Vivint Smart Home, Inc.

We're standing by. Welcome to the Vivint Smart Home first quarter 2021 earnings call. This time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. If you require any further assistance, please press star zero. I would now like to hand the conference over to Nate Stubbs. Investor Relations, please go ahead.

Good afternoon, everyone. Thank you for joining us to discuss the results of Vivint Smart Home for the three months ended March 31st, 2021. Joining me on the conference call is Todd Peterson, CEO, and Dale R. Gerard, CFO. I would like to begin by reminding everyone that today's discussions 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 the amendment to our annual report on Form 10-K-A for the year ended December 31, 2020, which we filed with the Securities and Exchange Commission on May 11, 2021. 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 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. During today's call, management 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 website at investors.vivint.com. I will now turn the call over to Todd.

Thanks, Nate, and good afternoon to everyone. I hope that life is starting to get back to normal for all of you as vaccine rollouts accelerate until case counts decline. Today, we will cover the following topics. Discuss our strong financial and operating results for the quarter. Review our robust customer engagement and the performance of our platform. Talk about our excitement over the near-term outlook for Vivint's premier end-to-end smart home platform as we gear up for what we expect to be a normal summer selling season. and as our customers' engagement levels remain high, regardless of whether people are spending time inside or outside their homes. The momentum around our business that we saw in 2020 has carried into the first quarter of 2021, and we are pleased to report continued improvements in our key metrics year over year, including an accelerated revenue growth of 13%, along with 60,000 new smart home originations, which represented a 20% increase all while producing an adjusted EBITDA margin of 47%. As of March 31st, 2021, Vivint's total subscribers grew 10% from the same period in 2020 to more than 1.7 million. Along with the highlights I previously mentioned, we also saw solid improvements across the board and other key metrics for the quarter, including another steep decline in net subscriber acquisition costs per subscriber, and the lowest LPM attrition rate in the past nine quarters. I believe that these strong results speak 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. Dale will provide more specifics on the financials during his remarks, as well as share our thoughts about our full year 2021 guidance. If the past year has taught us anything, it's that there is no better time for homeowners to have a comprehensive smart home system. The 1.1 billion daily events processed by our smart home operating system across more than 23 million connected devices are the best indicator of the frequent engagement of Vivint's customer base. We are uniquely qualified to help our customers deal with any environment across the various smart home devices we support. from door locks, cameras, security monitoring, thermostats, lighting controls, garage door controls, and many other connected devices. All of these innovative products are designed to work together seamlessly through our elegant platform that homeowners can control from their in-home touchscreen hub to a single app on their phone or by simply using their voice. Vivint services also include life-saving and life-protecting 24-7 professional monitoring or emergencies such as medical, fire, carbon monoxide, and burglary alerts. Our vertically integrated model includes dedicated customer care and monitoring teams to ensure that we respond to alerts within seconds. Our cloud platform and proprietary technology also allows customers to seamlessly manage and protect their homes, regardless of whether they're socially distancing inside the home or from somewhere outside of it. Vivint takes care of our customers and their families while providing the peace of mind that people demand during times of heightened awareness, anxiety, uncertainty, and mobility. We've been securing and innovating smart homes for over 20 years, and our experience since the onset of the pandemic has only cemented in our minds the fact that our customers will continue to value home security and smart home technology during challenging economic and societal times. underscoring the strength and resiliency of the Vivint model in any type of environment. With attention now turning to the reopening of the economy and having this coincide with the onset of our summer selling season, we remain bullish about the near-term demand for the business. Given that approximately 50% of the adult population in the U.S. have now received at least one dose of the vaccine and that by the end of the month, We anticipate that all states will have lifted mandatory quarantine restrictions. The tried-and-true process of selling door-to-door and installing new, vibrant systems inside of homes is getting back to normal. We believe the pent-up demand for travel also plays right into our hands. To the extent that last year's shelterers became this year's travelers, they still have every reason to remain highly engaged with their smart home systems. Based on interaction volumes with our platform before COVID, during COVID, and now as the country begins to look beyond COVID, our systems and services have proven to be just as relevant in all of these environments. We are still respectful of the fact that we continue to operate in a world actively dealing with COVID-19. We have increased the preparedness of our direct sales team as they head out to markets across the US