江森自控 (JCI) 2009 Q2 法說會逐字稿

Good morning ladies and gentlemen and thank you for joining Brink's Home Security Holdings second-quarter, 2009, financial results conference call.

My name is Damale and I will be your operator for today.

At this time, all participants are in listen only mode.

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

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

(Operators instructions)

An earnings release was issued this morning and is available on the company's website at www.investors.broadviewsecurity.com, under the investors 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 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 market its new brand name and the occurrence of expenses and 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 include our report on form 10K and 10Q.

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 and 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 provides useful information for investors to enhance the understanding of the company's performance.

The conciliations 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 investor relations website www.investors.broadviewsecurity.com.

As a reminder today's call is being recorded.

A replay of the webcast will be available today at approximately 2.00 p.m.

eastern time and can be found on the investor relations section of the companies website as previously noted.

A replay of the call be can accessed by calling 888-286-8010 or 617-801-6888, using the replay pass code of 26009900.

I will now turn the call over to Bob Allen.

Thank you, Damale.

I would like to welcome everyone to our second-quarter, 2009 Financial Results conference call.

I am glad you were able to join us today.

We launched our new brand, Broadview Security, the next generation of Brink's home security on June 30, 2009.

We are very excited about our new brand name and positive reception we are experiencing from both existing and prospective customers.

We will get into more details regarding the Broadview security brand name later in my comments.

This morning we reported second-quarter earnings of $16.6 million up from $15.5 million last year.

Diluted earnings per share were $0.36 versus $0.34 last year.

New brand development expenses were $2.2 million in the quarter representing a $0.03 reduction in the earnings per share.

We also increased our base-level marketing expenditures by $1.4 million in the quarter versus prior year, to build sales momentum coming into the new brand introduction, representing a $0.02 reduction in earnings per share.

We delivered solid organic growth in subscriber account revenues and operating profits in a very challenging economic environment.

The end of the quarter with a subscriber count of 1.338 million an increase of 5.2% over the prior year.

We added approximately 16,700 net new subscribers in the second-quarter of 2009, compared to 21,900 in the same quarter, last year.

Dell's opportunities, which are inquires from prospective customers, increased on a year-over-year and on a sequential quarterly basis driven by our increased marketing expenditures.

Conversion of those sales opportunities into new customer installations was more challenging in the quarter due to increases in customer window-shopping or rejections to meet credit score minimums and increased competitive price pressure.

New customer installations were 42,700 in the second-quarter, down 3.4% from 44,200 installations the second-quarter of 2008.

Average monthly recurring revenue per new customer installation approached $37.

We continue to add customers in a discipline economic manner and remain focused on the cash flows on the full lifecycle of our customer additions.

Sifting over to customer retention our annualized customer disconnect rate for the second-quarter was 7.8% versus 7.1% in the year ago quarter.

The increase in the customer disconnect rate continues to result for 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 7.9% up from 6.9% in the prior year.

Monthly recurring revenue at the end of the second-quarter rose 8.4% versus prior year to $42.6 million.

This increase was primarily the result of the 5.2% increase in ending subscribers and a 3% increase in monthly recurring revenue per ending customer.

Revenue increased 4.6% to $140.0 million in the second-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 effected by the slowdown in the new housing market.

Second-quarter operating profit rose to $27.5 million up from 8.7% from last year's $25.3 million.

Operating profit margin was 19.6% up from last years rate from 18.9%.

Adjusted EBITDA, from recurring services, for the quarter totaled $84.0 million, up from $80.7 in the year-ago quarter.

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

Now I would like to turn my remarks to the launch of our new brand, Broadview Security.

We introduced our new brand on June 30th, the culmination of over nine months of concerted effort and hard work by our marketing staff, our external partners and our entire organization.

We believe Broadview Security encompasses the wide-range of services we offer today and will offer in the future to provide active protection to our existing and prospective residential and commercial customers.

We have added the tag line, The next generation in Brink's Home Security, in all of our communication materials and in our advertisements to clearly point out our heritage as Brink's Home Security.

We communicated our new brand introduction and the rationale behind it to existing customers through letters, emails, and posting through our website in early July.

