Vivint Smart Home, Inc.

Hello and welcome to the Vivint Smart Home Inc third quarter 2021 earnings call. My name is Robin and I'll be coordinating your call today. If you would like to ask a question during the presentation, you may do so by pressing star followed by one on your telephone keypad. I will now hand you over to your host, Nate Stubbs, VP of Investor Relations for Vivint Smart Home. Nate, please go ahead.

Good morning, everyone. Thank you for joining us to discuss the results of Vivint Smart Home for the three and nine-month periods ended September 30th, 2021. Joining me on the conference call this morning are David Bywater, Vivint Smart Home's Chief Executive Officer, and Dale R. Gerard, Vivint's Chief Financial Officer. I would like to begin by reminding everyone that the discussion today may contain forward-looking statements, including with regard to the company's future performance and prospects, Forward-looking statements are inherently subject to risks and uncertainties that can cause actual outcomes or results to differ materially from those indicated in any such statements. We describe some of these risks and uncertainties in the risk factors section in our annual report on Form 10-KA for our fiscal year 2020, in our Form 10-Q that will be filed today, and in other filings we make with the SEC from time to time. The company undertakes no obligation to update or revise publicly any core related 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 to the most comparable measures calculated and presented in accordance with GAAP, to the extent available without unreasonable effort, are available in the earnings release and accompanying presentations. which are available on the investor relations section of our website. I will now turn the call over to David.

