APX Group Holdings, Inc. 2nd Quarter 2017 Results. August 3, 2017

Transcription

1 APX Group Holdings, Inc. 2nd Quarter 2017 Results August 3,

2 forward-looking statements APX Group Holdings, Inc. (the Company, Vivint, we, our, or us ) obtained the industry, market and competitive position data included in this presentation from its estimates and research as well as from industry publications, surveys and studies conducted by third parties. Industry publication studies and surveys generally state that the information contained therein has been obtained from sources believed to be reliable but there can be no assurance as to the accuracy or completeness of such information. While APX Group, Inc. believes that each of the publications, studies and surveys is reliable, We have not independently verified industry, market and competitive position data from third-party sources. While we believe our internal business research is reliable and the market definitions are appropriate, neither such research nor these definitions have been verified by any independent sources. Accordingly, you should not place undue weight on the industry and market share data in this presentation. This presentation includes forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995, including but not limited to, statements related to the performance of our business, our financial results, our liquidity and capital resources, our plans, strategies and prospects, both business and financial and other non-historical statements. Forward-looking statements convey the Company s current expectations or forecasts of future events. All statements contained in this presentation other than statements of historical fact are forward-looking statements. These statements are based on the beliefs and assumptions of our management. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions. These statements may be preceded by, followed by or include the words believes, estimates, expects, projects, forecasts, may, will, should, seeks, plans, scheduled, anticipates or intends or similar expressions. Forward-looking statements are not guarantees of performance. You should not put undue reliance on these statements which speak only as of this date hereof. You should understand that the following important factors, in addition to those discussed in Risk Factors in our most recent annual report on Form 10K, and other reports filed with the Securities Exchange Commission ( SEC ), 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: (1) risks of the security and smart home industry, including risks of and publicity surrounding the sales, subscriber origination and retention process; (2) the highly competitive nature of the security and smart home industry and product introductions and promotional activity by our competitors; (3) litigation, complaints or adverse publicity; (4) the impact of changes in consumer spending patterns, consumer preferences, local, regional, and national economic conditions, crime, weather, demographic trends and employee availability; (5) adverse publicity and product liability claims; (6) increases and/or decreases in utility and other energy costs, increased costs related to utility or governmental requirements; (7) cost increases or shortages in security and smart home technology products or components; and (8) the introduction of unsuccessful new products and services; (9) privacy and data protection laws, privacy or data breaches, or the loss of data; and (10) the impact to our business, results of operations, financial condition, regulatory compliance and customer experience of the Vivint Flex Pay plan and the Best Buy Smart Home powered by Vivint Program. In addition, the origination and retention of new subscribers will depend on various factors, including, but not limited to, market availability, subscriber interest, the availability of suitable components, the negotiation of acceptable contract terms with subscribers, local permitting, licensing and regulatory compliance, and our ability to manage anticipated expansion and to hire, train and retain personnel, the financial viability of subscribers and general economic conditions. These and other factors that could cause actual results to differ from those implied by the forward-looking statements in this presentation are more fully described in the Risk Factors section of our most recent annual report on Form 10-K, as such factors may be updated from time to time in our periodic filings with the SEC. These risk factors should not be construed as exhaustive. We disclaim any obligations to and do not intend to update the above list or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements. We undertake no obligations to update or revise publicly any forward-looking statements, whether a result of new information, future events, or otherwise. 2

3 non-gaap financial measures This presentation includes Adjusted EBITDA which is a supplemental measure that is not required by, or presented in accordance with, accounting principles generally accepted in the United States ( GAAP ). Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income or any other measure derived in accordance with GAAP or as an alternative to cash flows from operating activities as a measure of our liquidity. We believe the presentation of Adjusted EBITDA is appropriate to provide useful information about the flexibility we have under our covenants to investors, lenders, financial analysts and rating agencies since these groups have historically used EBITDA-related measures in our industry, along with other measures, to estimate the value of a company, to make informed investment decisions, and to evaluate a company s ability to meet its debt service requirements. Adjusted EBITDA eliminates the effect of non-cash depreciation of tangible assets and amortization of intangible assets, much of which results from acquisitions accounted for under the purchase method of accounting. Adjusted EBITDA also eliminates the effects of interest rates and changes in capitalization which management believes may not necessarily be indicative of a company s underlying operating performance. Adjusted EBITDA is also used by us to measure covenant compliance under the indenture governing our senior secured notes, the indenture governing our senior unsecured notes and the credit agreement governing our revolving credit facility. We caution investors that amounts presented in accordance with our definition of Adjusted EBITDA may not be comparable to similar measures disclosed by other issuers, because not all issuers and analysts calculate Adjusted EBITDA in the same manner. See Annex A of this presentation for a reconciliation of Adjusted EBITDA to net loss for the Company, which we believe is the most closely comparable financial measure calculated in accordance with GAAP. Adjusted EBITDA should be considered in addition to and not as a substitute for, or superior to, financial measures presented in accordance with GAAP. 3

