Q4 2019 Earnings Call
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Fourth quarter in 2019 earnings conference call.
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I would now like to hand, the conference over to your speaker today neat stuff.
President Investor Relations.
Thank you. Please go ahead Sir.
Good afternoon, everyone. Thank you for joining us. This afternoon discussed the results of debit Smart home and IPX Group Holdings for the three month period and fiscal year ended December 31st 2019.
Today's call, we will be presenting the results would have been smartphones in the press release, we issued today as well as the accompanying presentation, we provide tables with reconciliations for the results IPX Group Holdings.
Joining me on the conference call. This afternoon are taught Peterson said, its smart homes, Chief Executive Officer, Scott Hardy debit smart homes, Chief operating officer.
They are Gerard Devon, Smart homes, Chief Financial Officer, I would like to begin by reminding everyone that the discussion today may contain forward looking statements, including with regards to the company's future performance and prospects.
Forward looking statements are inherently subject to risks uncertainties and assumptions and are not guarantees or performance.
Not put undue reliance on these segments you should understand that a number of important factors, including the items discussed in the risk factors in our proxy statement consent solicitation statement and prospectus dated December 26, 2019 and filed with the security in Exchange Commission.
As such factors may be updated from time to time in our filings with the FCC, which are available on the Investor Relations section of our web site could cause actual results to differ materially from those expressed or implied in our forward looking statements.
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 also refer to certain non-GAAP financial measures reconciliation of these non-GAAP financial measures for historical periods to the most comparable measures calculated and presented in accordance with gap are available in the earnings release, an accompanying presentation or on the financial information page of the Investor Relations portion.
Of our website I will now turn the call over to Todd.
Thanks, Nate and good afternoon, everyone. Joining the call we're excited to be hosting our first earnings call as a publicly traded company listed on the New York Stock Exchange. We began this new chapter is a leading public smartphone company. After successfully completing our merger with mosaic acquisition Corp. on January 17.
As part of the merger, we raised nearly 500 million a new capital to help delever, the business and drive future growth.
It's notable that Blackstone has been a key partner and investors since 2012 demonstrated its renewed confidence in the long term vision of the company by investing an additional $100 million.
We believe our successful merger with mosaic has a major step forward and raising dozens profile in the marketplace as a leading smart home provider and in promoting an even stronger platform for future profitable growth.
Before turning to the results I wanted to discuss with you the management change as we announced on Tuesday.
I will also provide an overview of the business highlighting some of our major accomplishments to date as well as our overall vision for the smart home and why we believe we are the clear leader in this emerging growth category.
First driven smart homes President Alex done this step down after 14 years of the company.
Alex will remain as an advisor to even through March 2021 to ensure a seamless transition.
Grateful to Alex for helping doesn't become a leading smartphone provider. We wish him continued success in his future endeavors, Scott Hardy Vivants, Chief operating officer, who is on the call today and it's held various senior leadership roles at the company since 2013 will assume many of Alex's key responsibilities, our board of directors and I have comfort.
That's an scott's ability to handle this expanded scope.
Next I'm pleased to announce the appointment of del Gerard as our Chief Financial Officer, we had confidence in deals ability to step in when we named to the interim CFO nearly five months ago.
And as expected he's done a great job, leading the finance organization, while at the same time, representing the seventh and the investment community as we were on the road educating the market about different in advance of the merger we've made to other important executive appointments Todd Santiago has been named Chief revenue officer, overseeing all account acquisitions and marketing.
Todd has been a senior sales leader driven since 2012.
J.T. Wong has been named Chief Technology Officer responsible for leading the company's product and platform development. She has been with US for the past 12 years previously serving as the company's cheap Engineering officer and was the key architect of Evans cloud infrastructure.
Our long term focused on building a deep bench of leadership experience shows and all these executives, it's an exciting time to be in the smartphone market and we're confident that these talented leaders will continue to play strong roles in the ongoing success of our company.
Moving now to the key financial highlights of the business, we had a strong finish to 2019.
Fourth quarter revenue grew by more than 11% to approximately $308 million adjusted EBITDA was approximately $125 million up over 40% from the prior year and producing an adjusted EBITDA margin of over 40% in the quarter.