Thank you, Nate, and good morning, everyone. I've enjoyed talking with many of you since our last phone call, and I really appreciate your interest in the company. Today, we are excited to give you an update on our strong performance for the third quarter, remind you of why we are a leader in the smart home, and provide additional insight onto of the third quarter, along with our guidance for the remainder of the year, which we are updating given the positive momentum in the business. Before I get into the strong results for the quarter, let me remind you of why we are a leading smart home company and what differentiates Vivint from others in the marketplace. Our mission is to redefine the home experience with technology and services to create a smarter, greener, safer home that saves our customers money every month. What is a smart home? We know that a single device such as a doorbell camera or thermostat doesn't make a home smart. Rather, a smart home has multiple devices, properly located and installed, all tied into an expandable platform that incorporates AI and machine learning in its operating system. Similarly, we don't believe that having a smart speaker in the home is the same as having an AI-driven machine learning operating platform like Vivint. While DIY products and companies get a lot of press, and many believe that DIY is a faster-growing segment of the industry versus the professionally installed and monitor segment, surveys show that many DIY products purchased never get installed, and over 20% of the products that do get installed are by some other than the purchaser. While DIY might have higher sales growth, we believe it represents only a small were results, as we had double-digit year-over-year growth in both revenue and GFC . Our revenue growth was more than double the growth rate in the prior year period, reflecting the robust demand for the products and services we deliver. Many of the underlying metrics of the business While the enhancements in our underwriting criteria and product performance are part of the story, I believe our lower attrition rate is also driven by our smart home platform delivering our mission of providing value and peace of mind to our customers. Another metric we are pleased with is the nearly $78 million in net cash that goal again in 2021. Our belief is that Vivint's business model is superior to others in the industry, both in terms of unit economics, as well as the ability to adapt to changing economic environments, including the recent pandemic and the current labor and supply chain challenges. We believe Vivint is truly in category one. What do I mean when I say we're in category one? We believe Vivint is the only company with a proprietary and distribution model, strong growth with compelling economics, and multiple levers for sustained profitable growth. Expanding on that, our proprietary cloud-based AI and machine learning platform that we designed, engineered, and can continue already delivered to more than 1.8 million customers. With an average of 15 devices installed per home, we own at every point of interaction with them. As our customer satisfaction increases, the trust in us builds, and this creates multiple potential levers for sustained profitable growth for years to come. Our strategic priorities are focused on leveraging the trust to redefine the home experience with the best-in-class technology and services to create a smarter, cleaner, safer home that will save our customers money every month. As we do this, has the potential to meaningfully decrease the attrition of our customer base and increase the lifetime value of our customers. We have a layered strategy for pursuing growth and achieving this vision. Our flagship product offering is Smart Home. Over the years, we have developed a best-in-class solution that levers what we believe is the premier Smart Home offering to the masses. investing in the development of two linked markets, smart energy and smart insurance. Until now, we've been light on details surrounding these two growth opportunities. Today, I hope to expand your understanding of why we believe smart energy and smart insurance are perfect extensions to our smart home offering and worth our focused investment. As the first smart home company to expand, customer value by offering a comprehensive bundle that subsidizes the cost of smart home and helps protect customers from rising energy costs while being better stewards of the environment. The vision is to create a bundle offering of smart home and smart energy that integrates energy production and consumption data in the Vivint app, allowing customers to intelligently manage their home's energy use. A study performed previously by a premier and cells lead-based. Back in July, we announced a partnership with solar finance partners, Sunrun and Mosaic, as well as with Freedom Forever, one of the country's largest and fastest growing solar We believe we can do significantly more in 2022 as we methodically expand our bundle solution in markets where customers benefit from residential solar. Over time, as we integrate the production data from the solar panels with customer behavior patterns, we believe smart energy can drive material savings that will reinforce the value of the Vivid platform. As this catches on, we believe I would note that adjusted EBITDA margins in smart energy are lower than in smart home. So while we'll see incremental growth in adjusted EBITDA dollars, overall margin percentages will be a bit lower as the revenue from smart energy comes in a lower margin. We are okay with this, as we believe our ability to leverage subscriber acquisition costs and increase the lifetime value of our customers by addressing an obvious market demand to bundle these two solutions presents a very compelling growth opportunity. and provide more opportunities to interact with current and potential customers. We will share more details on this opportunity in the upcoming months, but trust me, we believe this is a good adjacent market for us to invest in. Now that we've discussed smart insurance, we've been selling our insurance to a limited number of customers for a while now. The logic we mention here is that the $600 billion plus property and casualty insurance market has been looking for funds fire, and theft. As we have worked with several leading insurance carriers, we have been encouraged by their eagerness to help us create a home insurance solution that leverages our smart home ecosystem. We believe our platform can help insurance companies better price the risk of a customer. That is a professional installed system in their home that is monitored and used consistently to mitigate the severity of claims events. In short, we should be able to demonstrate to or a DIY system that was inadequately sculpted and installed. To date, we have been operating as an agency, reselling insurance products from a few large carriers, and we're on pace to sell approximately 8,000 insurance policies in 2021. To better leverage our smart platform and provide the opportunity for additional savings for consumers, we are working to become a managing general agent, which will allow us to develop specific forms larger states. As we demonstrate the savings and benefits of our proprietary coverages, we believe we can expand into most states over the next several years. We will expand in a thoughtful and deliberate manner as we prove to our customers the benefits that it can provide in protecting their homes, their families, and their walls. We are focused on accelerating long-term growth through each of the and insurance solutions. Our vision is to be the preferred operating system in the home and a true platform Thanks, David. Good morning, everyone. Thanks for joining the conference call. This morning, I will provide detail for our third quarter and year-to-date operating and financial results. I will also provide updated thoughts on our guidance for the full year. We will open the call for a Q&A session after my prepared remarks. Before I dive into the numbers, I want to address the delay in reporting our third quarter results. While reviewing certain customer contract transactions during the quarter ended September 30, 2021, we identified a material weakness in our internal controls over financial reporting related to the timing of revenue recognition resulting in certain and material errors in previously reported amounts of revenue. Specifically, we found that we did not properly design and maintain effective control as well as prior reporting periods to actively determine the appropriate period to recognize revenue associated with certain transactions. These transactions primarily related to monthly service charge adjustments and contract modifications, which resulted in errors in the reporting of revenue and other income and balance sheet items in certain prior periods. The company assessed the material OV statements by both quantitatively and qualitatively, and determined that the correction of these errors to be immaterial to all prior consolidated financial statements. Taken as a whole, and therefore, amending previously filed reports to correct the errors was not required. However, the company concluded that the cumulative effect of correcting the errors in the quarter ended September 30, 2021, would materially mistake the company's unaudited Consents consolidated financial statements for the three and nine months into September 30, 2021. Accordingly, the company has reflected the corrections of the end material errors and the results for prior periods included in the financial statements in its unauded earnings release, company presentation, as well as its quarterly report on Form 10Q that will be filed today. The company will also revise such information in future problems to reflect the correction of the errors. I refer you to our Form 10Q that will be filed today for more details. In conjunction with this call, we posted a presentation to our investor relations website that provides additional context on the quarter. On slide 10 of the presentation, we highlighted a few of our key subscriber portfolio metrics. Total subscribers grew nicely from September 30, 2020, up 9.2% to 1.84 million as of September 30, 2021. Average monthly reoccurring revenue per user, or AMRU, increased by 4.7% versus the prior year period, driven by customers purchasing more smart home and security products at the point of sale. The combination of the growth in total subscribers and the growth in AMRU, along with a few other items, lifted total monthly recurring revenue by 15.1% year-over-year to $121.5 million. Now moving to revenue for the three-month and nine-month periods ended September 30, 2021, on slide 11. For the third quarter of 2021, $6.7 million, a 21.3% increase from the prior year period. The primary drivers of the year-over-year revenue growth were an increase in total subscribers, an increase in the average monthly recurring revenue per user, and contributions from our smart energy and smart insurance initiatives. The 21.3% revenue growth in the third quarter of 2021 was more than double the 9.6% growth rate in the third quarter of 2020. Revenue for the nine months ended September 30, 2021 was $1.08 billion, an increase of 17.6% from the nine-month period in the prior year. December to the third quarter, the key drivers of growth in the nine-month period were growth in total subscribers, growth in AMRU, and contributions from our smart energy and smart insurance initiatives. Now turning to slide 12, I will discuss adjusted EVA for the third quarter and year-to-date periods. For the third quarter adjusted EVA I would note that adjusted EBITDA margins in smart energy and smart insurance are lower than our smart home margins. We are very pleased overall with the solid EBITDA margins achieved in the face of legendary pressures in today's economic environment. I would note included in the third quarter results are approximately $9 million of investments in brand awareness, new product and service innovation, and IT enhancement. Moving to the nine months into September 30, 2021, adjusted EBITDA grew 13% from the same period in 2020. This includes approximately $20 million of investment spend associated with brand awareness, new product and service innovation, and IT enhancements. Since 2020, results have a lot of noise related of 2021 versus the same periods in 2019. Adjusted EBITDA in the three and nine months of 2021 grew by more than 64% compared to the same periods in 2019. We have also been able to expand our adjusted EBITDA margin from the mid-30% range in 2019 to the mid-40% range in 2021. Now moving to slide 13, I'll highlight a few metrics around new subscriber originations. New subscriber originators during the third quarter of 2021 were 114,056. Our direct-to-home sales channel was lower than the previous third quarter, driven largely by the impact of COVID that COVID had on the timing of the selling season in 2008. September of last year. Our National Insight Sales Channel, or NIS, had year-over-year growth of 7.6% in the third quarter of 2021 compared to the third quarter of 2020. For the nine-month period ended September 30, 2021, NIS originations grew by over 18%, and the company added 295,782 new subscribers. period in 2020. We are pleased with the consistent growth in the NIS channel over the past few years and believe it is a strong indicator of the value that customers see in the Business from Home platform. Within all of the Origination For the third quarter of 2021, more than 99% of new subscribers either paid in full or financed the purchase of their equipment through one of our financing partners. I will now cover net service and net subscriber acquisition costs on slide 14. Net service cost per subscriber for the third quarter of 2021 was $10.49, up slightly from a record low in the third quarter of 2020. but down almost $4 from the same period in 2019. Net service margin in the third quarter of 2021 remained robust at 77.7%. I'm pleased that our customer experience and field operations groups have been able to provide our customers a delightful experience while managing costs. As customer interactions in our call centers and in-home services rebounded from the abnormally low levels during the height of the pandemic last year. The introduction of the FlexPay model has allowed us to achieve a significant reduction in net subscriber acquisition costs per new subscriber over the past few years. Net subscriber acquisition costs per new subscriber for the period ended September 30, 2021, decreased by 52.2% to $100. This is a $109 reduction from the prior year period, while the average proceeds collected at the point of sale increased to almost $2,200. Moving to slide 15, our last 12-month attrition rate was 11.4% from the period ended September 30, 2021. 140 basis points lower than the same period last year, and is at a 13-quarter level for customer attrition.

