Ascent Capital Group's (ASCMA) CEO William Fitzgerald on Q2 2016 Results - Earnings Call Transcript

| About: Ascent Capital (ASCMA)

Ascent Capital Group, Inc. (NASDAQ:ASCMA)

Q2 2016 Earnings Conference Call

August 09, 2016 5:00 PM ET

Executives

William Fitzgerald - Chairman and Chief Executive Officer

Jeffery Gardner - Chief Executive Officer, Monitronics International, Inc.

Michael Meyers - Senior Vice President and Chief Financial Officer

William Niles - Executive Vice President, General Counsel, Secretary

Analysts

Jeffrey Kessler - Imperial Capital, LLC.

Shlomo Rosenbaum - Stifel, Nicolaus & Company

Andrew Boyce - Piper Jaffray & Co.

Todd Morgan - Jefferies & Co.

Geoffrey McKinney - Bank of America Merrill Lynch

Operator

Good day and welcome to Ascent Capital Group’s Conference Call to discuss the Company’s Second Quarter 2016 Earnings. Today’s call is being recorded, and a replay of the call will be available on the Ascent IR website, an hour after the completion of the call. For those of you following along on the webcast, we will be using a slide deck to supplement a portion of management’s commentary today.

This call includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about business strategy, development of and access to multiple sales channels, market potential and expansion, consumer demand for interactive and home automation services, account creation and related costs, subscriber attrition, anticipation account generation at LiveWatch, future financial prospects 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. These such statements include, without limitation, possible changes in the market, acceptance of the Company’s services, technological innovation in the alarm monitoring industry, competitive issues, continued access to capital on terms of acceptable to Ascent Monitronics, our ability to capitalize on acquisition opportunity, 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 Ascent expressly disclaims any obligation or undertaking to disseminate any update or revision to any forward-looking statements contained herein and to reflect any change in Ascent’s expectations with regard thereto or any change in events, conditions or circumstances in which any such statement is based.

Please refer to the publicly filed document of Ascent, including the most recent Form on 10-K and 10-Q for additional information about Ascent and about the risks and uncertainties related to Ascent’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 and pretax adjusted EBITDA. The required definitions and reconciliations are included in the earnings release, which was made publicly available earlier today.

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

William Fitzgerald

Thank you, operator, and good afternoon, everyone. Welcome to our second quarter 2016 earnings call. Joining me on the call today is Jeff Gardner, our CEO of Monitronics; as well as our CFO, Mike Meyers, and Ascent’s General Counsel, Bill Niles.

During the call, I’ll provide a brief update on the business, then turn the call over to Jeff to discuss the Monitronics business and performance in more detail. Following that, Mike Meyers will give you a more detailed look at second quarter financials. We’ll also leave time at the end for your questions.

The business performed consistent with our expectations for the quarter and I remain very encouraged with the management teams’ efforts around strengthening the businesses’ performance. Jeff has made very good progress building out his management team, refining the operating goals and strategies and driving improved performance metrics throughout the organization.

Most notably, we continue to show meaningful progress in improving dealer economics through further reductions in creation costs during the quarter. The recently announced partnerships with AARP as well as the AAA Alliance Club also marks another solid step towards strengthening monies direct lead generation opportunities.

Additionally, I’m quite pleased with the progress of our LiveWatch business, which continues to deliver, posting another quarter of solid growth. While there is still more work to be done, I’m encouraged by the solid progress to date and the opportunities that lie ahead for the business. During the second quarter, Ascent purchased 389,179 shares or 3.2% of our equity, spending approximately $7.1 million, evidencing our continued confidence in the business.

With that, let me turn things over to Jeff to provide a broader update on the business and the initiatives he is pursuing. Jeff?

Jeffery Gardner

Thank you, Bill, and good afternoon, everyone. I am pleased to report that we had a solid second quarter and first half of the year. Our revenue and adjusted EBITDA growth was in line with expectations, and we’ve made notable progress on a number of critical initiatives. A major accomplishment in the quarter was signing an agreement with AARP to be their exclusive provider of security and home automation, which I will provide more detail on in a moment.

We also continue to invest in human capital, adding Kelly Harris as our new Chief People Officer; Jason Chancellor as our VP of IT. We are pleased to have them as part of the Monitronics team. In terms of top line performance, Monitronics delivered net revenue of $143.7 million in the second quarter, up 1.5% year-over-year and reported pre-SAC adjusted EBITDA of $93.4 million. Slide 3 revisits the key characteristics that positions Monitronics in the marketplace.

