Q1 2021 Vivint Smart Home Inc Earnings Call
[music].
Good day, and thank you for Spain.
And then by walking through the <unk> Smart home first quarter 2021 earnings call.
At this time all participants are in a listen only mode. After the Speakers' presentation there.
Okay.
If you require any further assistance. Please press star zero I would now like to hand, the countries over to <unk> clubs in.
Investor Relations. Please go ahead.
Good afternoon, everyone. Thank you for joining us to discuss the results of visit Smart home for the three months ended March 31 2021.
Joining me on the conference call is Todd Peterson, CEO and Dale R. Gerard <unk> CFO.
I would like to begin by reminding everyone that today's discussions 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 of performance and you should not put undue reliance on these statements.
I would direct your attention to the risk factors detailed in the amendment to our annual report on form 10-K, a for the year ended December 31, 2020, which we filed with the Securities and Exchange Commission on May 11th 2021.
Please be aware that these risk factors may be updated from time to time in the Companys periodic filings with the Securities and Exchange Commission.
And that the realization of any such factors 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 cash.
Company undertakes no obligation to update or revise publicly any forward looking statements, whether as a result of new information future events or otherwise.
During today's call management 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 on the earnings release and accompanying presentation, which are available on the Investor Relations website.
At investors Dot <unk> Dot Com I will now turn the call over to Todd.
Thanks, Nate and good afternoon to everyone hope that life is starting to get back to normal flow for all of you has vaccine rollouts accelerate in total case counts decline.
Today, we will cover the following topics.
Discuss our strong financial and operating results for the quarter review, our robust customer engagement and the performance of our platform.
Talk about our excitement over the near term outlook for <unk> Premier end to end Smart home platform as we gear up for what we expect to be a normal summer selling season.
And as our customers engagement levels remained high regardless of whether people are spending time inside or outside their homes.
The momentum around our business that we saw on 2020 is carried into the first quarter of 2021, and we are pleased to report continued improvements on our key metrics year over year <unk>.
Including an accelerated revenue growth of 13% along with 60000, new smart home originations, which represented a 20% increase.
All while producing an adjusted EBITDA margin of 47%.
As of March 31, 2021, Vivants total subscribers grew 10% from the same period in 2022 more than $1 7 million.
Along with the highlights I previously mentioned, we also saw solid improvements across the board and other key metrics for the quarter.
Including another steep decline in net subscriber acquisition cost per subscriber and the lowest LTM attrition rates from the past nine quarters.
I believe that these strong results speak to the fact that our core value proposition proven over two decades of reliably taking care of our customers on their families.
As relevant today as ever.
Dale will provide more specifics on the financials during his remarks as well as share her thoughts about our full year 2021 guidance.
If the past year has taught us anything it's that there is no better time for homeowners to have a comprehensive smart home system.
The $1 1 billion daily events processed by our smart home operating system across more than 23 million connected devices are the best indicator of the frequent engagement of <unk> customer base.
We are uniquely qualified to help our customers deal with any environment across the various smart home devices, we support.
From door locks cameras security monitoring thermostats lighting controls.
<unk> door controls and many other connected devices.
All of these innovative products are designed to work together seamlessly through our elegant platform that homeowners can control from their in home touch screen hub through a single app on their phone or by simply using your voice.
<unk> services also include lifesaving and life protecting 24, seven professional monitoring for emergencies, such as medical fire carbon monoxide and burglary alerts.
Our vertically integrated model includes dedicated customer care and monitoring teams to ensure that we respond to alerts within seconds.
Our cloud platform and proprietary technology also allows customers to seamlessly manage and protect their homes, regardless of whether they are socially distancing inside the home or from somewhere outside of it.
We havent takes care of our customers on their families while providing the peace of mind that people demand during times of heightened awareness anxiety uncertainty and mobility.
We've been securing an innovative smart homes for over 20 years and our experienced since the onset of the pandemic is only cemented in their minds. The fact that our customers will continue to value home security and smart home technology.
During challenging economic and societal times underscoring the strength and resiliency of the model and any type of environment.
With attention now turning to the reopening of the economy and having this coincide with the onset of our summer selling season, we remain bullish about the near term demand for the business.
