Ascent Capital's (ASCMA) CEO Bill Fitzgerald on Q3 2017 Results - Earnings Call Transcript

Ascent Capital Group Inc. (ASCMA) Q3 2017 Earnings Conference Call November 2, 2017 5:00 PM ET

Executives

Bill Fitzgerald – Chief Executive Officer

Fred Graffam – Chief Financial Officer

Jeff Gardner – Chief Executive Officer-MONI Smart Security

Analysts

Jeff Kessler – Imperial Capital

Shlomo Rosenbaum – Stifel

Ashish Nair – Citi

Todd Morgan – Jefferies

Operator

Good day and welcome to Ascent Capital Group's Conference Call to discuss the Company's Third Quarter 2017 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 this 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 strategies, including the launch of MONI's direct sales and installation channel, market potential and expansion, the success of new products and services, consumer demand for interactive and home automation services, account creation and related costs, diversification of distribution channels, generation of new sales and marketing leads, the anticipated benefits of the partnership with Nest, subscriber attrition, anticipated account generation, 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 by such statements, including, without limitation, possible changes in market acceptance of the Company services, technological innovations in the alarm monitoring industry, competitive issues, continued access to capital on terms acceptable to Ascent, our ability to capitalize on acquisition opportunities, 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 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. Please refer to the publicly filed documents of Ascent, including the most recent Forms 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 pre-tax 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.

Bill Fitzgerald

Thank you operator. Good afternoon, everyone and welcome to our third quarter 2017 earnings call. Joining me on the call today is Jeff Gardner, our CEO of MONI Smart Security; as well as our new CFO, Fred Graffam; and Ascent's General Counsel, Bill Miles. I'm particularly happy to welcome Fred and to be able to introduce him to you as he joins us for first earnings call with the team.

During the call, I will provide a few comments on the business and then turn it over to Jeff to discuss MONI’s operating performance in more detail. Following that, Fred will give you a detailed look at the third quarter and year-to-date financials. We will leave time for your questions at the end.

The MONI team continued to make meaningful progress in the third quarter, further developing and diversifying its distribution channels, expanding key partner relationships an improving certain of the core performance metrics of the business. Most notably, MONI’s recently announced partnership with Nest, serves as an exciting opportunity allowing MONI to broaden its reach and capture a greater share of the growing smart home market.

Operationally, I believe Jeff and the team are focused on right initiatives to stabilize our deal account, reduce operating expenses and improve our go market strategies. While these efforts will take time to bear fruit I’m encouraged by our progress to date and the opportunities that lie ahead of our business.

Finally, I’d again like welcome Fred to the group. I'm sure many of you will have a chance to meet him in the coming months when we're on the road. And I hope you'll join you in welcoming him to our team.

With that let me turn things over to Jeff and let him provide further insights for you on MONI.

Fred Graffam

Thank you Bill. And good afternoon everyone. It was another busy quarter for the MONI team. On this call we will cover off on four main themes. First, we will provide an update on our dealer channel. At a high level, we continue to experience some softness there, but have a solid plan to improve volume and overall economics. Second, we will talk about our direct-to-consumer channels at MONI and LiveWatch, where we are making good progress year-over-year, as it continues to be competent in more important part of our growth story. Third, I want to talk about the efforts we have taken to reduce costs and drive greater efficiencies across the business. Fourth, we will discuss our exciting new partnership with Nest, that we see as transformative to our business.

Before I get into the details, let me briefly touch our financial results. In the third quarter MONI delivered net revenue of $138.2 million reporting a net loss of $25.5 million and Pre-SAC Adjusted EBITDA of $87.1 million.

Year-to-date, MONI reported net revenue of $419.9 million, a net loss of $96.7 million and Pre-SAC Adjusted EBITDA of $265.9 million. During the quarter and year-to-date, we added 21,268 and 77,423 customers respectively.

Our performance in the quarter and year-to-date continues to be impacted by softness in our viewer channel. This discontinuation of our relationship with our largest dealer, as well as slower growth from certain other viewers has created a headwind to the business. That we are working hard to address.

As I previously discussed, we are partnering with our dealers to help them augment traditional go-to-market strategies, like door-to-door sales with more sophisticated methods like online sales and marketing. We're doing it through investments in sales training, recruitment support and lead generation. Slide 4 highlights some of these initiatives in greater detail.

