Q3 2020 Vivint Smart Home Inc Earnings Call
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Good afternoon, everyone. Thank you for joining us this afternoon to discuss the results of doesn't smart for the three and nine month periods ended September Thirtyth 2020.
Joining me on the conference call. This afternoon are Todd Peterson, the CEO and Dale our Gerard Vince CFO.
I would like to begin by reminding everyone that the discussion today may contain forward looking statements, including with regards to the companys future performance and prospects.
Forward looking statements are inherently subject to risks uncertainties and assumptions are not guarantees of performance and you should not put undue reliance on these statements I.
I would direct your attention to the risk factors detailed in our most recent annual report on form 10-K.
And in our quarterly reports on form 10-Q issued in fiscal year 2020, including for our most recent quarterly period ended September Thirtyth 2020, which we expect to file on or about the date of this earnings call. Please.
Please be aware that these risk factors may be updated from time to time in the company's periodic filings with the Securities and Exchange Commission and.
And that the realization of any such risk factors that could affect our future results and could cause those results or other outcomes 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 GAAP are available in the earnings release and accompanying presentation, which are available on the Investor Relations section of our website at <unk>.
Www Dot <unk> dot com.
I will now turn the call over to Todd.
Thanks, Nate and welcome to everyone joining the call. This afternoon we.
We're pleased to report another quarter of very strong performance our results underscore the importance of having a proprietary fully integrated AI driven smartphone platform.
Which is the backbone of our predictable and consistent recurring revenue model.
Touching briefly on a few financial highlights for the quarter total revenue and total subscribers grew by nearly 10%, reflecting healthy consumer demand for smart home and security services, along with our ability to retain a higher percentage of our customer portfolio.
Our adjusted EBITDA margins continue to build upon previous quarters and expanded to new highs.
Finally, we have stated our desire to operate the business at a more cash efficient way and we are tracking to be cash flow positive by more than $100 million in 2020.
As we continue our focus on optimizing the business, we saw solid improvement across the board in many of our key performance metrics for the quarter note.
Notably the last 12 month attrition rate improved by nearly a full point in the quarter and continues to exceed our forecast.
Our LTM attrition rate for Q3 was the lowest in the past seven quarters and I believe it speaks to the fact that our core value proposition proven over two decades of reliably taking care of our customers and their families is as relevant today as ever.
Then it's fully integrated proprietary platform provide smart security and peace of mind to nearly 1.7 million customers across North America.
Our customers interact with their systems on average 12 times every day, which provides our.
Hi, based platform with over 1.5 billion pieces of data daily.
This creates a real time feedback loop, which enables us to proactively react to any issues happening in their homes.
In many cases, we could identify an issue and are already working on a solution before the customer recognizes that something might be a miss.
By controlling the entire customer experience from the design of the software and hardware to the sales installation and service throughout the life of the customer we're able to provide a robust reliable and elegant solution to our customers. We believe that homeowners recognize the value of having increasingly complex systems professionally installed and serviced.
In this do it for me age we're living in we believe we have been the leader in revolutionizing the smart home industry by delivering what consumers demand.
Fully integrated smart home and security solution does professionally installed and seamlessly managed.
We believe this consumer demand is proven in our impressive growth.
We added nearly a 127000 new subscribers during the quarter up 14% from a year ago and driven by positive contributions from each of our major sales channels.
In today's environment of uncertainty homeowners are spending more time thinking about and investing in their homes, which we believe is a very positive sign for the.
Our national inside sales channel continue to stand out performance generating 32% year over year growth in new subscribers.
Meanwhile, our direct to home sales channel rebounded nicely from the coveted related constraints earlier in the year growing new subscriber adds by 5% versus the prior year period.
With coverage over 98% of ZIP codes in the United States, We believe that Devins Premier model isn't the best position to deliver a full smart home and security solution to virtually every household in the us.
Consumers continue to expect increasingly complex smart home solutions that include integrated door locks exterior cameras into your cameras lighting controls and thermostat set of professional installed monitored and serviced but we're just getting started.
Even though we have nearly 1.7 million subscribers, our unaided consumer awareness is in the low single digits.
The fact that we have been a leader in the rapidly developing smart home market, while relying mostly on grassroots efforts by our sales teams makes US believe there is a tremendous upside if we can increase consumer awareness on a national scale as we look forward to 2021 and beyond our focus will be on our key objective of building a different brand and investing in new products.
Services and technologies.
We want to do a better job of telling consumers, who we are what we do and how we can enhance our lives by delivering the convenience security and peace of mind they desire.
In addition, we will look to continue our leadership and differentiation in the smart home industry by increasing our investment in technology and new product development to ensure that we're on the leading edge when it comes to deliver the products and services consumers want we believe it is the clear leader in the smart home and security solutions market, we're nationwide to fully integrated smart home and.
