Protection One, Inc. Q4 2008 Earnings Call Transcript

Protection One, Inc. (PONE)

Q4 2008 Earnings Call Transcript

March 13, 2009 10:00 am ET

Executives

Richard Ginsburg – President and CEO

Darius Nevin – EVP and CFO

Analysts

Jeff Kessler – Imperial Capital

Paul Bourke – Stanfield Capital Partners

Gary Freeman [ph] – Steinberg Partnership

Presentation

Operator

Good morning and welcome to Protection One’s conference call to review the company’s fourth quarter and annual 2008 results. If you do not have a copy of the earnings release, you may call 785-856-9368 to request one. A copy also is available on the Investor Relations section of Protection One’s website at ProtectionOne.com.

Before we begin, please note that the following live broadcast by Richard Ginsburg, Protection One’s President and CEO and Darius Nevin, the company’s Executive Vice President and CFO is copyrighted to Protection One.

In addition, the company’s remarks today that are not historical facts may be forward-looking statements that involve risks and uncertainties. Forward-looking statements may include words or phrases such as we believe, we anticipate, we expect or words of similar meaning. Forward-looking statements also may describe the company’s future plans, objectives, expectations or goals.

Such statements may address the future events and conditions concerning customer retention, debt level, and debt service capacity. Actual results may differ materially from those projected, implied, or anticipated by the company’s forward-looking statements as a result of the numerous factors including the company’s significant debt obligations, net losses, and competition.

For a further discussion of factors affecting the company’s performance, see Protection One’s annual report on Form 10-K for the year ended December 31st, 2008, which the company expects will be filed with the SEC on Monday, March 16th.

Protection One disclaims any obligation to update any forward-looking statements as a result of developments occurring after this call. During today’s call the company will provide financial measures that do not conform to generally accepted accounting principles or GAAP including adjusted EBITDA, recurring monthly revenue, or RMR, and net debt.

The company believes that these non-GAAP financial measures will enhance the understanding of the company’s performance. Please refer to the company’s press release, which can be found at ProtectionOne.com for a reconciliation of these non-financial measures to the most directly comparable financial measures calculated in accordance with GAAP.

As a reminder, today’s call is being recorded. A replay of the call and webcast will be available today at approximately 1 PM Eastern Time through the Investor Relations section of the company’s website or by calling 888-203-1112. The replay pass code is 6277412.

And now, let me turn things over to Richard.

Richard Ginsburg

Thanks, Gwen and good morning, everyone. This is Richard Ginsburg. We do appreciate your interest in Protection One and our 2008 financial results.

So, during this call this morning, we are going to focus on fourth quarter comparisons because the full year of 2007 includes only three quarters of IASG results. I want to use my time today to talk about a few highlights from 2008, what we’re going to be emphasizing in 2009, and some recent significant events. After that, as usual, Darius will take you through the financial statements and your questions.

So I’m pleased to be able to tell you that during a quarter when many companies have reported significant weakening in their results, we delivered a modest increase in EBITDA based on better monitoring and service margins in our wholesale and retail reporting units. EBITDA in the fourth quarter was $28.3 million or $113 million on an annualized run rate. Wholesale monitoring and service revenue increased 10% year-over-year while monitoring costs increased only 4%.

We also reduced retail monitoring cost by $1.2 million or almost $5 million on an annualized basis. I previously mentioned that we had undertaken process improvements to lower our cost. We are now seeing some of the benefits of those improvements. It’s worth noting that our annualized EBITDA in the fourth quarter was better than annualized EBITDA in the third quarter by almost $5 million.

Before I comment on our key segments, let me mention that we have adapted our 2009 plans to the current economic environment in the capital market. Our principal goals in 2009 are to deliver increased EBITDA and free cash flow compared to 2008. Consistent with those goals and in recognition of higher expected returns on capital, we are determined to reduced the creation multiple for both our resi, as well as our commercial additions.

With respect to our resi sales force, we intend to remain disciplined on pricing and to reduce investments per account, as well as total investments compared to last year to help lift EBITDA and to improve free cash flow in the near term.

