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.