Ascent Capital Group's (ASCMA) CEO Bill Fitzgerald on Q2 2014 Results - Earnings Call Transcript

Aug. 7.14 | About: Ascent Capital (ASCMA)

Start Time: 17:07

End Time: 17:37

Ascent Capital Group, Inc. (NASDAQ:ASCMA)

Q2 2014 Earnings Conference Call

August 7, 2014 05:00 PM ET

Executives

William R. Fitzgerald - CEO

Michael A. Haislip - President & CEO, Monitronics International, Inc.

Michael R. Meyers - VP and CFO

John A. Orr - SVP of Corporate Development

Bill Niles - Executive Vice President & General Counsel

Analysts

Daniel Moore - CJS Securities

Jeff Kessler - Imperial Capital

Shlomo Rosenbaum - Stifel Nicolaus & Company

Operator

Good day and welcome to Ascent Capital Group’s Conference Call to discuss the Company’s Second Quarter 2014 Earnings. Today’s call is being recorded.

This call includes 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 businesses including the consolidated performance of Monitronics after giving effect to the 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 by such statements, including without limitation competitive issues, Monitronics’ ability to realize synergies associated with the acquisition 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. The required definitions and reconciliations are included in our earnings release which was made publicly available earlier today.

I’d now like to turn the call over to your host, Ascent Capital Group’s Chief Executive Officer Bill Fitzgerald. Please go ahead, sir.

William R. Fitzgerald

Thank you, Operator. Good afternoon, everyone, and welcome to our second quarter 2014 earnings call. Joining me on the call from Dallas are Mike Haislip, Monitronics President and CEO; Mike Meyers, the CFO for both Ascent and Monitronics; and from Denver our Senior Vice President of Corporate Development John Orr and our General Counsel Bill Niles.

During the call today I’ll provide you with a brief update on Ascent and Monitronics and then will turn the call over to Mike Haislip who will take you through Monitronics second quarter performance. Following that, Mike Meyers will give you a more detailed look at the second quarter financials. Then we’ll leave time for questions at the end of the call.

For starters, I’d simply like to say that we’re very pleased with our second quarter performance. Having completed the operational integration of Security Networks in April, the combined business is benefiting from strong operating efficiencies and significant cost savings.

In terms of our financial performance, Monitronics delivered another quarter of strong revenue and adjusted EBITDA growth, just as important total subscribers were up a solid 26% year-over-year as organic dealer account growth showed strong quarter-over-quarter results.

At the Ascent level -- at the Ascent Capital level, we continue to evaluate opportunities for deploying capital to satisfy both strategic and value creation objectives. In addition to pursuing several acquisition and investment opportunities, we also repurchased roughly 116,000 of our shares in the quarter. As we’ve been, we will continue to be opportunistic in this area.

On the acquisition front, we remained committed to pursuing additional strategic opportunities within home security and monitoring -- and related monitoring businesses that can enhance our growth profile and drive shareholder value.

In summary, we remain very enthusiastic about our business and encouraged by the future growth prospects. The combination of Monitronics and Security Networks has created a very strong and productive dealer network as well as a scaled and efficient operating platform that has positioned us very well in this expanding industry for future growth. I like our platform and feel very good about the future of our business.

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

Michael A. Haislip

Thanks, Bill. Monitronics is off to a solid start in the first half of 2014. As we noted on our last quarterly call, we successfully completed the operational integration of Security Networks in April and generated $7 million in annual operational synergies. With the integration behind us, the combined business continues to perform well.

On a year-over-year basis, Monitronics revenues increased 31.7% to $134.7 million. While adjusted EBITDA grew a solid 28.2% to $90.3 million. Our attrition level remained unchanged sequentially and were down from 12.5% to 12.3% year-over-year. This reduction is primarily attributable to the age of the accounts in our portfolio.

After a harsh winter, the Ascent account generation in the first quarter, sales rebounded nicely in the second quarter as weather conditions improved. On a sequential basis, production increased to 42,851 accounts in Q2 compared to 31,700 accounts in Q1.

