Ladies and gentlemen, thank you for standing by and welcome to the Vivint Smart Home Inc. Second Quarter 2020 Earnings Call. At this time all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Nate Stubbs, Head of Investor Relations. Thank you. Please go ahead, sir.

Good afternoon, everyone. Thank you for joining us this afternoon to discuss the results of Vivint Smart Home for the three and six-month period ending June 30, 2020. Joining me on the conference call this afternoon are Todd Pedersen, Vivint Smart Home’s Chief Executive Officer and Dale R. Gerard, Vivint’s CFO. I would like to begin by reminding everyone that the discussion today may contain forward-looking statements, including with regards to the company’s future performance and prospects. Forward-looking statements are inherently subject to risks, uncertainties and assumptions and are not guarantees of performance. You should not put undue reliance on these statements. You should understand that the following important factors, in addition to those discussed in the Risk Factors section in our annual report on Form 10-K for fiscal year 2019, and in our quarterly reports on Form 10-Q issued in fiscal year 2020, including for the quarter ended June 30, 2020, could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements. The company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In today’s remarks, we will also refer to certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures for historical periods to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings release and accompanying presentation, which are available on the Investor Relations section of our website. I will now turn the call over to Todd.

Thanks, Nate, and good afternoon to everyone joining the call. I hope everyone continues to be healthy and safe in the current environment. Today, we will cover three main topics. One, discuss our strong financial and operating results for the second quarter; two, review our success in optimizing our portfolio economics and the resilient performance of a recurring revenue platform; and three, talk about the strong demand for our services as homeowners have spent more time focused on reconnecting with their homes. We’ve done a great job as an organization navigating the challenges and uncertainties encountered during the first half of 2020. And we are very pleased with the significant improvements across all our key metrics in Q2. Revenue and total subscribers continue to grow at a steady pace, reflecting healthy demand for our smart home and security solutions despite a pause in our direct-to-home sales efforts for the first six weeks of the quarter. Adjusted EBITDA margins continue to expand meaningfully and we now expect to be cash flow positive in 2020. Dale will dive into more specifics on the financial results in his remarks and he will also share updated thoughts on the full-year outlook, which we are revising upward given recent momentum in the business. Vivint now delivers smart home and security services to more than 1.6 million customers across North America. Our incredible results during what has been an extremely challenging time support what we’ve said all along. The customers value the peace of mind that our fully integrated services offer and that our high-margin recurring revenue model is built not only to be resilient, but also to thrive in the current environment. This is a time when people are reconnecting with their homes and we believe that Vivint is perfectly positioned for what could be a lasting change. In fact, live video views through the Vivint app and panel increased by 19%, and the views of recorded video increased by 15% from Q1 to Q2. Although our customer value proposition is clear, our ability to add nearly 108,000 new smart home subscribers during the quarter is remarkable, given the fact that we paused all direct-to-home sales from mid-March to early May. We discontinued all direct-to-home sales activities in Canada and we mostly eliminated the number of new customers we generated from retail installment contracts. Despite these self-imposed limitations, new subscribers were down by just 3% from a year ago when no constraints were in place. Our national inside sales team, on the other hand, hasn’t missed a beat and continues to see strong demand in the quarter, generating 25% year-over-year growth in new subscribers. We resumed direct-to-home sales in early May, as states around the country began reopening their economies. Aside from the delayed start, our summer sales program is proceeding well and we’re actually seeing productivity gains versus the prior year. Another powerful tailwind is that we’re funding virtually all new customers through our paid-in-full or third-party financing with Vivint Flex Pay. This allows us to bring on new subscribers in a much more capital-efficient way. Our external financing partners have remained committed to underwriting high volumes of high credit quality smart home customers. And we believe we have a significant edge over our competitors by providing customers with options to easily finance a full smart home experience, while also dramatically improving our unit economics and cash flow dynamics. The nearly half-point decrease in attrition this quarter is another standout result and frankly beat our internal plan by a significant margin. This speaks to the fact that our core value proposition, proven over two decades of taking care of our customers and their families, is as relevant as ever, as people are reconnecting with their homes in the current environment. Today we have well over 20 million connected devices on a proprietary cloud-based platform that enables customers to seamlessly manage and protect their homes. We believe we are uniquely qualified to help our customers deal with the current environment across the various smart home devices we support from door locks, outdoor and indoor cameras, thermostats, lighting controls, smart speakers, garage doors, and many other connected devices. We recently announced a partnership with Chamberlain, the leading garage door manufacturer, to integrate myQ Smart Garage technology into our platform. Vivint customers with a myQ Smart Garage can now control, secure, and monitor their garage anytime from anywhere using the Vivint Smart Home app. All these innovative products are designed to work together seamlessly through our elegant platform that homeowners can control from their in-home touchscreen hub, through a single app on their phone, or by simply using their voice. Our improved guidance for the full year underscores the confidence we have in our high-margin recurring revenue model. We are seeing healthy demand across all our sales channels for our smart home and security offerings and we are fully prepared to meet that demand. We continue to be judicious around overhead spend, budget and projects, and we now believe that we will be cash flow positive in 2020. To that point, we generated $111 million in cash from operating activities in the second quarter alone. We’re excited to continue reporting our progress on this front. Before concluding my remarks, in light of recent events nationwide, I believe it’s important to express how much we value diversity and inclusion at Vivint. The issues of racial inequity and injustice are significant and we must all take ownership of these issues. We can start by simply listening to each other, engaging in productive conversations, re-examining our own views and actions, and ultimately being part of the positive change. I will now turn the call over to Dale to go through specifics of our strong second quarter results, as well as provide our updated guidance for 2020.

