VVNT (2019 - Q4)

Ladies and gentlemen, thank you for standing by and welcome to the Vivint Smart Home Inc. Fourth Quarter and 2019 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. [Operator Instructions]I would now like to hand the conference over to your speaker today, Nate Stubbs, Vice President, Investor Relations. Thank you. Please go ahead, sir. Nate Stu

Good afternoon, everyone. Thank you for joining us this afternoon to discuss the results of Vivint Smart Home and APX Group Holdings for the three month period and fiscal year ended December 31, 2019. On today's call, we will be presenting the results for Vivint Smart Home. In the press release we issued today as well as the accompanying presentation we provide tables with reconciliations for the results of APX Group Holdings.Joining me on the conference call this afternoon are Todd Pedersen, Vivint Smart Home's Chief Executive Officer; Scott Hardy, Vivint Smart Home's Chief Operating Officer and Dale R. Gerard, Vivint Smart Home's Chief Financial Officer.I would like to begin by reminding everyone that the discussion today may contain forward-looking statements, including with regards to the company's future performance and prospects. Forward-looking statements are inherently subject to risk, uncertainties and assumptions and are not guarantees of performance. You should not put undue reliance on these statements. You should understand that a number of important factors including the items discussed in the risk factors and our proxy statement, consent solicitation statement and prospectus dated December 26, 2019 and filed with the Securities and Exchange Commission, as such factors may be updated from time in our filings with the SEC, which are available on the investor relations section of our website could cause actual results to differ materially from those expressed or implied in our forward-looking statements.The company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.In today's remarks, we will also refer to certain non-GAAP financial measures. A reconciliation of these non-GAAP financial measures for historical periods to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings release and accompanying presentation or on the financial information page of the Investor Relations portion of our website.I will now turn the call over to Todd.

Thanks, Nate. And good afternoon to everyone joining the call. We're excited to be hosting our first earnings call as a publicly traded company listed on the New York Stock Exchange. We began this new chapter as a leading public smart home company after successfully completing our merger with Mosaic Acquisition Corp on January 17. As part of the merger, we raised nearly $500 million in new capital to help delever the business and drive future growth. It's notable that Blackstone has been a key partner and investor since 2012, demonstrated its renewed confidence in the long-term vision of the company by investing an additional $100 million. We believe our successful merger with Mosaic is a major step forward and raising Vivint's profile in the marketplace as a leading smart home provider, and in promoting an even stronger platform for future profitable growth.Before turning to the results, I wanted to discuss with you the management changes we announced on Tuesday. I will also provide an overview of the business highlighting some of our major accomplishments to date, as well as our overall vision for the smart home and why we believe we're the clear leader in this emerging growth category.First, Vivint Smart Home's President Alex Dunn has stepped down after 14 years with the company. Alex will remain as an advisor to Vivint through March 2021, to ensure a seamless transition. I'm grateful to Alex for helping Vivint become a leading smart home provider. We wish him continued success in his future endeavors. Scott Hardy, Vivint's Chief Operating Officer who was on the call today, and has held various senior leadership roles at the company since 2013, will assume many of Alex's key responsibilities. Our board of directors and I have confidence in Scott's ability to handle this expanded scope.Next, I'm pleased to announce the appointment of Dale Gerard as our Chief Financial Officer. We had confidence in Dale's ability to step in when we named him the interim CFO nearly five months ago. And as expected, he's done a great job leading the finance organization, while at the same time represented Vivint in the investment community as we were on the road educating the market about Vivint in advance of the merger. We've made two other important executive appointments. Todd Santiago has been named Chief Revenue Officer overseeing all account acquisitions and Marketing. Todd has been a senior sales leader at Vivint since 2012.JT Hwang has been named Chief Technology Officer responsible for leading the company's product and platform development. JT has been with us for the past 12 years. Previously, serving as the company's Chief Engineering Officer and was the key architect of Vivint's cloud infrastructure. Our long term focus on building a deep bench of leadership experience shows in all these executives. It's an exciting time to be in the smart home market. And we are confident that these talented leaders will continue to play strong roles in the ongoing success of our company.Moving now to the key financial highlights for the business. We had a strong finish to 2019. Fourth quarter revenue grew by more than 11% to approximately $308 million. Adjusted EBITDA was approximately $125 million up over 40% from the prior year, and producing an adjusted EBITDA margin of over 40% in the quarter. For the full year Vivint Smart Home grew total revenue by more than 10% to $1.2 billion and adjusted EBITDA grew over 51% for the year, topping $421 million. As of December 31, Vivint had more than 1.55 million total smart home subscribers up 7.5% for the full year. Dale will provide more specifics on the financials during his remarks as well as share our outlook for 2020.For the benefit of those who may be less familiar with the Vivint Smart Home Story, I would like to provide additional background about us, our growth strategy and our overall vision for the smart home. Since I founded Vivint nearly 20 years ago, we have grown to become the premier Smart Home company in North America with the largest subscriber portfolio and the most dedicated employees. We are redefining the home experience by delivering intelligently designed cloud enabled solutions directly to every home. Our proprietary cloud-based Smart Home operating system along with our well trained team of smart home professionals make it possible to create a completely customized smart home from door locks, cameras, security monitoring, thermostats, lighting controls, smart speakers and many other connected devices.All of these innovative devices are designed to work together seamlessly in an elegant system that homeowners can control from their in home touchscreen hub, to a single app on their phone or other devices or by simply using their voice. Over a decade ago, we came up with the modern vision for Vivint when we recognized the first mover opportunity, and made it our mission to deliver a transformative smart home experience to every home. We've come a long way in accomplishing that mission in the 10 years since we installed the first smart home hub connected with smart thermostat. Today, we have over 20 million connected devices on the Vivint Smart Home proprietary cloud based platform, with new customers buying an average of 15 devices across the various smart home types that I mentioned earlier.We have industry leading engagement on our smart home operating system with over 13 interactions a day on average, and over 1.4 billion daily events being processed on our platform. We believe the total addressable market for smart home presents a massive opportunity, and in the not so distant future, the vast majority of the 150 million homes in North America will be running on a comprehensive smart home operating system. Our focus on delivering this type of smartphone experiences significantly broaden the potential customer base, and it is completely disrupting the traditional security and high end home automation industries.From the very beginning of Vivint Smart Home, we have focused on building a subscription service that is comprehensive, easy to use and affordable for the mass market. Delivering a truly integrated smart home experience requires a unique proprietary technology, the expertise to customize and install that technology in the customers' home and importantly, the ability to support that customer over an entire lifecycle. That's why our nationwide workforce of over 10,000 dedicated smart home employees is such a critical differentiator to the Vivint model.There are three key drivers that guide our strategic decision making. First, deliver transformational smart home experience to every customer. Second, drive consistent top-line and subscriber growth. Third, improve margins and profitability to fund that growth in a cash neutral way.I'd like to now turn the call over to Scott Hardy, Chief Operating Officer of Vivint Smart Home to drill down a bit further into our recent progress across our key initiatives.

