Ascent Capital's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.26.14 | About: Ascent Capital (ASCMA)

Ascent Capital Group, Inc. (NASDAQ:ASCMA)

Q4 2013 Earnings Conference Call

February 26, 2014 05:00 pm ET

Executives

Bill Fitzgerald – Chief Executive Officer

Mike Haislip – President & Chief Executive Officer, Monitronics International, Inc.

Mike Meyers – Chief Financial Officer

John Orr – Senior Vice President of Corporate Development

Bill Niles – Executive Vice President & General Counsel

Analysts

Jeff Kessler – Imperial Capital

Daniel Moore – CJS Securities

Steven Shu – Stifel Nicolaus

Karru Martinson – Deutsche Bank

Operator

Good day and welcome to Ascent Capital Group’s Conference Call to Discuss the Company’s Q4 and Full-Year 2013 Earnings. Today’s call is being recorded.

This call includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including statements about business strategies, acquisition opportunities, market potential, future financial performance, new service and product launches, consumer demand for interactive and home automation services, the integration of acquired assets and business including the consolidated performance of Monitronics after giving effect to the ongoing integration of security networks, 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 in such statements, including without limitation competitive issues, Monitronics’ ability to realize synergies associated with the acquisition of Security Networks, Monitronics’ ability to successfully complete the integration of Security Networks, continued access to capital on terms acceptable to Ascent, our ability to capitalize on acquisition opportunities, general market conditions and regulatory issues.

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

On today’s call we will discuss certain non-GAAP financial measures including adjusted EBITDA. All 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, Ascent Capital Group’s Chief Executive Officer Bill Fitzgerald. Please go ahead, sir.

Bill Fitzgerald

Thank you very much, Operator. Good afternoon, everyone, and welcome to our Q4 and full-year 2013 earnings call. Joining me on the call from Dallas today are Mike Haislip, Monitronics President and Chief Executive Officer; Mike Meyers, our CFO for both Ascent and Monitronics; and from Denver Ascent’s Senior Vice President of Corporate Development John Orr and our General Counsel Bill Niles.

During the call I’ll provide you with a brief update on Ascent and Monitronics and discuss activity from the past quarter and full year. I’ll then turn the call over to Mike Haislip who will take you through the Monitronics business. Finally, Mike Meyers will give you a detailed look at Q4 and full year financial results. We’ll leave plenty of time for your questions at the end of the call.

Our operating performance over the past quarter and year highlights both the strength and growth potential of the Monitronics business model. The business reported strong year-over-year growth in both revenue and adjusted EBITDA as total subscriber accounts were up 29% in 2013 driven primarily by the acquisition of Security Network.

The Security Network acquisition was a huge accomplishment for us last year, moving us above the 1 million subscriber mark and creating an even greater scale opportunity. I’m also happy to report that the integration of Security Networks is moving forward as planned and we are very pleased with the progress we’ve made on that front to date.

As I’ve stated before, we continue to believe the residential alarm monitoring business holds significant opportunities for growth. Our management team has done an excellent job of supporting our growth objectives, having grown the business well in excess of 50% since acquiring Monitronics just three years ago; and we believe the scale we have achieved affords us unique opportunities for continued growth.

We remain committed to pursuing additional investment opportunities within the industry that will serve to further strengthen our position in the industry, our growth profile, and enhance shareholder value. We are confident that our patient and disciplined approach to incremental investment activity has served us and you very well, and we’ll continue to do so in the future.

With that let me turn the call over to Mike Haislip who will walk you through the Monitronics business in more detail. Mike?

Mike Haislip

Thanks, Bill. I want to start by updating you on our efforts to integrate the Security Networks acquisition. We are right on target for completing the integration in Q2. We are currently staffing up and training personnel in Dallas to be able to handle the increased volume. We are also on target to exceed the $4 million to $6 million annual cost savings we had estimated and expect to fully realize those savings by the second half of this year.

