Q3 2022 Vivint Smart Home Inc Earnings Call
Thank you for joining the call today.
Q3 was a strong quarter for our team we.
We made solid progress on the financial operational and strategic priorities.
We are focused on highlighted by another strong set of results for the third quarter.
After normalizing for the sale of our Canadian business in June of 2022, we grew total subscribers by nearly 10%.
Revenue by over 18% and adjusted EBITDA by nearly 31%.
The unit economics underpinning our record performance continue to shine as well with average monthly reoccurring revenue per user increasing to nearly $70 and net service cost per subscriber dropping to $9 43.
Another all time low.
Attrition continued to perform near record low levels coming in at 11% for the period and we believe our brand loyalty is the best in the industry.
Based on our positive momentum through the first three quarters, we are raising our full year guidance for total subscribers revenue and adjusted EBITDA.
As we continue to invest significantly and growing our subscriber base and expanding our innovative product portfolio. We are actively working to mitigate the impact of higher interest rates through updates to our value proposition and consumer financing program.
And the implementation of key strategic initiatives that I will cover later.
In terms of guidance for the full year.
Raising total subscribers to within the range of $1 $92 million to $193 million.
We are raising total revenue within the range of $1 65 to $1 67 billion.
We are raising adjusted EBITDA within the range of $727 million to $742 million.
And we are adjusting our free cash flow to within the range of $10 million to $30 million.
I would note that beginning this quarter, we are no longer adding back the consumer financing fees associated with our flex play our flex pay program to adjusted EBITDA.
Had we not made this change to the metrics our guidance for adjusted EBITDA range would have been roughly $58 million higher for both the low and higher end of the new range.
We continue to invest in our product portfolio and we believe that we are the industry leader in smart home product innovation.
During the quarter, we launched the <unk> spotlight pro which is one of the only lighting solutions in the industry that uses the camera technology to activate lighting and dynamically adapt based on what the cameras seen.
When set to determine the spotlight pro can detect people on your property.
China's spotlight on them and follow them to let them know that they are visible.
Together with our doorbell camera pro and outdoor camera pro <unk> has developed a suite of solutions that doesn't just inform homeowners homeowners about security events that have happened, but actually works to prevent crime from happening.
On the smart energy side, we continue to develop a solution that will allow customers to view and monitor their home solar energy production straight from the <unk> App and smart home display. This integration will rollout in the coming months and is just the tip of the iceberg in terms of more integration features to come.
We are in the final stages of developing an integrated indoor license that is.
<unk> for launch in the first half of 2023.
This solution addresses what we believe is a multibillion dollar total addressable market.
And it will allow customers to control their lights directly from the <unk>, App and smart home display, including setting up customer rules and schedules.
We believe these new product developments will continue to expand what we believe is industry leading customer engagement.
Our average smart home customer installs approximately 15 devices in their home.
With our smart home system more than 12 times per day and stays with us for approximately nine years.
Simply put our customers are demonstrating the value they see and visit by purchasing more products.
We're acting with their systems, more and staying with us longer our strategy of developing our own platform and technology allows us to innovate and continuously improve the customer experience, which leads to increased loyalty lower attrition longer customer life and expanding customer lifetime value.
Our strategic Adjacencies of Smart energy and Smart insurance are natural extensions of our smartphone business and we believe they will allow us to penetrate and redeem even more households, with smart home technology and services.
We are particularly pleased with the positive momentum.
Our asset light smart energy business we.
We've installed nearly 70 megawatts of solar through our strategic partners through the third quarter and we are on pace to install more than 100 megawatts for the full year.
Our <unk> sales force and partners, who bundle of vivid smart home system with solar continue to see considerably better sales realization rates than those who are selling solar stand alone and.
And we continue to make progress towards our long term vision of combining energy production and consumption into an integrated platform that uses artificial intelligence to manage power consumption more intelligently and.
In addition, our smart energy adjacency is becoming a powerful new smart home distribution channel and we're very optimistic about this potential future growth opportunity.
Equally excited about the distribution opportunity that exists there are smart insurance vertical and a growing interest in our capabilities in this space.
