Q2 2022 Vivint Smart Home Inc Earnings Call
Peter low and a 70 basis point improvement versus the prior year.
We're extremely pleased with this result, and we continue to believe our attrition rate is the lowest among national smartphone companies by a significant margin.
Our improving customer retention as a result of years of work to improve the overall credit quality of our customers improve the performance of our products and services and increase the frequency of customer interactions with our platform.
We ended the second quarter with our net service cost per subscriber at an all time low a strong indication that we are operating the business efficiently and effectively while delighting our customers.
It has more than 20 years of operating history, and we have developed and refined and proprietary cloud based platform that we believe is the benchmark in the smartphone space. Our reoccurring revenue model has proven resilient during challenging economic times, and we believe the peace of mind and secured it would provide as relevant in any environment.
Another key highlight during the second quarter was the successful divestiture of our Canadian operations for $104 million in cash proceeds.
As a reminder, we stopped doing direct to home sales in Canada in the first quarter of 2020 due to unsatisfactory new subscriber economics in that part of our business. Our Canadian revenues were generated a meaningful amount of cash flow from operations since we're no longer investing in growth. There. However, our lack of.
<unk>, Canada made these customers more vulnerable to attrition. So we made the prudent and proactive decision to sell the Canadian business and secure the value of the cash source by putting years of future cash flow from operations safely on the balance sheet and removing the risk of attrition to these customers.
Divesting the business also allows us to sharpen our focus on the exciting growth opportunities that exist here in the U S.
<unk> is a leader in terms of revenue and subscriber growth.
We plan to invest the resources of the transaction and value accretive areas that may include but are not limited to subscriber acquisition efficiencies growth and adjacencies enhancing the customer experience.
And improving our cost structure.
<unk> execution in these areas should drive higher customer lifetime value and more durable top line growth.
While elevating the cash generation potential of the business.
We are continuously focused on redefining the smart home experience with technology products and services that create smarter greener safer at home and our integrated platform as the core enabler that allows us to deliver on this mission.
We now process more than $1 1 billion events per day across our subscriber portfolio.
Our average smartphone customer as approximately 15 devices in their home interacts with their smart home system more than 12 times per day and stays with us for approximately nine years, a number that has increased over time as our customer retention has improved.
We believe our revenue streams are resilient and customer value customers value the technology and services they receive from pivot.
They are demonstrating this by taking more products.
<unk> with their systems more and staying with us longer we continue to install more complex technology in home and yet our net service cost per subscriber continues to go down a remarkable feat. We believe has made possibly possible by our world class integrated planning.
Smart energy and smart insurance are natural extensions of our smartphone business and we believe they are platforms that will allow us to penetrate and retain more households, with smart home technology and services. We believe the additional customer touch points will lead to even lower attrition longer average customer lifetimes and expanded customer.
Time value, we continue to be encouraged by the progress of our strategic Adjacencies, we've seen positive momentum in our smart energy business, where we installed 11 eight megawatts of solar through our partners in the first quarter and ramped 20 megawatts in the second quarter.
Due to the seasonality of our smart energy business, we would expect the majority of our revenue generated from that business to come in the back half of the year and we remain on track to double to 45 megawatts, we installed through our partners in 2020.
Our vivid salesforce and strategic partners, who bundle a vivid smart home system.
With solar continue see considerably better sales utilization rates than those who only sell solar and we continue to make progress towards our long term vision of combining energy production and consumption and to an integrated platform that uses artificial intelligence to manage power consumption more intelligence.
We believe our nationwide footprint and ability to install our award winning smart home solution within a day or two of customers signing up for a solar is a game changer for the industry and for our customers. We believe that as we grow and solidify our go to market partnerships will prove to be a powerful and differentiated combination to grow and retain smartphone customers.
On the Smart insurance front, we continued to operate as an agent so on insurance policies to new and existing smartphone subscribers. We continue to progress towards becoming a managing general agent, which will allow <unk> to develop specific hormone owner coverages and enable us to accelerate growth.
Because of our meticulous focus on optimizing the smart home experience for our customers, we've been able to grow faster than our peers and the do it for me smartphone segment, while generating higher profits than the alternatives do and the do it for your do it yourself segment, we believe that as we continue to leverage the advantages from our intelligence and a great platform we will further.
Expand and extend our leadership in.
And the do it for me segment.
In closing it is.
Just over eight years since I rejoined visit I continue to be impressed with the strength of the business model and the quality of our people. We truly have a world class group of employees to match. What we believe is a world class platform for growth. We're extremely pleased with our performance for the first half of 2022, especially against the backdrop of challenging.
Economic environment.
And our supply chain constraints.
Recognized and sincerely appreciate the hard work and tireless efforts of our employees to achieve these results. We're excited about the future as the markets, which we operate are large expanding and provide significant headroom for further growth.