I know the uppermost question in many of your minds is “Well, but what about cable and telco competition?” so we’ll jump right to that. I know you won’t be surprised to hear me say yet again that their impact on our business remains insignificant and I believe it’s largely because of our business model, the way we go to market.

Most of our dealers have been selling – and “selling” is the key word – interactive and home automation services for several years. They welcome the increased consumer awareness all the recent marketing campaigns have created for these products and they tailor their sales pitch to their individual market situation.

The product they offer is every bit as good as any of our competitors and they have enough flexibility to be competitive on pricing. Security sales have always been competitive but our strong results in 2013 clearly reflect the success our entrepreneurial dealers continue to have in their local marketplace and the strength of our business model.

In short we believe our go to market approach is fundamentally different from our major competitors and is proving to be highly effective at generating account growth in this more competitive environment. Let me share a few highlights with you:

On a year-over-year basis Monitronics revenue for Q4 increased 39.6% to $132.8 million while adjusted EBITDA increased 36%. For the full year Monitronics revenue increased 30.8% and adjusted EBITDA- grew 29.5% to $305.3 million.

Our accounts at year end were up 28.8% year-over-year. This was driven largely by the acquisition of nearly 200,000 accounts from Security Networks but also by account generation through our authorized dealer program and the bulk purchases that we completed earlier in 2013. You will note that we had no bulk purchases in the second half of the year as our Operating Team was consumed by the Security Networks integration effort. We will renew our bulk buy efforts on the other side of our Security Networks integration project.

Demand for interactive and home automation services remained strong. 57% of our new accounts in the quarter took some level of advanced services. At year end, fully 32% of our total customers subscribed to advanced services. This has helped to drive RMR to $40.90 per account and total RMR to $42.8 million at year end.

Our attrition levels declined from 12.6% in Q3 to 12.3% in Q4. This decline was in line with our expectations and was driven primarily by the fact that the Security Networks accounts are at an earlier point of the lifecycle attrition curve. This time last year though we told you that we expected Monitronics standalone attrition to increase during 2013 before moderating in Q4 and that is exactly what happened.

Also, the impact of cable and telco competition on our attrition was [diminutive] in 2013. As has historically been the case, traditional security companies had a much greater impact on our attrition than cable and telco competitors.

In summary, Monitronics had a very good year. We are successfully wrapping up our major acquisition which is helping to drive substantial growth. Attrition has been in line with our expectations and enhanced service offerings are helping us continue to grow the core business. We are excited about the industry and especially our niche within the industry.

Now let me turn things over to Mike Meyers to walk you through the numbers.

Mike Meyers

Thanks, Mike. Good afternoon, everyone. Beginning with our top line, Ascent’s net revenue increased 39.6% to $132.8 million in Q4 and increased 30.8% for the full year in 2013. The increase for the three- and twelve-month (inaudible) account growth at Monitronics which makes up all of Ascent’s revenue.

The increase in Monitronics net revenue was attributable to growth in the number of subscriber accounts and the increase in average RMR per subscriber. The growth in subscriber accounts reflects the acquisition of over 136,000 accounts through our authorized dealer program, various bulk buys, and the over 200,000 accounts acquired in the Security Networks acquisition. Also driving revenue growth in the quarter was a 3.5% increase in average monthly revenue per subscriber to $40.90 as of December 31, 2013.

Turning to our expenses, Ascent’s total cost of services for the quarter and full year increased 58.3% and 48.3% respectively. The increase is primarily due to the increased number of accounts monitored across the cellular network and higher service costs as existing subscribers upgrade their systems.

As Mike Haislip mentioned earlier we have been very successful in our efforts to increase the number of new subscribers signing up for additional services. While this modestly impacts margins it also increases cash flow in absolute dollars and we believe will help lower attrition rates over the long term.

Ascent’s SG&A expense for the quarter and full year increased 36.0% and 24.5% to $26.9 million and $92.0 million respectively. SG&A expenses at Monitronics’ level increased 42.2% in Q4 and 28.5% in the full year.