For the full year, driven smart home grew total revenue by more than 10% to $1.2 billion and adjusted EBITDA grew over 51% for the year topping $421 million.
As of December 30, Onest, driven had more than 1.55 million total smartphone subscribers up seven and 8% for the full year Bill will provide more specifics on the financials. During his remarks as well as sure outlook for 2020 for the benefit of those who may be less familiar with the vision Smart home story I would like to provide additional back.
Round about us our growth strategy and our overall vision for the smartphone since I founded vivant nearly 20 years ago, we have grown to become the Premier Smart home company in North America with the largest subscriber portfolio and the most dedicated employees. We are redefining the home experienced by delivering intelligently design cloud enabled solution.
Since directly to every home.
Our proprietary cloud based smart home operating system, along with our well trained team of smart on professionals make it possible to create a completely customize smart home from door locks cameras security monitoring thermostats lighting controls smart speakers and many other connected devices.
All of these innovative devices are designed to work together seamlessly in an elegant system that homeowners can control from there in home touchscreen hub through a single app on their phone or other devices or by simply using their voice.
Over a decade ago, we came up with the modern vision for Devon, when we recognize the first mover opportunity and made it our mission to deliver a transformative smart home experienced every home.
We've come a long way in accomplishing that mission and the 10 years since we installed or for smart home hub connected to a smart thermostat.
Today, we have over 20 million connected devices on the vivid smart home proprietary cloud based platform with new customers buying an average of 15 devices across the various smart home types that I mentioned earlier.
We have industry, leading engagement on our smart home operating system with over 13 interactions a day on average and over 1.4 billion daily events being processed on our platform.
We believe the total addressable market for smart home presents a massive opportunity and in the not so distant future. The vast majority of the 150 million homes in North America will be running on a comprehensive smart home operating system.
Our focus on delivering this type of smart home experience has significantly broadened the potential customer base and it is completely disrupting the traditional security and high end home automation industries from the very beginning of Evan Smart home. We have focused on building a subscription service that is comprehensive easy to use that affordable for the mass market.
Delivering a truly integrated smart I'm experience requires a unique proprietary technology the expertise to customize installed that technology and the customers home and importantly, the ability to support that customer over an entire lifecycle.
That's why our nation wide workforce of over 10000 dedicated smart home employees is such a critical differentiator to the government model.
There are three key drivers that guide our strategic decision, making first deliver a transformational smart I'm experienced every customer second drive consistent top line and subscriber growth.
Third improved margins and profitability to fund that growth in a cash neutral way.
I'd like to now turn the call over to Scott Hearty, Chief operating officer, driven smart home to drill down a bit further into our recent progress across our key initiatives.
Thanks, Todd and good afternoon, everyone that it's been able to drive significant improvements in both our customer experience and our overall profitability and cash flow thinks to our relentless focus in three primary areas first transforming net service cost through our vertically integrated business model.
Second, bringing down net subscriber acquisition costs through flex pay and third scaling our overall DNA expenses, let me touch on each of these areas starting with net service costs.
In recent years growing consumer demand for smartphone devices, particularly in the highly sought after camera segment has helped grow our average revenue per user.
But the number and location of these devices, particularly those outside the home also created additional complexity in ongoing support driving our net service costs up in the first quarter of 2018, our net service cost per subscriber peaked at $17.04.
We believe our competitors in the smart home space, all will face the same challenges.
But we believe our unique ability to solve them is evidence of the power of our vertically integrated model by controlling all parts of the smart home delivery model. We believe we're able to identify and understand the root cause for issues and then quickly make changes to the hardware the firmware the cloud platform the installation price.
Sassy's and the diagnostic tools used in both self healing and assisted support.
In the fourth quarter as a result of these changes we achieved net service cost per subscriber $13.51.
Savings of $3.53 per subscriber month from just 21 months ago.
Improving upon our industry, leading operating margins.
Perhaps most importantly, these changes have significantly improved both the product reliability and service levels, which in turn his driven improvements in customer satisfaction metrics.
We believe the advantages achieved through our vertically integrated model are very difficult for others to replicate.
Second we continue to drive down net acquisition cost per subscriber through the increased adoption of third party consumer financing, which we call. The flex paid since we introduced flats being 2017, our net subscriber acquisition costs have dropped by 50% were over $1000 per subscriber given our first mover advantage and flexible.
