Vivint Smart Home, Inc.

Thank you for attending today's Visit Smart Home, Inc. Second Quarter 2022 Financial Results Conference Call. My name is Bethany, 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 would now like to pass the conference over to our hosts, Nate Stubbs, VP of Investor Relations at Vivint Smart Home. Please go ahead.

Good afternoon, everyone. Thank you for joining us to discuss the results of Vivint Smart Home for the three months ended June 30th, 2022. Joining me this afternoon are David Bywater, Vivint Smart Home's Chief Executive Officer, and Dana Russell, Vivint's Chief Financial Officer. Also in the room today are Rasheesh Patel, COO, and Nitin Abraham, SVP of Finance. 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 described 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 interest in the Vivint story. We continue to work hard every day to earn your confidence and your support. My comments today will cover three main areas. First, I'll review some of our key financial and operating highlights for the second quarter. Second, I'll cover some business developments that have taken place since our last earnings release. And third, I'll review our strategic priorities as we continue to redefine the home experience with technology and services to create a smarter, greener, safer home. Before I begin, let me take a moment to welcome our new Chief Financial Officer, Dana Russell. We're thrilled that Dana has joined our leadership Personally, I have a rich history with Dana, having worked closely with him for seven years at our sister company, Vivint Solar, up until the successful sell to Sunrun in the fourth quarter of 2020. Dana's expertise in building and leading best-in-class finance organizations fits perfectly at Vivint as we enter our next phase of profitable growth. Though he's only been with us for a very short time, he's already made a very positive impact. Dana will review our financial results and share our updated outlook following my comments. We also have our new Chief Operating Officer, Rasheesh Patel, in the room with us today, who joined the company in May. Rasheesh has a broad charter that spans operations, technology, product, and customer experience. He is focused on improving the value and functionality of our products and services, delivering industry-leading customer experience and loyalty, and driving the next level of operational excellence and productivity. Rasheesh has extensive experience in these areas. from his prior role as the Chief Product and Platform Officer of AT&T Business, a segment of AT&T with $35 billion in annual revenue. Prior to that, he was a key executive at DirecTV during their explosive growth period. Moving on to our highlights for the quarter, I am pleased to report that our strong track record of execution as a public company continued through the second quarter of 2022. As we grew total revenue by over 17%, and adjusted EBITDA by more than 23% after normalizing for the sale of our Canadian operations. We originated over 126,000 new smart home subscribers, an all-time high for the second quarter period, with significant contributions from our smart energy partners. Our last 12-month attrition was 10.9%, which was a 17-quarter low and a 70 basis point improvement versus the prior year. We're extremely pleased with this result, and we continue to believe our attrition rate is the lowest among national smart home companies by a significant margin. Our improving customer retention is a result of years of work to improve the overall credit quality of our customers, improve the performance of our products and services, and increase the frequency of customer interactions with our platform. We ended the second quarter with our net service cost per subscriber at an all-time low, a strong indication that we are operating the business efficiently and effectively while delighting our customers. Vivid has more than 20 years of operating history, and we've developed and refined a proprietary cloud-based platform that we believe is the benchmark in the smart home space. Our reoccurring 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. Another key highlight during the second quarter was the successful divestiture of our Canadian operations for $104 million in cash proceeds. As a reminder, we stopped doing direct-to-home sales in Canada in the first quarter of 2020 due to unsatisfactory new subscriber economics in that part of our business. Our Canadian revenues were generating a meaningful amount of cash flow from operations since we were no longer investing in growth there. However, our lack of investment in Canada made these customers more vulnerable to attrition, so we made the prudent and proactive decision to sell the Canadian business and secure the value of the cash source by putting years of future cash flow from operations safely on the balance sheet and removing the risk of attrition to these customers. Divesting the business also allows us to sharpen our focus on the exciting growth opportunities that exist here in the U.S., where Vivint is a leader in terms of revenue and subscriber growth. We plan to invest the resources of the transaction in value accretive areas that may include but are not limited to subscriber acquisition efficiencies, growth and adjacencies, enhancing the customer experience, and improving our cost structure. Successful execution in these areas should drive higher customer lifetime value and more durable top line growth while elevating the cash generation potential of the business. We are continuously focused on redefining the smart home experience with technology, products, and services that create a smarter, greener, safer home. And our integrated platform is the core enabler that allows us to deliver on this mission. We now process more than 1.1 billion events per day across our subscriber portfolio. Our average smart home customer has approximately 15 devices in their home, interacts with their smart home system more than 12 times per day, and stays with us for approximately nine years. a number that has increased over time as our customer retention has improved. We believe our revenue streams are resilient and customers value the technology and services they receive from Vivint. They are demonstrating this by taking more products, interacting with their systems more, and staying with us longer. We continue to install more complex technology in the home, and yet our net service cost per subscriber continues to go down. A remarkable feat, we believe, is made possible by our world-class integrated platform. Smart energy and smart insurance are natural extensions of our smart home business, and we believe they are platforms that will allow us to penetrate and retain more households with smart home technology and services. We believe that additional customer touch points will lead to even lower attrition, longer average customer lifetimes, and expanded customer lifetime value. We continue to be encouraged by the progress of our strategic adjacencies. We've seen positive momentum in our smart energy business, where we installed 11.8 megawatts of solar through our partners in the first quarter and ramped to 20 megawatts in the second quarter. Due to the seasonality of our smart energy business, we would expect the majority of our revenue generated from that business to come in the back half of the year. And we remain on track to double the 45 megawatts we installed through our partners in 2021. Our Vivint sales force and strategic partners who bundle a Vivint smart home system with solar can see considerably better sales realization rates than those who only sell solar. And we continue to make progress towards our long-term vision of combining energy production and consumption into an integrated platform that uses artificial intelligence to manage power consumption more intelligently. We believe our nationwide footprint and ability to install our award-winning smart home solution Within a day or two of a customer signing up for a solar 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. On the smart insurance front, we continue to operate as an agent, selling insurance policies to new and existing smart home subscribers. We continue to progress towards becoming a managing general agent, which will allow Vivint to develop specific homeowner coverages and enable us to accelerate growth. Because of our particular focus on optimizing the smart home experience for our customers, we've been able to grow faster than our peers and to do it for a smart home segment while generating higher profits than the alternatives do in the do-it-yourself segment. We believe that as we continue to leverage the advantages from our intelligent and integrated platform, we will further expand and extend our leadership in the Do It For Me segment. In closing, it's been just over a year since I rejoined Vivid. I continue to be impressed with the strength of the business model and the quality of our people. We truly have a world-class group of employees to match what we believe is a world-class platform for growth. We're extremely pleased with our performance for the first half of 2022, especially against the backdrop of challenging economic environment and of supply chain constraints. We recognize and sincerely appreciate the hard work and tireless efforts of our employees to achieve these results. We're excited about the future, as the markets in which we operate are large, expanding, and provide significant headroom for further growth. With that, I'll turn the call over to Dana to further discuss our second quarter results and our updated outlook for the year, which now excludes the divestiture of our Canadian operations. Dana?