The advertising for our new brand began, July 6th, with greatly increased media weights through a series of 30 second and 60 second television commercials on a wide range of cable channels.

Each commercial highlights the change from Brink's Home Security to Broadview Security.

All of our customer-facing materials, such as the website, yard signs, uniforms, truck graphics, contracts, and a myriad of other elements have been converted to Broadview Security, "The next generation of Brink's Home Security".

The initial reaction from existing and perspective customers has been favorable.

Most customers understand that we are the same company, focused on providing outstanding customer service.

Only our brand name has changed through necessity.

We have received a low number, a very low number of inquiries or complaints and virtually no requests for termination of service from our existing customers due to the new brand introduction.

In almost all cases our customer service representatives are able to address these inquiries through simple conversation with the customer.

We have been seeing and expect to continue to see, increased interest in our service from prospective customers due to our increased marketing efforts, which we expect to continue over the next 24 to 36 months.

Calendar year 2009, we will incur incremental marketing and branding expense of approximately $25 million in addition to our base-level marketing expense of roughly $40 million.

The first and second-quarters we incrementally spent $1.1 million and $2.2 million respectively on the development of the new brand.

For the remainder of the year, incremental spending will increase to about $9 million to $12 million in each of the third and fourth-quarters.

Actual spending in 2009, and in future years will depend on our ability to generate sales opportunities, balanced with the need to build the awareness of our new brand.

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

To that end we previously indicated that we would incur cumulative incremental marketing and conversion costs between $70 million and $120 million pre-tax dollars over a 24 to 36 month period from the date of the brand launch to fully establish a new brand identity.

We believe this range continues to be appropriate, but we will need several quarters' worth of data before we can refine the range of the cumulative spent.

It is important to remember that we are building a brand and it is our desire to build an identify that will allow us to continue to drive our subscriber growth through direct response marketing.

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

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 for the general economy and a soft housing market.

We believe we can continue to grown 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 continue to expect growth in GAAP operating profit in 2009.

We believe we will see continued pressure on customer retention and anticipate our full year disconnect rate to range between 7.8% and 8.3% up from the 7.5% disconnect rate, posted for the full year of 2008.

For the balance of 2009, we will be focused on building our new brand identity, growing our residential and subscriber base with high quality customer additions, increasing our average revenue per subscriber and maximizing customer retention.

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

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

Thanks, Bob, and good morning everyone.

I will begin with a few, routine housekeeping items regarding our reporting.

First, the 2009 results that reported, this morning, include actual royalty expense calculated at the rate of slightly less that 1.25% of revenue.

A historical rate of approximately 7% of revenue is used for the 2008 periods for GAAP reporting purposes.

Same as last quarter, we have included a section in the press release where we presented earnings recalculated with the royalty expense for 2008 to the lower go-for-it rate to allow for better comparability.

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

Another reminder as we were not a stand-alone public company during most of 2008 our earns-per-share calculations for the second-quarter and first half of 2008, are reported using proforma shares outstanding.

Please don't confuse the term proforma with other non-GAAP earnings-per-share calculations that we have provided.

One last housekeeping point, we expect to file our 10Q with the SEC, this evening.

Now, turning to second-quarter results.

Revenues increased $6.1 million or 4.6% for the quarter over the comparable 2008 period.

I should point out that in comparing this year to last year, revenue in the second-quarter of 2008, included an extra $1.8 million due to non-cash accounting correction booked last year.

As Bob mentioned, the revenue increase was primarily due to the effect of the 5.2% larger ending subscriber base, supplemented by an increase in average revenue per ending customer of 3.0%, a little stronger than what we achieved in the first-quarter.

Pricing actions we took in late 2008 are holding, adding to our growth in recurring revenue.

It is important to note that the total monthly recurring revenue or MRR grew 8.4% in the second-quarter.

A rate unchanged from the first-quarter even as our subscriber base growth decelerated by 0.5% during the quarter.

As has been the case for some time, now, we again experienced a decline in our new construction business revenues, which for the quarter were down $1.6 million from a year ago.

But, let me remind you, new construction revenues which are not a part of recurring revenues are a very small part of our overall business.

Our cost of revenues decreased by $5.0 million when comparing this second-quarter results with last years.

