Protection One, Inc. F1Q08 (Qtr End 03/31/08) Earnings Call Transcript

Protection One, Inc. (PONE)

Q1 2008 Earnings Call

May 14, 2008 10:00 am ET

Executives

Richard Ginsburg – President & CEO

Darius Nevin – Executive VP & CFO

Analysts

Jeff Kessler – JTK Consulting

Unidentified Analyst

[Gary Frohman – Steinburg Partners]

Presentation

Operator

Good morning everyone and welcome to Protection One’s conference call to review the company’s first quarter 2008 results. By now you should have received a copy of their earnings press release. If you have not received a copy please call 785-856-9368 to request one. A copy also is available on the Investor Relations section of Protection One’s website at www.protectionone.com.

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

In addition the company’s remarks today that are not historical facts may be forward-looking statements that involve risks and uncertainties. Forward-looking statements may include words or phrases such as we believe, we anticipate, we expect or words of similar meaning. Forward-looking statements also may describe the company’s future plans, objectives, expectations or goals. Such statements may address future events and conditions concerning customer retention, debt levels and debt service capacities. Actual results may differ materially from those projected, implied or anticipated by the company’s forward-looking statements as a result of numerous factors including the company’s significant debt obligations, net losses and competition.

See Protection One’s Annual Report on Form 10-K for the year ended December 31, 2007 which was filed with the SEC on March 17, 2008 for a further discussion of factors affecting our performance. Protection One disclaims any obligation to update any forward-looking statements as a result of developments occurring after the date of this call.

During today’s call the company will provide alternative views of its earnings results that do not conform to generally accepted accounting principals. The company believes that these alternative views will enhance the understanding of its performance. The company has provided schedules that reconcile these non-GAAP views with its reported results on a GAAP basis as part of its earnings press release which again is available at www.protectionone.com.

As a reminder today’s call is being recorded. A replay of this conference call and webcast will be available today at approximately 1:00 pm Eastern Time through the Investor Relations section of the company’s website or by calling 888-203-1112 and the replay pass code is 9034814.

And now I’d like to turn things over to Richard Ginsburg.

Richard Ginsburg

Good morning everyone. We really appreciate your interest in Protection One and your willingness to take the time to join our call this morning. I have a lot of info this morning to talk about so I’m going to do my best to talk slowly so everyone gets it.

As usual I’m going to address some key operating metrics on a consolidated and a segment basis and then I’m going to turn the call over to Darius Nevin, many of you know is our CFO, and Darius will review other financial results of the company.

As I noted in the release this morning we had a really, really busy first quarter. As most of you know we closed $110 million Senior unsecured financing on March 14 during what we all know is a very difficult environment for raising capital. We also had to devote significant resources from our field team to address the cellular industry’s movement to digital technology and thousands and thousands of our customers across the country.

We continued our efforts to welcome IASG’s residential and commercial customers to Protection One by providing the superior service our existing PONE customers have come to expect. Our wholesale employees and IT talent drawn from all parts of the company worked very long hours in the first quarter and continue to do so to ensure that we meet our targeted deadline of upgrading our wholesale monitoring platforms in New Jersey and Southern California by the end of the second quarter. Once that upgrade is completed, we will then be able to cost affectively offer all of our wholesale customers the most advanced services available in the industry from our four centers in Florida, St. Paul, New Jersey and California.

Even with the undertakings that I just noted, we managed to deliver record retail RMR additions in a weakening economy and to make progress on reducing attrition on the acquired IASG base. I’m going to discuss those results more in detail in a moment. At the end of January we took a very important step to position ourselves for growth in the balance of the year when our new marking department launched new initiatives to raise awareness of our brand and to create leads from targeted segments. They’ve also been working to rebrand our operations in the South East so that we have a unified brand across the United States.

Also in the first quarter we were the first of the big three national monitoring providers to introduce wireless and broadband-based monitoring systems that use the power of the internet to deliver interactive services. This service which we call e-Secure, adds relevance and value to our offerings and is available today through all of our branches across the country.

Finally we have continued to build our commercial national account capabilities and we look forward to competing successfully for more business in this area. So let me give you some numbers.