We remain laser focused on operating the business more efficiently and leveraging our platform to expand profitably.
And free cash flow.
We are actively working on initiatives that we believe could create more than $100 million of incremental cash flow on an annual basis.
These initiatives include but are not limited to an extended warranty program that provides customers with peace of mind, while generating incremental monthly revenue reoccurring revenue and margin.
Value engineering programs that systematically optimize product costs through component modifications and sourcing leverage.
Improvements in inventory management that lead to reductions in freight costs.
Further scaling of service and G&A costs through improved tools technology, and processes, and expanding profitably and our smart energy business through improved processes and scaling fixed costs.
Additionally, we are actively working to improve the cash flow dynamics of our flex pay program.
In closing we continue to believe that we are setting the standard for value creation and growth in the do it for me segment by expanding market share growing customer lifetime value and extending our proprietary platform, which we believe is years ahead of our competition.
We believe our combined investment in subscriber growth in monthly reoccurring revenue as a catalyst for profit expansion and cash generation for years to come.
We believe our employees dedication hard work and contributions have enabled our success in the marketplace.
<unk> is an exciting and rewarding place to work.
Consequently, we're recently named to Newsweek's top 100, most loved workplaces and Forbes list of best employers for diversity we.
We are grateful for and proud of our people and we believe that our employees many everything to success as a company.
With that I'll turn the call over to Dana to further discuss our third quarter results and our updated outlook for the year.
Thanks, David and good afternoon, everyone. The three months ended September 30 marks the first full quarter with time.
I continue to be energized and excited about the potential of <unk> unique business model and the growth opportunities that exist for this company.
I mentioned on our last earnings call that I felt this is a special company with tremendous upside and my impression is only been solidified since that time.
My comments will refer to information in our earnings presentation was posted to the Investor Relations section of our website at <unk> Dot com prior to this call.
All of my prepared remarks, we'll open up the call for Q&A session.
Our key subscriber portfolio metrics continue to perform well in the third quarter and showed substantial year over year improvement.
During the quarter, we reported growth in total subscribers of four 2% versus the prior year period, reaching 192 million as of September 30.
Normalized for the divestiture of our Canadian business earlier this year, our year over year growth until subscribers was nearly 10%, which we believe is the highest growth rate in the do it for me Sparkles segment.
Our average monthly recurring revenue per user in the third quarter increased by five 1% year over year.
To $60 million 70 success.
Total revenue grew by 13, 6% to $439 4 million in the third quarter of 2020 to.
Normalized for the Canada sale revenue growth for the quarter was 18, 1%.
Growth in revenue was attributable to the previously mentioned increase in total subscribers and average monthly recurring revenue per user as well as a solid contribution from our smart energy adjacency.
We are pleased with the revenue growth through the first nine months and we're on track to exceed our original revenue guidance for the full year, even after factoring in the spinoff of our Canadian operations in June .
As David mentioned in his comments, we're no longer eliminating the amortized portion of consumer financing fees incurred under our flex pay programs from adjusted EBITDA.
Like revenue adjusted EBITDA grew nicely in the third quarter of 2020 to finish.
Finishing at $195 5 million up 23, 3% with same period in 2021.
Normalized for the Canadian divestiture, adjusted EBITDA growth was 39% year over year.
The scale of service costs with lower G&A expenses were primary drivers of the improved margin performance.
We're extremely pleased with the growth in adjusted EBITDA, especially given the tough macro conditions that have existed throughout the year.
Next I'll highlight a few metrics on subscriber originations for the third quarter.
We continue to see positive momentum for our smart energy partnerships, where we sold nearly 6000 smart energy Smart home systems, a demonstration of the benefits of bundling smartphone with solar.
New subscriber growth for the nine months ended September 30 was three 5% and was again driven by originations through our smart energy partners.
We continue to be encouraged by the quality of the customers, we're 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 10% excluding Canada.
Our next cover our net service cost per subscriber and net subscriber acquisition cost per new subscriber for the quarter.
We are now including financing fees related to revenue generated service activities in the reporting of net service cost per subscriber.
For the current quarter and for prior quarters as well.