Monitronics remains the second largest player in the U.S. residential security and home automation space with over 1 million customers. During the quarter, we made progress in our dealer channel, strengthening account growth sequentially to 37,284 accounts, all added at a lower multiple than a year ago. As you know, Monitronics pose the largest independent dealer network in the country. Our dealer model is very flexible and allows us to generate the highest Pre-SAC margins in the industry.

Slide 4 illustrates how we continue to transform our dealer program. In the past, dealer programs were simply a funding model with little differentiation other than the multiple take. Today, it’s all about enablement. The goal is to make our partner successful by providing unwavering commitment, training and marketing support. If you turn to Slide 5, a major focus for us in 2016 is improving creation cost multiples in our dealer channel.

In Q1, we lowered the creation multiples to 36.1. This was the first year-over-year reduction in over eight quarters. During the second quarter, we further lowered the creation multiple to 35.5, an improvement sequentially and year-over-year. LiveWatch, our attractive highly complementary DIY business, continued to perform exceptionally well, scaling nicely and creating accounts at lower creation multiples.

Slide 6 illustrates the growth at LiveWatch since we acquired the business in February 2015. The monthly average RMR per new customer has grown to $38, up substantially year-over-year, as illustrated on Slide 7.

Turning to attrition. In the second quarter, core attrition, which excludes the impact of our Pinnacle bulk buy and 2G, rose modestly on a sequential basis to 13.2 in line with expectations. We continue to work aggressively to improve our core attrition and are confident that we are taking the right steps to drive improvement.

If you turn to Slide 8, you can see some of the key initiatives we are pursuing around attrition. As I mentioned last quarter, our first priority is providing the best customer service in the industry. Customer service metrics, including the average speed of answer, first call resolution and net promoter scores, are at all-time high for both Monitronics and LiveWatch.

We continue to target high credit quality accounts, with an average credit score of 715. We also implemented our predictive attrition model in the second quarter and are forwarding calls from customers that have been flagged as higher risk to our most highly skilled service advisors. In addition, we made great progress selling interactive services to new customers. Customers who subscribe to our HomeTouch smart home services are more engaged and we believe will exhibit better attrition characteristics.

Slide 9 illustrates the progress we have made in terms of the percentage of new customers purchasing interactive services. More importantly, data from providers, like Alarm.com, also continues to validate that interactive customers are illustrating a longer life than traditional home security customers.

Let me now touch on some of our efforts related to lead generation. Our three primarily lead sources are paid leads, partnerships and organic leads. In Q2, we made tremendous progress on the partnership front. Lead generation from our dealer program is a critically important initiative. In the second quarter, we grew leads generated year-over-year by over 136%.

Slide 10 describes our three major partnerships that currently support our lead gen efforts. As I mentioned earlier, we are excited to have been selected as the exclusive provider of security services to AARP. This is one of the strongest brands in the country and provides us access to 38 million AARP members. We have an outstanding value proposition with our offer, and we have an opportunity to leverage this across all of the AARP properties.

We also recently announced an exclusive partnership with AAA Alliance Club, an organization with 5.8 million members. In addition, we continue to make progress with our first partner, consolidating communication. We are in the process of identifying additional partnership opportunities, and we will keep investors abreast of our progress.

Turning to 2G. Slide 11 illustrates the progress we have made over the last eight quarters. We are now more than halfway through 2016 and quickly approaching December 31, 2016, after which AT&T is expected to shutdown the 2G network. We made significant progress in the first half of 2016 and our 2G team continues to do a tremendous job. As of today, we have just over 20,000 remaining customers that need to be converted and we are working hard to address those accounts by year end.

Overall, I am excited about the progress we have made in a number of critical areas. There is still more work ahead of us, but the business is running well, and our future is bright.

I will turn the call over to Mike Meyers to discuss the financials.

Michael Meyers

Thanks, Jeff. Let me begin by reviewing our topline performance. Ascent’s net revenue increased 1.5% to $143.7 million in Q2 and increased 2.5% to $286.9 million in the first half of 2016. The increases in net revenue are attributable to increases in average RMR to $42.70 and for the six months also reflects the inclusion of a full first quarter for LiveWatch.

