NRG Energy Inc (NRG) — Q1 2021 Earnings Call Transcript

Good afternoon, everyone. Thank you for joining us this afternoon to discuss the results of Vivint Smart Home for the three months ended March 31, 2021. Joining me on the conference call is Todd Pedersen, CEO; and Dale R. Gerard, CFO. I would like to begin by reminding everyone that today’s discussion may contain forward-looking statements, including with regards to the company’s future performance and prospects. Forward-looking statements are inherently subject to risks, uncertainties and assumptions and are not guarantees of performance, and you should not put undue reliance on these statements. I would direct your attention to the risk factors detailed in the amendment to our Annual Report on Form 10-K/A for the year ended December 31, 2020, which we filed with the Securities and Exchange Commission on May 11, 2021. Please be aware that these risk factors may be updated from time to time in the company’s periodic filings with the Securities and Exchange Commission and that the realization of any such risk factors could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements. The company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. During today’s call, management will also refer to certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures for historical periods to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings release and accompanying presentation, which are available on the Investor Relations website at investors.vivin.com. I will now turn the call over to Todd.

Thanks, Nate, and good afternoon to everyone. I hope that life is starting to get back to normal for all of you as vaccine rollouts accelerate and case counts decline. Today, we will cover the following topics: discussing our strong financial and operating results for the quarter, reviewing our robust customer engagement and the performance of our platform, and talking about our excitement over the near-term outlook for Vivint’s premier end-to-end smart home platform as we gear up for what we expect to be a normal summer selling season. Our customer's engagement levels remain high, regardless of whether people are spending time inside or outside of their homes. The momentum around our business that we saw in 2020 has carried into the first quarter of 2021. We are pleased to report continued improvements in our key metrics year-over-year, including an accelerated revenue growth of 13% along with 60,000 new smart home originations, which represented a 20% increase, all while producing an adjusted EBITDA margin of 47%. As of March 31, 2021, Vivint’s total subscribers grew 10% from the same period in 2020, to more than 1.7 million. We also saw solid improvements across the board in other key metrics for the quarter, including another steep decline in net subscriber acquisition costs per subscriber and the lowest LTM attrition rate in the past nine quarters. I believe that these strong results speak to the fact that our core value proposition, proven over two decades of reliably taking care of our customers and their families, is as relevant today as ever. Dale will provide more specifics on financials during his remarks, as well as share our thoughts about our full year 2021 guidance. If the past year has taught us anything, it’s that there is no better time for homeowners to have a comprehensive smart home system. The 1.1 billion daily events processed by our smart home operating system across more than 23 million connected devices are the best indicators of the frequent engagement of Vivint’s customer base. We are uniquely qualified to help our customers deal with any environment across the various smart home devices we support, from door locks, cameras, security monitoring, thermostats, lighting controls, garage door controls, and many other connected devices. All of these innovative products are designed to work together seamlessly through our elegant platform that homeowners can control from their in-home touch-screen hub through a single app on their phone, or by simply using their voice. Vivint services also include life-saving and life-protecting 24/7 professional monitoring for emergencies such as medical, fire, carbon monoxide and burglary alerts. Our vertically integrated model includes dedicated customer care and monitoring teams to ensure that we respond to alerts within seconds. Our cloud platform and proprietary technology also allows customers to seamlessly manage and protect their homes, regardless of whether they’re socially distancing inside the home or from somewhere outside of it. Vivint