Monitronics International Inc

OTC:SCTY

Earnings Call Transcript 2019-Q4

[Operator]

Hello and welcome to the Monitronics International Inc. Conference Call to discuss the company's Fourth Quarter 2019 Earnings. Monitronics International doing business as Brinks Home Security will be referred to as Brinks Home Security on today's call. The call today is being recorded. And a replay of the call will be available on the Brinks Home Security IR website, an hour after completion of this call.

This call includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about business strategies, including those with respect to our dealer and direct sales and installation channels, market potential and expansion, the success of new products and services, the launch of Brinks Home Security's consumer financing solution; the anticipated benefits of the Brinks Home rebranding; customer retention; account creation and related cost; anticipated account generation; future financial performance; debt refinancing; recovery of insurance proceeds and other matters that are not historical facts.

These forward-looking statements involve many risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements, including, without limitation, possible changes in market acceptance of the company services, technological innovations in the alarm monitoring industry, competitive issues, continued access to capital on terms acceptable to Brinks Home Security, our ability to capitalize on acquisition opportunities, general market and economic conditions and changes in law and government regulations.

These forward-looking statements speak only as of the date of this call, and Brinks Home Security expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in Brinks Home Security expectations with regard, thereto, or any change in events, conditions or circumstances, on which any such statement is based.

Please refer to the publicly filed documents of Monitronics International doing business as Brinks Home Security in the most recent Forms 10-K and 10-Q for additional information about Brinks Home Security and about the risks and uncertainties related to the company’s business, which may affect the statements made during this call.

On today's call, we will discuss certain non-GAAP financial measures, including adjusted EBITDA. The required definitions and reconciliations are included in our earnings release, which was made publicly available earlier today.

I would now like to turn the call over to your host, Brinks Home Security’s, Interim Chief Executive Officer, William Niles. Please go ahead, sir.

[William Niles]

Thank you, operator, and good afternoon, everyone.

I'd like to welcome you to the Brinks Home Security fourth quarter and full year 2019 earnings call. However, first, on behalf of Brinks Home Security, I would like to say that we hope you and your loved ones are healthy, safe, and remain so during the pendency of this unprecedented pandemic.

Joining me on the call today is Fred Graffam, Brinks Home Security's Chief Financial Officer. And our comments today, Fred and I will provide you with a comprehensive update on how we were responding to the COVID-19 pandemic, and an update on our financial results.

Today, our efforts with respect to COVID-19 have been focused on three key areas. First and foremost, safety; protecting our employees, our customers, our dealer partners in the community we serve. Secondly, operations; we've put in place protocols to ensure our business remains operational, both in terms of servicing our customers and supporting our dealer network. And third, liquidity and balance sheet management. We've remained laser focused on ensuring adequate liquidity and the health of our balance sheet and in turn the health of the enterprise.

As you all know, the COVID-19 crisis has presented not just our business but the entire world with unprecedented challenges. Despite this, I want to personally assure you that Brinks Home Security and its dedicated employees remain 100% committed to supporting the health, safety and well being of our customers, our fellow employees, our dealers, and the communities we serve.

Early on in the COVID-19 crisis, we established a crisis response team. This team is comprised of the company's most senior executives, as well as a team of outside experts. Team meets on a daily basis, usually multiple times to assess the situation in real-time and in turn, make timely and informed decisions. The crisis response team is dedicated to focusing on the three priorities we established and is outlined at the beginning of this call.

To ensure the health and safety of our team members and in accordance with guidance from the CDC and federal and state governments, we have implemented the following protocols. We have instructed employees and dealers to take appropriate preventative safety measures, including using hand sanitizer and disinfecting spray and wipes, regularly cleaning and sanitizing their work environment and encouraging employees who may not feel well to stay at home.

Additional paid time off has also been provided to all of our employees want to help them manage through the crisis to take additional time to care for family members and to discourage them from coming to work, if they're sick or even symptomatic.

With respect to our call and alarm response centers, we have established three lines of defense to ensure full continuity of our monitoring services moving forward. First, we've implemented procedures to distance our monitoring staff in all of our call centers. Second, we have activated our backup call centre facility which is now fully operational and available should we need a redundant call centre. And third, as a last line of defense and in a worst case scenario, we have enabled our call center operators to operate from home should conditions warrant. However, I want to be clear that as of today, we remain fully operational in our existing primary call center and continue to provide best in breed professional monitoring service to our customers on a 24/7 basis.

