NRG Energy, Inc. (NRG) Q3 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thanks for standing by, and welcome to the Vivint Smart Home Third Quarter 2020 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Nate Stubbs, Head of Investor Relations. Thank you. Please go ahead.

Good afternoon, everyone. Thank you for joining us this afternoon to discuss the results of Vivint Smart Home for the 3- and 9-month periods ended September 30, 2020. Joining me on the conference call this afternoon are Todd Pedersen, Vivint's CEO; and Dale 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, are not guarantees of performance, and you should not put undue reliance on these statements. I would direct your attention to the risk factors detailed in our most recent annual report on Form 10-K and in our quarterly reports on Form 10-Q issued in fiscal year 2020, including for our most recent quarterly period ended September 30, 2020, which we expect to file on or about the date of this earnings call. Please be aware that these risk factors may be updated from time to time in the company's periodic filings with the Securities and Exchange Commission and that the realization of any such risk factors 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 at www.vivint.com. I will now turn the call over to Todd.

Thanks, Nate, and welcome to everyone joining the call this afternoon. We are pleased to report another quarter of very strong performance. Our results underscore the importance of having a proprietary, fully-integrated AI-driven smart home platform, which is the backbone of our predictable and consistent recurring revenue model. Touching briefly on a few financial highlights for the quarter. Total revenue and total subscribers grew by nearly 10%, reflecting healthy consumer demand for smart home and security services, along with our ability to retain a higher percentage of our customer portfolio. Our adjusted EBITDA margins continue to build upon previous quarters and expanded to new highs. Finally, we have stated our desire to operate the business in a more cash efficient way, and we are tracking to be cash flow positive by more than $100 million in 2020. As we continue our focus on optimizing the business, we saw solid improvement across the board in many of our key performance metrics for the quarter. Notably, the last 12-month attrition rate improved by nearly a full point in the quarter and continues to exceed our forecasts. Our LTM attrition rate for Q3 was the lowest in the past 7 quarters, and I believe it speaks to the fact that our core value proposition, proven over 2 decades of reliably taking care of our customers and their families, is as relevant today as ever. Vivint's fully-integrated and proprietary platform provides smart security and peace of mind to nearly 1.7 million customers across North America. Our customers interact with our systems on average 12 times every day, which provides our AI-based platform with over 1.5 billion pieces of data daily. This creates a real-time feedback loop, which enables us to proactively react to any issues happening in their homes. In many cases, we can identify an issue and are already working on a solution before the customer recognizes that something might be amiss. By controlling the entire customer experience from the design of the software and hardware to the sales, installation and service throughout the life of the customer, we're able to provide a robust, reliable and elegant solution to our customers. We believe that homeowners recognize the value of having increasingly complex systems professionally installed and serviced. In this do-it-for-me age we're living in, we believe we have been the leader in revolutionizing the smart home industry by delivering what consumers demand: a fully-integrated smart home and security solution that is professionally installed and seamlessly managed. We believe this consumer demand is proven and our impressive growth. We added nearly 127,000 new subscribers during the quarter, up 14% from a year ago and driven by positive contributions from each of our major sales channels. In today's environment of uncertainty, homeowners are spending more time thinking about and investing in their homes, which we believe is a very positive sign for Vivint. Our national inside sales channel continued its standout performance, generating 32% year-over-year growth in new subscribers. Meanwhile, our direct-to-home sales channel rebounded nicely from the COVID-related constraints earlier in the year, growing new subscriber adds by 5% versus the prior year period. With coverage over 98% of ZIP codes in the United States, we believe that Vivint's premier model is in the best position to deliver a full smart home and security solution to virtually every household in the U.S. Consumers continue to expect increasingly complex smart home solutions that include integrated door locks, exterior cameras, interior cameras, lighting controls and thermostats that are professionally installed, monitored and serviced, but we're just getting started. Even though we have nearly 1.7 million subscribers, our unaided consumer awareness is in the low single digits. The fact that we have been a leader in the rapidly-developing smart home market while relying mostly on grassroots efforts by our sales teams makes us believe there's a tremendous upside if we can increase consumer awareness on a national scale. As we look forward to 2021 and beyond, our focus will be on our key objective of building the Vivint brand and investing in new products, services and technologies. We want to do a better job of telling consumers who we are, what we do and how we can enhance our lives by delivering the convenience, security and peace of mind they desire. In addition, we will look to continue our leadership and differentiation in the smart home industry by increasing our investment in technology and new product development to ensure that we are on the leading edge when it comes to delivering the products and services consumers want. We believe Vivint is the clear leader in the Smart home and security solutions market. We are nationwide a fully-integrated smart home and security provider, and we have an opportunity to expand our business and accelerate growth by investing in our brand and technology and helping people understand the incredible value that Vivint brings. I believe the company is ready to take the next step, and we're ready to handle the inevitable growth that will come with it. We have the technology and services that we believe consumers would absolutely want if they just knew about them. So we're excited about getting the message out, and we're excited about the possibilities and opportunities that exist for Vivint. I will now turn the call over to Dale to go through the specifics of our strong third quarter results as well as provide our updated guidance for 2020.

