Fourth Quarter 2014 Results. Interface Security Systems Holdings, Inc. March 31, 2015

Transcription

1 Fourth Quarter 2014 Results Interface Security Systems Holdings, Inc. March 31, 2015

2 Cautionary Statement Regarding Forward-Looking Statements This communication includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act ), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act ), regarding, among other things, our plans, strategies and prospects, both business and financial. 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 including, without limitation, the factors described under Risk Factors from time to time in our filings with the SEC. Many of the forward-looking statements contained in this presentation may be identified by the use of forward-looking words such as may, could, would, should, believe, expect, anticipate, plan, estimate, target, project, intend, understand, among others. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this presentation are set forth in other reports or documents that we file from time to time with the SEC, and include, but are not limited to: our inability to maintain compliance with various covenants under the Revolving Credit Facility (as defined below) to borrow funds; restrictions in the indenture governing the Master Holdings Notes (as defined below) on our ability to incur additional funded debt, other than amounts available under the Revolving Credit Facility; our ability to obtain capital, grow RMR and maintain our business strategy, which raises substantial doubts about our ability to continue as a going concern; our ability to compete effectively in a highly-competitive industry; catastrophic events that may disrupt our business; our ability to retain customers; concentration of recurring monthly revenue ( RMR ) in a few top customers and concentration of our business in certain markets; our ability to manage relationships with third-party providers, including telecommunication providers and broadband service providers; our reliance on third party component providers and the risk associated with any failure or interruption in products or services provided by these third parties; our reliance on third party software and service providers; our ability to obtain or maintain necessary governmental licenses and comply with applicable laws and regulations; changes in governmental regulation of communication monitoring; our reliance on network and information systems and other technologies and our ability to manage disruptions caused by cyber-attacks, failure or destruction of our networks, systems, technologies or properties; macroeconomic factors; economic, credit, financial or other risks affecting our customers and their ability to pay us; the uncertainty of our future operating results; our ability to attract, train and retain an effective sales force; and the loss of our senior management. All forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by this cautionary statement. We are under no duty or obligation to update any of the forward-looking statements after the date of this communication. 2 Interface Security Systems 2015

3 2014 Highlights Continued customer growth driving improving financial performance with lower attrition and subscriber creation multiples Maintained a substantial Contracted Backlog and sales pipeline Entered into a long-term partnership with Family Dollar. Deployment is well underway at full velocity with over 3,600 stores completed in 2014 and an additional 1,700 stores completed as of February 28, 2015 Focused on selling bundled services to national accounts and continued improvements in infrastructure Launched new website theme Simplify to the Power of One Introduced Bluetooth Low Energy Beacon technology and mobile platform for customer engagement in retail applications Leveraging our market leading position while continuing to invest in the future 3 Interface Security Systems 2015

4 Fourth Quarter Overview Total Revenue Operating and Financial Overview ($ in thousands) $32,198 $3,538 $28,720 $3,015 $27,427 $2,634 $32,424 $5,552 $34,276 $5,145 Total revenue increased $2.1 million, or 6.5% Y/Y Services revenue up 1.6% Y/Y even considering sale of Hawk monitoring services $28,660 $25,705 $24,793 $26,872 $29,131 Products revenue increased 45.4% Y/Y related to product installations of Contracted Backlog Ending RMR of $8.4 million 4Q13 1Q14 2Q14 3Q14 4Q14 Services Products Adjusted EBITDA (1) ($ in thousands) $10,156 Added $0.2 million of new contracted RMR to backlog in 4Q14 76% of RMR sourced from national accounts pipeline Added $5.4 million of installation revenue to backlog in 4Q14 $7,205 $7,765 $7,790 $7,652 ARPU increased to $109.16, up 34.6% Y/Y Capital expenditures of $0.6 million, excluding subscriber system assets Adjusted EBITDA (1) of $7.7 million ~76% of revenue is contracted RMR 4Q13 1Q14 2Q14 3Q14 4Q14 1) See notes on slide Interface Security Systems 2015

