Q3 2021 Vivint Smart Home Inc Earnings Call
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Hello, and welcome to the student Smart Sand, Inc. Third quarter 2021 earnings call. My name is Robin and I will be coordinating your coach day. If you would like to ask a question. During the presentation. You may do so by question stopped when each by one on your telephone keypad I will now hand, you over to your host Nate Stubbs VP of <unk>.
Relations if they've been small same Nate. Please go ahead.
Good morning, everyone.
Thank you for joining us to discuss our results.
For the three and nine month periods.
And at September 32021.
Joining me on the conference call. This one for David.
It's Martin Chief Executive Officer, Dale onshore.
<unk> financial officer.
I would like to begin by reminding you.
Everyone does the discussion today may contain forward looking statements, including with regard to the company's future performance.
Forward looking statements are inherently subject to risks and uncertainties that could cause actual.
Actual outcomes or results to differ materially from those indicators.
Statements.
We describe some of these risks and uncertainties in the risk factors section.
Our annual report on Form 10-K for fiscal <unk>.
Year 2020.
Our Form 10-Q filed today.
Other filings, we make with the SEC from time to time.
The company undertakes no obligation to update or revise publicly any forward looking statements, whether as a result of new information future events or otherwise.
In today's remarks, we will also refer to certain non-GAAP financial measures reconciliation of these non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP.
To the extent available without unreasonable effort are available in the earnings release and accompanying presentation, which are available on the Investor Relations section of our website.
I'll now turn the call over to David.
Thank you.
Good luck.
John last earnings call.
We really appreciate your interest in <unk>.
Today, we are excited to continue.
Marshall.
Third quarter.
While we are a leader in the smart <unk> and Google.
That additional insight into our strategic initiatives.
Mark So I will turn the call over to Dale. The KCG are details of the third quarter alone plus guidance will be for the year, which we are updating given the positive business.
Before I get into the strong results for the quarter, while we arent adv smartphones to be looking for.
Ritchie from others in the marketplace.
Omni continues to redefine the home experience and technology services to create smarter leaner safer.
This saves our customers money every month.
What is this morning.
Under a single device, which the doorbell camera with Goldman Sachs.
Smart rather a smartphone has multiple devices.
Relocated to install all tied into an expandable platform that incorporates AI ADC Mooney and his operating system.
Similarly, we don't believe that having smart speakers.
And the same with AI and machine operating platform.
While DIY products and companies being a lot of press and even DIY.
It's a growing segment of the industry, Berkshire professionally installed and walk through segment certainly show that CPI linked products purchased navigate installed and over 80% of the product that can be installed or by some other than any purchaser.
DIY might have higher sales growth, we believe it represents a small percentage of the book.
Our growth, which we believe is seven to eight times greater than specialty installment loans, where citizens equal growth is delivering 40% plus adjusted EBITDA margins.
I am very pleased with our third quarter results as we had double digit year over year growth in both revenue and adjusted EBITDA. Our revenue growth was more than double the growth rate in the prior year period.
Reflecting robust demand for the products and services we deliver.
The underlying metrics of the business showed strong improvement year over year, our last 12 volt nutrition.
Seven, 4%, which was our 13th quarter, though and 140 basis point improvement versus the prior year period.
While these headwinds in our underwriting criteria and product performance are part of the story I think.
Some of our lower attrition rate is also driven by our smartphone platform delivering our mission of providing value and peace of mind to our customers.
Another metric that we're pleased with is the nearest to $70 million to $80 million in net cash from operating activities during the quarter operating business with positive net cash from operating activities has been a focus of the entire organization and we expect to build.
Spectrum.
Will it be.
One <unk>.
Our belief is that <unk> business model is superior to others in the industry. Both in terms of unit economics, as well as the ability to adapt to changing economic environments, including the recent pandemic and improved labor and supply chain challenges.
We believe these truly in category one we're looking at when I say, we're in category. One we believe <unk> with a proprietary cloud based platform.
We achieved an end to end distribution model strong growth with competing economics and multiple levers for sustained profitable growth.
Expansion that our proprietary cloud based AI and machine learning platform now.
We designed <unk> <unk>.
The group center of a true differentiator.
We believe we can integrate new customer offerings large adjacent markets that are completely back to our smarten platform.
And the value that we already delivered along with $1 8 million customers with an average of 50 devices installed from whom we only rich first party data environment that helps us not only protect our customers, but also improving efficiency means.
And elevate their peace of mind.
Our confidence in our strategy stems from those unique focus on the importance of owning the entire technology stack and coupling that with the end to end distribution model that leads to an inception customers. Once we believe this is absolutely critical but TMC enhancing our platform. We can delight our customers at every point of interaction with them.
And our customer satisfaction increases the trust in our skills and has created multiple potential levers for sustained profitable growth for years to come.
Our strategic priorities are focused on leveraging the trust to redefine the experience was less in class technology and services creates smarter.
That will save our customers money every month as we speak.
We believe we can transform long term client relationships is the lifetime relationships. We believe this will allow us to extend our average customer life of loan eight years today to something much longer future.
Even moderate success in that transformation has the potential to meaningfully decrease the attrition of our customer base and increase the lifetime value of our customers.
We're going to layer strategy for pursuing growth in television distribution, our flagship product offering is smarter.
Over the years, we have developed a best in class solution that Leverages, what we believe is the premier smartphone offerings to the masses.
All of our competitors definition of a smartphone begins and ends with a key yourself doorbell. We know it is much more DIY customers.
With teams that are inaccurate protected by partial solutions and that is in smart.
We believe customers are better served by having the right scope installed and monitor it to protect their homes and families.
To be in a true category one the platform with lean muscle allows homeowners to you much more it should enable them to benefit from new products and services that leverage the smart home ecosystem that is why we are investing in the development of two week markets Smart energy and smart insurance until.
