Q4 2019 Earnings Call
Greetings and welcome to 80 teas fourth quarter 2019 earnings conference call. At this time all participants are in listen only mode. A question answer session will follow the formal presentation. Please note. This conference is being recorded I would now like to turn the conference over to your host Mr., Derek Fiebig, Vice President Investor Relations. Thank you Sir.
We began.
Thank you operator, and thank you everyone for joining Eightys fourth quarter 2019 earnings conference call. This.
This afternoon, we issued a press release inside slide presentation on our financial results and preliminary 2020 outlook.
These materials are available on our website at Investor Day, 80 T Dot com.
Our remarks today will include forward looking statements within the meaning of the private Security Litigation Reform Act of 1995. These forward looking statements are subject to risks that could cause actual results to differ materially from those expressed or implied by such forward looking statements. These risks include among others.
Matters that we've described in our press release issued this afternoon and in our filings with the FCC.
Please note that all forward looking statements speak only as of the day of this call and we disclaim any obligation to update these forward looking statements.
During today's call will make reference to non-GAAP financial measures art historic and forward looking Nongaap financial measures include special items, which are difficult to predict and mainly dependent upon future uncertainties.
For a complete reconciliation of historical non-GAAP to GAAP financial measures. Please refer to our press release issued this afternoon and our slide presentation, both of which are available on our website.
I'm joined today by <unk>, President and CEO, Jim to reach and our CFO, Jeff like Us are.
Also joining us and available for Q and I are down young our CIO and <unk> field operations and Jason Smith Senior Vice President Finance.
That I'll turn the call over to Jim.
Thank you Derek and welcome 80, T., it's great to have you on board and some of you already know Derek is our new Vice President of Investor Relations and I know he's looking forward to meeting many of you in the year ahead.
I want a welcome everyone to todays call. We're glad you can be with us the fourth quarter of 2019 capped a strong year for 80 team successfully balancing financial operational and strategic objectives.
Well, we lead with our financial results.
Full year revenue of $5.1 billion was 544 million higher representing a 12% increase from 2018.
When adjusting for the acquisition of Red Hawk and the sale of our Canadian operations was approximately 5%.
Adjusted EBITDA increased $30 million to $2.483 billion full year free cash flow before special items was $590 million.
10% from 538 million in 2018.
Each of these measures was either in line with or ahead of our outlook. Despite the fourth quarter sale of our Canadian operations. Our trailing 12 month revenue attrition was nearly flat at 13.4%.
Additionally, we ended the year with an improved revenue pay back of 2.3 years versus 2.4 years in 2018, Jeff will cover the fourth quarter results shortly but I'd like to take a moment and provide an overview of the actions we've taken during the past year to position 80 to be there.
Continued leader insecurity, and automation and 2020 and well into the future.
First I'll start with our core residential do it for me security and home automation offerings, where revenues are about four times larger than our nearest competitor in a highly fragmented market.
We continue to be exceptionally positive in residential where are we enjoy strong recurring revenues high gross margins and a brand position that is overwhelmingly the industry leader, we're not just resting on our laurels, though in 2019, we focused on strengthening our base.
Wes residential customers, who are new product enhancements consistent growth in our interactive take rate and an increased use of new technology and automation in the home. We began 2019 with the launch of an all new panel in out that's called command and control which has led.
Two measurable increases in our interactive take rate and in the number of customers using automation in video we completed the year with a more engaged higher quality highly profitable customer base significantly while making those improvements we were able to also lower our overall net.
Cost to acquire new customers, we also launched and expanded our consumer financing pilot throughout 2019, while optimizing our customer experience in economics, all leading to a successful national launch launch just last month.
Consumer financing provides customers more options to enjoy the advanced security and home automation technology, they desire, while providing 80 t. with attractive financial benefits.
In addition to rolling out our new hardware and introducing consumer financing. We also enhanced our core residential capabilities. Just this january with the acquisition of defenders, our largest dealer the overall impact will be improved efficiencies with strong returns on.
Invested capital lower cost create subscribers and better control of the customer experience. We also expect the acquisition of defenders will allow us to better leverage our brand and marketing investments to accelerate growth.