5 RMR and ARPU ARPU of $ $ for commercial customers $30.88 for residential customers Average net attrition rate of 10.3% in 4Q14 Net attrition of 9.7% after adjusting for two large cancellations in 4Q14 National account customers with IP Managed Services had 5.8% attrition rate in 4Q14 ARPU and attrition trending better than industry averages ARPU $160.0 $140.0 $120.0 $100.0 $80.0 $60.0 $40.0 $20.0 $0.0 4Q13 1Q14 2Q14 3Q14 4Q14 Commercial Accounts Residential Accounts Historical Average Net Attrition RMR Commercial vs Residential ($ in millions) 14.0% 12.0% 10.0% 8.0% $10.0 $8.0 $ % $ % 89.2% 89.7% 90.5% $0.8 $0.8 $0.8 $ % 6.0% 4.0% 10.0% 12.2% 9.8% 9.1% 10.3% $4.0 $2.0 $6.7 $6.6 $6.6 $7.0 $ % 0.0% 4Q13 1Q14 2Q14 3Q14 4Q14 $ % 4Q13 1Q14 2Q14 3Q14 4Q14 Commercial Accounts Residential Accounts % of RMR - Commercial 5 Interface Security Systems 2015

6 National Account Growth Installed $0.8 million of new national account RMR for 4Q14; $1.6 million YTD 70% of total company RMR is from national account customers National account attrition for 4Q14 was 6.3% National account sales initiatives are driving consistent and substantial RMR growth ($ in thousands) Ending National Account RMR $6,000 $5,945 $5,500 $5,194 $5,000 $4,817 $4,796 $4,773 $4,500 $4,000 4Q13 1Q14 2Q14 3Q14 4Q14 6 Interface Security Systems 2015

7 Customer Creation Cost RMR installation volume and absorption of fixed sales and installation overhead at high RMR volume level resulting in decreasing creation cost as illustrated in chart below Large multi-location retail deployment driving optimal new RMR volume, driving down creation cost Benefiting from investments in sales infrastructure and several large proof-of-concept projects completed in 2013 Large national account wins in 2014 and significant increase in RMR volume is reflected in 2014 lower creation cost Improved performance is expected as RMR volume increases Creation Cost and New RMR 80.0x 60.0x 40.0x 63.0x 70.6x $587, x $894, x $1,000,000 $800,000 $600,000 $400, x $187,146 $143,365 $200, x 1Q14 2Q14 3Q14 4Q14 $0 Creation Multiple New RMR Installed 7 Interface Security Systems 2015

8 Family Dollar Installation of FD new build stores began in late May 2014 and we started the conversion project on their ~7,800 existing stores in July 2014 On plan to substantially complete over 8,200 sites by early June 2015 Through the end of December 31, 2014, project is meeting budgeted creation costs The chart below shows our monthly installation activity, both actual and planned, for 2014: over 3,600 sites were installed at 12/31/2014 Solid Processes, Teamwork, Great Team Members and Partners 8 Interface Security Systems 2015

9 Capital Structure ($ in thousands) Capital expenditures $ 845 $ 1,302 $ 1,501 Total Debt (1) $ 209,288 $ 256,818 $ 266,406 Total RMR $ 7,842 $ 8,412 $ 8,449 Debt/RMR Ratio RMR plus Backlog RMR $ 8,442 $ 8,735 $ 10,462 Debt/Adjusted RMR Ratio (1) Represents our long-term debt, capital leases and other obligations, including the current portion thereof capital expense increased 15.3% Y/Y primarily due to the build out and upgrades of our data centers to improve redundancy and increase capacity Optimize capital structure Issued $115M 12.50% / 14.50% Senior Contingent Cash Pay Notes at Interface Master Holdings, Inc. Master Holdings purchased shares of Class A and Class B common stock of Holdings for $71.6M 9 Interface Security Systems 2015

