江森自控 (JCI) 2009 Q1 法說會逐字稿

Good morning, and thank you for joining Brink's Home Security Holdings First Quarter 2009 Financial Results 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 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 rates, disconnect rates, 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 differ 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 informational 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 reports on Form 10-K and Form 10-Q.

The information discussed on this call is representative as of today only.

Brink's Home Security Holdings disclaims any obligation to update any forward-looking statements as a result of development or events 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 will provide useful information for investors to enhance the understanding of the Company's performance.

Reconciliations of the non-GAAP measures to GAAP can be found on 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 2 PM 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 or 617-801-6888, giving the replay passcode 78295431.

I will now turn the call over to Bob Allen.

Thank you, Grace Ann.

I'd like to welcome everyone to our First Quarter 2009 Financial Results Conference Call.

Glad you were able to join us today.

As most of you are aware, Brink's Home Security was spun off from the Brink's Company via stock distribution to existing shareholders on October 31st last year.

On November 3, 2008, we began regular way trading on the New York stock exchange under the ticker CFL, which reflects our mission of creating customers for life.

With that, let's take a look at our first quarter results.

This morning we reported first quarter earnings of $15.2 million, up from $12.8 million last year.

On a GAAP basis, diluted earnings per share were $0.33, versus $0.28 last year.

Operating profit in the quarter was reduced by $4.0 million, due to a non-cash litigation charge associated with an unfavorable jury verdict, which the Company intends to appeal.

This charge reduced net income by $2.4 million, or $0.05 per diluted share.

Operating profit in the quarter also included new brand development expenses of $1.1 million.

These costs further reduced reported earnings per share by $0.02.

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

We ended the quarter with a subscriber count of over 1,320,000, an increase of 5.7% over prior year.

We added approximately 19,700 net new subscribers in the first quarter of 2009, compared to 25,700 in the same quarter last year.

New customer installations were 43,000 in the first quarter, down 3.5% from 44,600 installations in the first quarter of 2008.

Although our installations were down, the average monthly recurring revenue per new customer installation in the quarter increased approximately 4% versus prior year.

We continue to add customers in a disciplined economic manner and remain focused on growing the net present value of our future cash flows.

Shifting over to customer retention, our annualized customer disconnect rate for the first quarter was 7.1% versus 6.1% in the year-ago quarter.

This one percentage-point increase in the customer disconnect rate continues to result from more customers requesting termination of service, and an increase in financial write-offs of customer accounts.

Customers continue to cite household financial pressure as the major reason for requesting termination of service.

On a trailing 12-month basis, the disconnect rate was 7.8%, up from 7.5% at the end of 2008.

Monthly recurring revenue at the end of the first quarter rose 8.4% versus prior year, to $41.5 million.

This increase was primarily the result of our 5.7% increase in ending subscribers, and a 2.5% increase in our average revenue per customer.

Revenue increased 6.4% to $136.0 million in the first quarter.

Revenue continues to be driven by the growth in monthly recurring revenue, partially offset by lower revenue from our new construction business, which continues to be negatively impacted by the slowdown in the new housing market.

First quarter operating profit rose to $25.1 million, up 18.4% from last year's $21.2 million.

Our operating profit margin was 18.5%, up from last year's rate of 16.6%.

As previously mentioned, operating profit for the quarter included a $4.0 million of litigation expense and $1.1 million of brand development spending.

Adjusted EBITDA from recurring services for the quarter totaled $78.4 million, up from $77.0 million in the year ago quarter.

Adjusted EBITDA for the quarter was also reduced by the litigation expense.

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

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

We hold a 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 31st' spin-off.

We've been working diligently since September of last year on our initiative to develop a new brand identity.

With the assistance of Landor Associates, we've made solid progress over the past eight months on the development of the name, design, logo treatment and positioning of our new brand.

Together with Landor and our other marketing partners, we have developed detailed launch plans to introduce our new brand identity early in the third quarter of this year.

In calendar year 2009, we expect to spend an incremental $25 million on our new brand initiative.

The first quarter, we incurred incremental marketing expenses of $1.1 million.

The second quarter of 2009, we expect to incur incremental new brand spending of approximately $2 million.

Upon the new brand introduction early in the third quarter of 2009, incremental marketing spending will pick up to approximately $10 million to $12 million in each of the third and fourth quarters.