In commercial, we are shifting our emphasis to the kind of jobs from which we can get a sale for more than one product and service and also, collect a bigger portion of the system revenue upfront. We expect these steps will improve commercial RMR creation multiple. The improved monitoring and service cost that I’ve already reported will help us to improve EBITDA and cash flow while increasing returns from our existing customer portfolio and shortening payback from new accounts.

While I’m an optimist about our prospects and about our industry in general in this environment, we still do expect lower RMR additions compared – in 2009 compared to 2008 as a result of less emphasis on residential sales and more emphasis on full line commercial selling.

We believe this is a prudent thing to do in this environment as it leverages the commercial platform we have developed in the recent years. We did begin to see slowing RMR additions in the fourth quarter of 2008, but we did manage to add almost the same amount of RMR in the fourth quarter of 2008 as in 2007 through selective price increases on our customer base.

Our wholesale business shrank slightly in the quarter as our dealer customers added fewer accounts this year and cancelled more. Our feedback from these dealers is that they are experiencing slower growth and slightly higher attrition due to the recession that we are in.

Even so, by unifying that business’ monitoring centers on one monitoring platform, we made tremendous progress on service costs while improving the quality of services we can offer. We think that wholesale’s 2009 contribution can look a lot like 2008, except that its results could vary depending on the decisions of its largest customers make, whether to stay or go or to develop new arrangements with us.

Turning to multi-family, we plan to continue to invest conservatively in that reporting unit while giving those customers very, very good service. Turning to retail gross attrition for the full year, it increased by 50 basis points to 13.7% in 2008 compared to 2007. It’s no secret that cancellations for financial reasons are up more than the decrease in cancels for moves. We aren’t seeing anything that makes us think attrition in 2009 is going to be a lot different one way or the other.

Please note that we revised our second retail RMR attrition metric to adjust for new owners and moves and to exclude price changes. We think this calculation of attrition would yield 10.5% for the year as more like the way our major competitors report their attrition.

In summary, we showed resilience in the fourth quarter of 2008 as the economy slowed and unemployment soared. Prudent decisions we made earlier in the year to improve processes delivered timely cost savings. Our investment perspective for 2009 is that returns from creating new RMR need to be higher. We want to take what the market gives us rather than strive for growth with very, very high costs. Also, we don’t mind putting cash in the bank and giving our shareholders a healthy free cash flow return.

Before I turn the call over to Darius, let me mention two recent developments. We have received a number of calls asking why Steve Rattner of Quadrangle Group left the Protection One Board. To clarify, he did so to join President Obama’s administration where he is working in the Treasury Department on the auto industry restructuring. There is nothing more to read into it other than he left Quadrangle and our Board in order to help our country.

The other item is that our former parent, Westar Energy, announced that it is going to book a $32.5 million net earnings benefit in the first quarter, arising from a settlement with the IRS on the tax treatment of some of its losses incurred while it owned Protection One.

We have an agreement with Westar enticing us to sharing those benefits subject to certain adjustments. We’ve only just started discussions with them, but we are optimistic our benefit could be material relative to our current cash position. We caution listeners that we can provide no assurance on the amount or the timing of receipt of cash related to this matter.

So, I’m now going to turn the call over Darius to review additional financial results and then we’ll both take any questions that you may have. Darius?

Darius Nevin

Thank you, Richard and good morning, everyone. I plan to run through the key captions on the income statement and then make a few comments on our uses of cash, and close with an update on our net debt position. Unless otherwise noted, all the comparisons will be to the fourth quarter of 2007.

Consolidated monitoring and service revenue increased by $800,000 or 1% from the prior year due to wholesale RMR growth from additions by that unit’s largest customer, partially offset by a decline in multi-family RMR. Retail monitoring and service revenue was essentially unchanged from the fourth quarter of last year.

As Richard noted, improvement in retail and wholesale monitoring and service gross margin is responsible for the consolidated gross margin improvement to 67.6% in the fourth quarter of 2008 from 66.2% last year, and most of our EBITDA improvement. This improvement is particularly noteworthy in that lower margin wholesale revenue represented 15.3% of total monitoring and service revenues in 2008 compared to 14.1% in 2007.