Thanks, Todd. I’ll walk through the financial slide portion of the presentation that we posted today in conjunction with our earnings release. Overall, results were very strong across the board and this outperformance informs our decision to raise our guidance range for the full year, which I’ll cover later. But first on slide seven, we highlight our revenue for the second quarter six-month period ended June 30. For the second quarter 2020, revenue grew by 8.9% to $306 million. The growth in revenue is attributable to a 6.8% increase in total subscribers as well as a 2.1% increase in the average monthly revenue per user. Our average monthly revenue per user was up $1.31 in the quarter versus last year. Moving to slide eight. Adjusted EBITDA has scaled significantly in the second quarter and six-month periods. The drivers were lower selling expenses and net service costs and continued scaling of our G&A. For the quarter, we are proud to have expanded adjusted EBITDA margins by 2000 basis points to 49.9% of revenue compared to 31.4% in the second quarter of 2019. This is clearly a great result overall and a function of a lot of hard work by our entire organization. Due to some seasonality inherent in our business, we wouldn’t necessarily anticipate sustained full-year margins at that high level. It should be noted, for example, that the lower service costs we saw in the second quarter were due in part to fewer service calls and truck rolls due to concerns over COVID-19, while we do believe to be sustainable on a number of cost reduction initiatives that we completed during the first quarter and then expect to meaningfully reduce G&A and overhead costs by streamlining our operations, focusing engineering and innovation, and driving better customer satisfaction. In addition to these actions and because analyzing how we operate more efficiently is a continuous exercise at Vivint, we initiated another round of focused cost-cutting during the second quarter to further reduce our discretionary spend. As a result of these actions, we have achieved greater than $30 million in permanent annualized fixed cost reductions. Meanwhile, covenant adjusted EBITDA, which is the calculation used for our debt covenants, was $200.5 million in the period, scaling by $45 million compared to $155.3 million in the second quarter 2019. As you look on slide nine, we highlight a few data points for the subscriber portfolio which were strong across the board. Total subscribers at quarter-end grew from 1.51 million to 1.61 million year-over-year or 6.8%. Average Monthly Revenue per User, or AMRU, also increased to $64.66, up 2.1% year-over-year. AMRU has been growing from the recognition of deferred revenue and effective cost selling of new products, such as our newest generation of outdoor and doorbell cameras. On the next slide, slide 10, we highlight a few points on new subscribers. New subscriber originations were 107,980 for the second quarter, which was quite resilient considering that direct-to-home sales were paused in the U.S. for the early part of the quarter. We discontinued all direct-to-home sales in Canada during the quarter and reduced the number of retail installment contracts or RICs by over 89%. One last point, by shifting a greater portion of our subscribers away from RICs and toward our third-party financing partners and pay-in-full, we are able to grow the point of sale revenue, thus reducing our net subscriber acquisition costs and significantly improving our cash flow dynamics. As we look to the future, we will continue to align the organization on delivering a true smart home experience to millions of homes in a profitable and cash efficient way. Moving to slide 11, we will cover our net service cost per subscriber and net subscriber acquisition cost per new subscriber. The reduction across both these key metrics continue to be a significant driver of our earnings improvement during the second quarter of 2020. We’ve continued our trend of year-over-year improvements in net service cost per subscriber, moving from $16.71 in the second quarter of 2018 to $13.13 in the second quarter of 2019, and now to $9.93 in the most recent quarter, a $6.78 improvement versus 2018. This represents the lowest service cost per subscriber in the last ten years by a significant margin and it demonstrates the advantage of Vivint’s fully integrated smart home cloud platform, which encompasses the software, the hardware, the installation and ongoing customer support. The result is that our net service margin continued its increasing trend moving from 68.6% in the second quarter of 2018 to 75.2% in the second quarter of 2019, and now 80.2% in the most recent quarter. These efforts contributed greatly to the improvement seen in our adjusted EBITDA. It’s important to note here that given the seasonality of how we generally put on new customers, particularly in the summer, we tend to see service costs increase in the back half of the year. Additionally, as mentioned before, we believe service calls were abnormally low in the second quarter due to concerns over the coronavirus. So while we’re really excited and encouraged by the current trends and the corresponding benefits to the margins