Vivint Smart Home, Inc.

Good afternoon, everyone. Thank you for joining us this afternoon to discuss the results of Vivint Smart Home for the three months and fiscal year ended December 31, 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, and 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 annual report on Form 10-K for the period ended December 31st, 2020, which we expect to file within a few days 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 factor 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'll start by recapping our terrific results for the fourth quarter and full year, along with some of the key drivers of that performance. Then I'll spend some time outlining some of our future priorities, sharing more of our vision for the smart home and why we think we have the unique capabilities to deliver that vision as the premier end-to-end smart home platform company. Starting with the key financial highlights of the business, we had a strong finish to what was a very successful year for Vivint and our first year as a public company. Fourth quarter revenue grew by more than 8% to approximately $333 million. Adjusted EBITDA was approximately $147 million, up over 17% from the prior year, and producing an adjusted EBITDA margin of 44% in the quarter. For the full year, VIVA grew total revenue by over 9% to $1.26 billion, and adjusted EBITDA grew by 40% or $589 million. We originated over 343,000 new smart home subscribers this past year, which was an acceleration from the previous year and the highest we've ever achieved in a year. As of December 31st, Vivint had approximately 1.7 million total subscribers, up more than 9% versus the prior year. Dale will provide more specifics on the financials during his remarks, as well as share our outlook for 2021. But I do think it's important to provide some additional context to put our performance in perspective. The fact that we turned in such strong results amidst the unprecedented challenges related to COVID-19 pandemic is nothing short of remarkable. We've certainly seen a lot in the 20 years since I founded the company, and we performed well through the past economic downturns. But 2020 was altogether different. and the challenges we dealt with in maintaining our sales and exceptional customer service while protecting our employees and customers were profound. Some of these headwinds were self-imposed, such as our decision to essentially eliminate retail installment contracts as one of our financing options, as well as stopping direct home sales in Canada. But what we could not have foreseen was having to move our call center and corporate employees to a work-from-home environment and and pulling our entire direct home sales team out of their markets, delaying the start of the summer selling season for six weeks during the first wave of the pandemic. Despite all of this, we were able to substantially beat our initial guidance for total subscribers and adjusted EBITDA. This attributable to the fact that we were well positioned as a business heading into the pandemic, both operationally and financially. We believe our cloud-based operating platform and the Vivint user experience are better today than ever before. The end-to-end Vivint platform is driven by AI and machine learning, so it's continuously getting smarter and improving. And because each smart home is installed professionally by us, it ensures that those systems work as designed, delivering a delightful and transformational smart home experience to our customers. We believe we have been able to drive significant improvements in our customer experience, as well as overall profitability and cash flow, thanks to our strategic focus in three primary areas. First, transforming net service costs through our vertically integrated business model. Second, bringing down net subscriber acquisition costs through FlexPay. And third, scaling overall G&A expenses, excluding stock-based compensation. As a final reflection on 2020, while we were fortunate that we were able to adjust our process to deal with the most challenging sales climate we've ever seen, we're still seeing the impact of COVID-19 on our business in terms of restrictions in certain markets. Additionally, our unaided brand awareness is in the low single digits. We began the process of fixing that late last year, investing to drive better consumer awareness of the brand on a national scale. Those investments will continue as we tell the story of who we are, what we do, and how we can add value to people, delivering the security and peace of mind they desire. But beyond the brand, we also think that now is the time to step things up in terms of overall vision. to continue pushing new boundaries and delivering transformative smart home experience to every home. Vivint is an end-to-end smart home platform company with the most robust service offering. Our vision is to extend the reach of the smart home experience well beyond where it is today by delivering additional services to the home, bridging even further to a truly autonomous home. Our smart home operating system processes over 1.4 billion daily events. and our proprietary platform collects and controls a massive amount of relevant data delivered through the Vivint devices in the home. There are many logical extensions of our end-to-end platform, including insurance, energy management, aging in place, in-home healthcare, pet monitoring services, home inventory replenishment and delivery, home maintenance and repair. These initiatives are completely within our wheelhouse, in large part because we have built a platform that allows us to extend to the many services homeowners want. Our expertise has always been in redefining the home experience by delivering intelligently designed cloud-enabled solutions directly to every home. Our proprietary cloud-based smart home operating system, along with our well-trained team of smart home professionals, makes it possible to create a completely customized smart home. Today we have over 20 million connected devices on the Vivint platform, and we believe the data collected from those devices puts us in a very unique position to deliver many of the additional services I just mentioned. From the very beginning, we have focused on building products and services that are comprehensive, easy to use, and affordable for the mass market. Delivering a truly integrated smart home experience requires unique proprietary technology. the expertise to customize and install smart devices in a customer's home, and importantly, the ability to provide services through the entire lifecycle of the customer via call center professionals or in-home support. That is why our nationwide