江森自控 (JCI) 2008 Q4 法說會逐字稿

Good morning, and thank you for joining Brink's Home Security Holdings Fourth Quarter and Full Year 2008 Financial Result Conference Call.

Today's remarks will be made by President and CEO Bob Allen and CFO Steve Yevich.

A question and answer session will be held following the prepared remarks.

An earnings release was issued this morning and is available on the company's website at www.investors.brinkshomesecurity.com under the investor's information tab.

If you wish to have a copy of the release emailed to you, please call 972-871-3511.

This call and the ensuing question and answer session may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements may involve risks and uncertainties.

Such statements may address subscriber growth or growth rate, disconnect rate, customer attrition, the ability for the company to successfully change its brand name, the incurrence of expenses in future periods, and financial results the actual results of which may vary materially from those projected, implied or anticipated by the company's forward-looking statements.

Please refer to today's press release for additional forward-looking cautionary information statements included therein.

Actual results could differ materially from projected or estimated results.

Information regarding factors that could cause such differences is available in today's press release and in our SEC filings which includes our Form 10 registration statement.

The information discussed on the call is representative of today only.

Brink's Home Security Holdings disclaims any obligation to update any forward-looking statements as a result of developments or event occurring after this call.

This call is copyrighted and may not be used by a third party without written permission from the company.

Today's call will contain references to certain non-GAAP financial measures which the company believes provides useful information for investors to enhance the understanding of the company's performance.

Reconciliation of the non-GAAP measures to GAAP can be found in the earnings release.

A copy of the release can be found under the investor information tab at the company's investor relations website www.investors.brinkshomesecurity.com.

As a reminder today's call is being recorded.

A replay of the webcast will be available today at approximately 1:00 p.m.

Eastern time and can be found on the investor relations section of the company's website as previously noted.

A replay of the call can be accessed by calling 888-286-8010 for domestic or 617-801-6888 for international using the replay pass code 11778006.

I'll now turn the call over to Bob Allen.

Thank you, [Becky].

I'd like to welcome you all to our Fourth Quarter and Full Year 2008 Financial Results Conference Call.

I'm glad you had the opportunity and the interest to join us today.

As I'm sure all of you are aware, Brink's Home Security was spun off from the Brink's company via a stock distribution to existing shareholders on October 31st of last year.

On November 3rd, 2008, we began Regular-Way trading on the New York Stock Exchange under the ticker CFL which reflects our mission statement of creating customers for life.

This morning, we reported fourth quarter earnings of $14.8 million, up from $12.2 million last year.

On a GAAP basis, diluted earnings per share were $0.32 versus $0.27 last year.

For the full year, earnings were $57.1 million versus $44.2 million in the prior year.

Diluted earnings er share on a GAAP basis for the full year were $1.25 up from $0.96 a year ago.

Once again we delivered solid growth in subscriber count, revenues and operating profit in a challenging economic environment.

We added over 16,000 net new subscribers in the fourth quarter and over 77,000 on the full year.

Ending subscribers at December 31st totaled over 1.3 million, an increase of 6.3% over 2007.

Installations for new customers were over 41,000 in the fourth quarter.

5.5% lower than last year due primarily to the ongoing weakness in the housing market and the general economy.

On a full year basis, installations totaled over 173,000, 4.3% lower than prior year.

We continue to add customers in a disciplined economic manner and are focused as always on continuing to grow the net present value of our future cash flows.

On a trailing 12 month basis, the fourth quarter disconnect rate was 7.5%, up 50 basis points from last year's 7.0%.

The annualized disconnect rate for the fourth quarter was 7.8%, up from 6.7% in the year ago quarter.

Both timeframes, the majority of the increase in disconnect rate was due to higher residential and commercial subscriber cancellations.

The increase in the customer disconnect rate has been fairly well spread out geographically across our residential and commercial customer base.

We continue to see fewer disconnects due to customer household moves and more disconnects from customers requesting termination of service.

Monthly recurring revenue at the end of the fourth quarter rose 8.9% to $40.5 million.

The increase was primarily the result of our 6.3% increase in ending subscribers and a 2.7% increase in our average revenue per user.

Revenues increased 7.3% to $135.2 million in the fourth quarter.

On a full year basis, revenues increased 9.9% to $532.3 million.

Revenue continues to be driven by the growth in monitoring and service revenue, which accounts for 89% of total revenue on a full year basis.

Fourth quarter operating profit rose to $24.7 million, up 30% from last year's $19 million.

Our profit margin was 18.3%, up from last year's rate of 15.1%.