Our Elevate program, which is designed to help dealers learn how to more effectively recruit and train professional sales teams is driving solid results. Eight of our larger dealers have participated in the program and have collectively realized an 80% increase in production as a result of this participation. Due to its success we are expanding this program, so we can impact more dealers.

We do have a number of other dealers that are showing year-over-year growth. And we feel remaining dealers are stable and are working with our team to increase volume. We're also actively cultivating a healthy and growing pipeline of potential new dealers. That is the strongest we have seen in the last 24 months. The dealer channel will continue to be a core part of MONI and we are committed to the continued success of our partners.

Creation cost in our dealer channel continue to decline, as a result of our efforts. In the third quarter, our creation multiple in this channel was 34.9, down sequentially from 35.4 in the second quarter and well below the third quarter of last year of 35.9. In addition to our core dealers, our future business is dependent on growing that back to consumer channel.

To that end we recently reorganize our marketing and sales teams to consolidate both MONI Direct and LiveWatch to create a single sales engine under one executive leader. This structure better streamlines all marketing and sales directives to achieve greater sales productivity, while realizing meaningful cost efficiencies. At LiveWatch, we continue to see solid performance. Unit creation remains strong and average RMR held steady at approximately $40 dollars per month. We believe LiveWatch is compelling and unique DIY offering, positions squarely between our professional install and Nest products.

Not only does LiveWatch offer lower out front costs for the consumer, but all have a more comprehensive portfolio of add-ons such as water leak detection, fire and smoke detection and a full suite of home automation options for consumers looking for a more expansive home monitoring system.

Late in the third quarter we increased investments in our direct channel to help drive seasonal Q4 growth. These efforts result in a sequential increase in total MONI creation cost to 36.6, as illustrated on Slide 5.

Going forward, we will continue to make investments in our direct channels, while looking for areas to achieve efficiencies. However, in the long-term we believe we can create customers more efficiently in our direct channel.

I would now like to turn to other measures we are taking to expand our direct channel. In late September, we announced a multi-year agreement with Nest and are the only provider of professional monitoring in the U.S. for the recently announced Nest Secure home security system. In partnering with Nest MONI has a unique opportunity to expand its addressable market beyond traditional home owners and drive greater penetration into the $80 billion dollar and growing connected home market. See Slide 6, for more detail.

MONI will also benefit from Nest national marketing progress helping to further elevate our brand recognition. Other than partnership MONI is the only national security company offering the Nest secure product suite to consumers.

If you turn to Slide 7, you will see that the system is comprised of three specific products, designed to work together including Nest Guard, the brain for the system, an all-in-one security base provides the alarm, keypad and motion sensor. Nest Detect a sensor that detects of motion and open or close movement in one compact battery powered, product. And Nest Tag, a convenient fob that can attach to a keychain, allowing you to easily arm and disarm Net Secure without pass code.

This innovative Do-It-Yourself (DIY) system only takes 20 minutes for consumers to install. The Nest Secure product suite is available for purchase as of November 1 in MONI for professional monitoring operating is scheduled to launch in early December. The Nest Secure system starter kit will be sold for $499 and will be offered through nest.com, retail outlets such as Best Buy and Lowes and through moni.com, mymoni.com. We will also offer Nest equipment through the LiveWatch and moni direct channels and provide dealers with the option to sell Nest equipment.

Nest Secure customer that purchase the product through nest.com or retial outlet will automatically be referred to MONI for professional monitoring, and will be able to activate service in the Nest app without ever talking to a representative and without a visit to a customer's home. MONI will offer customers multiple pricing options for professional monitoring, ranging from 34, 99, for no contract, month-to-month service, to 24, 99 for customers signing a three-year monitoring contract. All arm are generated by these customers will go to MONI once they activate their monitoring service.

We believe that creation cost for Nest customers will be significantly lower than poor MONI traditional security business. And therefore we anticipate solid returns in shorter path to breakeven cash flow. We expect to scale our direct channel, as well as our sales for Nest Secure over 2018 as we integrate Nest into all of our distribution channels. As we transition to a more diversified channel strategy we are also making changes to improve our efficiency, and cost structure. As highlighted on slides 9 and 10. As part of this effort we reduce our headcount principally in Dallas by roughly 9% this quarter which resulted in approximately $7 million of annualized cost savings. Going forward, we will continue to look for additional areas to optimize our cost structure as the business continues to evolve.