Previously, we indicated that we would incur cumulative incremental marketing costs between $100 million and $150 million pre-tax dollars over a 24 to 36-month to fully establish our new brand identity.

After extensive planning with our marketing agencies, we now believe that we can introduce and establish our new brand at an estimated cumulative incremental cost of between $70 million to $120 million pretax dollars.

We have reduced our incremental spending estimate by $30 million, but we have not yet narrowed the range of spending.

Actual spending levels in 2009 and in future years will be dependent on our ability to generate sales opportunities and build the awareness of our new brand.

We need to gain experience from actual results in the market upon the launch of our new brand before we can further refine our estimates on the possible range of incremental spending.

Remember, our desire is to build a brand identity that will allow us to continue to drive our subscriber growth through direct response marketing.

We will carefully monitor our spending and adapt incremental spending levels as appropriate.

We expect to fund the new brand initiative through cash on hand and cash generated from operations.

Looking ahead for the full calendar year of 2009, we see continued weakness in the housing market and in the general economy.

We believe that we can continue to grow organically, even in these difficult circumstances.

We expect revenue growth for the full year to be in the mid to upper single-digit range, driven by mid single-digit growth in the subscriber base.

We also continue to expect growth in GAAP operating profit for 2009.

We believe we will continue to see moderate pressure on customer retention and anticipate our full-year disconnect rate to range between 7.8% and 8.3% versus the 7.5% disconnect rate posted for the full year of 2008.

For 2009, we remain focused on growing our residential subscriber base, developing our commercial business, increasing our average revenue per subscriber, maximizing customer retention and launching our new brand identity.

We continue to maintain our disciplined economic approach to the business.

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

Thanks, Bob, and good morning, everyone.

Let me start with a couple of housekeeping items regarding our reporting.

First, the results we have reported this morning include royalty expense calculated at the new lower rate of slightly less than 1.25% of revenue, while the historical rate of approximately 7% of revenues is used for the 2008 period for GAAP reporting purposes.

Same as last quarter, we've again included a section in the press release where we have laid out earnings, recalculated with the royalty rate in 2008 adjusted to the go-forward rate of 1.25% to allow better comparability.

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

Another reminder, as we were not a standalone public company during most of 2008, our earnings per share calculations for the first quarter of 2008 are reported using pro forma shares outstanding.

Please don't confuse the use of the term pro forma with non-GAAP earnings per share calculations that we have provided to allow better comparability of our performance between the two periods.

One more housekeeping point, we expect to file our 10-Q with the SEC no later than the end of the day tomorrow.

Now, getting on with first quarter results.

Revenues increased $8.2 million or 6.4% for the quarter over the comparable 2008 period.

As Bob mentioned, the increase was primarily due to the effects of the 5.7% larger ending subscriber base and supplemented by a solid 2.5% increase in recurring revenue per subscriber.

The pricing actions we took late in 2008 are holding well.

Once again, we experienced a decline in our new construction business revenue, which for the quarter were down $1.5 million from a year ago.

Our cost of revenues decreased by $4.7 million in this year's first quarter from last year's.

The reduction in the royalty rate accounts for most of the improvement in gross margin performance, which increased to 52.1% this year, from 45.3% reported last year.

If the royalty rate had been 1.25% in the first quarter of 2008, the gross margin would have been 50.9% last year.

Selling, general and administrative, or SG&A spending, overall, grew in the first quarter to 33.5% of revenue, compared to 28.7% in last year's first quarter.

SG&A increased by $8.8 million this year compared to last year.

$4 million of the increase is due to the non-cash accrual for the adverse jury award that recently occurred.

GAAP accounting rules require that we go back and record this subsequent event as though it occurred in the first quarter.

We feel we have solid grounds for an appeal, but all or a portion of this accrued layout liability may turn into a cash payment at some point in the future.

About $2.3 million of the SG&A increase can be explained by growth of the subscriber base.

As Bob mentioned, we occurred $1.1 million of brand development costs in the first quarter, about what we expected and this cost is also included in SG&A.

We had incremental corporate costs in the first quarter of around $2.5 million, due to new primarily governance functions we added as a result of the spin-off, which were about $500,000 higher than the $2.0 million in corporate overhead allocated to us from our former parent company last year.