Increases attributable to higher payroll expenses at Monitronics, as well as the inclusion of Security Networks’ SG&A costs which were for the full year $6.5 million, acquisition and integration costs related to the Security Networks acquisition also contributed to increases in Monitronics’ SG&A in both Q4 and 2013.

Looking at profitability, Ascent’s adjusted EBITDA during the three and twelve months increased 23.0% and 27.5% to $86.3 million and $304.5 million respectively. The increases in adjusted EBITDA were primarily driven by solid revenue and subscriber growth at Monitronics.

The increase in adjusted EBITDA for the three months ended December 31, 2013, is impacted by a gain on sale of Ascent real estate of approximately $7.4 million recognized in Q4 2012. Monitronics’ adjusted EBITDA during Q4 and full year 2013 increased 36.0% and 29.5% respectively. The increase in adjusted EBITDA for the quarter and the twelve months is due to strong revenue and subscriber growth at Monitronics.

Finally, before I turn the call back over to Bill let me summarize our liquidity position. At December 31, 2013, on a consolidated basis Ascent had $174.2 million of cash and marketable securities. Year-to-date Monitronics used cash of $234.9 million to fund the acquisition of subscriber accounts through bulk buys in our authorized dealer program net of holdback and guarantee obligations.

As of December 31, 2013, the existing long-term debt principal of $1.6 billion includes Monitronics’ senior notes, credit facility, and credit facility revolver, and Ascent’s convertible notes. The convertible notes have an outstanding principal balance of $103.5 million as of December 31, 2013, and mature July 15, 2020. Monitronics’ senior notes have an outstanding principal balance of $585 million as of December 31, 2013, and mature on April 1, 2020.

The credit facility term loans have an outstanding principal balance of $907.5 million as of December 31 and require principal payments of approximately $2.3 million per quarter with any outstanding balance becoming due on March 23, 2018. The credit facility revolver has an outstanding balance of $19.5 million as of 12/31/13 and becomes due on December 22, 2017.

With that let me turn the call back over to Bill.

Bill Fitzgerald

Great, thanks Mike. As I mentioned earlier I’m extremely pleased with our accomplishments during 2013. The strong and consistent operating performance coupled with the predictability of this business model and our healthy balance sheet creates an attractive opportunity for growth and shareholder returns.

Thanks for listening. We appreciate your continued support. Now were happy to take any questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions.) Our first question comes from the line of Jeff Kessler with Imperial Capital.

Jeff Kessler – Imperial Capital

Thank you. A couple questions: first, Bill, the integration of Security Networks into Monitronics, die Security Networks use Alarm.com or did they use another platform, or did they not have a platform, did they not have an interactive platform at all? And are those costs part of the increased costs that you’re seeing right now in cellular?

Mike Haislip

They do use Alarm.com as well as AlarmNet and others, but I think primarily Alarm.com. They had a very high penetration of cellular and advanced services so that does put some upward pressure on expenses.

Jeff Kessler – Imperial Capital

I’m wondering, we’re seeing some companies that are actually getting some very, very high penetration rates in this area right now and we’re talking about over 58% or 60%, over 70% penetration rates in some cases. They’re beginning to see, these private companies they’re beginning to see that increase in percentage of costs and the upward pressure on creation costs, downward pressure on margins, (inaudible). Have you been able to see anything of that yet or are you not yet at that point where you can say “We kind of see the light at the end of the tunnel?”

Mike Haislip

Well, I do think if you look at our penetrations, Jeff, which are pretty strong themselves, that at least the take rates for the last three quarters have remained fairly consistent on cellular and on interactive and home automation services. But we still believe that there’s some upside on our general portfolio which will continue to have an impact on margins but it is going to moderate fairly quickly.

Mike Meyers

Yeah, when you look at it as Mike mentioned earlier, we’re about 59% sell right now, our entire base. We expect that to continue to move up because we’re adding accounts. Our new accounts have a much higher percent of sell. We also 32% interactive services and home automation in our base, and again, our take rates are higher than that. So you’re going to see continued move up in that expense line faster than revenue growth for a bit longer.