On a full year basis, operating profit rose to $94 million, an increase of 29% to prior year.

The full year operating profit margin was 17.7% versus 15.1% in 2007.

EBITDA from recurring services for the full year totaled $321.6 million, an increase of 10.9% from prior year.

Steve Yevich will cover EBITDA in further detail in his comments.

Now I'd like to turn my remarks to our new brand development initiative.

As you are aware, we hold the brand license for the use of the Brink's brand name at a royalty rate of 1.25% of revenues for a maximum duration of 36 months from last October 1st's spin off.

We are heavily engaged with Landor Associates and with our other marketing partners to develop a new brand identity.

We are making progress on this initiative and continue to anticipate that our new brand will be introduced in the third quarter of this year.

To fully establish our new brand identity, we believe that we will incur cumulative incremental marketing costs of between $100 million and $150 million pre-tax dollars.

In the fourth quarter of 2008, we incurred $600,000 of expenses directly related to re-branding.

These costs were mainly associated with Landor's work and related marketing research.

In the first and second quarters of 2009 combined, we expect to incur incremental re-branding expenses of under $4 million.

Upon the new brand introduction in the third quarter of 2009, incremental marketing spending will pick up and most likely continue over the next 24 to 36 months.

We will carefully monitor our spending and the results from our new brand introduction.

We intend to build our new brand in the most cost-effective manner we can.

Our desire is to build a new brand identity that will allow us to continue to drive our subscriber growth through our direct response market.

We expect to fund our brand development and our ongoing subscriber growth initiatives through the use of cash on hand at year end and the cash generated from our operations on a go-forward basis.

Continuing our look ahead for 2009, our current expectations are for continued weakness in the housing market and in the general economy.

Despite these headwinds, we believe we have a solid strategy and the necessary operational initiatives to deliver continued subscriber revenue and GAAP operating profit growth in 2009.

Our strategy for 2009 remains consistent.

We are focused on continuing to grow our residential subscriber base, continuing to develop our commercial business, increasing our average revenue per subscriber, continuing our efforts to maximize customer retention, and developing and introducing our new brand identity.

As always, we will maintain our disciplined economic approach to the business.

Now I'll turn it over to our Chief Financial Officer Steve Yevich for his comments.

Thanks, Bob, and good morning, everyone.

To start, let me be clear on one important point.

The GAAP results we have reported this morning include royalty expense calculated at their historical rate of approximately 7% of revenues for all periods except that in the fourth quarter of 2008 we incurred royalty expense at a rate of 7% of revenue only for October dropping to the new lower rate of slightly less than 1.25% of revenue for the remainder of the fourth quarter.

We have included a section in the press release where we have laid out earnings, recalculated on a non-GAAP basis, with the royalty rate in all periods normalized to the go-forward rate of 1.25% to allow better comparability across periods.

Royalty expense is an item that will continue to affect comparability of our reported GAAP results for the remainder of 2009.

Another point, as we were not a stand-alone public company for the full timeframe for any period shown, all of our earnings per share calculations are done using pro forma shares outstanding.

This use of the term pro forma should not be confused with the non-GAAP earnings per share calculations that we have also provided for the normalized royalty expense.

One more point, we must file our 10K by the end of March.

Like all 10Ks, ours will provide additional details on our full year performance as well as a complete set of audited financial statements and footnotes.

Now, getting back to the fourth quarter results, revenues increased $9.2 million or 7.3% for the quarter over the comparable 2007 period.

As Bob mentioned, the increase was primarily due to the affect of the larger ending subscriber base supplemented by an increase in average monitoring rates.

These increases were partially offset by a decline in Brink's Home Technologies pre-wire and print out revenues which for the quarter comprised only about 1.6% of total revenues, down from 3.2% of total revenues a year ago.

Total operating expenses in the quarter increased only $1.5 million on a GAAP basis or slightly less than a 1.4% increase from 2007 but there are several items to take note of.

Our cost of revenues decreased by $2.4 million in this year's fourth quarter from last year's despite a larger subscriber base.

The reduction in the royalty rate charge saved us about $5.1 million in the quarter from what it would have been under the previous agreement.

Most other costs increased proportionally less than the growth in subscriber base.

On an adjusted basis with royalty calculated at the new lower 1.25% rate in both periods, gross margin improved 51.6% from 49.8%.

Selling, general and administrative or SG&A spending overall grew in the fourth quarter to 30.5% of revenue compared to 29.6% in last year's fourth quarter.

As in the third quarter, part of the growth in SG&A was due to higher spending year over year on additional resources devoted to expanding our commercial activities to a broader range of products and services and across more geography.