We continued our trend of year over year improvement in net service cost per subscriber.
Wrapping from $10.90 in the third quarter of 2021 to an all time low of $9 43 sets, including financing fees in the third quarter of 2022.
Correspondingly our net service margin increased from 76, 8% in the third quarter of 21 2021 to <unk> 79, 9% in the most recent quarter.
These results demonstrate the advantage of <unk> proprietary platform, we continue to install more devices and more complex technology, while net service cost per subscriber continues to improve.
The constant feedback loop from our platform enables us to continuously enhance our integrated products and services, leading to fewer customer issues lower service costs and higher customer satisfaction.
Including financing fees net subscriber acquisition cost per new subscriber for the last 12 months ended September 30.
With $739, an increase of $94 versus the prior year period.
The year over year increase was driven by higher equipment related expenses as well as higher consumer financing fees due to the recent interest rate increases.
Moving next to attrition, we continue to be pleased with the performance of our subscriber portfolio.
For the period ended September 30, our attrition rate came in at 11% remaining at very close to last quarter's all time low.
This was despite an uptick in the percentage of our subscriber base being at the end of their initial contract term during the period.
Our enhanced underwriting standards improve product performance and the high level of customer engagement with our platform continued to drive what we believe is the lowest attrition rate among national smartphone companies.
In terms of free cash flow, we generated $12 9 million during the third quarter of 2022.
The decrease versus the prior year was primarily driven by a change in the timing of loss share fees paid to our lease financing partner as well as higher interest costs related to our consumer financing program and term loan.
As of September 32022, our balance sheet reflected just over $305 million of cash on hand, and a very strong liquidity position of $664 million.
In conclusion, we're pleased with our consistent execution across our key financial and operating metrics. The fundamentals of the business remains strong and we're encouraged by our momentum as we move through the fourth quarter.
As a reminder, the divestiture of our Canadian operations in the second quarter pulled approximately $104 million of cash forward.
And this provides optionality to invest in areas, we believe will drive incremental value for our stakeholders.
It has a long operating history, and we've exhibited strength and resiliency through challenging economic times, because people value safety and security regardless of the economic environment.
Our recurring revenue model provides a consistent and predictable revenue stream that is built to weather adverse conditions and we're confident that our customers will continue to value the security of smart home solutions.
We have long believed the trove total addressable market for smart home presents a tremendous opportunity and we believe the success positioned to take advantage of that.
This concludes our prepared remarks for the third quarter.
Operator, please open the call for Q&A.
As a reminder, if you'd like to register an audio question. Please press star followed by one on your telephone keypad. If you change your mind. Please press star followed by two am please ensure your omni tick when speaking.
Our first question comes from Ashish <unk> of RBC, Ashish Alon Israel.
Hi, This is Josh filling a fresh congratulations on a strong results could you maybe just remind us what is really driving the momentum.
Possible could you also talk about.
And voluntary and non pay attrition and just anything youre seeing in the customer. Thanks.
John It's David I'll start and then I'll, probably a pull in.
We should talk about attrition.
Yes, I think our momentum.
Is really a function of the business model.
We've been around now for 20 years.
Perfect at El Terry you've never perfect, but we've really.
Solidified.
Our go to market strategy or direct to home is quite resilient.
Our inside sales is quite resilient and then as we continue to expand.
Into new <unk>.
Channel as you go to market, that's what we're doing with some indirect partners through solar in particular right now has been.
Very well received so I think that the.
The velocity and momentum that.
Our revenue organization has.
On a balanced portfolio has been strong.
But really it's the I mean.
Because that's been phenomenal.
And then the core secret sauce of our business has really been customer engagement.
<unk>.
You talk about those metrics 15 devices, our customers interact with 12 times per day.
Our contract terms are five years or less yet or.
Our customers are staying with us nine years, and it's been growing every year our engagements growing every year.
And that level of stickiness.
It makes us core were central to the home.
People.
Whether they're just enamored with us or lessen damage for different reasons, they interact with US 13, 12% to 13 times per day.
And we are core to.
So what they want and I think thats stickiness, which is manifested by our low attrition rate.