Thanks Todd and good afternoon everyone. Vivint's been able to drive significant improvements in both our customer experience and our overall profitability and cash flow thanks to our relentless focus in three primary areas. First transforming net service cost to our vertically integrated business model. Second, bringing down net subscriber acquisition costs through Flex pay, and third scaling our overall G&A expenses.Let me touch on each of these areas, starting with net service costs. In recent years, growing consumer demand for smart home devices, particularly in the highly sought after camera segment, has helped grow our average revenue per user. But the number and location of these devices particularly those outside of the home also created additional complexity and ongoing support driving our net service costs up. In the first quarter of 2018, our net service costs per subscriber peaked at $17.04. We believe our competitors in the smart home space all will face the same challenges, but we believe our unique ability to solve them is evidence of the power of our vertically integrated model. By controlling all parts of the smart home delivery model, we believe we're able to identify and understand the root cause for issues and then quickly make changes to the hardware, the firmware, the cloud platform, the installation processes, and the diagnostic tools used in both self-healing and assisted support.In the fourth quarter as a result of these changes, we achieved net service cost per subscriber of $13.51, a savings of $3.53 per subscriber month from just 21 months ago, improving upon our industry leading operating margins.Perhaps most importantly, these changes have significantly improved both the product reliability and service levels, which in turn has driven improvements in customer satisfaction metrics. We believe the advantages achieved through our vertically integrated model are very difficult for others to replicate.Second, we continue to drive down net acquisition cost per subscriber through the increased adoption of third-party consumer financing which we call Vivint Flex Pay. Since we introduced Flex Pay in 2017, our net subscriber acquisition costs have dropped by 50% or over $1000 per subscriber. Given our first mover advantage in Flex Pay, we believe that we are well ahead of the competition in enabling consumers to easily finance a full smart home experience while also dramatically improving our unit economics.Third, we continue to scale our G&A expenses to drive improved profitability. In 2019, our G&A was 16.5% of revenue down 350 basis points from 20% in 2018. We plan to continue to manage our cost prudently restructuring is needed and allocate our investments in areas designed to drive positive ROI. For instance, we recently announced a number of cost reduction initiatives that are expected to meaningfully reduce G&A and overhead costs by streamlining operations, focusing engineering and innovation and driving better customer satisfaction. The company expects to complete the majority of these cost reductions by the end of the first quarter of 2020.Finally, let me address customer attrition, which is an important part of our subscription model. Our attrition dynamics are driven by two primary factors. First, the rate of attrition for a customer cohort changes as it progresses through different phases of the life cycle. We define these phases of in term, end of term and post initial term. Each phase carries with it a corresponding expected attrition rate. With attrition at its highest during the end of term phase. As we shared in our last earnings call, the cohort attrition curves remained fairly steady.The second factor that affects attrition is the percent of total customers in each stage of the life cycle. The percentage of customers in the end of current phase rose in 2019, and will stay elevated in 2020 before falling again in 2021. In the fourth quarter attrition was flat sequentially at 13.9%. This remains higher than our long-term trend per attrition, but it's in line with our expectations given the higher percentage of customers that are in that end of term phase.I will now turn the call over to Dale to go through the specifics of our fourth quarter and full year results, as well as provide our initial outlook for fiscal 2020.