We believe that continued improvement in attrition is related to our enhanced underwriting standards and the increased interactions of our customers with the platform.

In terms of cash for operating activities, we had another solid quarter at nearly $78 million. I wouldn't have it. that our cash and operating activities in the quarter in the nine-month period includes the impact of the change in the timing of payments to one of our financing partners, as well as our investments in brand awareness, new product and service innovation, and IT enhancements. At the end of the quarter, we had a solid equity position of approximately $635 million. In July, we completed a average cost of debt by nearly 200 basis points and increased our revolving credit facility from $334 million to $370 million. We expect the refinancing to save the company approximately $50 million in annualized interest expense. Before providing an updated thoughts on guidance, I want to give a little bit more perspective on our expectations for cash flow from operating activities. As we have discussed over the last year, we plan to operate the business on a cash flow positive basis. We will use the excess cash flow to, among other things, fund sales growth initiatives, pursue new adjacencies such as smart energy and smart insurance, invest in new product and service innovation, and reduce outstanding debt. When comparing cash flow in 2021 to 2020, it's important to note that cash flow from operating activities in 2020 benefited from COVID-induced cost reductions, some permanent and some temporary. In 2021, we have seen many of the temporary cost reduction initiatives come back into our run rate, and we have seen as much their pressures in labor and material costs. We also pushed through a price increase on our starter pack at the beginning of the pandemic in 2020. Another significant change in cash flow from operating activities from 2020 to 2021 has to do with the change in the way we pay financing fees and anticipated credit losses to one of our financing partners, switching from paying over the term of the loan to upfront at the time of the financing. This will also have an impact on cash flow from operating activities in 2022. and 2022. Finally, in terms of guidance for the full year, we believe there's a lot of positive momentum in our business, and we remain very optimistic about the rest of the year, despite notable headwinds related to supply chain disruptions, inflationary pressure, and labor constraints. We are updating our guidance for the full year as follows. Total subscribers in the range of 1.84 million to $1.85 million versus previous guidance of between $1.8 and $1.85 million. Total revenue in the range of $1.4 to $1.46 billion, above the previous guidance between $1.38 to $1.42 billion.