Both installation revenue and installed cost of revenue increased due to higher amortization of previously deferred amounts. Selling expense increased $1.4 million in the fourth quarter of 2008, primarily as a result of spending on lead generation activities in our retail segment. The remaining increase resulted from a larger staff of commercial sales consultants and sales trainers, as well as amortization of previously deferred commissions.

While there was movement within accounts comprising G&A, in total, G&A changed little between the two periods. Amortization and depreciation expense decreased in the fourth quarter of 2008 by approximately $3.5 million from last year. Over half of the decrease is a result of an adjustment in connection with a lifing study that we recently completed.

Based on the results of the lifing study, we extended the amortization life of our customer account and dealer intangible assets. The impact for the full year of 2009 is expected to be lower amortization by about $8 million. Operating income at $4.4 million in the fourth quarter of 2008 compared to $2.4 million one year ago benefited from the improved gross margin contribution from monitoring and service revenues that we’ve already talked about. Also, lower amortization and depreciation expense was offset by higher net installation and selling expenses.

Interest expense decreased in the fourth quarter due to lower amortization of debt discount, which was partially offset by higher interest costs on our unsecured term loan compared to the 8.125% we were paying last year on the instrument it replaced. The cash interest costs were $11.8 million compared to $11.3 million in 2007. As a result of the changes I just described, our net loss for the quarter decreased to $7.2 million from $10.2 million previously.

Turning to cash used in the quarter, we used $3.6 million on cash – I’m sorry, we used $2.6 million cash on maintenance CapEx in the quarter and $9.8 million in full year 2008 including investing $400,000 and $2.1 million in vehicles through capital leases in those same periods.

If we look at RMR creation activities now, our retail segment created or bought approximately 547,000 RMR, down from 601,000 RMR in 2007. As I noted earlier – I’m sorry, as Richard noted earlier, price increases narrowed the difference in RMR additions to only $20,000.

In the fourth quarter, our activities creating RMR resulted in our incurring a consolidated total of $18.3 million net cost compared to $17.5 million in 2007. Net creation activity expenses that flowed through the income statement and thereby reduced EBITDA increased to $9.1 million from $8.1 million last year.

Retail activity accounted for $16.7 million in that cost this quarter compared to $15.7 million last year. Net spending on creation and acquisition activity increased because of lead generation through our new marketing strategies, which got underway earlier in the second quarter. Creation multiple was also impacted by a shift from commercial outright to lease sales, which have a higher creation cost but contribute more RMR per unit. We also incurred higher levels of sales, management, and technical support expenses.

Finally, at the end of December, we had approximately $522.6 million face amount of debt and capital leases outstanding compared to $526 million calculated the same way at December 31, 2007. Our cash position on December 31, ‘08 was $38.9 million compared to $41 million at the end of December 2007. Net debt decreased only slightly in 2008 because free cash flow was largely absorbed by fees and expenses incurred in refinancing our subordinated debt in the first quarter.

Before turning the call back to Richard, I would just like to mention that we filed an 8-K last week on the presentation we gave at the Security Growth Conference in California. We included a capitalization table and sensitivity analysis on covenant compliance that I think should give our investors comfort that we have significant cushion.

With that, I turn it back to you, Richard.

Richard Ginsburg

Great. So, Gwen, if there are any questions, we’d be more than happy to take them.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We’ll pause for just a moment to assemble our queue. We’ll go first to Jeff Kessler with Imperial Capital.

Jeff Kessler – Imperial Capital

Hi, Richard. Hi, Darius.

Richard Ginsburg

Hi, Jeff.

Jeff Kessler – Imperial Capital

I always like having this nice, long conversation with you guys on the quarter and I’m sure that there will be a lot of other – I’m sure of the fact that there is a lot of people listening doesn’t deter from the fact that I maybe the only guy asking questions. There is lots of people listening, I know that out there. Now to get to more serious stuff, it appears that your cash flow has improved over the course of the last quarter year-over-year and I know you went through that a little bit. I’m just wondering – you’ve gone through this – you went through it pretty quickly. It seems to me that you’re managing your creation costs, particularly your creation costs in the area where you are focusing, that’s commercial, a little bit better than when you started off really focusing on commercial. Is that part of the equation here?