4 participants Todd Pedersen Chief Executive Officer Alex Dunn President Mark Davies Chief Financial Officer Dale R. Gerard SVP, Finance & Treasurer 4

5 second quarter 2017 update Transition to Vivint Flex Pay offering Strong new subscriber originations Inside sales up 16% YOY Customer acceptance of purchasing smart home products at point of sale is well received Simplified pricing structure 100% smart home offering at $39.99 /$49.99 ~$79 million of cash collected at point of sale 2.6x LTM net subscriber acquisition cost multiple improvement year over year Best Buy Partnership Co-branded revenue sharing Subscriber acquisition cost favorable (POS leveraging Bank Financing and Paid-in-Full only) Initial store rollout plan up to 400+ stores by the start of holiday sales season (~ 90 stores opened at the end of July 2017) ~$50K per store start-up expense Sales and Operations staffing, training and related support costs Smart Home Market Overview Competitive landscape MSO, DIY, Tech companies, Hero products: no meaningful change, always vigilant Vivint s Brand awareness aided and un-aided building momentum, as evidenced by Inside Sales growth 5

6 revenue and adjusted EBITDA (1) Quarter ended June 30, Six Months ended June 30, ($ in Millions) $157.9 Revenue $180.8 $212.1 ($ in Millions) $310.1 Revenue $355.1 $ Growth: 14.5% 17.3% Adjusted EBITDA Growth: 14.5% 17.6% Adjusted EBITDA $93.4 $105.0 $120.5 $183.0 $207.8 $ Growth: 12.4% 14.8% Growth: 13.6% 13.5% (1) A reconciliation of Adjusted EBITDA to GAAP Net Loss is included in Annex A of this presentation 6

7 Net Service Costs service and subscriber acquisition costs (1) Net Service Cost and Margin per Subscriber Quarter Ended June 30, Net Subscriber Acquisition Cost Multiple LTM Ended June 30, $15.02 $ x 27.9x Net Service Margin 72.7% 72.5% Increase is driven by investment in customer care and service support to improve the customer experience (1) Excludes wireless internet business and pilot sales channel initiatives Impact of Vivint Flex Pay Mix of new originations (consumer financing and Paid-in-Full vs RIC) ~$855 Upfront Fees per subscriber collected in 2Q17 vs $108 in 2Q16 Product cost reductions, largely offset by higher installation and sales support cost 7

8 new smart home subscriber originations (1) As of June 30, New Subscribers (1) DTH NIS Avg. RPU Per New User (2) Vivint Flex Pay Mix 89,185 13, ,334 23,047 92,837 26,729 $ % 44.0% $ ,283 78,287 66,108 $ % 1.7% Growth: 13.6% (8.4%) DTH 4.0% (15.6%) NIS 65.8% 16.0% Growth: 8.1% (11.3%) Citizens RIC PIF Other (1) Excludes wireless internet business and pilot sales channel initiatives (2) RPU is stated as of the end of each period. As we complete the transition to the Vivint Flex Pay model we expect Average Revenue Per New User to decline. 8

9 smart home subscriber portfolio data (1) As of June 30, Total RPU (2) Total Subscribers (1) Avg. Revenue Per User (2) ($ in Millions) $69.9 1,215,056 $57.53 $52.4 $ ,163 1,088,909 $53.05 $54.50 $54.92 $56.20 $ Growth: 16.8% 14.2% Growth: 14.0% 11.6% Growth: 2.4% 2.4% (1) Excludes wireless internet business and pilot sales channel initiatives (2) RPU is stated as of the end of each period. As we complete the transition to the Vivint Flex Pay model we expect Average Revenue Per User to decline. 9