Finally, let me touch on attrition. If you turn a Slide 11, in the third quarter, core unit attrition improved sequentially to 14.0% as the subscriber base continues to mature and we begin to see the impact of our contract extension efforts. We will continue to leverage our projected churn analytics to help identify our most at risk customers. As discussed on our Q2 call, we have also refined our process to reduce concessions made to high risk customers. And believe we are now executing at a sustainable level. We remain on track to exit the year with the highest percentage of customers under an extended contract in the last three years.

RMR attrition was relatively flat sequentially at 13.5%. While we pursued a number of price increase strategies in the quarter, we were less aggressive than in the same quarter of 2016, putting modest pressure on sequential attrition. However, we expect to do more price increases in the fourth quarter, as compared to prior year. Overall, I am pleased with our hard work in the third quarter and I am excited about the opportunities ahead. While we still have more work to do and it will take time for our newer projects like Nest to meaningfully impact our results, I’m confident that we have the right initiatives in place to drive long-term growth and the overall shareholder value.

With that I will turn things over to Fred to discuss our financials in more detail. Fred?

Fred Graffam

Thanks Jeff. Before I begin, I want to briefly say that I am pleased to have joined the Ascent and MONI team. I believe there are great potential in this business and I’m eager to take part in its ongoing transformation. I also welcome the opportunity to meet with and get to know many of you in person when we are out on the road over the upcoming months.

With that let me review our top line performance. In the third quarter and nine months Ascent’s net revenue decrease 3.2% to $1.382 million and decrease 2.3% to $419.9 million due to lower account growth at MONI, as compared to the prior year periods. The decrease was partially offset by an increase in average RMR per subscriber to $43.79 as of September 30 from $42.84 in the prior year period, primarily due to certain price increases enacted during the past 12 months. Ascent reported a net loss of $29.2 million in the quarter and $91.5 million for the nine months.

Let me now turn to costs. During the three and nine months next expense creation cost totalled $10.2 two million and $26.1 million, versus $6 million and $16.6 million in the prior year periods respectively. MONI’s direct sales channel, which expenses nearly all of its creation cost similar to LiveWatch due of our total operating expenses higher and reduced it up adjusted EBITDA margins. Ascent’s pre-stack adjusted EBITDA, which adds back the expense portion of creation costs decreased 5.5% and 5.2% in the three-month and nine-month periods respectively.

MONI’s pre-tax adjusted EBITDA decreased 6.1% and 4.7% in the three and nine month periods, respectively. On a pre-tax basis which removes MONI’s and LiveWatch’s expense creation costs, MONI’s pre-tax EBITDA margins in the three and nine-month periods were 63.5%, and 63.9%, compared to 65.6% and 65.5% in the prior year periods respectively. I should reiterate that lower pre-tax margins are partially driven by the fact that LiveWatch is a much younger business and therefore has lower margins than MONI. As LiveWatch grows, and matures we expect margins to expand approaching MONI levels.

During the third quarter and nine months LiveWatch drove 120 basis point and 90 basis point reduction in pre-tax margins respectively. Increases in retention related field service, the number of interactive and home automation customers and investments in our service areas to improve the customer experience also contributed to margin pressures.

Turning to our liquidity position, at September 30, on a consolidated basis, Ascent had $135.4 million of cash, cash equivalents and marketable securities, of which $27 million was used to make the October 2 high yield interest payment. At quarter end under our revolver we had an outstanding balance of $80.4 million and available borrowings of $214.6.

I should also note that during the quarter MONI paid $5 million of the $28 million legal settlement we previously disclosed in Q2. We expect to pay down the remaining $23 million in Q1 of 2018 pending final court approval of the settlement. In connection with this we are now engaged in litigation with our insurance carriers to recover $28 million.

With that let me call that let me turn the call back to the operator for questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line Jeff Kessler with Imperial Capital.

Jeff Kessler

Jefff could you talk a little bit about, if there is a trailing effect? If you go back if you were to take core attrition verses RMR and unit attrition going back several years, before further than your chart has, is there a lag – is there some type of lag effect with regard to is it six months, nine months that core unit attrition drives both RMR and unit attrition?

