6.3 million, or 6.3%, with an average monthly revenue per user, or AMRU, of $63.79. On slide seven, we highlight our revenue for the three and nine month periods ended September 30th. For the third quarter 2020, revenue was $319 million, up approximately 10% year over year. The growth in revenue was primarily attributable to an 8.2% increase in total subscribers. I would note that the third quarter 2019 revenue includes a $9.1 million reduction to revenue resulting from a change in estimate related to RIC revenues recorded in prior periods. Moving to slide eight, adjusted EBITDA increased significantly in the third quarter and year-to-date periods. The key drivers were continued scaling of our cost of service, our subscriber portfolio, the expense portion of subscriber acquisition costs related to the origination of new subscribers, and general and administrative expenses. We grew Adjusted EBITDA by 53% to $154.5 million in the quarter. while expanding our adjusted EBITDA margins by nearly 1,400 basis points to 48.4% of revenue, compared to 34.6% in the prior year period. This is clearly a great result, and it's a function of a lot of hard work by our entire organization. Although not shown on this slide, covenant adjusted EBITDA, which is the calculation used for our debt covenants, was $212.3 million in the quarter, an increase of $42.9 million, or 25.3%, compared to $169.4 million in the prior year period. On slide 9, we highlight some of our new subscriber metrics. New subscriber originations were $126,847 for the third quarter. which reflects outstanding results from our national inside sales channel and a nice rebound from our direct-to-home sales channel following some of the COVID-19-related restrictions earlier this year as the pandemic started to take hold across the U.S. Overall, new subscribers grew by 13.8% in the quarter versus the prior year period. We continue our focus to improve the cash flow dynamics of the business as evidenced by the 89% reduction in RICs during the quarter. While this has had some impact on these subscribers, by shifting a greater proportion of our subscribers away from RICS and towards our financing partners and paying full arrangements, we're able to increase the amount of cash collected at the point of installation, thus reducing our net subscriber acquisition cost and significantly improving our cash flow dynamics. Moving on to slide 10, we will cover our net service cost per subscriber and net subscriber acquisition cost per new subscriber for the quarter. We continued our trend of year-over-year improvements in net service cost per subscriber, moving from $16.38 in the third quarter of 2018 to $14.43 in the third quarter of 2019, and now down to $9.82 in the most recent quarter. a $6.56 improvement versus 2018. This continues our record-setting trend of achieving new loads and service costs per subscriber, and it demonstrates the advantage of Vivint's fully integrated smart home and security platform, which encompasses the software, the hardware, the installation, and ongoing customer support. The result is that our net service margin continued its positive upward trend, moving from 68.7% in the third quarter of 2018 to 72.4% in the third quarter of 2019, and now to 80.1% in the most recent quarter. These efforts contribute significantly to the improvement seen in our adjusted EBITDA during the quarter. It's important to note that given the seasonality how we generally put on new customers, particularly in the summer, we tend to see service costs increase in the latter part of the year. Additionally, as mentioned before, we believe service calls have remained abnormally low in the third quarter due to concerns related to the COVID-19 pandemic. So while we're really encouraged by the current trends and the corresponding benefits to our margins, we wouldn't anticipate sustained full-year results at the 80% level. On the right-hand side of the slide, our net subscriber acquisition costs for the last 12-month period ended September 30th were $209 versus $1,033 in the private year period. The decrease represented nearly an 80% reduction as we have nearly eliminated the number of new subscribers that are financed via RICS by shifting to a higher mix of customers utilizing our financing partners or paying in full for the purchase of their smart home products. The year-over-year comparison also benefited from pricing leverage at the point-of-sale purchase of products and installations. Moving on to slide 11, we show our typical subscriber walk that illustrates the changes in total subscribers at quarter end and our attrition rate trend. One of the biggest highlights for the company continues to be the reversal in our attrition rate, which was lower sequentially by 90 basis points and fell to the lowest rate in the past seven quarters. The third quarter measurement period benefited from a 2% sequential drop in customers that were in the end of their initial term life cycle phase. While the end of initial term mechanics helped, our portfolios continued to perform better than expected in terms of the number of subscribers canceling and other leading portfolio indicators through October. We believe that the pandemic, social unrest, and improved product performance, as evidenced by our lower net service cost per subscriber, are having a positive impact on our overall attrition rate. Before we move to our updated outlook, I'll point out that several factors tied to our strong third quarter performance leave us feeling very good, including our overall liquidity position, which stood at approximately $630 million as of September 30th. Our third quarter operating cash flow was strong. For the three-month period ended September 30th, we generated $142.5 million in net cash from operating activities, compared to $8.2 million for the same period in 2019. During the quarter, there were approximately 1.7 million warrants exercised, which added approximately $19 million to our September 30th cash position. Finally, let's move to slide 12, where I will address our updated financial outlook. We believe that the fundamental characteristics of Vivint's high margin, reoccurring revenue model are compelling. More than 95% of our revenue is recurring, which provides long-term visibility and predictability to our business. Many of our new subscribers initially sign up for five-year contracts and remain on the Vivint platform for approximately eight years, producing significant lifetime margins. Despite the many uncertainties pertaining to the COVID-19 pandemic, our reoccurring revenue model has proven resilient and we remain comfortable with our previous revenue guidance. A better-than-expected attrition rate performance and improving unit economics have prompted us to update our guidance for total subscribers and adjusted EBITDA. We are raising our guidance for total subscribers to between 1.66 and 1.70 million versus previous guidance of between 1.62 and 1.68 million. We are reaffirming our guidance for total revenue of between $1.23 and $1.28 billion. We are raising our adjusted EBITDA guidance to between $570 and $580 million versus previous guidance of between $555 and $565 million. Thanks to everyone for joining the call. Operator, you may open the line for Q&A.