Given that approximately 50% of the adult population in the U S have now received at least one dose on the vaccine and that by the end of the month, we anticipate that all states will have lifted mandatory quarantine restrictions the tried and true process of selling door to door and installing new vision systems inside of homes as Guinea.
Back to normal.
We believe the pent up demand for travel also plays right into our hands to the extent last year's shelters became niches travelers. They still have every reason to remain highly engaged with their smart home systems.
Based on interaction volumes with our platform before COVID-19 during COVID-19 and now as the country begins to look beyond COVID-19, our systems and services have proven to be just as relevant in all of these environments.
We're still respectful of the fact that we continue to operate in a world actively dealing with COVID-19.
We've increased the preparedness of our direct sales team as they head out to markets across the U S at full capacity.
And there'll be ready to go with all the right training the necessary PPE to interact with current and new customers.
As a reminder, last year at this time, we had to swiftly move our call centers and corporate employees to a work from home environment.
Caused our entire direct home sales teams for about six weeks during the first wave of the pandemic delaying the start of the summer selling season.
At this point, we fully expect to return to more normal summer sales season. This year.
Meanwhile, our other sales channel national inside sales, which on boards nearly half of all new subscribers in a normal environment has turned and robust results through the pandemic and we believe that momentum will continue in 2021.
We have long believed 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 <unk>.
We believe <unk> is the premier end to end Smart home platform company with the most robust service offering and as such is the best positioned provider to take advantage of this opportunity.
We believe in order to take advantage of the growth opportunities in smart home. It's important that we increase our focus and investment in our brand technology and new product development.
On this front I am pleased the early returns we have seen from our brand investment.
During the fourth quarter of 2020 to drive better consumer awareness on a national scale.
Those investments will continue as we tell the story of who we are what we do and how we can add value to people by delivering the security and peace of mind they desire.
But beyond the brand. We also think now is the time to step things up in terms of technology and our product vision to maintain our position on the leading edge new product development and to continue pushing new boundaries by delivering a transformative smart home experience to every home.
Before I turn the call over to Dale to go through specifics of our first quarter results.
As you may have seen Devon recently resolved the matter with the U S. Federal trade commission related to certain historical instances of violations of the company's policies by sales employees.
We are pleased to put this matter behind us and it takes matters of compliance seriously, particularly as customers across the country put their trust in us to protect their homes and families.
<unk> already taken steps before the FTC began its review to strengthen our compliance policies and we will continue to make this a focus going forward to that and we are deeply committed to operating with integrity doing right by our customers.
Delivering on our commitments to stakeholders and providing exceptional service to our customers I will now turn the call over to Dale.
Thanks, Tom before I get into the results for the quarter just a quick comment on the recent statements by the FCC related to the accounting for warrants issued by spec companies on.
On the issuance of the statement, we reevaluated our historical accounting for both the public and private placement warrants assumed in conjunction with our merger with mosaic in January 2020.
Like a majority of specs. We previously recorded these warrants as equity however, based on our evaluation, we determined that the warrants should have been classified as liabilities and measured at fair value. The closing date of the merger with subsequent changes in fair value reported as non operating income or expense on a consolidated statement.
From operations each reporting period.
On Tuesday of this week, we filed an amendment to our 2020 form 10-K to restate. Our previously filed financial statements. As a result of this restatement, we recorded a $109 3 million non operating loss related to the warrants.
And our warrant liability was $83 6 million as of December 31, 2020.
I'll now walk through the financial portion of the presentation that we posted today in conjunction with the earnings release.
Looking on slide six we highlight a few metrics from the subscriber portfolio, which continued to be strong across the board.
Total subscribers grew 10, 2% from $1 five 5 million per $1 seven 1 million.
Average monthly revenue per user or <unk> increased to $67 24 up.
Up 3% year over year.
The increase in <unk> was driven by additional sales of new products, such as our latest generation of outdoor and doorbell cameras as well as the recognition of deferred revenue.
On slide seven.
We cover revenue and adjusted EBITDA for the quarter.
For the first quarter of 2021 revenue grew by 13, 2% to $343 $3 million.
Our revenue growth is attributable to previously mentioned double digit increase in total subscribers as well as the increase in the average monthly revenue per user adjusted EBITDA grew nicely in the first quarter.