Jeff Kessler – Imperial Capital

Will that also include a 2G to 3G switchover over the next couple of years? Are you doing that now or are you willing to wait until 2015 to start doing that?

Bill Fitzgerald

We put together our strategy on 2G and we’ll obviously be doing some of that as we do our normal service work and our normal upgrade work. I don’t think we’re going to proactively address it immediately because with the impact of that service work and attrition, we don’t want to spend more than we have to on that project. But we want to leave ourselves plenty of time to address all the customers.

Jeff Kessler – Imperial Capital

Okay. Can you give some idea of when you make a bulk purchase like the one that you did toward the end of last year and what you intend on doing continuing when you complete the integration of Security Networks? How [should we view] the IRRs on those bulk purchases versus your accounts?

Mike Meyers

Sure, Jeff. When we look at really any acquisition, any purchase, we’re going to do an IRR based on cash flow. So when we look at a bulk, and depending on how much 2G there is in that bulk we’re going to factor that into the economics in determining what we think is a reasonable amount to pay for that.

Jeff Kessler – Imperial Capital

Okay. [laughs] And I know, I guess I shouldn’t start sharpening the knives on these questions for me but I’m going to ask it anyway: do you have an idea of what your steady state numbers were in Q4 and for the year?

Mike Meyers

I don’t have that with me, Jeff.

Jeff Kessler – Imperial Capital

We can discuss that offline at some point, correct? In any event the final question is what are, in going to market obviously can you tell me exactly what percentage of your business is actually national media generated and what percentage is what we’ll call self-generated leads and other types of generated leads – meaning if you’re using the internet, using referrals and things like that?

Bill Fitzgerald

Our business is very, very, very small percentage of advertising. I mean we don’t do any to speak of but some of our dealers I’m sure do some form of advertising, but it would be a very, very small percentage of our account creation. Most of our account creation is direct sales of some sort by way of our dealers.

Jeff Kessler – Imperial Capital

Right, I get it. Great, this is good but I know you guys were pulling your hair out for two or three weeks waiting to be able to say something like this and I give you the credit for having the patience to wait out the storm there. Thank you very much.

Bill Fitzgerald

Thanks Jeff, good to talk to you.

Operator

Our next question comes from the line of Daniel Moore with CJS Securities.

Daniel Moore – CJS Securities

Good afternoon. Your dealers generated a little over 37,000 accounts in Q4, obviously a very solid number. Any color into the performance with regards to Security Networks versus sort of the core Monitronics dealers? And I’m wondering did weather impact their ability to generate accounts at all in Q4 or thus far in Q1 in any of your markets?

Mike Haislip

Yeah, I’m sure weather has had a drag on our dealers’ ability to create accounts. I can’t put a number to that because I’m not out with them all and I haven’t talked with them all but there’s no doubt that that impacts business. Security Networks dealers have performed about as we expected – no big surprises on that front either.

Daniel Moore – CJS Securities

Very solid numbers despite the weather. Obviously you’ve looked at lots of different investments. Given the pullback in the shares and the IRR with where the share price is now have you been actively buying back stock in Q1 and would you consider increasing the authorization at this stage?

Bill Fitzgerald

Dan, I guess that’s a two-part question. Number one, we’ve been in a blackout so we’ve been unable to buy shares and we did authorize a new share buyback program that was announced in Q4.

Daniel Moore – CJS Securities

Indeed, just above and beyond that but that should give you enough firepower. And then maybe just talk a little bit about the acquisition pipeline, your outlook for putting capital to work. Are bulk buys still your first priority or are you looking equally inside and outside the monitor (inaudible)?

Bill Fitzgerald

We certainly look both within and without. So you know, as we sort of look at the business, the bulk purchase opportunities really sort of tend to be part and parcel to the Monitronics sort of business plan – I mean that’s just sort of been part of their agenda and part of the business’ normal course. And so as Mike said, they’ve been enormously preoccupied over the bulk of the past couple of quarters since the acquisition of Security Networks on the integration project; and when they have an opportunity to come up for air on the other side of the completion of that integration project they’ll be able to refocus on those efforts.