We have just been through our first year-end reporting cycle as a separate company, where our costs in the quarter were a little higher than we would normally expect in other quarters.

We are still on track with our previous guidance on corporate G&A for the full year, which with at apples-to-apples, we would run about $1 million higher in 2009 than in 2008.

As we have mentioned in the last two earning conference calls, over the course of the last year, we have been adding some capabilities to handle a broader array of commercial service offerings.

These incremental additions account for roughly $700,000 of increased SG&A in Q1 of this year versus first quarter of 2008.

Recapping -- the increase in SG&A is mostly explained by the litigation charge, growth of the customer base, brand development, some governance costs and some effect from broadening our service offering.

One expense category included in SG&A that merits separate comment is the provision for bad debts.

We increased the rate at which we record our provision for bad debts slightly in Q1.

But, we also recovered a higher than normal volume of old receivable balances previously written off in prior years.

Thus, our net provision for bad debt in the quarter averaged 2.2% of revenue, a level unchanged from the overall rate incurred in 2008.

Other operating expense of $0.2 million in this year's first quarter was due to foreign exchange on our Canadian operation.

Other operating expense for last year had a slightly higher foreign exchange charge, but it was fully offset by income from third party royalties.

As we mentioned in the last call, the underlying brand sublicensing agreement was generated as royalty fee income, was transferred to our parent company in the spin-off and we ceased recording any benefit from this arrangement late last year.

Our tax rate for the first quarter was 39.7%, up a little from 39.0% last year.

We still expect that the 2009 effective tax rate for the full year will end up between 38% and 40%.

Turning to the balance sheet, we ended March with an $83 million cash position, an increase of more than $19 million from December 2008.

For several quarters now where we have been operating in a range where we are generating positive free cash flow.

Accounts receivable at March 31st stood at $35 million, down about 4% from March 31, 2008, even though the subscriber base has grown almost 6%.

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

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

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

On our GAAP cash flow statement that will be in our 10-Q filing, cash flow from operations for the quarter improved from $47 million last year, to almost $67 million this year.

Total CapEx for this year's first quarter was $47 million, up slightly from about $46 million last year.

With no financing activities, that generated the cash build-up on the balance sheet.

Moving onto some key non-cash items.

Depreciation and amortization totaled about $22 million in the quarter, up a little from last year due to the larger subscriber base.

Impairment charges related to subscriber disconnects were approximately $14 million in the first quarter, up from Q1 of the prior year, but down sequentially from the fourth quarter of 2008.

Impairment charges run through cost of sales.

Let me remind you that the first and fourth quarters are the seasonal low point for these charges.

Impairment charges or -- disconnect expense, as we refer to it internally -- is seasonally higher in the second and third quarters.

As we look at our business, the metric we call adjusted EBITDA from recurring services, adjusting for accounting deferrals and amortizations, we believe provides a better picture of the Company's ability to generate cash from its existing subscriber base and provides improved clarity as to the intrinsic value of the customer base we have built through the years.

For the first quarter, we generated $78.4 million compared to $77 million last year.

Note that the accrued litigation charge reduced adjusted EBITDA from recurring services for the current quarter by $4.0 million.

In the 10-Q that we will be filing later today or tomorrow, we have also added a table showing the total cash invested in new subscribers, whether capitalized, deferred or expensed, and its reconciliation back to operating profit.

This metric is another key one in understanding our economic model, as many of you already know.

A few comments on that metric and its components are in order.

Total cash invested in new subscribers for the quarter was $63.9 million, not very different from the $63.2 million last year.

Cash invested per new customer is running higher this year than last year, as we expected.

About $25 of the increase per customer is due to the $1.1 million in brand development cost.

Another major driver of higher cash investment, more than $30, is more equipment and material cost per install on average, due primarily to our installation of somewhat more expensive wireless technology and an increasing proportion of our new installations.

A minor contributor of less than $10 is due to the loss of third party royalty fees, which used to be accounted for as a reduction of subscriber acquisition costs.

The cash we collect from newly installed customers is still averaging more than $300 for customers that come in through our own field sales and installation process.

But, as in the fourth quarter, more than 20% of our new customers were delivered through our authorized dealer network and on those customers, we don't record any cash collected at install.