On a consolidated basis we ended the quarter with $26.6 million in RMR, down only slightly from RMR at the end of the year. Most of the decrease related to reductions arising from the movement to digital technology was a cause of this. However this reduction came with minimal impact on operating results as we offer the service essentially at cost to our customers. Also on a consolidated basis we delivered adjusted EBITDA of $26.8 million in the first quarter, up 32% from the $20.2 million adjusted EBITDA we earned in the first quarter of 2007.

As it relates to EBITDA, it’s important to note that we are not immune to economic conditions. Like other companies with extensive fleets of vehicles for example, we are feeling the pinch of higher fuel prices across the country. We are especially focused now on identifying opportunities to operate more efficiently to compensate for revenue loss through attrition and for costs such as these, like fuel, that are running higher than last year.

I would like to turn not to segment performance starting with our retail reporting unit. As I alluded to earlier even with a slowing economy, we got off to what I think is a very, very good start adding about $590,000 of retail RMR in the first quarter, an increase of almost 13% over RMR additions one year ago. Our commercial team delivered more than 47% of total RMR additions in the first quarter, which is up from approximately 40% in 2007.

As I’ve said numerous times, our goal is to achieve at least 50% of our new additions from the commercial sector. At the end of the quarter, 28% of total retail RMR or $5.8 million was commercial, which puts Protection One among the largest holders of commercial RMR in the United States.

Turning to wholesale, the wholesale business turned in a solid quarter of growth adding just over $300,000 of RMR, compared to $800,000 for all of 2007. Also our multifamily segment increased additions, doubling production to $38,000 of RMR in the quarter. It’s also important to note that multifamily currently retains a pretty nice backlog of almost 8,000 systems.

So let met turn to attrition which is a very important metric for the business and I know everyone follows. Our retail reporting unit reported annualized attrition in the first quarter of 13.6%, which is up considerably from the 10.9% of one year ago when the portfolio was just PONE accounts and did not have IASG. The principal reason for the increase is no surprise. We have continued to experience a high level of attrition on the acquired IASG portfolio. We also however saw an attrition on the PONE base increase to 12% in the first quarter because cancels for financial reasons increased.

In our last call, if everyone remembers, I indicated that we expected this level of increase. The good news is that attrition on the residential part of the IASG portfolio does look like it peaked in October and has decreased slowly but steadily each month since that time. It’s still too high in our view but its trending down slowly. It’s also important to remember that we only integrated the residential portfolio at the end of June last year.

We saw high attrition on the IASG commercial base in the first quarter, but we also believe that might have been the peak as well. We integrated that portfolio at the end of September of ’07, thus it looks like the lag from integration to peak attrition is about four to five months on these portfolios.

During our last call, I offered our view that the products and services offered by good companies in the security alarm business are less vulnerable to economic cycles than those of other industries. We continue to believe that this is the case but we continue to watch carefully for signs that the economic slowdown is affecting our commercial prospects. We believe we can continue to hold our own in the residential space with our new marketing programs and innovative new products and service offerings.

So I’m going to turn the call over to Darius Nevin now and he’s going to review some additional financial results and then after his comments, we’ll be more than happy to take any questions that you may have.

Darius Nevin

Thank you Richard and good morning everyone. I will run through our income statement and then move on to the balance sheet. As we have noted in our last three quarterly calls, it is the merger with IASG at the beginning of the second quarter of 2007 that is driving most of the revenue and cost increases that we are reporting today. All the comparisons will be to the first quarter of 2007 unless I note otherwise.

Let’s start with consolidated monitoring and services revenue which increased 33.4% in the first quarter of 2008 to $82.8 million. Because the cost to deliver monitoring services varies by type, it’s important to understand where that growth came from. Wholesale monitoring and service revenue with the lowest gross margin of our three segments, increased almost 300% to $11.5 million from $3 million and accounted for roughly 14% of total monitoring and service revenue. This was up from about 5% a year ago.

Even though our retail monitoring and services revenue increased 24.5%, as a percentage of total monitoring revenue, it declined to about 77% from 82%. In addition commercial RMR, which has lower gross margins than our residential RMR, now comprises 28% of our retail RMR compared to 24% one year earlier.