The primary drivers were the scaling of service and expense subscriber acquisition cost for the quarter, we increased our adjusted EBITDA margin by 270 basis points to 47, 2% of revenue compared to 44, 5% from the first quarter of 2020.
Moving to slide eight we will highlight a few points on the subscribers originated in the first quarter of 2021.
A subscriber originations led by a 29% year over year growth in our national inside sales channel or 60127 for the quarter.
How and with subscribers. We on board is important test of SaaS, the day and in the future and we continue to redefine and boost the underwriting requirements and process to qualify and onboard new subscribers.
One of the positives of the enhanced underwriting requirements is that we were able to reduce the number of retail installment contracts or risks that our financial on the companys balance sheet.
For the first quarter of 2021, we saw a 77% reduction in the number of subscribers financed through retail installment contracts.
By shifting a greater proportion of our subscribers away from bricks and towards third party financing partners and painful arrangements were able to reduce our net subscriber acquisition cost and improve the companys cash flow dynamics.
Speaking of our third party financing partners I'm pleased to announce we recently completed a successful renegotiation of our agreement with citizens Bank, our primary financing partner under the visit Flexpath program.
This renewal resulted in a contract extension of three years and the implementation of a new line of credit finance offering to our consumers, which will streamline the initial sales process and facilitate up sales on upgrades of additional and new equipment during our customers' lifecycle.
Moving to the new line of credit finance offering changes the timing of when the merchant discount rate and loss share fees are incurred.
Which will impact the amount of cash in the near term.
That said, we are fully committed and intend to operate the business on a cash flow positive basis, this year and going forward.
Moving to slide nine we will cover service cost per subscriber and new subscriber acquisition cost per subscriber.
We continued our trend of year over year improvements in net service cost per subscriber moving from $11 76 in the first quarter of 2020 to $10 77 in the first quarter of 2021.
This reiterate the advantage of <unk> vertically integrated smart home cloud platform, which encompasses the software or hardware installation and ongoing customer support.
As we continue to make improvements in all these areas, we're seeing positive trends in both the cost of service as well as customer satisfaction.
Our net service margin continued to be in the high 70% range at 77, 7% for the first quarter of 2021.
The drop in service cost per subscriber is driving a significant portion of the increase in adjusted EBITDA dollars as well as adjusted EBITDA margin percentage.
On the right hand of slide nine we highlight net subscriber acquisition cost for the last 12 month period.
For the period ended March 31, 2021, net subscriber acquisition cost burden on subscriber decreased to $66.
That's 93% lower year over year as we continued to drive down the number of new subscribers that are financed via ricks and shift to a higher mix of customers utilizing our financing partners are paying in full the purchase of their smart home products.
During the quarter.
We also continue to benefit from pricing leverage on the point of sale purchase and installation of equipment.
Slide 10.
Pixar typical subscriber walk that illustrates the changes in total subscribers at quarter end.
One of the pleasant surprises throughout the pandemic has been the performance of our subscriber portfolio.
Once again, our attrition improved ending at 11, 8%.
Which is 230 basis points lower year over year and at a nine quarter low.
Our portfolio continues to perform better than expected in terms of both attrition and other leading indicators and.
In terms of cash flow, we saw a nearly $19 million improvement in net cash used in operating activities during the quarter.
We finished the first quarter with $274 million of cash on hand, and a very strong liquidity position of approximately $600 million.
Finally, moving to our guidance for the year on slide 11.
Top of the page highlight several fundamental characteristics of our financial model.
<unk> reoccurring monthly revenue from long term subscriptions, a highly predictable business model and the ability to thrive in all economic environments.
We are pleased with the momentum in the business from a strong start to the year and we're bullish about our ability to operate the direct to home sales team. During this summer selling season at full capacity.
We are also aware of potential supply chain disruptions inflationary pressures and hiring constraints that could limit further upside.
Taking all of these factors into consideration we are confirming our original guidance as follows.
We still expect to end 2021, with $1 8 million the 185 million total subscribers.
Our estimate for 2021 revenue continues to be 138, the 142 billion and finally.
We are firm our previous 2021, adjusted EBITDA guidance of between $640 and $655 million.
This concludes our prepared remarks on the first quarter.
Operator, please open the call for Q&A.