And finally, adjusted EBITDA in the range of $650 to $660 million versus previous guidance of between $640 to $655 million. Robin, this concludes our prepared remarks.

Please open the call for Q&A.

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind and would like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure your phone is unmuted locally. Our first question comes from Rod Hall from Goldman Sachs. Rod, please go ahead. Your line is open.

Hi, this is RK on behalf of Rod. Thanks for taking my question and my job on the results and all the color on the smart energy and smart insurance. So I want to start there. I wanted to ask on the economics of the smart energy offering. So how exactly will you generate the smart energy revenue and how much lower are the margins? And on insurance, can you also talk about the business models you considered? Are you offering vivid branded insurance or will this be more of a partnership with third-party providers? And I have a follow-up. Thank you.

Yeah, so I'll take the margin stuff, and then David can jump in here around how we're thinking about whether it's a VIVA branded or not on the smart insurance. In terms of margins, any kind of new admissions that you go into, You've got to build some scale on those to be able to come up with those margins. So we expect margins in smart energy and smart insurance to improve as we continue to build those out. What I would say is the revenue associated with kind of those two initiatives in the third quarter would approximately help contribute probably 5% to 6% of our revenue growth of the 21% was related to those initiatives. and you know again we're not probably ready to tell you all the economics around those but uh as we continue to build those out we will expand those but but as you can imagine solar industry this is kind of common you can all look across this those margins are less um than what we would see on important to realize we're going to act that life business here we're not we're not doing it solar installs it's more of a sales approach as we're generating leads and so we're getting paid you know for the leads that we generate across our platform so I don't know David if you have anything more on either one of those two topics no I like I think with regards to the second question around the branding, right now it is branded Vivid Energy and Vivid Smart Insurance and Smart Energy. We'll continue to evaluate that to see if we want to brand anything differently. But as of right now, just given where it is in the incubation cycle, we've kept them under the Vivid brand. And we'll evaluate if that makes more sense or less sense over time. But as of right now, they are Vivid branded with the option to change it if it makes sense.

Thank you. Appreciate all the color there. And on the quarter itself, I wanted to touch on new subscriber growth. It's down 10% year on year. And you mentioned that it's a difficult comp for DTH. So can you comment on linearity? And how should we think about a normalized rate of growth for new subscribers? Thank you.

Yeah, I think, so again, direct-to-home, you know, I think when you go back and kind of do comparisons year over year, direct-to-home is a difficult comparison because, again, we got started late last year in terms of we didn't really start slowing things down. They extended all the way through September and kind of had a full season, which normally that season ends towards the end of August. I think there's also a lot of pressure around, you know, differences in 2021 maybe than 2012 per average drop come back to kind of what we saw historically back in 2019 versus 2020 was slightly higher. Again, I think that was related to the fact that you had more people who were home both work from normal locations. So all those kind of come together. What I think we would expect to see out of both our channels is kind of 10% plus growth on an annualized basis. That's what our targets are, going to continue to grow those channels. And so we've seen really good growth in NIS. We've actually seen good growth in direct to home in different periods. But when we look at this and think about, We'd like to see, again, 10% or greater annualized growth in both those channels.

Thanks, guys. Appreciate it. Okay. Thanks. Have a good day.

Thank you. Our next question comes from Paul Chung from JPMorgan. Paul, please go ahead. Your line is now open.

Hi. Thanks for taking my questions and very nice top line here. On your average monthly revenue, you know, it's trended quite nicely this year. So, you know, what are customers buying more of today? Kind of driven strength there. And then as we think about insurance and solar initiatives, how does that monthly revenue, you know, kind of per user accelerate from here? And then are there any price increases that we should think about in the near term as well?

I think I'll take the first part, and then Dale, you can have the second half. house earlier and outside my house uh earlier than normal and uh you know it's a very smart i'm going to have an ai and and just a smart camera you know when the light come on when it whistles and records you and then gives you um a diagnostic as i'm driving to work i saw i had a stop sign i'm safe i looked down my phone you know it helped summarize that i thought there might have been an appetite by our customers for our cameras. So you've seen that average device in the home increase. So we're really focused on making sure that we deliver what they want, but also properly scope that home and install all the devices appropriately. But I think cameras has really been driving that nicely year over year. Yeah, in terms of the way we'll recognize the smart insurance and smart energy revenue, currently that will be recognized in period. That's not reoccurring revenue. That's kind of one-time revenue associated with those kind of cards where our business model is set up there. So I think that addresses that question. Did you have one other question?