10 First Quarter 2015 Business Update 10 Interface Security Systems

11 Recurring Monthly Revenue ($ in thousands) 1Q15* 4Q14 Beginning $ 8,449 $ 7,785 New and Acquired 1, Canceled (199) (230) Ending $ 9,292 $ 8,449 Relocations/Resigns Month Average Net Attrition Rate 8.0% 10.3% Net Internal Growth Rate 9.1% 10.4% * Results are estimates and should not be relied upon as actual results Normalized attrition in the first quarter 2015, estimated attrition rate of 8.0% Projected quarterly high of new RMR installations Annualized growth rate estimated over 36% 11 Interface Security Systems 2015

12 Capital Structure ($ in thousands) 1Q15* 1Q14 Capital expenditures $ 136 $ 352 Total Debt (1) $ 262,000 $ 261,004 Total RMR $ 9,292 $ 7,441 Debt/RMR Ratio RMR plus Backlog RMR $ 10,264 $ 7,752 Debt/Adjusted RMR Ratio * Results are estimates and should not be relied upon as actual results (1) Represents our long-term debt, not including capital leases and other obligations, including the current portion thereof. Debt to Adjusted RMR ratio, which includes RMR backlog, decreased to 25.5 times from 33.7 times last year 12 Interface Security Systems 2015

13 Adjusted EBITDA (1) New RMR installed over the last six months now contributing to Adjusted EBITDA (1) Adding existing contracted backlog will increase cash flow allowing the company to service debt and if necessary to generate additional liquidity cushion in 2016, the company can reduce its investment in new RMR through reductions in sales and marketing costs as well as fixed operations overhead Three Months Ended March 31, December 31, 2015* 2014 Net loss attributable to Interface Security Systems Holdings, Inc. $ (16,080) $ (17,965) Provision for income taxes 321 1,013 Interest expense 6,178 6,175 Interest income - (3) Depreciation 2,819 2,680 Amortization 1,561 1,789 EBITDA (5,201) (6,311) Loss on sale of long-lived assets Sales and installation expense (2) 32,616 27,035 50% of overhead expenses (2) 2,845 3,327 Capitalized expenditures, subscriber system assets (2) (11,285) (8,845) Sales and installation revenue (2) (7,762) (8,225) Adjusted EBITDA (1) $ 11,423 $ 7,652 Annualized Adjusted EBITDA (1) $ 45,690 $ 30,608 * Results are estimates and should not be relied upon as actual results 1) See notes on slide 17. 2) See slide Interface Security Systems 2015

14 Family Dollar We have installed ~5,600 sites vs. planned of ~ 5,400 through February 2015 The chart below shows our monthly installation activity, both actual and planned FD Store Installations JUL-14 AUG-14 SEP-14 OCT-14 NOV-14 DEC-14 JAN-15 FEB-15 Actual Planned Solid Processes, Teamwork, Great Team Members and Partners 14 Interface Security Systems 2015

15 Interface is Well Positioned Leader in bundled physical security, secured managed Strong Platform and Infrastructure broadband and IP managed services Operating model creates stickier customers Established Blue Chip customer base Significant Pipeline and Operating Growth Upside High ARPU customers with attractive creation costs Pipeline is robust, maturing and expanding Large opportunity to sell upgraded services to existing customers Unique and Valued Bundled Offering Focused on technology enabled bundled service offerings and industry verticals Compelling products and pricing creates strong demand for future business One provider, one lower price 15 Interface Security Systems 2015

