As one of the largest and fastest-growing smart home technology and services providers in the industry, Vivint continues to demonstrate the ability to generate strong recurring revenue growth and improve its subscriber base with a higher average revenue per user (ARPU) rate.
More than a million consumers pay between $40 and $80 a month to have Vivint monitor their security systems and receive ancillary services for connected smart devices made by Vivint or its technology partners. On average, Vivint installs $1,500-$2,000 worth of hardware into a home, much of it free of charge. You can imagine the exorbitant creation costs that weigh on its bottom line. As a result, privately held Vivint has tapped the debt capital market for hundreds of millions of dollars in the last few years to finance its rapid growth.
Enter Vivint Flex Pay, an interest-free financing payment model introduced Jan. 3. In a nutshell, the program is intended to help Vivint reign in its creation costs by recouping 100% of its retail equipment costs, while giving the consumer a more flexible means to outfit (and refresh) their residences with smart home products and services.
Vivint Flex Pay separates the full retail purchase of products and the monitoring/service agreement into two separate transactions. There are three distinct options under the program:
1) Qualified customers can finance the purchase of products and installation with a 0% APR interest installment loan (42 or 60 months) with Citizens Bank. A separate monthly monitoring/service fee of $39.99 for security or $49.99 for smart home services will be billed by Vivint. (The Citizens Bank offer will only be available in the United States.)
2) Customers who don’t qualify for the Citizens Bank loan terms, but do meet Vivint’s current underwriting criteria, can purchase the products and installation with the same 0% APR installment contract terms, along with a basic service agreement of $39.99 per month for security or $49.99 per month for smart home services.
3) Customers have the option to pay cash up front for products and installation, and choose either the $39.99 per month for security or $49.99 per month for smart home services. Customers will also be given the option to select a month-to-month agreement.
“With this new financing there is much less capital required up front by the company than traditionally because the customer is essentially financing the purchase of their hardware,” Vivint CFO Mark Davies told me. “All of that is financed through the customer’s balance sheet. Citizens Bank funds that and then reverts that money back to Vivint.”
Davies said the company is funded through 2017, and if their expectations for mass adoption of the program are realized then Vivint won’t need to raise any more debt for growth for the foreseeable future. In fact, the company would be cash flow positive.
“We will be the only self-sustaining, growth-oriented company in our space. We are really excited about this,” Davies said. “Not just from a customer standpoint, but from the ability to finance our business and to grow without the constraints that we’ve had in the past, which is raising capital.”
In accordance to their agreement, Vivint will pay a monthly fee to Citizens Bank based on the average daily balance of the loans provided by Citizens outstanding, and Citizens and Vivint will share liability for credit losses. Vivint will be responsible for anywhere between 5% to 100% of lost principal balances, depending on factors specified in the agreement.
David Stang, founder and president of Stang Capital Advisory, explains the biggest benefit the new business model offers Vivint is it diversifies their financing options. The company, heretofore, has been dependent on raising capital in the high-yield bond market. The agreement with Citizens Bank will provide Vivint an additional external source of financing.
Because of the monthly discount rate Vivint will pay to Citizens Bank, which is about the same as the interest rate on their unsecured debt, as Davies explained on an investors call Jan. 5, Vivint is still raising roughly the same amount of debt. Hence, their interest expense is still going to be the same whether they pay it to a bond holder or to Citizens Bank, Stang said.
One potential negative side effect of the new model, Stang said, is it could decrease the lifetime value or LTV of customer accounts.
“If you have a customer with an 8-year average life, they are paying that higher amount of RMR for 8 years. Now they are going to be paying a lower amount of RMR,” he said. “And once the customer has paid off that finance contract they will still be paying that lower amount. It could allow Vivint to grow faster with customers, but their RMR and the ARPU will be comparatively lower. Vivint is probably looking at it as the need for financing their growth rate has been a burden. They are trying to balance that. They won’t need the financing, but their RMR won’t grow as quickly.”
Vivint spent the better part of 2016 introducing the concept to its sales force, and lately it has been conducting a pilot program to test the model with select consumers. The company will continue testing the program in the first quarter of 2017 with plans to officially begin rolling it out in the second quarter. If all goes well, the old subscription model will be scrapped and Vivint Flex Pay will become the company’s new offering in all its channels.
Vivint President Alex Dunn told me the company is very encouraged by how well the program is being received by consumers in the pilot program. The transition period, however, is expected to present some challenges.
“One of the potential outcomes of that [transition period] is we think as the company adjusts to the new model there could be a hit on volume, but we think that will be short-term in nature,” he said. “This all depends on how it’s adopted by the consumer, but we feel if we are successful in making the transition that we give the consumer a better deal. It’s more affordable, more flexible for the consumer, and we give the company a lot more flexibility in being able to continue to grow.”