Turning to 2G. In terms of expenses, we incurred approximately $7.6 million in the second quarter and $16.7 million for the first six months. In line with our previous estimates, we expect to spend between $2 million and $3 million for the remainder of 2016 to complete the 2G conversion project.

As expected, 2G conversions resulted in a modest increase in cancellations in Q2, totaling approximately 4,000 accounts as we moved aggressively to convert customers. On our call at the end of the first quarter, we estimated that incremental 2G disconnects could total 1.5% to 2% for 2016 and 2017 combined. We now believe we will fall in the high end of this range with about half occurring in 2016 and the remainder when the network shuts down late in 2016 or early in 2017.

As noted in our press release, excluding the 2G impact, unit attrition increased to 13.9% at June 30, from 13.4% in the prior year period, driven by the number of subscriber accounts reaching the end of their initial term. Overall, attrition reflects the impact of the 113,000 accounts Pinnacle bulk buy, which are now experiencing normal end-of-term attrition.

Looking at attrition on an RMR basis, we have experienced significant improvement, driven by new price increase strategies implemented in the second half of 2015. LTM RMR attrition was 12.5% at June 30 versus unit attrition of 13.9%. Given our average RMR of $42.70, we believe we have the opportunity to continue to do similar price increases going forward without affecting unit attrition.

In line with expectations, core unit attrition, which excludes the Pinnacle bulk buy, increased to 13.2%, reflecting the mix of accounts coming to term. Overall core attrition continues to track our pool attrition curve, which remains largely stable and in line with historical trends. As we shared last quarter, we expect our core attrition to moderate slightly from current levels by year-end.

Let me now turn to cost, with specific focus on LiveWatch’s impact on our cost structure and margins. During Q2 and the first six months, LiveWatch’s net expense creation costs totaled $4.8 million and $9.6 million, respectively. Because LiveWatch expenses its creation cost associated with new customers, this drives our total operating expenses higher and reduces margins.

Ascent’s Pre-SAC adjusted EBITDA, which adds back the expense portion of LiveWatch creation cost, increased 0.9% in the second quarter and decreased 0.6% in the first six months. Monitronics’ Pre-SAC adjusted EBITDA was flat with the prior-year quarter and decreased 0.5% in the first six months. Monitronics’ adjusted EBITDA margins for the three-month period decreased to 61.7% in Q2 and decreased to 61.2% in the first six months.

However, on a Pre-SAC basis, after removing LiveWatch’s expense creation cost, Monitronics’ Pre-SAC EBITDA margins in the second quarter was 65.5% and 65.1% for the first six months. This compares to 66.6% and 66.9% in the year-ago periods. I should reiterate that narrower Pre-SAC margins are partially driven by the fact that LiveWatch is a much younger business, and therefore, has lower margins than Monitronics.

As LiveWatch grows and matures, margins will expand approaching Monitronics level. In both the second quarter and the first six months, LiveWatch drove a 0.7% reduction in margins. Increases in the number of HomeTouch customers, higher benefit costs and investments in our service areas to improve the customer experience also contributed to margin pressures.

Relative to our liquidity position. At June 30, 2016, on a consolidated basis, Ascent had $86.3 million of cash, cash equivalents and marketable securities. At quarter end, we had drawn $154.5 million on our revolving line of credit and had $160.5 million of availability remaining.

Before I turn the call over for questions, in regards to our capital structure, we continue to actively explore opportunities to refinance our revolver and Term B, which come due in December 2017 and March 2018, respectively. We are looking to get back out into the market in the fall, and we’ll keep investors abreast of our efforts as necessary.

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

William Fitzgerald

Thanks, Mike. As I said at the outset, I think Jeff and his team are doing a great job leading a foundation for improved operating performance and a better growth profile for the business. I’m optimistic will continue to deliver on that in the quarters ahead.

With that, we’d be happy to take any questions you may have for us. Operator?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen the floor is open for your questions. [Operator Instructions]. Our first question comes from the line of Jeff Kessler with Imperial Capital.

Jeffrey Kessler

Hi, guys. How are you doing?

Jeffery Gardner

Hi, Jeff.

Jeffrey Kessler

Can you drill down a little bit on the things you are doing to reduce creation cost? You’ve gone through obviously, the - like you’ve gone through the new relationships you’ve made. You’ve gone through the beginnings of looking at things with - looking at things more analytically, and - but I’d like to find out - you mentioned 35.5 times. I’d like to find out how you get that lower and what you can do with something like AARP to get it even lower?