Jeff Gardner

You know the words what type of lag can we see, because we were looking for a flattening of core unit attrition around this quarter for the year. We've gotten that flattening, now we need to see the others are beginning to look like the other items of attrition looks like to be in the flat out as well. But I want to see those things actually happen. And knowing that lag effect would help.

Bill Fitzgerald

Yes. Well Jeff there's no lag effect per se it's really driven by two things, what we're doing with the existing customers in terms of price decreases and we've been doing some of that as you know to extend contracts in some cases, but we’ve really managed that much more tightly. And so we made big improvement this quarter versus last quarter. If you recall, I discussed a lot on last quarter's Q [ph] call that we made some corrections. I'm happy to say that that really we're managing that much better.

The second thing is price increases. And so we've always had a price increase strategy of course. In this particular quarter when you compared it to a year ago, we had more price increases a year ago. But as I said on the call in the fourth quarter we'll see more price increases going forward, as compared to a year ago. So I mean overall the key here is to be consistent with your price increase strategy and to really manage what you're doing with the existing customers in terms of giving credits. And so the team has done a really nice job there, we've really worked closely with our frontline team to provide some more structure and discipline around that. And it's really coming to paying dividends for us.

And I think overall it's a minor improvement in core unit attrition, which obviously has an impact into RMR ultimately. So we're very pleased to see a decrease the first since 2015 in our business. And we're doing the right thing. So we're having a lot of success with our at risk model going forward. And some of the fundamentals that we've been talking about for the last year, six months to a year, around having more customers under contract and fewer customers coming to term are going to play out for us. So to me we still can help ourselves by growing faster on the attrition side, but fundamentally we're doing absolutely the right things to manage RMR attrition.

Jeff Kessler

Okay. The second thing is you talked about several payment methods you had for Nest for Nest users. For the company as a whole you've been talking about the possibility of being more flexible in terms of how much the company – how much the end user pays upfront relative to whether or not that can be financed by an outside or even inside? Could you talk a little bit about what types of things you're looking at there?

Jeff Gardner

Sure, and just to be clear we're really excited about the Nest product and we did announced two plans a 34 99 [ph] plan for customers who are going month to month with no contract. And then secondly we talked about a 24 99 [ph] plan for 36 customers funding a 36-month contract. So I think that's going to be really attractive in the marketplace. This Nest product is very attractive in the marketplace. This Nest product is very differentiated and already we can see there's a lot of buzz in the marketplace on that.

So really exciting to see. And as I mentioned in our call, they launched in their channels yesterday. So it's a pretty exciting time for everyone with that regard. In terms of our – we still believe financing will be a good alternative for us, we've been working on that.

I'm going to turn it over to Fred to give you an update. He’ll spend some time on that. His first quarter at MONI, and I'd like him to give a quick update.

Fred Graffam

I just say that we are actively working with our vendors to potential vendors to look at the financing options. We are just making sure that the economics make sense and that the monthly revenue that we would request makes in light of the financing that they would also have to pay. So we're going to be beta testing in very short order, some ideas that we have and make sure that there's good acceptance by the customer’s side.

We have to have a lot more to talk about with that probably in the next quarter.

Jeff Gardner

It’s pretty exciting when you think about the NASH product jobs and the opportunity with the financing option, because it is a different upfront, it's a premium product. But I’ll just give it some more opportunity to launch that product in a big way. So we're excited about it. And Jeff if I could just real quick on your question, I don't know if I got to it, I think, I did a nice job explaining the fundamentals of what's going on with our RMR attrition. You may have been referring to the fact that the attrition, RMR attrition is a 12-month backward looking. It’s the last 12 months.

And so…

Jeff Kessler

That’s why I asked about the lag. Yes.

Jeff Gardner

I get it. So yeah all the progress, we're making tons of progress so you've got to look at it over that last 12, you don't see the complete impact of what you do in the current quarter, reflected in your last 12 months. But the trends are very good which I think sets us up well going forward.

Jeff Kessler

Okay. One more question and then I'll get off in the queue. You mentioned that you are beginning to become more aggressive with other apps, in getting perhaps pushing up your ARPU little bit, water, fire home – to make other home automation options. Are you – those options that have been out there if you are working your provider at lunch long time. My assumption is the you are now getting more aggressive in marketing these other options, which you had at your –had in hand but probably were not totally focused on those, on airing those other extra options to the to the plan. Is this something that has just started this quarter?