In addition, automobile reimbursement costs for the sales force were higher compared to last year.

We did, however, trim our marketing and advertising expenses almost 8% compared to the fourth quarter of 2007.

As Bob noted, marketing costs expensed in the quarter include $600,000 related to the branding project.

As we expected, we incurred incremental corporate costs in the fourth quarter due to the spin off and these cost increases were partially offset by a decrease in the corporate overhead allocated to us from our former parent company for only one month -- October -- this year versus three months last year.

Investors are reminded that 2009 will be our first full year as a stand alone business.

In establishing stand alone operations, we expect to directly incur approximately $9 million of new general administrative expenses in 2009, including stock based compensation costs.

In 2008, we were allocated $4.1 million in G&A from our former corporate parent and we directly spent approximately $2.6 million of incremental G&A expenses, the majority of which was incurred in the fourth quarter.

One item also included in SG&A that I should point out is the provision for uncollectible accounts receivable.

We strengthened our bad debt reserve some in Q4 so that our provision for the full year averaged 2.2% of revenue, a level unchanged from 2007.

Other operating expense of $1.4 million in the quarter was due to a $1.5 million foreign exchange loss we incurred in the quarter.

The FX loss was driven primarily by the translation of affect on the carrying value of our Canadian assets.

Other operating expense for the quarter includes a credit of $100,000 for income from third party royalties earned in October.

The prior year, we earned $600,000 of income from third party royalties.

The underlying brand sub-licensing agreement, which generated this royalty fee income was transferred to our parent company in the spin off and we ceased recording any benefit from this arrangement as of October 31st.

Let me recap.

Our fourth quarter results include some start up SG&A that includes about $600,000 of fees and expenses associated with setting up our line of credit, $400,000 of deferred compensation revaluation costs due to the spin transaction, and $600,000 of brand development, a year over year reduction of $500,000 in third party royalty income and a $1.5 million Forex charge.

That totals $3.6 million in items, not counting the change in the royalty fee we pay influencing comparability between this year's results and last year's results for the fourth quarter.

Our tax rate for the fourth quarter was 39.9%, up from 35.4% last year.

The lower effective tax rate in the 2007 fourth quarter resulted from the timing of when some discrete tax benefits were recognized during 2007 for some accounting adjustments to state and federal income taxes pursuant to FIN 48.

The full year effective tax rate for 2008 was 38.9%, up slightly from the 38.6% rate of 2007.

We still expect that the 2009 effective tax rate will be between 38% and 40%.

Turning for a moment to our balance sheet, we ended December with a $63.6 million cash position, including cash equivalents.

This includes the $50 million that our former parent contributed to us in the spin off.

With the deceleration in our subscriber growth, we are now operating in a range where we are generating free cash flow.

As we have previously disclosed, we have a $75 million revolving credit facility.

We have no plans to draw on the facility given our current cash balance and ability to generate cash flow from operations.

So we have no long term debt.

We have the credit facility.

And we also now have more than $60 million of cash on hand.

We have a strong balance sheet and we believe that we have sufficient liquidity to execute our plans for subscriber growth and to finance the introduction of the new brand that we expect will occur in the third quarter of 2009.

Yesterday's stimulus package signed by the President includes a provision for bonus depreciation for federal tax purposes on certain types of capital assets placed in service in 2009.

Although we have not yet read the bill in its final, as signed form, we believe that this one provision could substantially reduce, if not eliminate, our 2009 federal current tax liability deferring cash payment for those taxes into subsequent years.

If our assumption proves correct, this would provide a substantial boost to our near term cash flow.

Now let's review some key non-cash items.

CapEx for the fourth quarter was $43 million and year to date was $178 million, essentially flat with 2007 for both the quarter and year.

Depreciation and amortization continued to run at about $21 million per quarter, the same pace as in Q3.

Impairment charges related to subscriber disconnects totaled approximately $15 million in the fourth quarter, up from Q4 of the prior year but down sequentially from this year's third quarter as expected.

While we're on the topic of non-cash items, let me once again address the overall cash flow of our business and try to put that into perspective.

Many of you are already familiar with our business so you know that we view our upfront cash investment and new subscribers as a long term investment with significant future value.

We initially invest in our newly acquired subscriber sights with the intention of recouping that cash and earning a solid economic return on the investment while we provide a valuable service to the customers over a long period of time.

One of the dynamics associated with our business is that the faster we grow the subscriber base, the more cash we invest in those new subscriber relationships and assets.