takes care of our customers and their families while providing the peace of mind that people demand during times of heightened awareness, anxiety, uncertainty and mobility. We’ve been securing and innovating smart homes for over 20 years. In our experience since the onset of the pandemic has only cemented in our minds the fact that our customers will continue to value home security and smart home technology during challenging economic and societal times, underscoring the strength and resiliency of the Vivint model in any type of environment. With attention now turning to the reopening of the economy and having this coincide with the onset of our summer selling season, we remain bullish about the near-term demand for the business. Given that approximately 50% of the adult population in the U.S. have received at least one dose of the vaccine and that by the end of the month, we anticipate that all states will have lifted mandatory quarantine restrictions. The tried and true process of selling door to door and installing new Vivint systems inside of homes is getting back to normal. We believe the pent-up demand for travel also plays right into our hands. To the extent last year shelters became this year’s travelers, they still have every reason to remain highly engaged with their smart home systems. Based on interaction volumes with our platform before COVID, during COVID, and now, as the country begins to look beyond COVID, our systems and services have proven to be just as relevant in all of these environments. We’re still respectful of the fact that we continue to operate in a world actively dealing with COVID-19. We have increased the preparedness of our direct sales team as they head out to markets across the U.S. at full capacity. They’ll be ready to go with all the right training and necessary PPE to interact with current and new customers. As a reminder, last year at this time, we had to swiftly move our call centers and corporate employees to a work-from-home environment and paused our entire direct home sales team for about six weeks during the first wave of the pandemic, delaying the start of the summer selling season. At this point, we fully expect to return to a more normal summer sales season this year. Meanwhile, our other sales channel, national inside sales, which onboards nearly half of all new subscribers in a normal environment, has turned in robust results through the pandemic, and we believe that momentum will continue in 2021. We have long believed that the total addressable market for smart homes presents a massive opportunity. In the not-so-distant future, the vast majority of the 150 million homes in North America will be running on a comprehensive smart home operating system. We believe Vivint is the premier end-to-end smart home platform with the most robust service offering and, as such, is the best-positioned provider to take advantage of this opportunity. We believe in order to capitalize on the growth opportunities in smart home, it’s important that we increase our focus and investment in our brand, technology and new product development. I’m pleased with the early returns we've seen from our brand investment rolled out during the fourth quarter of 2020 to drive better consumer awareness on a national scale. Those investments will continue as we tell the story of who we are, what we do, and how we can add value to people by delivering the security and peace of mind they desire. But beyond the brand, we also think now is the time to step things up in terms of technology and our product vision to maintain our position on the leading edge of product development and to continue pushing new boundaries by delivering a transformative smart home experience to every home. Before I turn the call over to Dale to go through specifics of our first quarter results, I would like to mention that Vivint recently resolved the matter with the U.S. Federal Trade Commission related to certain historical instances of violations of the company’s policies by sales employees. We are pleased to put this matter behind us. Vivint takes matters of compliance seriously, especially as customers across the country put their trust in us to protect their homes and families. We have already taken steps before the FTC began its review to strengthen our compliance policies, and we will continue to make this a focus going forward. To that end, we are deeply committed to operating with integrity, doing right by our customers, delivering on our commitments to stakeholders and providing exceptional service to our customers. I will now turn the call over to Dale.

