Vivint Smart Home, Inc.

Good afternoon. Thank you for attending today's Vivint Smart Home first quarter 2022 financial results conference call. My name is Nate, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star 1 on your telephone keypad. I'd like to pass the conference over to our host, Nate Stubbs with Vivint. Nate, 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, 2022. Joining me this afternoon are David Bywater, Vivint Smart Home's Chief Executive Officer, and Gail 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 could 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-K, which was filed on March 1st, 2022, and in other filings we make with the SEC from time to time. The company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. In today's remarks, we will 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 presentation, which are available in the investor relations section of our website. I will now turn the call over to David.

Great. Thank you, Nate. And good afternoon, everyone. We appreciate your ongoing interest in the Vivint story. We continue to work hard every day to earn your confidence and your support. To that end, I am pleased to report that our strong track record of execution as a public company continued to the first quarter of 2022 as we grew total revenue by nearly 15% and adjusted EBITDA by almost 26%. We originated over 66,000 new smart home subscribers, which was a record for the first quarter period. Our last 12-month attrition rate was 11.2%, which was a 15-quarter low and a 60 basis point improvement versus the prior year. We believe our attrition rate is the lowest among national smart home companies by a significant margin. Our improving customer retention is the result of years of work and collaboration to improve the overall credit quality of our customers, as well as performance enhancements across our portfolio products and services. We end in Q1 with net service costs per subscriber near all-time lows. a strong indication that we are operating the business efficiently and effectively while delighting our customers. Our recurring revenue model has proven resilient during challenging economic times, and we believe the peace of mind and security we provide is relevant in any environment. We believe the momentum in the first quarter sets the stage for us to meet our full-year targets for total subscribers, revenue, and adjusted EBITDA. that we communicated to the market in late February. Given the challenges presented by rising interest rates and supply chain constraints, we are lowering the bottom end of our guidance range for free cash flow while leaving the top end of the range unchanged. Dale will speak the specifics of this change in his remarks. We are focused on redefining the home experience with technology, products, and services that create a smarter, greener, safer home, while saving our customers money every month. Our integrated platform is the core enabler that allows us to deliver on this mission. We process more than 1.1 billion events per day across our subscriber portfolio. Our average customer has about 15 devices in their home and interacts with their system nearly 11 times per day and stays with us for approximately nine years. Our proprietary platform allows us to not only protect our customers' homes and families, but to make their homes more enjoyable and intelligent as we integrate solutions with artificial intelligence to make smart decisions on their behalf. As we work to also bundle smart energy and smart insurance, we will leverage our integrated, easy-to-use operating system to help customers save money on their electric bills and insurance premiums. We believe our strategy provides distinct advantages that will allow us to increase the lifetime value of our customers. which in turn should drive strong economic value for our shareholders. We expect that the unit economics of our customers should also improve, further enhancing the cash flow generation of the company and allowing us to reinvest in compelling value accretive initiatives. We are confident in our strategy as our data indicates that at scale, a customer who bundles smart home with smart energy and or smart insurance has a greater lifetime value than a smart home customer alone. Moreover, the lifetime value of a smart home customer increases by $200 to $400 with each additional year they remain on the platform. And we believe that customers who bundle services will remain with us longer than the current nine-year average. We believe our broader platform strategy will further cement Vivint as being in the category of one. And as we leverage the advantages from our intelligent and integrated platform, we will further extend our leadership in the do-it-for-me smart home segment. Of course, executing on our strategy of making smart homes smarter, greener, and safer requires us to focus on operational excellence, continuous product innovation, and a commitment to enhancing the experience of our customers. I am pleased to welcome Rasheesh Patel, our new chief operating officer, to the Vivint team. Rasheesh will join us in mid-May, and he brings to Vivint 20-plus years of experience in building technology service businesses, driving innovation, and improving the customer experience. Most recently as the Chief Product and Platform Officer of AT&T Business, a segment with $35 billion in annual revenue. He will oversee all of our customer facing operations, as well as our technology and product platform. We look forward to Roshish helping us refine our approach to expanding the lifetime value of our customers. Turning to our key strategic adjacencies, as one of the first smart home companies to expand into smart energy, We are very encouraged by the momentum we saw in the first quarter. Due to the seasonality of our business, we would expect the majority of our sales to come in the back half of the year, and we remain on track to double the 45 megawatts we sold in 2021. Our Vivint Salesforce and strategic partners, who seamlessly bundle a Vivint smart home system with solar, are seeing a considerably better sales realization rate than those who are only selling solar. This is an incredible demonstration of the power we bring by offering a bundled solution, and it strikes directly at one of the issues the solar industry struggles with, wasted upfront costs on the cells of a solar system that never get installed. Our long-term vision is to combine energy production and consumption into an integrated platform that uses data-infused AI to manage power consumption more intelligently. Our nationwide footprint and ability to install our award-winning smart home solution up with solar, we believe is a game changer for the industry and for our customers. We believe that as we grow and solidify our go-to-market partnerships, we will prove to be a powerful and differentiated combination to grow and retain smart home customers. Evan Pack, who I've worked with for several years at Vivint Solar, joined the Vivint leadership team a few months back to lead our smart home energy initiative. and manage our relationships with these key partners. I'm confident he is the right person to lead our smart home energy business in this next phase of growth. Surveys show that less than 4% of the addressable homes in the U.S. have adopted solar at this point. With our nearly 1.9 million customers across North America, we believe there is a significant opportunity to provide bundled smart energy to our existing customers, as well as the hundreds of thousands of new subscribers we add to our portfolio every year. Now, to briefly discuss our Smart Insurance Initiative, we continue to believe that our data-rich platform can help better price the risk of a customer who has a professionally installed and actively monitored smart home system that can potentially mitigate the severity of lost events. We believe that when customers present a lower risk than homeowners without a smart home system, or with an unmonitored DIY system that was inadequately scoped and poorly installed. We continue to invest in this initiative. And in March, we welcomed Ron Davies to a newly created role as the chief insurance officer. In this role, Ron leads all aspects of the smart insurance business, including the development of our marketing strategy, as well as the process of becoming a managing general agent, which will allow us to develop specific homeowner coverages and enables us to provide proprietary insurance offerings. Ron is a proven leader that has showcased his ability to transform and build insurance companies over a career spanning more than two decades at universally recognized brands, such as Progressive, Allstate, and most recently, Safe Auto, which was recently purchased by Allstate. In closing, we're extremely pleased with our performance in the first quarter of 2022, and we're excited about the future. The markets in which we operate are large. They're growing and provide a significant headroom for growth. Our business model provides a platform for growth in smart home as well as adjacencies like smart energy, smart insurance, and more. We believe that we continue to grow at a much faster rate than our do-it-for-me peers and do so in a profitable way while generating positive free cash flow that we can invest in value accretive opportunity. With that, I will turn the call over to Dale to further discuss our first quarter results and our outlook for the year.