at full capacity. And they'll be ready to go with all the right training and necessary PPE to interact with current and new customers. As a reminder, last year at this time, we had to swiftly move our call centers and corporate employees to a work from home environment. We paused our entire direct home sales teams for about six weeks during the first wave of the pandemic, delaying the start of the summer selling season. At this point, we fully expect to return to a more normal summer sales season this year. Meanwhile, our other sales channel, National Inside Sales, which onboards nearly half of all new subscribers in a normal environment, has turned in robust results through the pandemic, and we believe that momentum will continue in 2021. We have long believed the total addressable market for smart home presents a massive opportunity, and in the not-so-distant future, the vast majority of the 150 million homes in North America will be running on a comprehensive smart home operating system. We believe Vivint is the premier end-to-end smart home platform company with the most robust service offering and, as such, is the best position provider to take advantage of this opportunity. We believe in order to take advantage of the growth opportunities in smart home, it's important that we increase our focus and investment in our brand, technology, and new product development. On this front, I'm pleased with the early returns we've seen from our brand investments. rolled out during the fourth quarter of 2020 to drive better consumer awareness 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 by delivering the security and peace of mind they desire. But beyond the brand, we also think now is the time to step things up in terms of technology and our product vision to maintain our position on the leading edge through product development, and to continue pushing new boundaries by delivering a transformative smart home experience to every home. Before I turn the call over to Dale to go through specifics of our first quarter results, as you may have seen, Vivint recently resolved a matter with the U.S. Federal Trade Commission related to certain historical instances of violations of the company's policies by sales employees. We are pleased to put this matter behind us. Vivint takes matters of compliance seriously, particularly as customers across the country put their trust in us to protect their homes and families. We had already taken steps before the FTC began its review to strengthen our compliance policies, and we will continue to make this a focus going forward. To that end, we are deeply committed to operating with integrity, doing right by our customers, delivering on our commitments to stakeholders, and providing exceptional service to our customers. I will now turn the call over to Dale. Thanks, Todd. Before I get into the results for the quarter, just a quick comment on the recent statement by the SEC related to the accounting for warrants issued by SPAC companies. Following the issuance of the statement, we re-evaluated our historical accounting for both the public and private placement warrants assumed in conjunction with our merger with Mosaic in January 2020. Like a majority of SPACs, we previously recorded these warrants as equity. However, based on our evaluation, we determined that the warrants should have been classified as liabilities and measured at fair value in the closing date of the merger, with subsequent changes in fair value reported as non-operating income or expense and are consolidated statements of operations each reporting period. On Tuesday of this week, we filed an amendment to our 2020 Form 10-K to restate our previously filed financial statements. As a result of this restatement, we recorded a $109.3 million non-operating loss related to the warrants. And our warrant liability was $83.6 million as of December 31, 2020. I'll now walk through the financial portion of the presentation that we posted today in conjunction with the earnings release. Looking on slide six, we highlight a few metrics for the subscriber portfolio, which continue to be strong across the board. Total subscribers grew 10.2% from 1.55 million to 1.71 million. Average monthly revenue per user, or AMRU, increased to $67.24, up 3% year over year. The increase in AMRU was driven by additional sales of new products, such as our latest generation of outdoor and doorbell cameras, as well as the recognition of deferred revenue. On slide seven, we cover revenue and adjusted EBITDA for the quarter. For the first quarter of 2021, revenue grew by 13.2% to $343.3 million. The revenue growth is attributable to previously mentioned double digit increase in total subscribers, as well as the increase in the average monthly revenue per user. Adjusted EBITDA grew nicely in the first quarter. The primary drivers were the scaling of service and expense subscriber acquisition costs. For the quarter, we increased our adjusted EBITDA margin by 270 basis points, the 47.2% of revenue, compared to 44.5% in the first quarter of 2020. Moving to slide eight, we will highlight a few points on the subscribers originated in the first quarter of 2021. New subscriber originations led by a 29% year-over-year growth in our national inside sales channel were 60,127 for the quarter. How and which subscribers we onboard is important to our success today and in the future, and we continue to redefine and boost the underwriting requirements and process to qualify and onboard new subscribers. One of the positives of the enhanced underwriting requirements is that we were able to reduce the number of retail installment contracts, or RICs, that are financed on the company's balance sheet. For the first quarter of 2021, we saw a 77% reduction in the number of subscribers financed through retail installment contracts.