Fred Graffam

No I wouldn't say it started this quarter, but we have much more of a focus on it at MONI going forward. And we really do believe that the more engaged our customers are, the better our relationship, the better their attrition. Of course the ARPU will be better. As of in this quarter our percentage interactive was 95%, so we've always done very well in terms of moving customers to the interactive service. But not going to get them engaged with multiple products, I think, is really something that we're putting more of a focus on, both in our marketing and customer service departments both at LiveWatch and MONI.

Jeff Kessler

Great, great. Okay Thank you very much.

Fred Graffam

Thank you.

Operator

Our next question comes from Shlomo Rosenbaum with Stifel.

Shlomo Rosenbaum

Hi good morning. Good afternoon. Thank you for taking my questions. Hi. Can you talk a little bit about the creation multiples going up in the quarter, was it specifically marking stuff that's going on, is the direct channel? Generally the thought was that the direct channel is going to be cheaper in terms of the marking costs.

Fred Graffam

Yes….

Shlomo Rosenbaum

And I'm just trying to get a sense of what's happening?

Fred Graffam

Yes, that’s a great question. And I'm glad you asked it because I addressed it with the script. But I really wanted to talk about it in the Q&A. As the direct channel is a different animal than the dealer channel. In the dealer channel we're buying activated customers from our dealers. So there's no there's no lag effect. In the DIY business in particular we're investing in marketing dollars that turn into customers maybe not next week or the next week, or the next week, but certainly in the next month or two.

And so especially going into what we believe is going to be a very important fourth quarter in our industry, where we’ve got a very – we've got very good offers in our LiveWatch business. We made some investments late in the fourth quarter that were really marketing dollars, think of them as marketing dollars. Some focused on the search engine marketing, some focused on other programs to drive more customers. And those will really turn into better sales in the fourth quarter.

So that's what's going on there. It's simply some dollars that we invested late in the quarter that don't turn into customers until fourth quarter.

Shlomo Rosenbaum

So is the lag on that is what you're saying it normally goes through and it's inter-quarter here you should see a benefit next quarter.

Fred Graffam

Yes so like a DIY customer you want activate as many as you can in a week, but you activate some two weeks later, some three weeks later. And almost all of them you’ve got within four or five weeks. So we’ve got the lease coming in, we've got really going lease flow in our direct business. That I think is going to really help us as we enter the fourth quarter.

But absolutely what you said is true. We believe long-term in the direct channel we can create customers more efficiently over time.

Shlomo Rosenbaum

Okay. And then is that average RMR went down a little bit sequentially. Is that because a higher percentage of the counts are coming from the likes of LiveWatch.

Bill Fitzgerald

Yes as we've had some softness in that dealer channel, where we’re replacing with this direct-to-consumer. The majority of that is LiveWatch. And while LiveWatch is pretty impressive, it’s $40 for a DIY company, it’s much less that our dealer channel which is typically comes in the low 50s.

Shlomo Rosenbaum

Okay. Hey Fred what were the RMR on the accounts that were purchased in the quarter?

Fred Graffam

$1.028 million.

Shlomo Rosenbaum

Okay. And do you want just discussing a little bit the competitive environment there's been net announced acquisitions from ADT Security Services, Protection, one. And I know you have this – you talked a lot about Nest, which sounds very exciting. But can you talk about the competition in all different fronts kind of what used to be viewed as the new entrants which were the cable providers and then the ones that are out there that are doing things that are more similar to Nest or simply say for something like that?

Fred Graffam

Yes, there haven't been huge job changes in the competitive environment with MSOs. You’ve red probably AT&T maybe exiting the business so that that hasn't happened yet, but that’s certainly significant. We really haven't seen much change there. It is a market where brand is more relevant than ever. And I think the biggest – what's going on is we're in the middle of it. Probably the biggest change is this whole DIY phenomenon. And some of the new technology coming into the business.

So I think while people are nervous about that in terms of how it impacts the industry. And MONI we think it's a very good thing, that's going to increase the awareness of. These products are some of the smartest products that we've seen, they're very easily installed. You’ve seen this Nest product it's very, very different than anything that's out there in the marketplace today. And as it relates to ADT and their acquisitions, I think, most of those have been on the commercial side. So not a lot of big change there.