Thank you, David. Good afternoon, everyone. My comments will refer to information in our earnings presentation that was posted to the investor relations section of our website at Bivens.com prior to this call. Following my prepared remarks, we will open the call for a Q&A session. Our key subscriber portfolio metrics continued to perform well and showed year-over-year improvement in the quarter. During the first quarter of 2022, we had growth in total subscribers of 9.6% versus the prior year period, increasing from 1.71 to 1.87 million. Our average monthly reoccurring revenue per user, or AMRU, in the first quarter increased 3.1% year-over-year to $67.87. The average in AMRU was driven by customers purchasing incremental smart home products at the initial point of sale, a trend that we have seen over the past several quarters. The year-over-year growth in total subscribers and AMRU drove a 12.9% increase in total monthly recurring revenue or total MRR. For the first quarter of 2022, total MRR was $126.5 million, up from $112 million reported in the prior year period. Moving on to revenue and adjusted EBITDA. Revenue grew by 14.7% to $392.7 million in the first quarter of 2022. The growth in revenue was attributable to the previously mentioned double-digit increase in total subscribers and the increase in AMRU, as well as a solid contribution from our smart energy initiative. We are very pleased with the first quarter's revenue growth, and we remain on track to meet or exceed our revenue guidance for the full year. Like revenue, adjusted EBITDA grew nicely in the first quarter of 2022. finishing at $202.3 million, up 25.9% from the same period in 2021, with a margin of 51.5%. The scaling of service costs and lower G&A expenses were the primary drivers of the 25.9% year-over-year increase. I would note that in the first quarter of 2021, we incurred a one-time legal expense And this was the primary driver of the decrease in year-over-year G&A costs. We are happy with the growth in adjusted EBITDA and our ability to increase adjusted EBITDA margin in the face of continued economic challenges and supply chain restraints. Next, I will highlight a few metrics on subscriber originations in the first quarter of 2022. Led by 8.9% year-over-year growth in our national inside sales, we installed a first quarter record of 66,734 new subscribers. Additionally, our smart energy partnership continued to show the benefits of bundling smart home with solar, adding 2,940 new FEM and smart home subscribers in the quarter. Nearly all of the customers originated in the quarter either paid in full or financed the purchase of their equipment through one of our financing partners. Every financing partner has changed from over the term of the loan to upfront and netted from the gross proceeds received from that partner. Due to this change, we are updating how we report average proceeds collected at point of sale and net subscriber acquisition cost for a new subscriber. These metrics will now include the fees paid to our financing partners for all periods shown, whether the fees are paid over the term of the loan or upfront at the point of sale. Net of fees paid to our financing partners, average proceeds collected grew by $93 from $1,556 in the last 12-month period, ended March 31st, 2021, to $1,649 in the same period in 2022. Average proceeds collected at point of sale excluding finance fees increased from $2,067 in 2021 to $2,185 in 2022. I will next cover our net service cost per subscriber and net subscriber acquisition cost per new subscriber for the quarter. We continued our trend of year-over-year improvement in net service cost per subscriber, dropping from $10.77 in the first quarter of 2021 to $10.18 in the first quarter of 2022. Our net service cost per subscriber for the first quarter remained near an all-time low. Our net service margin remained strong at 78.2%. These results reinforce the advantage of Vivint's fully integrated platform, which encompasses the entire customer journey, as well as the constant feedback loop that enables us to continuously improve the performance of our products and platform. Before I discuss Net Subscriber Acquisition Cost per new subscriber, as mentioned earlier, we are now including the fees paid to our financing partners in the reporting of this metric. whether those fees are paid over the term of the loan or upfront at the point of sale. Including financing fees, net subscriber acquisition costs per new subscriber for the last 12 months ended March 31, 2022, with $618, up slightly from $577 in the prior year period, but down $635, or approximately 50%, from the same period in 2019. The marginal year-over-year increase was primarily driven by higher equipment and housing-related expenses. Net subscriber acquisition cost per new subscriber, excluding financing fees, was $82, up slightly from $66 in the prior period, but down $878 from the same period in 2019. Our customer financing model, Vivint Flex Pay, has been instrumental in our transition from using cash and taking on debt to grow the business to producing cash, reducing debt, and having the flexibility to invest in new initiatives that we believe will be value accrued to our shareholders. Another metric we are happy to report is our last 12-month attrition rate. For the period ended, March 31, 2022, our attrition rate improved for the eighth consecutive quarter to 11.2%, a 15-quarter low. Our enhanced under-ready standards, improved product and service performance, and the high level of customer engagement with our platform continue to drive what we believe is the lowest attrition rate among national smart home companies. In terms of net cash used in operating activities, we used $31.1 million, excuse me, $36.1 million during the first quarter of 2022, up $21.9 million from the first quarter of 2021, which was primarily driven by a change in the timing of interest payments due to the refinancing of our debt last year and a change in the timing of finance fees paid to our lead financing partner. We finished the quarter with $153.2 million of cash on hand and a very strong liquidity position of approximately $510 million. In conclusion, we are proud of our consistent execution across our key financial and operational metrics, particularly since becoming a public company in January of 2020. The fundamentals of the business remain strong. We are pleased with our momentum going into the second quarter, and we are bullish about the opportunities that lie ahead of us. We are also aware of the continuing supply chain disruptions, inflationary pressures, rising interest rates, and challenging labor dynamics. Taking all of these into consideration, we are reaffirming our original guidance issued during our fourth quarter of 2021, earnings call for total subscribers, revenue and adjusted EBITDA. And we are lowering the bottom end of our guidance range for free cash flow by 17 million to $50 million, while leaving the top end of the range unchanged at $77 million. We expect to end the year with total subscribers within the range of 1.95 and 2 million. Total revenue within the range of $1.6 and $1.63 billion. Adjusted EBITDA within the range of $725 and $745 million. And free cash flow within the range of $50 and $77 million. This concludes our prepared remarks for the first quarter. Operator, please open the call for Q&A. Absolutely.