With that I'll turn the call over to Dana to further discuss our second quarter results and our updated outlook for the year, which now excludes divestiture of our Canadian operations Dana.
Thanks, David Good afternoon, everyone.
Let me start by saying how pleased I am to join the reunite with David and work with the rest of the leadership team.
I really believe it provides a unique combination of solid business fundamentals.
Talented and driven people, great market opportunities and a culture that fosters growth and development.
I felt this way when I accepted the job and two months in.
Even more encouraged about the prospects for our customers shareholders and employees.
I feel this is a special company with a solid foundation that has tremendous upside.
The remainder of my comments will refer to information in our earnings presentation that was posted to the Investor Relations section of our website at <unk> Dot com prior to this call.
Following my prepared remarks, we'll open the call up for Q&A session.
Our key subscriber portfolio metrics continue to perform well and showed year over year improvement in the quarter.
During the second quarter of 2022, we had growth in total subscribers of four 7% versus the prior year period, reaching one $8 6 million as of June 30.
Normalized for the Canadian divestiture, our year over year growth in Tulsa subscribers was nearly 11%.
Our average monthly recurring revenue per user in the second quarter increased by 4% year over year to $68 <unk> III.
Excluding Canada average monthly recurring revenue per user was $68 69 for the quarter.
Moving on to revenue and adjusted EBITDA revenue grew by 15% to $407 3 million in the second quarter of 2020 to.
Normalized for the Canada sale revenue growth for the quarter was 17, 5%.
The growth in revenue was attributable to the previously mentioned increase in total subscribers and average monthly recurring revenue per user as well as solid contribution from our smart energy adjacency.
We're very pleased with the revenue growth through the first half of the year and we remain on track to meet or exceed our original revenue guidance for the full year. Despite the spin off of our Canadian operations.
<unk> revenue adjusted EBITDA grew nicely in the second quarter of 2022 finished.
Finishing at $189 7 million up 18, 9% from the same period in 2021.
On a margin of 46, 6%.
Normalized for the Canada divestiture adjusted EBITDA growth was 23, 5% year over year.
The scaling of service costs and lower G&A expenses were the primary drivers of the improved margin performance.
We're pleased with the growth in adjusted EBITDA in the face of continued economic challenges and supply chain constraints.
Next I'll highlight a few metrics our subscriber originations for the second quarter.
New subscriber growth was three 9% compared to the same quarter in the prior period.
In the prior year period, and was driven by over 4600 originations through our smart energy partners.
The demonstration of the benefits of bundled smart almost sold.
New subscriber growth for the six months ended June 30 was six 2% and was again driven by originations through our smart energy partners.
We continue to be encouraged by the quality of our customers were adding to the portfolio.
And the loyalty of our customer base continues to improve as evidenced by the overall growth in total subscribers of approximately 11%.
Nearly all of the customers originated in the quarter either paid in full or finance the purchase of their equivalents through one of our financing partners.
For the last 12 months period ended June 30 average proceeds collected at the point of sale was $642 after the payment and will finance.
Ill next cover our net service cost per subscriber and net subscriber acquisition cost per new subscriber for the quarter.
We continued our trend of year over year improvement in net service cost per subscriber.
Dropping from $10 three in the second quarter of 2021 to an all time low of $9 29 in the second quarter of 2022.
Correspondingly our net service margin increased from 79% in the second quarter of 2021% to 81% in the most recent quarter.
These results demonstrate the advantage of business fully integrated platform.
<unk> attach rates, particularly cameras continue to increase while net service cost per subscriber continues to drop.
The constant feedback loop from our proprietary platform enables us to continuously improve our integrated products and services, leading to fewer customer issues and higher customer satisfaction.
As discussed in prior earnings calls then it now includes the fees paid to our financing partners in the reporting of net subscriber acquisition cost for new subscribers.
Whether those fees are paid over the term of the long for upfront at the point of sale.
Including financing fees.
Net subscriber acquisition cost per new subscriber for the last 12 months ended June 32002 was 606 more.
Up marginally from $604 in the prior year period.
The year over year increase was driven by higher equipment related expenses as well as higher MBR fees due to recent interest rate increases.
Another metric we are happy to report as our last 12 month attrition rate.
For the period ended June 32022, our attrition rate improved for the ninth consecutive quarter to 10, 9% a 17th quarter low.
Our enhanced underwriting standards standards improved product and service performance and the high level of customer engagement with our platform continue to drive what we believe is the lowest attrition rate among national smartphone.
In terms of free cash flow, we generated $62 7 million during the second quarter of 2022.
Down $12 3 million from the second quarter of 2021. The decrease was primarily driven by a change in the timing of financing fees paid to our lease financing partner.