And finally, we're continuing to focus on creating strategic alliances such as the new home automation partnership with Hh Fund announced earlier this year as well as a number of other successes in the multifamily and build their market.
In addition to growing in the high.
Volume do it for me space, we have two significant opportunities in adjacent lower capital intensity areas, namely commercial and residential Dci why.
First we have rapidly growing our sales to commercial customers and exited the fourth quarter, where the run rate in excess of $1 billion, representing more than 20% of our total 82019 revenues.
We started 2019 with Red Hawk, and the 82 fold, which added talented leadership expanded our footprint and added a new lake to our business with fire protection.
We continue to execute our growth channel for disciplined tuck in transactions, adding a number of small businesses that included great local leaders and a technological expertise in key markets.
As I shared at the beginning of 2019, our approach would be to integrate these businesses and a pragmatic way with a focus on avoiding customer disruption, while developing core best practices.
The success of 2019 as a foundation will now leverage a larger base from which to continue to grow while also accelerating our integration efforts overall, we're still in the early innings of a very large unexciting growth opportunity and we look forward to building our commercial capabilities as a.
Market leader in 2020 and for many years to come.
The second low capital intensity area. We're pursuing is de Iwai, we began 2019 with the acquisition of light shield, giving us the chassis or foundation for our growing in DIY offerings, and then rebranded at this year's consumer electronics show as planned.
80 key early staff and our DIY expansion.
The DIY market is growing fast and 80 possesses the brand expertise and scale to participate in this attractive market, where we anticipate generating high returns along with commercial Dci why will be a strategic growth opportunity growth price.
I already for our organization. Finally, 2019 also brought some exciting new opportunities to 80, we acquired new technology with the I view now acquisition, which further.
Furthers our opportunity to differentiate our monitoring via prioritized alarms for first responders, we expect the I view now acquisition to extend our ability and setting the standard for professional monitoring into the future.
And we expanded our consumer platform and mobile safety to include a new partnership with left that is currently operating life as a pilot across 10 U.S. cities, our partnership with lift we see as the first sizable proof case to leverage our brand.
The nascent market of mobile safety and we're excited about the future in this space.
Overall 2019 was a Europe, great progress on multiple fronts, our best in class employees and dealer organization together made strong progress on our operating initiatives. We also generated significant free cash flow, we returned more than $700 million to share.
Holders via dividends and share repurchases and we improved our debt structure by significantly lowering our borrowing costs and extending maturities in 2020, we'll continue to enhance our core residential platform and pursue more assertively related.
Smart home opportunities, we're bullish on the defenders acquisition as well as the benefits of our growing partnerships and investment in new technology. In summary, we have many exciting initiatives in motion and core residential and we couldn't be more excited about the growth opportunity in commercial and.
Hi, why we'll continue to focus on enhancing our leadership in security and automation to expand our trusted service and drive efficient growth leading to higher cash flows.
With that I'd like to turn the call over to Jeff, who will walk us through the fourth quarter results and share our outlook for the year.
Thank you Jim and thank you everyone for joining us today.
I will take a few minutes to summarize our fourth quarter results and to provide some perspective on 2020 before opening the call to questions.
Overall, we had a strong fourth quarter in which we grew revenue and continue to generate strong free cash flow before special items.
Our total revenue grew 10% year over year, with 2% growth and monitoring and services revenue and 65% growth and installation and other revenue driven by commercial.
Our total commercial revenue grew by 58%, including the benefits of acquisitions.
Excluding the effects of the Red Hawk acquisition, and our November disposition of Canada. Our total company revenue grew by approximately 6%.
Our adjusted EBITDA of $607 million was down 1% with our sale of Canada adversely affecting year over year adjusted EBITDA by approximately 2%.
We remain especially focused on cash generation and are pleased that we again delivered strong free cash flow before special items, which drove full year total to $590 million up 10% compared to 2019.
This increase was driven by reduced net subscriber acquisition spend our full year increase in adjusted EBITDA and lower cash interest.
Highlighting our cash performance was improved efficiency in net subscriber acquisition cost and we're pleased that our trailing 12 month revenue payback declined from 2.4 times to 2.3 times.
This improvement was due to higher installation revenues on outright sales reduced product costs and installation efficiencies.