Yet our high growth.
We will continue to add more and more of their systems. I think really shows that we are really core valuable service and solution that they can't do without and Thats.
That really at the end of the day is what we're excited about I mean, you see it with our lower cost per subscriber.
The technology and operation teams have done a great job of making.
The system works and works well and meet expectations.
And we continue to upsell at every opportunity.
To our customers and they are buying at a consistent rate so.
So I think that resiliency of the business model.
In conjunction with our expansion to how we go to market.
Really had been at the center of our of our shrink. So that's my thoughts on what's been driving and then there's just a level of discipline across the company scale your costs right delight your customers and make sure that we're investing in the right areas.
The business.
I'm really pleased with my team and how they are approaching how to run a company.
Be more delighted, but with regards to attrition reshaping parts on that <unk> I'll, just add to what David said.
And then it had industry leading brand loyalty into our vertically integrated approach.
Attrition overall decreased by 40 basis points year over year to 11%.
And when you look at that over a two year horizon the decreased by 180 basis points.
Kind of give you a little bit of color under what's driving that.
Seeing extremely positive trends in attrition.
Similarly, with the cohort of customers that were originated on our dividend pay progress and as a reminder, those customers.
They hit months 60 in their contract expires.
Equipment financing comes up and so they see a big bill decreased at the end of that contract period. So we see very favorable trends on voluntary attrition and then as it relates to involve we've seen sort of payment rate.
Normalized to pre Covid levels.
And so.
We're not seeing anything abnormal in the inbound activity I think that has a lot to do with as Dana mentioned, the credit quality of our customer base.
But really voluntary and the story in terms of a tailwind up yes.
That's great color. Thank you and maybe just quickly could you just remind us on the kind of puts and takes for the free cash flow. It just seems like.
Perhaps I missed it but.
Think about free cash flow also normalizing how should we kind of view of the cadence and also the progression of expanding free cash flow. Thank you.
Free cash flow so when we think about.
Whats happened over the course of the year.
The company has.
A fair amount of debt.
That that subject to variation and interest rates as interest rates have gone up especially.
In regards to a term loan that we had $1 3 billion or so and then our consumer financing program wherein we're impacted by.
Rising interest rates and so that's been.
A major impact the company I think it's impacted.
The interest rate alone has impacted the company. If you look at 'twenty 2020 to about $75 million.
<unk>.
Cash flow.
As a result of rising interest rates in 2022.
Which if we'd had steady rates, we'd have another $75 million of cash.
Cash flow.
However.
When you look at our financial statements, we've made tremendous progress in the financial structure of the company.
This resulted added profitability and margin and despite the increase in the rates. We continue to generate positive cash flow, we're operating and committed to operate in a positive way.
David It outlined a number of initiatives, which I'll, which will continue to improve profitability and we feel great about the current.
Liquidity situation the ability of the company to sustain itself through operating activities.
On its own.
So we will provide more color as we get through the fourth quarter in terms of what this looks like going forward, we're very optimistic over the next.
Really a number of years in terms of outlook, we continue to be in.
In a position to magnify that performance and continue to improve it.
Demonstrate a lot more cash flow as we go forward here. So all in all I am not sure if that answers specifically.
Ins and outs, but the major impacts to cash obviously has been the rise in interest rates offset largely.
<unk> operating improvements, which we're going to continue to make and then there's a number of initiatives that David talked about which we see the potential to improve cash flows by.
Greater than 100 million over some period of time here and we will detail a lot of those activities here as we get into the fourth quarter.
Great color. Thank you.
Youre welcome.
Our next question comes from Brian <unk> of Imperial capital. Please go ahead.
Okay.
Yes, thank you very much.
On the first question I have is on the situation with ADP.
Just got off their call I think it is still ongoing but they're talking about.
Spending yes.
North or north of $20 million on legal fees too.
Yes.
The situation with year end.
The contract that.
But you are no longer involved in can you give us a little color on that guidance.
Have you reserved anything or maybe not the guidance for 2023. Thank you haven't given that but what you have reserved for planning to reserve for the legal basis and how you feel.
About your legal finally in terms of walking away from the contract.