Conversely, as subscriber growth slows, we reduce our upfront investment and generate more free cash flow from operations.

As we look at our business, on measure we use to monitor our performance is what we call EBITDA from recurring services.

We believe it provides a reasonable picture of the company's ability to generate cash from its existing subscriber base.

We have included a table in today's press release that details the calculation of EBITDA from recurring services.

If you look at page 7 in the press release, you will see profit from recurring services for the year of $195.3 million.

Adjusting for depreciation and amortization, impairment charges from disconnects, and amortization of deferred revenues, -- all of which are shown on that page, -- and also normalizing the royalty rate to the go-forward rate, you can calculate EBITDA from recurring services which is a pretty reasonable approximation of pre-tax operating cash flow captured from the existing subscriber base.

As shown on page 7, that number for the year was about $322 million.

The reconciliation of EBITDA from recurring services to its nearest GAAP measure operating income is included in a table on page 10 of the earnings press release.

We generated almost $32 million more, an increase of 11% this year than last year in cash flow from the existing customer base.

As I have said before, we believe that looking at our business in this fashion, adjusting for the accounting deferrals and amortizations, allows you to see the cash flow generation from the existing subscriber base and provides improved clarity as to the intrinsic value of the customer base that we have built up through the years.

You can, from the disclosures on page 7 of the press release, similarly calculate the total cash used in acquiring new subscribers.

For the year 2008, this investment -- whether capitalized, deferred or expensed -- totaled $258 million or $64 million less than EBITDA from recurring services.

With EBITDA from recurring services and total cash used in acquiring new subscribers, you have the key building blocks to get a feel for what some people call our steady state operating cash flow.

Looking at our business this way, you begin to get a better feel for the power of our business model and the substantial economic value and cash flow generating capacity we have built up in our customer base.

With that, let me turn the call back over to Bob.

Thanks, Steve.

In summary, it was another solid for Brink's Home Security.

We continued to deliver growth in our customer base, revenues and GAAP operating profits even in difficult economic times.

We have a great team, a proven strategy, a strong balance sheet, and zero long term debt.

We are well positioned for 2009 and future years.

Becky, let's open the call to questions, please.

Certainly.

(Operating Instructions)

And your first question comes from the line of Ian Zaffino of Oppenheimer & Co.

Please proceed.

Great, thank you.

A good quarter.

As you go through the re-branding and as you're looking at what you intend to do, can you give us an update on how your thinking has potentially changed as to what you intend to spend?

Do you think that you'll be closer to the bottom end of the range or the higher end of the range?

And then anything else that you found surprising as you do your due diligence.

Thanks.

Ian, let me just back up to the beginning of re-branding I guess.

We've engaged Landor Associates.

We have a number of other marketing partners that we do business with.

And we've been working diligently on the re-branding project since last fall.

We're making solid progress.

We've learned a lot from our marketing research, in the work we've done internally, in talking to customers.

And we're narrowing down our options and again looking forward to the third quarter for launch.

At this point, we still want to leave that range at $100 million to $150 million in accumulative incremental spending.

We still haven't finalized on a name yet, and we haven't finalized on a launch plan.

And it'd just be a little premature to tighten up that range at this point.

Okay.

And generally you can almost give us an ideal of what type of concessions you may be making to maintain your customers if they were to per se call up to maintain that customer for life, what are you having to give away?

Is there any way we could track that?

Yes.

We keep pretty close tabs on that.

When anybody calls into indicate problems or wanting to disconnect services it'll go to a dedicated group of employees in our loyalty desk and we'll try to ask question from the customer and really understand what the issues or circumstances.

And on occasion we will make concessions on monthly monitoring rates, either on a go-forward basis or a temporary suspension of monitoring for a month or two.

It's a pretty small impact and it hasn't really picked up over time.

I mean I think it's on the order of, Steve, what?

Order magnitude is $0.02 a customer?

On an annual basis, it's probably pulling down our growth in average revenue per user something on the order of about $0.20 on an annual basis.

Yes, so it's $0.02 a month.

So it's less than $0.02 a month.

Right.

Yes.

Okay.

All right.

Thank you again.

A good quarter.

Thank you, Ian.

And your next question comes from the line of Vance Edelson of Morgan Stanley.

Please proceed.

Hi, thanks a lot.

You mentioned that you experienced fewer disconnects from household moves which I would take to be viewed as one counter-cyclical element of customer growth.

Any feel on whether the weak economy is prompting households to seek a home security system also you know based on their perception of higher crime which could also be another counter-cyclical aspect to the growth effect?