For those employees that can work remotely, we have instituted measures to support them, including purchasing additional equipment to enable work from home capabilities. Importantly, we now have over 2/3rds of our workforce working remotely. We're also ensuring we comply with our data security measures to guarantee that all employee customer data remains protected and secure despite the remote work locations.

In short, all measures that can reasonably be implemented are being taken to protect the quality and continuity of our monitoring services, our customer service and our dealer partners. We're also committed to creating a safe environment for team members in the field, as well as the customers they serve. In jurisdictions where local or state governments have implemented "shelter in place," or similar orders, we have instructed our dealers to cease doing door-to-door sales until such measures are lifted.

We continue to take inbound service and sales calls as part of our safety protocols prior to any in home service visit, our service representatives are conducting preliminary phone screenings to inquire about the health of the customer's household and a customer's comfort level. With a service technician entering their home subject to a service request and adhering to these safety protocols, we continue to send field technicians out to service a customer's home or to install a new system.

We've also taken steps to protect our supply chain and product pipeline recently signed agreements with certain product vendors to mitigate the risk of equipment shortages as we move forward throughout this crisis.

For customers experiencing financial hardship as a result of the COVID-19 pandemic, we have provided direction to our customer service agents to offer payment flexibility options to those customers. We believe our essential services are particularly important to our customers at this time, as it provides peace of mind to their families, loved ones at home and possessions are protected by Brinks Home Security.

In addition to these corrective measures, we are also closely evaluating our liquidity position. While we cannot predict all potential outcomes, we have taken prudent and timely actions to protect our liquidity during this crisis. Our actions include, first, we've taken steps to cut and manage expenses.

For example, we are reducing both digital and brand marketing spend in this uncertain time. We are also taking a disciplined approach to hiring and staffing. Other discretionary spend, making smart and timely decisions to manage needs and demand. Second, we drew an incremental $50 million under our revolving credit facility in the first quarter that we intend to hold during the pendency of this crisis. We believe this is a prudent action to maintain fiscal flexibility.

It should also be noted that in our economic model, were meaningful upfront payments are made to our dealers. A near term benefit of fewer gross ads is reduced cash expenditures, which will provide additional liquidity.

As we move forward, we remain committed to making prudent and thoughtful decisions to protect employees. ensure continuity of service and assist our dealer partners as they manage through this unprecedented challenge. While our response to COVID-19 remains our immediate priority, we are also using this time to take a hard look at our strategic initiatives and addressing how best to position the business for the long-term. We had intended to provide a comprehensive overview of our strategic priorities at an Investor Day later this spring. However, given the fluid nature of the COVID-19 pandemic, we have decided to postpone the event tentatively until fall of this year.

That said, I will note that our strategic planning process has been guided by the Northstar of improving unit economics and acquiring profitable accounts at scale and retaining them for life. I feel confident that we were taking the right steps to position the business for success. With that, let me turn things over to Fred. Fred?

[Fred Graffam, Chief Financial Officer]

Thank you, Niles.

Net revenue for the 3 and 12 months ended December 31, 2019, declined 6.3% and 6.6% to $125.9 million and $504.5 million, respectively. The decrease in both periods is primarily attributable to a decrease in alarm monitoring revenue due to the lower average number of customers in the 3 and 12 month periods. Also impacting revenues in the 12-month period was the previously disclosed $5.3 million Fresh Start fair value adjustment that reduced post emergence revenue.

Product installation and service revenue decreased $6.7 million in the 12 months largely due to fewer revenue generating service jobs in 2019, relating to our smaller customer base. Further, revenue related to contract extensions for our customer retention efforts decreased due to fewer jobs as part of our pre-emergence cash management. These declines were partially offset by higher revenue per transaction in our direct-to-consumer sales channel relating to the elimination of equipment subsidies.

Product installation and service revenue increased $1 million in the fourth quarter as compared to the prior year, as we increased the post mergence contract extensions for retention combined with higher revenue per transaction in our direct to consumer sales channel.

During the 3 and 12 months, we added 13,026 and 62,367 subscriber accounts respectively, through our dealer channel versus 15,690 and 62,368 accounts in the prior year periods. While year-over-year annual dealer production was flat, the decline in dealer production in the fourth quarter was due to our election to cease purchasing accounts from two of our dealers who represented production of approximately 2200 accounts in the fourth quarter of 2018.