As of June 32022, our balance sheet reflects a $299 million of cash on hand, and a very strong liquidity position of approximately $658 million.
In conclusion, we're pleased with our consistent execution across our key financial and operating metrics.
The fundamentals of the business remains strong.
With our momentum going into the back half of the year.
The divestiture of our Canadian operations pulled approximately $104 million of cash forward, which we believe is significantly more cash than we would have generated from new subscribers over the next 10 years and it provides optionality to invest in areas that we believe will drive incremental value for our stakeholders.
Vivek has been securing and creating smart homes for over 20 years, and we have a history of exhibiting strength and resiliency through challenging economic times, we are confident that our customers will continue to value the security and smart home solutions, we provide.
We have long believed the total addressable market for smart home presents a tremendous opportunity and we believe <unk> is the best positioned provider to take advantage of that opportunity.
Despite current challenges in the broader economic environment, we are reaffirming our original guidance.
First announced in connection with our earnings call in February .
For revenue and adjusted EBITDA.
To account for the sale of our Canadian operations, we are adjusting our guidance range for total subscribers by 85000 or roughly the number of subscribers that were sold.
We're also adjusting our guidance range for Q3 cash flow by $17 million on the top end and $15 million on the bottom end to account for the decrease in operating cash related to the Canadian subscribers or sold.
In summary, we expect to end the year with total subscribers within the range of 186.
And $192 million.
Revenue within the range of one six.
And $163 billion.
Adjusted EBITDA within the range of 725 and $745 million.
And free cash flow within the range of 35 and $60 million.
This concludes our prepared remarks for the second quarter.
Operator, please open the call for Q&A.
If you would like to ask a question. Please press star followed by one telephone keypad.
Anything you want on that question. Please press star followed by team.
To ask a question. Please press star one as a reminder, using a speaker phone. Please remember to pick up your handset before asking your question.
Pause here briefly ask questions I would like to start.
Our first question comes from the line of Rod Hall with Goldman Sachs. Please go ahead.
Hi, Yes. This is Max on for Rob. Thank you for taking our questions. First question is on cash flows and interest rates and I think you touched on this but could you walk us through the main ways, how they've been impacted by rising interest rates and then possibly quantify what you think the incremental headwinds to cash flow.
That what percent or is that what the wider free cash flow guidance represents another form.
Thank you.
So Max as you probably know a lot of our.
That has a variable component to it and so we're impacted by rising interest rates associated with the change.
There and then the customer.
Financing options that we provide also.
Variable component too so both of those things.
Can impact us pretty significantly if you quantify that and let me just give you a little bit of.
A benchmark here, if we rise by about 1%, 1% increase in interest rate creates about a $26 million increase.
Interest expense for the company at the current run rates with the current structure.
That's a combination of the debt outstanding debt as well as the financing that we provide.
Tumors to buy.
Buy the products with.
And so thats roughly a benchmark on an annualized basis of what that an increase in interest rates.
So we've seen some fairly significant interest rate increases here over the last few.
Months.
Which have impacted the company.
And so we're we're seeing those kind of.
Interest rate increases in our financial statements there as far as the impact.
Free cash flow.
And operating expenses.
The good thing is we've been able to operate.
And continue to provide guidance here for the full year, which is pretty robust and very close to the original figures.
Back in February .
And we also expect to.
To be able to operate in those ranges, excluding what we talked about from Canada.
To be pretty close to what we originally guided to so.
Optimal in terms of.
<unk>.
The increase in interest.
<unk>.
Many companies are faced with and we're certainly not immune to that either but we feel pretty good about the position that we're in in terms of they are still generating a.
Significant free cash flow.
And feel like.
We're operating very well along in the environment that we originally guided to earlier this year.
Yes, I'd add to that Dana just to your point I mean, the team has done an incredible job our net servicing margins improve you saw our net servicing costs.
I think the team has responded really well in the market.
And given us inflationary challenges in interest challenges.
And the development so we've been thoughtful about cost optimization.
About how we do a route optimization self help tools that we've been rolling out this reducing our roll call demands.
And there's just been a.
I think the technology.
Efficiency of the technology.
And how we continue to tighten that make a better experience for customers all of those things translate to lower cost and we've seen that in our net servicing customers in Chicago down to an all time low so.
With interest rates with we're not an environment theyre in but I'm really pleased with how the team has operated and that bodes well for us.
They move forward.
Once the traits are little more stabilized.
The core performance of the company.
<unk> to impress me I'm encouraged by what they have.
Up their sleeves to do over time to continue to make a better so good.
Good question Max.
Yes.
Very helpful. Thank you for all that color and then as a follow up.
Wondering if youre seeing any change in the popularity of citizens financing.