Our fourth quarter net subscriber acquisition cost of $318 million was 14% lower than the prior year.
We generated approximately $12 million of additions to recurring monthly revenue or RMR, which was down 1% excluding Canada.
Our RMR balance at the end of the year was $336 million up 2% versus the end of 2018, excluding Canada.
Turning to our capital structure, we executed several improvements during the past year and you can see are well laddered debt maturities on slide 13 quarterly earnings deck.
During the fourth quarter, we completed the sale of our Canadian operations were approximately 700 million Canadian dollars.
Additionally, we paid a special per share dividend 70 cents in a regular dividend of 3.5 cents.
This January we completed a new offering of secondly notes due 2000 in 28.
6.25% coupon, enabling us to redeem our nine into quarter 2023 nodes.
Also in January as Jim mentioned, we acquired defenders, our largest dealer.
The purchase price included approximately 60 million shares of equity in cash of $260 million, which we funded partially from our revolving credit facility.
We also today declared a fourth quarter dividend of 3.5 cents per share payable on April 2nd to shareholders of record on March 19th.
Before addressing our preliminary outlook for 2020, I want to expand a bit on Jim's brief mention of our consumer financing program.
As we've discussed during our past quarterly calls during 2019, we piloted a consumer financing program, enabling certain customers to finance their upfront system cost the consumer loan from a third party bank and in other cases offered our customers are retail installment contract with 80.
Based on learnings during the pilot we modified the program as we rolled it out nationally to focused predominantly on a retail installment contract model rather than third party consumer loans.
This approach enables us to offer our customers a seamless experience in which they need to interface only with 80 to finance or upfront system costs for up to 60 months.
We are now partnering with the large international bank to securitize. These customers evils, enabling improved economic benefits for us in a way to does not require each customer to acquire in administered in individual loan with a third party.
We are excited by this program and encouraged by the early results in the first few weeks of the National launch.
Overtime, we expect these options will lead to higher installation revenues and more comprehensive systems.
Now I will turn into our preliminary outlook for 2020, which you can see on slide 14 of our slide deck.
Our primary planning focus for 2020 is on cash generation, we expect adjusted free cash flow before special items to be in a range of $630 million to $670 million.
As always we will bounce near term cash generation against longer term growth and return objectives.
We expect full year total revenue to be in a range of $5.0 billion to $5.3 billion, the midpoint of which implies an underlying growth rate.
5%, excluding the 2019 results of Canada, driven by expected continuation of growth and installation revenue, including Sneinton commercial along with more modest increases in monitoring services revenue.
We expect our 2020 EBITDA to be in a range of $2.175 billion to $2.250 billion.
As you consider our preliminary outlook ranges for revenue and adjusted EBITDA I want to remind everyone that Canada represented approximately 4% of our business in 2019 prior to the sale in November.
Additionally, as we've previously shared the acquisition of defenders will cause certain costs that were previously capitalized as part of dealer account purchases to now be expensed in RPL, which will meaningfully reduce our reported adjusted EBITDA.
I also want to point out one item that does not affect our cash flow, but will affect our 2020 reported revenue and adjusted EBITDA.
As a reminder, 80 has historically retain ownership to most residential equipment.
The defenders model is to sell equipment outright to customers and also our pilot financing program required outright sales to enable third party worms.
With our new securitization partnership we intend to transition the bulk of our residential business back to our historic ATM model.
During the transition period, most customer additions will result in outright sales and will therefore generate installation revenues and associated cost upfront, which I recognize overtime under the company owned model.
I also wanted to point out that we're not providing a quantitative outlook for attrition or any other operational measures.
We of course will continue to report attrition in conjunction with earnings releases in the future.
As we have previously discussed we expect attrition will be modestly higher in the near term due to dealer mixed dynamics in the acquisition of the vendors.
We do not manage the business to any single Paipai and our focus remains on optimizing customer lifetime value more holistically.
Through the coordinate management of several CPI, including attrition revenue payback and cost to serve we expect to drive increased capital efficiency and improved unit economics over time.
Before turning to Q in a I'd like to cover a few housekeeping items first as a reminder, we recently passed the one year anniversary of a Red Hawk acquisition, which contributed meaningfully to 2019 revenue growth.