Jeffery Gardner

Yes, Jeff. Good question. This is Jeff Gardner. It’s really, I think about three things as we think about multiple reduction. The first is actually what we did with renegotiating our dealer contracts to really - for the first time in a few years to really say that we’ve got to improve the acquisition cost in the business. And so fundamentally, that’s probably the biggest impact.

The second is, you’ve got to remember that we’re creating counts in the low 30s at LiveWatch. So if that business continues to grow in scale, their impact on our overall creation multiple continues to improve. And then our goal - on the partnership process with things like AARP, AAA and Consolidated, the economic varies slightly between those two deals. But fundamentally, all three will contribute to this initiative of continuing to lower creation cost. So - I mean, we’ve got a number of efforts going on a number of fronts. But really focused on bringing that down, and I think we’ve made good progress today. And you’ll see us continue to be very focused on creation costs going forward.

Jeffrey Kessler

Okay. Have you completed the negotiation process with your dealers with regard to - particularly your largest dealers, with regard to creation cost? Or what you’re paying to them?

Jeffery Gardner

Yes. We’ve completed our deals with all of our dealers today. There are some incremental economics that will start - that started a little later in the quarter than others. But as of July 1, we’ve completed all the negotiation.

William Fitzgerald

And Jeff, just to give you a little bit more color on that. We really did two things. One, we made some changes that might result in a lower multiple, but also could result in a higher quality. Given trends in landline accounts that really aren’t as sticky as they used to be, we disincentivized our dealers installing landline accounts.

And you see some of that showing up in the increase in HomeTouch this quarter. We did some other things like that, disincentivizing credit card and really pushing towards higher quality, which at the end of the day again may end up with not helping multiples overall, but helping quality, which at the end of the day leads to a higher return on these accounts. And then as Jeff said, we also renegotiate some deals with our larger dealers based on where their levels were and we thought was appropriate.

Jeffrey Kessler

Okay. One other question, on your RMR attrition versus your unit attrition. It would appear that you were losing - how do I put this? You’re losing the accounts you want to lose. Is that - does that make sense?

William Fitzgerald

Well, I don’t know that I’d look at it that way. I mean, we look at attrition both ways, on unit basis and RMR basis. And last year, we brought in an external consulting firm and focused on how could we be smarter, more aggressive about how we went about implementing price increases. And out of that program, we came out with a much broader across our base price increase philosophy. We also did higher ARPU price increases. And so far this year, we’re not seeing any additional impact in unit attrition from that. So we’re pretty pleased with that. And we think economically, it’s a great outcome.

Jeffrey Kessler

All right. And again, one final question. Are you beginning to get more aggressive in adding – in the way you are marketing the – if you want to call it, the various applications beyond on, off to your account? Previously, you’ve been – you folks have been fairly conservative in the way you’ve gone out and tried to push dealers. Your dealers are probably now more educated and you’ve turned them over a little bit. You’ve negotiated with them. Are they at a point where you have more confidence in them to take on more apps and add more ARPU?

Jeffery Gardner

Yes. So I think that, that’s absolutely true across our dealer base. For things like camera logs, thermostat control, lighting, the things that really add value and add ARPU, we’re in a much better shape than a year ago. And I think all of our dealers are very comfortable with that, kind of managing the balance of the additional subsidy that requires, but benefiting from the higher ARPU.

In addition, Jeff, something that’s really changed this year as a Company is we’re much more aggressive in introducing new technology to our base. And so we’ve got a customer outreach program really from the day they joined the company. We’ve made it easy for them to buy things like SkyBell and cameras from our customer service reps.

So I think all of those things, both from our dealers and what we’re generating internally through our service organization, has allowed us to introduce more of these value-added services that do increase average revenue per unit. But I think as important, they result in a much more engaged customer, someone who is using their services with us more every day. They’re attributing more value to those services. I think it’ll mean great things for attrition.

I mentioned that in my comments around the interactive customers. And that will go – the more services customers use, the better that differentiation gets in terms of interactive customers compared to a standard security customer as it relates to attrition. So all very good from a value creation perspective.

And I’m very excited to see us really taking advantage of selling things into our customer base in a different way. And in the telecom industry where I came from, almost 40% of our revenue growth came from our existing base. And I think we have a great opportunity here as we really start doing that for the first time.

Jeffrey Kessler

Okay. Great stuff. Okay, thank you so much.