Now we've been white on details surrounding these two growth opportunities today and to expand our understanding of why we believe smart energy and smart insurance.
Brokerage and extensions to our smart home offering and work our focus and investment.
As the first company is the first company to expand the smart energy, we are working to deliver deeper customer value by offering a comprehensive bundle that subsidizes the cost of smartphone and helps protect customers from rising energy costs, while being better stewards of the environment.
The vision is to create bundled offering a smartphone and smart energy that integrated energy production and consumption data and the video app, allowing customers to intelligently manage their homes or to use a study performed previously by their consulting showed.
Sure. There are many homeowners are interested in bundling smart home and smart energy and we are seeing that with our customers as well we are approaching this opportunity through a dual path strategy asset light and cells.
Ace back in July we announced a partnership.
With solid finance partners, Sunrun and mosaic as well as with freedom forever, one of the country's largest and fastest growing solar installers.
The partnership will enable cream forever to include.
Smart home system with each other solar cells.
Which will deliver immediate value customer and of course, we expect this to lead to more.
For smart home installed per visit.
In addition through our partnership with accretive forever and other solar installers, we can offer smart energy to our customers as well as new customers. We are on pace to generate nearly 45 megawatts of installed solar this year, bringing smart energy to about 5000 homes in some market.
We are seeing many instances of smartphone customers bundling with smart energy.
We believe we can be significantly more in 2022, as we move radically expand our bundled solution in markets where customers benefit residential floor.
Over time as we integrate the production data from the solar panels with customer behavior patterns. We believe smart energy can driving distributable savings that will reinforce the value of the platform.
As it catches on we believe consumers across the country will be a bundled solution of smartphone and smart energy as it cleared the current year.
I would note that adjusted EBITDA margins in smart energy are lower than smartphone.
So while we will see incremental growth in adjusted EBITDA dollars.
Overall margin percentages will be a bit lower as the revenue from smart energy comes in a lower margin.
With this as we believe our ability to leverage subscriber acquisition cost and increase the lifetime value of our customers by addressing an obvious market demand to bundle Wifi solutions.
The compelling growth opportunity another benefit is in our bundle differentiates smart home and smart <unk>.
We'll provide our sold channels with the ability to offer greater value in the products, they sell and provide more opportunities to interact with current and potential customers. We will share more details on this opportunity in the upcoming months, but trust me. We believe this is a good adjacent market for us to invest.
Now, let me discuss more insurance.
Selling our insurance to a limited number of customers for a while now the largest to mention here is that a 600 billion dollar plus property and casualty insurance market has been looking for.
Analogue to the smart driver discount that auto insurance carriers deliver through their telematic solutions in hospitals equally the panda and model given the rich first party data that comes from our average customer interaction with our system over 11 pounds per day on the 15th Smart device nominal.
That protect them against water damage fire impact.
We have worked with several leading insurance carriers, we have been encouraged by their eagerness to help us create a strong insurance solution that leverages, our smartphone ecosystem. We believe our cloud can help insurance companies better price the risk of a customer, but as a professional install systems at home.
That is monitored and used consistently to mitigating severity of claims events.
Sure, we should be able to demonstrate insurers as debit customers present, a lower risk of homeless without a smart home system or the DIY system that was inadequate sculpting installed.
To date, we have been operating in an agency zone insurance price from a few large carriers and we are on pace to sell approximately 8000 insurance policies in 2021 to better leverage our smartphone platform and provide the opportunity for additional savings for consumers. We are working to get from managing general agent, which will allow us to develop specific.
Homework coverages for our customers. We believe we can potentially double the number of policies sold in 2022 and provide a higher level of country specific coverages through our MGA insurance offerings and some of our larger states as we've demonstrated in savings and benefits of our proprietary coverages. We believe we can expand into more states.
Over the next several years, we will expand in a thoughtful and deliberate manner has improved our customers the benefits that it can provide and protect their teams. Their rewards. We are focused on accelerating long term growth through each of these adjacencies. Meanwhile, we will maintain a sharp focus on our core smartphone business.
Consider these opportunities be natural extensions of our core smartphone market. We believe we have the tools technology and capabilities to deliver value through an elegant smartphone experience, but to save our customers money throughout innovative energy and insurance solutions.
Harvey.
And the preferred operating system in the home and a true platform play, we believe customers Trust us to protect our teams and their families and the environment, while also helping them save money.
We do this we believe we will benefit from scaling subscriber acquisition costs, increasing the lifetime value of each customer and increasing a number of years customers on the platform.
We're excited about the road ahead and remain confident that the robust growth potential of our core business model along with the Adjacencies, we're pursuing will put us in a position to deliver long term sustainable value for our shareholders I will now turn the call that it <unk> to discuss the details of the.
Actual results as well as our updated guidance for the full year.
Thanks, David Good morning, everyone. Thanks for joining the conference call.
This morning, I will provide detail for our third quarter and year to date operating and financial results.
I will also provide updated thoughts on our guidance for the full year.
We will open the call for a Q&A session. After my prepared remarks.
Before I dive into the numbers I want to address the delay in reporting our third quarter results.
While we're getting certain customer contract transactions during the quarter ended September 32021 is identify the material weakness in our internal controls over financial reporting related to the timing of revenue recognition, resulting in certain immaterial errors previously reported amounts rather than specific.
Secondly, we found that we did not properly retire and maintain effective control in the quarter ended September 32021, as well as the prior reporting periods to accurately determine the appropriate period recognized revenue associated with certain transactions.
These transactions primarily related to bumping service charge adjustment and contract modifications.
As a result resulted in Ericsson are reporting revenue and other income and balance sheet items and certain prior periods.
The company at a material level of the misstatements, both quantitatively and qualitatively.
Turning to the correction of these errors to be immaterial to all prior consolidated financial statements.
Taken as a whole and therefore amending previously filed reports to correct errors was not required.