that we are seeing, we wouldn’t anticipate sustained full-year results at that level. On the right-hand side of slide 11, we highlight the recent trend on our average net new subscriber acquisition cost. For the LTM period ended June 30, 2020, net subscriber acquisition cost per new subscriber decreased to $630. That’s 40.8% lower compared to the prior LTM period, as we have nearly eliminated the number of new subscribers that are financed on a Vivint retail installment contract and shifted to a higher mix of customers, utilizing our financing partners or paying in full for the purchase of their smart home products. During the quarter, we also benefited from pricing leverage on the point of sale purchase and installation of equipment. Moving on to slide 12. Slide 12 is a normal subscriber walk to illustrate the changes in total subscribers at quarter-end. The biggest and most pleasant surprise was a reversal in attrition, which was lower sequentially for the first time in nine quarters. It is worth reiterating that our attrition has trended higher than our historical averages, given the higher percentage of customers that are in the end-of-term life cycle phase. First, the attrition rate for a customer cohort changes as it progresses through different phases of the life cycle. We define these phases as in-term, end-of-term and post-initial term. Each phase carries with it a corresponding expected attrition rate, with attrition at its highest during the end-of-term phase. As we have shared in the past earnings calls, the cohort attrition curves remain fairly steady. The second factor that affects attrition is the percent of total customers in each stage of their life cycle. The percent of customers in the end-of-term phase rose in 2019 and will stay elevated in 2020 before beginning to fall in 2021. In the second quarter, attrition reversed course and was lower sequentially by 40 basis points to 13.7%. This still remains higher than our long-term trend for attrition, but was much better than our expectations given the higher percentage of customers that are in the end-of-term phase. And for what it’s worth, our portfolio has continued to perform better than expectations in terms of attrition and other leading indicators through the end of July. Now we know there is a lot of curiosity out there regarding how we think our attrition curve may change as a result of the pandemic. The news on this front is all positive at least thus far. As to the potential drivers, our past experience through severe economic downturns, combined with the unique effects of the current pandemic, leading more people to reconnect with their homes and place tremendous value on our smart home solutions, as well as the general propensity for customers to focus inward and prioritize home security during times of crisis are some of the main factors that come to mind. Before we move to our updated outlook for the year, I’ll point out that several factors tied to our strong second-quarter performance leave us feeling very good about our overall liquidity position, which stood at approximately $478 million as of June 30. Our second quarter was strong from an operating cash flow perspective. For the three months ended June 30, we generated $111 million in net cash from operating activities compared to a use of $88 million for the same period in 2019. The strength in cash generation has carried through the end of July and we have repaid all of the outstanding amounts on our revolving credit facility. During the quarter, we also saw approximately $6.6 million of warrants exercised, which has a positive impact on our cash position and increased our public float as well. Finally, let’s move to slide 13 where I will address our updated financial outlook for the year. Over 95% of our revenue is recurring, which provides long-term visibility and predictability to our business. Most of our new subscribers that finance their smart home choose to enter into a five-year contract and remain on the platform for approximately eight years, driving significant lifetime margin dollars. Despite the many uncertainties pertaining to the COVID-19 pandemic, our recurring revenue model has proven resilient to any of the major downsides and we are comfortable with essentially restoring our original guidance for subscribers and revenue that we provided in early March before the country went on lockdown. Meanwhile, our strong unit economics and scale have contributed to our ability to drive significant adjusted EBITDA improvement. And that is reflected in our updated range. In terms of revised guidance based on our stronger than expected second quarter performance, solid demand for our products and services and having the full complement of sales channels available to acquire new Vivint customers, we expect to end 2020 with 1.62 million to 1.68 million total subscribers versus previous guidance of 1.55 million to 1.62 million. Our estimate for 2020 revenue is $1.23 billion to $1.28 billion versus previous guidance of $1.20 billion to $1.25 billion. And finally, we are raising our adjusted EBITDA guidance to between $555 million and $565 million versus previous guidance between $525 million and $535 million.