Thanks, Scott. I'll walk through the financial slide portion of the presentation that we posted today in conjunction with our earnings release. On Slide 12, we highlight revenue for the fourth quarter and full year. Fourth quarter 2019 revenue grew by 11.3% to $307.8 million.The growth in revenue was attributable to a 7.5% increase in total subscribers, as well as a 3.4% increase in the average monthly revenue per user. We saw a favorable year-over-year trends in subscriber financing mix during the fourth quarter, highlighted by 38% reduction in the number of subscribers financed through retail installment contracts, or RICs for short.We continue to actively pivot the subscriber financing mix to a more favorable profile for the company. By shifting a greater proportion of our subscribers away from RICs and towards our third party financing partners and pay in full, we're able to reduce our net subscriber acquisition cost per subscriber and improve our cash flow dynamics.As we look forward to the future, we will be focused on delivering a true Smart Home experience to millions of homes in a profitable and cash neutral way.Moving to Slide 13. Adjusted EBITDA has scaled nicely for both the fourth quarter and the full year. Once again, the primary drivers are lower net service cost per subscriber and continued scaling of our general and administrative expenses. For the year, we are proud to have scaled adjusted EBITDA margins by 1000 basis points to 36.5% of revenue compared to 26.5% in 2018. Meanwhile, covenant adjusted EBITDA which is the calculation used for our debt covenants, scaled by 440 basis points to 55.6% of revenue compared to 51.2% in 2018. As you look on slide 14, we highlight a few data points for the subscriber portfolio, which were strong across the board. Total subscribers at year end grew from 1.44 million to 1.55 million or 7.5%. Average monthly revenue per user or AMRU, increased to $65.98, up 3.4% year-over-year. AMRU has been moving up nicely due to the recognition of deferred revenue and effective cross-selling of new products such as our new generation cameras.On the next slide 15, we highlight a few points on new subscribers. New subscriber originations were 45,861 for the fourth quarter and 316,403 for the year. During the first half of 2019, we improved the underwriting requirements of our business and implemented a second list financing partner. While the net effect of these changes should produce a higher quality credit customer and reduce the number of new subscribers to finance on Vivint's balance sheet, it caused a temporary decrease in sales productivity which we believe suppressed our total originations to an extent in 2019. We saw a similar dynamic in 2017, when we implemented our primary financing partner and it took a few months for our sales channels to adapt to the structural change in our sales process. On the right hand of this slide, you can see the impact of our efforts to reduce the financing of new customers on Vivint's balance sheet, which are the RICs that I referenced earlier in my remarks. Our mix in the US was 10% in the fourth quarter, down from 16% in the fourth quarter a year ago. This has a significant beneficial impact on our cash flows and net subscriber acquisition cost per subscriber, which you can see on the next slide.Moving to slide 16, we will cover our net service cost per subscriber and net subscriber acquisition costs per new subscriber. The improvement in net service costs per subscriber have had a positive impact on our earnings in the quarter and the fiscal year periods for 2019. We've also continued our trends of year-over-year improvements in net service cost per subscriber moving from $16.27 in 2018, down to $13.73 this past year. As Scott discussed earlier, this solid improvement is due to the work of Vivint's vertically integrated Smart Home platform, which encompasses the software, the hardware, the installation and ongoing customer support. As we continue to make improvements in all of these areas, we are seeing continued positive trends in both customer satisfaction and the cost of service. The result is that, our net service margin continued its increasing trend moving up from 69.2% in 2018 to 73.8% in 2019. We believe these efforts explained the improvements I've cited in adjusted EBITDA.On the right hand side of slide 16 is our average net subscriber cost to create a new subscriber in the last 12 month period. For 2019, net subscriber acquisition cost per subscriber decreased to $1,018, that's 14% lower year-over-year as we continue to drive down to the number of new subscribers that are financed on a Vivint retail installment contract, and shipped to a higher mix of customers utilizing our financing partners or paying in full for the initial purchase of their Smart Home products.Slide 17 covers the lifetime value of our customers and the benefits of a recurring revenue model. In the last 12 months, we've added approximately $1.75 billion of lifetime value. We continue to see nice backlog numbers, which as a reminder represent revenue adjusted per attrition that we expect to recognize over the lifetime of the customer. Backlog today is $5.81 billion, up about 13%, compared to $5.16 billion a year ago.Slide 18, depicts our typical subscriber walk that illustrates the change in total subscribers at year-end. As Scott mentioned, our attrition has trended higher than our historical averages, given the higher percentage of customers that are in their end of term life cycle phase.Finally moving to our financial outlook for the upcoming year on Slide 19. First I'll share some of the fundamental characteristics of our financial model. Over 95% of revenue is reoccurring, which provides long term visibility and predictability to our business. Most of our new subscribers that finance their smart home systems choose to enter into a five year contracts and remain on the platform for approximately eight years, driving significant lifetime margin dollars. Our strong unit economics and scale has contributed to our ability to drive significant adjusted EBITDA improvement. In terms of guidance we expect to end 2020, with approximately 1.62 million to 1.66 million subscribers. Our estimate for 2020 revenue is $1.25 billion to $1.29 billion and we're projecting 2020 adjusted EBITDA between $525 million and $535 million.Operator, please open the line for Q&A.