During the 3 and 12 months, we added 4386 and 18,895 subscriber accounts respectively, through our direct-to-consumer channel versus 5004 and 32,696 accounts in the prior year periods. The decline in both periods is due to our previously discussed decision to reduce the equipment subsidy on new sales. While this decision has impacted sales volumes, we have seen a meaningful improvement in the credit quality in the channel with a 14% fourth quarter year-over-year reduction in customer disconnects for collections.

There were no significant bulk purchases for the 12 months ended December 31, 2019. Bulk accounts purchased for the 12 months ended December 31 2018 were 17,813, all but a minimal number of these accounts were purchased in the first nine months of 2018.

Total unit attrition was 17% in the fourth quarter as compared to 17.3% in the third quarter. The sequential improvement was driven by continued efforts around customer retention and improved credit quality in our DTC channel.

RMR attrition totaled 17.9% in the quarter as compared to 17.6% in the quarter; the increase in RMR attrition was primarily attributable to more moderated price increase strategy in 2019. We will continue to actively manage unit attrition as we enhance our efforts to attract high credit quality customers and aggressively execute against our customer retention efforts for the existing base. Improvements in RMR attrition will lag somewhat behind our improvements in unit attrition as we balance lower RMR in our DTC channel, a moderated rate increase strategy and a prudent use of rate adjustments to extend contracts and our high propensity to disconnect population.

Process services for the 3 and 12 months totaled $28 million and $112.3 million, respectively, as compared to $28.1 million and $128.9 million in the prior year periods. These declines are due to our year-over-year reductions in customers partially offset by increased costs incurred in the fourth quarter related to the company's retention efforts.

Selling, general and administrative expenses totaled $40.8 million and $138.5 million in the 3 and 12 months respectively, as compared to $20 million and $118.9 million in the prior year periods. The increase in SG&A for both periods was primarily attributable to post emergence consulting fees related to the development and implementation of various company initiatives. Also contributing to the increase in SG&A was a $12.5 million insurance settlement received by the company in the fourth quarter of 2018 with no corresponding settlement received in the prior year and the current year.

Net creation costs which are expensed during the period totaled of $8.7 million in the quarter as compared to $7.8 million in the prior year period. For the full year, net creation costs totaled $30.6 million down from $43.2 million in the prior year period. Total consolidated creation multiple was 40.6 in the quarter as compared to 39.2 in the prior year. The increase in our creation multiple reflects the impact of more sales coming from our largest dealers who generally enjoy higher multiples, combined with lower sales conversion rates in our DTC channel as we scale the channel with newer reps in our Dallas location.

Net loss for the three months ended December 31 was $22.5 million as compared to a net loss of $376.9 million in the prior year period. The change in net loss was primarily driven by a goodwill impairment of $349.1 million recorded in the fourth quarter of 2018 and decreased interest expense due to lower outstanding debt balances upon emergence in 2019.

For the full year, we had net income of $565.1 million as compared to a net loss of $678.8 million in the prior year period. The improvement was primarily due to a one-time $669.7 million gain on restructuring and reorganization related to gains recognized on the conversion of debt to equity and discounted cash settlement of the predecessor company's high yield senior notes in accordance with the company's bankruptcy plan. In 2018 that loss includes goodwill impairment charges of $563.5 million.

Adjusted EBITDA totaled $61.9 million and $266.5 million in the 3 and 12 month periods respectively, as compared to $76 million and $289.4 million in the prior year periods. At December 31, we had liquidity of $142.8 million to fund working capital and continuing operations, including $14.8 million of cash and cash equivalents and $128 million of remaining borrowing capacity under our $145 million revolving credit facility.

As a reminder, the company is required to maintain $25 million of minimum liquidity under its credit agreements.

As of December 31, we had long-term debt balance of $986.4 million outstanding, which matures in 2024. As we manage with the COVID-19 crisis, we are running a series of downside scenarios to project future liquidity requirements to continue operations and serve our customers. As Niles mentioned earlier, we drew an incremental $50 million in the first quarter of 2020 under our revolving credit facility. While it is impossible to foresee all potential downside outcomes, our analysis shows that we are well positioned to serve customers even in the event of reduced short-term account production combined with some level of escalated attrition. We will continue to review our cost structure and liquidity position throughout the coming months.