Thank you. Your first question comes from the line of Paul Coster with JPMorgan. Your line is open.

Wow, that was pretty awesome. Hard to pick this one apart; it was such good news under the circumstances, really quite impressive. So, Todd, you said you’re going to be cash flow positive in 2020, so you are ahead of expectations. Is it sustainable? Or does this feel like just, for instance, the RIC number was also just so low? And I’m just wondering, do you think all of this is sustainable?

Yes, we actually do believe it’s sustainable. And as Dale mentioned, the reduction of RICs led to that number. And by the way, as a side note to the reduction of RICs, we should see over time an improvement in the attrition number on this pool of accounts that we've put on this year's book of business, which is outstanding. But yes, it is sustainable. We’ve made some very good changes to the business and I think one that’s listened to us. This didn’t just happen. We’ve been working on the changes to the business models of the company and the cost structure for quite some time now, and this is just kind of a revelation of what we’ve been intending to do. So, I think the answer is yes, it’s sustainable.

Right. Got it. And then, of course, I mean, is it competition or is it a validation where Google seems to be trying to help ADT catch up with you a bit? What does that mean to you?

Well, I think you hit it on the head. It’s absolutely a validation of the model that Vivint delivers into the market, Smart Home as a Service. It absolutely requires great tech, but the need for installation, ongoing service, and providing the bulk of them is critically important to delivering really an elegant situation within. So, yes, we’re upbeat. When I read the news, honestly, that's great. We’ve been saying this all along. This is a huge total addressable market, a huge opportunity and someone with the likes of Google investing into this space you’re in, that’s got to be a good thing for us.

Your next question comes from the line of Rod Hall with Goldman Sachs. Your line is open.

Yes. Hi, guys. Thanks for the question. Likewise, nice job in a tough environment. A couple of questions for you. I wanted to start off with the new subscriber linearity and see if you could give us some idea of how that flowed through the quarter? And then secondly, just wondering if you could give us any idea as to what attrition might look like as you look forward through the rest of the year. If you can give us any kind of idea for what you’re thinking on attrition in the next couple of quarters, that would be useful. Thank you.