Thank you at this time, if you would like to ask a question simply press star one on your telephone keypad again to ask a question. Please press star one on your telephone keypad.
Yeah.
Your first question comes from the line of Paul Coster from J P. Morgan. Your line is now open.
Yes, thanks very much for taking my question.
You said it sounds like the guidance.
Implies.
The supply chain risks.
Upside perhaps.
But that's factored into the guidance for the limited from a downside.
I think one of the first two.
So to put it in that kind of way.
Can you just talk about what your biggest sort of component risks are in.
It is that you seem to be managing through this problem for well on a relative basis.
Hey, Paul its Dale.
Thanks for joining the call.
We look at it big part in our growth initiatives and some of the stuff. We're trying to do is really around camera attach rates.
We think thats one of the big.
Selling points and why people really like smart home, it's one of the day.
Advantages, we think our systems have over others integrated.
And on.
And the different things that we can do with that in terms of notices and so forth with customers and so part of what we're doing on the pricing, how we're selling and what we're seeing in terms of take rate or adoption of additional cameras.
We are in good shape, we believe right now, but adoption rates are higher than we think.
And if theres any disruption in terms of.
Chip manufacturing and or the big thing really one of the day logistics frankly supports and getting and then from that from the ports.
Could be some where we may have to limit the number of cameras we sell.
Maybe late third quarter fourth quarter, but.
We think we've addressed that we're doing some stuff with air freight and shipping.
And so we're just calling that out and say hey, based on what we're off to a good start we think that the year, we're going to have a good year.
With some stuff around supply chain.
On our questionnaire pressures out there would be some hiring constraints, we're probably no different than other companies as we try to continue to ramp up especially on the field.
Higher in the markets that we service have been able to be able to hire enough.
On the service professionals to be able to take care of the customers. The way we wanted to take care of them. So we just kind of put all that stuff together and said hey, based on where we where we are today on what we see we think.
Confirming our guidance, which we think is a really good guidance for the year to begin with as the best.
Path at this point got it on a peaceful.
I would just say Paul you kind of cop debt, which is based on supply chain and the issues that Bill mentioned.
On.
Potential for upside beyond where we sit is limited to.
Product being delivered to the U S b.
Being able to install that so.
Not impossible that we could see some upside, but it's going to be quite difficult.
Everyone else there are supply chain issues out there chips.
On the front and center driving most of that so, but we do feel very comfortable with this number we're fortunate that we have.
Let's see a seasonal business in some regards because we pre order a lot of the hardware and had done that last year and so a lot of.
What we need it.
These numbers, we already know we have kind of insight.
Got you.
Sure.
That's true as it would be working really hard on trying to figure out what's going wrong, because it starts been drawing down on rules.
So it's been something obvious here.
So try my luck is is the it.
Sounds like you've entered into an extended term with citizens bank, but as part of that Mr. From.
Allocation of the credit risk does that relate back to this FTC issue and then passing Todd can you just touched on.
It's actually the FTC is.
Issue.
Simplified and when it occurred.
Yeah, I'll take the first part Paul.
Danielle on it directly.
Of the.
Extension.
We're very very pleased with our partnership with citizens they've done a very good partner.
We've had a relationship there.
Configure financing debt.
Early 2017, and so we were glad to be able to extend it.
The changes that we're making in that program with citizens really has.
Nothing in terms of the FTC.
It was really part of the negotiations to move from the installment line and to a while.
What we call a line of credit.
What's really better for us long term and better for our customers.
<unk> for the Onboarding process.
And then really where we'll see the benefit of the.
Additional sales of hardware either additional products that customers want to take or as we rollout new products and customers who want to add some systems. Their line of credit allows for that in a way that the installment loans, which was kind of a fixed.
And so in reality.
The way the terms are set with debt.
Your line of credit or a more standard terms on terms that we have with the installment loan or probably not what was standard industry. We were able to do that I think early on.
And so by moving to the line of credit.
One of the things that was part of that was we had kind of go to more standard terms around how.
The users of these products pay per that the <unk>.
<unk> offering from citizens or from other banks from FX.
And then Todd will take the second.
First the first thing I'd say is we're glad to have this FTC settlement done.
Now know why we have not.