Thanks, Todd. Before I get into the results for the quarter, just a quick comment on the recent statement by the SEC related to the accounting for warrants issued by SPAC companies. Following the issuance of the statement, we reevaluated our historical accounting for both the public and private placement warrants assumed in conjunction with our merger with Mosaic in January 2020. Like a majority of SPACs, we previously recorded these warrants as equity. However, based on our valuation, we determined that the warrants should have been classified as liabilities and measured at fair value in the closing date of the merger, with subsequent changes in fair value reported as non-operating income or expense in our consolidated statements of operations each reporting period. This week, we filed an amendment to our 2020 Form 10-K to restate our previously filed financial statements. As a result of this restatement, we recorded a $109.3 million non-operating loss related to the warrants, and our warrant liability was $83.6 million as of December 31, 2020. I’ll now walk through the financial portion of the presentation that we posted today in conjunction with the earnings release. Looking on Slide 6, we highlight a few metrics for the subscriber portfolio, which continued to be strong across the board. Total subscribers grew 10.2% from 1.55 million to 1.71 million. Average monthly revenue per user, or AMRU, increased to $67.24, up 3% year-over-year. The increase in AMRU was driven by additional sales of new products, such as our latest generation of outdoor and doorbell cameras, as well as the recognition of deferred revenue. On Slide 7, we cover revenue and adjusted EBITDA for the quarter. For the first quarter of 2021, revenue grew by 13.2% to $343.3 million. The revenue growth is attributed to a previously mentioned double-digit increase in total subscribers, as well as the increase in the average monthly revenue per user. Adjusted EBITDA grew nicely in the first quarter. The primary drivers for the scaling of service and expense subscriber acquisition cost. For the quarter, we increased our adjusted EBITDA margin by 270 basis points to 47.2% of revenue, compared to 44.5% in the first quarter of 2020. Moving to Slide 8, we will highlight a few points on the subscribers originated in the first quarter of 2021. Subscriber originations led by a 29% year-over-year growth in our National Inside Sales Channel were 60,127 for the quarter. How and which subscribers we onboard is important to our success today and in the future, and we continue to redefine and boost the underwriting requirements and process to qualify and onboard new subscribers. One of the pauses of the enhanced underwriting requirements is that we are able to reduce the number of retail installment contracts or RICs that are financed on the company’s balance sheet. For the first quarter of 2021, we saw a 77% reduction in the number of subscribers financed through retail installment contracts. By shifting a greater proportion of our subscribers away from RICs and towards third party financing partners and pay-in-full arrangements, we’re able to reduce our net subscriber acquisition cost and improve the company’s cash flow dynamics. Speaking of our third-party financing partners, I’m pleased to announce we recently completed a successful renegotiation of our agreement with Citizens Bank, our primary financing partner under the Vivint Flex Pay program. This renewal resulted in a contract extension of three years and the implementation of a new line of credit finance offering through our consumers, which will streamline the initial sales process and facilitate upsells and upgrades of additional and new equipment during a customer’s lifecycle. Moving to the new line of credit finance offering changes the timing of when the merchant discount rate and loss recovery fees are incurred, which will impact the amount of cash in the near term. That said, we are fully committed and intend to operate the business on a cash flow positive basis this year and going forward. Moving to Slide 9, we will cover service costs per subscriber and new subscriber acquisition costs per subscriber. We continued our trend of year-over-year improvements in net service cost per subscriber, moving from $11.76 in the first quarter of 2020 to $10.77 in the first quarter of 2021. This reiterates the advantage of Vivint’s vertically integrated smart home cloud platform, which encompasses the software, the hardware, the installation, and ongoing customer support. As we continue to make improvements in all these areas, we’re seeing positive trends in both the cost of service as well as customer satisfaction. Our net service margin continued to be in the high 70% range at 77.7% for the first quarter of 2021. A drop in service cost per subscriber is driving a significant portion of the increase in adjusted EBITDA dollars, as well as adjusted EBITDA margin percentage. On the right-hand side of Slide 9, we highlight net subscriber acquisition costs for the last 12 month period. For the period ended March 31, 2021, net subscriber acquisition costs per new subscriber decreased to $66, which is 93% lower year-over-year, as we continue to drive down the number of new subscribers that are financed via RICs and shifted to a higher mix of customers utilizing our financing partners or paying in full for the purchase of their smart home products. During the quarter, we also continued to benefit from pricing leverage on the point of sale, purchase and installation of equipment. Slide 10 depicts our typical subscriber walk that illustrates some changes in total subscribers at quarter end. One of the pleasant surprises throughout the pandemic has been the performance of our subscriber portfolio. Once again, our attrition improved, ending at 11.8%, which is 230 basis points lower year-over-year and at a nine quarter low. Our portfolio continues to perform better than expected in terms of both attrition and other leading indicators. In terms of cash flow, we saw a nearly $19 million improvement in net cash used in operating activities during the quarter. We finished the first quarter with $274 million of cash on hand and a very strong liquidity position of approximately $600 million. Finally, moving toward guidance for the year on Slide 11. The top of the page highlights several fundamental characteristics of our financial model, including recurring monthly revenue from long-term subscriptions, a highly predictable business model and the ability to thrive in all economic environments. We are pleased with the momentum in the business on the strong start to the year, and we’re bullish about our ability to operate the direct-to-home sales team during this summer selling season at full capacity. We are also aware of potential supply chain disruptions, inflationary pressures, and hiring constraints that could limit further upside. Taking all of these factors into consideration, we are confirming our original guidance as follows: We still expect in 2021 to have 1.8 million to 1.85 million total subscribers. Our estimate for 2021 revenue continues to be $1.38 billion to $1.42 billion. And finally, we have reaffirmed our previous 2021 adjusted EBITDA guidance of between $640 million and $655 million. This concludes our prepared remarks on the first quarter. Operator, please open the call for Q&A.