Yes, this is Dale. Hey, Rod. Thanks for joining. I think in terms of subscribers, it’s tough. As we said, we had direct-to-home sales really paused for the first six weeks of the quarter. So we really started rolling out direct-to-home to the different locations around the second week of May. And we saw a very quick ramp from those teams and continue to see really good production from those teams across all offices, across all states that we’re in. There are not areas that we didn’t go to. You roll teams out to where we expected to go out to. And they seem to be reporting well. When you look at inside sales, inside sales was really strong in the first quarter, and that carried right into the second quarter. That’s a more kind of ratable in terms of those are leads coming in from SEO and different referrals and so forth. That volume and that demand has been very, very strong across the full quarter. So we’re seeing that demand continue into the third quarter here. And then, go ahead, Todd.

The one thing I want to note, and this is very important and again, it’s been mentioned already, but the fact that we’ve put the numbers up that we have proven very substantial demand from consumers for the Vivint Smart Home offering. We are not onboarding new customers in Canada, which was a decent percentage of our overall business in the past, and then the elimination of RICs and also the pause on direct-to-home. When you look at it as a whole and you don’t know the past, it looks good considering, like you said, the environment. But when you really add it up together, the performance of Vivint in Q2 was outstanding. It’s hard to describe how happy we are about how we’re positioned, the consumer view on the product and services that we offer, the value we provide and really demand coming into the company.

And then just to touch quickly on your question around attrition. I mean, attrition again, we were very, very happy with how the attrition performed in the second quarter. We again think that’s how people are really reconnecting with their homes, really valuing the services that we offer. We’re seeing the engagement with the platform. Even though people are at home, the engagement is as high or higher than what we’ve seen in previous quarters, because people are using it. Just a different way, they’re using the cameras more. They’re engaging more throughout their home with that, with the system. For example, having deliveries to your front door, being able to use your doorbell camera to talk to those people, see what packages are dropped off. Those types of interactions with the system we’re seeing more and more, now that people are actually in their homes and wanting to understand who is coming through that front door or what’s being left at that front door. We’re also cautious about attrition. In terms of we still have a higher percentage of customers in their kind of end-of-term life cycle. That’s still about 20% of our portfolio. We know those customers normally perform at or have higher attrition when they’re in that kind of phase of their life cycle. We’re also cautious about the economy in the second half. So, what I would tell you from attrition is we think it’s performing really well right now. But we’re also cautious as to what it will look like in the rest of the year, but we're feeling rather confident that we're seeing good performance out of it and will continue through the rest of the year.

Okay, great. Well, thanks for that. And congrats again on the numbers. Thank you.

Thank you.

Thanks, Rod.

Your next question comes from the line of Amit Daryanani with Evercore. Your line is open.

I guess a couple for me as well. Maybe to start off with on the net subscriber acquisition costs. That came in a lot lower than I think we were modeling at least. And it sounds like it really reflected the fact that you were able to raise pricing on the upfront cost. Was there any other factors that were at play as well that dropped this number down? And I'm just wondering, if you start to raise the pricing for these starter packs, do you think that impedes demand of your subscriber growth eventually?

Yes. So obviously, we did change the pricing in our starter kit package. And it was incredibly well received from the consumer. From a consumer's point of view, the dollars they're paying between ourselves and our financing partner didn't really change. It changes the balance of it, but it doesn't change the actual dollars paid on a monthly basis. I would just say that our performance spoke for itself when it comes to demand. It was increased demand, elevated numbers and better performance on a per-rep average for the direct-to-home program. Dale spoke to the inside sales group and their performance year-over-year. So absolutely did not affect demand from consumers.

This is Dale. One key factor in reducing our net subscriber acquisition cost is that we have decreased our RICs by nearly 90% year-over-year. This is not just a temporary change; it’s a goal we set when we began implementing Flex Pay and partnering with financing companies to bring RICs down to nearly zero. While we may still have some RICs, reducing them significantly has been a major factor in our ability to lower costs. To clarify, RICs are contracts with Vivint that do not provide us with any upfront money from customers. By substantially lowering these and transferring more upfront costs to our financing partners or having customers pay in full, we've successfully decreased our net subscriber acquisition costs.

Got it. That's really helpful. And then if I could just follow up, when I look at the new subscriber numbers and I completely understand how difficult Q2 was, right, it was down 3%, I think or something like that, the new subscriber growth number. I'm curious if you look at maybe the month of June or the six weeks where you were not in a complete shutdown. What did that trend line look like? And then any indication in terms of how that's looked in the month of July as well?