However, the company concluded the cumulative effect of correcting the errors in the quarter ended September 32021 with materially misstate the coverage above it.
Condensed consolidated financial statements for the three and nine months ended September 32021.
Accordingly, we are talking about to reflect the correction of the immaterial errors. The results for prior periods included in the financial statements Unaudited earnings releases cutting credit location as well as <unk> quarterly report on Form 10-Q that will be filed today.
The company will also revised plus information in future funds to reflect the correction of errors.
I refer you to our Form 10-Q that will be filed today for more details.
In conjunction with this call.
We posted a presentation to our Investor relations website that provided additional context on the quarter.
On slide 10 of the presentation, we highlighted a few of our key subscriber portfolio metrics.
Total subscribers grew nicely from September 32012, up nine 2% to $1 $84 million as of September 32021.
Average monthly reoccurring revenue per user or a M. R. R.
Increased by four 7% versus the prior year period.
Driven by customers purchasing more smart home and security products at the point of sale.
The combination of the growth in total subscribers and the growth of Aam's argue along with a few other items listed monthly reoccurring revenue by 15, 1% year over year to 121 5 billion.
Now moving to revenue for the three months and nine months periods ended September 32021 on slide 11.
For the third quarter of 2021 revenue was $386 seven 1 billion, a 21, 3% increase from the prior year period.
The primary driver of the year over year revenue growth or increase in pull subscribers an increase in the average monthly recurring revenue per user and contributions from our smart energy and smart insurance initiatives.
The 21, 3% revenue growth in the third quarter of 2021 was more than double the $9, 6% growth rate in third quarter of 2020.
Revenue for the nine months ended September 32021.
108 billion.
An increase of 17, 6% from the nine month period in the prior year.
Similar to the third quarter the key drivers of growth in the nine months period were broken Poles subscribers.
Brokers are here and contributions from our smart energy and smart insurance initiatives.
Now turning to slide 12, I will adjust I will discuss adjusted EBITDA for the third quarter and year to date periods.
For the third quarter, adjusted EBITDA grew 10, 7% to $174 million.
With an adjusted EBITDA margin of 44, 1%.
I would note the adjusted EBITDA margin in Smart energy and smart insurance are lower than our smartphone margins.
We are very pleased overall with the solid EBITDA margins achieved in the face.
Legendary purchase in today's economic environment.
I would now have included them in the third quarter results are approximately $9 million of investments in brand awareness through product and service innovation and IP enhancements.
Moving to the nine months ended September 32021, adjusted EBITDA grew 13% from the same period in 2012.
This includes approximately $20 million of investment spend associated with brand awareness.
Alex with service and duration.
Cancel.
Since 2020 results have a lot of noise related to the COVID-19 pandemic. We believe it is instructive for investors to look at the comparison of adjusted EBITDA growth of three nine months of 2021 versus the same periods in 2019.
Adjusted EBITDA in the three and nine months of 2021 grew by more than 64% compared to the same period of 2019.
We've also been able to expand our adjusted gross margin from the mid 30% range in 2019, the mid 40% range in 2021.
Now moving to slide 13.
I had a few metrics around new subscriber originations.
This subscriber originated during the third quarter of 2000 play one or 114050.
<unk> 56.
Our direct to home sales channel was lower than the previous third quarter, driven largely by the impact of Covid.
That COVID-19 has on the timing of the selling season in 2020 as the 2020 selling season was extended through September of last year.
Our national inside sales channel or NIH at year over year growth of seven 6% in the third quarter of 2021 compared to the third quarter of 2020.
For the nine month period ended September 32021, and our originations grew by over 18%. The company added 295782, new subscribers.
Three 8% from the same period in 2020.
We are pleased with the consistent growth in the <unk> channel over the past few years and believe it is a strong indicator of the value that customers see that business firewall platform.
Within all of the origination channels, we continue to focus on underwriting high quality profitable customers.
The third quarter of 2021 more than value to emphasize new subscribers either paid in full or financed the purchase with our equipment through one of our financing partners.
I will now cover net service and net.
Our acquisition cost on slide 14.
Net service cost per subscriber for the third quarter 2021 was $10 49.
Up slightly from a record low in the third quarter of 2020, but that will almost $4 for the same period in 2019.
That service margin in the third quarter of 2021.
Remains robust at 77, 7%.
I am pleased that our customer experience and build operations.
<unk> been able to provide our customers a delightful experience, while managing costs as customer interactions and our call centers and Emerald serves business rebounded from the abnormally low level during the height of the pandemic last year.
The introduction.
The flex based model.
As allowed us to achieve a significant reduction in net subscriber acquisition cost per new subscriber over the past few years.
Net subscriber acquisition cost per new subscriber for the period ended September 32021.
<unk> decreased by 52, 2% to $100.
This is a $109 reduction from the prior year period, while the average proceeds collected at the point of sale increased to almost $2200.
Moving to slide 15, our last 12 months attrition rate of 11, 4% for the period ended September 32021.
140 basis points lower than the same period last year.
At a 13th quarter low for cross border purchases.
We believe the continued improvement in attrition is related to our enhanced underwriting standards and an increased interaction of our customers with the platform.
In terms of cash for operating activities, we have.
Had another solid quarter at <unk> $78 million.
I would note that our cash from operating activities in the quarter and the nine month period includes the impact of the change in the timing of payments to one of our financing burgers as well as our investments in brand awareness through product and service intervention it enhances.
At the end of the quarter, we had a solid liquidity position of approximately $635 million.
In July we completed a global refinancing of our existing debt structure, which decreased our total debt outstanding by approximately $90 million lowered our average cost of debt by nearly 200 basis points and increased our revolving credit facility from $334 million to 370.
Yeah.
We expect the refinancing to save the company approximately $50 million in annualized interest expense.
Before providing an app.
Good thoughts on guidance I want to get a little bit more perspective on our expectations for cash flow from operating activities.