Gross margin increased to 51.5% this year from the 45.6% reported for last year.

If the royalty rate had been 1.25% in the second-quarter of 2008 and the effect of the accounting correction on gross-margin was also backed-out the gross margin would have been 50.0% last year.

Most of the 1.5% percentage point improvement in gross margin stated on this apples-to-apples basis can be attributed to the reduced P&L drag from the new construction business.

Partially offset by increased non-cash charges due to the higher disconnect volume this year, 3,700 more disconnects this quarter compared to the comparable quarter, last year.

Annualized disconnect rate for the second quarter increased to 7.8% up from 7.1% last year.

Multifamily disconnects were not a significant driver of disconnect activity in the current three month period but contributed about 30 basis points to the prior year disconnect rate.

Removing the effect of the multi-family disconnects, core disconnect rate was 7.8% this year versus 6.8% last year, a 100 basis point spread which is pretty consistent with the three previous quarters.

As in the several quarters the increase in disconnects was primarily due to more customers contacting us to request cancellation.

With the most significant increase in customers indicating cancellation for financial reasons.

Household moves, normally a major driver of disconnects contributed about 20 basis to this disconnect rate.

The benefit of fewer moves was offset by 20 basis point increase in disconnects resulting from account write-offs.

The disconnect rate calculated on a trailing 12-month basis was 7.9% compared to 6.7% last year.

As we noted in today's press release our estimated range for the full year disconnect rate for 2009 remains unchanged at between 7.9% and 8.3%.

Selling, general, and administrative or SG&A spending, overall, grew in the second-quarter to 32.4% of revenue compared to 27.0% in last years second quarter.

SG&A increased by $9.3 million this year compared to last year, about $1.6 dollars of the SG&A increase is attributable to the subscriber base.

As Bob, already mentioned, we incurred $2.2 million of brand development costs in the second-quarter, about what we were expecting.

This additional cost is also included in SG&A.

When we planned our budget for this year, we decided to keep our marketing activity steady in advance of the Broadview Security brand.

Last year, our second-quarter spend was lower than the first-quarter.

So in this year's quarter we spend about $1.4 million more in marketing when compared to last year.

Our base marketing spend for the full year remains about the $40 million level, we just smooth the quarterly tempo of the spending in the current year.

An additional $2 million in SG&A was accrued to cover three items.

Additional non-cash charges related to the jury award we discussed last quarter, high non-cash stock compensation expense recognized this year over last year, and a year-over-year increase in the accrual for bad debt.

In this years second-quarter we held the rate at which we record our provision for bad debt steady at 2.2% revenue, same as the first-quarter accrual rate.

That net rate remains high than what we were using for the first two quarters of last year.

So recapping, the increase in SG&A is mostly explained by growth in the customer base, brand development, higher marketing comparing to last year and the combined effect of higher accruals for litigation, stock compensation, and bad debt.

Other operating income of $8,000, in this years second-quarter was due, primarily, to a gain on foreign exchange in our Canadian operation.

Other operating income for last year also included income from third-party royalties we earned pre-spend.

Our tax rate for the second-quarter was 39.2%, up a percentage point from 38.2%, recorded last year.

Some of the costs we incurred in brand development that are non-deductible for federal tax purposes, have pushed the current year rate higher.

We expect that the rate will decline, sequentially, in the back half of the year, we still anticipate the full year of 2009 effective tax rate of between 38% and 40%.

Earnings per share, for the quarter, were $0.36 compared to $0.34, last year.

There is some noise in the numbers in both years with comparability being affected by the royalty rate, the brand development project, and last years accounting correction.

Note that the diluted shares, outstanding, increased, slightly, due to where the stock was trading on June 30.

Now turning to the balance sheet, we ended June with a cash position of $103.2 million an increase of more than $20 million from March 31st.

We continued to operate during the second-quarter in a range where we generate positive free cash flow.

Accounts receivable of June 30th, netted the bad debt provision, stood at $35.5 million, essentially unchanged since March 31st and lower by about 2.5% from June 30, 2008.

Even though, the subscriber base has grown by 5.2% since last year.

Our provision for bad debt at June 30, now stands at 15.1% of gross accounts receivable up from 11.9% at December 31st and up from 12.3% at March 31st.