We probably won't get into too much detail. However, I want to highlight that when we compare the numbers on the same basis, the fact that we are only down 3% in net subscriber additions compared to 2019 and 2020 is remarkable. To put it in perspective, we eliminated 12% of the customers we would have underwritten last year and did not this year, yet still achieved that number. In terms of revenue, thanks to the increase in revenue per subscriber per month, we actually outperformed last year. I cannot emphasize enough that it was an exceptional quarter. The trend appears to be continuing. While we can’t delve too deeply into current and future happenings, we believe we are in a very favorable position. This improvement is attributed to several factors, particularly the increased consumer demand. As Dale mentioned, people are really reconnecting with their homes, and we are witnessing the benefits. Our company is among those positively affected by the fact that people are at home and viewing it as their new environment, and we believe this could lead to a lasting change over time.

Got it. Last one from me and I'll leave after this. Given the better free cash flow expectations for the year, do we think about the company wanting to delever more quickly? Or how do you think about capital usage, given the fact this free cash flow positivity is getting pulled in a fair amount? That would be great. And congrats on a good quarter, guys.

Yes, thank you. Regarding our cash flow, we've always aimed to reach cash flow neutrality this year, and we are currently ahead of our initial estimates of 12 to 18 months. We have also set a target to maintain our leverage ratio at three times or less when looking at the EBITDA-to-debt ratio. We will consider how to utilize the cash we continue to generate, whether that involves paying down debt or investing in the company, such as in new products or services. As Todd mentioned this quarter, we currently don't have a strong brand presence. Therefore, we are contemplating whether to invest in branding the company, which we believe could attract more customers and support our long-term vision. We'll decide on our strategy moving forward. We are very excited that we achieved cash flow positivity in the second quarter, and we expect this trend to continue for the remainder of the year. Lastly, I want to mention that we paid down the revolver. We had $105 million outstanding on the revolver at the end of June, and we fully repaid it in July. We are now holding cash on the balance sheet.

Your next question comes from the line of Jeff Kessler with Imperial Capital. Your line is open.

Thank you. And hello, gentlemen.

How are you doing?

Hi, Jeff.

I'm doing well and feeling connected to my home. I'm curious if during the downtime for your direct-to-home group, both in the U.S. and the ongoing situation in Canada, you've used any of that time to refine or adjust what you want to add to that group, as well as how they market and sell their services.

That's interesting that you would ask. We actually conducted some experiments on how we engage with different types of inbound demand from consumers. We had to adapt quickly, like all companies did during the shutdown, and we saw positive results. This experience is helping us consider how we might expand our sales force and improve our engagement with consumers over time. As Dale mentioned, we hope to start building our brand and increasing awareness of Vivint's services this year. Currently, less than 5% of American households recognize us or understand what we do. We believe that there are significant opportunities from our testing to efficiently respond to any additional demand that might arise for Vivint's services.

Has there been an app or a group of apps? I understand it might ultimately relate to video, but have you managed to improve sales, especially for the initial package, by emphasizing or altering the focus of different apps throughout the year? This year has been unique compared to what we've observed in a long time. Are there specific types of video applications or video content that have helped you sell better than before? And is it solely video, or could there be other elements or additional partners quietly contributing to your success?

Yes. I would say that video is a major factor driving increased demand for our services. No one else provides what we do in terms of professional installations, our proprietary hub, platform, and technology stack, which creates a feedback loop and allows us to continue servicing our customers effectively. We are unmatched in the quality of our service delivery and connectivity. Moreover, we have noticed a growing demand for the peace of mind our services offer, which is reflected in how engaged our consumers are with their app. This engagement manifests in live video views, recorded video views, and system functionalities like arming and disarming. There are no external apps aiding this engagement; it's clear to us that this is a significant market segment. We believe that achieving over 80 percent penetration in U.S. households is within reach, although we won't speculate on the timeline. The demand is increasing, and many people are interested in integrating smart home features provided by a premium service provider like Vivint, indicating a large market ahead.