Richard Ginsburg

Yes. I mean, we are – as I said in my comments, Richard, we’re focused really on trying to sell four core products in commercial. I mean, not just burg, but access, fire, and video. And when we – and we are – spent a lot of money on training our sales force and when we can train the sales force to sell multiple products, it actually helps to reduce creation cost a lot. And we are getting there and we’ll get there overtime.

Darius Nevin

Right. And I would – this is Darius, I would just like to add that we have quietly, significantly lowered our costs. We have cut headcount by more than 10% since one year ago and you see that in our contribution from our monitoring and service activities. And as we enter into 2009, we have I think a much greater discipline in our pricing as I think should be clear from our comments. We are determined that our investments in creating new return revenue are going to have a faster payback and that’s both on residential and on commercial. And as we move into the more sophisticated systems, as Richard mentioned, we have the potential to generate EBITDA from those systems as well.

Jeff Kessler – Imperial Capital

Now, if you are able to generate some more EBITDA, realizing that who knows where the variable debt expense is going to go, but if you are able to generate some more cash flow, plus the assumption that you do get something from the Westar – the Westar rebate we’ll call it, I know you don’t want to put a number on it, but do you have some hope in paying down some of the debt that you incurred and I know that you’ve mentioned that on the – you’ve mentioned that in the 8-K that you filed for the – or on your website, but there is – you do have some expectation to pay down a bit of debt in 2009?

Darius Nevin

Well, yes, let me – I can comment. This is Darius. We have mandatory payments on our senior credit facility of $750,000 per quarter or $3 million in total. As we look forward to 2009 and 2010 and then, ultimately to our nearest term maturity, which is the 12% note, I think it’s – what I hear in calls that I take, people are asking, how are you going to address that instrument? Where is the cash coming from for the instrument? And as we sit here today, as we look at what – how much cash we had at the end of the year, which is roughly $40 million and if we are going to be reasonably successful in settling with the Westar and that if we achieve our goals of generating – and our cash flow goals for 2009, we could be looking at somewhere around $80 million by the end of the year. So, we are optimistic that we are going to be in a pretty good position as we head into 2010 such that by the time we get to the end of 2010, we’re in a very strong position to be able to handle that $110 million. So – I’m sorry; it’s a $115 million instrument. So, I don’t know if I addressed your question, it’s a complicated subject, do we take cash and use it to pay down the senior credit facility or do we just make it very clear to everybody that we are in a very strong position to address our nearest term maturity. That’s – it’s something that we are weighing here and that we think about and that our Board thinks about as well.

Jeff Kessler – Imperial Capital

On your wholesale business, have you done anything to address – everybody is looking at each other in the wholesale business and there is only – several big players and you are the biggest, that accounts do move and accounts do pose some risk. Are you addressing – are you, let’s say, addressing this to make sure that you have some idea of where your largest accounts are with you in terms of sticking with you for the full year of 2009?

Darius Nevin

This is Darius. I’ll tackle that again. We feel very good about our largest account and also with respect to our second largest account. They have recently extended with us – I can’t commit that they will be with us through the end of the year, but they made very nice noices to us that they are satisfied with our services. And then with respect to the third largest account, there is a – and there is a pretty significant drop from the first two down to the third. It’s likely that they will be leaving us, but that’s a very low margin account. I mean, it’s a very high cost account for us to service. So as we sit here today, we feel very good about our largest – almost as good about our second largest and then the third is in fact going to be leaving at mid-year, but it doesn’t – but it’s not going to have very much of an EBITDA impact on us.

Jeff Kessler – Imperial Capital

Okay. Going back to you retail business – the – you had about a year or almost a year now of being able to see how e-Secure is being adopted, recognizing that this is a bad economy, but also recognizing that you are getting your salesmen hopefully geared up to really push these types of online or, let’s just say wireless products, that will help your RMR. The question is – specifically is, are you satisfied that we’ve gone beyond the – I’d say geek first adopter level yet? Are you beginning to see the sales force sell into a more mass market with e-Secure?