By shifting a greater proportion of our subscribers away from RICs and towards third-party financing partners and paying full arrangements,

We're able to reduce our net subscriber acquisition cost and improve the company's cash flow dynamics. Speaking of our third-party financing partners, I'm pleased to announce we recently completed a successful renegotiation of our agreement with Citizens Bank, our primary financing partner under the Vivint FlexPay program. This renewal resulted in a contract extension of three years and the implementation of a new line of credit finance offering to our consumers. which will streamline the initial sales process and facilitate up sales and upgrades of additional and new equipment during a customer's life cycle. Moving to the new line of credit finance offering changes the timing of when the merchant discount rate and lost share fees are incurred, which will impact the amount of cash in the near term. That said, we are fully committed and intend to operate the business on a cash flow positive basis this year and going forward. Moving to slide nine, we will cover service cost per subscriber and new subscriber acquisition cost per subscriber. We continued our trend of year-over-year improvements in net service cost per subscriber, moving from $11.76 in the first quarter of 2020 to $10.77 in the first quarter of 2021. This reiterates the advantage of Vivint's vertically integrated Smart Home Cloud platform, which encompasses the software, the hardware, the installation, and ongoing customer support. As we continue to make improvements in all these areas, we're seeing positive trends in both the cost of service as well as customer satisfaction. Our net service margin continued to be in the high 70% range at 77.7% for the first quarter of 2021. The drop in service cost per subscriber is driving a significant portion of the increase in adjusted EBITDA dollars as well as adjusted EBITDA margin percentage. On the right hand of slide 9, we highlight net subscriber acquisition costs for the last 12-month period. For the period ended March 31, 2021, net subscriber acquisition costs per new subscriber decreased to $66.00. That's 93% lower year-over-year as we continue to drive down the number of new subscribers that are financed via RICS and shift to a higher mix of customers utilizing our financing partners for paying in full for the purchase of their smart home products. During the quarter, we also continue to benefit from pricing leverage on the point-of-sale purchase and installation of equipment. Slide 10... depicts our typical subscriber walk that illustrates the changes in total subscribers at quarter end. One of the pleasant surprises throughout the pandemic has been the performance of our subscriber portfolio. Once again, our attrition improved, ending at 11.8%, which is 230 basis points lower year over year and at a nine-quarter low. Our portfolio continues to perform better than expected in terms of both attrition and other leading indicators. In terms of cash flow, we saw a nearly $19 million improvement in net cash used in operating activities during the quarter. We finished the first quarter with $274 million of cash on hand and a very strong liquidity position of approximately $600 million. Finally, moving to our guidance for the year on slide 11. The top of the page highlights several fundamental characteristics of our financial model, including reoccurring monthly revenue from long-term subscriptions, a highly predictable business model, and the ability to thrive in all economic environments. We are pleased with the momentum in the business from the strong start to the year, and we're bullish about our ability to operate the direct-to-home sales team during the summer selling season at full capacity. We are also aware of potential supply chain disruptions, inflationary pressures, and hiring constraints that could limber further upside. Taking all of these factors into consideration, we are confirming our original guidance as follows. we still expect to end 2021 with 1.8 million to 1.85 million total subscribers. Our estimate for 2021 revenue continues to be 1.38 to 1.42 billion dollars. And finally, we affirm our previous 2021 adjusted EBITDA guidance of between 640 and 655 million dollars. This concludes our prepared remarks on the first quarter. Operator, please open the call for Q&A.

Thank you. At this time, if you would like to ask a question, simply press star 1 on your telephone keypad. Again, to ask a question, please press star 1 on your telephone keypad. Your first question comes from the line of Paul Koster from JP Morgan. Your line is now open.