Security provider and we have an opportunity to expand our business and accelerate growth by investing in our brand and technology and helping people understand the incredible value that doesn't brings.
I believe the company is ready to take the next step and we're ready to handle the inevitable growth that will come with it we have the technology and services that we believe consumers would absolutely want if they just knew about them.
So we're excited about getting the message out and we're excited about the possibilities and opportunities that exist for Vincent.
I will now turn the call over to Dale to go through the specifics of our strong third quarter results as well as provide our updated guidance for 2020.
Thanks, Todd I walk through the financial side portion of the presentation that we posted today in conjunction with the third quarter earnings release as Tom mentioned during his remarks, our results for the third quarter were very strong across the board.
First on slide six we highlight a couple of the key data points related to our subscriber portfolio.
Total subscribers at quarter end grew from 1.56 million to 1.69 million year over year or 8.2%.
Total monthly revenue increased by 6.3 million were 6.3% with an average monthly revenue per user or am are you have $63.79.
On slide seven we highlight our revenue for the three and nine month periods ended September Thirtyth.
For the third quarter 2020 revenue was $319 million up approximately 10% year over year.
The growth in revenue was primarily attributable to an 8.2% increase in total subscribers I.
I would note that the third quarter 2019 revenue includes a $9.1 million reduction to revenue, resulting from a change in estimate related to Rick revenues recorded in prior periods.
Moving to slide eight.
Adjusted EBITDA increased significantly in the third quarter and year to date periods.
The key drivers were continued scaling of our cost of service our subscriber portfolio.
Vince portion of subscriber acquisition costs related to the origination of new subscribers and general and administrative expenses.
We grew adjusted EBITDA by 53% to $154.5 million in the quarter, while expanding our adjusted EBITDA margins by nearly 1400 basis points to 48.4% of revenue compared to 34.6% in the prior year period.
This is clearly a great result, and it's a function of a lot of hard work by our entire organization.
Although not shown on this slide covenant adjusted EBITDA, which is the calculation used for our debt covenants was $212.3 million in the quarter, an increase of 42.9 million or 25.3% compared to $169.4 million in the prior year period.
On slide nine we highlight some of our new subscriber metrics. This subscriber originations were 126847 for the third quarter.
Which reflects outstanding results from a national inside sales channel and a nice rebound from our direct to home sales channel. Following some of the COVID-19 related restrictions earlier this year as the pandemic started to take hold across the U.S.
Overall, new subscribers grew by 13.8% in the quarter versus the prior year period.
We continue our focus to improve the cash flow dynamics of the business as evidenced by the 89% reduction irix during the quarter.
While this has had some impact on new subscribers by shifting a greater proportion of our subscribers away from rics and towards our financing partners and painful arrangements were able to increase the amount of cash collected at the point of installation, thus, reducing our net subscriber acquisition costs and significantly improving our cash flow dynamics.
Yes.
Moving on to Slide 10, we will cover our net service cost per subscriber and net subscriber acquisition costs per new subscriber for the quarter.
We continued our trend of year over year improvements in net service cost prescriber moving from $16.38 in the third quarter of 2018, the $14.43 in the third quarter of 2019, and now down to $9.82 in the most recent quarter a six day.
Holler and 56 cents improvement versus 2018.
This continues our record setting trend of achieving new loads and service cost per subscriber and it demonstrates the advantage of Vivants fully integrated smart home and security platform, which encompasses the software the hardware the installation and ongoing customer support.
The result is that our net service margin continued its positive upward trend moving from 68.7% in third quarter of 2018% to 72.4% in the third quarter of 2019, and now to 80.1% in the most recent quarter.
These efforts contributed significantly to the improvement seen in our adjusted EBITDA during the quarter.
It's important to note that given the seasonality how we generally put on new customers, particularly in the summer we.
We tend to see service cost increase in the latter part of the year. Additionally, as mentioned before we believe service calls have remained.
Abnormally low in the third quarter two concerns related to the COVID-19 pandemic.
So while we're really encouraged by the current trends and the corresponding benefits to our margins, we wouldn't anticipate sustained full year results at the 80% level.
On the right inside of the slide our net subscriber acquisition cost for the last 12 month period ended September thirtyth were $209 versus $1033 in the prior year period.
The decrease represented nearly an 80% reduction as we have nearly eliminated the number of new subscribers that are financed via ricks by shifting to a higher mix of customers utilizing our financing partners are paying in full for the purchase of their smart home products.
The year over year comparison also benefited from pricing leverage at the point of sale purchase of products in installation.
Moving on to Slide 11, we show our typical subscriber walk the illustrates the changes in total subscribers at quarter end and our attrition rate trend.
One of the biggest highlights for the company continues to be the reversal in our attrition rate, which was lower sequentially by 90 basis points and fell to the lowest rate in the past seven quarters.
The third quarter measurement period benefited from a 2% sequential drop in customers that were in the end of their initial term life cycle phase.