Thanks, Todd. I will walk through the financial slide portion of the presentation that we posted today in conjunction with our third quarter earnings release. As Todd mentioned during his remarks, our results for the third quarter were very strong across the board. First, on Slide 6, we highlight a couple of the key data points related to our subscriber portfolio. Total subscribers at quarter end grew from 1.56 million to 1.69 million year-over-year or 8.2%. Total monthly revenue increased by $6.3 million -- or 6.3% with an average monthly revenue per user or AMRU of $63.79. On Slide 7, we highlight our revenue for the 3- and 9-month periods ended September 30. For the third quarter 2020, revenue was $319 million, up approximately 10% year-over-year. The growth in revenue was primarily attributable to an 8.2% increase in total subscribers. I would note that the third quarter 2019 revenue includes a $9.1 million reduction to revenue, resulting from a change in estimate related to RIC revenues recorded in prior periods. Moving to Slide 8. Adjusted EBITDA increased significantly in the third quarter and year-to-date periods. The key drivers were continued scaling of our cost to service our subscriber portfolio, the expense portion of subscriber acquisition costs related to the origination of new subscribers and general and administrative expenses. We grew adjusted EBITDA by 53% to $154.5 million in the quarter while expanding our adjusted EBITDA margins by nearly 1,400 basis points to 48.4% of revenue compared to 34.6% in the prior year period. This is clearly a great result, and it's a function of a lot of hard work by our entire organization. Although not shown on this slide, covenant adjusted EBITDA, which is the calculation used for our debt covenants, was $212.3 million in the quarter, an increase of $42.9 million or 25.3% compared to $169.4 million in the prior year period. On Slide 9, we highlight some of our new subscriber metrics. New subscriber originations were 126,847 for the third quarter, which reflects outstanding results from our national inside sales channel and a nice rebound from our direct-to-home sales channel following some of the COVID-19-related restrictions earlier this year as the pandemic started to take hold across the U.S. Overall, new subscribers grew by 13.8% in the quarter versus the prior year period. We continue our focus to improve the cash flow dynamics of the business as evidenced by the 89% reduction in RICs during the quarter. While this has had some impact on these subscribers, by shifting a greater proportion of our subscribers away from RICs and towards our financing partners and paying full arrangements, we are able to increase the amount of cash collected at the point of installation, thus reducing our net subscriber acquisition cost and significantly improving our cash flow dynamics. Moving on to Slide 10. We will cover our net service cost per subscriber and net subscriber acquisition cost per new subscriber for the quarter. We continued our trend of year-over-year improvements in net service cost per subscriber, moving from $16.38 in the third quarter of 2018 to $14.43 in the third quarter of 2019 and now down to $9.82 in the most recent quarter, a $6.56 improvement versus 2018. This continues our record-setting trend of achieving new lows in service cost per subscriber, and it demonstrates the advantage of Vivint's fully-integrated smart home and security platform, which encompasses the software, the hardware, the installation and ongoing customer support. The result is that our net service margin continued its positive upward trend, moving from 68.7% in the third quarter of 2018 to 72.4% in the third quarter of 2019 and now to 80.1% in the most recent quarter. These efforts contributed significantly to the improvement seen in our adjusted EBITDA during the quarter. It's important to note that given the seasonality how we generally put on new customers, particularly in the summer. We tend to see service costs increase in the latter part of the year. Additionally, as mentioned before, we believe service calls have remained abnormally low in the third quarter due to concerns related to the COVID-19 pandemic. So while we're really encouraged by the current trends and the corresponding benefits to our margins, we wouldn't anticipate sustained full year results at the 80% level. On the right-hand side of the slide, our net subscriber acquisition costs for the last 12-month period ended September 30 were $209 versus $1,033 in the prior year period. The decrease represented nearly an 80% reduction as we have nearly eliminated the number of new subscribers that are financed via RICs by shifting to a higher mix of customers utilizing our financing partners or paying in full for the purchase of their smart home products. The year-over-year comparison also benefited from pricing leverage at the point-of-sale purchase of products and installation. Moving on to Slide 11. We show our typical subscriber walk that illustrates the changes in total subscribers at quarter end and our attrition rate trend. One of the biggest highlights for the company continues to be the reversal in our attrition rate, which was lower sequentially by 90 basis points and fell to the lowest rate in the past 7 quarters. The third quarter measurement period benefited from a 2% sequential drop in customers that were in the end of their initial term life cycle phase. While the end of initial term mechanics helped, our portfolio has continued to perform better than expected in terms of the number of subscribers canceling and other leading portfolio indicators through October. We believe that the pandemic, social unrest and improved product performance as evidenced by our lower net service cost per subscriber are having a positive impact on our overall attrition rate. Before we move to our updated outlook, I'll point out that several factors tied to our strong third quarter performance, leave us feeling very good, including our overall liquidity position, which stood at approximately $630 million as of September 30. Our third quarter operating cash flow was strong. For the 3-month period ended September 30, we generated $142.5 million in net cash from operating activities compared to $8.2 million for the same period in 2019. During the quarter, there were approximately 1.7 million warrants exercise, which added approximately $19 million to our September 30 cash position. Finally, let's move to Slide 12, while I will address our updated financial outlook. We believe that the fundamental characteristics of Vivint's high-margin reoccurring revenue model are compelling. More than 95% of our revenue is recurring, which provides long-term visibility and predictability to our business. Many of our new subscribers initially sign up for 5-year contracts and remain on the Vivint platform for approximately 8 years, producing significant lifetime margins. Despite the many uncertainties pertaining to the COVID-19 pandemic, our reoccurring revenue model has proven resilient, and we remain comfortable with our previous revenue guidance. Our better-than-expected attrition rate performance and an improving unit economics have prompted us to update our guidance for total subscribers and adjusted EBITDA. We are raising our guidance for total subscribers to between 1.66 million and 1.70 million versus previous guidance of between 1.62 million and 1.68 million. We are reaffirming our guidance for total revenue of between $1.23 billion and $1.28 billion. We are raising our adjusted EBITDA guidance to between $570 million and $580 million versus previous guidance of between $555 million and $565 million. Thanks to everyone for joining the call. Operator, you may open the line for Q&A.