We have increased our balance sheet reserve as we as we have finally begun to see a, slight, deterioration in our accounts receivable agings.

There could be a small pick up in financial write-off activity in the back half of the year.

A liability for deferred income taxes continues to grow this year, increasing by about $8 million during the quarter and continuing to the increase on the balance sheet.

Let me remind you that we do not expect to pay any federal income taxes this year but our cash tax payments during the next four years will be larger than normal as the taxes deferred from 2008 and 2009 come due.

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

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

On our GAAP cash-flow statement that will be in our 10Q filing, cash flow from operations for the quarter improved from $58.2 million last year to $65.9 million this year.

Total capital expenditures for this year's second quarter were $45.9 million up slightly from $44.3 million, last year.

Moving on to some key non-cash items.

Depreciation and amortization totaled $22.6 million in the quarter, up a little from last year, due to the larger subscriber base.

Impairment charges relate to subscriber disconnects were $15.8 million in the second quarter, up from the second quarter last year and up, sequentially, from the first quarter of 2009.

Impairment charges run through cost of revenues and, again, let me remind you that this impairment charge or disconnect expense, as we more typically refer to it, internally, runs seasonally higher in the second and third quarters.

For the second quarter we generated $84.0 million and adjusted EBITDA from recurring services from recurring services.

Compared to $80.7 million, last year.

Several of the SG&A items I mentioned, earlier, some of which were non-cash accruals, at this point in time, kept the growth rate of this metric slightly below where we would normally like to see it.

For those of you who are not familiar, adjusted EBITDA from recurring services is calculated by adjusting on-going profits from subscribers for depreciation, impairments and amortizations related to deferred subscriber acquisition costs and revenues.

It provides a look at our ability to generate cash flow from the existing subscriber base and provide some insight into the intrinsic value of that customer base.

In the 10Q we also show the total cash invested in new subscribers, whether capitalized, deferred, or expensed, and it's reconciliation back to operating profit.

This is another key to understanding our economic model, as you already now.

This metric was $67.1 million for the second quarter, including the $2.2 million of brand development costs, compared to $62.3 million last year.

Cash invested per new customer continued to run higher this last year, as we expected.

All in, including costs we incurred in capital expenditure for existing customer who relocate we invested $1,573 per new customer, compared to $1,411 last year.

A little more that $50 of the increase is due to the brand development costs.

Cash we collect from newly installed customers is still running more than $300 on average for customers that come in through our field, sales, and installation processes.

Also, keep in mind here that almost 25% of our new customers, this quarter, were delivered through our Authorized Dealer network and on those customers we don't receive any cash collected at install.

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

But the blended rate of cash collected per new customers that we reported in today's press release was about $240.

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

We pay particular attention to the net cash invested in new subscribers, there can be more variability in that metric quarter-to-quarter.

We initially invest in our subscriber sites with the attention of recouping that cash investment and learning a solid investment return over a long period of time, but that cash investment must be balanced with the margin dollars that we earn back over time as represented by adjusted EBITDA from recurring services.

And the stream of cash flows is also tempered by the long run disconnect rate.

With three inputs, adjusted EBITDA from recurring services, total cash invested in new subscribers, and a forward disconnect rate assumption you can construct a steady state operating cash flow for our business or more classic EBITDA calculation with or with an adjustment for maintenance capex.

We monitor our operating metrics closely and look to keep the key inputs in balance to better build long-run economic value and cash flow generating capacity in our customer base.

With that let me turn the call over to Bob.

Thanks Steve.

In summary, we continue to deliver organic growth in revenue GAAP operating profit, earnings per share, and net subscribers.

We are very excited about our new Broadview Security brand and believe we have the team and the initiatives to drive our growth going forward.

Damale, let's open the call for questions, please.

(Operator instructions)

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

Please proceed.

Hi, thanks a lot.

I am just wondering, what is it you saw during 2Q that convinced you to ramp up marketing and therefore, sales momentum ahead of the rebrand launch?

Was there anything in particular or were you just being conservative in case the new brand wasn't well received?

What were your thoughts there?

Actually, that spending level was in our plan, we had planned to have the second quarter be about that rate.