As we have discussed over the last year, we plan to operate the business on a cash flow positive basis.
We will use the excess cash flow to among other events fund sales growth initiatives pursue new adjacencies, such as smart energy and smart <unk> invested in new product and service innovation and reduce outstanding debt.
When comparing to cash flow in 2021 through 2020.
Imports are better at cash flow from operating activities in 2020 benefited from covenant interest cost reductions from partner sub temporary.
In 2021, we have seen many of the temporary cost reduction business come back into our run rate and we are seeing in the flagstar pressures in labor and material costs.
We also put through a price increase on our starter pack.
At the beginning of the pandemic in 2012.
Another significant change in cash flow from operating activities for 2020 for 2021 hop to note the change in the way, we paid financing fee and anticipated credit losses to one of our financing partners switching for paying over the term of the low to upfront at the time of the finance.
This will also have an impact on the cash flow from operating activities in 2022, as we've layered a full impact of the changed and over 2000 platelets A&P thousand 22.
Finally in terms of guidance for the full year.
We believe there are a lot of positive momentum in our business and we remain very optimistic about the rest of the year. In spite of notable headwinds related to supply chain disruptions with Blackstone Crusher labor constraints.
We are updating our guidance for the full year as follows.
Total subscribers in the range of $1 84 to $1 85 billion versus previous guidance of between one eight and $1 85 billion.
Total revenue in the range of one four to $1 4 billion.
Above the previous guidance between $1 38 to $1 $42 billion.
And finally, adjusted EBITDA in the range of $650 million to $660 million versus previous guidance of between $648 million to $655 million.
Rob This concludes our prepared remarks, please open the call for Q&A.
Thank you.
I'd like to ask a question. Please press star followed by one on your telephone keypad now if you change your mind I would like to withdraw your question. Please press star followed by K. Okay.
Thank you for your question, please ensure you're saying it's Amit.
Our first question comes from Rod Hall from Goldman Sachs. Please go ahead. Your line is open.
Hi, This is RK on behalf of Rod. Thanks for taking my question nice job on that or thoughts on all the color on the smart energy and smart in China. So I wanted to start there I wanted to ask on the economics of the smart energy offering.
Exactly that you generate the smart energy revenue and how much lower are the margins and on insurance can you talk about the business model that youre going to that are you offering driven branded insurance are those as being one of our partnership with third party providers and I have a follow up thank you.
Yes.
I'll take that.
Largest gothic David can jump in here around how our how we are thinking about whether it's a bit of a branded or or not on the smart insurance in terms of larger that as any.
Kind of a new admissions as you go into that.
Chart out.
<unk> got to build scale to be able to talk with gross margins. So we expect margins in smart energy and Smart insurance group as we continue to build those out.
And what I would say in the east.
Revenue associated with kind of those two initiatives in the third quarter.
It was approximately help contribute probably 5% to 6% of our revenue growth of 21% was related to those initiatives.
And.
Again, we're not probably ready to tell you that all of the economics around those but.
But.
As we continue to build those out as well as spend notes, but but as you can imagine the solar industry.
Tom maybe I'll look to process those margins are less.
But then what we did see our smartphone and.
Industry and I think it's also important to realize we're going to an asset light business here, where we're not we're not 200 solar installs or it's more of a sales.
Crouch as we're generating leads and so we're getting paid for the Liza regenerated.
Across our platform.
So Fortunately I don't know David.
Only a moron.
One of those two buckets.
Push there in the car.
Estimates are interested in <unk>.
<unk>.
I'm excited to see a scale acquisition costs Award.
<unk> customers worldwide.
Adjusted EBITDA was bundled solution for many of them.
I think with regard to the second question around the branding right now it is branded development.
Visit energy and.
Insurance Smart energy.
We'll continue to evaluate that to see that one brand is using differently, but as of right now to get awarded in the inspection cycle.
We've kept the money for the brand and we will evaluate if that makes more sense or less sense over time.
Now they are branded.
The option to change it if it makes sense.
Thank you appreciate all the color there and on the quarter itself I wanted to touch on your subscriber growth.
10% year on year, and you mentioned that the difficult comp ballpark <unk> edge.
Can you comment on linearity and how should we think about a normalized rate of growth for the subscribers. Thank you.
Okay.
Yes, yes, I think so so again project evolves.
I think when you go back to kind of do comparisons year over year, Dr. Coupled with difficult comparisons because again, we got started late last year in terms of a good early start slug away extended all the way through September kind of at a fall season, which normally that season and towards the end of August.
I think theres also a lot of pressure around.
Difference in the 2021, maybe even 2022 excuse me 2020 is also the pure average.
You get you see current average crop come back to kind of what we saw historically back in 2019 versus 2020.
Slightly higher again, I think that was related to the fact you had.
More people lower hold both bulk whole loan both decision.
Decision makers in the homework hold in 'twenty versus 21 are people starting to go back into their offices would go back to <unk>.
Work from global locations, so all of those kind of come together.
Well I think we would expect to see out of both of our channels.
10% plus growth on an annualized basis, that's level X what our targets are going to continue to grow those channels.
And so.
<unk> brought in NIF, we've actually seen good growth.
And dropped the ball.
The prior periods, but when we look at the big about 2022, and beyond and bankruptcy again, 10% or greater annualized broke the bulk of shapes.
Thanks, guys I appreciate it.
Okay. Thanks, Doug.
Thank you. Our next question comes from Paul Chung from Jpmorgan. Please go ahead your line is Burlington.
Hi, Thanks for taking my questions and very nice topline here. So on your average monthly revenue trended quite nicely. This year. So what what are customers buying more of today kind of driven strength there.
And then as we think about insurance and solar initiatives, how does that monthly revenue.
Kind of per user accelerate from here and then are there any price increases that we should think about it in the near term as well.
The first part and then the second.