Given this change in the composition of our first quarter monitoring and service revenue its not surprising that consolidated monitoring costs increased to $28.4 million or 34.3% of monitoring revenue, up from 30.2% one year earlier. Higher fuel prices which added almost $200,000 to costs to operate our fleet of 900 vehicles in the quarter also contributed to this increase.

While our total revenue increased 33% in the first quarter, our G&A costs increased only 20% to $19.3 million. As a result, G&A costs improved to 21% of revenue from 23.4% one year ago; a key benefit of the merger. We suggest you track the net of the items I just discussed which were monitoring and service revenue, monitoring and service direct costs and G&A as a very rough proxy for cash available to invest in maintenance CapEx, creating and acquiring RMR and servicing debt.

In the quarter, we invested $1.3 million in maintenance CapEx and during the last 12 months we have invested about $12 million. This level of spending was higher than the roughly $9 million we think we need under more normal circumstances because of the investments we’ve been making in our wholesale segment.

Turning our attention to RMR creation activities, we added a total of 940,000 RMR on a consolidated basis in the first quarter compared to 600,000 in 2007. As Richard mentioned our retail segment created and acquired approximately 590,000 RMR, up from 523,000 one year earlier. In creating and acquiring that RMR in the first quarter, we incurred either through net expenses or by deferring a consolidated total of $18.7 million net cost, compared to $15 million in 2007. Retail accounted for $16.7 million of those net costs, compared to $13.7 million in 2007.

Please note the amounts for the first quarter of 2008 exclude roughly $1.8 million of costs related to our conversion project arising from the cell industry’s movement to digital. Continuing our way down the income statement consolidated operating income for the quarter decreased to $2.2 million from $4.4 million in 2007, largely because we incurred $7.5 million more amortization of intangibles and depreciation expense coming principally from the merger with IASG.

Richard noted earlier that we delivered adjusted EBITDA of $26.8 million. While this represented an increase of roughly 32% from last year’s $20.2 million, adjusted EBITDA in the first quarter declined sequentially from the fourth quarter of 2007 because of the decrease in monitoring and service revenue, higher cost to service our retail accounts and more creation costs expensed currently.

Interest expense for the first quarter of 2008 was $12.6 million compared to $9.9 million one year earlier. This increase comes mainly from interest on the 12% Senior Secured Notes that we assumed with the IASG merger. We also incurred net non-cash amortization of debt costs, discounts and premiums of approximately $1.5 million in the first quarter of 2008 compared to $1.8 million one year earlier.

In connection with the retirement of the Senior Subordinated Notes, we incurred a loss of $12.8 million comprised of a non-cash write-off of a $7 million unamortized discount and $5.8 million in make-whole payments and termination fees. Cash interest expense in the first quarter was $11 million. By entering into swaps, we recently fixed the interest cost on $150 million of our senior secured term loan and 5.44% and in another $100 million tranch at 5.4%; both for 2.5 years.

As we noted in our release, $365.3 million or approximately 70% of the company’s debt now carries a fixed interest rate. At current LIBOR and prime rates, the company’s annualized cash interest expense is approximately $48 million.

Finally at the end of March, we had approximately $525.1 million face amount of debt and capital leases outstanding and this compares to about $526 million calculated the same way at the end of December. Our cash position at the end of March was $33.5 million, compared to $41 million at the end of December. The decrease was due primarily to the cash payments that we made in connection with the redemption of the Senior Subordinated Notes.

Back to you Richard.

Richard Ginsburg

Okay at this time if anyone has any questions about the quarter, we will be more than happy to answer them.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from the line of Jeff Kessler - JTK Consulting

Jeff Kessler - JTK Consulting

I want to ask about how you were able to increase your RMR during this period where given the sluggishness we’re seeing with other companies, both public and private, with RMR creation as basically netting out foreclosures; it’s been tough for a number of companies. You seem while your RMR overall sequentially was a little bit lower, your net creations seem to be a little bit higher than what we have seen with other companies on a percentage basis.