Yeah, thanks very much for taking my question. It sounds like the guidance implies that supply chain risks prevent upside perhaps, but they're factored into the guidance, so they're limited from a downside. I think you're one of the first to sort of tilt it in that kind of way. Can you just talk to us about what your biggest sort of component risks are and how it is that you seem to be managing through this problem so well on a relative basis?

Hey, Paul. This is Dale. Thanks for joining the call. You know, we look at a big part in our growth initiatives and some of the stuff we're trying to do is really around camera attach rates. And, you know, we think that's one of the big selling points and why people really like smart home. It's one of the big advantages we think our systems have over others is that integrated video. analytics and the different things that we can do with that in terms of notices and so forth with customers. And so part of what we're doing with our pricing and how we're selling and what we're seeing in terms of cake rate or adoption of additional cameras, we're in good shape, we believe, right now. But if adoption rates are higher than we think and if there's any disruption in terms of chip manufacturing and or the big thing really one of the big things is logistics frankly the ports and getting them in from the from the ports you know it could could be some where we may have to limit the number of cameras we sell the second you know maybe late in the third quarter or fourth quarter but You know, we think we've addressed that. We're doing some stuff with air spray and shipping. And so, you know, we're just calling that out as to say, hey, we're off to a good start. We think that the year we're going to have a good year. But with, you know, some stuff around supply chain, like there's some inflationary pressures out there. There's some hiring constraints. We're probably no different than other companies as we try to continue to ramp up, especially in the field and higher in the markets that we service, have been able to be able to hire enough installers and service professionals to be able to take care of the customers the way we want to take care of them. So we just kind of put all that stuff together and said, hey, based on where we are today and what we see, we think confirming our guidance, which we think is really good guidance for the year to begin with, is the best path at this point. Todd, I don't know if you want to. Yeah, no, I was just saying, Paul, you kind of caught that, which is based on supply chain and the issues that Dale mentioned, the potential for upside beyond where we sit is limited to product being delivered to the U.S. and being able to install that. So it's not impossible that we could see some upside, but it's going to be quite difficult. Just like everyone else, there are supply chain issues out there. Chips mean kind of front and center driving most of that. But we do feel very comfortable with this number. We're fortunate that we have a a seasonal business in some regards because we pre-order a lot of the hardware and had done that last year. And so a lot of what we needed to attain these numbers, we already know we have kind of insight.

Gotcha. And a quick follow-up. I think investors have been working really hard to try and figure out what's going wrong because the stock's been going down and we're all sort of very anxious. But nothing obvious here. Let me just sort of try my luck. It sounds like you've entered into an extended term with Citizens Bank, but as part of that term, there's a different allocation of the credit risk. Does that relate back to this FTC issue? And in passing, Todd, can you just tell us what exactly the FTC issue identified and when it occurred?

Yeah, I'll take the first part, Paul. In terms of the extension with Citizens, we're very, very pleased with our partnership with Citizens. They've been a very good partner. We've had a relationship doing consumer finance with them since early 2017, and so we were glad to be able to extend it. The changes that we're making in that program with Citizens really has nothing in terms of the FTC It was really part of the negotiations, the move from the installment line into what we call a line of credit, which really is better for us long-term and better for our customers. It's easier for the onboarding process. And then really where we'll see the benefit is the additional sales of hardware, either additional products that customers want to take, or as we roll out new products and customers want to add those to the systems, the line of credit allows for that in a way that the installment loan, which was kind of a fixed loan, didn't. And so, in reality, The way the terms are set with the line of credit are more standard terms. Our terms that we had with the installment loan were probably not what was standard in the industry. We were able to do that, I think, early on. So by moving to the line of credit, one of the things that was part of that was we'd kind of go to more standard terms around how the users of these products pay for that product. THE CREDIT OFFERING FROM CITIZENS OR FROM OTHER BANKS. THEN TODD WILL TAKE DISPUTE FOR THAT. THE FIRST THING I WOULD SAY IS WE'RE GLAD TO HAVE THIS FTC SETTLEMENT DONE. You now know why we have not. We've been asked about refinancing paid-out debt, and we were not able to do that. We didn't feel like it was good timing in the middle of that FTC settlement happening, so we're glad to have that passed us and in the past. Secondly, we're a company that we want to provide great service, take care of consumers, our customers, and so this behavior that's not consistent with integrity and doing right by consumers has no part of this company but back in 2017 we did have some sales people that got around some systems that we found out and let those people go and that was part of this this investigation by the ftc and the thing is when we found out we did let those return those people let them go But, again, that's in the past and done. We're glad to have that behind us. We've definitely made, and we do this every year, enhanced improvements on compliance and systems and controls to ensure that underwriting and everything is up to par and, again, compliant with laws of the United States from a financing perspective. So, again, glad to have that behind us and done and the settlement over.