Second half.
We continue to see really strong demand for cameras in particular in the smart home and our core business.
We've invested heavily there boutique.
The extreme team ahead of our cameras are quite excited each.
Sure can continue or not but.
Unusual gender quality events, but we also focus on returning negative events. This morning occasions Award.
Having a camera and.
In sugar as it was.
I was moving around the house earlier and also have them in house.
Normal and.
The British smart with our AI and and just a smart camera and a delight to model whistles into the core <unk> and <unk>.
Diagnostic as I'm driving to Warcraft saw soft signage safe as well.
Okay.
<unk>.
It helps summarize the Myrtle Beach house, because enough of that now so that other things, there's just been a much higher appetite by our customers for our cameras. So you've seen that average device in the home increased so we're really focused on making sure that we deliver what they want.
But also property scope that moment install all the devices.
Appropriately, but thats a good catch.
This has really been driving that nicely year over year.
In terms of the way, we'll recognize with smart.
Insurance of Smart energy revenue currently that will be recognized in period.
Not reoccurring revenue.
While Tac revenue associated with those type curves.
Models out there.
So I think that addresses that question.
As to the Atlantic.
That's good and then just a follow up on the insurance, how large can that business and contribute over time.
Your data is there so the comp side, two incremental but how the margin in this part of the business how material.
Can this be a part of your overall user base.
We compete against.
Yes, so as I mentioned in my comments right now with new strategic agency model.
Up to now.
Work with a variety of customers. Initially we've got the right best priced solutions out there as we move towards his MGA model, where you actually leverage the ecosystem that we have.
Meaning that all but essentially we have in the home we can tell the state as a whole better than the B wells.
Occupancy and then just the how.
Well the bulk of our ecosystem in the home.
Around flood fire theft, we think we can protect it better so as a consumer as the right system is properly sculpted installed.
Deepens our system.
Quite a bit.
We know that their occupancy of the home, which is determined at the time, we believe that we can fundamentally change the risk profile of what they are buying from P&C insurance. So if we prove that out.
We can drive material savings to them, so I am sure that because.
Adoption rate and ETP buy material.
Once again it is so beautiful opposites.
As you can show a customer that as the ecosystem correctly it should reduce their insurance premiums.
There's just a lot more to use it.
So the more savings did have and the more likely that the OLED customer base for a long time, so it really reinforcing mechanism between the two.
We'll know more next year.
I'd like to have approval before I talk about it but we think it will be a pretty high a pretty material attach rate.
As we as we demonstrate that value for them.
And what we've seen so far is the appetite for customers that would leave approach.
That they trust us.
We're helping them make a better selection and they see the logic in connection with this model.
That will grow to bet, it's state by state as a highly regulated industry and so you've got a lot of state by state correctly.
Great controls.
We will be thoughtful, but one of our biggest states first and then more across the entire country.
So we believe that over the next three to four years, we should be in.
Most if not all states.
And last one from me I mean, it's a similar question for the solar what.
Penetration rate do you expect for <unk>.
In subs in the subs over time and then you are.
Near peer one made a large acquisition here. So you are seeing thats kind of secular shifts with you guys and your competitor for a bundled solution. There. So how can you capture share in a more competitive environment.
Then.
The higher you, making the purchase decision and very simple for our customers.
Which sometimes can be somewhat complex. Thank you.
Great selection.
On the smart energy side.
We can get when you are the first one out there in a material way.
With what we announced with some mosaic and freedom.
We've had a very strong demand.
Toward that for our customers I know the solar industry quite well, obviously give my five year Hilbert visited Florida Covid sold etcetera.
You have to be really mindful of the economics for the customers.
Unfortunately, Florida didn't pencil nicely in every state there is no 20, or so states that it pencils.
And a pretty good way for the customers. So we're going to bulks of those states.
Were following obviously, we're both sometime.
Freedom are it's around 25 states today, it's growing as we continue to reduce the cost of such an acquisition cost you can make it pencil nicely into different states. So.
Your first guide there should be kind of one of the states that those were slowly being sold today, it's roughly $2 25 states.
We're differentially focusing on states, where you have to keep the savings, but we have a very large customer base and in the southern states, which would also impact the labor it makes a lot sense for solar.
And once again, we think the penetration there.
The bundling there can be.
<unk>.
Material for us.
It's probably going to be.
Less than 50%, but.
More than 10% will be in that range.
And we'll have more detail as we prove it out over time, but the momentum we've seen thus far it's been nice employment with a partial focus on it we really havent open it up for broad based adoption of our Salesforce youll see throughout 2022, which we will open up more and more and more and more.
We're seeing as people meet with smart home delivery by this model when and if to each set in flows easier set and close on the solar side.
And the combination of those two is resonating with a fair number of our customers and.
And you want to add.
Moving out of that.
Our partnerships with breeder Forever. For example, every one of our customers that buy solar so theyre actually selling the solar.
Including a visit spiral.
So we expect to see growth coming out of that that's kind of driven outside of the our sales force.
And that partnership so we kind of keep both sides, where we conduct our prior cost forever.
Jason with new customers that we're selling smart haul plus picked up the smartphone growth.
Fragrance solid solar so those customer to us.
Component about this and we've talked about these logical adjacencies.
And we'll share more detail in 2022.
But we're seeing a.
A substantial increase in the number of customers that stay sticky on on the solar side, we need to call. It same day solar so what's nice about this is they sell in the region, while our smart home within a day or two of the sell and the customer Siemens value from that and then taking those sorts.
The install started and then with the solar installed depending upon the jurisdiction, whether it's 30 days 45 days or 60 days they vary by state and by municipality Vega for second half of the install.
And so they're seeing value much earlier, the propensity to follow through on that is much higher bill well customer experience is much higher so we're seeing material benefits.