The dealers keep that installation revenue when they sell the accounts to us.

We closely follow both of these cash flow metrics, adjusted EBITDA from recurring services and cash invested in new subscribers.

And we pay particular attention to the creation cost, the cash invested in new subscribers, as there can be more variability in that metric.

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

We initially invest in our newly acquired subscriber sites with the intention of recouping that cash and earning a solid economic return on the investment by keeping those customers satisfied with our service for a long period of time.

Adjusted EBITDA from recurring services and total cash invested in new subscribers have two of the key building blocks needed to calculate a steady state operating cash flow for our business.

The third key building block is an assessment of future disconnect activity.

When you look at our business this way, you can better see the substantial economic value and cash flow generating capacity we have built up in our customer base and the power of our business model.

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

Thanks, Steve.

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

We continue to deliver growth in revenue, GAAP operating profit, earnings per share and net subscribers.

We believe we have a great team, a proven growth strategy, great new brand identity about to be unveiled, and a balance sheet that will serve us well in 2009 and into the future.

Grace Ann, let's open the call for questions, please.

(Operator Instructions)

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

Hi, thanks a lot.

The reason for lowering the estimated rebranding expense range -- how would you characterize that?

Is it that market trends are telling you that advertising will be more effective?

Or, is it lower ad rates in the marketplace?

Or, was it just a realization that the prior amount was too high, no matter what?

Vance, it was really more the latter.

As we got into the detailed planning of rolling our the new brand identity in the third quarter, putting together our media plans by channel, looking at customer communications, changing out yard signs, changing truck decals, all the things that have to happen with a new brand identity.

As we put it together and looked at it over the course of 24 to 36 months, we think that we were a little conservative on our initial estimate.

Now advertising rates are down a little bit and that does help.

So that is a component that is in that estimate, as well.

Okay, got it.

And then any thought of pulling back, right now, on advertising with the Brink's name.

I've seen a lot of commercials and I figure you're not going to be promoting the Brink's name post-this summer.

So do you want to put any more money into it now?

Does that give you an opportunity to, kind of, ratchet back ahead of the new brand introduction?

Well, our business model is driven by our direct response marketing.

So, we have sales staffing and installation technicians in the field that are dependent upon a pretty consistent, predictable stream of sales opportunities coming in from our media advertising.

So we'll continue to be out in the marketplace until we introduce that new brand name, because that's the way we generate new customers.

When we do introduce the new brand name in the third quarter, we will be co-branding.

We will not -- the Brink's Home Security brand name will not go away in a quick cut-over.

We will co-brand, try to take all the positive equity that we've built up in the Brink's Home Security brand name over the last 25 years and what Brink's, Inc.

had done over the last 150 years, and we'll try to transfer that over to our new brand identity as much as possible.

Over that 24 to 36 month time frame, you will see that Brink's brand name be minimized and eventually go away before October 31, 2011 when our brand license agreement ends.

Okay.

That's helpful.

And just one last one for you.

You mentioned that the disconnects are being driven partially by household financial pressure.

What about the other side of the equation?

What do you hear from customers signing up for service for the first time?

What's driving them?

Are you hearing, anecdotally, they're concerned about crime or anything like that?

And, kind of related to that, are the inbound call volumes still elevated, as I think that you mentioned they were a few months ago?

Yes.

From discussions with sales people, customers are more concerned about security today than they were -- at least marginally so, than they were a while ago.

So, crime rates -- or threat of crime rates makes people a little nervous in tough financial times.

We are experiencing a good flow of sales opportunities into our call centers.

We're getting more sales opportunities than prior quarter -- or prior year at about the same market spend.

To your point earlier, though, market rates are down slightly as far as cost.

So, it's still tough to generate sales opportunities, given tough economic conditions in the housing market in decline.

But, we are generating a very good, positive stream of sales opportunities that are turning into customers.

Okay.

That's great.

I appreciate the color.

Thanks.

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

Hi, good morning, Bob.

Good morning, Steve.

Good morning.

Good morning.

A couple of questions.

Are you guys starting to see the typical seasonality here in the second quarter driven by moving activity or other factors?

And your thoughts on how that might start to affect attrition rates.

And then secondly, can you talk a little bit more about the improvements in average monitoring rates, driven off of some of the pricing action you took in '08?