No, that's good. And then just for follow-up on the insurance, how large can that business be? and contribute over time. You know, your data is there, so the cost side doesn't seem too incremental, but, you know, how the margin in this part of the business, how material can this be as a part of your overall user base?

You know, as I mentioned in my comments, right now we've just been doing an agency model and helping them, you know, work with a variety the ecosystem that we have, meaning that with all the sensors we have in the home, we can tell the state of the home better than I think anyone else. We're on occupancy. And then just how well developed our ecosystem is in the home around flood, fire, or theft, we think we can protect it better. So as a you know, quite a bit. And then we know that their occupancy of the home, we can determine the occupancy of the time. You know, we believe that we can fundamentally change the risk profile of what they're buying around P&C insurance. So as we prove that out, we think that we can drive material savings to them. So I share that because the adoption rate we think can be quite material. as you show a customer that as they use the system correctly, it should reduce their insurance premiums, they'll use the system more. The more they use it, the more savings they have, and the more likely that they'll remain a customer with us for a long time. So we really like that reinforcing mechanism between the two. And I don't know. We'll know more next year. I like to prove it before I talk about it. But we think it will be a pretty high, a pretty material attach rate as we demonstrate that value to them. And what we've seen so far is a high appetite for customers, the ones we've approached, that they trust us, that we're helping them make a better selection, and they see the logic in connection with the smart home. How fast we'll grow depends, you know, state by state.

And last one for me, I mean, it's a similar question for the solar. What, you know, penetration rate do you expect for your existing subs and new subs over time? And then, you know, you're near pure, you know, made a large acquisition here. So you're seeing this kind of secular shift with you guys and your competitor for a bundled solution here. So, you know, how can you capture a share in a more competitive environment and And then, you know, how are you making the purchase decision very simple for a customer, which, you know, sometimes can be somewhat complex? Thank you. Great question.

On the smart energy side, you know, we think that you were the first one out there in a material way with the With what we announced with Sunrun Mosaic and Freedom, we've had a very strong demand for that with our customers. I know the solar industry quite well. I was given my five years over at Vivint Solar before we sold that to Sunrun. And you have to be really mindful of the economics for the customers. Unfortunately, solar doesn't pencil nicely in every state. Your first guide there should be kind of what are the states where solar is being sold today. It's roughly 24, 25 states. We're differentially focusing on the states where you have the deepest savings. We have a very large customer base in the southern states, which is also a nice overlay where it makes a lot of sense for solar. And once again, we think the penetration there, the bundling there can be material for us. less than 50%, but definitely more than 10%. our partnerships with Freedom Forever, for example, every one of their customers that buy solar. So they're actually selling the solar and they're including a smart home system in that. So we expect to be growth coming out of that. That's kind of driven outside of our sales force, but through that partnership. So we kind of see both sides where we can go to our selling smart home, plus take out the smart home growth from freedoms, selling solar to those customers. What's so compelling about this, and we talk about the logical adjacencies, is, and we'll share more detail in 2022, but we're seeing a substantial increase in the number of within a day or two of the sale. And the customers see immense value from that. And then we say, you know, the install started, and then when the solar is installed, depending upon jurisdiction, whether it's 30 days, 45 days, or 60 days, they vary by state and by municipality. They get the second half of the install. And so they're seeing value much earlier. Their propensity to follow through on that is much higher. Their overall customer experience is much higher. And when you think about that, when you have a higher yield on your funnel, you're able to subsidize the cost of that smart home. So we're seeing a true win-win-win. It's definitely benefiting customers. It's definitely benefiting us as a company, and then obviously benefiting our shareholders. So very encouraged by that. We'll definitely see a development. and how they're evolving.

Great. Thanks so much.

Thank you. Our next question comes from Ashish Sabhadra from RBC Capital Markets. Ashish, please go ahead. Your line is now open.

Thanks for taking my question and let me add my congrats as well to a strong momentum in the quarter. Maybe just a quick clarifying. We've heard about the tight labor market and supply chain constraint. I just wanted to confirm, have you seen any impact on your ability to add new customers or upgrade your customers because of the labor market and the supply chain constraints?

This is David. So, you know, they're definitely real. Both supply chain and leverage rates are real. proactive and thoughtful on both fronts. You know, we're up substantially on, for instance, our field professionals, our recruiting team, our operations team. I think we're up, you know, 200 heads since we were is resonating and they like our platform where we're going. So definitely a challenge, but that's what we get paid to do is to work through these challenges. And I'm really proud of our team on how they're managing through that. On the supply chain, same thing. They're real. We deal with this week to week. We've been going with many of our suppliers how innovative they are. Our vendors have been saying, hey, you approach us very differently. We love your roadmap. We love what you're doing. And they want to partner with us in the future, which is not very far off. Our new products will come out in 2022. They got that very excited. And I think that helps us get a better in queue with regards to current supply. So once again, there's real challenges. I don't mean to discount that. But our team is exceptional. I've been very, very impressed with how they've managed through this and continue to manage through it. They include me and Dale selectively with certain vendors. And those partnership conversations have been very, very positive. Once again, they see our roadmap, our momentum, the robustness of our model, much more than they are today. But our team, kudos to them. They've done an incredible job.