workforce of over 10,000 dedicated smart home employees is such a critical differentiator to the Vivint model. We took hold of a first mover opportunity in this emerging category many years ago, and we believe we remain the leader. While others are busy trying to bundle together multiple apps, hardware sets, and interactions across different providers, we're focused on extending the lead we feel we enjoy. I will now turn the call over to Dale to go through the specifics of our fourth quarter and full year results, as well as to provide our initial outlook for 2021. Thanks, Don. I'll walk through the financial portion of the presentation that we posted today in conjunction with the earnings release. First, on slide six, we highlight a few data points for the subscriber portfolio, which were strong across the board. Despite the economic and social challenges that existed in 2020, total subscribers grew from 1.55 million to 1.70 million, or 9.2%. And total monthly revenue grew by 8% year over year. On slide seven, we highlight revenue for the fourth quarter and the full year. fourth quarter revenue grew by 8% to $332.5 million, while revenue for the full year grew by 9.1% to $1.26 billion. The revenue growth was mainly attributable to the aforementioned increase in total subscribers and total monthly revenue. Moving to slide eight, adjusted EBITDA scaled nicely for both the fourth quarter and the full year. The primary drivers were lower expense subscriber acquisition costs, and scaling of service costs and G&A. For the year, we are proud to have increased adjusted our margins by another 1,000 basis points to 46.7% of revenue compared to 36.5% in 2019. While we feel we responded well to the challenges brought on by the pandemic, seamlessly transitioned thousands of customer service and corporate employees to our work-from-home environment, We had already implemented cost reductions even before the full impact of COVID-19 was felt. These actions put the company in a better position as the pandemic gripped the world. On slide nine, we highlighted a few metrics on new subscribers. New subscriber originations were 58,554 for the fourth quarter and 343,434 for the year. Both figures reflect outstanding results from our National Inside Sales Channel and a strong second half of the year from our direct-to-home sales channel, following the multiple-week delay at the start of the summer sales season caused by the pandemic. New subscribers grew by 27.7% in the quarter versus the prior year period, and for the year, we grew new subscribers by more than 8.5%. Furthermore, we reduced the number of retail installment contracts, or RICs, by 85%. As mentioned on previous calls, this has affected our new subscriber growth. But by shifting a greater proportion of our subscribers away from RICs and towards our financing partners and pay-in-full arrangements, we have increased the cash collected at the point of sale, thus reducing our net subscriber acquisition cost and improving our cash flow dynamics. Moving on to the right-hand side of slide 10, our net subscriber acquisition cost per new subscriber for the year was $139 versus $1,018 in the prior year period, an 86.3% improvement as we increased our upfront pricing for the purchase and installation of equipment and nearly eliminated the number of new subscribers that were financed via RICS. On the left-hand side of slide 10, the improvement in net service cost per subscriber had a major impact on our earnings for the fiscal year 2020. Our net service cost per subscriber declined from $13.73 in 2019 to $10.50 this past year. The solid improvement is due to the work of Vibrant's vertically integrated smart home platform, which encompasses the software, the hardware, the installation, and ongoing customer support. As we continue to make improvements in all of these areas, we're seeing continued positive trends in both customer satisfaction and the cost of service. The result is that our net service margins continued its upward trend, moving from 73.8% in 2019 to 78.9% in 2020. The improvement in net service costs explains a large portion of the improvement in adjusted EBITDA that I cited earlier. It's worth mentioning that service costs were somewhat muted during the year as homeowners either delayed service calls or elected to solve issues over the phone because of COVID-related concerns. Additionally, we saw higher service revenue during the year from upgrades and moves, which had a positive impact on the net service cost metric. We would also note that service margins dipped a bit in the fourth quarter versus the third quarter, as expected. Based on 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. Slide 11 depicts our typical subscriber walk that illustrates the changes in total subscribers at year-end. One of the areas we were concerned about as the pandemic took hold was its potential impact on the performance of our portfolio, and we were pleasantly surprised to see our attrition improve year-over-year, ending at 12.4%, which was 150 basis points lower year-over-year, and an eight-quarter low. As we have started 2021, our portfolio continues to perform better than expected in terms of attrition and other leading indicators. While we are very happy with the year-over-year growth in new subscribers, total subscribers, revenue, and adjusted EBITDA, the $448 million turnaround in cash flow from operations is our biggest accomplishment in 2020. We stated that our goal was to get to cash flow neutral in 2020. But with the change in upfront pricing, reduction of retail installment contracts, and improving operating metrics, we were able to generate $226.7 million in net cash flow from operating activities compared to a use of $221.6 million in 2019. We finished 2020 with a very strong liquidity position of approximately $648 million, including $313.8 million of cash on hand. During the quarter, we saw approximately 4.1 million warrants exercised, which also had a positive impact on our cash position and increased our public flow as well. Finally, moving to our financial outlook for the upcoming year on slide 12. The fundamental characteristics of our financial model remain highly attractive, particularly the contractual reoccurring revenue that provides long-term visibility and predictability to our business. We have several initiatives in 2021 that we believe will continue to fuel our leadership position in smart home. In terms of guidance for 2021, we expect to end the year with approximately 1.80 to 1.85 million total subscribers. full-year revenue between $1.38 and $1.42 billion, and adjusted EVA between $640 and $655 million. This concludes our prepared remarks. Operator, please open the line for Q&A.