Excluding bulk purchases, accounts purchased in Q2 increased 35% over the same period last year. We were very pleased to see that. You will note that we had no bulk purchases in the second half of 2013 or the first quarter of 2014 as we placed our operational focus on the Security Networks integration effort. With that, now behind us we renewed our bulk buy efforts in the second quarter purchasing 2900 accounts.

Demand for HomeTouch our branded home automation services product remained strong with 63% of our new accounts in the quarter purchasing some form of this product. This has helped to drive average monthly revenue per subscriber up to $41.26 as of June 30, 2014 from $39.98 last year.

Finally before I turn the call over to Mike, let me provide some concluding remarks on the competitive landscape. Consistent with what we have shared with you many times before, we are not seeing a material -- materially different impact on our sales or attrition levels compared to previous quarters as a result of the new entrants into the market.

Pricing and service offerings continue to be substantially similar to ours and our most significant competition continues to come from traditional security companies. In conclusion, this was a very strong quarter and we expect to further benefit from the Security Networks acquisition in the second half of the year.

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

Michael R. Meyers

Thanks, Mike. Beginning with our top line, Ascent’s net revenue increased 32% to $134.7 million in the second quarter and increased 32% to $267.6 million for the first six months. The increase in net revenue reflects account growth of Monitronics which makes up all of Ascent’s revenue.

The increase in Monitronics net revenue was attributable to a 26% increase in the number of subscriber accounts to 1,056,106 driven by the Security Networks acquisition and strong account growth from our authorized dealers over the last 12 months. Also driving revenue growth for the quarter was a 3.2% increase in the average RMR per subscriber to $41.26 as of June 30, 2014.

Turning now to our expenses, Ascent’s total cost of services for the three and six months ended June 30, 2014 increased 47% to $23 million and 46% to $45.1 million respectively. This increase is primarily attributable to Monitronics subscriber growth over the last 12 months as well as increases in the number of HomeTouch customers and service costs.

Ascent’s SG&A expense for the second quarter and six months ended June 30, 2014 increased 24% and 29% to $26.7 million and $53.3 million respectively. The increase is a result of higher Monitronics SG&A costs, which are attributable to subscriber growth over the last twelve months, and redundant staffing and operating costs at Monitronics Dallas, Texas headquarters in advance of transitioning security networks, operations from Florida to Texas.

As part of this process, Monitronics incurred integration and restructuring costs of $1.5 million and $3.1 million for the three and six months ended June 30, 2014 respectively primarily for employee severance and professional services rendered during the transition from Florida to Texas.

In terms of synergies, since purchasing Security Networks and through the transition to Dallas, we’ve achieved approximately $7 million in annual operating synergies, these cost savings were achieved in a variety of areas including the reduction of overhead, sales and marketing expense, and cellular costs as well as the consolidation of redundant call centers.

Looking at profitability, Ascent’s adjusted EBITDA during the three and six months ended June 30, 2014 increased 24% for both periods to $88.5 million and $176.5 million respectively. The increase is primarily due to revenue and subscriber growth at Monitronics as well as the acquisition of Security Networks.. Adjusted EBITDA in Monitronics increased 28% for the three and six month periods to $90.3 million and $179.5 million.

Finally, before I turn the call back over to Bill, let me summarize our liquidity position. At June 30, 2014 on a consolidated basis, Ascent had $155.2 million of cash, cash equivalents, and marketable securities. Year-to-date Monitronics used cash of $126.6 million to fund subscriber account acquisitions, net of holdback and guarantee obligations.

At June 30, 2014, the existing long-term debt principal balance 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 principle balance of $103.5 million as of June 30, 2014 and mature on July 15, 2020. Monitronics' Senior Notes have an outstanding principal balance of $585 million as of June 30, 2014 and mature on April 1, 2020.

The Credit Facility term loans have an outstanding principal balance of $902.9 million as of June 30, 2014 and require principal payments of approximately $2.3 million per quarter with the remaining outstanding balance becoming due on March 23, 2018. The $225 million Credit Facility revolver has an outstanding balance of $41.5 million as of June 30, 2014 and becomes due on December 22, 2017.

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

William R. Fitzgerald

Thanks, Mike. We are quite pleased with our second quarter performance and are happy to report the business is performing well. We remain encouraged and look forward to the second half of 2014. Thanks everyone for listening. We appreciate your continued support. We are now happy to take any questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Daniel Moore of CJS Securities.