10 subscriber account attrition (1) (# of Subscriber Accounts) 12.0% Annualized Attrition 12.9% Annualized Attrition 11.5% Annualized Attrition ~ 6% of portfolio reaching initial end of contract term in mo contracts (4Q16 1Q17) 12.9% 12.9% LTM Quarterly Attrition 12.6% 12.0% 11.5% mo contracts (4Q17 1Q18) Q Q Q Q Q (1) Excludes wireless internet business and pilot sales channel initiatives 10

11 2017 second-half priorities Best Buy store roll-out July through October Optimize sales and installation process Customer and Employee Experience Integration of co-branded sales team Vivint and Best Buy Blue shirts Vivint Flex Pay Enhancements optimizing the sales experience Targeted Investments product/service quality and functionality, channel optimization/business models, information technology infrastructure, return on innovation investments 11

12 Q&A 12

13 APX Group Holdings, Inc. Consolidated Financial Statements Quarters Ended June 30, 2017 and

14 condensed consolidated balance sheets APX Group Holdings, Inc. and Subsidiaries (In thousands) (Unaudited) June 30, December 31, ASSETS Current Assets: Cash and cash equivalents $ 1,470 $ 43,520 Accounts and notes receivable, net 26,182 12,891 Inventories 112,509 38,452 Prepaid expenses and other current assets 14,773 10,158 Total current assets 154, ,021 Property, plant and equipment, net 65,659 63,626 Subscriber acquisition costs, net 1,170,287 1,052,434 Deferred financing costs, net 3,407 4,420 Intangible assets, net 426, ,392 Goodwill 836, ,233 Long-term investments and other assets, net 58,953 11,536 Total assets $ 2,715,971 $ 2,547,662 LIABILITIES AND STOCKHOLDERS DEFICIT Current Liabilities: Accounts payable $ 110,944 $ 49,119 Accrued payroll and commissions 54,201 46,288 Accrued expenses and other current liabilities 48,439 34,265 Deferred revenue 66,705 45,722 Current portion of capital lease obligations 8,731 9,797 Total current liabilities 289, ,191 Notes payable, net 2,511,225 2,486,700 Revolving Credit Facility 100,000 - Capital lease obligations, net of current portion 4,949 7,935 Deferred revenue, net of current portion 154,244 58,734 Other long-term obligations 58,930 47,080 Deferred income tax liabilities 7,452 7,204 Total liabilities 3,125,820 2,792,844 Total stockholders deficit (409,849) (245,182) Total liabilities and stockholders deficit $ 2,715,971 $ 2,547,662 14

15 consolidated statements of operations APX Group Holdings, Inc. and Subsidiaries (In thousands) (Unaudited) Three Months Ended June 30, Six Months Ended June 30, Revenues: Recurring and other revenue $ 202,783 $ 172,472 $ 399,641 $ 339,918 Service and other sales revenue 6,358 5,826 11,749 10,837 Activation fees 2,985 2,509 6,089 4,305 Total revenues 212, , , ,060 Costs and expenses: Operating expenses 77,316 68, , ,934 Selling expenses 46,275 37,343 81,073 66,223 General and administrative expenses 38,902 36,109 77,763 66,550 Depreciation and amortization 80,096 72, , ,581 Restructuring and asset impairment recoveries - (725) - (680) Total costs and expenses 242, , , ,608 Loss from operations (30,463) (32,873) (46,990) (36,548) Other expenses (income): Interest expense 54,958 47, ,639 92,865 Interest income (47) (11) (104) (23) Other (income) loss, net (1,869) 9,861 10,197 4,753 Total other expenses 53,042 57, ,732 97,595 Loss before income taxes (83,505) (90,170) (165,722) (134,143) Income tax expense (benefit), net 732 (448) 1, Net loss $ (84,237) $ (89,722) $ (166,873) $ (134,815) 15