Thanks so much, Todd. Thanks.

Thank you, Paul.

Thank you. Your next question comes from the line of Jeff Kessler from Imperial Capital. Your line is now open.

Thank you. It's been great working with all you guys. Hopefully we'll continue to talk just That's all. I've got a couple of questions here. Firstly, what are the – it looks as though this year, from the sound of it, look, you're going to have to – the economy looks like it's opening up. You are making investments you're talking about and you've already started with in branding the company. Now, can you talk about what other types of investments and how much that may cost you that you're going to be involved with, assuming that the overall economy opens up? It's probably timely for you to start pushing on some of the other home, some improving home automation, trying to put some distance between you and others in terms of technology, trying to do things in terms of maybe improving technology. I don't know, improving your training or focus on how you onboard your new salespeople, spending more money there. Can you just talk about the various types of increased investment that you'll be doing in addition to branding? So, and by the way, it's been great to work with you through these years. We're going to miss this, I guess, to perfection. but hopefully the relationship continues. I'm sure I will with my other guys. That sounds great. Well, so a couple of things. You know, we agree that investment in continued product enhancement and quality and technologies is critical so that we can keep our lead in the market and deliver the best services that we can to consumers. I mean, that's first and foremost. The quality's got to be there, the value's got to be there, and we'll continue to drive that. We are investing in new tools and technologies from onboarding customers, underwriting customers. We've built these tools over the years. Some of them we feel need to be refreshed. You'll probably end up seeing within a year or so a platform kind of reinvestment in the platform. Again, we built out our operating system seven, eight years ago, and we believe that there are some updates that can be done and will be done to enhance that experience for the consumer, allow us to do more upgrades. have more content for consumers, information for consumers, and allow us to kind of deliver service to them through those enhanced operating systems. So that's going to happen. Now, we're super pleased with the results, and it's early. I mean, we started doing branding and marketing really in Q4. But as you saw with our Q1 numbers, 13% top-line revenue growth compared to – we're starting to see some momentum there. Now, we already mentioned earlier that with some supply chain constraints, You know, we're not going to be off to the races because we have to be, if we do add customers, we need product and hardware to be able to install. So although we're a great year planned out, we think the numbers and projections we have are strong. You know, the cash flow, the name of the business, the attrition numbers, our net operating margins, our net SAC are all super strong and improving year over year. So we're really excited about how the company's positioned today. and, you know, what the future looks like for us. Does this include an increased investment in SAC? Can you maybe explain? What do you mean by that? You talked about new tools for onboarding customers and getting customers trained and things like that. Yeah, I mean... It's really within our information technology area, which we do allocate out to SAC, some of that to SAC, some of that to service. So, yeah, there will be some of that there. And then some of the brand spend that's directly contributed to the media that we're doing is actually being paid out to SAC also. But, you know, it's part of, like, as we said early when we did the fourth quarter call and talked about kind of what we expect in 2021, we said, hey, we're going to make investments in the really three areas that Todd just talked about. You're going to see those. Really, you'll start to see the impact of those in Q2 in terms of where we're kind of really starting to get some of the spend in terms of how the brand is growing. as we kind of rolled out the summer Salesforce. And then as we've hired up for some of the stuff we need to do in technology and product development, you'll start seeing that kind of come through Q2, Q3. Okay. The second question actually is on attrition and going through the various components of attrition. Obviously, percentage of customers coming to term on their contracts is obviously an important one. Movers is an important one. People who can't pay is an important one. People who don't like your system or whatever. you know, is somewhat important. These all move around depending on the times we are living in and the ability of your firm to create a better value proposition for your customers. But what is going on with attrition? Because clearly you've been saying that your sweet spot is probably going to be somewhere in the 12 or maybe the high 11 to 12 to 13 area for some time to come. In the past, you seem to have maybe underestimated how far attrition can go up, but now you seem to be underestimating how far attrition can go down. Yeah, well, so here, you know, here's a couple of things. Um, you know, we, we deem that we are fully integrated platform end to end solution. You know, we continue to make improvements in the hardware, the installation process, the firmware. We've got this incredible feedback loop that we've talked about. So we continue to make improvements and enhancements from that perspective that if, you know, if these, if these products work and we have 14 or 15 devices on average per home, if they work. consistently and the use case are relevant to consumers to keep the product. Now, there are obviously circumstances where people lose their jobs or have financial changes in their lives that cause some of these people to cancel. We hope to think it's not because people don't like our system, but maybe that happens occasionally. But the other is, if you've noticed in the last year, we've made great enhancements to the underwriting The reduction in RICs to the platform is going to have a continued impact on attrition over time. And, again, enhancements in every little detail of what we do to deliver service to consumers is going to impact that. So we're hopeful. We're not... We're not trying to be pessimistic. We continue to see potential gains in that side. For a consumer-facing business, a 1% monthly attrition is pretty incredible. And then you add to that our net subscriber cost. some down substantially in our, our net service costs of 1077. This is a, this is a really good story and a real good buildup from, you know, what we've been trying to accomplish over the last couple of years. So is the sweet spot, are you changing your view of what maybe your, your long-term sweet spot range should be for, for LTM attrition? No, no, Jeff, at this point, Jeff, no, I think with, with, Like Todd said, I think as we get more time in here and we continue to see how attrition performs, we may update that. But at this point, I think we're going to say we're excited. One thing I would say that we're super pleased with is, well, all of it, all of the results are great, but the 1077 for subscriber and net servicing costs, That means our systems are working. We're not having to roll trucks to fix things as often as we used to or replace hardware. So again, the better and more reliable the system is and the more elegant, in fact, the more robust the system is, the more we see attrition coming down over time. So we're not done from an aspiration perspective, but we think we're feeling confident about what we've injected to the market for the years. and hope to make gains over that if possible. Great. Thank you very much. I appreciate it. Thanks again, Jeff. Good luck in retirement.