Okay. And finally, with regard to the market itself, it does seem as if young people moving out of the city or moving out of urban areas into the suburbs, getting into homes and larger homes are beginning to realize that DIY does not necessarily suffice, particularly if they need monitoring for a larger home with whatever it is, from 15 to 40 zones. Are you finding that there is an attitudinal change as you talk about people getting more in touch with their homes? There is also on movement of people, what I would call a de-urbanization, a little bit because of this?

I think that's an interesting observation. We currently offer a product and service that customers can manage themselves. Although we aren’t sharing specific numbers, we do provide support through truck rolls, phone assistance, and technical services. We can deliver our offerings in an end-to-end manner, catering to customers’ preferences while ensuring high quality and reliability at great value. It’s notable that DIY solutions frequently come up in our discussions. However, companies like Google, which have had DIY products for some time, are starting to understand that they need to collaborate with providers who can deliver in-home services professionally if they want to compete at a larger scale with us. Additionally, my personal experience during COVID has led me to rely on delivery services for food, rather than going out. I also hire others for tasks like lawn care and car washing. I don’t intend to sound lazy, but I prefer outsourcing these chores. I believe consumers seeking a comprehensive smart home experience don’t want to take on the role of managing numerous devices like cameras, thermostats, and door locks throughout their homes. The trend is clear: people are integrating more technology into their living spaces. We take pride in our market leadership and the position we’re in.

I'm sorry, but I have one last quick question. You mentioned an interesting point regarding the coverage, specifically about service and the costs associated with servicing customers. As your operations become more complex, what strategies are you implementing to ensure that your service levels meet the increasing complexity, so that users still find it easy to integrate and understand how to use the system? How do you communicate what they can and cannot do as they transition from five devices to 30 devices?

This is really important and this is where Vivint really excels. The fact that we own our operating system and develop it in-house, including our hub and platform, allows us to integrate top-tier products effectively. We take control of the entire process, managing the data flow and connectivity. Installing a doorbell camera, for example, is relatively straightforward, but as you add more devices, connectivity becomes increasingly challenging. The demand on your WiFi grows, which can lead to potential issues. However, our immediate feedback loop, supported by our engineering team across software, firmware, hardware design, installation, service platforms, and network operations, allows us to track 1.5 billion pieces of data daily through our AI system. We monitor everything regarding service delivery to consumers. If our service levels falter, attrition rates could skyrocket. Interestingly, while we've reduced our service cost per subscriber significantly over two years, our service levels have improved and become more enhanced, which is reflected in our attrition numbers that are better than anticipated. Having been in this business for a long time, we appreciate that it's a predictable model. As we continue to roll out new hubs, firmware, software, and installation protocols, our capability in delivering service, connectivity, and quality grows. This improvement reduces the need for truck rolls and lessens service demands. When systems function properly, the need for customer support decreases. We consistently outperform others in these areas.

Okay. Well, thanks, Todd, and thanks, Dale, and thanks, Nate. I appreciate it.

Your next question comes from the line of Shweta Khajuria with RBC. Your line is open.

Okay. Thank you. Let me try two please. When we think about service costs, you said that you expect costs to increase in the back half because of dramatic reduction in the quarter from your calls due to COVID. Could you talk about the sustainability of those costs, and not only in the back half, but just generally as we think for the outer years? And then a similar question on EBITDA margins. How should we think about the potential for margin expansion going forward? The margins are already at pretty elevated levels. Even barring this quarter, your guide implies very healthy EBITDA margin. So help us think about the potential for expansion going forward? Thank you.

Yes, thanks. I think if you think about servicing costs, if you looked at mid to high 70% margins, that's kind of where we think. I don't want to really quote a quarter dollar, I'd give you a service margin based on what we think. But we think in that 75-ish percent range is probably where we'll see servicing costs come back in the second half of the year. The reason why it's a little bit more, as you know, we put on a lot of our customers in a 90-day period. There are always follow-up and service needs. So there are more service calls in the third quarter and just going into the fourth quarter related to those new installs. Again in the second quarter, I think we had a lot of times where we had where the calls into the call center and into truck rolls were just decreased related around COVID. People not wanting people to come to their homes. I think it goes back also to Todd's point: we have this fully integrated system that we can help, like we can solve a lot of problems over the phone. When somebody does call in, we can log remotely into their panel, resolve a lot of the issues, without having to send a truck or someone out to their home, which is really important.