16 summary of consolidated statements of cash flows APX Group Holdings, Inc. and Subsidiaries (In thousands) (Unaudited) Three Months Ended June 30, Six Months Ended June 30, Net cash used in operating activities $ (127,108) $ (159,068) $ (133,261) $ (171,573) Net cash used in investing activities (3,966) (2,455) (12,002) (4,897) Net cash provided by financing activities 95, , , ,758 Effect of exchange rate changes on cash (3) 685 (10) (441) Net decrease in cash and cash equivalents $ (35,755) $ 120,894 (42,050) 118,847 Cash and cash equivalents: Beginning of period 37, ,520 2,559 End of period $ 1,470 $ 121,406 $ 1,470 $ 121,406 16

17 APX Group Holdings, Inc. Annex A 17

18 reconciliation of non-gaap financial measures APX Group ($ in Millions) Three Months Ended June 30, Six Months Ended June 30, Net loss $ (84.2) $ (89.7) $ (43.6) $ (166.9) $ (134.8) $ (91.7) Interest expense, net Other (income) expense, net (1.9) 9.9 (0.3) (0.3) Income tax expense, net 0.7 (0.5) Restructuring and asset impairment (i) - (0.7) - - (0.7) - Depreciation and amortization (ii) Amortization of capitalized subscriber acquisition costs Non-capitalized subscriber acquisition costs (iii) Non-cash compensation (iv) Other Adjustments (v) (6.1) Adjusted EBITDA $ $ $ 93.4 $ $ $ i. Reflects costs associated with the restructuring charges and asset impairments related to the transition of our Wireless Internet business and the sale in 2016 of our New Zealand and Puerto Rico Subscriber Contracts ii. Excludes loan amortization costs that are included in interest expense iii. Reflects subscriber acquisition costs that are expensed as incurred because they are not directly related to the acquisition of specific subscribers. Certain other industry participants purchase subscribers through subscriber contract purchases, and as a result, may capitalize the full cost to purchase these subscribers contracts, as compared to our organic generation of new subscribers, which requires us to expense a portion of our subscriber acquisition costs under GAAP. iv. Reflects non-cash compensation costs related to employee and director stock and stock option plans v. Other adjustments including items such as product development costs, subcontracted monitoring fee savings, non-recurring gain, and other similar adjustments 18

19 paid-in-full contract (average figures as of June 30) Monthly Amount Billed to Subscriber (Cash Received) Margin per User during Initial Contract Term Service RPU Equipment Total RPU Service Margin Equipment Subscriber Acquisition Cost Blended Margin / Contribution SAC$ SACx Payment from Customer is netted against gross SAC $0.00 $47.13 $34.16 N/A $34.16 $ x Margin % 72.5% 72.5% Income Statement View Initial 5-years Balance Sheet View Recurring and Other Revenue - P & L Monthly* Yr 1 Yr 2 Yr 3* Yr 4 Yr 5 Monthly Service RPU $ $ 566 $ 566 $ 566 $ 566 $ 566 Equipment Revenue (a) $ $ 188 $ 158 $ 133 $ 112 $ 94 Total Recurring and Other Revenue $ $ 754 $ 724 $ 698 $ 677 $ 659 * Monthly amounts shown are for year 1 only Assets Time of Installation Cash $1,176 Total Assets $1,176 Liabilities Deferred revenue (Current Liabilities) $188 Deferred revenue, net of current portion (a) $988 Total Liabilities $1,176 Company receives cash for the full amount of the purchase of products and related installation Revenue from the purchase of the products and related installation is deferred (reference item a) Deferred revenues (equipment revenue) are amortized over 15 years using a 240% declining balance method, which converts to a straight-line methodology after approximately nine years when the resulting amortization exceeds that from the accelerated method 19

20 consumer financing: Citizens (Based upon 2Q17 originations) Monthly Amount Billed to Subscriber (Cash Received) Service RPU Customer Payment to Citizens Total RPU Margin per User during Initial Contract Term Service Margin Citizens Contribution Subscriber Acquisition Cost Blended Margin / Contribution SAC SACx Payment from Citizens is netted against gross SAC $48.11 $26.68 $74.79 $34.87 N/A $34.87 $ x Margin % 72.5% 72.5% Income Statement View Initial 5-years Balance Sheet View Recurring and Other Revenue - P & L Monthly* Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Monthly Service RPU $ $ 577 $ 577 $ 577 $ 577 $ 577 Equipment Revenue (a) $ $ 197 $ 165 $ 139 $ 117 $ 98 Total Recurring and Other Revenue $ $ 774 $ 743 $ 716 $ 694 $ 675 * Monthly amounts shown are for year 1 only Assets Time of Installation Cash $1,618 Total Assets $1,618 Liabilities Deferred revenue (Current) $197 (a) Accrued Expenses and other current liabilities $78 Deferred revenue, net of current portion $1,033 (a) Other Long-term Obligations $311 Total Liabilities $1,618 Company receives cash from Citizens for the full amount of the customer s purchase of products and related installation Revenue from the purchase of the products and related installation, less the present value expected amount to be paid to Citizens for MDR fees and loss share is deferred (reference item a) Deferred revenues (equipment revenue) are amortized over 15 years using a 240% declining balance method, which converts to a straightline methodology after approximately nine years when the resulting amortization exceeds that from the accelerated method 20