Yes, thanks very much for taking my question. You said it sounds like the guidance implies that supply chain risks present potential upside, but not factored into the guidance, so limiting from a downside standpoint... Can you just talk to us about what your biggest component risks are and how it is that you seem to be managing through this problem so well on a relative basis?

Hey, Paul. It’s Dale. Thanks for joining the call. We're focused on a big part of our growth initiative around camera attach rates, and we think that’s one of the big selling points and why people really like smart home as one of the big advantages we think our systems have over others, integrated analytics, and the different things that we can do with that, in terms of notices and so forth with customers. So part of what we're doing with our pricing and how we're selling and what we're seeing in terms of take rate or adoption of additional cameras, we’re in good shape, we believe right now. However, if adoption rates are higher than we think and there's any disruption in terms of chip manufacturing, or the big thing really, logistics, it could be that we may have to limit the number of cameras we sell in the second, maybe late in the third quarter or fourth quarter. We think we’ve addressed that, we’re doing some stuff with air freight and shipping. We’re just calling that out as to say, hey, based on where we are today, we think confirming our guidance, which we think is really good guidance, is the best path at this point.

Yes, I would just add, Paul, you kind of caught that which is based on supply chain issues that Dale mentioned, the potential for upside beyond where we sit is limited to product being delivered to the U.S. and being able to install that. So, it’s not impossible that we could see some upside, but it will be quite difficult, like most everyone else facing their supply chain issues out there. Ships means, kind of front and center, driving most of that. We do feel very comfortable with these numbers. We’re fortunate that we have a seasonal business in some regards, as we prepared for a lot of the hardware and had done that last year. So, a lot of what we need to achieve these numbers, we already know we have.

Gotcha. A quick follow-up, I think investors have been working really hard to try and figure out what's going wrong, because the stocks been going down and we’re all sort of very anxious, but something is obvious here. Could you sort of try to discuss the terms with Citizens Bank? As part of that, there’s different allocation of the credit risk? Does that relate back to this FTC issue? And Todd, can you just tell us what actually the FTC issue identified and when it occurred?

Yes, Paul, regarding the extension with Citizens, we’re very pleased with our partnership with Citizens; they’ve been a very good partner. We’ve had a relationship during consumer finance with them since early 2017. We were glad to be able to extend it. The changes that we’re making in that program really have nothing in terms of the FTC. It was really part of the negotiations to move from the installment line into what we call a line of credit, which really is better for us long-term and better for our customers. It’s easier for the onboarding process. The benefits will show as we roll out new products, and customers want to add those systems; their line of credit allows for that in a way that the installment loan which was a kind of a fixed loan debt. The terms are moving to more standard terms, and that helps streamline the process.

Yes, I mean, we’re glad to have this FTC settlement done. I’d say we’re a company that wants to provide great service, take care of consumers. The behavior that is not consistent with integrity has no part in this company. Back in 2017, we did have some sales people that circumvented some systems. We found out and let those people go, and that was part of this investigation by the FTC. We’re glad to have that behind us, and we’ve made significant improvements on compliance and our processes to ensure we’re compliant with all laws in the United States for financing.

All right. Thanks so much Todd. Thanks.

Thank you. It’s been great working with all you guys. I will hope to continue our conversation. I have a couple of questions here. Firstly, what are the investments you’re talking about? You’re talking about rebranding the company. Can you talk about what other types of investments you’re going to be involved with assuming that, other than that, the overall economy opens up?

It’s been great to work with you these years. We’re going to miss this; hopefully our relationship continues. We're focused on investing in product enhancement and technology skills as critical to keep our market lead with consumers. Quality is paramount for us. We also plan to make investments in new tools and technologies for onboarding customers. Some of these tools need to be refreshed, and you'll probably see within a year or so a platform that’s a reinvestment in our operating system.

We’re also investing in our brand and in our advertising efforts. As we see returns from these efforts, we’re optimistic about how these investments have positioned us for growth in 2021. Our Q1 numbers show growth, but we’re not trying to run too fast too soon given the surges of COVID in different areas and maintaining our service quality. Our cash flow dynamics, attrition numbers, net operating margins, and net subscriber acquisition costs are strong, which positions us well for improvement.

This includes an increased investment in SAC?

Yes, some of that investment will be allocated toward SAC, as we are focused on areas of information technology for better customer engagement and onboarding. As we see performance improvement across the board, we continue to be optimistic about how these investments will bolster our existing business.

Okay. Same question actually on attrition. Clearly, the percentage of customers coming to term on their contracts is an important mover, but I am curious about your view on a normalized level for the business?

We expect attrition to stabilize between 12% and 13%. Currently, we are targeting a steady-state level of around 12% to 12.5%. As we improve service and pursue ongoing enhancements in underwriting and customer engagement, we are hopeful of achieving lower attrition rates over time.