[Operator Instructions] Your first question comes from the line of Paul Coster with JPMorgan. Your line is open.

Hi, guys. It's Paul Chung on for Coster. Thanks for taking our questions. But could you remind us of the seasonality of your sub-adds where you typically expect the year to play out in terms of, sub-adds every quarter to kind of hit that 1.6 million to 1.66 million, and then the kind of respective attrition rate. Does that attrition rate kind of peak in the second half as I have heard you mention in the past and then same question for your OpEx levels as we move through the year and I have a follow up.

Is that one question or lot of? I'm going to start with the first question. Thanks for that. We do have seasonality still to our onboarding of our customer base. In our direct to home program, the majority of the sub-adds happening over about a six month period really starting in about a month some of the teams kick off, they start going to full momentum, kind of middle of May. And that continues to the end of August into September. So that would be the spike of accounts being added, customers being added. And one thing I'll note on that is what's important for our business for those of you who have not, listened to one of our calls before is sales rep retention and productivity is incredibly important. We've had the best retention of our salesforce leadership and sales people year over year than we've ever had. So tremendous excitement around, what the company's doing, our product offerings, the opportunity in the market.And so we've got some really good momentum in that segment of the business. Now we do create customers on year on basis through our national inside sales group which is inbound, it's a little bit of outbound sales. And that's a very consistent business and it's about 45% of our overall sub-adds. So it's a nice healthy mix. And we have a few pilot programs going on.So that I think that covered the first question. The second was attrition.

Attrition is not as seasonal and it's based really on when customers are coming out of cohort. And so we've got firms that have different lengths. We will see that our overall attrition peak in really the mid part of this coming year through the end of the year, and that's over a long period of time, that will be a multi-year peak before it comes back down, and then customers will come off their terms. So, there is a little bit of seasonality that happens month or two or three after they're put on and because we have some seasonality in the summer. The attrition dynamics will peak in 2020 during that time.

So here is the great thing about attrition, just to add to that. We knew the attrition numbers several years ago again these are contracted service contracts with our customers and based on the volume like Scott had mentioned the contract length in term. This is an expected number for us and it's right in line with what we hope for so, that's not different…

And then, last thing on just that, I think we've kind of think it's attrition will spike somewhere in the 14 .5% to 15%, and we still believe that's what we'll see here, sometime in mid part of 2020.

And then maybe last part of the question.

Maybe you could repeat the last part of your question.

How the OpEx level kinds of changed throughout the year or is it follows kind of like last year?

Yeah, I mean, again as Scott said, it's kind of the way our business works. You have the ramping process going on here really in the first quarter, preparing for summer, which is a large percent of our accounts really in the second and third quarter. And then you've got to have the NIS channels that really do most of the counts in the first and fourth quarter. But in terms of OpEx, you'll see that same type of spend level. It's very seasonal in terms of how we ramp up our business, put on new accounts, the servicing of those accounts that happened. As we've said earlier in other calls, there is a little bit of, excuse me, a service cost spike as you come out of that summer period because those new customers that come on that first 90 to 120 days, there a little bit of extra service as we onboard, those customers throughout the summer. But in terms of the way you should think about it, it should follow a very similar trend to historical quarters.