Richard Ginsburg

First of all sequentially it’s a little lower because we did for the [AMPs] customers that choose not to upgrade, we lowered their RMR so part of the decrease is going to be in that and as I said in my comments that was kind of a pass-through charge. But as it relates to how we’ve been able to increase RMR in this tough environment I think two things. Number one is we started our marketing programs a little bit in the first quarter, not the whole quarter, but a little bit of that, but second is I truly believe that we have a pretty seasoned sales staff, sales management staff, and Vice President staff them, that have kind of been through some ups and downs in the economy and their careers and it really is just a very aggressive feed on the street, going after the right customers, selling the right product at a good price point. I think being disciplined we never were in that new construction business at all and that has helped us tremendously. And I think the focus on commercial, although we do hear a lot of concerns about is the commercial market going to grow, we still are seeing some nice increases in things like CCTV and access control. We’re starting to do a lot more fire across the country but I would really just put it at the sales force and sales management is just a seasoned team that is operating on pretty much almost eight cylinders.

Darius Nevin

I would just echo that our commercial group in particular, we have a higher headcount in that group and we typically brought over, as Richard mentioned, seasoned folks who want to work for Protection One, so we have a larger commercial sales force, very experienced and we’ve had I think consistently for the last four or five quarters pretty good growth in the commercial business and then we’re optimistic for the rest of the year in terms of growth, in terms of growth of additions, because we expect to see some benefits from the marketing activities which really only got started to a very limited extent in the first quarter.

Richard Ginsburg

And also our national accounts business, I think security directors are starting to realize that there is a choice in national accounts besides the large incumbent out there and when you look at the kind of landscape of the US and what companies can actually provide national account services that have their own branches and their own service techs, and don’t subcontract out, it’s a very, very select group and we’re starting to make a lot of inroads in that group.

Jeff Kessler - JTK Consulting

How much cost of the AMPs changed over is not going to recur, how much did you put in, and how much did you invest in the change-over to digital and how much is, in other words how much are you going to save obviously going forward?

Darius Nevin

It was pretty much, in terms of operating costs, what we’ve lost in RMR, we will be losing or not incurring as an operating expense on a go-forward basis, so our expectation is that the impact of losing I think its roughly $100,000 of RMR due to the AMPs reductions will not have a material effect on our operating income. We did incur as we noted about $1.8 million of costs that we capitalized, we were able to defer because we were able to get additional contracts from these customers. We had other costs, I can’t say that I can fully put my finger on all of those that ended up being expensed and flowing through the income statement, so we do expect to see a little bit of an improvement in the second quarter because this was a disruptive event. Those of you who have listened to Tyco’s calls for instance, anybody of any size who was committed to this product and service in the past found their operations disrupted because of this Sunset Clause.

Richard Ginsburg

I don’t know if people are that familiar with just how disruptive this was. We changed out over 20,000 of these customers in a very, very short period of time and I think its just really hard to kind of pinpoint exactly what it cost us because for the most part, our branch operations were turned upside down while they were trying to grow the business at the same time. So I think we’ll see in the second quarter now that this has simmered down.

Operator

Your next question comes from the line of Unidentified Analyst

Unidentified Analyst

Just wanted to get more color regarding the new RMR additions, is that primarily through market share gains? Were you taking away customers of other competitors?

Darius Nevin

I think on the commercial side, we are typically dealing with customers that have some kind of security. Now whether they have a burglar alarm system that they are expanding and adding card access and video, that can vary on a customer-by-customer basis. But certainly I think the commercial market is well over, I think its 70% or 80% of those customers have some kind of security system. We’re coming in using new technology and typically enhancing what they have.

Richard Ginsburg

Definitely on the national account side we’re taking share because all of our national account additions are coming from customers that already have service and are unhappy.

Darius Nevin

Resi it’s a mixture. I think you can look at varying reports and the penetration on the residential side is anywhere from 25% to 35%. So we are getting a mixture of people who don’t have any security device or any system. I think that’s roughly in the 40% to 50% range and then in others we’re doing competitive take-over’s and we’re also doing re-signs of homes that have systems of ours already.

Unidentified Analyst

How are you priced compared to your competitors?