[Operator Instructions]. Your first question comes from Paul Coster with JPMorgan.

I've got three quick ones. First of all, Dale, can you talk to us about the debt refinancing plans?

Yes, Paul, thanks for joining the call. I think we're actually monitoring the markets to capital markets, and we wanted to get the quarter results now. We think they're strong. We think they're helpful in terms of whatever we decide to do. But we're actually monitoring, and when we're ready, we'll come out to the markets.

Okay. Got you. The service costs are going up in the fourth quarter, although I think you said that they might go up in the third quarter, and they didn't. So obviously, you got a good handle on things. But I also noticed that the average monthly revenue declined. Can you just talk us through that dynamic a little bit?

Yes. So again, Paul, I think -- and we talked about this a couple of -- over the last couple of calls. We purposely are bringing it down kind of the average subscription monthly, right, because we're charging more upfront. When you look at the overall out-of-pocket to our customer, it's actually increased year-over-year in terms of the total dollars related to the amount they pay for the financing piece, which goes to the financing partner into what they're paying us. And so what we've done is shifted a little bit of what they were paying us in terms of that subscription amount each month to pay the financing partner. But we're able to actually bring more cash in upfront, which is why we're producing the level of cash we are in terms of cash from operations. So that's really the driver behind that.

And to add to that, this is Todd, Paul, the $209 subscriber acquisition costs is a direct result of that. So this -- we couldn't be happier about that. But it does -- if you don't understand it, we appreciate the question, but it does look like revenue per subs is coming down, but it's actually not. We're selling more hardware than we've ever sold at a high-margin upfront. And so the business is working very, very well.

And then we're booked on the service cost fall. Again, we're cautious. We think that there's still calls in terms of truck rolls, and calls coming our call centers are still down somewhat compared to what we think would be a normal trend. And so we do expect, at some point those, calls will come back. But we think there's a big part of this, is where our new hardware, our software is performing better, and thus, that's also a big driver in terms of this. But we're very excited about where that service cost is on a subscriber basis and working very hard to keep it low as possible but -- and still maintain a very, very high-quality customer experience.

Got you. And Todd, it sounds like you feel like you could be doing so much better if there was better unassisted brand awareness out there. And it also sounds like you've got these new products and services in the pipeline. I think, most recently, the insurance product is the one that you're talking about. Is that still the sort of first in line? And should we expect some big splashy event to get the brand out there? Or is it more subtle than that?