We believe that we are well ahead of the competition in enabling consumers to easily finance a full smart home experience, while also dramatically improving our unit economics.
Third we continue to scale, our DNA expenses to drive improved profitability in 2019, or DNA was 16.5% of revenue down 350 basis points from 20% in 2018.
We plan to continue to manage our cost prudently restructuring is needed now kit our investments in areas designed to drive positive ROI.
For instance, we recently announced number of cost reduction initiatives that are expected to meaningfully reduce gene and overhead costs by streamlining operations, focusing engineering and innovation and driving better customer satisfaction.
The company expects to complete the majority of these cost reductions by the end of the first quarter 2025.
Finally, let me address customer attrition, which is an important part of our subscription model.
Our attrition dynamics are driven by two primary factors first the rate of attrition for a customer cohort.
Changes as a progressive through different phases of the lifecycle. We define these phases in term end of term and post initial term each phase carries with it a corresponding expected attrition rate with attrition at its highest during the end of term phase.
As we shared in our last earnings call the cohort attrition curves remain fairly steady.
The second factor that affects attrition is the percent of total customers in each stage of the lifecycle.
The percentage of customers in the end of term fees rose in 29 team and we will stay elevated in 2020 before falling again in 2021.
In the fourth quarter attrition was flat sequentially at 13.9% this remains higher than our long term trend for attrition, but is inline with our expectations given the higher percentage of customers that are in that end of term pays.
I will now I'll turn the call over today ill go through the specifics of our fourth quarter and full year results as well as to provide our initial outlook for fiscal 2020.
Thanks, Scott I'll walk through the financial sled portion of the presentation that we posted today conjunction with the earnings release.
On slide 12, we highlight revenue for the fourth quarter and full year.
Fourth quarter 2019 revenue grew by 11.3% to $307.8 million the growth in revenue was a triple to a 7.5% increase in total subscribers as well as a 3.4% increase than the average monthly revenue per user.
We saw favorable year over year trends in subscriber financing mixed during the fourth quarter highlighted by 38% reduction in a number of subscribers finance through retail installment contracts or ricks for short.
We continue to actively pivot scrubber financing mixed rate were favorable profile for the company.
Shifting a greater proportion of our subscribers away from bricks and towards our third party financing partners and paying full we're able to reduce our net subscriber acquisition cost per subscriber and improve our cash flow dynamics as we look forward to the future. We focused on delivering ace troops smart home experience to millions of homes and a proposal and cash neutral way.
Moving to slide 13, adjusted EBITDA has scaled nicely for both the fourth quarter and the full year. Once again. The primary drivers are lower net service cost per subscriber and continued scaling of our general and administrative expenses.
For the year, we're proud to have scaled adjusted EBITDA margins by 1000 basis points to 36.5% of revenue compared to 26.5% in 2018.
Meanwhile, Covenant adjusted era, which is the calculation use for our debt covenants scale by 440 basis points to 55.6% of revenue compared to 51.2% in 2018.
As you look on slide 14, we highlight a few data points for the subscriber portfolio, which were strong across the board total subscribers at year end grew from 1.44 million to 1.55 million or 7.5%.
Average monthly revenue per user or am argue increased to $65, a 98 cents up 3.4% year over year.
I am argue has been moving up nicely due to the recognition of deferred revenue and effective cross selling of new products, such as our new generation cameras.
On the next slide 15, we highlight a few points on new subscribers. This scrubber originations were 45861 for the fourth quarter and 316403 for the year.
During the first half of 2019, we improved the underwriting requirements of our business and implemented a second look financing partner.
The net effect of these changes should produce the higher quality credit customer and reduce the number of new subscribers finance on vivants balance sheet. It caused a temporary decrease in sales productivity, which we believe suppressed our total originations to an extent in 2019.
We saw a similar dynamic in 2017, when we implemented our primary financing partner and it took a few months for our sales tenants to adapt to the structural change in our sales process.
On the right hand of a slide you can see the impact of our efforts to reduce the financing or new customers on Vince balance sheet, which are the ricks that I referenced earlier in my remarks.