Thanks, David. Good afternoon, everyone. Let me start by saying how pleased I am to join Vivint, reunite with David, and work with the rest of the leadership team. I really believe Vivint provides a unique combination of solid business fundamentals, talented and driven people, great market opportunities, and a culture that fosters growth and development. I felt this way when I accepted the job and two months in, I'm even more encouraged about the prospects for our customers, shareholders, I feel this is a special company with a solid foundation that has tremendous upside. The remainder of my comments will refer to information in our earnings presentation that was posted to the investor relations section of our website at Vivint.com prior to this call. Following my prepared remarks, we'll open the call up for a Q&A session. Our key subscriber portfolio metrics continue to perform well and showed year-over-year improvement in the quarter. During the second quarter of 2022, we had growth in total subscribers of 4.7% versus the prior year period, reaching 1.86 million as of June 30th. Normalized for the Canadian divestiture, our year-over-year growth in total subscribers was nearly 11%. Our average monthly recurring revenue per user in the second quarter increased by 4%, year-over-year to $68.03. Excluding Canada, average monthly recurring revenue per user was $68.69 for the quarter. Moving on to revenue and adjusted EBITDA, revenue grew by 15% to $407.3 million in the second quarter of 2022. Normalized for the Canada sale, revenue growth for the quarter was 17.5%. The growth in revenue was attributable to the previously mentioned increase in total subscribers and average monthly recurring revenue per user, as well as solid contribution from our smart energy adjacency. We're very pleased with the revenue growth through the first half of the year, and we remain on track to meet or exceed our original revenue guidance for the full year, despite the spinoff of our Canadian operations. Like revenue, adjusted EBITDA grew nicely in the second quarter of 2022, finishing at 189.7 million, up 18.9% from the same period in 2021, at a margin of 46.6%. Normalized for the Canada divestiture, adjusted EBITDA growth was 23.5% year over year. The scaling of service costs and lower G&A expenses were the primary drivers of the improved margin performance. We're pleased with the growth in adjusted EBITDA in the face of continued economic challenges and supply chain constraints. Next, I'll highlight a few metrics on subscriber originations for the second quarter. New subscriber growth was 3.9% compared to the same quarter in the prior period in the prior year period and was driven by over 4,600 originations through our smart energy partners, a demonstration of the benefits of bundling smart home with solar. New subscriber growth for the six months into June 30th was 6.2% and was again driven by originations through our smart energy partners. We continue to be encouraged by the quality of our customers we're adding to the portfolio. and the loyalty of our customer base continues to improve as evidenced by the overall growth in total subscribers of approximately 11%. 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. For the last 12-month period into June 30th, average proceeds collected at the point of sale was $1,642 after the payment of financing fees. I'll 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 $10.03 in the second quarter of 2021 to an all-time low of $9.29 in the second quarter of 2022. Correspondingly, our net service margin increased from 79% in the second quarter of 2021 to 80.1% in the most recent quarter. These results demonstrate the advantage of Vivint's fully integrated platform. Equipment attach rates, particularly cameras, continue to increase while net service cost per subscriber continues to drop. The constant feedback loop from our proprietary platform enables us to continuously improve our integrated products and services, leading to fewer customer issues and higher customer satisfaction. As discussed in prior earnings calls, Vivint now includes the fees paid to our financing partners in the reporting of net subscriber acquisition costs for new subscribers. whether those fees are paid over the term of the loan or upfront at the point of sale. Including financing fees, net subscriber acquisition cost per new subscriber for the last 12 months into June 30th, 22 was 661, up marginally from $604 in the prior year period. The year-over-year increase was driven by higher equipment-related expenses, as well as higher MDR fees due to recent interest rate increases. Another metric we're happy to report is our last 12-month attrition rate. For the period ended June 30, 2022, our attrition rate improved for the ninth consecutive quarter to 10.9%, a 17-quarter low. Our enhanced underwriting 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 free cash flow, we generated $62.7 million during the second quarter of 2022, down $12.3 million from the second quarter of 2021. The decrease was primarily driven by a change in the timing of financing fees paid to our lead financing partner. As of June 30, 2022, our balance sheet reflected $299 million of cash on hand and a very strong liquidity position of approximately $658 million. In conclusion, we're pleased with our consistent execution across our key financial and operating metrics. The fundamentals of the business remain strong and we're pleased with our momentum going into the back half of the year. The divested share of our Canadian operations pulled approximately $104 million of cash forward, which we believe is significantly more cash than we would have generated from these subscribers over the next 10 years. And it provides optionality to invest in areas that we believe will drive incremental value for our stakeholders. Vivint has been securing and creating smart homes for over 20 years, and we have a history of exhibiting strength and resiliency through challenging economic times, we're confident that our customers will continue to value the security and smart home solutions we provide. We have long believed the total addressable market for smart home presents a tremendous opportunity, and we believe Vivint is the best position provider to take advantage of that opportunity. Despite current challenges in the broader economic environment, we're reaffirming our original guidance which first announced in connection with our earnings call in February for revenue and adjusted EBITDA. To account for the sale of our Canadian operations, we're adjusting our guidance range for total subscribers by 85,000, or roughly the number of subscribers that were sold. We're also adjusting our guidance range for keep-free cash flow by 17 million on the top end and 15 million on the bottom end, to account for the decrease in operating cash related to the Canadian subscribers that were sold. In summary, we expect to end the year with total subscribers within the range of 1.86 and 1.92 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 35 and 60 million. This concludes our prepared remarks for the second quarter. Operator, please open the call for Q&A.