Richard Ginsburg

Yes, this is Richard. Look, we’ve been pretty happy with our e-Secure results and we’ve been told by the provider of that service, which is Honeywell, that we are probably the largest provider of that services in the industry right now. I think some of our competitors are just getting on that bandwagon up – on that bandwagon now. But I do think that it is past the kind of early adopter, geeky people that like it and it’s really being absorbed now by a broader audience and the sales continue even through the recession, I mean it’s their great sale, the sales force is adopting it, and we are actually working on the generation of that, which is e-Secure Video now. So, we think we have a good head start compared to our two other large national competitors. We know how to sell this stuff and our customers seem to be pretty happy with it. So, we are very – very pleased. We don’t give out numbers on how many e-Secures we sold because our competitors are probably listening on this call, but it’s thousands and thousands of the e-Secure sales and it looks like it’s continuing. So, it’s a foundation for us and we are continuing to push it.

Jeff Kessler – Imperial Capital

Are you wiling to segregate out – I know you’ve tried to stop this practice, but segregate out the IASG from the original P-ONE attrition rates? Do you have some idea of where that core attrition rate is on the company, particularly on the retail side?

Richard Ginsburg

Yes, Darius will give you some data, but I just want to say I think I’ve said this before, so those are our customers and the message that we tried to get to the staff internally is, look, it’s not a P-ONE based or an IASG-based, these are our customers. So, there is no excuse why the attrition rate should be higher or lower and so, internally, we’ve really tried to adopt it as one base. But in anticipation of the question, we’ll answer for you, but internally we really – it’s gone as one base.

Jeff Kessler – Imperial Capital

This will be the last time I ask that question, but you are going to have to promise me that somehow you’ll get that IASG attrition rate down.

Richard Ginsburg

Well, we are – I think we made a lot of progress. I mean, but Darius is going to give you some data.

Jeff Kessler – Imperial Capital

Okay.

Darius Nevin

I think if you’ll just look at the net attrition rate, which I think we’d like people to focus on and just – maybe I’ll take a minute on that, what we’re trying to do when Brinks reports it does accounts and disconnects. So, that really doesn’t include price decreases in their attrition calculation. Our gross attrition calculation, just so everybody is clear is RMR and it includes every type of cancellation. So, it’s from when somebody cancels, somebody put the account in a suspend, they say that they’re building their house and it’s going to take six months, that’s a cancel for us, and price decreases are a cancel for us. So, in the net calculation that we have – that we are presenting this quarter, it’s – we are adding back new owners and we are adding back movers, which is the way Brinks and we think. ADT does it, although I can’t say that I’ve actually formally seen how ADT does it. And we’ve also just taken up the price increases and decreases to kind of bring it closer to a pure account way of looking at attrition. So, if we look at it that way, we are saying that our attrition was 10.5% on a net basis and if we exclude IASG for the year, it was 8.9%. So, about a 1.6% or 160 basis points I guess is the way to look at it.

Jeff Kessler – Imperial Capital

Okay. And the –?

Darius Nevin

Jeff, I don’t want to give you the – what the attrition rate is on the IASG portfolio, but it has improved significantly over the course of 2008. So, when we look at a chart of IASG attrition both on the resi and on the commercial side, those are graphs that have a nice slope down to the right.

Jeff Kessler – Imperial Capital

All right. You said – by the way, you said one thing in your attrition calculation, which I thought was very interesting. I just want to make sure you said it right and I’m getting this right. That if you are carrying a – if a customer comes to you and they say, I can’t pay the $35 per month, I can only pay X amount and you’re carrying them for some amount just to keep them loving you and keeping them on, let’s say at half the price or whatever – or whatever that price is. You are taking that as a cancelled account.

Darius Nevin

Well, we’re taking the – I mean, if they continue to pay at a lower rate, we take as a decrease and recognize as attrition the decrease in their rate.

Jeff Kessler – Imperial Capital

Because you are basing it on RMR, not the account.