So speaking to the branding, and again, I had said pretty clearly that until we were positive that we were going to be cash flow positive as a company, on a levered basis, which now we're kind of -- we've kind of put it out there, we're promising $100 million of positive cash flow on a levered basis, which we're very, very excited about, and we know the markets are, too. But we are -- and by the way, that includes money we are going to spend in Q4 on a launch -- a marketing launch. Now we -- if you know anything about our company, we don't -- we like to test -- spend and test and test and analyze. And so we're going to be very, I guess, strategic and clinical about how we spend dollars on the marketing front, what to say, how to spend results that we can get from that. So we are launching in Q4 a branding and marketing effort nationwide. We've been working on it for quite some time, and we've known for a while that we're going to be cash flow positive for the year. So that -- we believe that's going to give us some great tailwind. Now as anyone has seen a branding marketing campaign for a national brand goes, it takes time. This is something you've got to be committed to for years, not months. And -- but again, we've got to be very surgical and strategic about how we spend, where we spend and what we say, how we present the products and services that we have to the consumers, but we are launching that. I think in the coming weeks, you'll see something happen, hopefully. And then the next question was what, Paul, again?

That was it.

No, no, there's something else.

The new products' insurance. How many insurance for the first in line? Or is there anything else coming on?

So we are -- so we are still very pleased with the way insurance is going. Again, we're not announcing numbers yet. We're being very patient about how quickly we launched that product, how we partner, how we position ourselves to our consumers. But I can say this, we believe we've got an incredible advantage because of the view we have into the data that is delivered through our smart home platform that is proprietary to pivot. And I say this with everything. This is going to be a huge advantage for our customers because they have a Vivint product and they believe in our services, not just smart home technologies, but services that we have and are going to be delivering. They're going to be the recipients of the benefit of that. So we're really excited. And again, maybe at some point next year, we start talking about the numbers and the relevance to the future of the business, but committed to it and continue to test and expand that product and service.

Our next question comes from Erik Woodring with Morgan Stanley.

Congrats on the quarter. It's really nice to see. I guess I just wanted to touch on the attrition rate. Obviously, you guys -- it's coming down. Just would love to hear your puts and takes, what you're hearing from your base in terms of what's keeping them on board. Or I guess, said another way, what's causing them to not roll off the platform? And then kind of how that's changed from kind of your guys' commentary maybe 2 or 3 quarters ago, where you've talked about attrition rates possibly being higher into the end of the year? And then I have a follow-up.

So this is -- attrition is an interesting thing. There's no one like silver bullet in attrition. It's a lot of little points of interaction with customers that determines their life cycle with us [indiscernible]. We've continued to improve. And again, this is really, really important. This is the differentiator with Vivint than everyone else. We create our own customers from a sales perspective. We professionally install the hardware that our engineers have designed and have written the software and the firmware for. We own our platform. It's this incredible cycle that -- and it's this feedback move that no one else has at this point. Others are trying to recreate our partnership to recreate that. But it's all -- it's lots of little points of contact and knowledge that we have to improve reliability of the product. It's how we answer calls, it's how we do installs, installation protocol, service protocols. And then this is just maybe not obvious, but it's obvious to us because we've been through a few downturns. Our product and services, when I'm talking about smart security generally, has done very, very well through every downturn, at least I've run the company through. So the last downturn, we shared very well. And I think in general, if you think about the burglar alarm security industry, they've done well also as far as attrition goes. I mean I think people historically, when those things happen, they want to protect their largest investment, which is typically their home, their families, the assets inside of those. We provide that. And then with this current environment of COVID, and people working from home, there's this incredible reconnection with the home, investment and kind of thought process around how people live and operate in their home, how they engage with -- and they're engaging with food delivery, grocery delivery, package delivery, increased demand for all of those services and how we integrate with that for consumer, making them safe and comfortable and giving them the knowledge that they wouldn't have without our services. There's all kinds of things that are benefiting our company today, and we're happy to do that because this environment is a little scary sometimes for people, and this provides nice peace of mind with smart security. And here -- the great thing is, well, one, I hope things calm down on all fronts for everyone worldwide and our country. The -- I think that the engagement with our product and services and app on an individual consumer basis, has been incredible, and it's going to be remembered by our consumers. And then again, I think you layer on with that, the fact that we are now starting at branding and advertising campaign really describing who we are, what we do, how we're differentiated and the value proposition that we deliver, we think we've got some good wind behind our backs.

Awesome. That's really helpful. And then I guess my follow-up would just be, why raise your subscriber -- year-end subscriber targets but not your revenue guidance? Just what was the thought process behind that? And any kind of moving pieces that we should be thinking about there?

Yes. I think, again, we're raising the subscriber targets based upon the fact that attrition is running much better than we had in our forecast. So our revenue guidance, the ranges, are we feeling comfortable? One, the number of subscribers increasing doesn't impact -- I mean because we've got a pretty good-sized range there and we're given in terms of $1 billion range. We're within that range even if the subscribers are 20,000 or 30,000 or 40,000 more subscribers. So we feel very comfortable. I mean if you go back, our revenue because this is the recurring revenue, we know going in, even starting to go into next year, we have a really good line of sight into what the revenue number will be. It's a little bit of moving around subscribers in terms of [indiscernible]. I think the other thing is we feel more comfortable today where we sit here in the first week of November than we did before in terms of the subscriber number, knowing how the metrics are working, how attrition has performed into a quarter plus or a quarter or so into the fourth quarter. So that's the reason why we made that guidance change.