Our Rick mix in the U.S. was 10% in the fourth quarter down from 16% in the fourth quarter a year ago. This has a significant beneficial impact on our cash flows and net subscriber acquisition costs per subscriber, which can seen on the next slide.
Moving to slide 16, we will cover our net service cost per subscriber net subscriber acquisition cost per new subscriber.
The improvement in net service cost Prescriber has had a positive impact on our earnings in the quarter in the fiscal year periods for 2019. We've also continued our trend of year over year improvements and net service cost prescriber moving from $16 in 27 cents in 2018 down to $13.73. This past year.
As Scott discussed earlier, the solid improvement is due to the work of Vivants vertically integrated smartphone platform, which encompasses the software the hardware the installation and ongoing customer sport.
As we continue to make improvements in all of these errors. We are seeing continued positive trends in both customer satisfaction and the cost of service.
The result is that our net service margin continued its increasing trend moving up from 69.2% in 2018% to 73.8% in 2019. We believe these efforts explain the improvements I've cited in adjusted EBITDA on the right hand side of slide 16, as our average net subscriber cost to create a new subscriber in the last one.
Period for 2019, net subscriber acquisition cost per subscriber decreased to $1018, that's 40% lower year over year as we continue to drive down the number of new subscribers that are financed on a different retail installment contracts and ship to a higher mix of customers utilizing our financing partners, we're paying full for the initial perks.
Most of their smart home products Slide 17 covers the lifetime value of our customers and the benefits of or recurring revenue model.
Last 12 months, we've added approximately $1.75 billion of lifetime value, we continue to see nice backlog numbers, which as a reminder, represent revenue adjusted for attrition that we expect to recognize over the lifetime of a customer.
A lot today is $5.81 billion up about 13% compared to $5.16 billion a year ago Slide 18 depicts our typical scrubber walk the illustrates the change in total subscribers at year end as Scott mentioned, our attrition has trended higher than our historical averages given the higher percentage of customers better.
In there in that term lifecycle face finally, moving to our financial outlook for the upcoming year on slide 19.
First I'll share some of the fundamental characteristics of our financial model over 95% of revenue is recurring which provides long term visibility and predictability to our business.
Most of our new subscribers that finance their smart home systems choose to enter into five year contract and remain on the platform for approximately eight years driving significant lifetime margin dollars.
Our strong unit economics and scale has contributed to our ability to drive significant adjusted EBITDA improvement.
In terms of guidance, we expect to end 2020, with approximately 1.62 to 1.66 million subscribers.
Our estimate for 2020 revenue is $1.25 billion to $1.29 billion and we're projecting 2020, adjusted EBITDA of between 525 and $535 million.
Operator, please open the line for QNX.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound or hash key.
Please standby, while we compile the culinary roster.
Okay.
Your first question comes from the line Paul Coster with JP Morgan Your line is open.
Hi, guys, it's Paul Chung on for cost her thanks for taking my questions but.
So could you kind of remind us of the seasonality of your your sub adds.
We typically expect the year to play out.
Sub adds every quarter it took a hit that.
1.6 to 1.66 million and then the kind of respective attrition rate does that attrition rate kind of peak in the second half half as that.
Hirji mentioned in past and that same question for your Opex levels as we move through the year follow.
That one question or why but.
I'm going to start.
First question Thanks for that.
We do have seasonality still core.
The onboarded more customer base.
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In our direct to home program. The majority of the so that's happened over about a six month period really starting in about a month from some of the teams kick off in start.
Going to get full momentum kind of middle of May and that continues through the end of August and September so that was that would be spike.
Of accounts being added customers being added.
And one thing I'll note on that is.
What's important for our business for those of you not.
One of the calls or.
His sales rep retention and productivity is incredibly important we've had the best intentions to our sales force leadership and sales.
Year over year things.
So tremendous excitement around what the companies doing our product offerings the opportunity in the market. So you've got some really good momentum in that segment of business now we do create customers on a year on basis to our national inside sales, which is inbound itself a little bit of outbound sales.
That's very consistent business and it's about 45% of our overall sub bands. So it's a nice nice healthy Mexico, we do have a few pilot programs.
So I think that covered the first question. The second is because it is attrition.
Attrition.
It's not a seasonal.