While they end up initial term mechanics helped our portfolios continued to perform better than expected in terms of the number of subscribers canceling and other leading portfolio indicators through October.
We believe that the pandemic, social unrest and improve product performance as evidenced by our lower net service cost per subscriber are having a positive impact on our overall attrition rate.
Before we move to our updated outlook I'll point out that several factors tied to our strong third quarter performance leave us feeling very good including our overall liquidity position.
Stood at approximately $630 million as of September Thirtyth.
Our third quarter operating cash flow was strong for the three month period ended September Thirtyth, we generated $142.5 million in net cash from operating activities compared to $8.2 million for the same period in 2019.
During the quarter, there were approximately 1.7 million warrants exercise, which added approximately $19 million tourists to our September thirtyth cash position.
Finally, let's move to slide 12 wire will address our updated financial outlook.
We believe that the fundamental characteristics of its high margin recurring revenue model our compelling more.
More than 95% of our revenue is recurring which provides long term visibility and predictability to our business.
Many of our new subscribers initially sign up for five year contracts remain on the Vivint platform for approximately eight years producing significant lifetime margins.
Despite the many uncertainties pertaining to the COVID-19 pandemic, our recurring revenue model has proven resilient and we remain comfortable with our previous revenue guidance.
Our better than expected attrition rate performance and improving unit economics have prompted us to update our guidance for total subscribers and adjusted EBITDA.
We are raising our guidance for total subscribers to between 1.66, and 1.70 million versus previous guidance of between 1.62 and $1.68 million.
We are reaffirming our guidance for total revenue of between 1.23 and $1.28 billion.
We are raising our adjusted EBITDA guidance to between 570 in $580 million versus previous guidance of between 555 and $565 million.
Thanks to everyone for joining the call operator, you may open the line for Q and a.
As a reminder to ask a question no need to press star one on your telephone withdraw your question press the pound or fashion.
Please standby, we compiled acuity roster.
Your first question comes from Paul Coster with Jpmorgan. Your line is open.
Thanks, So much got three quick ones first of all can you talk to us about the refinancing plans.
Yes, Paul Thanks for joining the call I think you know we're actively monitoring the markets to capital markets said.
Wanted to get the border resolved, we think there is strong.
You are helpful in terms of whatever we decide to do but you.
We're actually monitoring and when we're ready, we'll we'll come out to the margins.
Okay got you the the service costs are going up in the fourth quarter. Although I think you said that they might go off in the third quarter and they didnt.
So obviously you got a good handle on things, but also notice that the average monthly revenue decline can you just talk us through that dynamic.
Yes, So again, Paul I think and we talked about this a couple of Paul over the last couple of calls.
We purposely at bringing down kind of the average subscription multi right because we're charging more up front. When you look at the overall out of pocket for our customers actually it's actually increased year over year in terms of.
The total dollars related to the amount they pay for the financing piece, which goes to the financing partner what they are paying us.
And so what we've done to ship the little bit of what they were paying off in terms of that description about each month, so to that they pay the financing partner, but we're able to actually.
Bring more cash up front, which is why we're reducing the level of cash we are in terms of cash from operations, that's really the driver behind that.
And to add to that this is today, Paul how you doing hi, Tony.
That's the two and nine.
Subscriber acquisition costs is a direct result of that so this you couldn't be happier about about that but it does you don't understand it. We appreciate question that it does like revenue per subscriber number it's actually up selling more hardware than we've ever sold more high margin upfront and so the business as well.
Working very very well.
And then it becomes.
That's helpful I get more cautious, we we think that Theres still.
Calls in terms of truck rolls to Paul's give me a call centers are still down somewhat and what we think would be a normal trend and so you know.
We do expect at some point.
Those calls will come back, but we think there is a big part of this is where our AR.
Our new hardware or software or Mars, performing better and that's also a big driver charge there.
Very excited about where that serves boss is our subscriber basis and working very hard to keep falls off but still maintain a very very high quality customer experience.
Gotcha.
It sounds like you feel like you could be doing so much better food better on assisted brand awareness out there and there was this sounds like you've got these new products and services in the pipeline I think most recently the insurance product one that you're talking about is that still sort of first in line.
And should we expect some big splashy events.
To get the brand out there or is that most all of them.
Thank you.
So speaking to the branding that again, I said pretty clearly that and so we're positive that we are going to be cash flow positive as a company.
On a levered basis, which now we're kind of we've kind of put it out there we're going to we're promising 100 million to positive cash flow on a levered basis with where.
We are very very good about many of the markets are too but.
But that we are and by the way that includes our.
Money, we are going to spend in Q4.
On on launch marketing launch now we.
If you know anything about our company, we don't so we'd like to test.
Spend and test and test and analyze and so we're going to be very.
I guess strategic and clinical about how we spend dollars on the marketing front, you know what I want to say, how does that and if.