The reason we had it higher than prior year was because we did want to build momentum going into the incremental media spin that we had for the new brand.

We geared up head count, we added 100 people in the second quarter and early third quarter in anticipation of that increased new brand spend.

Okay, so really a matter of making sure you had the necessary infrastructure necessary to take advantage of the new brand when it was launched.

Yes, we didn't really want to do a step function change.

Okay, got you.

But, Vance, really the spending going from Q1 to Q2, this year was relatively steady.

The issue, really, is that in last year Q2 spending was lower than Q1.

So really, we were holding things steady this year and last year there was a little bit of a dip in the second quarter.

Okay, got it.

Now a similar question looking forward, you mentioned that you get real time feed back, pretty much, on how impactful you marketing spend is.

What is it that has driven you to lower the lower end of the rebranding range for 3Q and 4Q, have you seen anything more favorable than expected so that you can bring that range from the $10 million to $12 million down to $9 million to $12 million?

I think we are just being conservative, there Vance.

We are checking it on a daily basis where we are and trying to fine tune our spend.

We don't have a perfect crystal ball on advertising rates and what stations are going to be successful for us, so, I think we are just being conservative, there, with putting a range in for third and fourth quarter at $9 million to $12 million.

Okay, great.

Then just one question, the seasonal up tick in churn or the disconnect rate a year ago it was a full percentage point between 1Q and 2Q.

This year was a little bit more favorable at about 0.7%, I think.

Any positive factors at work, such that the seasonality didn't seem to have such an impact this year?

No, I would say that we are seeing pressure on the disconnect rates.

I think in Q2 last year we had a little bit of multifamily disconnects too.

I think that was a [2], Steve?

That was 30 basis points.

30 basis points.

So apples to apples, when you back out multifamily, in the 7.8% we really had no multifamily disconnects so it is really a 7.8% to 6.8% kind of number, so it is a full percentage point, as it has been for the last couple of quarters.

Higher than prior year.

Okay, that makes sense.

Just one more and I will get back in the queue.

Could you just comment on developments on the technology front and specifically any opportunities to increase the monthly revenue per user?

Anything that would give you reason for optimism there.

Yeah, the good news is that there is a pretty high take-rate now and growing on our control panels that offer communication of signals to our monitoring center.

Though people are putting on a GSM wireless module onto their panel so that signals can be sent without a hardwire telephone.

We also have an IP module so that you can connect through the Internet.

And we also have a radio product so that you send it over the airwaves.

Again, given the propensity in today's world of less people having hardwire telephones, that is having a higher installation rate and really helping drive, not only, upfront dollars on the installation but also a higher monthly occurring revenue number.

Okay, that great.

Thanks a lot guys.

Thank you, Vance.

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

Please proceed.

Hi, a couple questions here.

The first one being, you talk about the tough environment in your end, but you maintain your disconnect guidance.

Has there been a change in which part of that range you are thinking now.

You were at the lower end and now you are at the higher end.

Or are you pretty much like you were thinking when you first introduced the range?

We have given a range and we never gave an indication whether it was the high end or the lower end.

It was just the range.

Okay, but there is no change in your thinking as far as what you have been seeing from a disconnect.

Correct?

We are keeping that range, and as we said we continue to see pressure on the disconnect rate.

We have, the last three quarters had a full percentage rate increase on the disconnect rate.

Disconnect is not dissimilar that it was in the previous two quarters, or so.

Second question would be, as far as the conversion rates of the responses to the new brand name, have they been similar to what you are enjoying with the Brink's name?

Are they worse are they better, how do we think about that?

I don't see much different in the conversation rates.

The feed back from our sales folks is that we have done a good job of introducing Broadview Security, again using that tag line The next generation of Brink's Home Security.

We play on that heritage and make sure that people understand that we have just changed our name.

We have seen, as before, conversion of sales opportunities into installations, is tougher.

People are, I said earlier, window-shopping more.

They are calling just to check out pricing.

They are more reluctant to commit to a monthly contract for a three-year term.

We are also seeing a slight rise in people that can't meet our credit hurtles.

As always, there is tough, competitive price competition out there, as well.

There is more shopping going on.

I don't see that as a function of the brand name.

Okay, you are not seeing, let's just say, an acceleration in the price competition.