Are you planning some further pricing actions in '09?

Yes, as far as the seasonal impact on the disconnect rate.

We did come out with a full year forecast on the disconnect rate that ranges from 7.8 to 8.3.

So, we do expect that we're going to see a seasonal uptake in the second or third quarter, as always from more move activities and more cancellation activities.

So, that's going to be pretty much the normal course of things.

It's going to true to trend.

But again, we don't think that the disconnect rate is stepping out of control by any stretch of the imagination.

We do see pressure though.

Unemployment is high.

Economic conditions are tough.

A lot of people are moving out of houses.

And when they move out, more people are moving into apartments than before.

So we don't have a chance to reconnect them in a new location as often as in the past.

As far as pricing, we've been pretty consistent about taking pricing on our existing base on a monthly basis and we will continue to do so.

We -- that has been driving positive revenue for us.

Okay.

Great.

Then switching gears, can you talk a little bit more about the commercial side of your business?

I know you've been making some pretty significant investments there.

Can you talk a little about the contribution that you're seeing so far, and what the account base looks like in the quarter?

Well, the Commercial business is still growing at a faster clip than our overall Residential business.

But where we'd been growing about a 10% differential in growth rates, it's narrowed down in the first quarter to about a 5% differential.

So commercial is growing at a 5% greater clip than residential.

And part of the reason there is small retailers and small commercial accounts are really being impacted, probably differentially versus the residential business by the tough economy.

So commercial is still growing and it was almost 9% of our installations in the quarter.

And our customer base there on the commercial front is a little under 6% at this point.

So, we are still adding on market share on the commercial front, but it's slow.

This small business piece is slowing us down.

We are continuing to roll out our capabilities in higher scale activities like fire monitoring on the commercial front, access control and CCTV and we'll continue to do that.

But, it's not a major drain or a major use of cash.

Okay.

Great.

And then lastly, I don't know if you can talk a little bit about customers acquired through dealer accounts, if the pricing has changed significantly in the last couple of quarters, or how that's trended recently.

No, it's similar to our existing business.

The Dealer business hasn't added any differential impacts.

But, dealer is a big part of our installation mix.

In the first quarter, it was a little over 24% of our mix, versus 20% in the first quarter last year.

So dealers continue to grow.

As we've said before, we're adding more dealers on a geographic basis.

We're passing on a lot more sales opportunities to our dealer network and they're getting better at converting those sales opportunities into installations.

So, differentially going forward, I still think you'll see our Dealer business continue to grow up a tick or two.

Great.

Thank you very much.

Thanks, Michael.

Your next question comes from the line of Clint Fendley of Davenport.

Good morning, Bob, and Steve.

Good morning.

I wondered if there'd been any reconsideration of the type of spend on the rebranding.

Is the $70 million to $120 million still mostly a media spend here?

Yes, I mean it really is -- there's nuts and bolts that have to happen, as far as change of business cards, truck signage, building signs -- that kind of thing -- uniforms.

So the differential is we did tack down -- and most of that $30 million is coming out of media.

And of the spend, I'd say, north of 75%, at least, is spent on media as opposed to those other items I mentioned earlier.

Okay.

Thank you.

That's helpful.

And any idea on how much actually less advertising you're going to be doing?

I know the first questioner asked a bit about that.

But, how much of an incremental step down is this here?

Well, this is an incremental up.

I mean, we've taken down the entire range down.

But, on our quarter-to-quarter basis -- I mean, we're basically are going to be doubling our media spend in the third and fourth quarter.

So we're spending an extra -- incremental, above and beyond our base rate spending of $10 million to $12 million in the third quarter and fourth quarter.

But you're going to see our media weights increase pretty dramatically in the back half of the year.

It will be very clear to most people in America and Western Canada that we have rebranded.

Thank you.

That's helpful.

And finally, could you comment just on the competitive dynamic that you're seeing from some of the smaller regional competitors?

How are they fairing in this environment?

What kind of pressures are facing their models currently?

You know, I think one of the things that has surprised us on an ongoing basis is there is still a lot of cash out there in investment money willing to buy accounts from small dealers.

So, there is a place to sell accounts.

I read our general manager reports every month, and they always report that pricing is very competitive.

Pricing is competitive on the upfront installation charges, as well as the monitoring rates and increments on the monitoring rates.