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

Hi, this is Rocky on the office of Rod. Nice job on the results. could you expand on the difference between the installment lines versus line of credit and how it's better for customers and you also mentioned some impacts to cash flow so could you give us some color on that yeah yeah okay um

So the line of credit, what we had with Citizens and what we've been putting on Citizens is kind of a fixed-term installment loan. And so what that means, once the customer financed what they financed at the initial point of the sale, that was fixed. And if the customer called back six months later and said, hey, I only bought two cameras. I wish I would have bought a third camera so I could put it around on my back porch. We weren't able to actually add that to the finance. The line of credit, it's more like a credit card is the way to think about it. And so that will allow us to actually go back and add to that system and make it sort of have to come out of pocket at that point for that camera and the install. They can add that to their line of credit. So that's really the big difference. It just allows us that the customer and allows us as customers the company to be able to offer that product to them and the customer then to be able to finance that going forward uh as they want new or additional products installed in their homes um in terms of the cash the way you know the way the installment loan product has worked we've paid the kind of the mdr fee and the lost share over time and so every month uh if there were you know the mdr fee was paid every month and losses were paid has occurred up into the loss, based upon the loss arrangements that we had, the caps that we had in place. The way it will move, the line of credit will move eventually as we transition through the next kind of 24 months. It'll move to that'll be like a more standard where we'll pay the MDR fee and then the expected losses up front. And so it'll be a net settlement. Very similar to how our program works with for Kiva, our other financing partner.