Certainly. 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, please press star 1. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question comes from the line of Rod Hall with Goldman Sachs. Please go ahead.

Hi. Yes, this is Max on for Rob. Thank you for taking our questions. The first question is on cash flows and interest rates. And I think you touched on this, but could you walk us through the main ways how Vivint is impacted by a rise in interest rates and possibly quantify what do you think the incremental headwinds to cash flows that would present? Or is that what the wider free cash flow guidance represents? And then I'll have a follow-up. Thank you.

So, Max, as you probably know, a lot of our debt has a variable component to it, and so we're impacted by a rise in interest rates associated with the change there. And then the customer financing options that we provide also have a variable component to them. So both of those things can impact us pretty significantly. If you quantify that, let me just give you a little bit of a benchmark here. If we rise by about 1%, 1% increase in interest rate creates about a $26 million increase in interest expense for the company at the current run rates with the current structure. That's a combination of the debt, the outstanding debt, as well as the financing that we provide for consumers to buy the products with. And so that's roughly a benchmark on an annualized basis of what that increase in interest rates will do. So we've seen some fairly significant interest rate increases here over the last few months, which have impacted the company. And so we're we're seeing those kind of interest rate increases in our financial statements there as far as the impact of free cash flow and operating expenses. The good thing is we've been able to operate and continue to provide guidance here for the full year, which is pretty robust and very close to the original figures that were provided back in February. And we also expect to be able to operate in those ranges, excluding what we talked about from Canada, to be pretty close to what we originally got it to. So not optimal in terms of the increase in interest expense many companies are faced with, and we're certainly not immune to that either. But we feel pretty good about the position that we're in in terms of still generating significant free cash flow and feel like, you know, we're operating very well along the environment that we originally guided to earlier this year.