It is similar to what it was, again, three months ago, let's say.

I think that our field always feeds back price competition.

We are seeing a couple new things in the market.

I mean, as always, there are people that are going down to 0% down in the upfront and discounting monitoring rates.

A new phenomenon we have seen in the past few months, some of the competitors are giving out gift cards or gas cards.

So that in effect people are paying a down payment but are getting it rebated right back to them.

There are also rebates, mail in rebates.

There is a little bit more competition in the upfront then there was before.

All right, thank you very much.

You bet.

Your next call comes from the line of Chris Marangi with Gabelli & Company, please proceed.

Hi, good morning.

Are you seeing any change in the dynamics in the commercial market and in particular, I am curious to hear about the response from commercial customers to changing the name.

And getting rid of Home in the name, in particular.

I think it is easier to communicate a brand change to commercial customers.

One it is more one-on-one and there is fewer people to talk to.

I think that helps us from a competitive standpoint to not have that Home in the name.

Our competitors used to take great glee in saying, come on, these guys are residential guys, not commercial guys, just look at their name.

So I think that helps.

On the commercial front, we are seeing a tougher row to hoe there as far as installations.

Last year our commercial growth rates were over 10% higher than residential rates and that gap is closed now to low single digits.

We are seeing a differential impact on installs in the commercial world than in the residential world.

Okay, and what about attrition?

Attrition in the commercial side?

Yes.

Actually, we see less increase in the commercial disconnect rates than we do in residential rates.

Quick question, a little bit bigger picture.

You and others in the industry have had on again, off again, partnerships with some of the telecommunication companies.

I was just wondering if you could bring us up to speed as to what is going on today and do you think that a partnership with a cable company could be a meaningful distribution channel for you?

I would say that if we could reach an agreement with a telco or cable company it would be a great way to bring in new customers.

Through the years we have talked to everyone and tried to craft a deal that would be acceptable to all and that hasn't happened to date.

Are you still co-marketing with anybody, today?

No, we never really did co-market with anybody.

You have seen a couple of press releases.

Those guys have a tendency to through out press releases at the drop of a hat.

I looked for it and never saw it.

Right.

Okay, great, thank you.

Thank you.

Your next call comes from the line of Michael Kim with Imperial Capital, please proceed.

Hi, good morning, Bob, good morning, Steve.

Bob Allen and Steve Yevich: Good morning.

So, just touching on cash creation costs or costs of adding a new subscriber, I think, Steve you mentioned in year earlier comments that raised up to around $1,500 almost $1,600.

Is it your sense that we should continue to see that move a little higher or is it the sense that it has started to flatten out here backing out new brand expense?

It actually, flattens out, Q1 to Q2, when you adjust for the brand expense, Michael.

We really didn't see much change, this year.

We are running a little higher than we were first and second quarter of 2008, but is it is for all the same reasons we noted last time.

Nothing fundamentally has changed in the last three months on cash creation costs.

For the remainder of the year, it is your sense that nothing should change into the back half.

There will be noise in the numbers going forward, because of the ramp up in the marketing spend in the new brand roll out.

Underneath the covers we are not anticipating, at this point, any significant changes from where we are currently running.

Okay.

Just touching on pricing.

Are there are any planned pricing actions on the back half of the year, maybe offsetting some of the pricing pressure you are seeing on the competitive side?

Well, we increase the prices, our base monitoring rates, back in November of 2008.

Whether we increase prices at the end of this year, obviously, depends on competitive situations and the markets responsiveness to pricing.

We have continued to price to our existing base.

as well, as we have in the past.

Again, we always watch that carefully, and we will adapt accordingly.

Is the pricing pressure more on base monitoring rates or just on installation or both?

It really depends on who the competitor is, it can be upfront, it can be ongoing, it can be both in some instances.

That has been true forever, but in the last few months, it has heated up more.

There are probably a few more desperate characters out there.

Okay, then lastly, are there any significant multifamily contracts coming due, either this quarter or next quarter.

Last year, Michael, in the full year rate, about 40 basis points of the disconnect rate was due to multifamily activity.

We are expecting for the full year this year a similar amount of activity on multifamily.