Michael Meyers

Thanks Jeff.

Operator

Our next question comes from Shlomo Rosenbaum with Stifel.

Shlomo Rosenbaum

Hi. Good afternoon guys.

Michael Meyers

Good afternoon.

Shlomo Rosenbaum

Mike, a standard question. What was the monthly RMR that was purchased in the quarter?

Michael Meyers

Monthly RMR purchased was – let me get to the right sheet, Shlomo. It was $1.8 million.

Shlomo Rosenbaum

Okay. $1.8 million. And then, Jeff, what’s the competitive situation in the ground like right now? Is there any changes in either the telecom providers or the Protection 1 ADT? What are you hearing from the dealers?

Jeffery Gardner

There’s not been a lot of change, Shlomo, on the competitive front, either with the AT&T’s or Comcast of the world or on the dealers side. We still are feeling good about what we’ve done with our program. We’re out talking to dealers this week, in fact, on how we can grow around – they can continue to grow under these new economics that we’ve rolled out. But we’re not – we haven’t lost any dealers from our program as a result of making those moves.

I think everybody is anxious to see what’s going to go on with ADT. It’s been kind of quiet in terms of how they think about the dealer channel. I think the good thing is the more I hear people in our industry being concerned about the internal rate of return, all the leaders of our companies are talking about just improving the fundamental economics, which I think is good.

And so we really do – I mean, our overall sense is that others will follow what we’ve done. One of the fundamental challenges in the business, as I mentioned earlier, when we dropped creation costs, this is the first time in eight quarters. Well, many companies have that run-up of creation costs and you need to make some adjustments. And so I think we still feel very good about leading the industry in that regard, and believe that others will follow. So not much has changed, but importantly, we haven’t lost any of our dealer partners.

Shlomo Rosenbaum

Are you seeing ADT do the same kind of thing in their dealer channel? Because both of you guys and them together are like 85% in that dealer market. So if it happens together, then it makes sense?

Jeffery Gardner

Yes. Well, it’s a little early to tell with regards to – I don’t know. I’m not aware of any specific initiatives that ADT have. I think it’s a little early. I mean, that’s a huge acquisition and they’ve got a lot of details to care for. So I think we’ll learn more of that over time. What I do know is we did the right thing for our business, and I think it’s going to benefit the entire industry over time.

Shlomo Rosenbaum

Okay. Great. And then Jeff, is there a particular angle with AARP in the PERS offering and some of the stuff in health care? Or is it really primarily security?

Jeffery Gardner

It’s primarily security, but we will have opportunities to sell other value-added products like PERS and home automation as part of that process. The biggest thing there, Shlomo, is as you know, as Monitronics has not been making large investments in our brand over time, this is an enormous deal for us. I think it really is the beginning of a new era for us, where we’re doing these powerful partnerships with big brands across the country. We’re going to get our name out to these 38 million members that they have and be able to drive a lot of growth.

And this is really good for our dealers. And in terms of our plans are to deliver these leads to our dealers in a way that the economic makes sense for both of us so that we can increase their growth. So now we’ve got something very tangible to talk to our dealers about. They were excited about partnerships when we talked about them. But now that we’ve delivered three major programs, they really believe us when we say we have more in the pipeline, but they’re very excited about the three announcements that we’ve already made.

Shlomo Rosenbaum

Okay. And then lastly, Mike, can you go over a little bit more of the impact 1.5% to 2% that you were talking about on the 2G? I just wanted to get a little bit more clarity as to how that’s supposed to follow out this year and next year? And exactly what that means, we should take the like 1% or 1.5% to 2% of overall ending base at the end of 2015 and assume that, that will be impacted by this program?

Michael Meyers

Yes, sure, Shlomo. When we came into this year, we have said from the get-go that we thought we would – and these were estimates, that we would potentially have 0.5 of attrition this year and 1 to 1.5 points of attrition in 2017 related to 2G. We moved faster this year. We’re moving much more rapidly than we had forecast, which is a good thing we want to get as many of these done as quickly as we can. So we pulled some of the cancellations we expected to have first quarter next year into this year.

So overall, we’re really saying we’ll probably have around one point of additional cancels in 2016. And then another point when the network is discontinued, depending when they discontinue AT&T has said they intended to turn it down either the end of this year or in January. But we’ll have to wait and see. It may be that they keep a number of networks up for quite a while beyond year-end.

