APX (operating under the brand name Vivint) is reportedly one of the largest Smart Home companies in North America and the third largest home security company in the US.
Vivint services are based on a fully integrated touchscreen SkyControl panel, which communicates wirelessly and can be operated remotely through a smart phone application or a web-enabled device.
Customers can opt for different service packages that include residential security, energy usage controlling and management or the ability to remotely manage their home security and lock, unlock and monitor the status of the automatic door locks as well as monitoring the activity in their home through video surveillance and text alerts.
For such services the clients pay a monthly subscription fee and commit to long term contracts. As such, over 90% of the company’s revenues are recurring and, as the technology has become more advanced, Vivint succeeded since 2013 in expanding the length of the new contracts to 60 months.
Meanwhile, the number of subscribers have been expanding at a fast rate and the recurring monthly revenue per subscriber (RMR) has been increasing at a steady rate. What is more, close to 70 per cent of the new customers are opting for additional services beyond the basic security monitoring package and this proportion has been improving at a fast rate.
In 2014, Vivint also entered the Wireless market with a rather untypical product. The model is based on a network of hubs that can serve about 10 homes in the near vicinity; the hub in turn connects with a cell tower. The company estimates that there are 30 million target homes in the US.
Judging by the Q1 results, the product is met with good demand as the number of subscribers reached 13k from 8k a quarter earlier. This, together with cost savings, was enough to cut the Earnings before Interest, Tax, Amortization and Depreciation (EBITDA) for the segment by half, to negative USD2 million. In any case, this is a small amount when put against the USD89 million EBITDA reported at a group level. Moreover, Q1 is traditionally a seasonally weak period and sales are the strongest over summer when the company’s direct sales force is active. Once the service ramps up, APX’ calculations show that margins should be over 50% (over 2014 EBITDA was negative).
As regards the financials of the company, its leverage is commensurate to that of a B-rated company. Vivint experienced an increase in leverage in 2012 when the private equity group Blackstone acquired it in a transaction that was partly (2/3) financed via debt. More recently, an additional increase in debt was incurred due the IT and wireless investments but the management guided that it completed a 24 month investment cycle.
Indeed, the Q1 results released Wednesday showed a sizable strengthening in cash flow generation from a year earlier and a marginal decrease in Net Debt to EBITDA to 5.9x. The latter is particularly important due to the traditionally adverse seasonal factors. As I touched upon earlier, Vivint makes extensive use of direct sales but these take place mostly during summer. Furthermore, EBITDA margin rebounded to 60%, providing some assurance that the lower margins posted for 2014 reflected the ramp-up in wireless and other non-recurring costs.
Notwithstanding the fairly high leverage of the company, credit investors can look into the secured bond maturing in 2019 and having a 6.375% coupon. Given its seniority, the leverage is lower as the net senior debt is about 3 times EBITDA. I would also note that the company does not have any other sizable maturities ahead of 2019 and that the trend observed lately towards 60 month contracts bodes well for bondholders.
To conclude, while I acknowledge that Vivint is a growth company with commensurate risks I like its track record, its vision of innovating and adapting its products to market changes, the strong RMR (and its upward trend) and its success in scaling up its customer base.
Disclaimer:
This article was issued by Raluca Filip, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.