MONI’s Work to Improve Its Standing Among Investors Is Paying Dividends
A research report by Imperial Capital spells out how strategic initiatives instituted by MONI CEO Jeff Gardner could enhance the company’s standing in the investment community.
DALLAS — In late June, Imperial Capital hosted meetings with MONI CEO Jeff Gardner and investors to analyze the company’s uphill march to become a smart home and IoT solutions specialist from its roots as a dealer-dependent alarm monitoring firm.
MONI’s ongoing organizational and business model restructuring is bearing more fruit than many in the investment community have yet to recognize or fully appreciate, Imperial Capital wrote in a research report based, in part, on those meetings.
“[W]e believe MONI’s focus on technology and improving financial metrics may have been overlooked by investors,” the reports states.
Gardner has been holding his own meetings with investors to discuss his strategic initiatives and the positive changes that have taken place at the company the past 18 months. He is of the mind the market may not be valuing the company’s equity properly. With a small equity market capitalization of roughly $200 million, Gardner believes the operational improvements he is making need to be articulated to the investors on a more regular basis.
“As he looks out over the next 12 months, he appeared confident that 2018 could be an inflection point for MONI,” states Imperial Capital.
Enemy No. 1: High Attrition
Due to a years-long elevated attrition rate, investors have looked warily at MONI and its publicly traded holding firm Ascent Capital Group (Nasdaq: ASCMA). In 2012, Ascent purchased roughly 93,000 subscriber accounts from Pinnacle Security for $131 million. The attrition rate edged upward following the acquisition, just as MONI projected; however, the rate has remained stubbornly high and for far longer than projected.
Many of these accounts were five-year subscriptions that are now coming due. So, too, are a large number of dealer-sold, five-year contracts. MONI management remains focused on improving the unit economics of the accounts.
“One way in which the company has done that over the last several months is by being strict with dealer policies and renegotiating the contracts to be able to purchase accounts at an average of 37x [RMR], down from 41x RMR,” states Imperial.
With MONI thrusting new economics onto its membership, Imperial Capital initially expected the changes could result in dealers fleeing to sell their accounts to other monitoring companies. Yet most of them have elected to stay put.
In the report, Imperial Capital illustrates marketplace disruption where, until recently, the dealer model had become “unhinged” over a period of several years. ADT Corp. (now privately held) and MONI were paying higher RMR multiples than their historical average. Today, MONI is encouraging dealers not to outsource their work to other dealers, but instead generate the contract on their own.
“In addition, management is encouraging these dealers to hire newer employees that are tech-savvy and require lower compensation than a seasoned industry professional. We believe that the change in the dealer model could prove to be a positive for MONI. We believe it may take several quarters before it materially impacts the company’s margins,” Imperial states.
Credit standing is a key piece to management’s continued focus on improving customer profiles. MONI has an average customer FICO score of 715. Sixty percent of customers are under contract. Among new customers, 40% are under a three-year contract and 60% are under a five-year contract. As customers complete their annual contract, they are automatically switched to a month-to-month agreement.
The rate that month-to-month subscribers pay is roughly the same as the rate they paid while on an annual contract. Imperial Capital notes that customers of LiveWatch, the provider of professionally monitored DIY home security systems acquired by Ascent in 2015, create 15%-20% of all new accounts but do not sign an annual contract.
In the past year, MONI has implemented several strategies to improve its customer profile — work considered critical to lowering its unit and RMR attrition — such as a dedicated department to identify and retain customers that want to cancel.
“While it appears that this group is being well-managed, we believe that the team needs to successfully retain two-thirds of the customers who call to cancel their service. Mr. Gardner noted that the retention rate of over 60% has improved from 45% just 18 months ago,” Imperial writes.
Although MONI has historically relied on its dealers to create new customers, management acknowledges it previously waivered too far from its historical creation cost of 34x-35x RMR. When asked about the likelihood of pursuing a bulk purchase similar to the Pinnacle buy, Gardner said he does not see many such attractive bulk buy opportunities under 35x RMR.
Imperial views MONI’s fledgling internal sales model as potentially a key adjunct to its traditional dealer model. During the past year, the company has slowly begun to generate more and more of its customers via internal sales, although it remains under 10% of total accounts generated. Internal sales are growing between 20% and 25% year-over-year, and management is gunning to improve the metric further.
“One of the elements that usually has the best effect is the organically created subscriber business. Although this is positive, you can see that the production is pale in comparison to legacy base and their overall new production,” Peter Giacalone, president of Giacalone Associates, tells SSI. “If they are managing the LiveWatch business diligently and staying real strict to best practices that growth should bring them some added stability.”
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