Our next question comes from Amit Daryanani with Evercore ISI.

Yes. I guess a couple for me as well. Todd. First off, you've talked a fair bit about just increasing your brand awareness and recognition. I just want to get and understand the strategy there. But could you just touch on -- have you tested this in smaller regions, smaller cities? If so, what do those metrics look like to you? And then as you think about scaling this up to the extent you're talking about it, what does that investment look like from a cost perspective in calendar '21?

Yes. So we haven't tested the type of branding and advertising that we're going to do. But as you all know, we do -- we have an inside sales group that's about half of our -- half of the consumer adds on our customer base annually. So we do spend money on branding and advertising. It's more lead-gen type advertising. So this is going to be slightly different. We're branding style. So we have not yet done it, and that's why we're not going in full force. We're going to test in but on a national basis. And from a dollar spent on branding, it's much more expensive to be -- to go into a city or region than on a national basis on a spend. So that's what we're going nationally, not just on a local basis.

Got it. That's fair. I guess I was wondering if there's any way to dimension what that cost structure or cost will look like around that in calendar '21. And then I guess with Dale, the net service margins improved rather dramatically once again. And I understand some of this is more transitory in nature, perhaps even though on folks who come to the houses as much. But is there way to think -- if I look at the improvement you guys have had over there on a year-over-year basis, how much of that is structural versus something that's more transient that could go away in a post-COVID world if we get that ever?

Yes. So I think we believe that, again, we've been very focused on this. If you go back 24 months when servicing cost was, call it, high $18 range, $17 range, and this is the benefit of having this fully-integrated model where we own the software, we own the product, we own the hardware, we do the sales, we do the installation, all of that feedback loop that we have, the cost of feedback loop that we have allows us to know, hey, what are the issues. And as we said, one of the big issues and one of the big products that people want in their homes is video, it's cameras. Whether it's indoor camera, outdoor cameras, doorbell cameras, as Todd said earlier, there's lots of uses for the video. And we knew that with some of the connectivity issues were a big part of that, which were driving up calls into our call centers, which were driving calls in related to driving us to have to roll trucks up to people's homes. Those are expensive, and you have to actually roll -- go out to people's homes and fix those issues. So we believe by rolling out some of the new products -- we rolled out some new camera products, new doorbell camera. We've rolled out a new hub. We've upgraded the firmware and software associated with that, those products that service, and we've done a lot of work around the technology that we have from our tools when we're installing stuff around, hey, what's the Wi-Fi connectivity in this part of the house or this part of being outside on the start corner of the home and making sure that where we're installing equipment and hardware in those homes that it works and that there is Wi-Fi connectivity, and then we make sure it all works together before we're leaving. And so what I think you're seeing is there's a structural move but the lower -- and in terms of servicing cost will be lower. I'm not -- I can't tell you on the call today how much of that is, but we believe that there's definitely that movement because we're seeing less calls coming in. And then we do know, too, because, again, the feedback loop we have, because we have to own this whole thing, is that we do know the type of calls are coming in, what those -- what are those issues. And we can go actually go work on those issues, whether they're, again, updates to the firmware, software, things of how we're installing the product in folks' home. So we think that's a big part of it. Again, there's some part of it that's COVID-related. But fundamentally, we believe that we have this product and our services that we really are starting to fine-tune in terms of the cost to service those related to, again, calls coming in related to issues with the products. And again, a lot of that was around video, which we spent a lot of time and efforts to correct. Because ultimately -- and I think this also steps to the attrition that we talked about on an earlier question. If you get on your phone or you pull it up on your computer, however you're accessing the payment system and the cameras aren't on online or they're going offline, you're not going to be happy with the system versus today, you get on and the system works, the cameras are out there. You can go quickly to look at the events or you can pull it. It comes up and says someone's at your front door delivering a package. It works very well. It's seamless, your experience, that's going to drive customers to stay longer onto the platform.

Our next question comes from Shweta Khajuria with RBC.

Let me try two, please. Could you please run through why the subscriber acquisition cost decreased so much? And what -- how we should think about sustainability of that? That was a material decrease. And then the second one is, how are subscribers or potential subscribers responding to your new pricing plan or the change in the pricing plan? And yes. Just those two, please.