Shlomo Rosenbaum

Okay.

Fred Graffam

And then one other thing I'd just like to mention you might have noticed that we're continuing to make improvements in our dealer multiple, which is positive. But overall I also mentioned that we had a really nice pipeline in our dealer channel, which never count on anything until you get it. But it looks stronger than it has in the last 24 months. And I think the pricing discipline that really started with MONI kind of changing our prices a couple – over a year ago, has really manifested itself into a much better environment. And we're seeing dealers really focusing on which programs bring the most value. And that's really where we think we can win.

So it's not all about dollars, but what we do is provide a nice environment for dealers to grow their business over time with a partner that's going to be consistent and supportive. And I think that's what's helping us with our pipeline.

Shlomo Rosenbaum

Where did the pipeline coming from though? Where were those guys selling to before?

Fred Graffam

It’s a range of other providers across the industry. So it's not any one in particular. In fact, I think each one that I'm thinking about right now is coming from a different carrier or provider. So it's good. And we've got a really good reputation in the dealer marketplace in terms of supporting our dealer. So encouraged by that we'll see how that develops over the next couple of months.

Shlomo Rosenbaum

Okay, great. Thank you very much.

Fred Graffam

You’re welcome.

Operator

Our next question comes from Ashish Nair with Citi.

Ashish Nair

Thank you for taking my questions. A lot of the details. Actually on the Nest product I had a few questions. One the hardware potentially, I think, puts you to a more direct competition with guys like – is there a different approach that you're taking through your direct dealer channels in terms of you sales strategy. And how do you feel about potential adoption by your typical target customer? Or do you focus on a different customer completely?

Bill Fitzgerald

Well I think what's interesting about the Nest channel is it's getting out two segments that are really important to us. We’ve some customers in the trendy techy segment but the Nest product really these are people who are early adopters of trying to detect uses of marketing segmentation where that our team uses, but it's really needs people who are early adopters. And this product is so different the marketplace, I think, we’re going to do much better in that category. We've under indexed there historically, we've always been good in the smarthome space. But I think this takes us to another level.

And with the customer paying for the equipment upfront ti’s going to also open up a market of new customers in the rental market, in the multiple dwelling unit set. Prior to this because we're taking such a big – making such a big upfront payment to our dealer channels we were unable to really serve that market effectively. So we've got two brand new markets that we're serving that I think is really exciting.

With our traditional business, yes there's probably some overlap with LiveWatch, but I think the benefit we get from reaching these new customers far outweighs it. And as I said in the script the log wise product is still pretty differentiated. So our customers are going to have a lot of options. To me this is the most easy to install DIY product on the market. And I think it's going to really change the way people feel about DIY.

Ashish Nair

Right. Actually on that point, I mean you did mention this to the product withdrawal seems pretty smart. And the customer base, at least initially early on, might be pretty tech savvy. Are you concerned that it might limit the adoption of the product? Or maybe the financing plan that you referred earlier might be an incentive for those customers. Does it won't have to pay up that much up front. Just give your thoughts on that will be helpful.

Bill Fitzgerald

I mean if you've noticed any of the buzz, I mean Nest has really hit the ground running with this product, they were pre-selling the product and had – they've tons of interest. And they have an advantage, they have a great brand, they have a huge embedded base of existing customers. So I think that's so much more of an opportunity. It's a premium product. So I know our business has been really based mostly on zero down, but I think that's changing. We've seen that with some of the other players in the space.

And this is the kind of product where I think convene very good things for the industry, in terms of people really seeing a lot of value with their equipment. And with a brand like that, we're going to be able to reach customers there. Our RE part of the Nest family. And we think that's a huge benefit for MONI.

Ashish Nair

Right. I guess I am clear. But my question was specifically about the monitor [ph] to be on like the per monthly monitoring contract or even the month-to-month that adoption also you think will be an opportunity?

Bill Fitzgerald

Yes I think that’s going to be a great opportunity for us. Again we’re going to reach new market. Yes it’s going to have slightly lower RMR than our existing customers but we have much lower upfront. So to us when you look at the returns they're very good and then we are pathed [ph] to cash flow breakeven it’s much, much shorter.