It's based really on when customers are coming out of cohort. So we got terms they have different links.
We will see the our overall attrition peak and really the mid as part of this coming year to be ended the year and that's over a long period of time now will be.
Multiyear peak before it comes back down.
And then customers will add will come off their terms under the little bit of seasonality that happens.
Month, or two or three after they are put on it because we have some seasonality in the summer.
The attrition at dynamics will peak in 2020 during that time here, here's here's the great thing about attritions that add to that we knew the attrition numbers I'm several years ago again these are contracted.
Service contracts with our customers and based on the volume like like Scott had mentioned.
The contract maintenance.
This was this is an expected number for us it's right in line with what we hope for so that's.
Yes, the last thing I'll just balls I think we've kind of said, we think its attritional spiked somewhere in the 14 behalf that 15% and we still believe that's what we'll see here sometime in the big part of it.
2020.
And then the last part of the question, Yes, well, maybe you could repeat your last part of your question.
How the heavy opex level kind of change throughout the year.
Follows kinda like last year.
Yes, I mean again as Todd said kind of the way our business works you have the ramping process going on here really at the first quarter preparing for summer which is.
A large percentage of our accounts are put on really in the second third quarter.
Then you kind of have the and I asked channels that they do most of the counts in the.
First and fourth quarter, but in terms of Opex, you'll see that same type spend level, it's Barry.
Seasonal in terms of how we ramp up our business put on new account servicing of those accounts that happened as we've said earlier and other calls or is it a little bit of.
Usually a service costs by it gives you come out of that summer period, because those new customers that come on that first 90, 120 days, there's a little bit extra service as we onboard you know those those customers throughout the summer, but in terms of the way you should think about it it's.
Should fall are very similar trends to historical.
Yes.
Okay and then.
Do you see any I have to ask maybe she any possible impact from the Corona.
Maybe particularly on your ability to kind of get feet on the street, if there's any kind of restrictions on trial.
So at this fully.
From a sales perspective.
On the phone comps as part of its not just.
Well themselves, that's actually going into people's homes and physically installing.
The comprehensive systems that we're doing that you haven't had an impact at this point.
I'm going out into the summertime internationally doing.
The appointments in the consultative sales process now.
We're in the middle of doing that right now and it's not impact doesn't know what we know.
If there isn't much larger outbreak something happens.
In a bigger way than what we're seeing currently.
As every other business something could happen, but we're seeing nothing from that standpoint at this point in time.
And then Paul I'd add to that.
The guidance numbers, we put out in terms of subs in revenue you kind of to Todd point, we've taken that the information we have today, we kind of factored that into the most recent guidance, we put out around total portfolio subscribers at the end of the year in Canada revenue.
I think the other big point to drive home here is 5.8 billion a backlog that we talked about earlier.
And of the revenue for 2020 about 90% of that coming years already kind of contractually booked as Todd said. This is contractually. These costs. These customers are bought year contracts. So we know coming into January of 2020 that this is how much revenue based on our attrition curve than we historically have had himself.
Those type of assumptions.
So that revenue for 2020 is booked.
Gotcha. Thanks, and then last question is.
What's the earn out kind of impact on share count how should we think about you know that dilutive impact from from some of your stock Awards and what should we model for the year at next quarter. Thank you.
Thank you Bob.
In terms the earn out there there's three different earn out charges there was 12 million shares.
A price of 12 50, and again this will be lack over 20 out of 30 days that first.
Tranche was actually achieved on February 26.
And so then there's two ways.
Teen dollars of 117 50.
You can't say, whether or not the instructions will be met but.
But if they are than you would have another each one instructions will be another 12 million shares.
There will be distributed to the previous.
Holders of business startled chairs.
And then we'll put out.
If you found our 10-K than we'll have all the kind of fully diluted share account information of those.
Here shortly.
Your next question comes from the line of unmet Daria Nini with Evercore. Your line is open.
Thanks for taking my question congrats on the fourth quarter as an IPO company.
I guess, maybe to start with can you just touched on and what are your expectations in terms of free cash flow generation in Canada 20 on what the bond rate could look like in 2020 for you guys from a free cash flow basis.
And then related that when do you think you can get to free cash flow neutral position either revenue or timeline perspective.