Darius Nevin

Right.

Jeff Kessler – Imperial Capital

Okay, I see.

Darius Nevin

Right, but if they also suspend, they’d say, look, I’m not going to be living in this house for a year because I’m going to be moving and building a house. That’s a cancel until it comes back. So, I mean that – I don’t want to say that the whole lot of our attrition, but I just want everybody to be very clear.

Richard Ginsburg

There are more suspensions now in this economic environment. I mean, customers are saying, I have some issues and I want to put my account on hold and we’re suspending it, but we are taking it as attrition. I think that’s the right thing to do, but – that’s how it works.

Jeff Kessler – Imperial Capital

Okay. I’m sure that I’ve engendered a lot of questions amongst others here. So, I’ll just – I’ll get back into the queue. Thank you.

Richard Ginsburg

Thank you.

Operator

We’ll go next to Paul Bourke with Stanfield Capital Partners.

Paul Bourke – Stanfield Capital Partners

Hi, thanks. Lot of questions have already been answered, but can you go back to the maturities coming up given the free cash flow you have in the cash and balance sheet, do you think you’re going to – can you talk about the revolver at least, you think you’re going to want to renew that or –?

Darius Nevin

Well, Paul, this is Darius. We will certainly attempt to renew it, and we’ll see what the cost is to renew that instrument. Our planning – we don’t need it, we currently use a part of it for Letters of Credit, but we’ve already anticipated it not being available and we’ve made arrangements necessary to be able to use cash collateral for those instruments. Our understanding from speaking to our investment bankers is that we could get an extension of that instrument, but it would be costly and – but it’s still – this is March and we’ve got it until next year, so there is a lot of time between now and then and we’re not jumping off the cliff or anything like that. It isn’t going to change our business model here at all.

Paul Bourke – Stanfield Capital Partners

Okay, okay. No, it’s fine. I appreciate it, thanks very much.

Operator

We’ll take our next question from Gary Freeman [ph] with Steinberg Partnership.

Gary Freeman – Steinberg Partnership

Hi, good morning.

Darius Nevin

Hi, Gary.

Gary Freeman – Steinberg Partnership

A couple of questions for you, focusing now on 2009. First, so your EBITDA in Q4 I think was a little over $28 million you said. So, should we hope that you equal or better that throughout 2009?

Darius Nevin

This is Darius. We don’t give guidance, but at this point I don’t see any reason why we wouldn’t do better than that.

Richard Ginsburg

Yes, it’s tremendous focus on EBITDA in 2009.

Gary Freeman – Steinberg Partnership

Okay. And what about attrition – attrition has been pretty good throughout ‘08, what are you seeing so far? The economy continues to head into a tailspin. What do you see so far in ‘09 as far as attrition and what are your expectations in general at least?

Darius Nevin

Well, I think – Richard said I think that so far this year it’s kind of tracking to last year and the thing that we have working in our favor, and we’ve mentioned this in the past, is that the attrition on the IASG part of our portfolio was high last year and we think even with a deteriorating – that’s a hard word to say, even with a worsening economy, that portfolio will have lower attrition in 2009 than it did in 2008. So, it’s a very hard number to forecast.

Richard Ginsburg

I mean, a lot of it has to do with the economy, Gary. I mean, we are seeing that non-pay financial reasons are more than 50% of our attrition and that’s never happened to us before. In talking to some of our peers, they’re dealing with the same thing. So, it’s a little bit of a wildcard. As everyone knows, we have a big concentration in California, Florida, and Texas and especially California and Florid have been particularly hit hard. So, what we’re doing is we’re just focusing on the attrition that we can control and we are trying to get a little bit ahead of the financial non-pay reasons. If we have to lower some rates, we are doing that, although we’re cautious about that. But as I said in my comments – I mean so far – it’s – I think we are holding our own and I think it all – a lot depends on what happens with the economy. I mean, I would like to think that during times like these where crime is up in pretty much every state in the union and the perception of the crime is up, that our products and services are more warranted than ever and we’re making sure our customers know that, look, if you cancel our service, you’re losing your insurance discount and all these other benefits that you have. So, we are working really hard to keep it down, but as I said before – I mean so far I think we are okay.