If we can get from that so we are launching in Q4, a branding and marketing effort nationwide.
We've been working on it for quite some time and we've known for a while we are going to be cash flow positive for the year.
So that we believe that's going to give us some great tailwind now as anyone that's seen branding marketing campaign AD campaigns for Nash.
And goes it takes all right.
This this is something you've got to be committed to four years not months.
And.
Again, we've got to be very surgical and strategic about how we spend where we spend what we say how we present the products and services. We have the the consumers, but we are we are launching that I think in the coming weeks, you'll see something happen hopefully.
And then.
The next question is what Paul again that was it.
No no there's something else then new products insurance.
Insurance birth first mine or is there anything else coming on.
So we are so we are still.
Very pleased with the way insurance is going there again, we're not announcing numbers yet.
We're we're being very.
Patient about how quickly we launched that product, how we partner, how we position ourselves to our consumers, but I can say this.
We believe we've got an incredible advantage because of the view we have into the data that is delivered through our smartphone platform that is proprietary to Devin.
It's it's and I say this and.
And with everything this is going to be a huge advantage for our customers.
Because they have different product.
When they believe in our services not just smart home technologies, but services that we have and are going to be delivering you are going to be the recipients of the benefit of that so we're really excited again, maybe at some point next year, we start talking about the numbers.
And the relevance to the future of the business, but commit.
Committed to it.
We continue to test and expand that that product and service.
Thank you. Thank you so much.
Thanks, Paul.
Our next question comes from Eric.
In Stanley Your line is open.
Hey, guys good evening and congrats on the quarter is.
Really nice to see and I guess I just wanted to touch on the attrition rate, obviously, you guys, it's coming down.
I would love to hear your puts and takes what you're hearing from.
What you're hearing from your from your base in terms of.
What's keeping them on board or I guess said another way, what what's causing them to not roll off the platform.
And that kind of how thats changed from kind of your guys commentary, maybe two or three quarters ago, where you were talking about.
Attrition rates, possibly being higher into the end of the year and then I've a follow up.
So this is an attrition is an interesting thing there's there's no one.
Silver bullet in attrition, it's a lot of little points of interaction with customers.
That determines their life cycle.
Awesome.
We've and we've continued to improve and again. This is really really important is the differentiated with visions and everyone else, we create our own customers from a sales perspective.
Professionally installed hardware that are engineers of design.
And have written the software and firmware for we own our platform, that's just incredible cycle that.
And it's just feedback meet that no. One else has at this point others are trying to recreate or partner to recreate that but its all its lots of little points of contact and knowledge that we have through the reliability of the product.
It's how we answer calls it is how we do installs installation protocol service protocols.
And then and then this is just maybe.
Maybe it's not obvious, but it's obvious to us because we've been through a few downturns.
Our product and services when I'm talking about smart security generally has done very very well through every downturn at least I've run the company.
That's right. So the last downturn, we fared very well and I think the general if you think about the burglar alarm security industry.
They've done well also I am as far as attrition goes I mean, I think people.
Historically, when those things happen they want to protect our largest investment investment was just either home there.
Their families the assets inside of those.
Provide that.
And then you know with this current environment coded and people working from home. There's this incredible reconnection with the home.
Investment in kind of thought process around how people live and operate in their home how they engage with.
They're engaging with food delivery grocery bill.
Package delivery increased demand for for all of those services and how we integrate with that for consumer making them safe and comfortable giving them. The knowledge that they wouldn't have without our services. There's all kinds of things that are benefiting our company today.
And we're happy to do that because this this environment is.
Well scary, sometimes for people and this provides nice piece of mind Smart security and here's the great thing is well one I hope things.
Home down on all fronts.
For everyone worldwide.
The I think that didnt engagement with our product and services and on an individual consumer basis, it's been incredible and it's going to be remembered by our consumers and then again I think you layer on with that the the fact that we are now starting to branding and advertising campaign really describing who we are what.
We do how we are differentiated and the value proposition that we deliver we think we've got some good wins.
Yes.
Also note really helpful. Thank you for that color and then I guess my follow up would just be you know.
Why raise your subscriber year end subscriber targets, but not your revenue guidance just what was the thought process behind that at any kind of moving pieces that we should be thinking about there. Thanks.
Yes, I think.
Again that right that subscriber targets based on the fact that attrition is.
Running a much.
Much better than we had in our forecast.
So while our revenue guidance ranges are we feel comfortable one.
You know.
The number of subscribers, increasing doesnt make because we've got a pretty good size range, there and were given in terms of of million dollar range.
We're within that range, even if the subscribers.
20, or 30 or 40000 more subscribers, we feel very couple I mean, if you go back a revenue because it's the recurring revenue we know going in even started to go into next year. We have a really good line of sight into what the revenue number will be it's a little bit of moving around subscribers in terms of Polishers ours I think the other thing was we fill costs more.
Callable today, where we sat here the first week of November.