If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you're using a speaker phone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question goes to Rod Hall with Goldman Sachs. Rod, your line is open. Please go ahead.

Hi, thank you for taking my question. This is Max Gamperl on for Rod. First question would be on just if you could just elaborate on the attrition trends in the quarter and kind of how that compares to your expectations heading into the quarter. And from a longer-term perspective, where we should expect attrition to go from here for the rest of the year and maybe even beyond as some of the older cohorts come to an end. Thank you.

Yeah. I'll start with that. This is Dale. And then, David, you can jump in here and add anything. I think, you know, worse contingency attrition or retention of our customers perform really well. They're probably ahead of our, again, our expectation in the first quarter. But, again, we think when you have the interaction, you know, 11 times a day that individuals are acting with our system, interacting with our system, they're using the system, they're finding value in it, they're more likely to keep staying with the system and paying for it. And I think that's what we're seeing. And I think over time, our product and our service also continues to get better. And there's more functionality that they're able to get out of it. And so, that's leading to, again, customers that are wanting the system and wanting this service that we provide. In terms of what we see, I think we've said, hey, guidance-wise, we expect Tricia to probably be in the 12% range. For the full year, and I think, you know, that's what we said coming into this year in terms of guidance there. I think we still expect that. We're cautious. I mean, there's lots going on in the economy, as you know, Max. And, you know, while we think the attrition will continue to perform really well, and we believe it will, I think for guidance-wise, we would say we're expecting. And part of that is we have – we know that the end-of-term percentage of customers will go up. from where it is today. We go through renewals here later in the year. I think we're at 10.2% of customers that are at their initial in the contract for this last 12-month period. We expect that to go up and, you know, higher than that as we go through 2022. And so that's why we're saying, hey, based upon the hydraulics, when you have more customers in the term, the attrition usually of those cohorts at that point in time are higher than we expect, you know, 12%. or somewhere in that range for four-year guidance. The one thing I would point out, and then David, you can jump in if you have anything else, is the last time we were at this low was in, I think, the second quarter of 2018. And we had, you know, we have 10.8%, like I said, of customers that are in the term this period. It was 12.2% or 12.3% that point. So we've got, you know, We're performing better across the board, and so we're really excited about where that is and continue to perform better than what we expect, and we continue to think that will happen throughout the year.