We've been asked about refinancing pay net debt and we were not able to do that they feel like it was good timing in the middle of the FTC settlement happening. So we're glad to have that past us and in the past secondly.
We're a company that we want to provide great service take care of consumers our customers and so we.
Behavior, that's not consistent with.
Integrity and doing right by consumers.
No part of this company.
Back in 2017, we did have some sales people they've got around some systems.
Debt, we found out and let those people go and that was part of this investigation by the FCC and <unk>.
We found out we just let those return those people let them go.
But again thats.
That's in the past and done we're glad to have that behind US. We are definitely made and we do this every year enhanced improvements on compliance and systems and controls to ensure that underwriting the negative is.
Up to par and again compliance with laws.
States from a financing perspective so.
Again led to have that behind us and done on settlement.
Well I think from us.
Thanks.
Hey, Thank you Paul.
Thank you. Your next question comes from the line of Jeff Kessler from Imperial Capital. Your line is now open. Thank you it's been great working with you guys.
Hopefully, we'll continue to talk from.
Just just not in a position I am that's all.
I've got I've got a couple of questions here firstly.
What are the.
It looks as though this this year from the side or is it look you are going to have to.
The economy looks like its opening up.
You are making investments you're talking about and you've already started with in.
In branding the company.
Now can you talk about what other types of investments and how much that may cost you.
Net debt.
You are going to be involved with assuming debt.
Assuming that the debt.
On that.
The overall economy opens up.
It is probably true.
On the time line for you to start.
Started pushing on.
Some of the other.
Improving on home automation.
Trying to put some distance between you and others in terms of technology trying to do things in terms of maybe improving Idaho and per.
Moving your training or newer.
Or or or or focus on how you onboard you're new.
Your new your new sales people spending more money. There can you just talk about the various types of increased investment and you'll be doing in addition to branding.
So.
And by the way.
It's been great to work on future this year.
We're going to Miss this I guess a perfect.
But hopefully relationship continues.
Alright.
Sure with my other guys.
That sounds great.
A couple of things.
We agree that investment in.
Continued product enhancement and quality and technologies is critical so that we can keep our lead in the market.
And deliver the best service, we can consumers I mean, that's first and foremost.
On the quality has got to be the value has got a beat on work will continue to drive that we are investing in new tools and technologies from.
Onboarding customers underwriting customers, we built these tools over the years some of them, we feel need to be refreshed.
Probably end up seeing within within a year or so.
Platform.
Kind of reinvestment in the platform.
Again that we built out our operating system seven eight years ago.
I believe that there is some updates that can be done on will be done to enhance that that experience from the consumer allow us to do more upgrades.
More content for consumers information to consumers and allow us to kind of.
Delivered service them through those on here.
<unk> enhanced operating system.
So so that's going to happen now we are we're super pleased with the results and it's been it's early I mean, we started doing branding and marketing really in Q4.
But as you saw with our Q1 numbers, 13% top line revenue growth compared to net.
And then just.
We're starting to see some momentum there now.
We already mentioned earlier that with some supply chain constraints.
We're not going to be off to the races, because we have to be if.
If we do add customers, we need product in hardware to be able to install.
Although.
A great year popped out and we think the numbers on projections, we have are strong.
The cash flow dynamics of the business the attrition.
Numbers.
Our net operating margins are net sac.
Are all super strong and improving year over year. So we're really excited about how the company's positioned positioned.
And you know what.
The future looks like force.
Does this business income and increased investment in Sac.
Well.
Can you maybe explain what do you mean.
You talk you talk to that.
New new tools for for onboard onboarding customers in getting customers trained and things like that.
Yes, I mean.
It's really within our area.
Information technology, so that that area, which we do allocate out the sac from SaaS some of that service. So yes, there'll be some of that there and then some of the brand spend that's directly contributed to the media that we're doing it's actually Dan.
Paid it off debt.
So.
But it's part of Blake.
Early on we did the fourth quarter call on talked about kind of what we expect 2021 said hey, we're going to make investments in that really three areas that Todd just talked about you're going to see those those really youll start seeing the impact of them.
For Q2.
In terms of where we're kind of really starting to get some of the spend in terms of our brand as we kind of rolled out the summer sales force and then as we've hired up for some of the stuff we need to do on technology and product development, you'll start seeing that kind of come through Q2 Q3.