I guarantee you offer zero percent APR financing.
However, expect to move away from this R&D.
Do you plan to continue to offer this service on financing. Thank you.
Well, that's been a pretty successful thing from.
From my view is that entered here in his role as CFO zero percent financing skin attractive now whether or not we would ever move away from that I think there's certainly some other options there.
Obviously consumers.
Not being impacted themselves by an interest rate increase.
Bodes well in terms of their ability to get product.
Two.
Engaged with Devon.
There's certainly some of the things that we could look at and do as we go forward.
But today, we're pretty happy with that relationship its been a very good relationship.
Yeah.
That relationship our contractual amendments to that expense. So a couple of more years. So you don't see us going away from that.
In the near future here.
Been something that's been very successful in terms of being able to generate upfront cash.
And allow the company to be in.
Our strong cash position.
That's very helpful. Thank you so much.
<unk>.
Thank you Mr Hall.
Our next question comes from the line.
Tom with J P. Morgan. Please go ahead.
Paul Your line is now open.
Hi, Hi, Thanks for taking my question.
Nice execution here. So this is your second consecutive quarter with kind of positive GAAP operating profit.
Are we on a new trend here and can we be kind of GAAP profitable for.
For full year may be by 'twenty, three and then where are you seeing opportunities on the cost base and should we.
Some seasonal uptick here in the second half and help us kind of sparse out the opex related to Canada.
And a follow up thanks.
All I'll handle the second half of your question you want to push products.
GAAP.
Earnings Paul benefited somewhat from the sale of the Canadian operation. So when we look at the overall.
Profitability for the company, we had about a $25 million gain associated with the sale of the Canadian operation.
So that's a onetime event.
Will.
We are moving in a good direction. The company continues to improve in terms of its overall profitability.
Overall performance, David talked about the efficiency that we're gaining in terms of operation, especially in that service component. So we expect to continue to see that trend move in a positive direction I wouldn't want to put a timeframe exactly on that in terms of GAAP profits, but we certainly feel good about the direction, we're heading and we.
<unk> continued to see improvement over the upcoming quarters.
Yes, Im eager for the day when that doesn't crossing that threshold because here in the next future not too far off.
With regards to the cost reductions that we're going after Paul I mean, this is definitely an area of focus for us with <unk> coming on in as strong a competency that area dana's strong competency.
And the entire team there is a multitude of things that we're working through that I think will continue to reduce our costs and increase our cash generation.
But I'm very very bullish about.
They are pretty significant and you think about certain things, but I just the scale of our of our solar business now that's actually performing quite well and is that kind of comes into maturity.
You start to produce some nice profit for us there's a bunch of products that we're working through right now that will be quite.
Well received by the market and I think our.
Our profitable for us it would be nice there's a bunch of stuff around supply chain. When you think about the escalation costs that we had this year with the committed some habits priority on air versus boat as well as are we going to go back and stabilize and normalize relationships with our vendors. We spent a considerable amount of money every year on our product.
It gives us tremendous advantages with our customers, but there is real opportunity there.
And then there's just there's just some real real innovative things, we're doing around self help itself feeling.
What's going to drive customer care calls and service visits plus obispo stop so I mean, what I am really really excited about and then also just go to market channels will go to market.
We're exploring and pushing additional channels to market that should be a lower cost to acquire customers.
And at that blend in.
It will be accretive as well so you'll get more details on this over the coming quarters as we move from.
Pilots.
And all of what we're doing today to where we feel very comfortable sharing the details, but I'm encouraged by that roadmap. It definitely makes me.
Encouraged by our future and I think we will continue to drive our cash and cash generation up considerably and our and our costs down so more to come but definitely very encouraged by that.
Great.
And then follow up on this smart insurance platform and kind of timing of becoming a.
Managing general agent and the uplift there was transition.
And then given the kind of smart insurances your largest Tam on your slides you're participating in and just.
One of the biggest opportunities for growth in your view or is there a specific kind of.
We are targeting and so any comments on the uplift of this transition. Thank you.
Great question.
Im actually very encouraged by insurance, we're still moving towards the MGA model.
Still plan on being in a state or two by the end of this year.
He has been thoughtful as I mentioned on earlier calls I'm not looking to insurance right now to be a large growth for us with regards to profit or.
Revenue growth.
This as an investment that we're making over the next few years that will pay off very nicely down that road, we're getting a significant lift right now out of smart energy its immediate material, it's large and that is living a nice.
This addition to our portfolio of what we do insurance will well.
Feather in over the next few years.
And I think it'd be quite significant what's really interesting about the insurance piece is there is two parts I liked the MGA play for sure.
Build actually demonstrate to our customers the value of their data to their benefit so that has got great retention value.