David, I don't know if you have anything more on nutrition. No, I think that point is what I wanted to make. The other thing is, Max, I do think this is a good illustration of the integrated model. I see the collaboration between our operations teams and our our innovation teams. And, you know, we own the product, we own the IP. And, you know, seeing those two teams work well together to root cause anything that is causing friction with the customers, and how they collaborate to knock down those issues proactively is great to see. And those two teams work really, really well together. It's very close. So it's not a, you know, this large disparate set of solutions from across a large array of parties. The majority of it is what we own and do internally. So, you know, I think we're really pleased with the results coming from that integrated model. So, you know, so far, so good. And I think, as I mentioned in my comments, from everything we can see, I think we're materially ahead of a lot of our peers. And we're proud of that, and we'll continue to work hard to continue to widen that gap.

Got it. That's helpful. Thank you very much. And then another question would be just from a macro perspective, how are you thinking about direct-to-home sales headed into the summer with COVID largely in the rear of your mirror for the first time in, I guess, two years? I guess that should probably help your direct-to-home sales, but we also have a tough operating environment with rising labor costs. So wondering about your direct-to-home sales strategy for this year.

Yeah, no, great question. You know, direct-to-home is a very important channel for us. We launched this summer about two and a half, almost three weeks ago. We're off to a great start, actually. We've been very pleased with the first few weeks. They're performing better than we expected. And it's probably one of our best launches in years. So we're very encouraged by that. You know, it's a collaborative sell. It's an informative sell. We're very good at this. I think we're best in class at this. We've been doing this for decades now. And our teams know how to sell, where to sell. They're very pleased with the platform of services that we have to offer. And, you know, I think our productivity, we're very encouraged what we've seen these first few weeks. So we're very bullish and I'm very, very encouraged by the results we've seen. You know, you usually know within the first, four or five weeks of the summer, how the summer is going to trend out. And thus far, all the data tends to be a very strong signal for us. So very, very encouraged. So having COVID behind us is a great thing. But also, you know, we're not seeing – we're seeing the sales productivity hasn't really been hurt by kind of the economic chaos going on. So we're still cautious, but so far, so good. So let's see how the few more weeks stack up, and we'll report, you know, in August. But feeling good about it.

Got it. Thank you very much.

Thank you. Thanks, Max. Thank you. Our next question goes to Ashish Savadra with RBC Capital. Ashish, your line is open. Please go ahead.

Yeah, thanks for taking my question. So maybe just a quick question on the free cash flow guidance. I was just wondering what takes you to the high end versus the low end of the guidance range? And maybe just a follow-up question there, like why do we see that impact on the free cash flow, but I haven't really seen those headwinds impacting the EBITDA or other line items? So any color there will be helpful as well. Thanks.

Yeah, so with rising interest rates, you know, we have two pieces of kind of debt. I would say we have the term line that's on our balance sheet. And then the bigger component is really the citizens financing. As you know, we offer that to consumers for 0% APR. And so our cost associated to do that as rates rise will increase. And so we're trying to do something forecasting there around what we think will happen around rates and the different swap curves. And so that's why we said, hey, based on where we see rates today and what we expect the increases will be at the next, you know, two or three or four Fed meetings, we factored that into kind of our estimates and said, hey, we think that there will be potentially a greater use of cash than we originally anticipated. participated when we did our models for the beginning of the year. The reason why you don't see that into like EBITDA, for example, is when that comes through, it comes through as a deduction to revenue. And so, you know, as we put it on, so if you take the gross amount, left the fee, that net amount is what we put into deferred revenue and we recognize over, you know, say at 60 months of the period of the loan. And so, while it will be You know, a lot could be, you know, $10, $20 million in incremental cash, depending on what happens with rates here. It's very small when you look at it on a revenue basis, because it gets spread out over, think about it, five years. So, in any one period of time for revenue, it's not going to be material to change the numbers. But on a cash basis, because the cash that we get in this period related to those new sales, it will have some impact there. So that's why we're just, you know, we're being, you know, we're being realizing what's really happening in the economy. We're seeing these rates go up and they're going up a lot faster. I think maybe when you look at the yield curves in the out two, three years, you've got to remember, you know, most of our loans we put on the citizens are 60-month loans. And so that costs, the rates have not increased that dramatically when you look at it just quarter-over-quarter or, you know, one-year rates, but the calculation used to figure out what our cost is with them, it uses longer-term periods, and those rates have gone up higher than what they were the last time we put out our guidance.

That's very helpful, Kalai. And maybe just on my follow-up, thanks for that disclosure on the smart energy partners and the new subscribers which are generated from that channel. And just given the higher energy prices seems to be a strong demand for solar energy. So, I was wondering what are you seeing on that front and how should we think that partnership helping drive accelerated subscriber growth going forward? Thanks.