Second we expect to incur approximately $65 million associated with our January 2nd lien notes transaction.
Additionally, due to refinancing activities the quarterly timing of our cash interest will differ from 2019 with expected first in third quarter outflows approximately twice the size of second fourth quarter outflows.
Finally, consistent with prior years, we expect a first quarter cash outflow related to annual bonus payments.
To conclude we've increasingly excited about our competitive positioning and our strategic initiatives that leverage our strengths and increase our capacity to generate positive free cash flow in shareholder returns.
We are pleased with our 2019 financial and operational performance and we look forward to providing further updates on our progress during 2020.
Thank you again, everyone for being on today's call. We will now be happy to take questions. Operator. Please open the line.
Thank you at this time will be conducted in question and answer session. If you like to ask questions. Please press star one on your telephone keypad confirmations. All indicate you line is in the question Q. You mean for starts if you look to remove your question from the Q for participants using speaker equipment and maybe this year to pick up you had said before Parsons Starkey one moment, please as we pull for questions.
Our first question comes on line of George Tong with Goldman Sachs. Please with your question.
Hi, Thanks, good afternoon.
Attrition rate increased to 10 bips to 13.4% this quarter you touched on some of the near term impact on attrition from defenders can you discuss other underlying trends, you're seeing with attrition, including puts and takes.
Yes, George it's Jim Thanks for the question Hi, Doug.
Tell you that.
That most of the most of the headwind on the attrition front tends to be from the dealer channel. We talked about that I think on last call and that continues to be the case.
We believe that attrition going forward will be slightly higher in the near term.
And again, primarily due to the impact of the of the dealer channel.
We've got we've got some short term call headwinds there.
The.
We're optimistic about gross attrition going forward, we're confident that we can continue to manage it down over time, we talked about new tools data analytics voice analytics continued improvements in.
Customer experience. So we're bullish over the long term and some short term headwinds principally due to dealers.
Got it that's helpful. Georges Jeff I'd add to that you when we manage customer lifetime value in a holistic way and attrition of course is one one of many measures, but just like confidence as long term attrition trends. We also have confidence in opportunities to acquire certain kinds of customers more more efficiently and drive lifetime value that way as well.
Got it Thats helpful. You've owned defenders now for two months can you comment on your ability to improve the credit quality of new subscribers. After this acquisition and talk about progress in achieving free cash flow benefits from the transaction.
Yes, you of course.
So I'll give you just a little bit of context, and then get to your question. We saw defenders is an opportunistic acquisition.
The owners needed to sell defenders was our largest dealer and we thought no more natural owner than 80.
Financially the transaction, we think stands on its own.
Cash flow accretive in 2020 more so in 2021 is we as we realize synergies.
And then many strategic and operational benefits as well we're off to a good start.
Team is engaged we're looking at ways that we can leverage the leadership and talent as well as a second to none marketing engine.
We've already implemented some changes in terms of customer acquisition process that we think over time will help us improve attrition.
Got it thank you.
You bet.
Our next question comes the line of Toni Kaplan with Morgan Stanley. Please state your question.
Thank you I'm just on the topic of Corona virus, how should we think about supply chain impacts and other factors and also just from.
Plans you have could you see a scenario where technicians say they won't go to People's houses you tell them not to go and what kind of business insurance saga kicks in at that point and just all the implications that we could think about.
Yes.
Yes, thanks, Tony the so the virus to date has had no measurable impact on our business.
We're working very closely with our equipment suppliers as you can imagine.
Sometimes sometimes daily.
Working with them to date, we've had no disruptions, we have a healthy inventory as well.
It's difficult to.
Obviously difficult to protect the ultimate impact of krona virus, but we're monitoring it closely don't anticipate supply chain disruptions and end to date Havent had any issues from a technician perspective in managing that side of the business.
Great that's helpful and then.
Just in terms of the free cash flow guidance.
It suggests an incremental $60 million at the midpoint in 2020 could you help us with some of the puts and takes your around what's lost from the Canadian divestiture or whats coming from defender switch from commercial see expectations. Just what are the drivers leading to the increasing free cash flow.