Yeah, I'd add to that, Dana, just to your point. I mean, the team has done an incredible job. Our net servicing margins have improved. Our net servicing costs have come down. I think the team has responded really well in the market. And given those inflationary challenges and the interest challenges, I thought they performed really well in the quarter. So they're being thoughtful about cost, I think the optimization, about how we do route optimization, self-help tools that we've been rolling out, just reducing our roll-call demands. And there's just been a – I think the technology – the efficiency of the technology and how we continue to tighten that and make a better experience for the customers. All those things translate to lower costs, and we've seen that in our net servicing costs for subscribers go down to an all-time low. So I wish the interest rates were not in the environment they're in, but I'm really pleased with how the team has operated, and that bodes well for us as we continue to move forward once interest rates are a little more stabilized. I think the core performance of the company continues to impress me, and I'm encouraged by what they have. still up their sleeves to do over time to continue to make that even better. So good question, Max.

Yeah, that's very helpful. Thank you for all that color. And then as a follow-up, we're wondering if you're seeing any change in the popularity of citizen financing, given that you offer 0% APR financing. And do you ever expect to move away from this, or do you plan to continue to offer this 0% financing? Thank you.

Well, that's been a pretty successful thing from my view as I've entered here in this role of CFO. The 0% financing has been attractive. Now, whether or not we'd ever move away from that, I think there's certainly some other options there. Obviously, consumers not being impacted themselves by an interest rate increase bodes well in terms of their ability to to get product and to engage with Vivint. There's certainly some other things that we could look at and do as we go forward, but today we're pretty happy with that relationship. It's been a very good relationship. That relationship, our contractual commitment to that extends for a couple more years. We don't see us going away from that in time in the near future here, and it's been something that's been very successful in terms of being able to generate upfront cash and allow the company to be in a strong cash position.

That's very helpful. Thank you so much.

Thanks, Mike.

Thank you, Mr. Hall. Our next question comes from the line of Paul Chung with JP Morgan. Please go ahead.

Paul, your line is now open.

Hi. Hi, thanks for taking my questions and, you know, nice execution here. So this is your, you know, second consecutive quarter with kind of positive gap operating profit? You know, are we on a new trend here? And can we be, you know, kind of gap profitable for a full year, maybe by 23? And then where are you seeing opportunities on the cost base? And, you know, should we expect some seasonal, you know, uptick here in the second half? And help us kind of sparse out the op-eds related to Canada.

I have a follow-up.

Thank you. I'll handle the second half of your question. You went to the first part of us.

GAAP earnings, Paul, benefited somewhat from the sale of the Canadian operation. So when we look at the overall profitability for the company, we had about a $25 million gain associated with the sale of the Canadian operation. So that's a one-time event. We'll You know, we are moving in a good direction. The company continues to improve in terms of its overall profitability, its overall performance. David talked about the efficiency that we're gaining in terms of operation, especially in that service component. So we expect to continue to see that trend move in a positive direction. I wouldn't want to put a timeframe exactly on that in terms of gap profits, but we certainly feel good about the direction that we're heading, and we expect to continue to see improvement over the upcoming quarters.

Yeah, I'm eager for that day when that definitely crosses that threshold. I think it is here in the next, not too far off. With regards to the cost reductions that we're going after, Paul, I mean, this is definitely an area of focus for us. With Rasheesh coming on and his strong competency in that area, Dana's strong competency. And the entire team, there's a multitude of things that we're working through that I think will continue to reduce our costs and increase our cash generation that I'm very, very bullish about. And they're pretty significant. And you think about certain things, right? Just the scale of our solar business now, that's actually performing quite well. And as that kind of comes into maturity, that actually starts to produce a nice profit for us. There's a bunch of products that we're working through right now that will be quite well received by the market. And I think are profitable for us. That would be nice. There's a bunch of stuff around supply chain. You think about the escalation costs that we had this year with decommits and having to put everything on air versus boat, as well as opportunity to go back and stabilize and normalize relationships with our vendors. We spend a considerable amount of money every year on our product. We think it gives us tremendous advantages with our customers. but there's real opportunity there. And then there's just some real, real innovative things we're doing around self-help and self-healing that once again drives customer care calls and service visits, plus a whole bunch of other stuff. So I mean, what I'm really, really excited about, and then also just go to market. Channels will go to market. We're exploring and pushing additional channels to market that should be a lower cost to acquire customers. And as that blends in, that will be accretive as well. So you'll get more details on this over the coming quarters as we move from pilots and all the work we're doing today to where we feel very comfortable sharing the details. But I'm encouraged by that roadmap. It definitely makes me encouraged by our future. And I think it will continue to drive our cash generation up considerably and our costs down. So more to come, but definitely very encouraged by that.

Right. And then follow up on the smart insurance platform and kind of timing of becoming a, you know, managing general agent and, you know, the uplift there once transition. And then given the kind of smart insurance is your largest TAM on your slides you're participating in, is this one of the biggest opportunities for growth in your view? Or is there a specific kind of, you know, Sam, you're targeting and Just any comments on the uplift of this transition? Thank you.