Darius Nevin

I think we operate a little bit under where the largest company in the industry operates and I think we’re fairly competitive with the next largest one in terms of our prices. We do monitor that and we try to offer an attractive bundle. I think the direction we’re heading in is, as Richard mentioned, with e-Secure is less to compete on price and more on innovative service bundles that others have not rolled out.

Richard Ginsburg

We’re very focused on RPU and we are not gaining share in the commercial market by just dropping prices significantly to “buy the business” because we have a clear understanding of the ability to make a profit and so we’re not pricing it so low that it’s going to be harmful in later quarters.

Unidentified Analyst

Looking back at the previous recession, what were the attrition levels back then? I’m just curious as to what the people --

Richard Ginsburg

We were just here and that was when Protection One was, we had branches with 30%, 35% attrition not because of the recession. So I think it’s very hard to pinpoint on a steady state basis what attrition looked like at that point. I can tell you that we’re looking at our competitors and they’re all pretty much saying the same thing that they expect maybe 1%, 2% bump and that’s kind of similar to what we’re experiencing but if we go back to Protection One during the last recession, I just don’t think that would be an accurate number to give you. The company was somewhat upside down.

Darius Nevin

I would totally agree with that. I think what you’ll see with PONE, you’ve got a mixture, you’ve got the IASG portfolio that we purchased that has a higher level of attrition but coming down and then you have the PONE portfolio and if you want to call it legacy, but its not really legacy because we keep adding to it, and that had a slight bump up so you’ve got two things working there that hopefully will moderate, you’ll see attrition coming down on IASG portfolio and our sense is that the PONE portfolio has seen its increase other than the normal seasonal-type things, there is a higher level of attrition typically in the summer quarter than there is in the others. So we’re cautiously optimistic that we’ll see some stability in our attrition rate on a go-forward basis.

Unidentified Analyst

Do you happen to know where the industry was with [inaudible] recession then in terms of attrition levels?

Darius Nevin

I don’t but I have, I can go back and try to see what I can find. We participate in some of these attrition studies that are done by some of these companies and I have access to some of that data and I’d be happy to look it up and shoot it to you.

Operator

Your next question comes from the line of Jeff Kessler - JTK Consulting

Jeff Kessler - JTK Consulting

The South East rebranding, what is going on with that? How far into it are you at this point?

Darius Nevin

We should hopefully be, we’re starting to rebrand in the state slowly and I think by the end of June our goal is to be rebranded under the PONE name and move forward. We had to get relicensed in many of these states or transfer the license from one name to the other but we’re pretty much right on schedule.

Jeff Kessler - JTK Consulting

I was struck by the fact that you actually increased your wholesale monitoring business in a business that generally has been very competitive of late, probably due to the economy, I’m just wondering if you could describe where you’re getting your wins.

Richard Ginsburg

On wholesale and clearly [TMS] is the largest wholesale provider in the country and I think we’ve demonstrated, the TMS management team has really demonstrated that they’re one of the few companies that are able to put on thousands and thousands of accounts a month, for specific customers. Some of our customers are seasonal and they’ll put on a lot of customers in a very short period of time number one. Number two is if you look at TMS compared to its competitors, most of their competitors they’re all private companies, they’re very small and keeping up with making the investments that you need to make in wholesale is a daunting task.

I think we’re doing a pretty good job of letting people know, look we have four centers, they’re all going to be tied together sometime in July or August, and if you look at us compared to the other ones out there, its really just night and day. And then the other thing is that we’re really trying to help these wholesale dealers succeed. If Protection One could be of assistance to them in helping them whether it’s lending them money or helping with their equipment purchasing, we’re right there to help them. So I think the wholesale business is just doing a good job of educating the industry that they’re the best at what they do.

Jeff Kessler - JTK Consulting

You had a number of tough years in the multifamily business and now just as it seems as if you’ve gotten multifamily all back, you lose a large account. Was that, were you surprised by the loss of that account or was it something that was in the works and something that we should just take as part of you’re getting the multifamily business to where it has been?