Than we did before in terms of the subscriber number knowing how the metrics are working how attritions perform into quarter, plus or a quarter or so into the fourth quarter. So that's the reason why we made that.
Sure.
Awesome. Thanks, Congrats guys.
Thanks, Eric.
Our next question comes from on that Darren.
Diane Evercore ISI your line is open.
Yep.
Thanks, and thanks for taking my question guys I guess couple of usable Todd full stop you've talked a fair bit about just increasing your brand awareness and recognition.
I sort of get and understand the strategy that but could you just touch on have you tested this in smaller region smaller cities.
So one of those metrics look like to you and then as you think about skin this up to the extent you're talking about it.
What does that investments looked like from a cost perspective, including the 21.
Yes, so we have we havent.
Tested the type of branding and advertising that we're going to do but.
As you all know we do and we have an inside sales script, it's about half of our.
The half of the consumer ads on our our customer base annually. So we do we do spend money on branded advertising, it's more lead gen.
Type advertising. So this is going to be slightly different more branding.
Styles. So we have not yet done that and that's why we're not going in full force.
Going to test in that but on a national basis and from a from a dollar spent one branding it's much more expensive to be up to go into a city or region.
Then then on a national basis on a spend so it is.
That's where we're going nationally not just on a local level.
Since.
Got it so.
That's fair.
Hey, guys I was wondering if there's a way to dimension what that cost structural cost what looked like around that income the 21 and.
And then I guess with Dale.
Net service margins.
Proved rather dramatically once again.
I understand some of this is more transitory nature, perhaps people don't want folks to come to the houses as much but I think if I look at the improvements you guys have had over there on a year over year basis.
How much of that is structural versus something that's more transient that could go away in a postcode won't if we get that ever.
Yes, So I think we believe that again, we've been very focused on this and if you go back 24, Botswana servicing costs was call it high $18 range $17 range.
And this is the benefit of having this fully integrated model, where we own the software we own the product we own our hardware we do the sales we do the installation all that feedback loop that we have a constant feedback loop that we have allows us to know what are the issues and as we said one of the big issues and.
One of the big product set that people want in their homes is video campaigns, whether its indoor camera outdoor cameras barbell cameras as Todd said earlier, there's lots of uses will be.
With a video and we knew that was submit that connectivity issues were a big part of that was we are driving up calls into our call centers, which are driving calls in and that related to drive us to have to roll trucks out to People's homes. Those are expenses you have to actually roll go out to People's homes and fix those issues. So we believe by rolling out some of the new products.
We rolled out some new camera pro.
Products, New doorbell camera weve rolled out a new hub, we've upgraded the farm wired software associated with that.
Those products that service and we've done a lot of work around the technology that we have from our tools when we're installing stuff around hey, what's the Wi Fi connectivity in this part of the house or just part of being outside on the lock you know that this far corner of the home and making sure that we're more installing equipment at hardware in those homes.
It works and that there is wide buying activity and then we make sure. It all works together before before were leaving so what I think you're seeing is there is a structural move but the lower and in terms of servicing costs will be lower.
No not at all I can't tell you on the call today, how much that is what we believe that there is definitely that movement, because we're seeing less calls coming in and then we do know too because that gives feedback loop. We have because we have on this whole thing is that we do know that type of calls are coming in what those what are those issues and we and we can go actually go work on those issues.
There again updates the farm where software things of how we're installing the product and books home.
So we think Thats a big part of it again, there are some part of it thats Colbert related but but fundamentally we believe that we have this product in our services that weve really are starting to buying tune in terms of the cost to service those related to again calls coming in related to issues with the products or.
Again, a lot of that was around video, which we spent a lot of time and efforts to correct. Because ultimately it I think this is also steps the attrition that we've talked about on an earlier question.
If you get on your phone or you pulled up on your computer. However, your access independent system and the cameras on online or they are going offline.
On behalf of the system work versus today.
You get on and the system works. The cameras are out there you can go quickly look at the advance or you could pull it comes up that someone is that your front door delivering a package. It works very well it seamless your experience that's going to drive customers to stay longer on the block.
Perfect. Thank you very much.
Hey, thanks on it.
Our next question comes from so that it has yes with RBC. Your line is open.
Great. Thanks, let me try to.
Could you run through why the subscriber acquisition cost decreased so much.
What.
How we should think about sustainability of that.
That was a material decrease and then.
The second one is.
How are subscribers or potential subscribers.
Responding to your meal pricing.
Pricing plan.
The change in the pricing plan and.
Yes, yes.
Please.
Sure so.
I'll start here that taught you can jump in if I add up everything I think in terms and ask him to start in reverse order I take your second question first.
And then that drives incidents and the first question I think in terms of the pricing model that we have and.