Earlier thanks.
Hey, Thanks, Tony is Jeff there's a whole lot of puts and takes of course that goes into free cash flow just as we did in 2019, we were pleased with our performance you we intend to balanced throughout the year to optimize the balance between 2020 cash flow growth.
And growth in our additions and investments in our business. So the the positive factors.
Revenue.
Explicitly quantifying some of the positive factors implicit in our guidance is our core EBITDA and operational growth just for running the business will have some modestly lower interest expense as result of some of our successes with the recent refinancing activity will have some some near term benefit from defenders, which we expect to be greater as we get into the subsequent year.
Yeah.
Some near term benefits that are somewhat hard to predict precisely, but some benefits that will come from a pricing and our financial and our financing model along with some working capital improvement initiatives that we're working in the into other direction.
We do is intended to spend a bit more on net sac in 2020 to drive more. In addition, we do as you point out lose the contribution of Canada, and then of in places, where we have working capital necessary to fund growth and it has always theres some uncertainties.
In new castle that we'll manage as we work away through the year.
Thanks, so much.
Our next question comes the line of Manav Patnaik with Barclays. Please proceed with your question.
Hi, This is actually Greg, calling and I'm, just hoping to get some further clarification on the decision to not to the third party financing and doing here on a.
Retail financing and just some clarity on how that flows through on the panel and then ill on those same lines, how big you could imagine this financing securitization program could be and and kind of what you're thinking about for 2020 there.
Okay great.
Jeff I'll, just maybe starting remind of a couple of objectives of what we were trying to accomplish here. When we we began piloting different tweaks to our pricing model in endara offered to our customers that included financing.
We were trying to accomplish over time is more install revenue ability to manage discounting more effectively and maybe most importantly, encouraging customers and our sales force for that matter too to build more comprehensive systems. So we piloted this in a variety of different ways. You. We talked last year about a third party consumer loan program you that.
Actually worked quite well in terms of the financing part, but what we found is that it introduced some lumpiness with our go to market process. It as much as the customer had to interface with with two separate party and go through the credit check process and ultimately would have had two bills and we.
Through through some some work you came upon another idea to accomplish basically the same economic outcome, but in a way that's much more seamless way more transparent to our customer allows the customer to only deal with a single party being 80 single credit review process, you will get a single bill easier to administer for our sales team.
And then it gives us more flexibility with respect to the nature of offer isn't different configurations that we might offer overtime that led us to transition to two this does model that will be in partnership with Mizuho Bank that we'll have dizzying economic effect actually a little bit better economic effect given away that that we will be.
Well suited for our customer base and I'm going to start stop short of predicting exactly how much comes from this is we're just due to early still but we're encouraged by our near term results.
Okay Fair enough and then and maybe a.
A little color on the progress with the.
Preachy conversions it seemed like pretty much in line with what you were expecting for 2019, just some color on how that how you expect that cost to ramp up and.
Successes, there lessons learned as you've kind of gone through the process last few quarter. Thanks.
Yes, so Greg this is Don.
We've.
Kind of gotten through most of our experimentation in 2018.
The lessons that we've learned to the there's opportunities both on revenue offsets as well as some technology things that can gender for commercial reasons, but then we're going to approach 2020, a little down the high end of our hundreds $150 million range, but that's.
That's on purpose to go in intentionally pragmatic and conservative and probably introduce some more proactive.
Radio swaps as opposed to reactive ones that we do while we're at the friend during a service fall, but but we're feeling very comfortable that by the 2000.
22 funds the aging achieve.
Sounds that we're on track.
Our next question comes the line of Kevin Mcveigh with Credit Suisse. Please proceed with your question.
Hey.
Hey, I Wonder is there any way to think about within the context of the business. How are you thinking about kind of commercial versus DIY versus residential.
Longer term just given you know obviously, there's been some investment on the DIY side on the commercial and then the core business and then just within the context to D. I like Jeff can you give us a sense of.
What the EBITDA impact was in 2020 from from DIY overall.
Hi, Kevin it's Jim Thanks, Jim.
I'll give you a little bit of context and then.
And then ask Jeff to answer your question more directly on the impact EBIT impact in 19 and for DIY, why but just overall context.