That's a very helpful color, David. And maybe, Dale, a quick question for you on the cash flow. I understand there are some one-off items weighing on the cash flow in 21, some investments and changes. And you talked about some of those changes in the financing agreement weighing on 22. But as we think about the midterm, is there a way to think about the EBITDA conversion or how do we think about cash flow from operations over the midterm? Thanks.

Yeah, I mean, I think – That's a good question. I think for 21, you know, we just did $78 million in the third quarter. Fourth quarter, as you go back historically, there's always been a use of cash, and that's what we pay our backing commissions and so forth.

I think for the full year, I think we're looking at that kind of probably full year cash flow for operating activities is in that kind of call it $60 to $75 million range. And then I think we would look to grow that going into 2022. Again, it's the focus of the whole organization. This isn't just a financial initiative. It's across the organization, all of our leadership. leadership um it's something that it's part of kind of you know i don't like to use this word but it's kind of our core dna is that hey we want to operate our business put on you know sustained profitable growth that generates cash flow from that uh and so that's kind of where our focus is as we look across whether it's investments that we're making either today or in the future types of adjacencies that's why we're so you know high on kind of the smart energy and smart insurance we believe these adjacent both come with really good cash flow dynamics uh and so they they they're incremental or crazy i guess to cash flow not and so when we look at new um adjacent new products new services those are the type of it's one of the factors that we factor in as we think about hey where we want to go what do we want to offer to our customers That's kind of where we are. I'll give you an update on cash flow from our business. Yeah, I'm happy with that. I mean, when you think about our DNA and what we focus on that we've talked about. It's very exciting for our company internally to see the platform play, taking hold and growing. We love smart home. We love how well that's performing. And then these adjacencies, you know, as exciting for our employees as they see the platform play manifested. So that'll come through lifetime value of the customer. And then the last point on Dell, you know, it's cashflow generation. Guys, you know, we can grow like crazy. It's really a LTV in the platform play and it's cash generation. Those are the things that we're focused on and not if it's a company.

And I think as investors, those are the things you want us to focus on. That's very helpful. Thank you very much and congrats once again. Thank you. Thank you.

Thank you. Our next question comes from Eric Woodring from Morgan Stanley. Eric, please go ahead. Your line is now open.

Thank you so much, and congrats on the good quarter, guys. Just wanted to get to, you know, you guided the year roughly, you know, kind of early August. So what did you see kind of in the last two months of the quarter that allowed you to materially outperform, you know, and raise your full year expectations? And then I have a follow-up. Thanks.

Yeah, I think, Eric, as we said, that, you know, we were bullish on what the year would look like, but there were still some headwinds out there around supply chain, labor constraints. I think, as David said, we've managed really well through those in the third quarter and even earlier in the fourth quarter. And so, you know, we were able to have what I think was a really good third quarter in terms of all of our performance across our metrics. And so that gives us kind of the insight as we're, you know, We're sitting here, I guess, 55 days or whatever it is, 50 days from the end of the year. We feel really good about, you know, where we think the full year will be, and that's why we took our guidance up. Again, you know, when you look at things, attrition continues to form really well. So, you know, so subscribers for end-of-the-year subscribers is going to come in at the high end of the range. We've been able to, even with all the different things going on, you know, be able to keep our even-out margins in that mid-40s. uh 660 million dollars um so so again revenue with the addition of the of smart home continues to grow i mean we've seen really good growth year over year when you look at just smart home revenue that from that business and then you add in these two adjacencies that are really starting to contribute to in a meaningful way to our revenue that allows us to again go back and look at that and say hey based on where we are today we feel very confident in increasing that target for that guidance also. So just pulling all those things back together. I think where we were sitting in August, again, David has been here at that point, maybe 60 days, maybe 75 days. As we still were thinking about strategy and how we're executing for the rest of the year, looking at some of those headwinds are out there. We've been able to navigate that and feel very good where we are for the rest of 21. And frankly, you know, we're working on what we think 2022 will be and we're, side of where we're heading in terms of the momentum we have going into 2022.

Okay, that's really helpful. And then, obviously, you know, amazing job on the nutrition side. You know, where do you guys think that can end this year? And then, you know, directionally, how should we think about that going into 2022?