Yeah. You know, we are seeing some strong demand there. I think the work that the team did two years ago putting together that partnership that we really brought to market last summer. was fortuitous because we knew that there was a strong desire to bundle the two. We've known that for years. But we, you know, really saw the benefits of it at the end of last summer and then throughout this last fall and winter. You know, we have forecast that we think we'll double our megawatts. You know, we may do more than that. We also see that there are some challenges on the solar side, you know, There's some challenges with regards to supply constraints there on panels that is causing some concern. And so, you know, we're also just being realistic around the access to panels there. And there's also financing costs that impact, you know, solar, just like there is across all consumer products. But having said that, those headwinds are real. They're similar to what we see on the smart home side. But there is this desire, obviously, to control your energy costs. And I think with the rising cost of petroleum, there are people who are saying, hey, net, net, long-term, I want to be able to be in control of that. And so I think that they have that longer vision, and they are pushing forward to adopt solar. There is a strong desire there. And as we mentioned, we're seeing a much higher pull-through of those cells that actually go to install, which at the end of the day is what really matters, when they bundle smart home. We knew from the work that we had done, from all the survey work, that there was a strong desire to bundle them. And in fact, you know, in practice, we're seeing a materially higher pull-through rate. So we think we're onto something pretty special, and our partners agree. And so, you know, there's a yin and yang and a pro and a con. in the current environment, but net-net, we think that the demand for solar will continue to be strong, and the demand to bundle what we have will be even stronger, and those that provide the bundled solution will collect the customers even more and provide them more value, and as a result, we think we can actually do a better job in winning in that market space. But, yeah, it will continue to be very strong for solar.

That's a great color, and again, solid results, and good to see the great momentum in both subscriber and revenue growth. Thanks.

Yeah, thank you. It was a great quarter, and we're optimistic for the whole year.

Thank you. Our next question goes to Eric Woodring with Morgan Stanley. Eric, your line is open. Please proceed.

Hey, guys. I just want to echo the congrats. Really strong quarter across the board, really. And that kind of gets to my question, which is, you know, you saw a nice upside in one queue, kept your four-year guidance unchanged. Just want to understand, is that more a function of, you know, trying to embed some conservatism in the model for the rest of the year, given what's going on, or has there been any change in outlook as we think about the remainder of the year? And then I have a follow-up.

Yeah, yeah. Hey, Gary, thanks for the question. It's really about conservatism. I don't know if it's conservatism or it's being cautious of what we're seeing in the marketplaces, frankly, right? It was a great first quarter. And as David just mentioned, we're bullish on the full year prospect. But we're also, there's lots of things going on in the economy that we just don't know how consumer behavior, if it will change. We haven't seen it today. And as David, you know, we're feeling good about the start of the direct home sales season. That's a couple weeks in. But for where we are today, you know, we're five months into the year. I think we feel pretty good saying, hey, that's where we think we'll be. And as we get, you know, deeper into the year and get second quarter printed, you know, if there's a need to make any revisions, you know, then I'm sure we will. But it's really just thoughtful about everything that's going on out there with, you know, supply chain, you know, David, you can jump in this, but I think everyone thought supply chain in 2022, like we went through 2021, and they're like, oh, supply chain, it can't get any worse than this, or it's going to get better. And we're not, you know, we're still seeing it's, you know, it's every day it's a battle to make sure we've got decommits from subcomponents and suppliers and we've got to go work within to get those components recommitted or we've got to go out and find other suppliers to bring us those components. You've got, you know, they've got labor constraints. I think you've got China shut down, which is where a lot of subcomponents actually come out of. We don't really manufacture finished goods in China. But a lot of the subcomponents that go into our finished, you know, cameras and panels and so forth come out of there. And so that's a disruption. We don't know what's going to – how long that's going to go on or what that really will look like. And it's not only in just timing it does, but it's also in cost. There's going to be more cost. They're going to have to use more air freight. You know, it's going to be higher manufacturing costs because they're going to have to – use more labor and overtime to catch, keep the volumes that we need to come in for production. So, there's just lots of things out there that we see but don't have, like, full visibility of what those could, how those could impact us. And so, that's why we're kind of leaving that full year kind of where it is today from what we know and what we see. David, I don't know if you'd say anything else.