Yes, Vance.

In the fourth quarter, our marketing efforts actually shored up and we were bringing in a pretty constant stream of sales opportunities at a lesser cost versus prior year in the fourth quarter.

So we're continuing to have people raise their hand that are interested in a security system.

Okay, thanks.

And it seems like the spread between the disconnect rate with and without multi-family may have come down a bit.

In other words, this quarter multi-family added 0.6 to the churn rate and last quarter I believe it added more than that although there were some other adjustments to churn last quarter.

Would you say that the impact of multi-family disconnects is easing a bit and how do you think multi-family will affect the disconnect rate going forward?

Yes, multi-family did -- was -- is lumpy and it was high in Q3 and Q4 of '08.

On a full year basis, it was about four tenths of a percentage point in 2008 which is identical to what it was in 2007.

Looking forward, we don't see any big change in multi-family disconnect rates.

Okay.

And just back on finding a new name.

Is it conceivable that you'd make a small acquisition to acquire a name or at this point, you know based on your work with Landor does it sound more likely that you'll basically create a name from scratch?

Well the problem with any name as you get out there in the world there's a lot of names out there that people may or may not have rights to.

So it's not outside the realm of possibility that we might have to spend a little bit of money to acquire a brand name.

Okay, and just one final question if I may.

You mentioned you're not ready to fine tune the estimate of $100 million to $150 million in cumulative re-branding which seems high based on your market cap of about $1 billion.

If you do choose to adjust that range, any ideal on when you'd be able to adjust it?

Would that be maybe concurrent with coming out with the new brand in the third quarter?

Or do you think we could get an update on your thinking there ahead of time?

The big issue on the cost of re-branding is how well it takes in the marketplace.

I think the best look going forward on re-branding is that in all likelihood we'll come out with a new brand name in the third quarter and we will piggy back on the Brink's Home Security brand name.

So we'll be seizing that new brand name in the marketplace.

And the nice thing about direct response marketing is you get very quick feedback from how well your marketing is working.

I mean is the phone ringing?

Are people sending any emails?

Are requests for security services from us going up or down?

So that's really why we're feeling a little uncomfortable right now to narrow it down.

When we launch the new brand, we'll be going out there with pretty constant pressure as we do in direct response marketing on a day in, day out basis.

And we can dial it up or dial it back according to what kind of results we're getting.

So as we can into the launch, we'll have a very good feel very quickly for our brand awareness and the -- how well our new brand name is resonating with potential customers.

Okay, thanks.

I appreciate the call in.

Thanks, Vance.

And your next question comes from the line of Michael Kim of Imperial Capital.

Please proceed.

Hi, good morning, guys.

Good morning.

Good morning.

Just touching on the average monitoring rates and the increase there, can you talk a little about the drivers behind that?

Is it primarily from news services?

And looking down the road, is that -- are you assuming comparable growth or increases in average monitoring rates for '09?

Thanks.

Well we are getting an increase in average revenue per user from a few different areas.

One would be our monitoring rates today are higher than they have been in the past against the historical subscriber base.

We do continue to take some pricing against the existing subscriber base and we are providing more services to especially new customers and those would be in the realm of wireless communications, of singles to our monitoring center, wireless contacts in the house, smoke detector incremental monitoring fees, those kinds of things.

Moving in '09, we -- you know historically I think in our road show we said that we were right around a 3% increase in monthly recurring revenue per customer and I don't see any major change on that going forward.

Okay.

And then switching gears to the disconnect rate -- just to clarify then with the number of multi-family subs that you currently have.

Should we expect to see a convergence in the reported disconnect rate with and without the multi-family disconnects within a couple of quarters or you can you frame for that us just in absolute terms?

Michael, this is Steve.

We have at the end of the year just over 20,000 multi-family sights in the subscriber base.

The disconnects that we expect to incur in the future will be lumpy quarter by quarter depending on when the current contracts expire and whether or not some of the contracts get renewed.

So we will continue to break out data on multi-family as we move forward, but it will be lumpy through the quarters although as we've indicated this year for the whole year was similar to last year and we think 2009 may also be at a similar annual rate, but it may hit more in one quarter than another.

Okay, great.

Thanks very much, guys.

Thank you.

And your next question comes from the line of Steve Velgot of SIG.

Please proceed.

Okay, thank you -- a couple of questions.

I think we're all familiar with the way that you run the business relating to investing in subscribers and do you have some flexibility in whether or not you choose to run the business in that way going forward?

Can you tell me -- give me an ideal as to what kind of timeframe would be necessary to kind of shift gears if you were to say run the business more for cash than investing as much in subscribers?