But if I look back four or five years, I get the same comments.

I mean, it really is a very competitive market out there.

There's dozens of competitors in any location, and there's always somebody that's willing to have a lower price.

So, I don't think it's changed dramatically out there.

I do think that people are a little more cautious on their commitment of their dollars.

Great.

Thanks, guys.

Nice quarter.

Thank you.

Your next question comes from the line of Ian Zaffino of Oppenheimer.

Hi, guys.

This is Brian, sitting in for Ian.

Nice quarter.

Thank you.

Thanks.

I just want to ask a question on your disconnect rate assumptions.

You guys say 7.8% to, I believe, 8.3%, yet you did 7.1% in the first quarter.

So, is it something that you've seen since the quarter has ended, or is it just considered assumptions for the rest of the year?

Or, how do we think about that jumping up from where it really was in the first quarter?

Well, I think if you look back on a quarter-by-quarter basis last year, the disconnect rate really accelerated on us in the third quarter last year.

So, first quarter, second quarter, we were at or below -- in 2008, we were below 2007 levels.

So, in the third quarter, we took a step up.

We went up to a 9% annualized disconnect rate in the third quarter of last year.

That was up about 1.1 percentage points over the prior year.

In the fourth quarter, the same differential occurred.

The rate sequentially went down to 7.8%, but was still 1.1% above prior year.

So, this year, we've come in at 7.1%.

Prior year was 6.1%.

Going forward, we think that we're going to overlap the third and fourth quarter pretty well.

I mean, we have seen more pressure out there, but again, our forward look for the full year kind of tells you what we see as the tempo when we say 7.8% to 8.3%.

Okay.

That's really helpful.

And another question would be when you start spending this money on the rebranding, you're going to be spending over two times what you normally spend on advertising.

Do you think that's naturally going to accelerate your gross add growth for the second half of '09 and in 2010 just by naturally spending more money on advertising?

We are planning on having sales opportunities accelerate in the back half of this year, given that incremental spend.

The acid test is how much will it increase?

We're doubling our spending.

How much will sales opportunities go up?

Some of our -- let me just put a little color around our media spend in the back half of the year to maybe help you a little bit.

Traditionally, we're -- on television advertising, which is the bulk of our media spend, we're direct response in nature.

So we have 60-second commercials out there and we really want people to call -- call now.

Here's a problem.

We're the solution.

Here's a special offer.

Call now.

And oh, by the way, call now.

So, it's not traditional brand advertising ala GE, we bring good things to life.

But, as we get into introducing the new brand name, we will be running some 30-second commercials that will be making it obvious to public that Brink's Home Security is morphing into this new company.

Or, this new company is from heritage of Brink's Home Security.

I don't want to give away our punch lines or total media plans there.

But, the mix will be brand awareness, as well as direct response.

So while we're doubling our media spend, we aren't necessarily putting it all against direct response.

But, we should see increased sales opportunities and increase installations coming from that media spend.

Okay.

And then the last question would be it seems that you guys are generating more cash than you were before, but you're still growing.

Is there something that you're doing differently to throw off more cash now than you were doing before?

No, it really is -- remember back in the past, when we were still pretty much breakeven cash flow, we're growing at about a 10% clip on subscriber growth and -- than we be breakeven.

So, with our subscriber growth in the 6 range -- 5, 7 to 6 range -- we do spin off cash.

Okay.

Well, thanks for taking my questions.

Great quarter.

Thanks, Brian.

Your next question comes from the line of Chris Marangi of Gabelli & Company.

Hi, good morning.

Could you give us some color on the intra-quarter trend in terms of gross adds and churn and, if you can, some color on April?

Chris, clarify that question for me a little bit.

In other words, was March better than January on a seasonally adjusted basis?

I'm trying to figure out if -- did you see some pent-up demand -- people who just froze in the fourth quarter of '08 and came into the market in the first quarter?

No, because we were still growing in the fourth quarter of '08.

So we haven't seen any market change over the months.

And what about April?

Same trend?

Any change in the trend?

I really prefer not to talk about April.

But again, my comment -- over the last couple of quarters we haven't seen any change in trend.

Okay.

Fair enough.

And going back to a couple of earlier questions, in terms of the churn.

Obviously, you had -- churn was 100 basis points worse year-on-year.

