APX Group Holdings, Inc. 1st Quarter 2017 Results May 10, 2017 1
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. 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 forwardlooking 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
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
participants Todd Pedersen Chief Executive Officer Alex Dunn President Mark Davies Chief Financial Officer Dale R. Gerard SVP, Finance & Treasurer 4
first quarter 2017 company overview Business Model Transition Vivint Flex Pay Separating the purchase of equipment and installation from service offerings Customer optionality on smart home configuration with zero-percent financing Citizens Bank, N.A. consumer funding provides incremental cash flow to Vivint Channel Expansion Buy Best Strategic Partnership Broad scale big box retail format initial rollout of approximately 400 stores Co-branded partnership... Access to millions of customers, brand awareness Favorable subscriber economics IRR, SAC Multiple, and breakeven months Operational Focus Increased run-rate in Engineering to focus on product reliability and continued cloud capabilities in order to drive customer experience and service cost scaling IT and process development for Flex Pay and retail/bby capabilities New channel expansion Sales, start-up and capital resources for BBY partnership 5
revenue and adjusted EBITDA (1) Quarters Ended March 31, Total Revenues ($ in Millions) Adjusted EBITDA (1) $152.2 $174.3 $205.4 $89.5 $102.8 $115.4 2015 2016 2017 2015 2016 2017 Growth: 14.5% 17.8% Growth: 14.9% 12.3% Total RPU represented 95.9% of Q1 2017 Total Revenues (1) A reconciliation of Adjusted EBITDA to GAAP Net Loss is included in Annex A of this presentation 6
Net Service Costs service and subscriber acquisition costs (1) Net Service Cost and Margin per Subscriber Quarter Ended March 31, Net Subscriber Acquisition Cost Multiple LTM Ended March 31, $14.41 $15.95 30.9x 29.8x 2016 2017 2016 2017 Net Service Margin 73.8% 72.3% 2017: Includes $1.8 million of equipment cost for 2G to 3G upgrades 2017: Lower SAC multiple driven by higher ARPNU and higher upfront collections (1) Excludes wireless internet business 7
new smart home subscriber originations (1) As of March 31, New Subscribers 41,830 39,292 Avg. RPU Per New Subscriber (2) Smart Home Adoption Rate IS DTH 25,809 11,888 22,453 24,498 $61.46 $62.01 $67.99 66.9% 81.3% 85.7% 13,921 19,377 14,794 2015 2016 2017 2015 2016 2017 2015 2016 2017 Growth: 62.1% (6.1%) Growth: 0.9% 9.6% Growth: 1,440bps 440bps (1) All subscriber portfolio data presented excludes wireless internet business (2) RPU is stated as of the end of each period 8
smart home subscriber portfolio data (1) As of March 31, Total RPU (2) Total Subscribers Avg. Revenue Per User (2) ($ in Millions) $48.3 $56.3 $66.2 890,125 1,018,397 1,151,453 $54.26 $55.27 $57.49 2015 2016 2017 2015 2016 2017 2015 2016 2017 Growth: 16.5% 17.6% Growth: 14.4% 13.1% Growth: 1.9% 4.0% (1) All subscriber portfolio data presented excludes wireless internet business (2) RPU is stated as of the end of each period 9
subscriber account attrition (1) (# of Subscriber Accounts) 13.6% Annualized Attrition 12.6% Annualized Attrition 12.0% Annualized Attrition LTM Quarterly Attrition ~ 6% of portfolio reaching initial end of contract term in 2017 12.6% 12.9% 12.9% 12.6% 2013 42-mo contracts (4Q16 1Q17) 2014 42-mo contracts (4Q17 1Q18) 12.0% 12.0% 12.2% 12.0% (1) All subscriber attrition data presented excludes the wireless internet business for all periods presented Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 10
vivint flex pay & BBY status Vivint Flex Pay Customers have two options when purchasing the products and related installation Pay-in-Full: customers pay with credit card or check at time of installation Consumer Credit: Citizens installment loan or Vivint Retail Installment Contract (RIC) 42 or 60 month terms, 0% interest Significant IT and process changes required for implementation RIC offered to all new customers beginning late-february Citizens initial implementation late-march Customers appear to readily accept the new pricing model similar to recently promoted cell phone plans Both sales channels have shown an initial drop in productivity as training and experience is internalized at the representative level Financial / Operation Metrics: too early to provide details, but key metrics appear to be in-line with relevant range of estimated results Financial statement impact included in Appendix Best Buy Program Initial plan is to open approximately 400 stores, with as many as possible prior to holiday sales season Product package and service offering is consistent with existing channels Infrastructure, sales and management are currently being developed and acquired. Rollout expected end-of-summer. Sales productivity is expected to follow a typical experience curve, including a pre-opening hiring and training phase 11