Sure. And I'll start here and then, Todd, you can jump in if I don't cover anything. I think I'm going to start in reverse order. I'm going to take your second question first, and then that drives into the first question. I think in terms of the pricing model that we have -- and we're always looking at this pricing model, by the way, and I think you'll see us make tweaks to it as we roll into '21. We're always -- as Todd said, we test a lot of things. So we tweak things, and we keep tweaking until we find the optimal. But I think in terms of the acceptance from customers, I mean we grew subscriber 14% in the third quarter. Year-over-year, we continue to add new subscribers. And I think one of the things I'd say is inside sales is where you're getting leads coming from the Internet. So customers are going out on the Internet, for example, maybe they're searching for smart home, smart security, security. And they're going to see other people's offers out there, by the way, as they're doing that. And that channel is growing. I think it grew 32% in the quarter. So we think customers understand it. They like the transparency of it, by the way. They like to know, hey, this is what I'm paying for the equipment that's going home. I can -- this is the equipment that I want to buy. It's not that, hey, you're getting stuck with the package of things that you don't really want in your home, whether it's sensors or whatever. They're picking exactly what they want, as Todd mentioned earlier. They're taking more equipment today than they've taken in past, and they're taking smart home equipment. It's not just a sensor here and a door or a window, it's outdoor cameras, it's the doorbell cameras, it's door locks, it's response servers. It's really those things that help them have better management of their home, and so that's -- we think it's been received very well in terms of the customers taking that from both of our channels. In terms of the drop in net SAC, and we've kind of hinted to this on the last quarterly call, there's a couple of things going on here. One, we've reduced RICs substantially. If you go back to last year in the third, I think it's down 89% year-over-year in the quarter. And so if you recall, RICs are customers that we were basically financing and putting on our balance sheet, so we got no money upfront from those customers. Versus today, basically, 99% of the customers that we put on today, we're collecting money upfront either. They're -- it's coming from them financing through one of our financing partners, or they're just paying for it out of their own bank account. So that's fundamentally changing the amount of money that we're collecting upfront in terms of those customers. And what you're seeing is, again, this is an LTM calculation. So what you had when we dropped from 9 -- I think it was about 950 in the first quarter to 630 in the second quarter. Now we're down to in the 208, 209 range this quarter because we're having those quarters that have higher RIC percentages that are falling off as we recalculate this out. So it's fundamentally changed the business. It's really driving the cash production is coming into this. We think it was something that we needed to do, and it's really changed, and frankly, allowing us to do some of this investment Todd's talking about in terms of brand and marketing and some of the other things we want to go do here. In terms of how that looks, again, we'll tweak things. But I think, again, you'll have another quarter in the fourth quarter that as we kind of report out here in the next -- when we report fourth quarter, they have, call it, 8% to 12% RICs in that quarter, and those will fall off. And if you can kind of go do your math there, but if we have 1% RICs again, that number is probably going to continue on coming...

So the answer is it's sustainable. So I think we've kind of danced around this for a few quarters. Our business model is working the way it's working. We've said it was going to come down from 1,000. And we've not pinned a number, but we are very close to cash flow breakeven upfront when we create a customer. I'll just say it. We don't have to dance around or think about in the future. Anyone on the call, it's now public. So which is an incredible dynamic for our business compared to anyone on the call that listen to us, to our earnings call back when we were a consumer of debt. It was $2,200 -- our gross acquisition cost was -- gross and net was $2,200 subscriber acquisition costs. So this is an incredible turnaround, and you're seeing the cash dynamics for the business, which also is because of the reduction in service costs, which is also because of the reduction in overhead. If you look at our overhead numbers compared to the past years, we've been incredibly focused on being a very lean company spending where we need to reinvest in what we think we're going to get growth, better technologies, better software, better firm work, better service delivery. So we've been busy in the last couple of years, and we're finally seeing those results. And again, back to the -- how do we grow the business more, continue to enhance products and service -- products and services to consumers wanting demand and then really go tell our story. Someone's going to probably ask, I'm surprised no has, who's your competition. Our competition right now is a lack of awareness of business. We did -- we have an incredible business, north of $1 billion of revenue, incredible margins, great service delivery, and nobody knows who we are. Not nobody, but it's -- I mean it's single-digit consumer awareness of our brand. When people really do understand how incredible it is, what we can do inside of their home and interact and engage with the way they're now living their lives and the value prop that we deliver, we're going to -- we believe we're going to catch some wind from that perspective. And so we're -- and again, it's going to take time. It's not going to be overnight, but we're obviously patient and committed. So we have -- we're excited about what's ahead of us.

Our next question comes from Kunal Madhukar with Deutsche Bank.

This is Akash on for Kunal. I just have two questions. I guess the first question being, looking at third quarter versus second quarter, could we dig maybe a little bit deeper into buyer behaviors? And any changes in product mix that you guys saw in 3Q versus 2Q? And then also on the topic of competition, actually, looking at the landscape, any new trends that you guys are seeing in terms of the competition as it maybe relates to Amazon Ring X System or Google Nest? And any color there would be great.