So that's that's a great question.
And something that we are hyper focused on.
As we were on a road show.
Talked a lot about.
Back to the company is incredibly focused on reducing in if you can see in our numbers, reducing our we've got to gross creation cost and there are no gross and net Soc, which we've reduced net soc down pretty substantially over the last couple of years.
I'm not going to tell you had number but you people will be very pleasantly surprised by the changes that we're making some two financing structures.
The net Soc, which is going to be the biggest impact to cash usage and then are getting to getting to our goal of cash flow neutrality ER positive father.
Well, let alone a levered basis.
And again this is it's one of the top priorities at the company.
The other thing that everyone seems to be maybe just a slight restructuring some business just trying to rightsize overhead spend budgets projects.
Making sure that very judicious with what the capital.
So what I would tell you is.
We had on the road told people within about two years, we think we'll get to test, which we're going to that.
Got it that's fair and I guess.
Follow up on this coupons that you've had a fairly impressive reduction on your net subscriber acquisition costs over the last couple of yours.
Can you maybe just touch on how far can this number go in terms of how much more what did that optimize number could look like and how much more runway you have to bring it lower.
Well.
I'm not going to tell you a number we kind of mortgages and turn them.
Based on what we're doing right now.
It's going down and that's going to go down and fairly meaningful way compared to how it's been in the past.
And they will this we're going to talk about this.
Net secondly becomes very critical importance.
Well.
There is room and we're getting those and again this is to testing of pricing and packaging and financing structures and we've already launched its happening. So your real time, we've got very very positive.
So.
Got you may not trying to allude to question, but.
We were going to surprise Mark.
So.
Nice.
Yeah.
Fair enough they give just finally from me.
If I think about to calendar 20 guide.
I think if I look at the math in terms of the EBITDA dollars incrementally in the revenue that's going to be an incrementally I think you're going to do north of 90% could more than March enough revenue to EBITDA.
Hey, I guess, you decided to check me that math accurate and if so.
Collared, what's enabling such outsized EBITDA margin conversion and kind of 20 for you guys.
Yes.
So I think couple things revenue revenue is going up as we continue to add more customers and we're adding more customers that are taking more hardware. So we're recognizing more kind of the hardware revenue over time at the same time, we're taking we're scaling our cost I mean, if you think about it DNA for example, as a percent of revenues went up 350 basis points from.
Many 18 to 2019 as Todd said, we just recently took some actions that we think will.
Continued as a downward trend here that we can continue that.
In 2020, and then the other side of that in servicing cost continued to drive down servicing costs I think over the last 21 months. When it peaked back in first quarter of 2018, I believe we're in the $17 or range come in.
13th 53 range roughly EUR 51, that's like almost $4 a mountain servicing cost and so if you think about that driving to the bottom line, that's 50 $60 million of additional margin.
Goes flows rights to the bottom line.
Yes, so it's not really it's not really 90%.
Margin, it's all dollars, we're getting more margin out of almost like you said that service cost reduction net flows across all of the revenue and then scaling gionee.
Leveraging gionee and actually we are actually reducing.
Students were going to reduce year to year over year on a real basis on an as a percentage of revenue going down.
Nice way, so and we're just we're just getting operational leverage and business stage had been on the service side.
One thing to note. It's actually most important question to ask is how are we doing that and the reason that we're doing we're able to reduce the servicing costs, we own the entire technology stack.
Is this a proprietary operating system.
We managed to operate the from where the software the product development installation processes, we control. It if we did not and let's say we rented or.
Offering our operating system from warm dot com and product company all another other people, we could not the Columbus.
It's critically important is on the phone to understand that different zones, our entire technology that doesn't mean that we won't.
Partner with Amazon or will some of the hardware pieces that we control the entire process. This is a very large scale concerted effort from all parts of business to drive down servicing cost you on your updated software upgrades.
Installation protocol service deployment, Kurtz protocols and Theres a whole.
Myriad of things that we've done to focus on then we're not done we're not done constant trying to make sure that that's happening because the truth of the matter is your for servicing costs going down the products working better it's more reliable its online more and it leads to customer satisfaction. That's the action that's a core driving renter great quality service.
So we position due to.
Perfect. Thanks, a lot.