The headline for US is we're laser focused on capital efficient growth and we're positioning the company to drive capital efficient growth and so all of these things that you see the acquisition of defenders the the sale of Canada.
Consumer financing, even the rollout of the command panel.
All with an eye towards driving capital efficient growth.
And then that alternatives that we're developing to deploy capital whether those alternatives our partnerships.
Or growth in our core residential business or lower capital intensity operations like light commercial which were exceedingly bullish on anti why.
We.
We.
Our positioning those alternatives to be options for us to deploy capital and drive long term cash flow.
I'll, let Jeff address your question specifically on DIY.
Well I'll, let Kevin last year, we ever specifically called out the amount, but we did at the beginning of the year last year talk about we were making some investments in our business I believe we said about $40 million DIY was the biggest driver than that.
More than half of that and we executed in 2019 about as we had planned and and then as we go into 2020, we expect to invest similarly in DIY. The first couple of years of getting into this space is going to largely be spending on the creation of new customers and advertising in the like with the.
The returns to come in subsequent years. So it's part of your bouncy of that is driving cash flow and EBITDA for that matter balancing near term.
Generation of cash with investments and thing to pay off over over a little bit longer time horizon.
Got it and then just maybe Tim you or Jeff.
You mentioned kind of more benefit from upfront installation costs.
In terms of revenue contribution is that primarily coming from some of the commercial initiative or.
Residential or I guess, just Jewish what's driving that as well yeah. That's a combination of both of the we have had some success in upfront revenue in our residential business.
And then some of the benefit is just as you would suspect the mix as commercial continues to grow and just as a reminder, there too you traditionally or historically.
Residential business you are the install revenue serves to reduce the amount of what effectively the upfront subsidy.
We are providing the customer whereas in the commercial business in certain cases, there's positive margin even at the time of install not not in all cases, but typically.
For residential is to earn high margin RMR overtime, whereas in commercial that does subsidy model does not come to places in Houston.
Helpful. Thank you all.
Our next question comes the line of Gary Bisbee with Bank of America, you seem to question.
Hey, guys good afternoon.
A couple of questions, but the first one I just wanted to go back to defenders.
I realize it's still moving around your finalizing the accounting, but he can you give us any.
Color on sort of financial impact you talk about a lot of positives between lower your more capital efficient customer acquisition, a bunch of other things you mentioned, but I mean should should we think that this is very much on the margin at this point or or.
Or some of these benefits can be noticeable in in 2020, I mean all in.
How's it impacting.
Office.
Just give us directionally any color.
Yes, so the way the way to think about.
Vendors is.
As if we acquired a sales engine I mean, that's really.
As you know what what they were.
We've talked about the fact that they were about half of our dealer channel and that means that that half of our dealer channel no longer to dealer now their direct so so the way. The this shows up in terms of generating cash flow is we think over time the cost to acquire those accounts is going to go down because we'll have some synergies so in the very near.
Sure.
The benefit is whatever profit defenders used to earn now it will be cash flow to us offset by some some near near term.
Potential disruptions that we're working through but but didnt mean, we expected to be cash flow positive in 2000 in 20 and more so in 2021.
Part of the reason, we're not sharing a specific number for the vendors because as we integrated it will be difficult if not impossible to distinguish the effects of the vendors from this exit the rest of our business. We just expect that our average.
Cost to acquire new accounts will go down overtime, so really shows up as lower sac as opposed to two to higher BNL in fact, as we've described it actually makes the.
Worse.
Okay and so it is is it that they were acquiring customers more efficiently or is it.
There are 175 million of spend and yours doing a better job as you put that together so yeah.
Yes, and the reason I asked that question is the comment that it will be accretive to free cash flow in 2020, I guess I guess that would sort of imply either you can get some of those savings quickly or that the profit they were making.
Standalone before you were involved is more than the incremental interest expense you know in the and I suppose any integration costs. You will you will take on this year to integrate the business I mean is that.
Is it is it more of the savings from running a better or is there real profit there that will offset those two items the interest in the integration costs to be able to make that claim that it's free cash flow Korea, Yeah. I think the two primary reasons, Gary are essentially and just sort of alluded to this the first is that we alluded.