Great question. I'm actually very encouraged by insurance. We're still moving towards the MGA model. We still plan on being in a state or two by the end of this year. It's been thoughtful. As I mentioned on earlier calls, I'm not looking to insurance right now to be a large growth for us with regards to profit or revenue growth. I view this as an investment we're making over the next few years that will pay off very nicely down that road. We're getting a significant lift right now out of Smart Energy. It's immediate. It's material. It's large. And that is really a nice addition to our portfolio of what we do. Insurance will feather in over the next few years. And I think it'll be quite significant. What's really interesting about the insurance piece is there's two parts. I like the MGA play for sure. and for us to be able to actually demonstrate to our customers the value of their data to their benefit. So that has got great retention value over time, which I think will just add to what we're already doing and the benefits we're already seeing. So I like that from a customer-centric approach and the value we bring to them. But what I'm also really interested in is the opportunity to partner with some, you know, insurance companies and be able to use that as another channel of the market And, you know, they have a large customer basis that are looking for innovative solutions. And so, you know, look forward to having that play out over time as well. So insurance is very strategic for us. I'm not relying upon it in the short term. I am relying upon it for the long-term value add for our customers and for our shareholders. I think it will pay off very nicely. And I'm encouraged by multiple benefits I think it will bring for us. So it is a large TAM. And, you know, we're excited to tap into that. But it will be over the next few years.

Great, and then lastly, post the new bill passed in the Senate, how have your expectations for smart energy projections kind of evolving? Thank you.

Yeah, I mean, we'll see how that thing finalizes as it goes through the legislative process, but nothing but good. I mean, as I mentioned in my comments, it's amazing the amount of interest in this bundled solution that we have. The work that I had done previously at Devon Solar with Dana, we knew that the thing that they wanted to bundle almost the top of their heap was smart home. This concept of smart production, smart consumption, they do go hand in hand. We're seeing a considerably higher sell-to-install ratio with all of our sales force that sell them together. They're seeing it as well, which just means the customers value it. I think the work that's going through the legislation right now is a positive thing. Our goal is a smarter, greener, safer home. And greener means a lot to us. And so I'm hopeful that it will actually pass through and that we'll see some long-term stability around that going forward. So very encouraged by that.

Great. Thank you.

All right. Rasheesh, you got any thoughts on that piece?

No, I think you nailed it, David. I mean, with the Senate passing the bill this weekend, we're very optimistic about the demand that will be there for smart energy. And as you said, customers, you know, the smart home product makes the smart energy product very sticky from sale to activation. And, you know, that's driving small, strong demand from our third-party partners to bundle our smart home solution and So we look forward to the acceleration in demand driven by the energy bill, and we look forward to bundling with our solar energy providers.

Well said. All right. Thanks, Paul.

Thank you, Mr. Tung. Our next question comes from the line of Eric Woodring with Morgan Stanley. Please go ahead.

Hey, guys. Thanks for taking my question. Congrats on the really strong quarter. You know, I would just love to get to the revenue guide. You know, I think it would be helpful to get some of the puts and takes as we think at least about the second half because obviously you're losing 85,000 subscribers from your Canadian operations. You know, call it roughly six months of that. You know, that's $30 million plus revenue just kind of like back of the envelope math. And Obviously, you outperformed 2Q by a fair amount, but left your revenue guide unchanged, which means that there is something that's picking up that slack. So we'd just love to hear from you guys what you think some of the puts and takes are that help you keep your full year guide and whether that's, you know, on the pricing side, where that might be coming from. And then I have a follow-up. Thank you.

Yeah, I think the two major drivers there, Eric, that we're benefiting from is one is, you know, solar is quite strong. So we've been pleased with the solar growth and the revenue that's brought. And the second thing is the attrition has been incredible. So we've really outperformed there. The ongoing maintaining that revenue stream has been quite positive for us as well. So there's other things here and there that have helped us. Like you said, the performance of Q1 was helpful for sure. But kind of the balance of all of that has allowed us to reaffirm There's probably not a lot of companies that have done that, that reaffirmed the guidance they gave back in February, to reaffirm our guidance around revenue and the justity of the dog. And the team has obviously managed the cost quite nicely. So I'm pleased on both the value of the platform, diversification of the platform, the strength of our ecosystem to retain customers better than we thought, continue to see those new cohorts perform better than they thought they would has been a real advantage. So those are some of the major puts and takes. Dan, anything else you want to add to that?

I think we're seeing an increase in the usage. And I think the other thing that our attach rates for customer, you're seeing a significant uptick here with the value of each customer meaning more. So I find it interesting as I've come into the company here that the improvements have been made over the last several quarters in the value of these customers, their credit quality, their scores, the ability to buy more product and generate more revenue for customer. I think all those things are positive. And at the same time, as David mentioned, we continue to see lower attrition. So that points to the quality that they're getting and the happiness that they're having as they engage with it. So I think all those things point to a brighter roadmap ahead, and I think we feel quite confident about our revenue streams. Solar, David mentioned that. The real power of that is the attach rates that we give to smart homes. And so that's smart, especially in channel partners, is we're going out there and engaging channel partners. And we're just on the cusp of that. That's a thing where we're just sort of seeing the potential there, that we also feel like there's real value there in developing those channels. David alluded to that. So we're quite encouraged about our opportunities here as we go forward. Not only do that and generate the revenue, but to generate it at potentially lower cost than we have Historically, so over time, I think we can see the best of both worlds with growth and some efficiency in our cost structure.