Okay.
The second question actually is on your side.
On attrition.
Going through the various components.
On the attrition obviously.
Percentage of percentage of.
Customers are coming to term on their contracts is obviously an important one moving as an important one people who can't pay.
This is an important when people who don't like your system or whatever.
And so it's somewhat important these are all moving.
Does that move around depending on the times, we are living in and the ability of your firm to create a better value proposition for your customers.
Net.
But what are your color on that day when.
On the attrition because currently.
You've been saying that your sweet spot is probably going to be somewhere on the 12, four or maybe on the higher than the true 12 13 area for some time to come in the past you've seem to have maybe underestimated how far our attrition can go up but now you seem to be underestimating how far attrition.
Can go down.
Well so.
Here's a couple of things.
We deem that we are fully integrated platform end to end.
Solution, we continue to make improvements in the hardware the installation process the firm where we've got this incredible feedback loop that we've talked about so we continue to make improvements and enhancements from that perspective.
If these products work and we have 14 or 15 devices on average per home if they work.
Consistently and the use case for relevant to consumers to keep the product now they are obviously circumstances, where people lose their jobs.
Financials from changes in.
Realize that that caused some of these people.
People to cancel we hope strength not because people don't like our system, but maybe that happens occasionally but the other is.
If you've noticed in the last year.
Here, we've made great enhancement to the underwriting.
The production and risks to the platform is going to have continued impact on attrition over time.
And again enhancements in every little detail of what we do to deliver service to consumers is going to impact debt.
So we're not we're hopeful we're not.
We're not trying to be pessimistic.
Continue to see potential gains on that on that side.
For our consumer facing business on a 1%.
On the attrition is pretty incredible and then you add to that our net subscriber cost.
From down substantially on our.
Net service cost of $10 70.
There is a really good story.
And real good buildup from what we've been trying to accomplish over the last couple of years.
<unk> is the sweet spot are you changing or on your view of what maybe your your long term sweet spot range should be for LTM.
LTM attrition.
No Jeff at this point, Jeff now I think with.
Like Tom said, I think as we get more.
I'm in here and we continue to see how the how attrition performance, we may update that but at this point I think we're going to stay work assets.
I did.
Okay great.
I would say that we're we're super pleased with all of all of it all of the results were great, but the $10 77 per subscriber and net servicing costs that.
It means people are our systems are working we're not having to roll trucks to fix things as often as we used to replace hardware.
Yes.
And more reliable this system is in the more elegant in fact on the more robust the system is the more we see attrition coming down over time. So we're not done from an aspiration perspective, but we think we.
We're feeling confident about what we projected to the market for the year.
And hope to make gains.
If possible.
Alright, great. Thank you very much I appreciate it.
Thanks again, Jeff Good luck on retirement, thank you.
Thank you. Your next question will come from the line of Rod Hall from Goldman Sachs. Your line is now open.
Hi, this is on <unk> on behalf of fraud nice job on the results could you expand on the difference between the standard line per se.
<unk> credit and debt.
Customers and we are commencing from Baxter cash flow could you give us some color on debt.
Yes, yes, okay.
So the line of Craig.
But what we had with citizens on what we've been putting ounces, it's kind of a fixed term installment loans and so that means that once the customer finance what the finance at the initial point of the sale that was fixed and if the cost per call back six months later and said Hey, I really I only bought two cameras I wish that we thought about a third camera if I could.
What are out on the back porch, we arent able to actually add that to the financing against the line of credit it's more like a credit cards the way to think about it and so that will allow us to actually go back and add to that.
System and make it sort of have to come out of pocket that point for that camera and the install they can add that to their line of credit. So thats really the big difference just allows us that the customer and allows us what caused the company to be able to offer that product to them and the customer.
Bill to finance that going forward.
As they want new or additional products installed in their homes.
In terms of the cash the way the weighted installment loan product has worked we paid the kind of the MD RFP in the loss share overtime and so the average bump.
There were the MTA RFP was paid every BOP and losses were paid as occurred up into the loss.
Based on the last loss arrangements that we have the caps that we have in place.
The way it will move to a line of credit will move eventually as we transition through the next 24 months.