16 Appendix 16 Interface Security Systems

17 Non-GAAP Financial Measures The Company uses certain financial measures, including EBITDA and Adjusted EBITDA, as supplemental measures of our operating performance that are not required by, or presented in accordance with, generally accepted accounting principles in the United States ( GAAP ). They are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income, operating income or any other performance measures derived in accordance with GAAP or as an alternative to cash flows from operating activities as a measure of our liquidity. These measures are used in the internal management of our business, along with the most directly comparable GAAP financial measures, in evaluating our operating performance. In addition, our presentation of Adjusted EBITDA is consistent with the equivalent measurements that are contained in our Revolving Credit Facility and the indenture governing the Senior Secured Notes. EBITDA represents net loss attributable to Interface Security Systems Holdings, Inc. before interest expense, interest income, income taxes, depreciation, amortization and net loss attributable to noncontrolling interest. Adjusted EBITDA represents EBITDA as further adjusted for gain or loss of sale of long-lived assets, gain on sale of Transferred Assets, loss on extinguishment of debt, sales and installation costs, net of sales and installation revenue, related to organic RMR growth, plus 50% of non-capitalized corporate and service center administrative costs related to organic RMR growth, less capitalized subscriber system assets. Our calculation of Adjusted EBITDA does not include any adjustments for expenses related to the sale of the Transferred Assets, the merger of The Greater Alarm Company, Inc. and Westec Acquisition Corp. into Interface Security Systems, L.L.C. in September 2013, financing of the Revolving Credit Facility or costs of preparing for the initial registration of the Senior Secured Notes. These expenses for the three months ended December 31, 2014 and 2013 were $0.1 million and $0.5 million, respectively, and $2.7 million and $0.8 million for the years ended December 31, 2014 and 2013, respectively. Our measurement of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies and are not measures of performance calculated in accordance with GAAP. We have included information concerning EBITDA and Adjusted EBITDA because we believe that such information is used by certain investors as supplemental measures of a company s historical ability to service debt. We believe these measures are frequently used by securities analysts, investors and other interested parties in the evaluation of high yield issuers, many of which present EBITDA and Adjusted EBITDA when reporting their results. Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items. 17 Interface Security Systems 2015

18 Non-GAAP Financial Measures (continued) EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of, our operating results or cash flows as reported under GAAP. Some of these limitations are: they do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; they do not reflect changes in, or cash requirements for, our working capital needs; they do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; although depreciation is a non-cash charge, the assets being depreciated will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; they are not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows; and other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures. Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA only for supplemental purposes. Please see our consolidated financial statements contained elsewhere in this report. For a reconciliation of loss to EBITDA and adjusted EBITDA, see slide 19 in the appendix. 18 Interface Security Systems 2015

19 Adjusted EBITDA Reconciliation Three Months Ended December 31, September 30, June 30, March 31, December 31, ($ in thousands) Net loss attributable to Interface Security Systems Holdings, Inc. $ (17,965) $ (15,487) $ (12,901) $ 27,690 $ (12,842) Provision for income taxes 1,013 1,136 1,200 (2,311) 208 Interest expense 6,175 6,172 6,049 6,133 6,097 Interest income (3) (1) - (4) (4) Depreciation 2,680 2,368 2,381 2,450 2,565 Amortization 1,789 2,144 2,211 2,372 3,399 EBITDA (6,311) (3,668) (1,060) 36,330 (577) Loss on sale of long-lived assets Gain on sale of Transferred Assets (39,715) - Loss on extinguishment of debt (135) Sales and installation expense (a) 27,035 21,276 11,016 12,207 15,833 50% of overhead expenses (b) 3,327 3,238 2,816 3,988 3,642 Capitalized expenditures, subscriber system assets (c) (8,845) (5,122) (1,452) (1,682) (3,404) Sales and installation revenue (d) (8,225) (8,349) (3,709) (4,402) (5,266) Adjusted EBITDA $ 7,652 $ 7,790 $ 7,765 $ 7,205 $ 10,173 (a) Reflects sales and installation costs related to organic RMR growth. Certain other industry participants purchase customers through customer contract purchases, and as a result, may capitalize the full cost to purchase these customer contracts, as compared to our organic generation of new customers, where the majority of our customer creation costs is expensed. (b) Reflects 50% of the corporate and service center administrative costs related to organic RMR growth and is not capitalized. Corporate and service center administrative cost includes expenses and the related overhead to support the RMR and installation growth. Other industry participants customarily allocate 50% of their overhead cost to RMR and sales growth. (c) Reflects sales and installation cost related to organic RMR growth, including those costs associated with accounts payable that are capitalized as subscriber systems assets. Since the full amount of sales and installation expense is added as an adjustment in (a) above, the capitalized portion of the sales and installation cost is deducted from the Adjusted EBITDA calculation. (d) Reflects revenue received for the installation of subscriber systems related to organic RMR growth to match certain costs incurred in connection with the installations as described in (a) above. 19 Interface Security Systems 2015

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