Awesome. That's really helpful. Maybe as a quick follow-up to that, is there any way that you can help us size kind of for the year then how to think about kind of the revenue that you get from smart energy that isn't necessarily captured in, you know, the ongoing subscriber numbers, but just everything outside of that?

Yeah, so it's about a dollar per watt that we do there, right? So, you know, for a closer than 95 to 100 megawatts, then you can say, you know, 95 to 100 million. So pretty strong correlation there and pretty simple math.

Okay, that's really helpful. And then maybe just my follow-up, kind of all in the same bucket is, Maybe just talk about the puts and takes about you had to cut free cash flow, but you didn't cut your adjusted EBITDA forecast. So why was that? And then as it relates to free cash flow, obviously there's kind of a number of temporary headwinds in terms of selling Canadian operations and then some of the financing compares. Can you help us kind of bridge and think about what like a normal – normalized free cash flow would have been this year without some of these one-time factors? And that's it for me. Thanks so much, guys.

Yeah, good questions there. I think the Canadian operations we talked about was generating a disproportional amount of cash because we weren't making heavy investments in that operation. So when you think about that, you know, we've got on that presentation, our investor presentations there, $661 of net investment in a new customer, which we were not investing in Canada. So generating a lot of new customers in the US, but not in Canada. And so there's quite a bit of cash coming out of Canada as a result of those previously acquired customers that we were servicing. The decrease in our cash, our free cash flow, that we talked about from a guidance standpoint was really solely related to that operation. Now, in addition to the headwinds associated with seeing that go, now, we just want to reiterate that we thought that was an extremely prudent decision. We weren't investing there. It wasn't an area of growth for us. We have very good opportunities to grow and invest in the U.S. in much more prolific ways than we were in Canada. We pulled forward that cash. It's on the balance sheet. We've secured it. We thought that was the right thing to do. And we really believe that, in our opinion, that we've pulled forward cash that would have equated to over 10 years' worth of operations up there. So really, really good business decision in our mind to bring that forward and to use that cash in places where we have an opportunity

to get better returns yeah when I think about that just elaborate a bit you know if I was the sole shareholder of this company I would have done that deal in Canada 100 out of 100 times it was just the smart thing to do I think Telus was a good partner for us you know we're a growth company always have been and when we stopped growing in Canada we had a hundred employees up there like hey wait a minute we're not growing and um those customers weren't getting new services they weren't getting new bundled solutions so you know we're a growth company we're a customer-centric company and we're a financially supported company so you know you make sure you take care of those customers and i think that they now have a growth trajectory with their current you know owners of that portfolio which makes sense our employees have a road map there um and then for us you know i just looked at it and we like now this is the right thing to do de-risk that completely I think it was great for the acquirer, it was great for us, and like I said, I do that 100 out of 100 times. Definitely the right thing to do, prudent thing to do, and that cash is secure now.

The second half of that question, Eric, in terms of EBITDA guidance versus the cash impact, so EBITDA obviously isn't impacted by interest. That's excluded from those numbers, and so as we've seen those interest rate increases, and that's a fairly significant impact on our cash, on our cash flow from operations, but it's adjusted out in the EBITDA number. So we're not having an impact on EBITDA as a result of those increases in interest rates. It is an impact in cash, although I think we've mitigated some of that impact through other means and efficiency in our operations. But we feel very good about the EBITDA number. And we also feel like we're in a solid position on our free cash flow as well. I don't know if that answered your question fully or if you have a follow-up there, but there's the difference between those two really is associated with the interest rate not having an impact on .

I just might add, kind of forward-looking opportunity for free cash flow generation. I mean, I think we have a number of one-time items that affect us this year in the way of inflation, interest rates, as well as one-time hits to some changes to the financing program that were made last year. So if you get into 23 and you overcome those one-time pressures, and you combine that with the potential we have to be more efficient in customer acquisition costs, in product value engineering, in development of some adjacent services. I am very optimistic about the cash generation potential of this business over the next two to three years. And so, you know, I think that's one of the most exciting opportunities that I see in joining the company.

Yeah. You know, I think that's a great point, Rasheesh. You know, Nitin has pointed out to me too as we're sitting here that, You know, we've had some impacts here in the business associated with supply chain issues, different things. We've tried to meet demand with certain products and had some additional freight costs and other things that have impacted the business and been fairly significant. We've had to work around that. We think a lot of that is behind us from the standpoint of, you know, that's kind of resulted in the impact that we're seeing today. And we anticipated some of that knowing that those things were going to be there so it wasn't new. But it's certainly a headwind that we've worked through. And so, you know, all in all, I'd say, you know, those things considered on top of, you know, a couple of other little headwinds there, we've had extremely solid results and feel very good about the performance and even better about our ability to manage some of those things going forward.