Well, I'm going to talk first about the competition just because I said something and you asked the question anyway. We're always paying attention to what other people are doing out there. There's no question about it, we'd be crazy not to. But this is a tough business. I mean -- and I'm not talking about the single point solution stuff like a doorbell camera or an Arlo camera on the exterior of the house. These are fully-integrated smart home systems on a very intelligent platform, 14 devices installed in a home. And so to do that, you've got to have a very capable installation network, which we happen to own our own, our employees. And then the ability to -- and we've talked about this quite a bit today. Kind of own that whole interaction with customer from the sale process to the installation, the ongoing support, either technical support over the phone or if needs be driving a truck out there if that has to happen to deliver what we say we're going to deliver. So we have not yet seen someone else step up to the level that we're doing this. People have parts of what we have by way of nice camera design or a nice doorbell or nice thermostat. But we've got an incredible moat because of -- and this is 20 years in the making, incredible moat. To recreate what we've done is not easy. I'm not saying it can't be done, but very difficult to do. And speaking to Google, I mean they did invest in ADT. And I think the partnership, which we're super happy. It kind of validates -- we believe it's not just sort of it really validates their beliefs and the need for this infrastructure to be in people's homes, beyond the phone, answer calls, install professionally these new technologies that are coming. But you did -- if you've noticed anything, Google also did in their Google Nest security product. So it's even for a Google expense, I think they spend a lot of money. I don't know the number, but it's a lot. I see their ads all the time. It's not easy. People don't just buy this off-the-shelf and just understand how to install it themselves. It's not that easy. And then there is the DIY component of this industry, which we have that capability. We're testing that. We just happen to like to have really high margins, which we do; and a very long customer relationship, which we do. And as we've tested DIY, which we are, and we're capable of it. I mean that's the great thing, we have incredible flexibility in the services offering, pricing perspective. It's our hardware, our platform. We're not yet convinced that we want to heavily pursue DIY even if consumers demand it because we want to make sure when we get on this call, we say, hey, we had high margins and we have a long customer life and a huge profit pool ahead of us. We want to grow. We are growing at a very nice pace. We intend to grow -- we believe that there's a lot more growth in this space than what we show at this point. But we've got to invest in that and be focused on that, which we are. But we're not growing to grow just to add subs if it doesn't add margin, profit pool and customer longevity. We're not going to just chase that. And again, we are -- it's a good question. We are absolutely paying attention, and we watch what other people do. But I would say this, we've got 20 years doing this business. And we believe we're the clear leader in the smart home as a service space, a clear leader and a lot of experience. And we're just really excited about the way that consumers are engaging with our platform, the number of interactions per day, the different use cases that they're starting to discover as they -- again, this is me also. I'm so much more engaged with my home and my family because of the environment that none of us chose, it is what it is, and it's been unfortunate in some ways. But in other ways, we've had to learn how to do that. Enjoy the home is kind of our staycation, I think people are calling it. And it's our work environment for most of us a lot of the time. So we are perfectly positioned as a company that can deliver really interesting services and offerings into consumers' home right now. So we feel like we're a [indiscernible].

Mix of buyers [indiscernible].

Oh, so mix of buyers, not much change quarter-over-quarter. I mean not really actually. Sorry, I missed the last part.

Our next question comes from Todd Morgan with Jefferies.

I mean a great quarter. Good to see, I guess, year-over-year growth in subs, even with COVID. Two questions coming out of that. I guess first of all, is there any way to think about how much better or easier it would be to kind of sell and close and install and service customers without COVID? As you look forward, I know you've talked about continued growth, but how much is that kind of holding you back now, if that's the way to think about it. And I guess, secondly, you talked a little bit about the SAC cost, this is for costs being on an LTM basis, really only a couple of hundred dollars. I mean if my math is right, you're basically paying nothing to add subs now, and it looks like you kind of suggested the same. Is there any reason to think that, that doesn't continue to be the case? In other words, you can kind of grow with effectively a $0 cash cost of adding that new subscriber?

Thanks for the questions. So to the net SAC, that's absolutely at this point a choice. And Dale said, this is kind of interesting. Before we had consumer financing, and the hardware was kind of part of the overall package, it was a little bit confusing. It's so beautiful now because customers really can just pick and choose either to pay upfront with no contract, by the way, no commitment, it's month-to-month from that point or user financing, 0% financing going forward. And the majority choose the 60-month financing. But it's an interesting thing because we now have kind of levers we can pull on where we want to be. Now at this point, and again, things can change. I'm not -- we're not going to say nothing can ever change in the business environment or financing environment. But as it stands today, we are and can continue to operate at a minimum of breakeven upfront on the subscriber acquisition, which is absolutely amazing. By the way, I don't -- when we really set out to do this internally as a group 18 months ago, I don't even know if we believe that we could do it, but the same goes true for the sub-$10 servicing cost. We had a goal by -- just so everyone knows on the phone to get down to $10 a month servicing cost about 3.5 years ago. So the fact that it's happened -- and some of it's in the environment that we're in, but others are my choice and investment, we're really excited about that. So the answer is yes for now. Speaking to some date in the future where the economic environment changes and we are reliant on consumer financing group citizens, which has been amazing, in Fortiva, they've also been amazing, we can continue to do that. We think it's the right way to do this.