We're always looking at this pricing model by the way will and I think you'll see us make tweaks to it as we roll into two and that 21, we're always as Todd said, we test a lot of big So we tweak things, we keep tweaking until we find the optimal but I think in terms of the acceptance from customers I mean, we grew subscribers.
14% in the third quarter year over year, we continue to add new subscribers and I think I think one of the things I'd say is.
Inside sales is where you're getting leads coming from the internet. So customers are going out on the Internet. For example, maybe they're searching for smart home Smart security security and there are going to see other people's offers out there by the way as they are doing that and that channel is growing I think it grew 32% in the quarter. So we think customers understand that big.
The transparency of it by the way they like to know Hey, This is what I'm paying for their equipment Thats going home I think this is the equipment that I want to buy its not the hey, just get stuck with the package of things that you don't really want in your home whether its sensors whatever they're picking exactly what they want as Todd mentioned earlier, they are taking more equipment today than they've taken in.
And Pat undertaken smart home equipment, it's not just a sense or here in the door window its.
Outdoor cameras, the doorbell camera store like subscribes to brokers, it's really those things that help them have better management of their home and.
And so that's that's we think it's been received very well in terms of the customers.
Taking that from bulk of our channels in terms of the drop in net Zack.
We kind of headed to this on the last quarterly call.
There's a couple of things going on here, one weve reduced risks substantially if you go back to last year and a third I think is down 89% year over year in the quarter and so if you recall bricks or customers that we were basically financing and putting on our balance sheet. So we got no money upfront from those customers versus day basically 99% of the customers that we.
Put on today are we're collecting money upfront either it's coming from them financing through one of our financing partners for their just paying for it out of their own bank account.
So that's.
Fundamentally change in the amount of money that we're collecting upfront in terms of those customers.
And what you're seeing is again this is the LTM calculations. So what you had and when we dropped from nine I think it was about 950 in the first quarter.
Quarter to 630 in the second quarter and now we're down to.
208, $209 range this quarter.
It because you're having those orders that higher Rick percentages that are falling off as we recalculate this out.
So it's it's fundamentally change the business is really driving the cash you know thats. The cash production is coming into this we think it's a it's a it.
Wasn't something that we needed to do and it's really change and frankly, allowing us to do some of this investment Todd talked about in terms of a branded marketing and some of the other things we want to go do here in terms of how that looks again, we'll tweak things, but I think again, you'll have another quarter in the fourth quarter that as we kind of report.
It out here in the next when we report fourth quarter have you know call it 8% to 12% risks in that quarter.
And those will fall off and if you can kind of go do your math here, but we have 1% Rex again that number is probably going to continue.
So the answer is it's a good credit it's sustainable.
So I think we're kind of danced around this for a few quarters.
Our business model is working the way, it's working and we've said it was going to come down from 1000, we've not.
And that number but we are very close to cash flow breakeven up front when we create a customer I'll just say it went up to dance around it or think about the future anyone on the call.
So which is an incredible dynamic for our business compared to anyone that on the call that.
Listen to us through our earnings call back when we were consumer of debt. It was 2200, our gross creation costs was 20 gross and net was $2200.
Subscriber acquisition costs.
So now it's so this is an incredible turnaround youre seeing the cash dynamics for the business, which also.
Is because of the reduction in service costs, which is also.
Because of the reduction in overhead if you look at our overhead numbers compared to the past years, we've been incredibly focused on.
Being a very lean company spending where we need to reinvest to go we think were to get growth better technology, better software or firmware better service delivery. So we.
We've been we've been busy in the last couple of years and.
We're we're finally seeing those results.
And again back to the.
How do we grow the business more im continued enhanced products and service product and services. The consumers want demand and then really go tell our story is that.
Someone's going to probably outcomes I'm surprised going house who's your competition. Our competition right now is a lack of awareness investments. We should we just we have a incredible business north of $1 billion of revenue incredible margins, great service delivery and.
Nobody knows who we are.
Nobody, but it's I mean, it's it's seen.
Single digit consumer awareness of our brand.
And Pete when people really do understand how incredible it is what we can do inside of their home and interact and engage with the way. They are now living their lives.
End the value trough that we deliver we're going to we believe we're going to get some wind.
From that perspective, and so works and again going to take time, its not going to be overnight.
We're obviously patient and committed so we have we're excited about what's what's ahead of us.
Okay very helpful. Thanks, Doug Thanks.
Yes.
Our next question comes from so no magic bullet.
That's a bank your line is open.
Hi, Yes. This is a core Sean for Carol I, just have two questions I guess first question being.
Looking at third quarter versus second quarter to.
To be maybe a little bit deeper into buyer behavior than anything.
Any changes in product mix that you guys saw in Threeq versus Twoq and then also on the topic of competition actually.
Looking at looking at the landscape any new trends that you guys are seeing in terms of the competition.
As it maybe relates the Ams ordering X system or coupon asked on that any color there would be great. Thank you.
Well I'm going to I'm going to talk first about the competition just because I said something you asked the question anyway.