Super helpful. I also wanted to ask about direct-to-home. So the subscriber growth sequentially is a bit weaker than historical trend, but I understand we're still operating in a COVID environment. Could you talk about why that is and expand on the environment there?

Yeah, look, you know, we're – We're basically saying that we believe that we'll operate in a normal way from a deployment perspective. We've deployed the majority of our direct-to-home salespeople across the country. There's still some number of them that are still going out to market. We are obviously respectful of customers. You know, social distancing still at this point, even though that is changing somewhat with, you know, the vaccinations and the percentage of people being vaccinated across the country and based on CDC guidelines and suggestions. But it feels like it will be back to more of a normal type year for the summer selling season, which we're excited about. Now, we've made adjustments that that. Based on COVID, it maybe accelerated some of the adjustments on how we underwrite and do approvals for consumers. We used to do it on our devices, the salespeople who travel around with an iPad. Now it's done on the consumer's device. So we can maintain the social distancing even in the future. The second thing that it really does for us is from a compliance perspective, it really tightens things up. So this is a net positive all the way around. We're, again, trying to be respectful of COVID-19 and making sure that we're not spreading anything. We're still checking people's health on a daily basis in market, wearing the appropriate masks and gloves and that sort of thing. But then from an underwriting and compliance perspective, with the adjustments, it's going to be a net positive for the company. thanks todd and the last question from you could you give us an update on the insurance business yeah so we're we're still you know i would say we're still in um test mode um we we believe we have great um upside potentially with that business um again this is a great thing about owning our platform and the data that we have um if you think about it super it's hyper local data inside of the home based on consumer actions and interactions with the system so usage patterns we have all of that collected inside of our our data that we collect on a daily basis um we're not quite ready to start um announcing you know volume or you know future projections but um we're trying to make sure that we have you know everything from a compliance perspective from to a financial perspective and underwriting perspective dialed in before we really extend that business out.

Great.

Thanks, guys.

Thanks, Arcad.

Thank you. Again, to ask a question, please press star 1 on your telephone keypad. To ask a question, simply press star 1 on your telephone keypad. And your next question comes from the line of Eric Woodring from Morgan Stanley. Your line is now open.

Hey, good afternoon, guys. Congrats on the quarter. And again, congrats on the attrition rate. Really impressive stuff. I guess I wanted to ask an earlier question, perhaps a different way, and that was... You know, would you say that, you know, through the end of the March quarter, there was still a bit of what I'd call COVID complacency driving that metric? Meaning, you know, I know you had less than 10% of your base reach the end of term in one queue, but are people perhaps putting, you know, a decision to reevaluate their smart home provider on hold for now, given the environment? Just curious your take on that, and then I have a follow-up. Thanks.

Yeah, I mean, look, that could be true with some of the consumers. And then the other side of that is better underwriting. Our systems are working and operating better as we continue to make improvements, like I mentioned earlier, on firmware, software, new hardware releases, installation protocols, just every little thing that we do. You know, we've been through different types of downturns and issues in the past, and this kind of is proving out again the fact that what we deliver to people, which is peace of mind in different ways for different people based on their situation and their living environment, that this is something that people see value in. And we continue to try to push those boundaries and make sure that we're more and more relevant from a consumer perspective every day.

Okay. That's super helpful. And then I guess my second question is, Selling expenses were up more than 100% year over year. Smart home subscribers were up 20%. What drove that growth in selling expenses? Should we interpret that as meaning it's getting more expensive to acquire new customers? And then how do I kind of tie that with a net sack that obviously continues to reach very impressive new lows? Thanks. Yeah.