You know, there's two things on a trip to So what cohort's coming out of contract? What cohort's going into it? What was the growth rate back then? So that's one thing. And then the second thing is, you know, what we're trying to do here, which is can you provide more value to those customers? The more you can provide value to them, the better off you are. And the thing that our company's super excited bundle in these other logical adjacencies that really fit nicely with the platform. You know, if you roll in solar, you should save your customers money. You roll in an EV charger, you should save them money. As you roll in insurance, and it's to the benefit with our overall EVs, savings proposition. If you're in that situation where you're saving, you're protecting the family, the home, the earth, and their wallet, they're not going anywhere. They shouldn't go anywhere, right? If you execute well, you take care of that customer, they should say, wait a minute, I'm protecting all of this and I'm better off financially. So, you know, as we work to feather that into the overall portfolio and deliver it consistently across all of our customers, you know, we've that will take some time right i don't mean to get to be done overnight but it'll take some time but the roadmap as you help the customers see that i'm going to continue to execute nicely um you know we hope that the net the net of those two things will uh will benefit us over time so i you know you may have some more i think that's exactly right david that's that's kind of how that's why we really feel that all of this customer interaction, customer experience around our platform or something like that, along with, you know, as we mentioned, the enhanced underwriting and some of the changes we've made over the last few years. And again, we said this earlier, we can open that underwriting funnel back up and grow, you know, multiples of the way we're growing today, but we don't believe that's the right thing for the business, for the shareholders, and so we continue to of this year um you know we're probably somewhere in the range we are right now i i would say uh and then as david said attrition will probably go up a little bit as we go into uh 2022 when i say a little bit probably gets into the high 11s maybe low 12. again that's not a change in the in the code that's a cohort in the term and so your end of terms have higher attrition that's historically let's cross You know, they're what we've seen. But that's not, that doesn't, our attrition is actually not changing. It's just the mechanics of where, as David mentioned, the cohorts are in their end of term, what the number of cohorts were that are at the end of term because of the brokerage we've had in that year versus other years. But we're really excited. agencies, bringing in more value to the consumer, you know, where Vivint is not only part of, you know, protecting their families, but it's also helping them get savings on insurance. It's bringing energy to their home and helping them manage their energy usage inside their home, which drives other savings. We think there's lots of benefits across this model. And as David said, we believe that over time that will prove out. But, you know, you go back to the mission statement, right? We're trying to redefine the home experience with technology and services. It's the boat. With technology and services to create a smarter, cleaner, safer home that saves our customers money every month. Like, that's a fundamental shift, a positive shift for our customers. And then, you know, you've heard us earlier, we're trying to transform, which we already do, our long-term customer relationships into lifetime customers. That's what gets us motivated, right? We don't want to have a cut. We need that customer right now. Eight to nine years is remarkable when your contract's fine. Awesome. So grateful for that. But, you know, as we execute on this, you know, could you see our average lifetime going up by, So we've got to go to execute and execute flawlessly. We've got to make sure that we are bringing the right solutions and delivering every day. But as we do that, we think we truly will redefine this experience. And this platform playing the home will actually bear immense fruit. And that is what's got us as a company, everyone focused on making that happen on a scalable basis.

So, you know, that's what we've got to go execute on. No, that's great. I really appreciate the color, guys. Thanks again, and congrats on the great quarter.

Thanks, Eric. Thank you. Our next question comes from Amit Duryanani from Evercore. Amit, please go ahead. Your line is now open.

Thank you. I guess I have a couple of questions. First off, you talked about EBITDA margins being lower for new offerings like energy and insurance. Can you maybe just talk about where are they versus the 44% number you just printed? And then are they lower because these are subscale assets or revenue streams that you have, or are they going to be structurally lower even when you get to scale?

Yeah, so I think I have a question.

The margins from the revenue generated from the smart insurance and the smart So if we didn't have that, our smart home margins would have probably been a little higher. Again, we're building up these kind of new initiatives. So we're not at scale with a startup cost associated with getting these initiatives up and going. And so those are in the model today that we expect over time that you would see. those margins associated from those businesses. Again, I'm not going to go into the exact margins today. What I will say is we're excited about where those adjacents are taking it. We think there's more value than just the margin to the bottom line in terms of the overall customer relationship. As David said, if we can extend the relationship with a smart home customer that has, you know, 78% service margin, You know, whether it's a year, two, five more years, we think that's incrementally adds to the overall business and the profitability of the business. So I think that's kind of where we are. We'll get more details as we go and continue to scale up these two initiatives around some of the unit economics. But today, we're not going to give out any more than we already have. But LTV. That's really about LTV. Lifeline value. That's really what we focus on.

I guess the attraction of extending the duration of these customers by these new offerings, right? There's logic to that. But I'm wondering, as a company of finite resources, money to deploy, why not double down and expand the number of subs you have from 1.8 million to something bigger? Kind of in the core of what you do, which is going into adjacencies where It sounds like it's a more margin proposition. You know, A, you sometimes understand, why not go after a new sub more aggressively rather than expanding new offerings?