It was 110 basis points worse in the fourth quarter last year.

And you've had some particular issues in the third quarter of '08.

Do you think we've seen the peak in terms of the year-on-year pick up in churn?

Well, we finished the full year last year at 7.5% and we're saying this year could be 7.8% to 8.3%.

So we're looking to see increased pressure on the disconnect rate.

It is going to go up a few ticks, 30 basis points over prior year, at the low end and could be eight-tenths -800 -- 800?

No, I'm getting my basis points - let me say eight-tenths of a percentage point to 8.3%.

So we still see some pressure there, but obviously if we're one full percentage point in the first quarter, we see going forward that gap is not going to be as big.

Right.

And finally, just to clarify -- it sounded like you've actually decided on a new brand and a logo.

Is that true?

Yes.

That is true.

We have explored all the opportunities that are out there and have settled in on a new brand name.

And we're working feverishly on crossing the Ts and dotting the Is and getting everything ready.

We're in the process of shooting some new television commercials this month.

And there's a lot you've got to get done, obviously, before you can roll.

So, we are progressing very well.

Well, look forward to seeing them.

Thanks.

Thank you.

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

Thank you.

Good morning.

Most of mine have been answered.

Just a couple of quick ones.

Can you give us any insight into the legal settlement or the lawsuit -- the nature of that?

Maybe I missed that.

I don't want to get into too much detail.

It was a terminated employee who disputed the terms of that termination.

And a jury award, we thought was, obviously, a very high amount.

We think we have a number of -- we disagree with the judgment and there's a number of avenues of appeal open to us, which we'll take.

Okay.

And then just looking into the RPU increase year-over-year, I'm wondering if you could provide a little bit more granularity.

How much of that is just new price increases versus, sort of, complementary services such as wireless or fire protection, that sort of thing?

Yes, our average monthly recurring revenue per subscriber today is around $31.40.

So, across the 1.3 million customers, we're about $31.40.

And that's up 2.5% on an ending sub basis to prior year.

Less than 1% of that would be due to pricing to the existing base.

New customers are coming in north of $36 today.

So, that new customer base coming is driving up that average revenue per unit or user as well.

On new customers, our base rates are a couple dollars higher than they were last year, but we are getting a lot more people that are signing up for wireless communication alternatives, either GSM or connection over an IP that drives more revenue for us.

Okay.

Thanks.

And then last question -- is this kind of where we should expect gross margin to settle out, kind of in this range?

Gross margin on an annual basis should settle out somewhere in this range.

But don't lose sight of the fact that the impairment charge from subscriber disconnects flows through gross revenues.

So, seasonally, you'll see some movement between first and fourth quarters and second and third quarters, which will have lower gross margin.

Okay.

So if first and fourth are higher, second and third are lower, wouldn't the annual rate be a touch lower than what we just saw, something like that?

Is that the right way to think about that?

A tough lower, but not too terribly much lower.

Right.

Okay.

Yes, I think the tip off there, again, is our GAAP operating profit that we expect to be positive.

Yes, okay.

Thanks a lot.

Thank you.

Your next question comes from the line of Jerome Lande of MMI Investments.

Hi.

First question was on the -- I don't recall the details of the license agreement with regard to this.

But if you chose to stop using the Brink's brand before the three-year anniversary, could you stop paying that royalty, or is that fixed for the three years, no matter what?

The royalty agreement is that at the end, before or on October 31, 2011, or whenever we stop using the brand name and choose to terminate the license.

So if we shut off that Brink's brand name early, we would not owe any further 1.25% of revenue to Brink's Company.

Okay.

Thanks.

And second, on this litigation, I understand you don't want to talk too much about it, but I just want to clarify a little bit, because it helps us, I think, to band what a final number will be here.

I don't see how an employee termination could be $4 million.

I mean, that $4 million is the award?

Or, does that include legal fees that you've put in, or what?

And can you tell us, at least, what this -- a general order of magnitude of what this employee made?

It should, somehow, be related to that if it's an employee wrongful termination suit.

Yes, we agree with your assessment there, Jerome -- or the color you've put around it.

This was a sales person.

And the award is all for that individual, so it's about 40 times that person's annual compensation.

So, we view it as very excessive.

Okay.

That's quite a jury.