So a couple of things. Last year in the first quarter, if you recall, we shut down kind of direct-to-homes So part of your year over year is the fact that the last, I don't know, the last two or three weeks of the first quarter, there was no spend. When I say no spend, you know, we kind of said don't spend any more money on recruiting, training, anything. So that's a big variance or a variance kind of year over year. in terms of that. And then you have some of that brand spend also. As I said, we're pushing some of the brand spend that's media directly tied to commercials and so forth into SAC also. So in terms of our gross cost of SAC, it's in line with where we have been. And again, we keep driving down the net because we're charging more for for, sorry, we're selling more product. So the upfront, basically, the number of cameras, number of devices we're selling is higher. I think the other thing, just the other thing I'll call out, because I actually look at selling expenses, SAC, excluding stock-based comp. So stock-based comp is a big driver in that, in terms of the legacy equity that we had that came through in the first quarter that also got expense, plus the new grants that are there. So you have kind of a double kind of whammy there in terms of that expense. But if you looked at, I think it's 11%, I think, without that stock-based comp charge, you're only up about 11%, around $5 million year over year.

Okay, that's really helpful. And then I guess if I could squeeze on the last one, you know, I remember you guys kind of previously guiding to long-term adjusted EBITDA margins in the mid-40%. Correct me if I'm wrong, but is that still how we should think about the long-term? And I say that compared to obviously your current guidance, which would imply you're kind of already there. And that's it for me. Thanks again and congrats again.

Yeah, I think, again, a lot of things we're seeing improvement across the board, right? We're seeing better servicing costs, and we can continue to drive down service costs, but while still providing really exceptional service for our customers. Again, moderate being able to leverage gna in terms of what we're spending there i think overall we still think kind of in the mid 40s you know whether that's 45 to 47 is really kind of where we see margins at for the near term i think as we continue to to invest in the business and make make decisions that we think will help the business long term be more be more successful in terms of products technology uh brand as todd has mentioned and so that that's kind of where we're shooting for today

Okay. Thanks, guys. Thank you.

Thank you. Your next question comes from Marlene Pereiro from Bank of America. Your line is now open.

Great. Thank you for taking my questions. I just have two very quick ones. One, can you share any thoughts on addressing the capital structure? And two, and I apologize if I missed this, but for attrition, how do you think about a normalized level or kind of a steady state for the business? Thank you.

Sure. I'll go backwards. Attrition, I think we've kind of said we think 12 to 13. If I had to group attrition, I'd say attrition somewhere in the high 11s to probably low 13s. So maybe it's 12 to 12.5 is kind of where we think at this point. Again, as Todd said, as we continue to provide better service, better value to our customers, They look at this and say, hey, I need this every day as part of my life. I mean, our interactions that we saw pre-COVID, during COVID, and post-COVID continue to increase in terms of how many times people are interacting with their system via their app. And so that tells us that. And I think one of the things that we actually found during COVID is that those interactions went up. And I think part of that's being able to answer the door, get your deliveries without touchless deliveries, not having to talk to the person, but you can talk to them through your video camera, your doorbell camera, those type of things. So even when people go back to the office, which I think people will at some point, they've got these uses now, these use cases that they've discovered why they were at home, that actually it will be beneficial. And so we kind of, again, attrition, we're happy where it is. And the thing I think is important about attrition also is, as someone mentioned earlier, less than 10% of our portfolio is at the end of their initial term. If that goes up, that has an impact that will lift attrition automatically, even though attrition is not really performing worse. It's just as the percent of customers at the end of term, you always see a little bit of a higher percentage of attrition related to those customers. If we can drive that down, then we can lower that long-term attrition number. In terms of the cap structure, I think, as Todd said, we'll be looking to address that, I think, sooner than later as we want to go ahead and I think we've got some 22s, 23s for sure that we'd like to take care of the maturities and extend those. And so I think you'll see us look to be out in the market at some point in the near future.

Great. Thank you, Dale.

Thank you. Have a good day.

Thank you. There are no further questions at this time. I'd now like to hand it over to Mr. Todd Patterson for any closing remarks.

We appreciate everyone getting on the call with us today. And again, we're looking back at this past quarter, which was a build up in the past couple of years, a plan set in place. We're excited to see the acceleration in top line revenue growth, improvement in LTM attrition, net subscriber acquisition costs, servicing costs. Everything with the business is performing incredibly well. We're excited about the future of the business. and look forward to getting on the phone call with you guys again in the next quarter. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.