Is that something that you could change fairly readily?

Yes.

The simple answer is yes.

It's pretty quick, Steve.

What we really would do if we wanted to gear back would be dial back on our direct marketing efforts.

That would dial back on sales opportunities coming in.

It would mean we need less sales people in the field; we need less technicians to make installations -- so you shrink your infrastructure in the field.

We did something similar to that at the end of 1999 when we raised prices and credit scores to address customer disconnect issues we had back then.

And we shrunk our installations on a full year basis by 25% and we made the necessary infrastructure changes in the field at that point, too.

So there are degrees of freedom for us.

Okay.

And I don't know if you specifically addressed any sort of outlook for the disconnect rate or if you had any sort of handle on -- I think most of us are assuming that the disconnect rate for 2009 should be worse than 2008 -- but based on kind of where you sit, if you had any thoughts on that?

Well last year, we took a -- the disconnect rate increased in Q3 and Q4.

Right now we haven't seen any major shifts in disconnect rates going -- that we're experiencing currently.

So if that held on a go-forward basis, it might be safe to assume that you'd have an up tick there.

Okay.

And then just one last connect for Steve.

You had referred to the stimulus bill and the potential for deferring some cash taxes.

How do you understand that to work in terms of -- is that kind of a 2009 only effect?

Or might that translate for repeat in out years as well?

Our understanding is that it's a 2009 only effect.

There was a similar provision that was passed a year or so ago that affected 2008 and it is our understanding that it will work in the same manner for the 2009 tax year.

So does that mean that you already are going to be benefiting from this historically in 2008 meaning the one that passed?

Or I suppose that's something we would see just in the 10K filing.

Our -- remember the ten months of our 2008 operations ...

Right.

...

for tax purposes we were consolidated with the Brink's company.

So our tax position with the parent was settled up at October 31st as we spun off.

Okay.

There will be more details on all of this when we get to the 10K, of course.

Okay, thank you.

And your next question comes from the line of Jerome Lande of Milbrook Capital.

Please proceed.

Good morning.

Good morning.

So just to clarify here -- I think I understood your response to the last questioner as the disconnect rate has not demonstrated any kind of material change in the year to date so far versus what you're reporting for the fourth quarter.

Correct.

Okay.

And so when you say you might see it tick up you're talking about really just a continuation of what we've seen third and fourth quarter throughout the course of this year on the basis of what you've seen so far?

Yes.

So in other words, ticking up year over year -- a full year?

Correct.

Okay.

What about inbound calls?

It sounded like you made a positive comment earlier about inbound call volumes staying strong?

Is that true on a year to date basis?

In the fourth quarter, we had growth to prior year.

In the previous three quarters of 2008, we were at a decrement to prior years.

So it did shore up in the fourth quarter and they're still continuing to come in at that same clip.

Okay, great.

And on ad rates given such a big part of your cost structure -- there was a little bit of commentary last quarter that you expect to see some ad rates clip down but that you might get the benefit of it less in nominal dollars and more in better placements.

Can you give an update on that?

Yes, I think we've been getting better clearance than we have in the past.

I mean that has been good.

Pricing hasn't changed substantially.

I mean again we were getting things at pretty attractive rates before.

But we are getting on -- I'd say we're improving our gross rating points as far as reach.

And so we're getting on some programs that we might not have gotten on before.

We actually spent about I think on our advertising spend was flat to prior year in the fourth quarter, but we've got more sales opportunities.

Up -- went down.

We actually had less advertising -- sorry, I was looking at the wrong number.

So marketing has been more effective in the fourth quarter.

Okay.

And another thing that's a little vague but it would help if you have some guidance on it and, if not thus far but maybe going forward as you do the re-brand.

You know obviously the re-brand expense will be incremental advertising which should itself drive higher inbound call volume and maybe more new customer opportunities.

And at the same time, to some degree, there's cannibalization of your existing ad spend which is tens of millions of dollars per year anyway.

So what -- if you have any perspective you can offer on that today, great.

If not, if it's something you can put into future commentary that'd be helpful.

I agree with you, Jerome.

We'll address that on a go-forward basis.

Great, thanks, and a good quarter.

Thank you.

And your next question comes from the line of Chris Marangi of Gabelli & Co.

Please proceed.

Hi, good morning.

Could you give us an update on the commercial business -- where you ended the year and how you expect that business to fair versus residential in 2009?

Yes, our commercial business continues to outgrow our overall business -- our residential business.