Her time, which I think will just add to what we're already doing the benefits. We're already seeing so I like that from a customer centric approach and the value we bring to them.
But what I'm also really interested in is the opportunity to partner with some.
Insurance companies and building gives us another another channel to market.
They have a large customer bases that are looking for innovative solutions and so.
Look forward to having that play out over time as well so.
Insurance is very strategic for us.
I am not relying upon it in the short term I am without power for the long term value add for our customers and for our shareholders. I think it will pay off very nicely and I am encouraged by multiple benefits I think it brings for us. So it is a large tam and we're excited to tap into that but it would be over the next few years.
Great and then lastly, Costa Newbuild passing the Senate.
Have your expectations for smart energy projections kind of evolving thank you.
Yeah, I mean, we'll feel it.
Finalize them when they go through the legislative process, but nothing.
Nothing but good I mean as I mentioned in my comments, it's amazing.
The amount of interest in this bundled solution that we have.
The work that I had done previously a debit solar with Dana we knew that.
Wanted to bundle almost the top of their heat was smartphone.
This concept of smart production some are essentially they do go hand in hand.
And we're seeing a considerably higher sell the install ratio with all of our sales force that sell them together they are seeing it as well.
Which just means the customers value. It. So I think the work is going through legislation right now it's a positive thing.
Our goals are.
Smarter greener safer at home and in Greener means a lot to us and so on.
I'm hopeful that it will actually pass through and then we'll see some long term stability around that going forward. So very encouraged by that.
Great. Thank you Ashish.
On that on that pace.
I think David I mean, the Senate passing that Bill this weekend.
We're very optimistic about the demand that will be there for smart energy and use that.
Customers.
As smart home product make smart energy product, particularly from sales activation.
And that's frightening small strong demand from our third party partners to bundle, our smart home solution and so we look forward to the acceleration.
And demand driven by the.
The energy Bill.
And we look forward to bundling that with our solar energy.
Well said.
Thanks, Paul.
Thank you Mr Cheng.
Our next question comes from the line of <unk>.
Hello James.
Morgan Stanley . Please go ahead.
Hey, guys. Thanks for taking my question congrats on the really strong quarter.
I would just love to get to the revenue guide.
I think it would be helpful to get some of the puts and takes as we think about the second half because obviously youre, losing 85000 subscribers from your Canadian operations call. It roughly six months of that.
$30 million plus revenue just kind of like back of envelope math.
Obviously, you outperformed <unk> by a fair amount, but lesser revenue guide unchanged, which means that there is something thats picking up that slack. So would just love to hear from you guys. What you think some of the puts and takes are that help you keep your full year guide and whether thats.
On the pricing side.
That might be coming from and then I have a follow up thank you.
Yes, I think the two two major drivers there.
We're benefiting from us.
One is solar is quite strong so we've been pleased with the solar growth in the revenue Thats brought.
And the second thing is the attrition has been incredible.
So we really outperformed their ongoing.
Maintaining that revenue stream has been quite positive for us as well so theres other things here and there that helped us.
Got it.
Performance in Q1 was helpful.
For sure.
But kind of the balance of all of that has allowed us to reaffirm that's probably not a lot of companies have done that that reaffirms. The guidance. We gave back in February to reaffirm our guidance around revenue and adjusted EBITDA. So and the team is obviously manage the cost quite nicely.
I'm pleased on both the <unk>.
<unk> of the platform diversification of the platform.
The strength of our ecosystem to retain customers better than we thought and continue to see those new cohorts performed better than they thought they would it's been a real EBIT. So those are some of the major puts and takes there anything else you want to add to that I think we're seeing increase in.
The usage and I think the other thing that our attach ratio per customer youre seeing youre seeing a significant uptick here with the value of each customer meaning more so.
I find it interesting.
Come in at the company here.
The improvements <unk> made over the last several quarters and the value of these customers.
Their.
Credit quality of our scores the ability to.
Buy more product and generate more revenue per customer.
All of those things are positive.
And the same time as David mentioned, we continue to see.
Lower attrition.
Yes.
Once to the quality that they're getting and the happiness with their arguments.
Gage, what's driven so I think all of those things point to brighter.
Roadmap ahead, and I think we feel quite confident about our revenue streams.
Solar David mentioned that.
The real power of that.
Tax rates that we gave a smartphone.
And so that's smart home, especially in channel partners as we're going out there and engage in channel partners. We're just on the cusp of that.
So we're just sort of seeing the potential there that we also feel like there's real value there in developing those channels David alluded to that so we're quite encouraged about our opportunities here as we go forward, while we do that will generate revenue to generate at potentially lower cost.
Historically, so over time I think we can see the best of both worlds.
And some efficiency.
Yes, well said.
Awesome, that's really that's really helpful. Maybe as a quick follow up to that.