In eight the dealer margin.
So the difference between what we were paying them for a new customer and their cost to acquire is essentially now eliminated and that's the first big category in the second category has to do with precisely your point and that is marketing efficiency.
Okay, I mean that kincaid dealt with that dealer margin was.
Thats ultimately I think overall asking about.
Yes, so the first part of that the dealer margin part is the part of that we expect to see in the near term and in the efficiencies that come from.
That come from.
Smarter marketing spend more effective marketing spend you expect to see overtime.
But but we haven't shared and don't plan as you are exactly.
What that amount is.
As a is implicit in our overall free cash flow guidance and again part of it is because it will it will go into the soup and meet indistinguishable from the rest of the company overtime or said differently, we don't anticipate being able to even track it that way.
Once we get the same integrated.
Okay, maybe I'll sneak in one other if I could quickly just obviously commercial you've done a terrific job growing growing the business.
And you are looking for continued very strong organic revenue growth can you just give us a comment on how this is impacting profitability as a company. Obviously, we know it's it's much lower margin, but now that you have lapped red Hawk and are delivering this kind of attractive growth is is is there a profit stream there that you're expecting to.
Grow similarly to the double digit organic revenue, you're calling for and sort of how meaningful is it today. Thank you.
Yes, so in for sure depresses the overall.
Margin rate for the company and if you do the math on the midpoint of our of our guide on EBITDA in revenue, you'll you'll see that that it implies the EBITDA as a percentage of revenue to go down thats driven by the defenders dynamic that we talked about has also driven by.
Commercial growing had at a rate that we expect is greater than the rest of the company. So so absolutely. There is a profit stream that that has has grown nicely and we expect to continue to grow in commercial.
Generates positive EBITDA dollars positive cash flows, but it is at a lower rate as a percentage of revenue then our underlying residential business.
And Gary just a little more context that I did I want to add here I know you had a specific question about.
Above financials, but I want to take an opportunity just provide a little color on and on commercial. This is a return on invested capital play for us and the excitement in within commercial is just palpable for 2020, we've got we've got the Red Hawk.
Acquisition, it's gone well integration is on track.
Our national scale in brand.
Can continue to be a source of competitive advantage for us.
Pipeline strong momentum is strong we're targeting 10% growth for for this business and continue to be just exceptionally bullish on it.
Thanks for the color.
Our next question comes on line of see subject with Deutsche Bank. Please state your question.
Hi, Thanks for taking my question. So just a quick follow up questions on the financing program.
Do you managed to Pega Chris.
In that model, particularly given that yet into cycle and how does the company there's no future losses. Thanks.
Yes, so the way this financing program will work is we will effectively securitize. The receivables you with the third party bank on a.
Non recourse bases and.
And is maybe worth pointing out that that we're not changing anything with respect to the to the kinds of customers that were taking on as as result of this would be a book of business pretty similar to the book of business that we've we've.
We've acquired.
Also somewhat not exactly your question maybe worth mentioning to you talked about economic cycles is your traditionally our business.
Has and our industry for that matter has as whether through economic cycles quite well of course, we havent had a significant downturn in a number of years, but most of the industry data center that even in challenging economic times, you'll be people tend.
To to not cancel their their systems, partially because things like the threat of Prime goes up also because people tend to move less frequently in a in more challenging economic times that we do believe we have some hand.
Recessionary characteristics of or of our business.
That's very helpful. Maybe just a question on industry itself, just Amazon is moving into the professional installation channel, but that an index product.
Any implication self does for you.
We monitor our attrition and cause for attrition closely.
We haven't seen ring or any new competitors, making a meaningful impact on on attrition.
We can turn we monitor Amazon. Unlike we monitor all of our competitors vivant, Monitronics et cetera, and we'll remain focused on and our leading position in pro install and growth opportunities within DIY, but to answer your question directly we've not seen an impact.
Act from from Amazon in our attrition data.
That's very helpful. Thanks.
Our next question comes on line of Seth Weber with RBC capital markets. Please proceed with your question.
Hey, good afternoon guys.
Just wanted to circle back on an answer to the three G. expense question. It sounds like you're you're kind of angling towards the upper end of the 100 150 range for this year.