Daniel Moore - CJS Securities

Good afternoon.

William R. Fitzgerald

Hey, Dan.

Michael R. Meyers

Dan.

Daniel Moore - CJS Securities

Obviously you stepped up your share repurchase activity and I think you said most of the authorization at some place, maybe just talk about your willingness and ability to increase that in near-term, if the shares do remain at on your current levels?

William R. Fitzgerald

There is certainly an appetite to continue, to support the share repurchase plan, there is some amount remaining. I forget exactly what it is, something less than four.

Michael R. Meyers

3.2

William R. Fitzgerald

3.2 on the authorization and we’d certainly consider a new authorization if we feel that’s appropriate.

Daniel Moore - CJS Securities

Okay. Maybe just update us on the dealer account, now that we’re a little with further down the path in terms of the integration of Security Networks and how comfortable are you with the current dealer base and give an increased competition, talk about your ability to maybe add to that account over the next 6 to 12 months?

William R. Fitzgerald

We feel very good about where we’re with the subscriber base. We mentioned last quarter we had a few dealers lost when we did the acquisition, that’s what was expected. Not everybody wanted to be with Monitronics. We didn’t want everybody to be with Monitronics, but the prospects for adding dealers are looking good and we’re really feeling good about where we’re with our dealer network right now. It’s more solid than it has been in the long time and almost all of the major dealers are reassigned to longer term deals.

Daniel Moore - CJS Securities

Very good. Maybe just one more, a little bit of color around your geography. Are there particular areas where your dealers are generating above average growth in conversely somewhere you’re feeling a little bit more heat from competition?

William R. Fitzgerald

No, I can’t say there is any particular area where that phenomenon is happening. I mean, we’re obviously stronger along the Coast and across the Southwest we’re -- we’ve fewer dealers and less growth in the upper Midwest where people don’t lock their doors. And nothing has really changed on that front for several years.

Daniel Moore - CJS Securities

Lastly Mike, the -- you mentioned you’re at $7 million run rate in terms of synergies. Have we seen most of that benefit if we look at Q2, kind of adjusted SG&A was in the 25.5% range; should we think about that being sort of at the right level or perhaps still coming down as we look at the back half of the year?

Michael R. Meyers

Yes, Dan it’s going to be for the most part, the thing we got in the third quarter was the closure of the call centers in Florida, but that happened in April. So, we had two months at the run rate, but one month was still below.

Daniel Moore - CJS Securities

That’s helpful. Thank you.

Operator

Your next question comes from Jeff Kessler of Imperial Capital.

Jeff Kessler - Imperial Capital

Thank you. Just to follow-up on that. Now that we’ve -- you’ve basically gotten through the operational and in the logistical and probably even the logical, the data part of the integration, and you’ve probably got the cultural part down pretty much and those dealers who are not part of you are no longer -- who were not part of you anyway are not part of you now. Are we going to see -- begin to see your operating expense ratios begin to improve a little bit in the second half? Like what are we going to see it improve from an operational point of view now that we’re done with the integration?

Michael R. Meyers

Jeff, what you’ve seen is, once we brought everything to Dallas in the second quarter, we were integrated. We got to past April everything was here in Dallas, we had our staff on board. And so for two months you really saw the going forward platform. As you know, as a business we continue to have pressure on our cost of sales from the new services we’re adding home touch. But that also comes with more cash flow from the customer. But those services continue to at least squeeze visually the gross margin.

Jeff Kessler - Imperial Capital

And the trading or what I’ll call with the -- I realize that the Security Networks dealers were fairly well educated in the art of self generated leads to begin with. But moving into your -- the way you do things, because the way you guys do thing as a little -- a little bit more, lets just call it a little bit more efficient than the other companies. Have you gone to a point at which the dealers themselves are onboard with cost and what they know they have to generate in terms of the type of accounts, so that going forward there is going to be less, let’s say less backpedaling on holdbacks, things like that?