Q&A 12
APX Group Holdings, Inc. Consolidated Financial Statements Quarters Ended March 31, 2017 and 2016 13
condensed consolidated balance sheets APX Group Holdings, Inc. and Subsidiaries (In thousands) (Unaudited) March 31, December 31, 2017 2016 ASSETS Current Assets: Cash and cash equivalents $ 37,225 $ 43,520 Accounts and notes receivable, net 11,759 12,891 Inventories 80,845 38,452 Prepaid expenses and other current assets 12,426 10,158 Total current assets 142,255 105,021 Property and equipment, net 67,258 63,626 Subscriber acquisition costs, net 1,064,050 1,052,434 Deferred financing costs, net 3,914 4,420 Intangible assets, net 450,788 475,392 Goodwill 835,491 835,233 Long-term investments and other assets, net 24,654 11,536 Total assets $ 2,588,410 $ 2,547,662 LIABILITIES AND STOCKHOLDERS DEFICIT Current Liabilities: Accounts payable $ 92,757 $ 49,119 Accrued payroll and commissions 30,027 46,288 Accrued expenses and other current liabilities 87,322 34,265 Deferred revenue 48,820 45,722 Current portion of capital lease obligations 9,134 9,797 Total current liabilities 268,060 185,191 Notes payable, net 2,510,210 2,486,700 Capital lease obligations, net of current portion 6,039 7,935 Deferred revenue, net of current portion 73,715 58,734 Other long-term obligations 49,945 47,080 Deferred income tax liabilities 7,277 7,204 Total liabilities 2,915,246 2,792,844 Total stockholders deficit (326,836) (245,182) Total liabilities and stockholders deficit $ 2,588,410 $ 2,547,662 14
consolidated statements of operations APX Group Holdings, Inc. and Subsidiaries (In thousands) (Unaudited) Three Months Ended March 31, 2017 2016 Revenues: Recurring and other revenue $ 196,858 $ 167,446 Service and other sales revenue 5,391 5,011 Activation fees 3,104 1,796 Total revenues 205,353 174,253 Costs and expenses: Operating expenses 71,352 57,991 Selling expenses 34,798 28,880 General and administrative expenses 38,861 30,441 Depreciation and amortization 76,869 60,571 Restructuring and asset impairment charges - 45 Total costs and expenses 221,880 177,928 Loss from operations (16,527) (3,675) Other expenses (income): Interest expense 53,681 45,418 Interest income (57) (12) Other loss (income), net 12,066 (5,108) Total other expenses 65,690 40,298 Loss before income taxes (82,217) (43,973) Income tax expense 419 1,120 Net loss $ (82,636) $ (45,093) 15
summary of consolidated statements of cash flows APX Group Holdings, Inc. and Subsidiaries (In thousands) (Unaudited) Three Months Ended March 31, 2017 2016 Net cash used in operating activities $ (6,153) $ (12,505) Net cash used in investing activities (8,036) (2,442) Net cash provided by financing activities 7,901 14,026 Effect of exchange rate changes on cash (7) (1,126) Net decrease in cash $ (6,295) $ (2,047) Cash: Beginning of period 43,520 2,559 End of period $ 37,225 $ 512 16
APX Group Holdings, Inc. Annex A 17
reconciliation of non-gaap financial measures APX Group ($ in Millions) Three Months Ended March 31, 2017 2016 2015 Net loss (82.6) (45.1) (48.0) Interest expense, net 53.6 45.4 38.3 Other expense, net 12.0 (5.1) - Income tax expense 0.4 1.1 0.1 Restructuring and asset impairment (i) - - - Depreciation and amortization (ii) 30.0 33.2 37.7 Amortization of capitalized creation costs 46.9 27.4 19.4 Non-capitalized subscriber acquisition costs (iii) 43.3 36.0 34.9 Non-cash compensation (iv) 0.4 0.4 0.8 Other Adjustments (v) 11.4 9.5 6.5 Adjusted EBITDA $ 115.4 $ 102.8 $ 89.5 i. Reflects costs associated with the restructuring charges and asset impairments related to the transition of our Wireless Internet business and the 2016 Contracts Sales 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
paid-in-full contract (for illustration purposes only) Monthly Amount Billed to Subscriber (Cash Received) Margin per User during Initial Contract Term % of New Subscribers Service RPU Equipment Total RPU Service Margin Equipment Blended Margin / Contribution SAC$ SACx 10% Smart Home $39.99 $0.00 $39.99 $24.99 N/A $24.99 $800 20.0x Margin % 62.5% 62.5% 90% Smart Home + Video $49.99 $0.00 $49.99 $34.99 N/A $34.99 $750 15.0x Margin % 70.0% 70.0% Blended $48.99 $0.00 $48.99 $33.99 N/A $33.99 $755 15.5x Margin % 69.4% 69.4% Subscriber Acquisition Cost Payment from Customer is netted against gross SAC Assumptions Income Statement View Initial 5-years Balance Sheet View Blended Total Retail Sale (1) $ 1,315 (a) Blended Service RPU $ 48.99 Monthly Service Cost/Sub $ 