So should we think that you'll be kind of closer to the upper end for the full program costs I think the Rangers 200 to three and a quarter.
I think it was 25 million last year, so you'd be at close to 175 already so should we move towards the top end of that 200 to three and a quarter inch.
No I wouldn't draw that conclusion I used the we did change range, because we still think thats the right overall range.
There's a handful of things that we expect will play out over coming months that will will.
Allow us to refine that including.
The effectiveness of some of the thing we talked about in the past acuity.
Yes, so such as revenue offsets where customers with additional participation by by suppliers or others in the in the value chain home possible technological alternatives that could that could.
Make it less expensive, so so more and more to come but I I would say that kind of the midpoint of a range is the same it as it has been.
Okay. Thanks, and then just on the.
On on the defenders deal I mean is there a.
Are there or are there any other dealers of scale out there that might be additional opportunities for frady T to kind of continue to you know to do another one of these transactions and.
I guess, just conceptually do should we think about using using the dealer channel last kind of going forward.
Strategically thanks.
Thanks, a question Seth dealers for us are a great partner, a very complimentary part of our ecosystem.
We don't have a change in our strategy, we have no plans to acquire additional dealers.
Defenders acquisition was was opportunistic.
Vendors is really unique the defenders organization in of itself was larger than the rest of all of our other dealers combined and so no change in strategy no no current plans to acquire additional dealers.
Okay. Thank you very much.
Ladies and gentlemen, we have time for one more question. Our final question comes on line of Jeff Kessler with Imperial Capital. Please proceed with your question.
Well, thank you that I got to I got in it here.
Hi, uptime of one of the half more questions the.
First the first.
Question is can you go through more of a.
Just want to call it eight.
A day to day, what actually happens when somebody takes out when when when you do that when you do the financing prop process with somebody on the Oh on the equipment. If you go through you know if you go through getting huh.
Who sells it.
It does the installation time change at all how did they show how does how does your build pop up and at the end of the ER.
We ended the period, Oh, who owns you know who who gets to own the equipment and stuff like that.
Hey, Jeff I would encourage you to order yourself as you can try this.
For for yourself and I think what you would find is that the process works really no different. So is the same sales modes, you could could be initiated over the phone you could be initiated by a field sales rep.
You are part of the reason.
That we moved to do this.
Model that I described is because it made in weight more transparent to the customer. So so the way the customer would experience it would be similar to previous except that our salespeople would talk about things in terms of of a cost per month in many cases, particularly when when trying to do.
Describe additional features and capabilities to a customer and you can talk about it would you like a garage door opener.
And the ended extra camera and maybe a service that you that would be $3. A month is that something that I can interest you.
So that that tool in the tool kit.
Didn't exist previously and.
And that is the biggest change the customers Bill would would reflect a fee for the monthly monitoring and also also a fee associated with the installment, but but largely transfer to the customer.
Okay.
The second.
Let's see my last question.
Is on the commercial business could you. Please go through.
Quick please go through what parts of commercial are you seeing that as strong as and that's continuing to be strong or what parts of commercial a you're are you beginning to develop what parts of commercial are developing headwinds.
Hi, Jeff it so we're hitting cylinders on all all we're hitting all the cylinders in the commercial business.
National accounts is doing well our core commercial is doing well.
The Red Hawk acquisition is coming along nicely.
It is as you can read the we concluded the year was 16% organic growth.
Put up 18% organic growth in the fourth quarter and and continue to feel bullish about the business. The short answer your question is hitting on all cylinders.
Correct.
Well. Thank you for taking the thank you for taking my questions I appreciate it.
Thanks, Jeff Thanks.
We have reached the end of our question answer session and I will like to turn the call back over to Mr., Jim degrees for any closing remarks.
Thanks, Devin and as always on deeply appreciative of the dedication and the ongoing efforts of our ATP colleagues and our dealer partners.
I'd also like to once again extend a warm welcome to our associates from defenders.
We've made great progress on many fronts in 2019 were excited about the growth drivers, we see for our business going forward. Thanks again for being on the call. We look forward to updating you throughout the year have a good evening everyone.
This concludes today's teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
[music].