It will move to that will be like a more standard where we will pay the fee.
<unk> and then the expected losses upfront and so it'll be a net.
Very similar to how our program works with <unk>.
<unk>, our other financing partner.
Super helpful.
Also wanted to ask about connected home from the first.
Further growth.
Gary its a bit weaker than his total ghansham and that's on.
Vessel operating in a COVID-19 environment, but could you talk about how that why that day and expand on the amendment debt.
Yes.
Sure.
We're basically saying that we believe that we'll operate in a normal way.
From.
Deployment perspective, we deployed the majority of our direct channel salespeople across the country. They are still.
Some number of them that are still come in going out to market.
We're having we are obviously respectful.
Social distancing is still at this point, even though that is changing somewhat with.
On the vaccinations in the percentage of people are being vaccinated across the country and based on CDC guidelines and suggestions, but it feels like it will be back to more of a normal type year for the summer selling season on which.
We're excited about that we've made adjustments.
Debt.
Based on COVID-19, it maybe decelerated from the adjustments on how we underwrite.
And do approvals for consumers.
We used to do it on our devices.
The salespeople to travel on with an iPad now it's on it's done on a consumer's device. So we can maintain the social distancing even in the future. The second thing that it really does forces from a compliance perspective, it really tightened things up. So this is a net positive all the way around.
We're again trying to be.
Respectful of COVID-19, 19, and making sure that we're not spreading anything we still checking people's helped on a daily basis and market.
Wearing appropriate masks and gloves and that sort of thing, but then from an underwriting and compliance perspective.
With the adjustments thats going to be a net positive for the company.
Thanks, Todd on the last question from me could you give us on update on the insurance business.
Yes.
I would say we're still in test mode.
We believe we have great.
Upside potential with that business and again. This is the great thing about owning our platform and the data that we have.
If you think about it it's super it's hyper local data inside of the home based on consumer actions on interactions with the system. So usage patterns. We have all of that collected inside of our data that we collect on a daily basis.
We're not quite ready to start.
Announcing.
Volume or future projections, but.
We're trying to make sure that we have.
Everything from a compliance perspective from a financial perspective, and underwriting perspective dialed in before we will expand that business out.
Great. Thanks, guys.
Thanks, Okay.
Thank you again to ask a question.
Please press <unk> line on your telephone keypad to ask a question simply press star one on your telephone keypad.
And your next question comes from the line of Erik Woodring from Morgan Stanley. Your line is now open.
Hey, good afternoon, guys congrats on the quarter.
And again, congrats on the attrition rate really impressive stuff.
I guess I wanted to ask an earlier question, perhaps a different way and that was would you would you say that you know through the end of the March quarter. There was still a bit of what I'd call COVID-19 complacency driving that metric, meaning I know you had less than 10% of your base reached the end of term and <unk>, but our pea.
People, perhaps putting a decision to reevaluate their smart home provider on hold for now given the environment. Just curious your take on that and then and then I have a follow up thanks.
Yes, I mean look there that could that could be true with some of the consumers and then the other side of that is.
Better underwriting our systems are working on operating better as we continue to make improvements like I'd mentioned earlier on firmware software new hardware releases.
Installation protocols, just every little thing that we do.
We've been true different types of downturns on issues in the past.
This kind of proving out again, the fact that what we deliver to people, which is peace of mind in different ways for different people based on their situations and their living environment.
This is this is something that people see value in.
We continue to try to push those boundaries to make sure that we're more and more relevant from.
On the consumer perspective every day.
Okay, that's super helpful.
And then I guess my second question.
Selling expenses were up more than 100% year over year smart subscribers were up 20%.
What drove that growth in selling expenses should we interpret that as meaning it's getting more expensive to acquire new customers and then how do I kind of tie that with net sac that obviously continues to reach very impressive new lows.
Yeah. So a couple of things last year in the first quarter you recall, we shut down kind of direct to home. So part of your year over year is the fact that go on.
I don't know two or three weeks of the first quarter. There was no spend when I say no spend we kind of said don't spend any more money on recruiting training.
So that's a that's a big variance are already various kind of year over year.
In terms of that.
And then you have some of that brand spend also as I said, we're pushing some of the the brand spend that's media directly tied to commercials and so forth into <unk> also.