Unit.
Your next question comes from the line of Kunal Madhukar with Deutsche Bank. Your line is open.
Hey, Thanks for taking my questions a few if I might as well.
One with regard to that side of the Guy this looking toward that.
What cured initially talked about.
In November 2019.
Should I take it does get on the difference is basically just.
Prevention in fact, I don't know why this as you kind of look at it.
The second would be.
The ex Tac and completely get that.
As you can aren't accomplished the margin improvement.
The user user benefit our user satisfaction, but if you could informed except so.
How much is the cost of that tech stack, I mean, I couldn't quite figured out exactly where the product development expenses, where and how much the product development expenses, let him know enough for the year basis.
Let's start with that.
Thank you.
So I think if I understand your question on that first on the 2019 guide terms of where we can you.
Then.
The one I'd say on adjusted EBITDA. If we start there for example, I think we guided for 14, we actually came in at or 21.4. So so was above expectations. There and then in revenue we kind of signaled in the third once we get third quarter back in November we had some revenue adjustments related to.
The treatment of the retail installment contracts and that was about 9 million $9 million to $10 million in 2019, one that would flow through and and kind of impact those projections that we had out there around 20, Nike and then you'd see a little bit that flow into 20 to 28 and also there's a little bit more pleasant to 2021.
So that that's kind of the impact there in terms of 20 I think the other questions rounded grown a virus, we did kind of take 20 that impact again this top that taking what we know today.
And.
Rolling all that together turns of our sales force been able to go out knock doors are installers building on People's homes install our systems you kind of tick took what we know again today and put that into our guidance and that's kind of like you see a little bit of up probably a lower in terms of and Thats, new total subscribers not new starts but full started excuse not to oil and then also there.
Revenue guidance that we put up.
And then I think the second question around the cost of the the platform and the technology stack if that's.
Correct, yes.
Yes, and regarding the cost of the technology stack, so you'll see.
We don't disclose how much we spent specifically on product development within our our DNA, but those costs are embedded in and our overall DNA expenses.
There are important expenses for us we're very focused I think we produce as much and anybody per dollar spent.
In the industry and.
And so they're embedded there.
And then the second piece.
The operating cost of the platform that we have.
Included in our servicing cost news, we don't we don't break those out.
So as we we definitely improving to kind of the service cost.
Margins and improvements.
It's a massive massive advantage to.
Owned and controlled the entire stack well, it's not just the technology stack, it's be operational expertise being able to consult due to consultative selling home and just as importantly, the actual installation process only control that with their own employees trained by US single system single platform.
When the ongoing service, it's all in all kind of works in concerts, it's all it's incredibly important.
Now looking at that and then.
Well up one gigawatt understand the whole client.
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The Amazon Green ex announcement with regard to been on the home home automation home security when they said that something is becoming data this year through authorized dealers and what have you have you seen any any chatter in the industry with regard to what Amazon, maybe trying to do there and what their what their side.
Two could be.
No. So here's what I would say we've done that we've got a lot of people.
Enter into the smart home space in different areas in different ways single point solution companies both the number.
On an out of business others that are DIY platforms, which are different than what we do I mean this this is white glove professional.
Seamless trying to.
Easy easy, but in service for the consumer for comprehensive Smart home.
Really was purchased by Amazon I think has done a good job. So in the single point solution with.
Well the care, where spreads are going to get brand.
The did the launch into what we do.
Actually entry People's homes installing.
This is what we did not want anyone else does 15 pieces, which hardware in every single one average it's it's a lot of work. It's we've been doing this for 20 years. So.
So I don't know what they're going to do what's your the chatter and we always pay attention now we're not figure to watching with interest is doing but we also understand the complexity of what we do.
In the focus that it requires to deliver excellent service to our consumer base, so well what kind of Watson c., but before that were the median smart home provider. We've got the most experienced the largest customer base in the smart home as a service.
World.
We feel very confident about what we're doing well with Boeing or our path to our future. So we'll get taken too but.
No and actually Havent heard that much chatter in the last thing I would say is.
I want to own a unit of one basis and this is this is an interesting part of this.
Business. This business opportunity you have to earn a customer one of the time you don't just download an app and magically how smart.