So it's really a whole different way to think about the business. And so, yes, we think those prices are going to be competitive. This is a premium product in the space for sure and I think it's going to be – we are going to see a lot of adoption.

Ashish Nair

Got it. And the fees you mentioned, the $34.99 and the $24.99, well that’s net of any potential fees that you have to pay the NEST correct?

Fred Graffam

That’s the retial price.

Bill Fitzgerald

Yes so that’s the retail price for the customer. It doesn’t – we do pay a fee to Nest for providing the app in the wireless connectivity but of course it's not in there.

Ashish Nair

Okay.

Bill Fitzgerald

That won't be – The customer will pay $34.00 and $24.99.

Ashish Nair

Got it, understood. And I know this is a little early because you’re still in exploring this option and made a beta testing in. But financing plan seems to be a good way to incentivize people to finance for 3-year contract. Any early thoughts on whether the ARPU of that channel will be a little higher than your current ARPU, and would you design a plan [indiscernible] (0:41:27) after you pay off the device ARPU steps down. Just wanted to get some initial thoughts on that?

Bill Fitzgerald

Well I guess I would say that the financing option we were really excited about as it relates to Nest. So that's definitely squarely on our radar screen. With respect to pricing we're honestly it's early days we're working through that right now on pricing strategy. So it's probably a little premature to be talking about. I think the biggest thing it does and I think you've seen this with some of the other players in the space that it really allows you to zero down was a little constraining in terms of your ability to really help your customers take full advantage of home automation, a true SmartHome, it really concerned about the out front.

So with the financing it gives you opportunity to offer a little more in a way like you said with a customer where yes if you can pay for this over three years this will be your payment today, but it goes away at the end of three years. And it also gives you an opportunity to really up sell them after that. So dealing with a big problem that we've had in our industry is were customers who bought their product four or five years ago is outdated in your kind of at risk from an attrition perspective. So it has a couple advantages in that regard.

Ashish Nair

Got it. I just have one last question. With regard to your expectation that you are going to exit the year with most number of customers on the contract. Is there some sort of target that you're looking to have may be end of this year maybe end of next year, is a 40:50, is it like 40:60, 50:50 I just want to get sort of a reasonable target for you guys in terms of that mix?

Bill Fitzgerald

It moves along based on how what our sales look like, but, I mean, we are targeting – we think we're going to end up ideally at over at over 60% exit the year at 60% which is very good. We're seeing a lot of, I mean that coupled with the fact that we know that we're having fewer customers come to term up which is in a really good position. And what I'm really proud of our team is they've been able to get some of these extensions with very modest movements on price. And we've had a lot more success getting extensions by providing customers with more smarthome equipment.

An extending your contract in some cases increasing their arm are getting a contract extension. So we're making a lot of progress in kind of our sophistication on how to manage that, in the most economical way.

Ashish Nair

Got it. Thank you so much for answering my questions. Those were it. Good luck.

Bill Fitzgerald

Thank you.

Operator

Our next question comes from Todd Morgan with Jefferies.

Todd Morgan

Thanks, good afternoon. I was hoping you could talk a little bit about the subscriber ads may be in the quarter you provided on the rolling 12 months period. But if we were to exclude Alliance, is there any way to characterize how much of an impact that would have been in the prior quarter, for example, what are the adds looking like now versus excluding lines in the prior period?

Bill Fitzgerald

Yes, so the numbers I reported were 21,268 in the quarter, 77,423 for the year. I think the best way to characterize 23 for the year, I think the best way to chartreuse that is that we reported last quarter obviously Alliance didn't really do anything in this quarter. Last quarter they did about 3,900. So I think that's the best way to think about that. In terms of their impact they definitely had an impact we were unable to replace that. In the current quarter but we're pretty encouraged by our pipeline and of course, I think, going forward we fully expect a direct-to-consumer channel be a bigger part of our distribution.

But we're running behind our pace that we added last quarter, primarily because of that large dealer.

Todd Morgan

Right. On the same front, you've signed up a number of alliance partners with ARP consolidated commissions, feel like that. Is there any way to think about the impact that they may be having at this point or is that still in the building mode?

Bill Fitzgerald

It’s still in a building mode I mean both those programs the consolidate program has been good. The volume continues to grow, but it's not just not enormous compared to our company size. And ARP, we're still excited about the ARP program. It's just ramping slowly. And so, we're getting a lot of – we're getting more leads from them. We're really working with their marketing team to see how to work better there, but fair to say that it's been a positive, but it hasn't been as positive as we'd like. We're continuing to ramp that over time.