Awesome. Thanks for all the color, guys.

You're welcome. Thank you, Mr. Woodring. Our next question comes from the line of Brian Rutenberg with Imperial Capital. Please go ahead.

Yes, thank you very much. Just to get a summary real quick, Can you provide the adjusted revenue EBITDA and attrition for Canada for this quarter and with or without versus last quarter and last year?

Listen, did we have a slide or anything on that in the deck? That may be something, Brian, that

maybe made or nothing can help us with we could put up after in terms of numbers go out there I don't I don't have that up top my head but we certainly can you know provide that I have one I do know that the attrition in Canada was consider that yes yeah which is a function of what we said earlier you know not growing there and not be able to bring new product and services there you would expect that to be higher and we had seen that growing and You know, a year or two ago, it was the same almost as the U.S., and then it had gotten to 14% and then higher. So it was definitely growing at a rate that was going in the wrong direction. That was our core business.

Yeah, and you can see that, those components on our presentation, that investor presentation, Nate's broken some of that out, so you can see the individual components of Canada. You can also see that our growth rates were, were larger once we excluded Canada out of those numbers, most of the metrics were better as a result of not growing in Canada and having growth elsewhere. But I think we can break out the individual impact there of Canada for you if need to be.

Okay. And then just as a quick follow-up, how are you passing along these higher costs? You know, one point that you make is that roughly for every 100 basis point move in the interest rate environment, it negatively impacts free cash flow by, I believe, 26 million. Are you passing a certain percentage of that along to your customers and the new customers?

No, we really haven't. I think there's the option to do some of that through price changes or other things, which we have not done. But most of that impact has resulted in, you know, in economics that have been, you know, impacted as a result of those interest rate increases. Now, where we've done a really good job is being more efficient in the way that we've done other activities within the company. And certainly the service cost is a, you know, kind of a bellwether mark that we can point to and say that was exceptional, been well done. We've been careful about our other cost structures, but we continue to invest, and we're investing for growth. So I think we continue to believe that we have potential to grow. It's not like we're pulling back reins or making reductions. We haven't announced any kind of overall reductions, and David talked to that. But we continue to be optimistic and continue to invest as portrayed there by our customer acquisition investments there in the presentation there.

Great. Thank you very much.

Thanks, Brian. Thank you, Mr. Redenbart. Our next question comes from the line of John Mazzoni. with RVC Capital Markets. Please go ahead.

Congratulations on the strong results. Thanks for taking my question. I'll keep it quick. Just as we think about attrition, could you give us some color on why it's been trending so much better than expected? And also, how should we think about attrition going into the back half of the year? Thanks.

Yeah, I'll take that one. You know, when I think about attrition, John, I think there's three key drivers. So we talk about Two of them quite a bit, not the third. So we can talk about the two obvious ones. I think our underwriting criteria and the strong credit history that we have with our customers is tighter over time. So I think that's actually just proving out well against what we modeled. So I think that our underwriting has gotten quite strong. I think that the service and the performance of the system has gotten much tighter. I know for me personally, you know, I was gone for five years. I had the old Vivid system back in 2013, 2014. I was reinstalled last year. Personally, I was delighted. I remember I was just, I was like, wow, this is the technology and just all of the alerts and actually trying to prevent someone actually doing something wrong and just the use cases my family was finding in the system. It's quite remarkable. When Dana showed up and we installed his system, he called me up and goes, this is phenomenal. The professional install was incredible. The technology is incredible. You know, I got friends and family all asking for a system. So I just think that that's the second thing. That needs to get better. We own that technology. We own that feedback loop on how we find out what's rubbing customers wrong and what's delighting them. We can either eradicate and fix or we can reinforce. So I just think that's getting better. I think the third thing is the consumer financing. You know, when we went to consumer financing several years ago, the hypothesis was that, you know, at the end of your five-year contract, when you finish paying off the equipment, you know, your bill essentially drops in half. And what we have to do over those five years is to bring enough value for them and additional value so that when their bill drops in half, they're like, holy cow, I'm still getting all of this value and essentially I'm paying half what I was paying before. And I think that when you think about attrition, when you think about everything we've got going on, I think that's playing out. And we're just finding consumers saying this is well worth it, you know, around efficiency in my home, around productivity in my home, enjoyment in my home. And now they're bringing these new services around, bundling other things with them. I think they're finding great value. So, you know, I think those are the big three for me. Anything that you can add to that?