So that’s how we’re looking at it Shlomo and it’s really just been a little bit rearranged with about 1% coming this year and 1% maybe coming in January of next year, if they turned down all the networks.

Shlomo Rosenbaum

Okay. Great thank you very much.

William Fitzgerald

Welcome.

Operator

Our next question comes from Andrew Boyce with Piper Jaffray.

Andrew Boyce

Hi, thanks guys for taking my question.

William Fitzgerald

Sure, Andrew.

Andrew Boyce

Quickly on the predictive churn model. That’s pretty interesting. Do you think it will have a material impact to reducing churn over time? Or is this something that might just have like a 10 to 20 basis point impact every quarter?

Jeffery Gardner

No. I think this has the potential to have a very significant impact. I mean, we’ve really used Big Data analytics in a very unique way to help us get in front of these at-risk customers. And so these aren’t just customers who are calling us to tell us that they’re going to disconnect. They’re customers that we look across their history and say, well, they have some of the characteristics that may mean over the next six months, they may be at risk. And so getting in their proactively can make an enormous difference.

And so I’m very confident that we’ve got great data in there. Most importantly, we’re turning them over to a very highly skilled small team that is especially adept at saving these customers and looking at a customer’s history and understanding what it needs to do to take care of any kind of friction in that relationship with that customer. So that’s great. And when you couple that with - that’s one part of the equation.

And when you couple that with the huge improvement we’ve had in things like Net Promoter Score, average speed of answer, first-call resolution, all of those things mean, which I believe are very important in recurring revenue business that we’re giving our customers every reason to stay with us. And we’re also providing comprehensive set of services so they don’t need to look further than Monitronics to enjoy all the benefits of the Internet of Things. So the two of those things coupled together is, I think, we can have a significant impact on attrition over time.

Michael Meyers

And I’ll just add that we’re very young into this. We just started really two months ago. We’re using all our data from when we purchased accounts. We’re using our data from a customer’s experience with us, whether it’d be a service ticket and alarm, a phone call. We’re using all that data. We’re using data related to their HomeTouch account. And as we go forward, we’re using that to predict who should we put to this elite group? What offer should we give them? But we’ll be refining it as we go. And it’s going to take some time for us to shake out the data, get it cleaner, but it has, we think, very solid opportunities to help us improve attrition.

William Fitzgerald

Andrew, let me just add, too, if I may, that if we saw a 20 basis point reduction in core attrition resulting from the predictive churn analytics getting sort of baked into the system, I think we’d all be pretty happy about that. But that’s not to just that it couldn’t have a more meaningful impact. So just to sort of address the question posed in terms of just how to quantify, what to expect in quantifying it, I personally would be thrilled with a 20 basis point jump - drop over time and that’s not to suggest again that it couldn’t be more meaningful than that.

Andrew Boyce

Yes. That’s exactly what I was looking for. I didn’t expect any material impact this quarter. So as you guys said, it just got rolled out there two months ago. And then, I guess, kind of on - I guess, kind of to that, and I know in the past last quarter, you guys have said that you hired a Peter for VP of Products, and what some changes he might be making could help attrition going forward. Can you just talk about some of the changes you guys are making to products, may be to make them more interactive?

Jeffery Gardner

Sure. And you’re referring to Peter Tonti. We’ve hired him as our VP of Products. And he’s doing a couple of things. I mean, just a couple of examples. He quickly enabled us to roll out the Skybell. He’s putting together a product catalog that our existing customers can access to buy products and services, and it really is in reaction to some data that we’re getting from our frontline that was saying, many customers were calling in say, hey, I’m going with another provider because they’re offering cameras or SkyBell’s, and so very important that we have a dialogue with our customers from the day that we find them up.

And so those are the big things. He’s much more focused on the new products, making sure that we’re not a laggard, but a dealer in that regard, rolling them out well so that we can deliver those in an efficient way to our customer service organization. Plus, he’s really spearheaded with his team, customer communication process.

So there’s customers from day one are aware. We’re talking more to our customers over their life cycle, as opposed to leaving them alone and hope they pay their bills through term. Now with all the other kind of inputs out there around the Internet of Things, it’s more important than ever that they know that we have a comprehensive set of products and services as well.

Andrew Boyce

Jeff. I guess, if I can sneak one more in here. Do you guys feel that there’s anywhere you’re missing or you’re still laggard in terms of your product suite or product portfolio?