Gary Freeman – Steinberg Partnership

Okay, all right.

Darius Nevin

Right. So, just to put a number on that again, we finished the year with 13.7 gross attritions and as we sit here today, we don’t think that it should be worse than that. Somewhere in that 13% to 14% range is kind of where our sense of where we end up.

Gary Freeman – Steinberg Partnership

Throughout ‘09?

Darius Nevin

Yes.

Gary Freeman – Steinberg Partnership

Okay. Even accounting for some continued deterioration in the economy?

Darius Nevin

Right, for the reasons Richard mentioned.

Gary Freeman – Steinberg Partnership

Right.

Darius Nevin

This is not a discretionary service for most of our customer base. If we’ve done a good job of selecting our residential customers, this is not a discretionary item.

Gary Freeman – Steinberg Partnership

Okay, all right. And talking again about ‘09, RMR, I guess the message is, should be in the same range – your expectations are should stay in the same range as it ended ’08. The mix may be a little different, some growth in commercial and maybe some deterioration in retail because you don’t want to spend too much to add new customers. Is that the message? Did I read that right?

Darius Nevin

Yes. If we’re talking about retail RMR, I think our thought is that we will see a little bit of erosion in our retail RMR, in our resi RMR, and we would hope to have a modest growth in our commercial RMR. Correct.

Gary Freeman – Steinberg Partnership

Okay. And doing a quick calculation on that and on cash flow or maybe free cash flow, I’m talking about now, less interest expense and less customer acquisition cost, you could generate free cash flow after accounting for those things somewhere in the $20 million range. Am I way off in thinking that?

Darius Nevin

No.

Gary Freeman – Steinberg Partnership

Okay. Okay, that’s a significant number. Okay, thanks very much.

Richard Ginsburg

Okay, thanks Gary.

Operator

(Operator instructions) We’ll go next to Jeff Kessler with Imperial Capital.

Jeff Kessler – Imperial Capital

Yes, I have a follow-up question on your commercial business. In looking at what your press release said and then looking at my own numbers on the industry, it appears that you are taking some share and – you are taking some share in the commercial business, particularly what I would term to be smaller national accounts. Where are you getting this business from? Are you – do you think you’re getting it from some of the two larger players or are you getting it from companies that have been using local – local alarm companies?

Richard Ginsburg

I think it’s a – well, first of all, if you look at the two larger players, only one is really in the commercial business that we’re after. The other is more of a residential company trying to get into the commercial market. And so, I think it’s a combination of yes, some better service that we can offer, I think we could be a little more nimble than maybe – the big competitors.

Jeff Kessler – Imperial Capital

I’m sorry, I apologize. The one company that’s smaller than you that’s in commercial and the one company that’s larger than you in commercial.

Richard Ginsburg

Right. And then, I think we also have – we are also starting to get more national accounts that we are with a – maybe a super regional and as they expand nationwide that super regional can’t handle their growth. So, we’re starting to see some nice national accounts that maybe were a good Northeast national account, but as they kind of start expanding across the Mississippi and things like that, they need a bigger company and when you look at the landscape of commercial companies that have a national footprint, it is a very, very small list of companies that really have offices and are not virtual companies that really do it right. So, it’s a combination of those accounts, it’s a combination of us taking some accounts from maybe that big competitor and then, we are also growing with some accounts that maybe started with us with 20 or 30 locations that have expanded. And the other thing on national companies that I should mention is we have not really been burned yet. We haven’t had any national accounts that have – some of these big national accounts you’ve seen that are filed for bankruptcies, the Circuit Cities of the world, things like that. We have not had any national account fallout. So, we’ve chosen our national accounts pretty good so far, knock on wood.

Jeff Kessler – Imperial Capital

Okay. Okay, thank you very much.

Richard Ginsburg

Okay, thanks.

Operator

(Operator instructions) And that concludes our question-and-answer session. That also concludes our conference call. We thank you for your participation. You may now disconnect.

Darius Nevin

Thanks, everyone.

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