Brian . Thanks for the question I think you meant alarm dot com not ADT just want to clarify there.
I apologize.
Our dotcom.
Yes, no worries yeah. So in late September we notified alarm dot com that under the terms of the cross license agreement.
We are no longer obligated to make certain license fee payments.
We feel very confident in our position.
Beyond that it's our policy not to comment on pending litigation.
Feel very good about that decision given the cross licensing agreement and Thats our position there.
Just want to add to that Dan.
Well I think that's pretty clear.
<unk>.
Yes.
<unk>.
We've invested heavily in our proprietary system.
We went through our own back end years ago continue to fortify that and build upon that over the years.
Very grateful that we've gone to our integrated system.
It's been a differentiator for us significantly over the years.
Our ability to.
Not only do what the customers how they use our system, but how we can delight them more I think having a proprietary system has been a key enabler there and we continue to invest in that heavily.
And it's been a differentiator along with our innovative.
Our old Department that does our product innovation.
I think our ability to be able to.
Listen to and detect what customers value and for us to be able to spin on that and generate product that addresses their needs.
I think it's a world class.
And our ability to actually the fact that we actually service our customers and we own those customer same thing in our ability to be close to our customers and service them through our integrated platform I think it's been a differentiator. So we're grateful for that investment.
With regards to reserves.
I can't speak to that and you'll be able to look through our public documents there, but we do feel confident in the position to advance from a legal standpoint and.
And we don't have any further reserves associated with.
Any of this activity on our financial statements.
Okay.
As part of that debt.
A bit of a convoluted question, but.
Do you have any plans.
In terms of legal fees that you have set aside moving forward and then a separate question is about 2023 directional guidance do you anticipate revenue to be higher in 2023 versus 2022.
Given everything.
Yes, so with regards to.
As Dana mentioned in our next earnings call for Q4, we will outline the guidance for the year and the initiatives that we think that will be our primary focus there our primary focus today, but will articulate that.
In much greater detail for all of you.
I'm looking forward to that call and.
And we absolutely expect rich.
As far as any.
The accounting around financial statements, we'll apply all.
Correct.
The appropriate accounting.
For anything that comes up at this point, we don't have an accrual.
And in order for the accrual to be booked it has to be.
Quantifiable.
And likely for that for something to occur. We don't believe that we're in a situation to do that at this point and so that's as much information as we can give you around that.
Okay. Thank you very much.
Youre welcome.
Our next question comes from Erik Woodring of Morgan Stanley . Please go ahead.
Hi, This is sabrina on for Eric. Thank you so much for taking our question is our first.
Our math implies that your smart energy sales pilot accounting for almost 10% of revenue this quarter and was up nearly 100% quarter over quarter, which is which is very impressive.
This becomes a more important driver of revenue growth can you help us understand what are the key drivers of this business, we can better model it and to that end I believe you guided to 95 to 100 million of revenue in calendar 'twenty. Two so how are you thinking about this business today and its potential growth into 2020.
Okay.
And then I have a follow up thanks.
Thanks.
Yes, thanks for the question so.
I will speak a bit generally and then hopefully get specific to your question. So.
Our pilots.
Both in insurance and energy are getting more of the pilots.
The energy piece is accelerating faster.
But the reason why we're doing this is because.
We're a platform company.
And we believe that these natural extensions.
And our reach and deepen our engagement with our customers as well as expand profitably. So it's multi threaded.
We did about 45 megawatts of solar last year in 2021.
And as I mentioned in my comments will do over 100 megawatts in 2022.
Roughly every megawatt equals about $1 million of revenue. So you have 100 megawatts, you got about $100 million of revenue.
And at scale.
We think it could become a meaningful part of our business.
We think this business can generate between 10% to 20% margin.
Net volume.
<unk>.
It is it is it meaningful.
Meaningful today will become more meaningful.
But the reason why I'm so excited about it because these adjacencies.
<unk> help us deepen our relationship and it reinforced the value of our smartphone business.
Yes.
You heard a bit about our product innovation and our roadmap.
The way that we can portray the production has been coming from their solar system and then a bunch of things that we can overlay that from a proprietary backend.