Finally, before I open up the call to questions, I want to provide a preview of few items we will address through 2020. First, in terms of our progress on 2G and 3G conversions, we will provide quarterly updates on the remaining 2G and 3G populations and provide cumulative spend. As a reminder, our 2G carrier notified us that they will be turning off 2G spectrum at the end of 2020. Further, multiple 3G carriers will be turning off their 3G spectrum between February and December of 2022.

We have estimated the cost of converting 2G and 3G customers to be between $70 million and $90 million. Through December 31, 2019, we had approximately 415,000 customers with 3G or CDMA equipment, and 24,000 customers with 2G equipment. Cumulative through December 31, 2019, we have spent $4.2 million on 2G and 3G conversions.

In our direct-to-consumer channel, we plan on making some changes to the creation multiple calculation which better aligns us with the industry. For 2020, we will provide additional information so an apples-to-apples comparison can be made for the multiples as well as for EBITDA. We look forward to providing further updates on all our operating results for 2020.

With that, let's open up the call to questions. Operator?

[Operator]

[Operator Instructions] Your first question comes from the line of Dan Walker with Invesco.

[Dan Walker, Invesco]

Hey, guys, thanks for taking the time to run us through everything. I appreciate it. One question I had was looking at EBITDA margins, can you just describe the deterioration in the quarter versus what we've seen historically, it looks like, there's some related to cost of goods sold, and a little bit related to SG&A. But I'm curious with the rest of the effect was.

[Fred Graffam, Chief Financial Officer]

Well, honestly, the biggest piece is actually the revenue fall off. As you can imagine, our margins on monitoring are very high. And so the reduction in revenue is biggest driver. I will say also that prior to the emergence of the pandemic, we were kind of ramping the business back up to normal operations. So there was some additional spend related to just getting out of the pre-bankruptcy period and starting to run the business more on a normalized basis. I did mention there's some additional spend with respect to retention efforts. And those that spend predominantly hits the cost of service because most of the cost were during contract extensions with equipment is field services that we're running trucks to the home to install additional equipment.

[Dan Walker, Invesco]

Got it. And then following up, can you talk a little bit about the competitive environment, some of the bigger players had residential growth in the quarter versus your loss of 6.35%. You just talked about the landscape environment at this time?

[Fred Graffam, Chief Financial Officer]

Yes. So from a perspective of the competitive environment, I think we're frankly going through a reset on our go-to-market strategy. And so, I would say that the fall-off in unit production in the current year is kind of a continuation of what we saw prior to emergence. We haven't made a fundamental shift in our strategy. We'll be more prepared to talk about that in the future. But in the short-term, the real focus is to generate profitable accounts as Niles talked about.

And in addition, the most profitable thing we can do right now is really managing attrition. There's a lot of focus on that right now. So we're trying to trying to drive down our attrition which still remains escalated, although better than what it's been we were as high as 17.6% in the second quarter. So, most of our investment right now is going into attrition management, as well as reformulating our go-to-market strategy.

[Dan Walker, Invesco]

Sorry, if I missed it. Can you remind me what attrition was this quarter?

[Fred Graffam, Chief Financial Officer]

17% flat.

[Dan Walker, Invesco]

Got it. Okay. Thanks, guys. Appreciate it.

[Fred Graffam, Chief Financial Officer]

Thank you.

[Operator]

[Operator Instructions] Your next question comes from [indiscernible] with Oakfield Advisors.

[Unidentified Analyst]

Hey guys, how's it going? I just had a quick question about subscriber acquisition cost and just wondering if you could give us the total spend for that in the quarter both the capitalized piece as well as the amount that expensed?

[Fred Graffam, Chief Financial Officer]

Yes. Bear with me.

[Unidentified Analyst]

Fred, I guess in addition to that information, just the amount of RMR that was acquired in this quarter so that we can get to the DSC multiple?

[Fred Graffam, Chief Financial Officer]

Yes. I will give you the RMR number. The RMR for the fourth quarter of '19 was $831,000. I'll follow up with something out in the -- we'll put a chart out on the investor website with that number.

[Unidentified Analyst]

Okay. Got it. Really appreciate it, guys. Thank you.

[Operator]

[Operator Instructions] There are no further questions at this time.

[Williams Niles, Interim Chief Executive Officer]

Thank you, operator. I just like to say thank you to everyone who has joined the call today and stay safe out there. Appreciate it.

Thank you for participating in today's conference call. You may now disconnect your lines at this time.