There hasn't been that much on the first two quarters and there may be a reasonable amount of multifamily on the back half of this year.

Okay, great, thank you very much.

Thank you.

(Operator instructions)

Your next question comes from the line of Jeff Kessler, with Imperial Capital, please proceed.

Hi, guys, how are you doing?

Hi, Jeff.

All right, I have a couple of questions, here.

Quickly, to get to Armar and your creation multiple, not just your creation costs.

In new RMR sales, new RMR per client, that has gone up, on average.

Can you kind of whittle that down to how much of that comes from just basic price increase on new customers?

How much of it comes from addition of maintenance contracts that you might force into the contract and how much is coming from new enhanced services that the customer is taking.

I think the primary driver, there, is pricing, is higher than it used to be.

It is $2 high than it was a year ago.

I think that is a major driver on the new customer front.

We are having a good take rate on new customers of, again, enhanced communication abilities.

We have been pricing to our base, as well.

So, the number one reason is the first one, it is a $2 higher monitoring rate for new customers.

Obviously, I can figure that out and, obviously, you are not going to tell me what your new customer RMR is.

We can figure out that --

Actually, I did, Jeff.

It is a little under $37.

It is a little under $37.

Okay, with that said, given that your while your costs of creation has going up your RMR per customer has gone up.

It looks as though your creation multiple has actually remained fairly stable.

In fact, it looks as though it may have come down even slightly.

Yes, we are really up over 5% on that new customer RMR versus prior years.

So I would say your conclusion is correct.

Okay.

Which is unusual in this time.

That is good to get that out of the way.

With regard to that, when you are taking on new customers, are these at a FICO or Beacon scores?

Are you replacing other customers or are you attriting?

Are they generally lower credit customers are you replacing them with higher credit score customers?

One of the things that we found, last quarter, that we talked about and we confirmed it again this quarter, is, on the disconnect front the credit scores of disconnecting customers, there is pressure across all credit scores.

There is not just a low credit score phenomenon of people falling out.

We are holding to our credit scoring.

As I said before we are having a slightly higher failure of customers to meet our minimum credit score but our average credit score of a customer coming in, hasn't changed, this quarter, from last, or last year.

Okay, on attrition, the amortization of deferred revenue fell 14% to $9.8 million is that a reflection of the attrition?

That is, but there is also an effect, last year.

There is a credit because of the accounting correction, there was a $1.8 million adjustment in revenue but there was also a $600,000 adjustment in the amortization side of things, Jeff.

Okay, staying on attrition for a second.

When looking at your static pools for the last couple of years.

I know I am getting a little bit technical here, has there been a change in when they are dropping because of the economic pressure.

Are you static pools dropping at earlier periods of time than you have experienced before?

The average age of a customer disconnecting hasn't changed, it has been very, very steady.

Interesting.

One final question.

You have been very good at not ballyhooing your advanced services that you have been offering.

Maybe this is stealth marketing, because you haven't been out front like some other companies have.

I am interested to find out, you actually, are offering a full slate of GSM and other types of wireless enhanced services as well as wireless backup.

Are you using any of the wireless add on platform companies or are these your own products?

These are our own products.

We are not using a third-party to help us there.

Clearly, we are not manufacturing the products but we are always looking at additional services that we can provide our customers, obviously, with an IP connection down the road, there are lots of opportunities to add more enhanced services, as well.

Just, finally.

When you are talking about your credit scores can you tell me what type of service the credit score is based on?

Who that service is providing you with that credit score?

We use two of the three big service bureaus, Jeff.

Okay.

It is pretty typical scoring.

It is not a unique or customized score.

Yes that is what I wanted to know.

Because, obviously, you know what the base of that question is.

In any event, all right, I think that is about it for me.

Thank you very much.

Thank you.

Since there are no further questions, I would now like to turn the call back over to Bob Allen for closing remarks.

I really appreciate you joining us today.

Again, we are very, very excited about the successful launch of our new Broadview Security brand.

We are very pleased with a quarter where we can deliver solid organic growth and revenue, GAAP operating profits and net subscribers in a pretty tough economic environment.

So thank you for joining us today.

Thank you for your participation in today's conference, this concludes the presentation.

You may now disconnect.

Have a good day.