Michael A. Haislip

Yes, I think in that respect the programs were similar enough that there wasn’t a big adjustment for the dealers. I mean holdback was the same. Generally the criteria for accepting an account were very similar. The process for putting an account online was a little different and the communication back and forth was a little different. But at this point I think the dealers are very comfortable with it. We continue to fine tune it to make it better for the dealers, but right now its working very well.

Jeff Kessler - Imperial Capital

Good. Well it’s important that you don’t oversell your customers on wireless interactive services. It’s also important to be able to begin to upsell them and get them interested in new Apps that you can layer. What are you seeing in terms of customers who’re willing to take two or more services? You’ve given us a percentage for those who are taking at least one service, we know that but how have you been doing in the ability to start into upselling your customers?

William R. Fitzgerald

Well just looking at new customer coming in, that’s what we usually talk about. And that is, we have been giving a number for home automation customers. And those are customers who take both our interactive products and some form of home automation being able to turn the lights on and off or control a thermostat or lock around like a door. And 17% of our new customers this quarter took a home automation level product which is up from 13% last quarter. So, the home automation product is getting a little more traction and it’s becoming a larger percentage of the customers who are taking HomeTouch.

Jeff Kessler - Imperial Capital

Okay. Is it wireless locks, is it video inside or outside, is it thermostats. What are the main -- what's the main driver of the increase in home automation?

William R. Fitzgerald

I can't give you the breakdown here on the phone, but when we follow-up later I’ll be glad to put that together for you.

Jeff Kessler - Imperial Capital

All right. Couple of other questions, and that would be subscriber. Now that you’ve gotten Security Networks under wrapped here. If we’re going to look at organic subscriber growth going forward, it’s up to you -- you can obviously turn the dial up and down depending on what your cash flows allow and how good your dealers are. Is the 6% to 7% organic level that we’re seeing right now about the level that you’re comfortable with?

William R. Fitzgerald

I wouldn’t say there is a level that we’re comfortable with. We’re always looking to add more dealers and add more accounts. We are not limited by cash, like to second as we’ve talked about before, we’re limited a little bit by what we’re willing to pay for an account. We are always going to be judicious in what we’ll pay for an account. And I think we can continue to grow strongly even in this competitive market and we expect it to increase going forward.

Jeff Kessler - Imperial Capital

All right, great. I’ll catch you later. Thank you very much.

William R. Fitzgerald

Thanks, Jeff.

Michael A. Haislip

Thanks, Jeff.

Michael R. Meyers

Jeff.

Jeff Kessler - Imperial Capital

Yes.

Operator

(Operator Instructions) Your next question comes from the line of Shlomo Rosenbaum of Stifel.

Shlomo Rosenbaum - Stifel Nicolaus & Company

Hi, guys. Thank you for taking my questions this evening.

Michael A. Haislip

Sure.

Michael R. Meyers

Hi, Shlomo.

Shlomo Rosenbaum - Stifel Nicolaus & Company

What's the competition like for dealers in the market? Has that changed at all or is that kind of the same kind of competitiveness that you’ve seen kind of a little bit of an increase over the last year or two?

William R. Fitzgerald

Well, I would say it’s relatively the same. It’s at a higher level than two years ago, but relative to what we’ve talked about now for the last two or three quarters it’s remained relatively consistent, so no new developments there.

Shlomo Rosenbaum - Stifel Nicolaus & Company

And just a couple of housekeeping things as well; what was the current monthly revenue in the quarter and what was the RMR that you’ve purchased in the quarter?

Michael R. Meyers

The RMR we purchased in the quarter was 1,947,896. Now we don’t give a single purchase multiple for the quarter. Last year it was, it averaged 35% and we’re up modestly from there, based on what Mike said with the competition for dealers. But we don’t, during each quarter give that purchase multiple.

Shlomo Rosenbaum - Stifel Nicolaus & Company

Okay. And is it a material difference or is it just kind of the gradual like less than one churn type of things.

William R. Fitzgerald

Let me take that one, and that is -- we aren’t going to comment on multiples quarter-to-quarter because it gives out competitive information that we don’t want out there. It is up modestly. I would say a one point increase in multiples as we’ve talked about before relates to about 1% drop in IRR. So, in that respect whatever it’s doing its not substantial, not significant to the business.