Darius Nevin

I wouldn’t put it in the category of surprise, it was a property where the ownership changed and the new owner could not be persuaded, we could not persuade that new owner to continue service or even to upgrade the systems. One of the things that’s been a challenge in the industry is the accelerating rate of turnover of properties and it’s a relatively difficult sell cycle, long sell cycle and we get an owner persuaded to make a commitment and they see the value in it, but then three or four or five years into a 10-year contract, they sell the property and the new owner doesn’t necessarily always subscribe to that same set of beliefs and that was the case here and we did what we could but weren’t able to convince that owner.

Jeff Kessler - JTK Consulting

Ex out that one owner, what was the state of your multifamily business in the quarter?

Darius Nevin

I think there was around $106,000 of cancelled, I think that was around almost half of it so it was a significant bite of it, not quite half I think, so it was, it made a significant impact on our attrition for the quarter. I think its worth mentioning though, we do have a part of the portfolio that is month-to-month, most of it is on 10-year contracts is on long-term contracts, but when they reach the end of the term, some of them roll into month-to-month. So we have to work hard with those owners. We have to earn their business every month and in general I think we do a very, very good job of it and we also work very hard to persuade them to upgrade their systems and to sign long-term agreements. But at any moment in time, there is a part of the portfolio that is on month-to-month contracts.

Richard Ginsburg

I think the multifamily, they’re doing everything right, and they’re working incredibly hard. Fortunately sometimes they take a step forward here and they get kind of pulled back with a large cancellation which is really out of the control of the company. But as I said before there’s 8,000 units sold in backlog. There RMR additions were twice what they were in the year prior. I think they’re doing all the right things but unfortunately in this business as you know, you can get hit with a cancellation out of the blue and sometimes it happens.

Jeff Kessler - JTK Consulting

Given what you think is going to be a let’s just say diminishing attrition rate later on this year, you say you’ve seen perhaps the peak of the legacy PONE cancels rates as well as the continuing diminution of IASG, can you get up to $27 million of monthly recurring revenue by the end of the year?

Darius Nevin

Just let me clarify one thing, I don’t think we said that we would see diminishing attrition, I think we said that the, we would expect to see stability in our attrition because normally there is a seasonal increase in the second half of the year. I would say its, just to your question and normally we don’t give guidance but that’s not, I think to the extent we’ve given guidance, we’ve indicated that this year was one of steady state of trying to maintain what we have, fully digest IASG, get our marketing programs launched, improve our targeting and so forth. So I don’t know that we’re prepared to say that we’ll be at $27 million by the end of the year.

Jeff Kessler - JTK Consulting

You gave a shorthand for your steady state cash flow during the presentation, could you just give it once more.

Darius Nevin

That wasn’t necessarily a steady state, what I said was if you look, you can get kind of a sense of what was the contribution for the quarter from our monitoring and service business was and if you take a look at our monitoring and service revenue, our costs and our G&A, those items we suggest you look at that and then offset that with what we invested to create recurring revenue in the quarter. So that’s what I said earlier and the number is roughly somewhere in the $36 million, $37 million of contribution from our monitoring and service business from the quarter. Again that’s a very rough proxy, you have to do a little bit more work but it’s just some guidance.

Operator

Your next question comes from the line of [Gary Frohman – Steinburg Partners]

[Gary Frohman – Steinburg Partners]

I want to focus on the commercial side of the business, it said in the press release you grew commercial RMR 18% excluding the impact of the merger, that’s a significant growth isn’t it?

Darius Nevin

Yes. We’ve been logging what we consider to be very impressive increases in additional, let’s be clear what we’re saying here, we’re saying additions growth. We’ve had a long run in our commercial business, I can’t say that it’s been recognized, but we’ve had a pretty good run.

[Gary Frohman – Steinburg Partners]

You’re up to 28% or so commercial as a percentage of total retail, I think you’ve talked about this before, but did you have a long range target percentage mix wise as far as that goes?

Darius Nevin

I think that what we set as a goal was first to get over, just when you look at additions, get that over 50%. We still have $15 million of residential or close to $15 million of residential RMR so it’s going to take awhile for commercial to ever catch up to resi unless we were to do an acquisition of some type. So I think the goal is get the commercial adds up to or over 50% and then over time that ratio will take care of itself.