15.00 Initial Term (months) 60 (1) Includes all the equipment and installation paid for at installation Recurring and Other Revenue - P & L Monthly * Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Monthly Service RPU $ 48.99 $ 588 $ 588 $ 588 $ 588 $ 588 Equipment Revenue (a) $ 17.53 $ 210 $ 177 $ 148 $ 125 $ 105 Total Recurring and Other Revenue $ 66.52 $ 798 $ 765 $ 736 $ 713 $ 693 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 NOTE: Actual results and accounting treatment may differ from the above Illustration * Monthly amounts shown are for year 1 only Assets Time of Installation Cash $1,315 Total Assets $1,315 Liabilities Deferred revenue (Current Liabilities) $210 Deferred revenue, net of current portion $1,105 Total Liabilities $1,315 (a) 19
consumer financing: Citizens (for illustration purposes only) % of New Subscribers Service RPU Monthly Amount Billed to Subscriber (Cash Received) Customer Payment to Citizens Total RPU Margin per User during Initial Contract Term Service Margin Citizens Contribution Blended Margin / Contribution SAC SACx 10% Smart Home $39.99 $16.67 $56.66 $24.99 N/A $24.99 $800 20.0x Margin % 62.5% 62.5% 90% Smart Home + Video $49.99 $22.50 $72.49 $34.99 N/A $34.99 $750 15.0x Margin % 70.0% 48.3% Blended $48.99 $21.92 $70.91 $33.99 N/A $33.99 $755 15.5x Margin % 69.4% 69.4% Subscriber Acquisition Cost Payment from Citizens is netted against gross SAC Assumptions Income Statement View Initial 5-years Balance Sheet View Blended Total Retail Sale (1) $ 1,315 Derivative $ (263) Blended Total Revenue - Deferred $ 1,052 (a) Blended Service RPU $ 48.99 Monthly Service Cost/Sub $ 15.00 Initial Term (months) 60 (1) Includes all the equipment and installation paid for at installation ($21.92 x 60 months) Recurring and Other Revenue - P & L Monthly * Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Monthly Service RPU $ 48.99 $ 588 $ 588 $ 588 $ 588 $ 588 Equipment Revenue (a) $ 14.03 $ 168 $ 141 $ 119 $ 100 $ 84 Total Recurring and Other Revenue $ 63.02 $ 756 $ 729 $ 707 $ 688 $ 672 * Monthly amounts shown are for year 1 only 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 Assets Time of Installation Cash $1,315 Total Assets $1,315 Liabilities Deferred revenue (Current) $168 (a) Accrued Expenses and other current liabilities $53 Deferred revenue, net of current portion $884 (a) Other Long-term Obligations $210 Total Liabilities $1,315 NOTE: Actual results and accounting treatment may differ from the above Illustration 20
retail installment contract (for illustration purposes only) Monthly Amount Billed to Subscriber (Cash Received) % of New Subscribers Service RPU RIC Total RPU Service Margin Margin per User during Initial Contract Term RIC (1) Contribution (1) RIC Contribution excludes SAC Blended Margin / Contribution SAC$ SACx 10% Smart Home $39.99 $16.67 $56.66 $24.99 $16.67 $41.66 $1,800 31.8x Margin % 62.5% 100.0% 73.5% 90% Smart Home + Video $49.99 $22.50 $72.49 $34.99 $22.50 $57.49 $2,100 29.0x Margin % 70.0% 100.0% 79.3% Blended $48.99 $21.92 $70.91 $33.99 $21.92 $55.91 $2,070 29.2x Margin % 69.4% 100.0% 78.8% Subscriber Acquisition Cost Assumptions Income Statement View Initial 5-years Balance Sheet View Blended Total Retail Sale (1) $ 1,315 Loan Discount $ (318) Blended Total Revenue - Deferred $ 997 Blended Service RPU $ 48.99 Monthly Service Cost/Sub $ 15.00 Initial Term (months) 60 Discount Rate (imputed interest) 10% (1) Includes all the equipment and installation paid for at installation ($21.92 x 60 months) (a) (b) (a) Recurring and Other Revenue - P & L Monthly* Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Monthly Service RPU $48.99 $588 $588 $588 $588 $588 RIC Revenue Components Interest revenue (a) $8.31 $100 $83 $65 $46 $24 Equipment Revenue (b) $13.29 $160 $134 $113 $95 $79 Total RIC Revenue (a) + (b) $21.60 $259 $217 $178 $140 $103 Total Recurring and Other Revenue $70.59 $847 $805 $766 $728 $691 * Monthly amounts shown are for year 1 only Assets Time of Installation Accts and notes rec, net (Current Assets) $163 Long-Term investments and other assets, net $834 Total Assets $997 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 NOTE: Actual results and accounting treatment may differ from the above Illustration 21
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 revenue billed to a smart home and security subscriber. Total RPU - 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 activation fees, installation fees and upsell revenue. These costs exclude residuals and longterm equity expenses associated with the direct-to-home sales channel. 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. 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