Our opportunities here tend to focus more so beyond bulk purchases and you know, we have an active pipeline, we’re looking at opportunities each and every day. And we remain very excited about the opportunities that we see out there. And that said, as you’ve heard me say before we have been and will continue to be very disciplined investors and we think that that has served us and our shareholders well over the course of time.

Daniel Moore – CJS Securities

It definitely has. Lastly just a housekeeping – Mike, what was the fully diluted share count at the end of Q4?

Mike Meyers

Let me grab that…

Bill Fitzgerald

Dan, that’s probably one that Mike should get back to you on.

Mike Meyers

I’m happy to get back to you offline.

Daniel Moore – CJS Securities

Not a problem. Thank you again and congratulations on a fantastic year.

Bill Fitzgerald

Thanks Dan.

Operator

Our next question comes from the line of Steven Shu with Stifel.

Steven Shu – Stifel Nicolaus

Hey guys, thanks for taking my questions and good quarter.

Bill Fitzgerald

Thank you.

Steven Shu – Stifel Nicolaus

Can you guys give us a bit more color on the decrease in the attrition rate? Are there sort of initiatives you guys are taking to reduce churn and what’s going on with that?

Mike Haislip

Yeah, I mean we’re always taking initiatives to reduce churn but the most dramatic factor as we’ve stated repeatedly on attrition is the attrition curve and where our customers are on that attrition curve. And that is what is driving the current changes in attrition. We mentioned that Security Networks would help our attrition because their accounts our younger and earlier on the attrition curve.

We had also said last year that our attrition would increase during 2013, and this is Monitronics alone, and then decrease toward the end of the year – and that’s exactly what happened. So we’re always working to improve our retention efforts but I think those things work on the margins as opposed to driving the overall number significantly.

Steven Shu – Stifel Nicolaus

Okay, that makes sense. And then ADT has kind of talked about increasing financial support for their dealers and slightly upping the amount they’re willing to pay dealers for accounts. Have these actions put any upward pressure on your purchase multiples at all?

Mike Haislip

Yeah, I mean to be honest it has. They and others frankly, and probably in part because of our acquisition of Security Networks at 57x, are out willing to pay higher multiples right now. So it has had some amount of upward pressure on our purchase multiples. I would say that it’s not going to be material but it is happening.

Steven Shu – Stifel Nicolaus

Okay. And then…

Bill Fitzgerald

Hey Mike, will you just add… Sorry to interrupt, Steven, but Mike, just add a comment to your current efforts regarding signing dealers, resigning dealers in conjunction with the Security Networks portfolio.

Mike Haislip

Yeah, I mean one of the things that we’re focusing on particularly with the increase in multiples that a few dealer programs are willing to pay is being sure that our dealers are signed up for a long-term relationship with Monitronics. So we’ve been out trying to resign our top twenty dealers and have signed all but one at this point, and feel confident we’ll sign the other one.

Bill Fitzgerald

Thank you.

Steven Shu – Stifel Nicolaus

What was the monthly recurring revenue you guys purchased in the quarter?

Mike Meyers

For Q4, MRR added was $1.7 million.

Steven Shu – Stifel Nicolaus

$1.7 million, got it. Thank you.

Operator

Our next question comes from the line of Karru Martinson with Deutsche Bank.

Karru Martinson – Deutsche Bank

Good afternoon. When we look at that attrition rate how much do you feel is being driven by the mobility of the American homeowner today versus kind of the cycle of the accounts? I mean some of your competitors have really put a greater emphasis on that as the driving factor here.

Mike Haislip

Well, I think that’s another thing that works in the margins. It can move attrition a half a point one way or the other. And we do believe and our numbers support that the increase in moves is pushing attrition up a little bit. We talked about that I believe last quarter, and I think we said we thought the impact was about 0.3 of a point. I haven’t seen a big change in that this quarter.