Well, we're not. We're doing both. I mean, absolutely, the smart home is our flagship business. We're absolutely doubling down. I mean, you think about the new products we're bringing out, absolutely doubling down. We're not taking a great opportunity to go, you know, bring on more customers. So, if we gave that impression, we didn't mean to. We're absolutely going down the smart home and the product suite and the channels we're going after and growth on every channel. So, absolutely, full thrust. But at the end here, we're focused on delighting the customer. And when you think about delighting the customer, they want to bundle more and we think what's going to transition to be able to help them save money and protect their family, their home, the earth, which are logical, and their wallet, we think it's a superior solution. So, you know, with Smart Home, we love, we're investing in, absolutely growing it. These adjacencies not only make it stickier for those customers, but also introduce you to your customer's personal home. So solar is great. Solar helps it make stickier. Those are 30-year contracts, 35-year contracts of saving money. And if it's integrated into our app and they see both, I mean, think about it. If you're in California where time of use rates are changing all the time and our system can actually help that customer, they know with a high probability when that customer's getting home, they can do the math on time of use rates. We can help them consume better as they produce Very powerful, very sticky. But also now you have customers that were just doing solar and saying, wait a minute, I want smart home. So it should be the and, not the or for us. Same thing with insurance. So like, wait a minute, I got to get insurance. I need it forever, right? I want to protect my home. That's what insurance is about. Why not protect it and enjoy it more? And why not leverage the ecosystem to allow me to get even a better rate over time? It's the and, not the or. Definitely doubling down the core. We think the adjacencies are helpful. They'll grow value to the customers, make it stickier, and also introduce new stuff. So thanks for that question. I hope that provides clarity.

No, that's great. And just a final one to me. Maybe I missed this, but new subscribers, especially the direct-to-home piece, was down quite a bit. Could you just maybe call out what drove the drop and how did that normalize? Or maybe help explain what happened over there.

Yeah, we covered this a little bit earlier. It's really kind of largely driven by the fact that you had in 2020, you started the selling season later. We extended all the way through into September versus this year, and we were kind of back to historical selling season, which really runs from the middle of April to kind of the middle to the end of August. That was really a big driver of that year over year. Again, as David said, we're investing in smart homes. We'd like to see both those channels continue to grow double digits. And that's really where we're focused to make sure that that's what we're seeing out of those smart home growth from direct-to-home and NIS going forward.

Perfect. Thank you.

Thank you for coming in.

Thank you. And our final question comes from Brian Rottenberg from Imperial Capital. Brian, please go ahead. Your line is now open.

Yes, thank you very much. Congratulations on the quarter. I have a couple of questions around DNA. As a percentage of revenue, it's about 39% this quarter. Last quarter was around in the 40s, 42%. Last year was 45%. Is this decrease in DNA as a percentage of revenue due to the Citizens Bank agreement? And do you expect DNA to continue to decrease as a percentage of revenue at current levels and then kind of finally throw it all at you at once? In the last period, you provided the Citizens Bank fees. I think it was $10.2 million last quarter. And how much is that this quarter?

Yeah, Brian, if it's okay, I'll have Nate follow up with you on the percentage between B and A. I'll have all those data points right in front of me to be able to give you the answers correct. And then we can also follow up on that in terms of citizen in front. We should be in the queue. That should be actually in the queue later for everyone to have.

Okay, so then we can just follow up with those, and then let me just flip over then and ask a broader question. You talk about eight-year life and extending that eight-year life with these new offerings. What about going into existing homes and upgrading? Is there a process that you're, you know, because eight years ago, technology was much different. I would imagine that's going to be the same thing, you know, eight years from now that those new smart homes are not going to be so new anymore. Is there a process where you go in and upgrade and charge more and provide, you know, the latest, greatest hardware?

Great question. Absolutely. We've been doing it for a long time. So we have a systematic methodical upgrade program today. We go after customers before they get to end the contract. We work to upgrade them, show them the latest and greatest. And that is the core of what we do. Our operations teams are very focused on that. We think it's lower than our peers, so we're very proud of them. And that is a systematic program that we do and have been doing and will continue to do going forward. Yeah, I'll just add, it's one of the actual benefits of the change we made in the Citizens Financing Agreement was to move that to a line of credit, which makes it a little easier for our operations team as they upgrades. And so it definitely is a focus that we continue to kind of not only do it from an operational side, but make sure that we've got the tools there that allow our customers to upgrade the platform at their home and be able to finance that through one of our financing partners, whether it's Citizens or Fortiva. Great. Thank you very much.

Thank you.

Thank you. This now concludes our Q&A session. I will now hand over to David Bywater for any closing comments. Thank you.

Appreciate that. Thank you so much for joining our call. Hopefully this was helpful for you guys as you understand where we are and where we're going. We're very excited about the future. We've got a lot of work ahead of us. We're focused on that. But you can Appreciate it, and we'll see you out there. Bye.

Thank you, everyone. You may now disconnect your lines.