And add value to those customers. These customers will stay with us longer they see more value they see the ecosystem effect of our different solutions.
Logically, we believe that our average customer of <unk>.
Nine years today will grow to 10, 11, 12, 13 14 years 15 years now.
And this is at 80% service margin so.
It's that it's that interrelated.
Ecosystem of products that our customers have told us.
I want us to integrate.
And manage and bring to them.
We're doing so well.
Will it become more meaningful absolutely could we have grown our megawatts much more than 100 this year.
Absolutely.
But we're being thoughtful about it.
Where do you do it how do you do it.
How do you do a profitably how do you do it in a scalable fashion how do you make sure you have the right partners our asset light model.
Dana in Iran debit solar.
567 years together.
We understand that space nicely.
The way we are playing in an asset light way is a really smart way to do it.
And it allows us to be very thoughtful about how we attack this market and so I'm very pleased with the progress we've made and very optimistic about how it will contribute to future savings insurance. So these are thoughtful.
Integrated interrelated and logically built platform in place that will help us both from a cash generation perspective profitably perspective from a <unk> of our relations with our customers.
And both on an independent basis their own business unit as well as on an integrated basis across the whole smarten level. So.
So hopefully that gives you some additional commentary and color around why we're doing this and why we're so excited about it he gave it if I could just add the other thing thats really exciting about the energy business. As this is the deal size that opportunity for them.
Partners in the solar space see material improvement in their sales to activation conversion rate.
Wind solar bundled with the dividend smart home system and so what we're seeing is an increasing demand.
For the solar industry to include dividends smartphone as a part of solar installations.
And if the more efficient distribution model for video in terms of cost of acquisition and so not only that the solar opportunity.
<unk>.
You know accretive and meaningful on its own, but we think that sort of dual sided distribution opportunities are exciting.
Good point.
100% agree.
Hopefully that helps perfect. Thanks for all the color very helpful. Yes, very extremely helpful.
Follow up is if we take the midpoint of your calendar 'twenty two guide it would imply for Q revenue is down quarter over quarter, which hasnt been the case for at least the last decade. So wondering if you give us some more color on what's driving that dynamic this year. That's all thank you.
Yes, we do not expect our fourth quarter revenue to be down so they have to go back through the math on that and do the calculation.
So.
We expect and the trends that we've seen over the last.
A couple of years here, where we continue to build upon.
Revenue, excluding the Canadian operation if you looked at.
Press release, and those quarterly revenue.
<unk> outside of having taken revenue out associated with Canada we.
We've had a nice upward trend and we can we expect that to continue.
Yes, so maybe follow up afterwards with Nate.
It's been consistent for outlook.
Perfect. Thank you.
Great any other questions.
We have no further questions on the phone line, so I'll hand back to David Bywater for closing remarks.
Great well, thank you I appreciate that Jordan.
Just in summary.
We think that the business model at the event.
Is producing very nicely strong.
Subscriber growth strong revenue growth strong adjusted EBITDA growth.
The increase in our guidance reflects our confidence in <unk>.
Now the business model is operating.
We continue to work on I think all of the right initiatives.
To build a continued to delight customers and differentiate us in the future.
More than we are today, our new products coming out.
Disruptive and are disruptive.
And they're differentiated.
I think our performance operationally has been world class continue to bring down our servicing costs or attrition or can be very very nicely.
A long slew of initiatives, we're working on across the company.
I think we'll continue to strengthen and.
Position us very well for the future.
And our cash generation will get stronger and stronger and stronger.
With every year coming forward and with regards to our go to market strategy I'm very pleased with the work that that team is doing around continuing to fortify and expand our current go to market.
Channels as well as new go to market channels very very encouraged by that so.
Create you guys on one interest and just wanted to end with thanking our employees, but we have a phenomenal we have over 10000 employees that do incredible work day in and day out.
I'm proud to be associated with them and I appreciate the passion. They bring every day, how customer centric they are and how they inspire us to innovate and lead this industry. So thank you for your time.
This concludes today's call. Thank you for joining you may now disconnect your lines.