Customer perspective, and when you think about that when you have a higher yield on your on your funnel youre able to subsidize the cost of that the smartphone. So we're seeing a true win win win it's definitely benefiting customers certainly benefiting us in the cost of the company and then obviously benefiting our shareholders. So very encouraged.
By that you'll definitely see it develop more pleasant than a good lead on others that are trying to enter this space.
We're very very very pleased with our partnerships and how they're evolving.
Great. Thanks, so much.
Thanks, Paul.
Thank you. Our next question comes from Ashish that that truck from RBC capital markets. Please.
Please go ahead. Your line is now open.
Alright, Thanks for taking my question and let me add my congrats on the strong momentum in the quarter maybe.
Maybe just a quick clarifying.
<unk> heard about the tight labor market and supply chain constraint I was just wanted to confirm have you seen any impact on your ability to add new customer up going with your customers because of <unk>.
Because of the naval market and the supply chain constraints.
This is David.
So the definitely real.
Both supply chain and levered instruments or will.
So I don't want to discount that at all our team has done a really good job of being proactive and thoughtful.
On both fronts.
We're up substantially on for instance, our field professionals a recruiting team operations team I think we're up 200 heads into work at the end of the summer as we've really done a good job of work each.
To make sure you will understand our value proposition, what we stand for at least our mission of protecting families protecting homes.
Or the wallet is resonating.
Like our platform, where we're going.
Definitely definitely.
Challenge, but thats, what we get paid to do is to work through these challenges and I'm really proud of our team on how they are managing through that on the supply chain same team.
They are real.
We deal with this week to week, we've been doing with our <unk> with many of our suppliers and as we lay out for them our roadmap of what we're doing with products that were read market how innovative they are.
Our vendors have been saying youll purchase very differently, we'd love your roadmap to levels, we believe they want to partner with us.
The future, which is not very far off our new products will come out of 2022 and that they're very excited and I think that helps us get up.
Better.
With regards to current supply.
So we will continue to yield challenges that don't need to discount that but our team is exceptional I think very very impressed with how they manage through this key managed through it they include need build selectively with certain vendors and.
The partnership conversations have been very very positive.
You can see our roadmap our momentum the robustness of our model.
Our growth.
It's really helped us manage through this better than I had expected I will now first of all world class six months ago. So still have challenged the future. It's not over because we think these challenges will continue to manifest themselves throughout 2022.
Some point next year there'll be alleviated much where they are today, but our team and kudos to them. They have done an incredible job.
That's very helpful color.
Maybe a quick question for you on the free cash flow.
I understand there is some one off items being on the cash flow like 'twenty, one some investments and changes.
<unk> talked about some of those changes in the financing agreement mean by 'twenty two but as you think about the mix is that a way to think about the EBITDA conversion or how do we think about.
Cash flow from operations over the midterm.
Yes, I mean I think.
It's good question I think for 'twenty one.
We used a $78 million in the third quarter fourth quarter. If you go back historically, what the dollar spend.
Use of cash less what we pay our backend commissions.
So a quarter I think developed a whole euro equal in our we're looking at that.
<unk> full year cash flow from operating activities when that kind of a color.
$60 million to $75 million range.
And then I think we would look to grow that going into 2022 again, it's a focus of the whole organization.
Finance initiatives across the organization all of our leaders leadership.
It's something that private economy.
I'll, let you sort of it's kind of our core DNA is that hey, we want to operate our business.
Sustained profitable growth that generates cash flow from that and so thats kind of our focus is as we look at crossroads investments that we're making this either today or in the future active adjacencies or so.
Hi on the Smart energy Smart insurance, we believe these adjacencies both complex really good cash flow dynamics.
So.
Their incremental are accretive to cash flow and so when we look at new.
Adjacencies new products New services those are the type of it's one of the factors that we factored in as we think about where we want to go whether they want to offer to our customers.
And so that's kind of where we are right to be updated kind of cash flow from operating activities.
Yes.
And I mean.
Think about that.
<unk>, what we focus on.
We're really focusing on growth above market in all our segments was professionally installed monitor marker would be maturity pools.
Smartphone marinas, we want to show consistent growth above market, we definitely want to continue to scale the business and.
And so.
Okay.
To help make sure that those economics flow through to the bottom line.
We're very interested in growing the lifetime value of the customers demonstrating a platform play that we've talked about it.
It's very exciting for our company internally to see the platform play taking hold and growing.
The low smartphone, we love how well that's performing and then Adjacencies.
Adjacencies China.
For our employees as we see the platform play manifested so that'll come through lifetime value of the customer and then the last point unveil cashflow generation got.
Got it.
We can grow by.
By Craig.
Fortinet economics for cash generation, that's not how you want to grow a business we want to grow a business, where we also show you guys that the cash flow generation improved year after year after year.
<unk> strong British stronger stronger so it really is above market growth.
We would scale.
Business model truly LTV.
Right.
Generation doesn't keep that we're focused on.
Jonathan I think investors those IPG was focused on.
That's very helpful color. Thank you very much and congrats once again.
Thank you.
Thank you. Our next question comes from Erik Woodring from Morgan Stanley. Please go ahead. Your line is now open.
Thank you so much and congrats on the good quarter guys.
Wanted to get to and then you guided the year roughly kind of early August. So what did you see kind of in the last two months of the quarter that that allowed you to materially outperform and raise your full year expectations and then I have a follow up thanks.
Yes, I think areas that they are.
He said that at the Q2 earnings call in early August.
We were bullish on what the year would look like but there were still some.
Headwinds out there around supply chain labor constraints.
As David said, we've managed really well through those.
In the third quarter or even early here in the fourth quarter and so.
We were able to this.
What I think is a really good third quarter terms of all of our performance across our metrics and so that gives us kind of the inside.
It was <unk> 50.
55 days or whether it is 50 days from the end of the year.
We feel really good about where we think the full year of being in that that's why we took our guidance up again when you look at things attrition continues to perform really well.