Jeffery Gardner

I really don’t. I think that when I look across what’s out there, our team is able to deliver all the products and services that customers are focused on today. And we all understand that we’ve got to get the right cadence in running those out and we’ve done a much more effective job of that in the last six months. So I don’t feel like we’re behind.

Andrew Boyce

Great to hear. Thank you very much for the time. I appreciate it.

William Fitzgerald

You are welcome.

Operator

Our next question comes from Todd Morgan with Jefferies.

Todd Morgan

Thanks for the opportunity. I wanted to talk a little bit about the cost structure. If I look at the SG&A year-over-year, it’s up a couple of million dollars. I think you called out that there were some additional investments in customer care. And I’m assuming that LiveWatch’s sort of expense marketing costs are probably driving that a little bit as well. Is there any way you could sort of broadly categorize those areas? I think you also talked about some cost savings activities. Should we be thinking about this sort of a number as a run rate? Or is there some sort of pieces that, that might not be recurring? Thanks.

Michael Meyers

Well, one thing that you should do and we provide this information in MD&A in the press release, and in the queue, is we would suggest you back out LiveWatch’s expense creation costs, because quite frankly, they’re growing, producing more accounts and their creation cost is still in the low 30s. But they are producing more RMR. And that cost is growing.

So that’s really the most significant year-over-year cost increase that’s in SG&A. It’s about half of it. But we had 3% to 4% growth, which represented investments in the call center to help our performance there. We had a little higher benefit costs. And then HomeTouch is really up in the cost of sales area, and that affected that a little bit. But really, the way to look at is it is on a Pre-SAC basis and pull out those expense creation cost from LiveWatch.

Todd Morgan

Okay, that’s helpful. And then just a quick follow-up. You also had some success in the partnerships that you’ve announced here. I don’t know – is there any way you could sort of help us think about what kind of contribution those might have at some future point? I mean – and with the secular, you talked about a pipeline of additional potential opportunities. I mean, how large is this overall strategy for you? Thanks.

Jeffery Gardner

Yes, thanks. Well, we’re just getting started. And I think it’ll have a very major impact. When you’re talking about the size of these program, AARP was with another one of the security providers and we believe that they did a tremendous amount of volume there. I think we have the same opportunity. And we’re very proud of our team. We’re involved at the very top levels of AARP. I think our companies are both very focused on customer service.

And more importantly, I think you’re going to see over time that we’re going to be very innovative in exploring how we can best take advantage of this partnership on both sides, to bring the best product to their customers and to bring the most growth possible to Monitronics and LiveWatch. So I think although they’re small today I mean, we’re going to more than double the number of accounts we generate through marketing this year. And I think with all the good success we had in the last quarter, setting up for an even bigger year in 2017.

Todd Morgan

That’s good to hear then. Thank you.

Operator

Our next question comes from Geoffrey McKinney with Bank of America Merrill Lynch.

Geoffrey McKinney

Hi, thanks guys. I guess one clarification point. The core and overall unit attrition figures this quarter versus last, talking about both of those exclude the 2G cancellations, just to clarify?

William Fitzgerald

Yes, they do. The 2G is a one-time disruption that we’re going through. It makes sense to show our attrition excluding that.

Geoffrey McKinney

And then, I think on the last call, there is whole guidance as it relates to kind of the cadence around unit attrition for the second half of the year moderating? How should we think about that versus – and you had kind of indicated that second quarter would see an uptick sequentially. How should we think about a third and fourth quarter from where we are today?

Michael Meyers

Yes. As I mentioned in the prepared comments, we do expect it to moderate slightly from where we are now. And that’s what we think based on the pool card data we have and what we’re seeing, we expect to happen.

Geoffrey McKinney

In moderating kind of a sequential decline in the 12-month attrition rate or moderate in kind of the uptick?

Michael Meyers

No, no. Relative to a modest decline.

Geoffrey McKinney

Okay. And then you mentioned in your remarks, repurchasing some stock in the quarter. I guess, how do you think about kind of where your bonds are trading and the potential return on repurchasing those at a significant discount to par?

William Fitzgerald

We are well aware of where the bonds are trading and the yields attendant. And at the moment, we have purposely chosen to sort of stand-down really as we give further thought to, yes, it’s the balance sheet requirements of the business when we get to the other side of that. It certainly represents an opportunity for us as a use of holding company cash.

Geoffrey McKinney

Okay. And then any update as it relates to the balance sheet and kind of the road marks ahead?