Michael R. Meyers

And I’ll add Shlomo, one of the things that’s driven up cost a little bit is we’ve -- as we mentioned last quarter we have been very active in extending the contracts on our existing dealers and have nearly all of our dealers under contract through 2014 and a significant number under contract to the end of 2015.

Shlomo Rosenbaum - Stifel Nicolaus & Company

Okay, it makes sense. And then what percent of the base is now home automation or interactive, however you want to split that up, and then also in terms of being cellular how far or long are we there?

William R. Fitzgerald

It’s about 35% interactive in home automation and the cellular universe is up to 62%.

Shlomo Rosenbaum - Stifel Nicolaus & Company

And what was the ending share count?

Michael R. Meyers

The ending share count 13,403,000.

Shlomo Rosenbaum - Stifel Nicolaus & Company

So the share financially did go down with the repurchases?

Michael R. Meyers

And for more details on that one, we can do a follow-up.

William R. Fitzgerald

Hey, Mike just to be clear, it’s really 13,700,000 including the (indiscernible).

Michael R. Meyers

Right. I left out the (indiscernible), thanks, Will. But Shlomo to get those specific numbers we can give them to you on the follow-up.

Shlomo Rosenbaum - Stifel Nicolaus & Company

I’m just trying to get, are you -- if you’re buying back stock, is the share count going down or you’re buying back stock and the share count is staying the same, that, that’s kind of where I’m going with that?

Michael R. Meyers

Sure, it’s going down little bit.

William R. Fitzgerald

Share counts gone down.

Michael R. Meyers

Yes, I mean it was 14,050,000 at year-end.

Shlomo Rosenbaum - Stifel Nicolaus & Company

Okay. And then, just this is a housekeeping thing. Just remind me again, is the decrease in other recruit liabilities again, if those are -- if that’s the debt payment that you got twice a year -- big moment there?

Michael R. Meyers

In June that didn’t occur, and why don’t we handle that on the follow-up, Shlomo?

Shlomo Rosenbaum - Stifel Nicolaus & Company

Okay. Thanks a lot guys.

William R. Fitzgerald

Thank you.

Operator

Your next question is a follow-up from Jeff Kessler of Imperial Capital

Jeff Kessler - Imperial Capital

Yes, you mentioned that there has been some slight pressure on the upside in trying to get dealers, and obviously it comes from its not just -- its coming from all of the folks who have got into the dealer business to try to copy you folks will say. What I’m asking is, what are you doing -- what can you do at the monitoring level once you get that customer in your hands to try to drive the ultimate net cost to create down from 30 -- lets call it from 36 -- for 35.8 or something like that down by 80 basis points. So, are you doing anything at the head end, anything with regard to service or trying to add new product on your own that can drive that creation cost down?

Michael R. Meyers

Well the number we talk about generally is the creation cost at time of purchase.

Jeff Kessler - Imperial Capital

Correct, correct. I understand that.

Michael R. Meyers

So, the main thing we can do beyond that point is generate stronger cash flows, better operating margins which doesn’t reduce the purchase multiple, but it makes that purchase multiple payoff better, if you get my drift. There’s more money you can take out of the …

Jeff Kessler - Imperial Capital

What I’m thinking of is …

Michael R. Meyers

… (multiple speakers) sell some extra services, that will be a great thing too. Yes.

Michael R. Meyers

Okay. And that’s what I’m thinking of the, extra services that I might interpret as a net out but others might not, so.

Jeff Kessler - Imperial Capital

Right.

William R. Fitzgerald

I think Jeff the other thing I would add to that again relative to some of our smaller competitors is that our cost of capital is lower and as a result our return profile against an uptick in our purchase multiples obviously looks a little better than it might for the smaller guy.

Jeff Kessler - Imperial Capital

Yes. Okay, thank you.

Operator

This concludes today's question and answer session. I would now like to turn the floor back over to Will Fitzgerald for any closing remarks.

William R. Fitzgerald

Good. Thank you, operator. Thank you all for joining us today. Thanks for the good question guys, and we’ll look forward to reconvening here in three months with a third quarter update for everyone, and in between now and then we’ll see you guys out on the road.

Operator

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

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