We were always paying attention to what other people are doing out there. There's no question about it we'd be crazy not to but.
Yeah. This isn't this a tough business, if I mean and I'm not talking about the single point solution stuff like that.
Doorbell camera or Arlo camera, yes.
Yes to your house. These are fully integrated smart home systems on a very intelligent.
14 devices installed in a hole.
And so to do that you've got to have a very capable.
Installation network, which we happen to own our own there are our employees.
And then the ability to and we've talked and we've talked about this quite a bit today.
Kind of own that whole interaction with customers during the sale process to the installation of the ongoing support either technical support over the phone or if needs be.
Dr. driving a truck out there is that how to how to deliver all cigarette. So we have not yet seen someone else step up to.
To the level that we're doing this.
People have parts of what we have you know by way of nice camera design or a nice doorbell are nice thermostat, but we've got an incredible notes because and this is 20 years in the making by with incredible modes to recreate what we've done is not easy I'm not saying it can't be done, but im very very difficult to do.
And you know in speaking to.
Google I mean, they did invest in ABTS I think the partnership.
Which were super happy it kind of validates we believe it not just sort of it really validates their belief in the need for this infrastructure to be in People's homes, you on the phone answer calls install professionally. These these new technologies.
But you did if youve noticed anything Google also did and their Google nest security products. So it's even for a Google spends I think there's been a lot of money I don't I don't know, but it's a lot of cedar as Ulta, it's not easy people don't just buy this off the shelf and.
And just to understand how to install it themselves it's not that easy.
And then there is the DIY component of this industry, which we have that capability and we're testing we just happened to like to have really high margins, which we do in a very long customer relationship, which we do.
And as Weve tested VI, which we which we are and we are capable of and that's the great thing we have incredible flexibility services offering pricing perspective, our hardware our platform.
We work, we're not yet convinced that we want to heavily pursue YY, even if consumers demand it because we want to make sure when we get on this call, we say hey, we had.
High margins and we have a long customer life and a huge profit pool have so.
We want to grow we are growing it's a very nice pace, we intend to grow we believe that there is a lot more growth in the space and what we've shown you know this.
At this point, but we've got to invest in them, we'll be focused on that which we are.
But we're not growing to grow just to add subs if it doesn't add.
Margin profit pool, and customer longevity, we're not going to just chase that.
So.
And again, we are it's a good question we are absolutely been attached we watch what other people do but I would say this we've got 20 years doing this this business and we believe we're the clear leader in the Smart home service space clear leader, but.
And a lot of experience and we're just really excited about.
You know the way the consumers are engaging with our platform. The number of interactions per day. The different use cases that are starting to discover as they again. They are there and this is me also I'm. So much more engaged with my home and my family because of the environment that none of US chose it is what it is and that's been.
Unfortunately, some ways, but in other ways.
We've had to learn how to do that I enjoy the home is kind of our Staycation I think people are.
And it's our it's our work it's our work environment for most of US a lot of the time. So we are perfectly positioned.
As a company that can deliver really interesting services.
Offerings and of consumers. So we're we feel like.
Great. Thank you that's that's helpful color.
Oh, so mix of buyers not not much change quarter over quarter not number.
Oh, sorry, sorry, I missed that.
No. Thank you I appreciate it.
Our next question comes from Todd Morgan with Jefferies. Your line is open.
Thanks, Thanks for the question I mean, a great quarter, good to see I guess year over year growth in subs, even with Cove it.
Two questions coming out of that I guess first of all.
Is there any way to think about how much.
Better or easier would be to kind of sell and close and install and service customers without covance. As you look forward I know you've talked about continued growth, but how much is that kind of holding you back now if that's the way to think about it and I guess secondly, you talked a little bit about the SEC cost us approaching cost being you know on an LTM basis really only a couple of hundred.
<unk> dollars I mean, if my math is right, you're basically paying nothing to add subs to now and it looks like you kind of suggested the same is there a reason to think that that doesn't continue to be the case or do you can kind of grow with effectively a zero dollar cash cost of adding that new subscriber. Thanks.
So so the thanks for the questions so to the net sac.
That's that's absolutely at this point a choice in the end deal. So this is kind of interesting before we had consumer financing and the hardware. It was kind of part of the overall package.
It was a little bit confusing its so beautiful enough is customers really can just pick and choose.
Either to pay upfront with no contract by the way no commitment its month to month from that point or use our financing zero percent financing going forward and the majority choose the 60 been fine financing.
But isn't where it where it's an interesting thing because we now have kind of levers we can pull.
On where we want to be now.
At this point and again things can change I'm, not we're not going to say nothing could ever changing business environment or financing environment, but as it stands today.
We are we are and can continue to operate at a brief at a minimum breakeven upfront on the on the subscriber acquisition, which is which is absolutely amazing by the way.