Karru Martinson – Deutsche Bank

Okay. And when you look at the Security Networks accounts being earlier in the cycle is there any point in the next say year or two where we will see those accounts shift? Or where is that cycle just from a modeling perspective?

Mike Haislip

If you will go on our website we have the attrition curve on that website that shows you where attrition occurs in the customer’s lifecycle. I can’t give you a specific breakdown of where all of the Security Networks customers are on that curve but you’ll see that early on attrition is lower.

Mike Meyers

Yeah, and being younger in their curve it’s going to be a little ways out, and Security Networks as we do has a mix of contracts that are three-year and five-year. And that blending has a tendency to push the hump out a little further, the renewal hump because you mix in five-year contracts.

Karru Martinson – Deutsche Bank

And some of your competitors have been really pushing that five-year contract and certainly providing incentives to realize that. Do you feel that that’s something where the industry is going or you’re going to kind of stay with that mix?

Mike Haislip

We offer incentives for five year contracts also. And we’ve historically had a good mix – I don’t have the number in front of me of what percentage are five-year but a healthy percentage are five-year at this point. And we don’t want to push that too far; I mean there’s certain states where we don’t allow it at all because of regulatory issues. But we do think it’s a positive relative to attrition, obviously.

Karru Martinson – Deutsche Bank

Thank you very much guys, I appreciate it.

Bill Fitzgerald

Thank you.

Operator

Our next question comes from the line of Jeff Kessler with Imperial Capital.

Jeff Kessler – Imperial Capital

Thank you. When your subscribers take an interactive system what one, two, or three items are they taking, are you able to sell extra? In other words when they do begin to start moving up in terms of new apps what are those apps in terms of preference that they’re adding?

Mike Haislip

Yeah, I mean you’re talking the home automation type functionality.

Jeff Kessler – Imperial Capital

Anything. Put it this way – anything beyond the base cellular system. Once you get them interactive you want to give them some options. Is there a security angle? Is there a camera that they want to buy first or is it some type of home automation app that gets them first? In other words, what are your dealers focusing on when they try to upsell them?

Mike Haislip

Right. The vast majority of people are taking interactive services, which just means they can arm and disarm remotely, they can get messages on their phone or on their computer when alarms or when triggers happen in their home. That’s the vast majority of what people are taking. When people move to home automation obviously lights are popular and after that come locks and thermostats.

Mike Meyers

And I will add it’s a less sexy add-on but a lot of our customers take two-way voice. We as a company do a lot of two-way voice where the customer, if an alarm goes off our operators can hear into the home and see if there’s a crime in progress through a speaker on the wall. It’s something that customers really like.

Jeff Kessler – Imperial Capital

With the increased cost of cellular out there one of the things you can do is to try to make things easier for your dealers when they’re installing, to maybe perhaps do some remote tuning or things like that. Are you providing any types of, if you want to call it wireless tools or remote tools for your dealers to get out of the home more quickly and also make that installation more accurate so that they don’t have to roll a truck again?

Mike Haislip

I’m not sure I totally understand the question but the technicians in the field are able to test signals and test the communication without talking to somebody at this point, so they can do it automatically through our systems if that is your question.

Jeff Kessler – Imperial Capital

Yes.

Mike Meyers

And I will add that you know, an Alarm.com system to install or AlarmNet, is a very straightforward installation. There’s no additional hub that you have to put in the home. Our dealers have been doing it a long time and none of them seem to have any issues with it.

Jeff Kessler – Imperial Capital

I like the fact that you keep mentioning AlarmNet – it’s making the big guy happy. [laughs] In any event thank you very much.

Bill Fitzgerald

Thanks Jeff.

Operator

At this time there appears to be no further questions. I’d like to turn the floor back over to Mr. Fitzgerald for any additional or closing remarks.

Bill Fitzgerald

Thank you, Operator. Simply said we appreciate your support, we thank you for being here and we look forward to reporting to you again here in another three months on our Q1 results. Thanks again, bye-bye.

Operator

Thank you. This concludes today’s conference call. You may now disconnect.

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