We’re really encouraged by our attrition numbers. It's clear our system enhancements work well for user engagement, improving satisfaction and minimizing the need for customers to leave us. The periodic interactions people are having with their smart home systems are remarkable indicators of their satisfaction. As we move toward restoring fully opened economies, we want to ensure our service remains relevant and essential.

Great, thank you very much. I appreciate it.

Thanks again, Jeff. Good luck in your future endeavors.

Hi, nice job on the results. Could you expand on the difference between the installment line and the line of credit and how it benefits customers? You also mentioned some impacts to cash flow; could you provide more details on that?

Sure. The line of credit functions like a credit card while an installment loan represents a fixed amount financed and is non-variable. So when customers call back months later wanting to add to their service, a line of credit allows them to finance those additional purchases seamlessly without additional upfront costs. The cash flow will evolve as we transition over the next 12-24 months, moving to more standard repayments of the credit offering, aligning with typical financing partner arrangements.

Super helpful. I also wanted to ask about direct-to-home. The subscriber growth sequentially is a bit weaker than historical trends. But could you talk about how that operates?

Currently, we believe we will return to a normal deployment schedule for direct-to-home sales. Our salespeople are being deployed across the nation while being respectful of COVID protocols, and we know it looks to be a normal consumer environment for summer season sales. We've adapted our systems for remote onboarding, which has kept our process efficient amid social distancing needs.

Thanks, Todd. And last question from me, could you give us an update on the insurance business?

We’re still in test mode with the insurance business but see tremendous potential. Having direct access to hyper-local home data allows us to tailor coverage based on user interactions. We're ironed out financial perspectives, and only upon established compliance will we announce future projections.

Great. Thanks, guys.

Hey, good afternoon, guys. Congrats on the quarter, and again, congrats on the attrition rate, really impressive stuff. I guess I wanted to ask earlier questions in a different way. And that was, would you say that through the end of the March quarter, there was still a bit of what I’d call COVID complacency affecting that metric? Curious for your take on that?

COVID complacency could be affecting some, but we’re seeing better system performance leading to lower attrition. More customers have become acquainted with our products and systems, reinforcing their ongoing relationship with us. It's more than the pandemic; being relevant and providing peace of mind for customers during any challenges is central to why people choose Vivint.

Okay, that’s super helpful. And then I guess my second question, selling expenses were up more than 100% year-over-year, smart home subscribers were up 20%. What drove that growth in selling expenses? Should we interpret that as meaning it’s getting more expensive to acquire new customers?

The significant year-over-year hike in selling expenses also reflects the resurgence in our direct-to-home approach, with costs incurred during times we were halted in previous quarters. We anticipate those expenses to normalize as we continue operating full-scale throughout the summer selling season. The overall cost metric provides a more comprehensive picture, offering assurance that we can return to lower costs with increased future customers.

Okay, that’s really helpful. And then I guess if I can squeeze on the last one. I remember you guys previously guiding to long-term adjusted EBITDA margins in the mid-40% range. Correct me if I’m wrong, but is that still how we should think about it?

We’re optimistic about adjusting EBITDA margins in the long-term being in the mid-40% to 47% range. As we consider the investments we are making today, we're focused on positioning ourselves for sustainable growth and ensuring our long-term trajectory is solid.

Okay, thanks guys.

Thank you.

Great, thank you for taking my questions. I just have two very quick ones. One, can you share any thoughts on addressing the capital structure? And two, and I apologize if I missed this, but for attrition, how do you think about a normalized level?

We believe that attrition is likely to stabilize between 12% to 13%. We're currently working towards sustaining a level around 12% to 12.5%. We see substantial room for improvement as we refine service and offer even greater value to customers. In terms of capital structure, we will be looking to address that sooner than later. We want to take care of the 2022s, 2023s for sure, and extend those. You will likely see us reach out to the market in the near future.

Great. Thank you, Dale.

Thank you. Have a good day.

We appreciate everyone joining the call with us today. We’re looking back at this past quarter, which was a build-up over the past couple of years. We’re excited to see the accelerated top-line revenue growth, improvement in LTM attrition, net subscriber acquisition costs, servicing costs – everything with the business is performing incredibly well. We’re truly excited about our future. Look forward to connecting with you again next quarter. Thank you.