William Fitzgerald

Well, as Mike mentioned in his prepared comments, it’s certainly something that is on the forefront of our agenda and one that we continue to sort of assess the options and alternatives to us. And it’s sort of alive and real-time effort. And we’ll see what the fall brings.

Geoffrey McKinney

Okay. That’s very helpful. Thank you, guys.

William Fitzgerald

That said, too, we’re pleased with the slight improvement in the financial markets over the course of the past six weeks or so. That’s obviously helped them.

Geoffrey McKinney

Yes. I think collectively everyone. Everyone here is so, it’s certainly a good thing to see. Thank you guys.

William Fitzgerald

Thanks, Geoff.

Operator

Our final question comes from Kevin Ziets with Citi.

Unidentified Analyst

Hi, guys. This is [Ashish] on for Kevin. Thanks for taking my questions. Just wanted to get some more color on LiveWatch. You mentioned the creation costs were below 30s. Could you talk a little bit about the growth at LiveWatch. What sort of things are you doing there to drive the growth there? Is it accelerating sequentially? And also if you could touch on the creation multiple. Is it stable? Is it declining? Is there something you can do to make any drastic changes there?

Jeffery Gardner

Yes. I mean, a couple of things - this is Jeff, on LiveWatch. Yes, their success is really - what we’ve done very well is continuing to learn and how to generate leads effectively and efficiently and close those leads. So like any company in that space - I mean, we’re relying a lot on digital marketing to accomplish that. The team is doing a very good job of really widely investing our money in programs where we can generate leads at costs that allow us to deliver those creation costs in the low 30s.

We’re doing some television, but most of it is digital marketing, driving people to our website. And what they do really well is once we get a lead, I mean, these are very high quality customers and we’ve been extremely skilled sales depth that I think is incredibly good at closing these leads and establishing rapport with the customer.

They’ve done a really nice job with our – we’ve got a great brand image on the web. So when people are looking for a partner, there’s very good references out there for LiveWatch. And probably one of the things that we’re most thrilled about, and I don’t think things are going to get drastically better, but I think that we can continue to improve our ability to kind of test these lead generation options and continue to improve our creation cost modestly. But one of the things that shouldn’t go unnoticed, and probably a bit of a surprise to us, is that the team has done so well in kind of moving up the average revenue per unit.

I had a slide in my deck today that shows that we got very close – we were in the high 30s at the end of this quarter. When we acquired LiveWatch, they were generating accounts at a much lower rate, in some cases under $30. So the fact that we’re driving these lower creation costs with these higher ARPUs is very encouraging and that business is scaling nicely.

Michael Meyers

And I’ll add that their higher RMR and a similar creation multiple turns into a higher return because you get higher margins. So Brad and Kris, guys running that business had done a fantastic job, really honing the way they go to market.

Unidentified Analyst

Got it. That’s very helpful. Just also quickly on the dealer cost side. Now that you guys have more partnerships on the pipeline, lead generation should continue improving. Should we expect sequential improvement and creation costs on the dealer side through the rest of the year and maybe first half next year?

Jeffery Gardner

Yes, I think without getting precise on our guidance there, you’ll continue to see significant improvements on a year-over-year basis in creation costs. It depends a little bit on the mix and in terms of how the actual will fall out. But you’ll continue to see for the rest of the year, creation costs that had greatly improved year-over-year. And then, as I said, will continue to drive more sales at LiveWatch. LiveWatch in 2017 will be a much bigger part of the equation. So all of those things, I think land us to an environment where we’re just focused on creation costs now and going forward. And you’ll continue to see some improvements.

Unidentified Analyst

Great. That’s all my questions. Thank you so much guys.

Jeffery Gardner

Thank you.

End of Q&A

Operator

And that concludes the Q&A session of our call today. And it is now my pleasure to hand our program back over to Bill Fitzgerald for any additional or closing remarks.

William Fitzgerald

Thank you, operator. Just a quick closing comments. Happy that we had a great quarter to report for you guys and as I said, pleased with the direction that things are going. Jeff and the team are making really good progress against the initiatives that we laid out for everyone earlier this year. So congrats to them, and thank you all for being with us and look forward to talking to you in a few more months after our third quarter results. Thank you.

Operator

Thank you, ladies and gentlemen. This does conclude the second quarter Ascent Capital Market call. You may now disconnect your lines, and have a wonderful afternoon.

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