So subscribers for the end of the year subscribers commented in at the high end of the range.
We've been able to even with all the different things going on to be able to keep our EBITDA margins in that mid 40 developed at 40%, which given what we're seeing the growth together.
Go to increase those EBITDA ranges for up to 660.
$160 million.
So again revenue with the addition of the Smart home continues to grow and we've seen really good growth year over year. When you look at your smartphone revenue for methods of the new App is these two adjacencies that are really starting to contribute.
In a meaningful way to our revenue that allow us again to go back and look at that based on where we are today, we feel very confident in reaching that target or that guidance also so all.
All of those things back together I think when we were setting in August again, David has been here at that point, maybe 60 days, maybe 75 days.
So we're thinking about strategy.
Executing for the rest of the year looking at some of those headwinds are out there we've been able to navigate that and feel very good where we are for the rest of 2001 and frankly.
Working on what we think 2022 will be.
We're excited.
Where we're headed in terms of the momentum we have going into 2022.
Okay. That's really helpful. And then obviously amazing job on the attrition side, where do you guys think that can end. This year and then directionally, how should we think about that going into 2022.
<unk> done a terrific.
Our operations team kudos to them.
At Schuh booster as well I appreciate all of you.
Two big factors here is always where you are in the cycle with customers.
So what cohorts coming out of contract law correspondence or what was the growth rate back then so that's one thing and then secondly is.
We're trying to do here, which is can you provide more value to those customers. The more you can provide value to them. The better off you are amphitheater RMB Super excited about is <unk>.
Margin rates will be.
Panel at protecting family homes bankers from Moody's, which blip, but it came at a cost.
And we think that we earn that better than India.
What's the solution to product, but now we could bundle lending other.
Logical adjacencies that we could fit in nicely with the platform.
Roll in sort you should.
Save your customers might be rolling in EV Charger, you should see some money as you roll in insurance and as to the benefit with our overall ecosystem you can save the money. So in some situations you may offset a portion of that expense save the family protected family and home in other situations.
Alright feedback is very positive.
Savings proposition, if you're in that situation, where your safety protecting family.
The earth in their wallet.
W word, but shouldn't go anywhere right.
Execute well you take care of that customer agency Whitman on protecting all of this and I'm better off financially. So he worked at feather that into the overall portfolio and deliberate consistently across all of our customers.
We hope that lessons have a great positive impact on attrition.
I don't mean to get them done overnight.
But the growth math as you can tell the customers see that and we continue to execute nicely.
We hope that.
The net net of those two things will will benefit us over time, so I think that's it.
Hi, David.
Now why we really feel that all of us at customer interaction customer experience. Our platform is helping that along with as we mentioned payments other items. Some of the changes we've made over the last few years.
The input. This earlier, we can open them underwriting funnel back up and grow.
Multiples of the labor going on today, but we don't believe that's the right thing for the product.
Business for the shareholders. So we've continued to tweak that underwriting make those debates around that.
But look when you look at attrition for the rest of this year.
We're probably somewhere in the range, we are right now I would say.
Dataset attrition.
Probably go up a little bit as we go into 2022 cohorts that are a little bit probably gets into the high elevens maybe local.
Exchange and the Covid, that's a cohort and the charter until you're into terms from higher attrition is historically less crop.
What we've seen with <unk>.
Our attrition is actually not changing it's just the mechanics of where that David mentioned.
Cohorts of our and Theyre in the curve, what's the number of cohorts work at are at the end of the curve because of the brokerage we've added net year versus other years.
But we're really excited about where attrition is and where we think he would go status as we add other adjacencies frankly more value to a consumer.
We're not holding part of protecting their families. But it's also helping them get savings on insurance, it's bringing energy to their call and helping them manage their energy usage inside their home, which drives other savings we think there's lots of benefits across the <unk> model and as.
As David said, we believe that over time that will prove out in our attrition rate. Yes. So what we're trying to even structural changes that will help us over time and material materially impact nutrition.
If you go back to admissions gave Greg we're trying to redefine the home experience with technology services, the boat with technology and service to create a smarter leaner safer at home it saves our customers money three months against.
I guess, a fundamental shift a positive shift for our customers.
You've heard us already returning to transform which we already build long term customer relationships and the lifetime cost relationships.
Aspirational for us.
Gets us motivated right, we don't want our EVP of customer I know eight to nine years is remarkable when you contract spot.
Also so grateful for that but.
As we execute on this.
Our average life I'm going up by a multiple of that absolutely.
So we got to execute and execute flawlessly, we've got to make sure that we are bringing the right solutions and delivering every day, but as we do that we think which we will redefine its experience and its platform play as a whole will actually bearing fruit.
And that is what's got us the company.
Everyone's focus on making that happen on a scalable basis. So.
That's what got to execute on.
No that's great I really appreciate the color guys. Thanks, Thanks, again, and congrats on a great quarter.
Thank you Sir.
Thank you our next question comes from.
<unk> <unk> from Evercore.
Please go ahead. Your line is now open.
Thank you.
I have a couple of questions.
After the EBITDA.
Floor with new offerings like energy and insurance.
Can you maybe just talk about where are they with the 44% number you just printed and then are there more because.
The sub scale asset revenue stream that you have are they going to be structurally lower and then you get to scale.
Yes, so so I think I'll ask questions.
Thus the margin from the revenue we generated from smart insurance and smart energy are excluded in the 44%. So so so.
We didn't have that are marvell margins would've probably been a little higher again, we're building up these kind of new initiatives. So we're not at scale have startup costs associated with getting these machines up and going and so those are the model today that we expect over time that you would.
You would see that we build scale and improve those.
Those margins associated.
Those businesses again, but I am not going to go into the exact margins today.
What I will say that we're excited about where we are there.
So Jason to take it we think there is more value than.