Is there any way that you can help us size kind of for the year, then how to think about kind of the revenue that you get from smart energy that isn't necessarily captured in the ongoing subscriber numbers, but just everything outside of that.
Yes, so its about one dollar per watt that we do there.
No.
We're closer to the 95 to 100 megawatts in USA.
$100 million.
So pretty pretty strong correlation there and pretty good.
Okay.
That's really helpful. And then maybe just my follow up kind of.
All in the same bucket is maybe just talk about the puts and takes about.
You had to cut free cash flow, but you didn't cut your adjusted EBITDA forecast. So why was that and then as it relates to free cash flow. Obviously, there's kind of a number of temporary headwinds in terms of selling Canadian operations and then some of the financing compares can you help us kind of bridge and think about what they can.
Normal normalized free cash flow would have been this year without some of these one time factors and that's it for me. Thanks, So much guys.
Yes. Good question, Eric I think the Canadian operations, we've talked about was generating a disproportional amount of cash because we weren't.
Making heavy investments in that operation.
And we think about that we've got on those presentation, our investor presentations, there $661 of net.
Investment in a new customer, which we were not investing in Canada, so generating a lot of new customers in the U S and Canada.
And so and so there is quite a bit of cash coming out of Canada as a result of those.
Previously acquired customers services.
The decrease in our cash our free cash flow.
<unk> talked about from a guidance standpoint was really solely related to that operation now in addition to the headwinds associated with seeing that go now.
We just want to reiterate that we thought that was an extremely prudent decision.
And invest in their it wasn't an area of growth for us.
Very good opportunities to grow and invest in the U S are much more pro.
Terrific ways of award in Canada.
For that cash on the balance sheet, we secure that we thought that was the right thing to do.
And we really believe that.
In our opinion.
Pull forward.
Cash that would have equated to over 10 years' worth of operations up there. So really really good business decision in our mind to bring that forward.
And it and to use that cash in places, where we have an opportunity.
To get better returns.
When I think about that just elaborate a bit.
So.
Shareholder of this company I would've done that deal in Canada.
100 out of 100 times. It was just the smart thing to do I think tell us whats a good partner for US we are a growth company always have been and when we stop growing in Canada. We had 100 employees up they're like wait a minute were not growing.
And those customers, we are getting new services, they were getting new bundled solutions. So we're a growth company, we're a customer centric.
Financially for the company.
So make sure you take care of those customers.
Think that they now have a growth trajectory with their current owners of that portfolio, which makes sense of our employees have a road map there.
And then for us.
Looked at it and we'd like now this is the right thing to do it de risks that completely I think it was great for their requirement is great for us and like I said I'll do that 100 out of 100 times.
Definitely the right thing to do.
Cash and secure now so yes second half of that question, Eric in terms of EBITDA guidance versus the cash impact. So EBITDA, obviously were impacted by interest that's excluded from those numbers and so as we've seen those interest rate increases.
That's a fairly significant impact on our cash.
Cash flow from operations.
But it's adjusted out in the EBITDA longer so we're not having an impact on EBITDA as a result of those increases in interest rates.
It has an impact in cash although I think we are.
<unk>.
Mitigated some of that impact through other means.
And.
And efficiency in our operations.
But we feel very good about the EBITDA number and we also feel like we're in a solid position or on our free cash flow as well I don't know if that if that answered your question fully or if you have a follow up there, but there is the difference between those two.
Really is associated with the interest rate.
Not having an impact.
Sure.
Yes, no thats perfect.
Yes.
Yes, I just might add kind of forward looking opportunity for free cash flow generation and I think we have a number of onetime items that affected us this year in the way of inflation and interest rates as well as one time hits to some changes to the financing program that were made last year. So if you get into 'twenty.
Really any overcome those one time pressures and you combine that with the potential we have to be more efficient in customer acquisition costs and product value engineering and development of some adjacent services I am very optimistic about the cash generation potential of this business over the next two to three years.
I think I can.
That's one of the most exciting opportunities.
And joining the company.
<unk>.
I think that's a great point.
Yes.
As pointed.
Pointed out to me too as we're sitting here.
We felt some impacts here in the business associated with supply chain issues different things, we've tried to meet demand with certain products and had some additional freight costs and other things that have impacted the business and then fairly significant we've had to work around that.
A lot of that is behind us from the standpoint of that.
Just kind of resulted in the <unk>.
Impact that we're seeing today.
And we anticipate some of that.
Knowing that those things are going to be there. So it wasn't new but it is certainly a headwind that we've worked through.
And so all in all I'd say.
Those things considered.
On top of.
A couple of other little headwinds there.
Extremely solid results and feel very good about the performance and even better about our ability to manage some of those things going forward.