And then the other question is around COVID. The impact of that do you think that's having on sales.

Yes. So from a COVID perspective, and I think maybe we have had -- we obviously had to put our direct-on-sales organization on pause. We also -- and I didn't mention this earlier. I want to make sure I do again. We eliminated about 40,000 subscribers we would have put on in the past in the form of RICs. So when you really look at our sales performance, customer adds and revenue, it's not good, it's outstanding. And so again, we have benefited from people being home, being more engaged with their home. Our performance on a per reps or sales per or sales per sales rep per day and revenue per customer, it is up substantially. It's up really nicely, I guess, I would say that right saying. I think we are going to see that trend, at least where we are, maintained because I think there is a lot more awareness in markets about who Vivint is. And as we layer on the branding and marketing campaign that we're doing, that we hope to perfectly describe how elegantly we deliver services to consumers, the quality of product, the design of the product, the value prop that we're going to keep those gains going forward. I'm actually fairly confident of that.

Our next question comes from Marlin Rio [ph] with Bank of America.

Just a quick one on attrition. A few quarters back, you had talked about kind of a 14.5% to, let's call it, 15% level, mainly attributable to lower cohorts coming due. And I was just wondering if you can provide any commentary on how -- given the improvements in the last 2 quarters, if that has changed or if it's been pushed out or if it's maybe been kind of spread over a longer time frame?

And I just want to make sure in terms of the question -- I mean we think attrition, again, we've seen really, really positive signs of attrition in terms of the number of folks that were canceling that were at their initial in the term. That's been much lower than we had forecasted. Our payment indicators in terms of payments coming in from customers performed really well. So we're seeing really good performance of the portfolio. I think as we look to the rest of this year -- and again, there is COVID. There's cases spike in all across the country, and we can't -- we don't know how that's going to actually impact or if it will impact our customer base. I think if we looked at this year where I'm comfortable saying it is we're somewhere probably in the a 12.5% to 13% is where we'll end attrition for this year, so kind of in the range we are right now. That's where I think we'll end this full year. And then once we get a better indication of how things look going into next year, will give us an indication of what we think for 2021. But I think we believe that our -- that the big fundamental change in how our service is performing, how we're delivering that service and the products that we're providing to the customers and the fact that even though they're home, Todd mentioned this earlier, there's just that reconnection that remodeling of their home, upgrading their home, adding the service to their home is something that they're doing and they want that in their home, and so we believe those customers will stay on the Vivint platform for a longer period of time.

Got it. And that's what I was getting at, Dale, is that instead of saying x amount of cohorts are coming due, normally, we see this type of behavior, that the past 2 quarters have been much better than my expectation. So it's not that, that 14% or whatever that number was got pushed forward. You could actually maybe even see that attrition or those cohorts coming due maybe spread out over a longer period. I guess my point is, that 14.5% to 15%, is that necessarily still out there and just pushed out? Or based on what you said in terms of people reconnecting with their home, we could actually see a shift in that to some extent?

Yes. No, I don't -- we don't believe -- again, I'll just kind of give you the range, I think, for the end of this year. We don't -- and we'll give you next year. But we don't believe that 14.5% to 15% is it's -- you could take that off the table, I guess, is the best way to say it. We think we're somewhere again in this 12.5% to 13% range this year. And then we'll see what happens next year. Again, if things continue to perform as they are today, it's been -- we're going to be in that 13-ish range. But we don't think that we're going to see this spike back up to kind of that 14% -- north of 14- ish, 15% range.

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

Yes. So we just want to thank everyone for getting on the call. We are excited about the quarter that we've had and the year that we've had to this point. Hopefully, we've lived up and beat expectations, at least that we've told you in the market. I want to make sure you all know this, we're incredibly focused on the current quarter, all of the dynamics of the business. We've got a pulse on everything, where we feel very confident in what we've stated and what we've promised for the year. But as an organization, and I think you'll learn this over time, it's not just the next quarter. We are investing currently in making sure that we make improvements and strides towards better service delivery and everything for the future of the business. We hope to continue to outperform expectations in the future. So thank you.

This concludes today's conference call. You may now disconnect.