[Gary Frohman – Steinburg Partners]

What about creation costs strictly for commercial, can you give us a feel for that?

Darius Nevin

I think we’ve indicated in the past they’re in the 20x to 24x range. But then on the other hand resi is in the upper end of the range, somewhere in the 28x to 30x range.

[Gary Frohman – Steinburg Partners]

Well given the market at least on a private basis is valuing commercial versus retail, it would seem you really would want to focus greatly on adding commercial as opposed to retail.

Richard Ginsburg

Clearly the private market has put much higher valuations on commercial so you take $5.8 million of commercial RMR and if you just kind of put a conservative private valuation on it of like 40x, 42x, you’re way over $200 million in value. I think what Darius alluded to is and we’re trying our best to do a good job of letting people know that PONE, our commercial business alone is pretty significant and we have to let people understand that almost $6 million of recurring revenue in the commercial side is something that is very hard to come by in the industry and we don’t think they’re getting the valuation for that.

[Gary Frohman – Steinburg Partners]

What are you doing to communicate that?

Richard Ginsburg

Well I’m personally out on the street trying to get people to understand the company and we’re going to turn up a little bit of our investor relations in the latter part of the year and we’ll just try to educate the market that we are not just a residential company.

[Gary Frohman – Steinburg Partners]

You’ve talked a great deal about attrition, you’ve had some questions on it as well, so based on your last question and discussion on it, you would expect attrition to stay pretty much where it is, by the end of the year you expect it to be pretty much where it is now and that includes some seasonality factors and some economic weakness. So did I understand that correctly?

Darius Nevin

I think what we’re saying is for the next couple of quarters we wouldn’t anticipate significant change, the December quarter and then the first quarter of the following year we would hope to see an improvement because we would have had the IASG portfolios under our control and our service for a longer period of time and as we indicated we think we see a pretty steady decrease in attrition in the IASG resi portfolio. Its not a steep slope, let me be clear on that, but there is a slope to that line. And then the commercial business we think we’ve been through the worst of that so we would expect some modest improvement there as well.

Richard Ginsburg

The IASG base has been challenging, clearly I feel if we hadn’t taken the base over that base would be I think trending at probably 30% right now. We are really working way overtime to try; I think we’ve got it stabilized. To put some comparison, it took us, back in 2001 it took us two years to stabilize PONE’s attrition base and really we’ve had the IASG resi base for maybe seven or eight months, integrated in the commercial base for maybe four or five months, so we’re ahead of schedule if you compare us to historical PONE. But that base just had a lot of worth on it and we’re reinvesting in those customers, we’re reaching out to them, we’re doing all the right things, but crossing our fingers that it’s peaked and now we’ve got to continue to get it down.

[Gary Frohman – Steinburg Partners]

Turning to multifamily you say that you’ve had a backlog of nearly 8,000 units, how does that compare to where the backlog was a year ago or a quarter ago?

Darius Nevin

It’s pretty steady with respect to a quarter ago, but it’s been steadily building. One of the turnarounds in the business is that we have some visibility into additions and then there’s also a nice pipeline of sales opportunities that are near the point of a customer making a purchase decision as opposed to simply sort of speculating about what somebody might or might not do. So there’s been a lot of progress but again as I was trying to make the point earlier, there was a lot of activity in that business 10 years ago. There are contracts that have come due. We happen to be in a period of a high number of contracts coming to term. We’ve already worked through that bulge but we still have a few more quarters where that’s going to kind of work itself through and then we should be in much better shape in terms of that facing these contracts coming to term.

[Gary Frohman – Steinburg Partners]

The 8,000 units, what’s the average period of time it takes for those to become revenue generating units?

Darius Nevin

Most of those we should see some time this year although there are some that will go into, I want to say 20% or 25% that will end up being activated in 2009. What will happen in all likelihood is they’ll be installed and what happens is that we will give periods of free monitoring and so the billing doesn’t start but almost all of those will actually be installed this year and then we’ll start to recognize revenue later.

Operator

That will conclude today’s question and answer session. On behalf of Protection One I’d like to thank everybody for your participation.

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