Todd Morgan

Great, and then last thing on cash. I'm just looking again at the Ascent side, $135 million consolidated cash and securities in the third quarter, looks like it was up a little over $20 million from what you reported in the second quarter. You drew some on the revolver. I think you also – looks like you also I think you should put $5 million towards the legal settlement.

Fred Graffam

Right.

Todd Morgan

Is there other big moving parts in that? I mean there were asset sales or anything else like that that would have caused that cash balance to go up?

Fred Graffam

No, no, but keep in mind we made a interest payment of $27 million on October 2nd, so that's why it looks unusually high.

Todd Morgan

Right, okay, that makes sense. Thank you.

Fred Graffam

And then other thing on the cash side is just that – there's never a silver there – there's never truly a silver lining when your – your ads are not what you wanted to be, but we are spending much less than anticipated as it relates to dealer commissions. And so that's been a favorable impact on our cash position.

Todd Morgan

That's a good point. Thanks.

Bill Fitzgerald

Hey, Todd, just to be clear, it’s Bill. We did close on the London property in Q2, but that roughly $20 million would have been reported in Q2, so not a big difference Q2 to Q3.

Todd Morgan

Great.

Operator

We have time for one final question today. Our final question is a follow up from the line of Jeff Kessler with Imperial Capital.

Jeff Kessler

Yeah, I am just – I'm interested in finding out how you are going to manage the LiveWatch versus Nest - versus Nest programs? I'm assuming at the LiveWatch people were brought on quite early on in the program or in the discussions. So that once this thing went live, there would – there were on board and you were able – you would be able to separate out. The two programs, the sales materials and going to market, so that one factor – if you want to go, LiveWatch doesn’t feel they're becoming pushed aside a little bit.

Bill Fitzgerald

No, but that’s a good question, Jeff. The LiveWatch, the LiveWatch team was a part of our Nest team. So they were integrated – integrally involved from day one the whole team there. So they’re very excited about it. I mean when we first looked at this product, we said oh no what this does mean to our LiveWatch business, but guess what. Nest was going to market with or without MONI and so the fact that we're there. And as I described in the script, we think there are pretty different offerings. They can offer a very low MONI down option to customers with slightly different features, maybe more home automation initially. And then they have this great option with this easy to install great brand that really fits well with the DIY model.

So I think it really expands the opportunity and just like what I was talking out with MONI and our dealers. The extension of the market for LiveWatch is exactly the same. They're going to be able serve these early adopter segments better and they're going to be able to reach some households that previously we stayed away from. So I think it’s going to help them grow their volume. They're really quite excited about that.

I mean if you think about what I said on the call. Our LiveWatch Chief Marketing Officer is running marketing for all of MONI. So we don't really think about it separately anymore. We're running and we did that in large part because we wanted to hit the ground running with the Nest product.

Jeff Kessler

Are you going with G2 to G3 expenses?

Bill Fitzgerald

2G, oh, yeah, they're largely – I mean well they're trickling in. So, yeah, the expenses are minimal.

Jeff Kessler

Okay.

Bill Fitzgerald

We have 2,000 customers loved and they’re really governed about converting. But yeah, we get a couple of hundred every month, but just a couple thousand left. So…

Jeff Kessler

Okay.

Bill Fitzgerald

Those are all done.

Jeff Kessler

Okay, great. Thank you.

Bill Fitzgerald

You’re welcome. Thanks, Jeff.

Operator

And with that we will conclude the Q&A session. I will now hand the program back over to Bill Fitzgerald for any additional remarks.

Bill Fitzgerald

Thank you, operator. We continue to make good progress in the third quarter. And while there is certainly much more work to be done, I believe while there is certainly much more work to be done, I believe we’re focused on the key initiatives that will serve the benefit long-term growth of the business and drive value. So we look forward to reporting after year-end, our fourth quarter results for you all and we appreciate your support and interest and we'll talk to you soon. Thank you.

Operator

Ladies and gentlemen, this will conclude Ascent Capital Group third quarter 2017 earnings results conference call. You may now disconnect your lines and have you wonderful evening.