No, I, you know, I agree. You know, we have a gentleman named Josh Kudnick who runs our director home. And, you know, we've been talking to him about this year. You know, we're encouraged by the start of Direct-to-Home this year. And the reason why I bring that up is because I think the solutions that we have this year that we're bringing forth with our sales force and with our customers, it resonates. You know, these bundled solutions, they resonate. The fact that we're trying to make homes safer, more efficient, and also more cost-effective. They resonate. You know, we talk about the roadmap of our company. You know, we're trying to extend how long we are with the customers to pull our high service margins we have today in our current business plus bundle and incremental margin. And we're trying to create more value for our customers. I mean, you take all of that and, you know, You know, we're encouraged by the year, so, and Q1 was a great manifestation of that. I mean, the work we're doing with our inside cells, you know, our direct home really kicks off in the spring and summer, but our inside cells was relatively strong. So, you know, we feel good about the refinement of our strategy and our execution of our strategy. Our operations teams, I mean, they continue to dial in on their ability to execute, even in a more leveraged way than they have in the past. So we're encouraged, but, yeah, to Del's point, you know, I'm not sure what the Ukrainian conflict with Russia, I'm not sure what oil prices are going to end up. I'm still concerned about these supply chain constraints. And then interest rates, you know, we have the three-year curve. You know, I'm not exactly sure where they're going to go as they try to beat them. So just that unknown or just that it was prudent just to hold where we are and, you know, Our goal with you guys is to give it to you how we see it. You know, we've done a really good job performing ever since we did an IPO. We don't want to blow that. We want you guys to believe in what we say. And, you know, that's kind of how we roll. So that's who we are.

I appreciate all that color, and I think you're taking the right strategy, so kudos to you. Maybe just my follow-up, David, I think you mentioned a comment earlier where you said the customer stays for nine years. Is that just a subtle hint that you think your long-term attrition rate, which was originally thought to be closer to 12%, could actually be lower than that because you now see customers staying kind of nine years versus the high end of seven or eight years? That was kind of prior estimation. I just want to make sure if that was just a common in passing or if that's something that you think has fundamentally changed where now the long-term attrition rate might now be lower than it was when you were thinking maybe 3, 6, 9, 12 months ago.

No, Eric. We're very explicit about this. Our aspiration is very much to turn long-term customers into lifetime customers. It's very aspirational, but You know, our goal here is to have it be 12 years, 15 years. You know, a solar relationship is 35 years, you know. If we, you know, if you bring to them a better insurance solution that they benefit from because of their smart home solution, you know, why would they go anywhere else? You know, if we can continue to make their home more efficient today, and more enjoyable, and they interact with that home more and more. So it very much is our stated desire and objective to bring them value so that it goes from 9 to 12 to 13, and that would very much reduce attrition. You know, I talk about this internally a fair bit. We're trying to have the entire bundle solutions. be a lower cost than they have today. And when you do that, and you help educate the consumer about the value you're bringing, you know, I really do hope that we're dropping out, you know, hundreds of basis points of attrition over time. And, you know, by math, you extend that relationship. You know, it's so interesting. Ten years ago, when you were just in the security business, you sold a system, And, you know, people hope that they never had to use it. They hope they never had an instance where they had an alarm go off. By default, they never knew it was really working. And we've completely flipped that. You know, we are trying to drive interaction with them every day. We're reminding them every day the value that we bring. So we always talk about that 11 times per day. We hope that we can get that to 13 times a day, 15 times a day, where you're so integral into their family. You know, it's so funny. My wife, she hates it. But, you know, I will often get on my phone. I will see her on my cameras in the house, and I'll talk to her over the phone. And she's like, you know, David, I hate this. You can now see what I'm doing at home, you know. But, you know, I'm interacting with my family at different times. If I'm late for dinner, you know, I'll actually be having dinner and I'll be talking to them. You know, there's new ways that I'm interacting with my family that, I never even thought about a year ago. So we're always trying to think about ways that we can become more central to who they are so that they can't live without us. So, yeah, very much, Eric. I hope that that average lifetime continues to go up. And like I said, on just the smart home alone, not even including insurance or solar, just the smart home, for every year we extend it, it depends on how big the package is, it's $200 to $400 more of lifetime value. And then when you add in solar and you add in insurance, you know, my goal here is to show you guys over time that the lifetime value of the customer is expanding nicely. So you as investors are saying, you know, wait a minute, you know, this is the superior investment option for us. So that's what we're trying to prove to you.

Perfect. I love that answer. Thank you so much, guys. All the best. Thank you, Eric. Thank you, Eric.

Our next question goes to Paul Chung with JPMorgan. Paul, your line is open. Please go ahead.

Paul, your line is open. Please proceed.

Sorry about that. Thanks for taking my question. So, just on 1Q, what kind of drove the big, you know, uptick there, typically seasonally slower? You know, what were some pockets of, you know, demand? What regions you saw strength? And then how's competition kind of fair? Are more and more people becoming aware of your brand?

Well, hey, David. You know, in Q1, most of that was driven through our inside sales. So the seasonality of our direct home, they really kick in as we diversify our channels. you really see the strength of direct-to-home in Q2 and Q3, and then part of Q4. But so really Q1, the majority of that is from inside sales. And I really think that's a function of many things. You know, one, once again, is I think our product is getting better. And so that's folks who are researching our product. They're seeing the accolades that we have from our product. We call ourselves a category of one. We really do think that we have the best product out there for the money. And so I think people see that. You know, the success of our direct-to-home, you see all the advertisements, all the homes that have the signs out front, you know, that we benefit from that. So there's a symbiotic relationship there between the two. But that was really around just digital marketing and the effectiveness of that and just brand awareness. We've done a fair bit of survey work. around our brand awareness, it's surprisingly high for how little we spend on brand. And we think that's earned brand. That is, you know, that's from doing this now for 20 years and really earning that on a word-of-mouth basis, which is the most valuable brand awareness you could possibly have. So, you know, once again, it's hard to earn, and that was really largely from inside sales, which I think stands on the merit of the efficacy of the product.