The margin to the bottom line in terms of the overall customer relationship as David said as we can if we can extend that relationship with the smartphone customer.
About 78% service margins.
Whether it's a year to buy more years, we think that's incrementally add to the overall business and the profitability of the business. So I think that's kind of where we are but we'll give more detail as we go continue to scale up to those initiatives.
Some of the unit economics, but today.
But I think about it where we already got the LTV LTV lifetime value.
Thats really really well.
Yes.
I guess that tracks extending.
The duration of these customers by these new offerings.
Logic to that.
I was wondering if as a company have finite resources money to deploy.
Why not double down and expand the number of subs you have for $1 8 billion bigger kind of in the core of what you do.
Adjacencies, where it sounds like it's a low margin proposition.
Yes, Brian why not go after new rapidly rather than expanding new offerings.
While we're not we're doing both apps.
Absolutely the smart homes are <unk> flagship business, we're absolutely building depth and you think about the new products, we're bringing out absolutely W. We're not taking our foot off that at all.
We think this differentiates us immensely and provides us a great opportunity to go bring on more customers. So we.
If we gave that impression we will meet you were obviously building down in smart home and the product suite and the channels, we're going after and growth on every channel so absolutely full for us.
And here, we're focused on delighting the customer.
And when you think about the alignment customer.
They want to bundle more and we see what's given us transition to build to help them save money and protect their families. Their home the earth, which are logical and their wallet. We can just superior solution. So.
It.
With smart home with low we're investing is absolutely growing.
These adjacencies not only makes it stickier for those customers, but also introducing more Christmas first Michael So solar is great solar helps that makes get here. Those are 30 year contracts 35 year contract with saving money and its integrated or activate T. Bone I would think about it if you're in California, where kind of.
These rates are changing all the time and our system can actually help that customer with a high political attention get home. They can do the math on E rate, we can help them consume better as they produce very powerful very sticky, but also 95 customers, they're just doing solar wind minute one smart.
Home.
So it should be and not be work for us.
Same thing with insurance, so nice movement.
Insurance I need it for ever right.
My phone that's what insurance is about one I, particularly enjoy a more leveraged ecosystem to allow me to give you even a better rate over time and not be or sold them and doubling down on the core, but we seem to be adjacencies or helpful to help us grow value of their customers maybe to keep your analysis of these new stuff.
Thanks for that question a little bit clearer.
No that's great and just a final one for me maybe I missed this but new subscribers, especially the director home piece was down quite a bit could you just maybe call out what drove that drop and how does that normalize or may.
Can you help us with what happened over that.
Yes, we cover a little bit earlier, and I'll cover that a little bit.
Really kind of.
Largely driven by the fact that you had in 2020, starting with the selling season later extended all the way through the September versus this year and you are kind of back to historical selling season was really around the middle of April So Canada metals as of August without that would look that was really it.
Big driver to that on a year over year again, one of them.
As David said, we're investing in smart home, we'd like to see both of those channels continued to grow double digits.
And that's really where we're focused to make sure that that's what we're seeing out of the smartphone growth from direct to home and Nols going forward.
Perfect. Thank you.
Thank you Kevin.
Sure.
Thank you and our final question comes from Brian <unk> from Imperial Capital. Brian. Please go ahead. Your line is now open.
Yes. Thank you very much congratulations on the quarter.
Questions around DNA.
As a percentage of revenue is about 39% this quarter last quarter was around 48, 42% last year was 45%. This decrease in D&A as a percentage of revenue due to the citizens Bank agreement and do you expect D&A to continue to decrease as a percentage of Rev.
At current levels, and then kind of finally throw it all at once.
And the last periods you provided that citizens bank.
Yes.
Fees I think it was $10 2 million last quarter and how much of that this quarter.
Yes, it's Brian.
And a follow up.
With you on the on the percentage between DNA at all I'll have all those data points treasury funding being available.
So the excess correct.
And then we go develop it also follow up on that in terms of citizens.
Adam.
Which should be in Q attributing some of that should be actually in the Q later today.
Okay.
Okay.
Then we can just follow up with those and then let me just flip over then.
And ask the broader question you talked about eight year life, extending that Asia life.
With these new offerings.
What about going to end two existing homes at upgrading is there a process that youre because eight years ago technology was much different.
And that's going to be the same thing eight years from now that those new smart homes are not going to be so new anymore is there a process, where you go in and upgrade.
Charge more and provide the latest greatest.
Hardware.
Great question absolutely.
Our core business with beginning of a long time, so we have a systematic and methodical upgrade program today. We go after customers before they get to end of contract as we worked to upgrade them show them the latest and greatest.
Incentives.
Ordinarily do our operations teams are very focused on that have been for a long time.
Part of the reason why with regard Trish and rates in the residential space, we think it's lower than our peers. So very proud of them and that is a systematic program that we do and how do we can continue to do going forward. Yes. It has established its one of the actual benefits update the big change debate the citizens financing agreement was.
<unk> line of credit facility.
Makes it a little easier for our operations team is they are reaching out to upgrade these customers.
To actually finance that the pizza the hardware that's part of the upgrade.
That is a focus that we've continued to not only from operational side to make sure that we've got the tools there.
That allow our customers to upgrade the platform at the hall and build a fine asset to one of our finance department for their citizens.
But.
Great. Thank you very much.
Thank you.
Thank you.
Keith our Q&A session I will now hand, it to David Bywater Mek.
Thank you.
I appreciate that thank you so much joining our call hopefully.
Which was helpful. For you guys as you understand where were you on what we're doing we're very excited about the future lot of work ahead of US we're focused on that.
But.
Over the last one on us to continue to.
Thoughtful methodical and strategic.
As well as with operational excellence <unk>. So appreciate it and we'll see it but.
Thank you everyone. You may now disconnect your lines.
Okay.
Right.
Okay.
Okay.
Okay.
Yes.
Yes.
Yes.
Yes.