Okay.

Thanks very much.

And congrats on a good quarter.

Thanks, Jerome.

Your next question comes from the line of Steve Velgot of SIG.

Yes, just a quick question on your expectation for CapEx for the year.

Is it somewhat lower now than it had been three or six months ago, or are you still looking the same type range for CapEx?

No.

All things being equal, CapEx would be in the same range.

The wild card is to what extent do our installation volumes increase in the third and fourth quarter, as a result of the extra brand spending.

That could push the CapEx up a little bit.

Okay.

But you're not looking at any lower CapEx than you might have originally?

No.

Okay.

Thank you.

The next question comes from the line of Jeff Kessler of Imperial Capital.

Thank you, guys, for allowing me on the call.

Firstly -- first question is, your CapEx went up a bit slightly -- 47.2 from 45.8.

Your installs actually decreased a little bit.

Is that reflective of the increased amount of dealers accounts acquisitions?

That is a piece of it.

But the bigger driver, Jeff, is that in the first quarter, we actually had $4.9 million of maintenance CapEx.

We had a couple of facility improvement projects that were running that we completed in the quarter.

And we also were changing out some of our servers in the computer rooms.

So the non-security system CapEx was higher this first quarter than we would expect it to be for the remainder of the year because we still expect for the full year, non-security CapEx of around $10 million.

Okay.

And just so you can see where I'm going, here because I'm driving to my little pet number, here.

You mentioned there was about $2.3 million of SG&A in the subscriber base.

Is this a number that is for new customers?

Or, is this a kind of steady state SG&A that you would expect to be spending on that subscriber base?

That $2.3 million was more along the lines of a steady state SG&A.

Okay.

All right.

That's very helpful.

Those are the questions I had.

Good quarter, guys.

Thanks, Jeff.

Thanks.

Your next question comes from the line of Ben Shim of CRT Capital.

Hi.

Great quarter, gentlemen.

Thank you.

I just have two quick questions -- on the outlook for the 2009 disconnect rate of 7.8% to 8.3%.

Is that including anything that might happen with multifamily on disconnects?

Yes, that does include multifamily.

Multifamily was 0.004% of the disconnect rate in '08 and a similar kind of rate is baked in for '09.

Okay.

My second question is with respect to customer recruitment.

In anticipation of the rebranding effort and maybe in response to, I guess, competition heating up with the current macroenvironment, have you done anything different with respect to promotions and customer recruitment, apart from pricing?

No.

We really haven't done anything differently than we've always done.

I mean, rely on direct response and continue to push that.

Okay.

And I'm sorry if this has been asked before, but I just wanted to confirm with you.

Are you running yard sign promotions, where you give away a free install in exchange for having a sign on the front lawn?

No, that's not our mode of operation.

Okay.

Great quarter.

Thanks again.

Thanks, Ben.

Your next question comes from the line of [Louis Gaboski] of [Mass Capital].

Hey, guys.

Good morning.

Good morning.

Just a couple of quick questions.

I know you mentioned, previously, that there's still a lot of cash out there to buy accounts from smaller dealers.

I'm just wondering if you've been aware of any activity in the private M&A market and, if so, the approximately size and valuations of these transactions.

We really haven't heard of any transactions of note.

So it's really hard to tell what people are valuing accounts or businesses at, at this point.

Okay.

Great.

My next question is just with regards to your disconnects.

Can you provide a little bit more color in terms of who's disconnecting?

Are you seeing any concentration by geography or vintage, or things like that?

The disconnect rate is pretty diffuse across our customer base.

And we're not seeing -- as a percentage of our total customers, it's really not geographically bound.

I mean, we have more customers in certain states and we're getting more disconnects from those customers, but there's really no difference across our portfolio.

And interestingly, when we go back and look at credit scores and actually rerun some credit scores on people that disconnect, we aren't seeing a lot of differential in the types of people that are disconnecting.

It's pretty good pressure across the entire spectrum there on the disconnect rate.

That's the last call.

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

Thank you, Grace Ann.

Thanks, everyone for joining us today.

We look forward to speaking with you again in the summer when we report on the second quarter 2009 results.

We very much appreciate your interest in Brink's Home Security.

Thank you.

Thank you for participation in today's conference.

This concludes the presentation, and you may disconnect.