The other thing I'd just layer in that, too, is really, really strong. We did pick up almost 3,000 additional new subscribers from that partnership that we've created. As David said, groundwork was laid 18, 24 months ago, really started coming to fruition in 21, and we're continuing to see that really come full.

circle so to speak in 2022 and so you got almost 3 000 new business smart homes from a channel that didn't exist previously and we think there's lots of because solar largely sold year-round you're right and the team has helped them understand the value of bundling and we've trained them and they've seen the benefits that's true that engine has also helped us yeah so inside cells and that new channel coming online a good point yeah and you see that in the numbers right

Yeah, on the solar stuff. Yeah, the solar stuff. So nice momentum there. How do we think about kind of the new subs growth relative to, you know, the doubling of the megawatts you mentioned and kind of the revenue and margin contribution per sub kind of moving forward on that basis? And then I guess the same kind of question for smart insurance, kind of the unit economics per sub there.

Yeah, so I'll start with Smart Insurance and work my way back. Paul, this is Dale. We're not really giving out. We haven't given out. I think we're still very early into the life cycle of the insurance business and billing out. I mean, we did 7,000 or so, you know, sole policies last year. So that's very early to continue to build out. We're actually spending, investing there. That's one of the investments that we're making in 2022 to build out the MGA that we're working on. You know, Ron's been in place. Ron Davies, who we run in the lead, has been in place for 60 days, I think, at this point. So very early there. We definitely believe it's creative to our EBITDA margin and definitely drives extended and increased lifetime value of a customer. But, you know, we'll give those out when I think it's appropriate, when we have a better feel for what those really look like, because there's a lot of movement there still today. I think on the smart energy side, you know, I think that 45 megawatts that we did last year would be, you know, that was probably 5,000 homes or so. So if you double that this year, you get to 90, you're probably in the 9,000 to 9,500 or 10,000 homes. You know, and we believe that we'll be able to drive, you know, incremental value and margin out of that business. And then what I think comes, there's two pieces of that, right? There's the revenue that's generated from the selling of that solar to that customer, and we get the margin from that. And then there's also from this partnership, the development and increased smart home customers that are very strong, you know, margins in terms of lifetime value for those. So there's kind of two pieces to that. I think we want to make sure we think of it that way. You know, I think we can drive, you know, I think we can drive 10,000-ish or more new subs from that, smart home subs. And then you'll have, you know, last year, I think we said that 45 megawatts was, you know, both 45 to $50 million of revenue. And so you can kind of back in if we're doubling. where we are this year then we're probably looking at somewhere between call 85 and 95 million dollars of revenue from that that um and then we're still working uh it's early i think we think we feel good about where our cost structure will come out there um but it's it's probably a little still so early but i think it'll be you know somewhere north of 10 percent uh what we'd say is the margin on that uh and i and i think our goal is to get you know into the mid to high teens But there's, you know, we're still working on that, on investments. We're making investments now to make sure that we scale it correctly. And again, I think, Paul, to make sure that, you know, it's incremental to what we did today. So it's positive to whatever we're doing today in terms of the even value we're getting from that. And I think it's really about, as David said previously, it's about the lifetime value of the customer. And if you can take that customer that has a 75 to 80% service margin from the smart home side, you can add incremental, revenue that you're getting from that customer related to a solar sale or the annual insurance premiums coming in from that customer, it really expands out, we believe, the lifetime value of that customer and pull the margin from smart home in other years.

It's really quite powerful. We saw some people were saying, hey, the margin's diluted, and I'm like, you've got to open your aperture. If you were If you're running this business on your own, you make the investment because you're protecting and elongating and adding, and most importantly, you're adding value to the customer, which makes you a must-own asset. So as you open your aperture and think about value to the customer, defending your base, and incrementally adding margin on a very risk-adjusted basis, it is a no-brainer to do. And the way we're doing it in an asset-light, balance-friendly way

Thank you so much.

Thank you for the question, Paul.

Thank you, Paul. Our next question goes to Brian Ruttenberg with Imperial Capital. Brian, your line is open. Please proceed.

Yes. Thank you very much. First of all, in terms of second quarter, can you talk a little bit about where you see G&A going because you had a dramatic drop in G&A year over year sequentially in the first quarter. Where do you see that going in second quarter?