Awesome. Thanks for all the color guys.
Good luck.
Thank you Mr Ritchie.
Our next question comes from the line.
Britain with Imperial capital. Please go ahead.
Yes, thank you very much.
Just to get a summary real quick can you provide the adjusted.
Revenue EBITDA and attrition for Canada for this quarter.
And with or without <unk>.
Versus last quarter and last year.
This one because we have a slide.
Okay.
That may be something Brian .
Moody made or different can help us with we could put up.
Zero in terms of numbers.
Go out there I don't I don't have that off my head.
But we certainly can provide that I have one I do know that the attrition in Canada was considerably U S.
Which is a function of what we said earlier not growing there and not be able to bring new products and services that our you would expect that to be higher than we had seen that growing.
Year or two ago. It was the same almost the U S. And then I have gotten to 14% and then higher so it was definitely growing at a rate.
That was going the wrong direction.
<unk> business, which have been done.
And you can see that.
Those components on our presentation that investor presentation.
<unk> broken some of Thats that out so you can see the individual components of Canada. You can also see that our growth rates were where larger once we exclude Canada.
Out of those numbers.
Most of the metrics are better as a result.
Not growing in Canada, and having a growth elsewhere, but but.
Think we can we can break out.
Individual impact there Canada.
For Ya if needs be.
Okay, and then just as a quick follow up.
How are you passing along these.
Higher costs.
Hi.
One one point that you make is that roughly for every 100 basis point move in the interest rate environment.
Negatively impacts free cash flow by I believe $26 million are you passing a certain percentage of that along to your customers and the new customers.
No. We really have I think there is the option to do some of that through price changes or other things, which we have not done.
But most of that impact as a result.
And in.
The economics that have been.
Impact and as a result of those interest rate increases.
Where we've done a really good job.
Being more efficient in the way that we've done other activities within the company and certainly the service costs.
Hey.
Kind of a bellwether mark that we can point to and say that was that was exceptional in the world.
We've been careful about our other cost structures, but we continue to invest and we're investing for growth. So I think we continue to believe that we have.
Have a potential to grow it's not like we're pulling back ranger or making reductions, we haven't announced any kind of overall reductions and David talk to that but we continue to be optimistic.
We continue to invest as portrayed thereby our customer acquisition.
Investments there.
Yes.
Great. Thank you very much.
Thanks, Greg.
Thank you Mr <unk>.
Our next question comes from the line of.
John Magnani with RBC capital markets. Please go ahead.
Congratulations on the strong results. Thanks for taking my question I'll keep it quick just as we think about attrition could you give us some color on why I'm struggling so much better than expected and also how should we think about attrition going into the back half of the year. Thanks.
Yes, I'll take that one.
And when I think about attrition.
John I think there's three key drivers. So we talk about two of them quite a bit not the third so we can have up to obviously once.
I think our underwriting.
Criteria.
Strong credit history that we have with our employees with our customers.
So I think thats actually just proving out well against what we modeled so I think that our underwriting.
I think that the service and the performance of the system has gotten much tighter I know for me personally I was gone for five years.
The old <unk> system back in 2013, 2014, I wish we installed last year.
Personally I was delighted I remember I was just I was like Wow. This is the technology and just all of the.
Alerts and actually trying to prevent someone actually doing something wrong and just the use cases and my family was finance system is quite remarkable Dana when Dana showed up and we installed this has to be called me because this is phenomenal.
Professional install this incredible technology incredible I've got friends and family all asking for assistance. So I just think that that's the second thing.
Do you get better we own that technology, we own we own that.
Feedback loop on how we plan it was rubbing customers wrong, what's delighting them, we can either eradicate fix where we can reinforce so I just think it's getting better.
The third thing is the consumer financing.
When we went to consumer financing several years ago. The hypothesis was that at the end of your five year contract. When you finished paying off the equipment.
Bill essentially drops in half.
And what we have to do over those five years is to bring it up value for them and additional value. So that when they are their bill drops in half there like Holy Cow Im still getting all of this value and essentially I'm paying half of us paying for.
And I think that when you think about attrition and you think about everything we got going on I think that's playing out.
And we're just finding consumers, saying this is well worth it.
Around efficiency, my home or out productivity my mom enjoyment of a home and now as we bring these new services around bundling other things with them I think they are finding great value. So.
It was the big tree for me anything that you want to add to that.
I would say one thing John your question about how do you how does this look going forward here.
Some of this as correlated as David mentioned to the end of the contract periods, so that side for life on those contracts as those.
Contracts mature there is some variation and some increase at times with attrition.
But that is I've been educated by the team here looked at the results here lately.
It seems like Youre bending that curve a bit and we're getting much better results, where we would've expected prior year's numbers to be higher for most curious array standpoint, just because of the timing of those contracts.