I don't when we really set out to do this and that internally as a group 18 months ago I don't even know we believed that we could do it but the same goes true for the the sub $10 servicing cost we had a goal by just sort of on those on the phone to get down to $10 a month servicing cost about three and half years ago. So the fact.
Thats happened in some of its environment, if the environment that we're in but others are are my choice and investment. We're really excited about that so answer is yes for now.
Speaking to some in the future where.
Economic environment changes and we are reliant on consumer financing group citizens, which has been amazing I mean fortiva. They've also been amazing we can continue to do that we think it's the right way to do so.
And then.
Okay.
Thanks.
Yes.
So so from from a cobot perspective.
I think maybe.
We have had we obviously had put our direct sales organization on pause, we also and I Didnt mentioned that certainly I want to make sure I do again.
We eliminated about 40000 subscribers, we would have put on in the past in the form of Rex. So when you really look at our sales performance customer adds in revenue, it's not it's not good its outstanding.
And so again, we have benefited from people being home being more engaged with her home our performance on a per reps.
Sales per sales per sales rep per day and revenue per customer.
It is up substantially its up really nicely I guess I would say that said I think we're I think we are going to see that trend at least where we are.
Maintain.
Because I think there is a lot more awareness and markets about who the tenant is and as we layer on the branding and marketing campaign. We are doing that we hope to perfectly describes how.
Elegant Lee we deliver services to consumers the quality of product the design of the product that the value prop that we're going to keep those gains going forward I'm I'm actually fairly call from Europe. So.
Thank you good well that's good to hear thank you. Thank you.
So.
Again, if you would like to ask a question press star one on your telephone.
Next question comes from Marlene Rio with Bank of America. Your line is open.
Hi, Thank you for taking my question.
Just a quick one on attrition a few quarters back you had talked about kind.
Kind of a 14 and a half to let's call it 15% level, mainly attributable to lower cohort coming due and I was just wondering if you can provide any commentary on how that given the improvements in the last two quarters. If you know.
That has changed or if it's been pushed out work, it's maybe been kind of spread over a longer timeframe.
And just to make sure I had in terms of the question do I mean, we think attrition again.
We've seen really really positive signs that attrition in terms of terms of the number of folks that would canceling that we're after initial into term that's been much slower than we had forecasted our payment.
Indicators in terms of payments coming in from customers.
Really well so we're seeing really good performance of the portfolio I think as we look to the rest of this year and again you know.
Tobey This case the spike in all across the country and we can't we don't know, how that's going to actually impact oral or if it will impact our customer base I think if we looked at this year, where a couple of saying we're somewhere probably in the 12.5% to 13% is where we'll end the attrition for this year so cutting.
In the range, we are right now that's where I think we'll end this full year.
And once we get a better indication of how things look going into next year, we will give us an indication where we think 2021, but I think we believe.
That are that the big change you know a fundamental change in our service performing how we're delivering that service the products that we are providing the customers and the fact that even though their home.
Miss This earlier is this that reconnection that remodeling of their home upgrading their home, adding this to service their whole is something that they are doing and they want that is in their home and so we believe those customers or will stay on the different platform for a longer period of time.
Got it and that's what I was getting at sale is that you know instead of saying X amount of cohorts are coming to you normally see that type of behavior.
The past two quarters have been.
Much better than my expectations. So it's not that that 14 or whatever that number what got pushed forward you could actually maybe even see that that attrition or those cohorts coming due.
Maybe spread out over a longer period, I guess my point is that 14.5% to 15%.
Is that necessarily still out there and just pushed out or based on what you said in terms of people reconnecting with our home, we could actually see a shift in that to some extent.
Yes, no I don't we don't believe you know again I just kind of give you the range I think for the end of this year, we don't and we'll give you next year, but we don't we don't believe that 14 to have to 15 is it's it's out you can take that off the table I guess is the best way to say, we think were up.
Somewhere again in this 12 and a half to 13 range. This year and then we'll see what happens next year again, if things continue to perform as they are today and.
We're going to be in that 13 ish range.
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Range, but we don't think that we're going to see this spike back up to kind of that 14, north fourteenish, 15% range.
Got it thank you very much.
Thank you.
There are no further questions at this time I will now turn the call back over to Todd Henderson for closing remark.
Yes, so we just want to thank everyone for getting on the call. We are excited about the quarter that we've had in the year that weve add to this point.
Hopefully we've lived up and beat expectations at least that we've we've told you in the market.
We are I want to make sure you'll notice we're incredibly focused on current quarter.
All of the dynamics of the business we've.
We've got a pulse on everything we're we feel very confident in what we've stated what we've promised for the year.
But as an organization.
Thank you will learn this overtime, it's not just the next quarter. We are investing currently in making sure that we make improve.
Improvements in strides towards better service delivery and everything for the future of the business, we hope to continue to to outperform expectations futures.
This concludes today's conference call you may now disconnect.
Okay.
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