Yeah. So sequentially it'll go up from Q1 to Q2 or go up. I think when you look at it on a year over year basis, it's going to be, you know, call it 5%, 6% growth. So, again, one of the things we've really focused on is really trying to drive efficiencies out of the dollars that we're investing. And G&A is an investment. I mean, it's like it's a capital allocation like anything else, whether it's new subscribers or technology or products. And so we're really focused on that, Brian, making sure that where we're spending our dollars in G&A, whether that's in finance, you know, legal, marketing, exactly wherever that is, that we're actually getting a return on those dollars. So there will be, you know, some year over year. I mean, there's got to be some, as you know, Brian, there's got to be some inflationary pressures just on some of the core things that we have in that, whether it's travel, you know, we're starting to see a little bit more travel. David and I, you know, have been to conferences and so forth. So there are certain things like that that we're starting to see. But we're going to try our best to maintain and really drive, you know, scale across the G&A. Okay, very good.

The other question is more macro. It's kind of your roadmap. Can you talk a little bit more about the insurance offering, where you are now in terms of the rollout? Are you going to be farming this out? Are you self-insuring your customers here? What's the structure? And then maybe what other offerings could you potentially be selling through your channel?

right brian thanks for the question i think that one um so yeah first and foremost we believe this is a platform play and you know we're really seeing that come to fruition last year and then this year um so this this ecosystem we have in the home relationship we have with the customers you know they're asking us to say hey bring us other solutions so you know we talked about solar the insurance is a great manifestation of that so Where we are, you know, this last year and a half, we really were working on just making sure that we could actually be relevant and the customers would buy from us. We've just been actually just selling policies, reselling policies, just making sure we have the systems in place, the compliance apparatus to be able to sell to our 2 million customers. And so there wasn't anything terribly creative about that. It was just trying to get the ability to sell, sell correctly through an agency. We've been working to actually develop an MGA model where we can then take the data that we have and underwrite with partners with the reinsurer to actually be able to have them underwrite a lot of the risk to actually bring data to bear that the customers have on their behalf to underwrite a product that would benefit them. And so this year, our goal is to be in the three states. We should be in our first state as an MGA later this summer and then hopefully be in two more states by the end of the year. And, you know, the states we're going into is a function of where our partners want us to go, where we have a large customer base, and the risk profile works for our product. So, you know, once we've been thoughtful, Dale mentioned this. This is not going to be a material piece of our economics probably for a year or two. What we're trying to do now is just make sure that we do it correctly, methodically, working with our partners. There is a very large interest level because we own the data. You know, with our customers, we have the platform, and so we're just making sure we're doing it correctly. We're not relying upon this to be a large revenue lift or a large EBITDA lift or a large cash lift or drain. We're doing this to be able to prove out value to our customers, and this will be a nice growth engine in the years to come. But most important, it's a great manifestation of the platform play, and it will do. So to answer your question there, Brian, we're partnering with, some large, large industry players. We're making sure the risk falls appropriately where it should be, relying upon their expertise and our expertise. We're not trying to play in areas of risk that we're not competent in. We're relying upon them, and we're relying upon where we're really good at to do our part. And that really is the data we have, the installation we have, and the servicing we have. And they're helping make sure we price the risk and underwrite the risk correctly. With regards to where else we can go, we've done a fair bit of work on this on other platforms. We feel right now our plate is pretty full, not only with the continuing expansion of smart home and smart energy and smart insurance, but also the expansion of channels and how we bring these to market is a fair bit on our plate. And for the next 18 to 24 months, we're really digesting and scaling that. But we've mentioned in prior calls that we're interested in aging in place. It's an area in the marketplace we think we have a really strong product offering to bring to bear there. And we can really drive out a lot of costs and bring a lot of, you know, comfort and value to folks who want to age in their home where they are happier, healthier, and do it in a much more cost-effective way and connect their families. So, you know, that's an area that we're doing some work around. And I can see that being an area that we'll probably invest in the future. But right now, we're focusing on what we have. Great. Thank you very much. That may be through partnerships. That may be through organics. We're still trying to manage exactly how we want to approach that marketplace and when we'll do it. But that's another example of where the platform will most likely go down the road. Great. Thanks. Appreciate it.

Thank you, Brian. All questions have been adopted. So, I will turn the conference back over to David Bywater for closing remarks.

Great. Thank you. We appreciate you guys' interest. Like I said, I think we had a great Q1. We're looking forward to a solid year. We appreciate you guys' ongoing interest in us. We're focused on delighting the customers, taking care of our shareholders, taking care of our employees. I did want to mention to all of you guys that we really appreciate our employees. We think they're world class. I hear often from our customers how well our employees take care of them, whether it's how they sell, whether it's how they service them, whether it's, you know, calls over the phone or when they're in their homes. And I'm very proud of our employees. And I appreciate how they innovate. I appreciate how they take care of each other and how they've come through this COVID crisis. with respect for one another and just how to treat each other and how to treat our customers. So once again, thanks for your time and your interest, and we'll look forward to talking to you guys on our next call. Take care.

That concludes today's Vivint Smart Home First Quarter 2022 Financial Results Conference Call. Thank you for your participation. You can now disconnect your line.