Okay. And then on the margins, please?

Yes, on the margins, again, we thought we'd be in that low to mid 40% EBITDA margins. And I think that's again, when you look at the rest of this year, if you looked at on a full-year basis, I think that's kind of where we are. We're continuing and I think Todd said this and I've said this, we're always looking at ways to optimize in the business and optimize the scale we have. And so we'll continue to look at that. When you look at it quarter over quarter or for the full year, we're probably looking in that low to mid 40% range.

Hi. Thanks for taking the question. Great quarter. I have a couple of inquiries. First, regarding the service cost, I would like to know how it is divided between truck rolls, the personnel responsible for monitoring, and the customer service aspect. Secondly, concerning attrition, I am interested in understanding how much of it results from customer relocations versus billing issues or other reasons, including switching to competitors.

Yes. So we actually don't break the numbers out on the service cost per subscriber per month down to the actual action happening inside of that structure. We just haven't done that and probably wouldn't be the detail that we would dig into. We're hopefully very happy with the results. But we probably gained efficiencies across the board in all of those actions. Again, back to Vivint's owning of our operating system and technology, hub development, software, firmware releases, these all are results of not just what's happening today in the current environment. These are investments that we've made into our technology, service delivery, installation protocols over the years. And then there is how we answer phones and training down to the individual person. A lot of things go into the reduction of our service costs. We also don't want to break out the attrition numbers with moves. I hate giving you that answer on both of those, but we just don't break those out in detail.

That's an interesting point. If I could ask a follow-up, how do you see Google's partnership with ADT affecting alarm.com, which serves as the operating system for several of your competitors? In what ways will alarm.com change and operate differently, particularly with Google's technology coming into play?

What I would say is that I'm not sure about the specific arrangement, so you would need to inquire with them. However, regarding Vivint, I'm proud that we own and have developed our platform, having invested tens of millions of dollars in it and continuing to spend significantly on its maintenance and enhancement. The seamless integration with our hub and platform is something I value, as we own everything end-to-end and are not reliant on other hardware developers or software providers. Our investors, including Blackstone and others, have been supportive over the years in allowing us to maintain full control over our technology stack, which is proving to be not just relevant but essential for our operations.

Thank you. Great results. Two things. Number one is a couple of companies have talked about supply chain issues in sourcing materials from overseas. I know you guys typically would stock up early in the year. I don't know if given the very high subscriber adds that you're getting any kind of shortage or any difficulties in that front. And I guess, secondly, if I look at the net subscriber acquisition costs at $630, that's a really great number. I mean, that's down by a third just even sequentially. If I think about the drivers that you called out, Dale, with the higher package prices and really reduction in the RIC subscribers. Should that not continue to sort of ratchet down pretty rapidly here as you get into the third quarter, which is another big subscriber add quarter? Thanks.

Thank you. To address the supply chain, we conduct a lot of pre-buying to ensure we have the necessary inventory based on our installation plans. We haven't experienced any disruptions in our supply chain. Our Chief Procurement Officer is excellent, and we continually collaborate with our vendors to ensure our contract manufacturers provide the products needed for our technicians and sales representatives for timely installations. Regarding net subscriber acquisition costs, you are correct. Based on the structure of our current pricing model and the reduction in RICs, we expect the acquisition cost, currently at $630, to decrease further. As we move into the third quarter, this trend should continue.

There are no further questions at this time. I will turn the call back over to management for closing remarks.

Yes. We appreciate everyone getting on the phone call for our Q2 numbers. We were happy with the results. We hope all of you were also. Just know that management is very focused on the current economic environment, making sure that we're being cautious about any upcoming economic continued downturns impact or individual subscribers, customers or underwriting in their cost structure and investments. We look forward to getting on the phone with you all again in Q3. So, thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.