It's slowed down -- the gap or the increase in growth rates slowed down slightly in the fourth quarter.

I think we're seeing -- like a lot of people -- there's a major impact of the economy on retailers.

So we have slowed down a little bit in our small business, but we're still -- you know the growth rate's higher in commercial than it is residential still.

And we see that being true going forward as well.

And what about churn?

Churn -- we haven't seen any market differences in residential or commercial churn rates.

I mean they've been moving in lock step.

They've both ticked up.

Okay, great.

And then -- just shifting gears quickly, -- a lot of hand wringing recently about wireless substitution and people cutting the cord.

How -- are you seeing any of that?

It doesn't seem that you -- it doesn't seem as though you are given the churn rate in the quarter but how are you going to address that customer desire in the future?

Well if you're a new customer and you're moving into a house and you don't have a hard wired phone -- I mean we have alternatives for you.

You can -- we can send monitoring signals either via the internet now or over radio.

And so we can address that.

If you're a current customer and you're changing, you will contact us and then we can come back and do a retro fix so that can -- we can make that work for you.

Okay, great.

Thanks.

You're welcome.

And your next question comes from the line of Jeffrey Kessler of Imperial Capital.

Please proceed.

Thank you.

I appreciate you taking my call.

First, at the recent (inaudible) conference, clearly there was talk about what the bigger challenge will be for 2009.

You guys stood about the same on customer acquisition, but you had less installation.

So clearly you're customer acquisition costs have been going up versus attribution which seemed to jump up in the last couple of quarters but seems to be staying at about the same level at where it is now.

I guess my question is when you're looking at those -- the two major variables that people generally view as negative which have been impacting the valuations of both public and private companies, are you looking at customer acquisition costs being a bigger challenge going into 2009 than attrition?

Do you have your hands around -- is there enough movers to offset disconnects that the other problem is the one (inaudible)?

Well we're always concerned on both fronts, Jeff.

We're concerned on the cost of customer acquisition and we're concerned about attrition rates and focused on both.

Our acquisition costs have gone up, but our month recurring revenue has gone up from those subscribers as well.

We continue to look at all our channels of customer acquisition to make sure that -- given our best guess at mid-term and long term disconnect rates -- that we're being -- making good capital investments and new subscribers.

Great.

Now another question that a lot of people have is at what point do you take the disconnect when you're helping out a customer?

There's some arguments inside the industry right now as to if you're cutting them back by two or three dollars that's a disconnect.

If you're cutting them back by half in terms of what they have to pay, that's a disconnect.

Do you have -- are you looking at some type of policy in which there will be a point of no return, at which you're going to get that customer and keep them but you're going to have to write it off?

Well let me just see if I can understand -- I mean we aren't counting -- if we gave a price concession to a customer and they're still a monthly recurring revenue customer and paying us on a monthly basis, we don't ...

Right.

...

count that as a disconnect.

But when some people do call in to request a disconnect, we don't always try to save every customer.

I mean we do let some people disconnect.

Okay.

And most of my other questions have been answered.

You guys have a lower royalty rate right now.

If I might -- if I could perhaps ask will the high royalty on that stated free cash flow phase every time you use it that'll be great.

We'll keep that in mind, Jeff.

Okay.

I'll see you soon.

And your next question comes from the line of Jamie Clement of Sidoti & Co.

Please proceed.

Bob, Steve, good morning.

Good morning, Jamie.

Bob, you know just getting back to just a follow up question on some of the others, including Jeff's.

You know it sounds as if call volume into your centers was pretty solid in the fourth quarter.

Has the economy made your team's ability to screen customers -- and let me rephrase -- is it -- has it become a little bit more challenging to actually find suitable customers for Brink's Home Security?

Like in other words if the volume is solid, are you finding that you're actually turning away more people than you may have in prior years?

Well when we get calls on the line we don't pre-screen.

We -- basically we view somebody as a sales opportunity if they own a home or business and they're interested in a security system.

So it's a pretty broad definition.

Then we'll go down into our sales organization and try to convert that into a sale.

I think there are more people that -- there are more lookers than there have been in the past.

More people that are pricing things and a dollar commitment's a little harder to come by.

We haven't seen any kind of big up tick in our credit decline rate -- credit scoring and it's gone up very, very slowly in the fourth quarter.

Okay, and that was actually going to be my next question, so I appreciate that.

You bet.

And, Steve, if I may, I just -- in your prepared remarks you were running through some SG&A line items for comparability.

In looking to 2009, I think you were talking about a $9 million incremental corporate cost associated with SFL being its own public company.