Well, I would say one thing, John, your question about, you know, how does this look going forward here? Some of this is correlated, as David mentioned, to the end of a contract period. So that fight for life on those contracts, as those contracts mature, there is some variation and some increase at times with attrition. But as I've been educated by the team here and looked at the results here lately, seems like you're bending that curve a bit and we're getting much better results where we would have expected on prior years numbers to be higher from a nutrition rate standpoint just because of the timing of those contracts uh you know coming through fishing there now we're seeing the the attrition still be lower so so there's we we believe the overall trend is uh going to stay in a positive direction that we've seen. There may be a slight uptick, you know, on a specific quarter associated with contracts, you know, being at the end of a life. But we do believe that we're going to be in a better situation and continue to see these downward trends where attrition continues to improve and that we're not going to see a reversal of that, a significant reversal of that, certainly over a longer timeframe.

I would just add to that, you know, being at a 17-quarter low of 10.9% just demonstrates the power and the brand loyalty that our platform has. To put it into context, the average life of a Vivint customer is now 106 months, approaching nine years. And so there aren't many platforms that generate that type of brand loyalty. And to give you a little bit more color into the attrition trends, our involuntary attrition is running right on plan. But where we're really seeing the favorability is on voluntary attrition. And that gives us good confidence that the cohort of customers that originated on the Succlate platform and are now coming off contract has a much higher stickiness than we had originally expected. And that bodes well for our sort of go-forward expectations around attrition.

That's great colors. Thank you again.

Thank you, Mr. Montoni.

Our next question comes from the line of Abdullah Khan with Evercore. Please go ahead.

Hi. Thank you for the question. This is Abdullah Khan dialing in on behalf of Ahmed who's unable to be here today. So it's great to see your average monthly recurring revenue per user grow quite nicely this quarter. And I wanted to ask you whether you could talk about some of your efforts to continue to expand it. And how do you think this KPI can trend long-term? And longer term, what kind of contribution to your growth profile do you see from growth in your install base versus new subscriber growth? Thank you.

Yeah, Abdullah, really good question. I'll take the first half of this and let Dana and... Rasheesh adds to the back end of that. One of the key things that we view a customer as is it's not once and done up front and then you see what happens at the end of five years. The amount of upselling that occurs throughout those five years has actually gotten quite good. So that's been nice to see that improve as we continue to sell a little bit. And then the other thing is you're seeing solar play in there. It does not include it all in that section. So once again, us being able to go meet with customers and share new ideas new products, new services, but it's really the attach rate. So cameras, for example, continue to be strongly attached. The demand for cameras just continues to grow and grow and grow. The use cases that our customers are using and discovering for the system continues to expand as we share those and help people understand new use cases. And then just the frequency of the interaction. I think that frequency of interaction shows there's a demand. They're always thinking about our system. They're always used in our system. And so when we do a service call and somebody says, hey, you know, you don't have a camera on that back part of your house, they're like, hey, I'd love to add it. And that's additional, you know, RMR charge. So I think it's really use and scope of what we're doing has been driving kind of that average monthly. So I don't know if you want to add, Rasheed, sure.

Yeah, you bet. I just add that our service revenue is up 26% year on year. And so we feel good about the ability to drive more engagement on the platform as we have service interactions with customers. And as David referenced earlier, there are going to be some exciting product announcements that we have coming into 23 that will open up even more opportunity to drive further engagement of the Vivint customer base into those new product categories. And so, I mean, if you think about the smart home and the connected platform, I think we're in the very early days of fully being able to realize the power of controlling every aspect of your home through this type of platform. And so as we continue to open up that opportunity, we're really refining the organizational capabilities to drive those engagement interactions through our service platforms, both on the customer service side as well as during in-home service visits.

I mean, the thing I'm most excited about a bull company is, if I had to boil it down to one thing, it's engagement. It's the engagement that customers have. When we talked about this 12 times per day, it was 11 just, I think, a quarter ago or two quarters ago. So it continues to grow up, go up and up and up. And if you've got the engagement working in your favor, other positive things come along, usage, growth. So, thank you for that. Awesome.

Thank you for the call, guys. Yep. Great. Thank you. Thank you.

Thank you, Mr. Kahn. There are no additional questions waiting at this time. I would like to pass the conference back to David Bywater, CEO, for any closing remarks.

Thank you. I appreciate that, Bethany. Just in closing, once again, I appreciate you guys' interest in the company. I appreciate our employees. Bethany did a phenomenal job in Q2. There was so much headline news around all of the headwinds and we definitely felt them but our team did a great job of responding I think their focus on the customer their focus on how we delight them better and the fundamentals of the business we've got a great roadmap going forward for me I'm excited about our roadmap and encourage for us to execute I think the one thing we've done since we've been a public company is we consistently execute we've done what we said we were going to do I expect that to continue the case going forward So our employees, you know, my message to them is continue to execute and deliver on our promises. Hopefully you guys see that come through. So appreciate you guys' interest, and, you know, we'll take calls afterwards one-on-one. Thanks so much, guys.

That concludes the Visit Smart Home, Inc. Second Quarter 2022 Financial Results Conference Call. I hope you all enjoy the rest of your day. You may now. Disconnect your lines.