We we don't lose two people on on the face to face basis with the consumer we're very very good to what we do we've got over 10000 professionals, which inside of.
Our hyper focused on delivering that those most comprehensive investment on the state that's out there so.
We there's there's some competition out there to get done were very good.
Great. Thank you so much.
Thank you.
Your next question comes from the line of at Mally with Imperial Capital. Your line is open.
Great. Thank you I'm, just with respect to sourcing your hardware what is your supply chain exposure to China, specifically and have you seen any disruptions and sourcing hardware.
The second half of the question is do you also have any alternative and contingency plans in place for sourcing hardware. If there was a disruption.
Yes. This is Scott we add.
Early on in the tariff discussions as we move.
Effectively all of our finished goods manufacturing out of China and so.
We have.
Very very little and finished goods that comes out in that country enforce and like the rest of the consumer electronics industry. Many of the sub components are made in China.
But we do plan for our summer ramp of Todd talked about the seasonality of the business will tend to build.
Buffer inventory going into that so were relatively good shape has a lot of bodes I'm components have been in inventory we of course, we're watching it constantly.
The only potential risk, we may have kids and.
Shipping cost to continue to expedite it can get all the goods here on time for our summer season, that's built into our forecast.
Okay.
And.
Beyond you know any issues of the trade war atmosphere needed disruptions due to the Corona virus specifically.
And we paid very close attention to what we're getting out of our suppliers everybody's been trying to see how quickly and the manufacturers are coming back to work with velocity is that's coming out of factories and we've seen that and.
Stepping up over the last few weeks and.
Clearly, it's been a little slow because corona viruses and add people and taking longer from the Chinese new year to go back worth is they have and figured out how to deal depending on location within the manufacturing facility had built around virus. So we've seen a little bit of delay that as well would potentially drives some of the the it.
Additional costs in freight for us.
But but we are seeing supply come out.
Okay very good thanks very much.
So.
Your next question comes from the line of Todd Morgan with Jefferies. Your line is helping.
Thank you. Thanks for the question graduations being a public company.
I was looking at slide 24, which is the cash flow side and was hoping to ask if you could help me sort of bridge. The Q4, 2018, Q4, 2019, Cashel numbers operating cash flow and investing cash flow is roughly flat over that period. Your EBITDA was much higher cash interest a little bit higher.
The looks I would presume that the Soc numbers were probably on a net basis lower given the.
Progress you've made on that front.
Other where their special additional costs or something that came in this fourth quarter based on the.
The IPO in the merger or were there other items that would have caused us to be again, roughly flat year over year. Despite the EBITDA growth.
I mean, we didn't have some cost related to the.
Thanks action going on in the.
Fourth quarter it's.
Probably Todd we could take this offline Bobby easier for me to go through that I don't have all the numbers in front of me in terms of a detailed behind us.
I was just wondering if there is like for example inventory build you'd mentioned trying to try to make sure that you had components on hand, if there was something like that going on but that's right.
Certainly talk offline just secondly quickly you mentioned the cash flow goals in the next two years trying to move towards a deposit timeline is there any different thinking about how you might go about financing any needs I mean, given what you've done in the past the simply kind of periodically tapping the debt markets is there any thought different than that thanks.
There are also the.
What you're going to see is.
We are going to continue to utilize the consumer financing model, we have but in a much greater way.
And changing kind of the mix on.
What what we're putting on our books and what being financed through citizens Huber partners.
Just pushing for cash.
To the company sooner maybe.
Maybe I just sort of sense.
Very positive.
And.
That is there potential first too.
The path to markets again, what we aren't going to do some form of refinanced the ship or into the markets strong R 22 bonds.
And again on the hope would be and again this is a basis gold we wouldn't ask what end markets.
Yes, or get new debt do double business.
That's good I'm, assuming that's compared to previous years, and we've trended well, we continue to improve would be an ambitious.
We're very focused.
If not this year will be next year.
Great. That's helpful. Then thank you and good luck.
Thanks, Tim.
So.
Mhm.
Just want to say thanks, everyone for joining the call. It a lot of view on the phone then weapons for years, maybe on the debt side, there's a default company those that are in the company.
Thanks for coming into paying attention. We're excited about how do you watch and see what to do.
Sure.
Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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