I mean, we are in terms of terms of our gross cost and our net our gross cost of Sac. It's in line with where we would have been.
And again, we keep.
Driving down.
The net because we're charging more for.
Or sorry, we're selling more product so the upfront basically the number of cameras number devices. We're selling is higher I think the other thing to say I think I caught because I actually look at.
Selling expense or Sac.
Excluding stock based comp so when you so stock based comp is a big driver in that in terms of.
The legacy equity that we had debt.
<unk> in the first quarter that debt also got expense.
Per new grants that are there so thats kind of a double whammy there in terms of that expense, but if you looked at.
I think it's up.
11% I think with the out.
That stock based comp charge here on.
On the up about 11% around $5 million year over year.
Okay. That's really helpful. And then I guess, if I could squeeze on last one.
I remember you guys just kind of previously guiding to long term adjusted EBITDA margins in the mid 40% correct me if I'm wrong, but is that still how we should think about the long term and I say that compared to obviously you got your current guidance, which would.
It would imply you're kind of already there and thats. It from me, Thanks, again and congrats again.
Yes, I think again a lot of things there, we're seeing improvement across the board right, we're seeing better servicing costs.
We can continue to drive down service costs, while still providing really a section exceptional service for our customers.
Again.
Moderate being able to leverage G&A in terms of what we're spending there I think overall, we still think kind of in the mid forty's, whether that's 45% to 47% is really kind of where we see margins that for the near term I think as we continue to invest in the business and make decisions that we think will help the business long term.
<unk> be more be more successful in terms of product technology.
Brand as Todd has mentioned and so that's kind of where we're shooting for it today.
Okay. Thanks, guys.
Eric.
Thank you. Your next question comes from my Lane per <unk> from Bank of America. Your line is now open.
Great. Thank you for taking my question I just have two very quick one.
One can you share any thoughts on addressing the capital structure and to and I apologize if I missed it.
Christian how do you think about a normalized level or kind of steady state for the business. Thank you.
Sure.
I'll take it I'll work backwards Trisha I think we've kind of said, we think 12 13.
If I had to group attrition I'd say attrition somewhere in the high elevens.
So probably low <unk>. So maybe it's 12 to 12 on a half its kind of where we think at this point again as Scott said as we continue to provide a better service better value to our debt.
Debt they really they look at this and say hey, I need debt every day as part of my life I mean, our interactions that we saw pre COVID-19 during COVID-19 and post COVID-19 continue to increase in terms of how many times people are interacting with their system via the App and so that tells us that and I think what are the things that we actually found their total debt.
Those interactions went up and I think part of that debt.
Being able to answer the door gets your deliveries without touchless deliveries that have to talk to the person, but you can talk to them through your video camera. Your doorbell camera those type of things. So even when people go back to the office, which I think people will at some point.
<unk> got these uses <unk> use cases that day that they've discovered why they were on that actually it will be beneficial.
And so we kind of again attrition, we're happy where it is.
And the thing that takes important about traditional soon.
Somebody mentioned earlier, we are less than 10% of our portfolio is that their end of their initial term as that goes up that has a drop that has an impact that will lift attrition automatically even though attrition is not really performing worse. It's just as a percentage of customers at the end of term you always see a little bit of a higher.
Higher percentage of Patricia just to those customers.
If we can drive that down and then we can we can lower that long term attrition number in terms of.
The cap structure I think Scott said.
We'll be looking to address that I think.
Sooner than later as we want to go ahead and take care of I think we've got from 'twenty to 'twenty threes for sure that that we'd like to take care of the maturities and to extend those.
And so I think youll see us.
What could be out in the markets on point in the near future.
Great. Thank you Dan.
Alright, Thank you and good day.
Thank you there are no further question at this time I would now like you had it over to Mr. Todd Patterson for any closing remarks.
We appreciate everyone getting on the call with us today and again looking back at this past quarter on which was a buildup from the past couple of years a plan set in place.
We're excited to see the acceleration in top line revenue growth improvement in LTM attrition net subscriber acquisition costs servicing costs.
<unk> business.
Is performing incredibly well, we're excited about the future of the business and look forward to getting on the phone call with you guys again next quarter. Thank you.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect.
So.
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