21 retail installment contract (average figures as of June 30) Monthly Amount Billed to Subscriber (Cash Received) Service RPU RIC Total RPU Service Margin Margin per User during Initial Contract Term RIC (1) Contribution (1) RIC Contribution excludes SAC Blended Margin / Contribution SAC$ SACx $73.87 $34.77 $25.89 $60.67 $2, x Margin % 72.5% 100.0% 82.1% Subscriber Acquisition Cost Recurring and Other Revenue - P & L Monthly Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Monthly Service RPU $ $576 $576 $576 $576 $576 RIC Revenue Components Income Statement View Initial 5-years Interest revenue (a) $13.34 $160 $82 $59 $34 $6 Equipment Revenue (b) $13.68 $164 $138 $116 $97 $82 (a) + (b) Total RIC Revenue $27.02 $324 $220 $175 $131 $88 Total Recurring and Other Revenue $75.00 $900 $796 $751 $707 $664 * * Monthly amounts shown are for year 1 only Assets Balance Sheet View Time of Installation Accts and notes rec, net (Current Assets) $208 Long-Term investments and other assets, net $818 Total Assets $1,026 Liabilities Deferred revenue (Current Liabilities) $160 Deferred revenue, net of current portion $837 Total Liabilities $997 (b) Company records a notes receivable from the customer for the purchase of products and related installation less the imputed interest Revenue from the purchase of the products and related installation less the imputed interest is deferred (reference item a and b) Deferred revenues (equipment revenue refer to item b) are amortized over 15 years using a 240% declining balance method, which converts to a straight-line methodology after approximately nine years when the resulting amortization exceeds that from the accelerated method The imputed interest (interest revenue refer to item a) are amortized over the initial term of the RIC No Customer bad debt assumption in example Loan discount amount is subject to market interest rates changes and the customer credit profile 21

22 certain definitions Total Subscribers - the aggregate number of active smart home and security subscribers at the end of a given period Monthly Revenue per User ("RPU") - the recurring monthly amount billed to a smart home and security subscriber for Products and Services. RPU excludes cash received from Product sales associated with the initial installation. Total Revenue per User - Total RPU is the aggregate RPU billed to all smart home and security subscribers Average RPU ("ARPU") - The total RPU divided by total subscribers Average Revenue per New User ("ARPNU") - The aggregate RPU for new subscribers originated during a period divided by the number of new subscribers originated during such period Attrition - The aggregate number of canceled smart home and security subscribers during a period divided by the monthly weighted average number of total smart home and security subscribers for such period. Subscribers are considered canceled when they terminate in accordance with the terms of their contract, are terminated by us or if payment from such subscribers is deemed uncollectible (when at least four monthly billings become past due). Sales of contracts to third parties, certain moves and takeovers are excluded from the attrition calculation. Net subscriber acquisition costs - The direct and indirect costs to create a new smart home and security subscriber. These include commissions, equipment, installation, marketing and other allocations (general and administrative and overhead); less cash received from Product sales associated with the initial installation, activation fees, installation fees and upsell revenue. Net subscriber acquisition cost multiple - The total net subscriber acquisition costs, divided by the number of new subscribers originated, and then divided by the ARPNU. This multiple excludes residuals and long-term equity expenses associated with the direct-to-home sales channel. Net service cost per subscriber - The total service costs for the period, including monitoring, customer service, field service and other allocations (general and administrative and overhead) costs, less total service revenue for the period divided by total subscribers Net service margin - The ARPU for the period less net service costs divided by the ARPU for the period 22