Let me go through efficient there.
Now, we're seeing the attrition still be lower so so there is we believe the overall trend is going to stay in a positive direction that we've seen there may be a slight uptick.
On a specific quarter associated with contracts.
Being at the end of our lives, but we do believe that we're going to be in a better situation will continue to see these downward trends where attrition.
<unk> two <unk>.
Improve and that we're not going to see a reversal of that in a significant reversal of that certainly over a long longer timeframe.
And I would just add to that.
Being at 17 quarter are lower than that 9%. This demonstrates the power and the brand loyalty that our platform has.
But in the context, the average length of the zinc customer with now 106 months.
<unk> nine years and so there are many platform.
That generate that type of brand loyalty and to give you a little bit more color into the efficient trends are in voluntary attrition is running right on plan.
But what we're really seeing the favorability is on voluntary.
Attrition.
And that gives us good confidence that the cohort of customers that are.
Originated on our platform and are now coming off contract.
Yes.
A much higher stickiness than we had originally.
Expected and that bodes well for our sort of go forward expectations on interest.
Okay. That's great color. Thank you again.
Thank you Mr <unk>.
Our next question comes from the line of.
<unk> <unk> with Evercore. Please go ahead.
Hi, Thank you for the question.
Is it a han dialing in on behalf of Amit, we've been able to be here today.
Great to see the average monthly recurring revenue per user grow quite nicely this quarter and I wanted to ask whether you could talk about some of your efforts to continue to expand it and how do you think this <unk> trend long term and longer term what kind of contribution to your growth profile do you see strong growth in your installed base versus.
New subscriber growth. Thank you.
Yes.
I appreciate the question I'll take the first half of this and let Dana in Canada.
Ashish add to the back end of that.
One of the key things that we view of customer as its not once and done upfront and then if you haven't been in five years.
The amount of Upselling that occurs throughout those five years has actually gotten quite good.
So that's been nice to see that improve as we can.
To sell a little bit and then the other thing is youre seeing solar playing there.
It does not include at all in that section. So once again us be able to go meet with customers and share with new ideas.
New products New services.
But it's really the attach rate. So cameras for example continue to be strongly attached.
Demand for cameras, just continues to grow and grow and grow the use cases that our customers are using and discovery for the system continues to expand as we share those and we will understand the use cases.
And then just the frequency of interaction I think that protrudes of interaction.
There is a demand there are always thinking about our system is used in our system and so when we do a service call and somebody says Hey, you don't have a camera on that back part of your house.
The added additional.
RMR charge, so I think it's really us and scope of what we're doing is been driving kind of that average monthly and you want to.
Add Rishi sure Yeah, you bet I'll, just add that our service revenue.
Up 26% year on year, and so we feel good about the ability to drive more engagement on the platform as we have service interactions with customers and as David referenced earlier, they are going to be some exciting.
Product announcements that we had coming into 'twenty three.
That will open up even more opportunity to drive further engagement.
Did that customer base into those new product categories, and so and if you think about.
The smart home and the connected platform.
We're in the very early days of fully being able to realize the power of controlling every aspect of your home.
Through this type of platform and so as we continue to open up that opportunity.
Really refining the organizational capability to drive those.
Engagement interactions through our service platforms, both on the customer service side as well as during the in home service business.
I mean, most of them most of the 10 most excited about.
The company has provided boil it down to one thing it's engagement.
It's the engagement that customers have when we talked about those 12 times and.
Per day and was 11, just I think a quarter ago or two quarters ago reflect continues to grow up go up and up and up and if you've got the engagement working in your favor.
Other positive things come along usage growth so because of that.
Got it.
Right.
Yep, great. Thank you.
Thank you.
Thank you Mr. Huang.
There are no there's no question.
John I would like to pass the conference back to David <unk> CEO for any closing remarks.
Thank you I appreciate that.
Just in closing I. Appreciate you guys have interest in the company.
I appreciate our employees.
Phenomenal job in Q2.
With so much headline.
News around all of the headwinds and we definitely felt them, but our team did a great job of responding to <unk>.
On the customer their folks on how we'd like them better in the fundamentals of the business I think we've got a great roadmap going forward for.
I am excited about our roadmap.
And encourage for us to execute I think the one thing we've done since we've been a public company as we've consistently executed.
I won't say, we wouldn't do.
I expect that to continue be the case going forward.
So our employees.
Our message to them to continue to execute and deliver on our promises.
Hopefully you guys see that come through.
So appreciate your interest in <unk>.
We'll take after calls afterwards thanks.
Thanks, so much guys.
That concludes.
Smart home, Inc. Second quarter 2022 financial results Conference call.
I hope you all enjoy the rest of your day you may now disconnect your lines.