From a just sort of apples to apples recurring basis looking out to next year, what was the quarterly cost in the fourth quarter?

Quarterly cost in the fourth quarter apples to apples to the $9 million next year is probably around $2 million.

Okay.

And did that not -- now on your income statement in this quarter, was the month of October was that not charged to you or was that -- or was it charged to you?

In other words, was that -- I was a little unclear there.

There was a -- there was a charge to us for the month of October.

Okay.

That's what I -- okay.

Good.

Thank you very much.

Thank you.

And your next question comes from the line of Steve Dyer of Craig-Hallum.

Please proceed.

Good morning, guys.

Thanks for taking my call.

A couple of -- a couple quick model related questions.

Is 51.6% -- I think you gave that as kind of the apples to apples gross margin going forward -- is that a good number to use do you feel like going forward?

There is -- this is Steve.

There is some variability in that cost of revenue or gross margin number because there are, among other things in there, the non-cash cost from customer disconnects.

So when you're modeling on a quarterly basis, you need to be careful on that charge.

On an annual basis though, probably somewhere north of 50% is a reasonable position to take.

Okay.

Okay.

And then in the absence of a full balance sheet and cash flow statement, what was your cash flow from operations in the quarter -- unless I missed that?

We have not -- we did not disclose that yet this morning.

The -- we think looking at the numbers that we have in the press release you can back into an all-in EBITDA number for the quarter and that is fairly representative of what a normalized cash flow would be.

Recall, however, though that we were separating from the parent and there was movement in various current assets and current liabilities as we separated our balance sheets.

So the cash flow statement is a little confusing on the fourth quarter.

Okay -- and then your accounts receivable for the quarter?

Accounts receivable is fairly flat with prior year.

Okay -- but not a number that you disclose or are willing to disclose at this point?

Hold on just a moment, I'm reaching for the page.

Accounts receivable at the end of the quarter net was $36.3 million compared to $38.1 million a year ago.

Okay.

Okay.

Okay.

And again, I'm just circling back here on the incremental $9 million.

So I mean there's a good way to look at that, kind of taking Q4 on the SG&A line as a run rate and then on top of sort of the additional marketing costs looking at essentially an incremental $9 million related to being a public company.

Am I thinking about that right?

We're getting a little deep into some modeling questions here.

Okay.

Perhaps we can table these for a discussion another time?

Okay.

That sounds good.

Then the rest of mine have pretty much been answered, so thank you.

Sure.

And your next question comes from the line of [Lars Munsten] of [Pipot Capital].

Please proceed.

Just following up on Jeff's question about customer acquisition costs.

Can you just tell us what are the economics of creating a specific customer right now and to what extent has the promotional environment changed at all where it would affect those numbers over the short or intermediate term?

Lars, over the course of 2008 our cost of creating new customers have gone up about $100 from the averages we were running in 2007; that's due to several different factors -- part of it being that we maintained marketing costs at a relatively high level through the course of the year and were getting slightly fewer subscriber -- new subscribers over which to spread that cost.

And there've been some other cost increases in there.

As Bob has already indicated, we have raised our -- both our installation pricing as well as our recurring revenue on new customers so that we have kept the economic model in balance on a go-forward basis.

Okay.

And can you throw some numbers to that?

I mean what is the cost of acquiring a customer now?

Or the dollar amounts?

There are enough numbers in the press release that you can get at a fairly good representation of that.

Okay.

Thank you.

And your next question comes from the line of Chris Temple of Goldman Sachs.

Please proceed.

Hi, guys.

What is your average credit score across your account base?

We don't -- we don't go there, Chris.

We don't disclose that.

Okay.

What about the initial -- the percentage of your accounts at least on the residential side they're on in their initial term?

You know, I don't have that number in front of me.

If you give Steve a call or Gary a call later, I think they'd be able to handle that one for you.

Okay.

And then just overall how do you -- how should we think about the difference between net and gross attrition with respect to -- I assume your moves are included in the attrition number?

They're netted out.

What number will you publicize?

Yes, we're going to -- when the 10K comes out we will disclose moves.

We -- in a previous discussion -- we have said that we'd break that out to make a little more clear.

I think we had enough moving parts in the press release this time that we didn't put it in there, but it'll be there in the 10K and moving forward.

Okay, great.

Thank you, guys.

You're welcome.

That's the last call.

I'll turn it over to Bob Allen for closing remarks.

Thank you, Becky.

We think we had a very solid quarter, especially given the economic conditions.

And we think that we are well positioned to move forward in 2009.

We appreciate your interest and in being with us today.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.