Okay. And then, do you see any, I have to ask, do you see any possible impact from corona, maybe particularly on your ability to kind of get feet on the street and if there's any kind of restrictions on travel.

At this point from the sales perspective, on the phone, and part of the sales that's actually comes on with closing sales it's actually going into people's home and physically installing the comprehensive systems that we're doing. We haven't had any impact at this point. Going out into the summertime and actually doing the appointments with consultative sales process we have, we're in the middle of doing that right now and it's not impacted us and what I would say you know what we know. If there's much larger outbreak, something happens in a bigger way than what we're seeing currently as every other business something could happen, but we're seeing nothing from that standpoint at this point.

And then Paul I'll to add to that, once the guidance numbers we put out in terms of subs and revenue, it kind of took ups point, we've taken the information we have today and we got to factor that into the most recent guidance we've around, so total portfolio subscribers at the end of the year and kind of revenue, but I think the other big point here is that, there is we have $5.8 billion of backlog that we talked about earlier and other revenue for 2020, about 90% of that coming into the year is already kind of contractually booked as Todd said this is contractually, most of these customers are five year contracts. So we know coming into January of 2020 that this is how much revenue based on our attrition curves that we've historically had. And so for those type of assumptions 90% of that revenue for 2020 is booked.

Got it. thanks. And then last question is, what's the earnout kind of impact on share count? How should we think about the diluted impact from some of your stock awards and what should we model for the year and next quarter. Thank you.

Thank you Paul. In terms of earn out, there is three different earn out tranches. There was 12.5 million shares at a price of 12.15. Again, this is a we lapped over 20 out of 30 days, that first tranche was actually achieved on February 26. And so then there's [indiscernible] or one at 17.50. I can't say whether or not those tranches will be met. But if they are, then you would have another each one of those tranches would be another 12.5 million shares that would be distributed to the previous holders of Vivint Smart Home shares.And then, we filed we do file on our 10-K's and we'll have all the kind of fully diluted share count information of those here shortly.

Your next question comes from the line of Amit Daryanani with Evercore. Your line is open.

Thanks for taking my question. And congrats on the first quarter as an IPO company. I guess maybe to start with, can you just touch on what are your expectations in terms of free cash flow generation in January '20 on what the burn rate could look like in 2020 for you guys from a free cash flow basis, and then related that when do you think you can get a free cash flow neutral position either revenue or timeline perspective?

So that's a great question. And something that we are hyper focused on. As we were on a road show, we talked a lot about the fact that the company is incredibly focused on reducing I think you've seen our members, reducing our --- we've got our gross creation cost and our net gross SAC and net SAC. Which we've reduced net SAC down pretty substantially over the last couple of years. I'm not going to tell you a number but people will be very pleasantly surprised by the changes that we're making something from their fee structures to the net SAC which is going to be the biggest impact to cash usage, and are getting to our goal of cash flow neutrality or positive cash flow even on a levered basis.And again, this is it's one of the top priorities of the company. The other thing that everyone is seeing is we would just kind of slightly structures its own business just trying to right size, overhead spend, budgets, projects, making sure that we're very judicious with the capital that's coming. So what I would tell we some of us told people, within about two years we will get the cash flow neutral. We're going to beat that for sure.

Got it. That's fair. And I guess the follow up on this is -- to point make you had a fairly impressive reduction on your net subscriber acquisition costs over the last couple of years. Can you maybe just touch on how far can this number go in terms of how much more -- what is the optimize number could look like and how much more run way you have to bring it lower.

And I'm not going to tell you a number. We kind of lower this internally. Based on what we're doing right now. It's going down and it's going to go down and it's in a fairly meaningful way compared to how it's been in the past. And we'll just, we're going to talk about this in upcoming quarters but that net SAC is very critical important to us and there's room and we're getting those, there's [indiscernible] of pricing and packaging and financing structures and we've already launched it. It's happening real time and we've got very, very positive and improving partners. Driving the mid, I'll turn it a little deflection but we are going to surprise the market for sure.

Fair enough. And then just finally for me, if I think about your calendar '20 guide, I think if I look at a map in terms of the EBITDA dollars incrementally in the revenue, that's going to be an incrementally, I think it's going to do north of 90% conversion margin of revenue to EBITDA. A, I guess you're just check me, is that math accurate? And if so, maybe tell us what's enabling such an outsized EBITDA margin conversion in calendar '20 for you guys?

Yes. So, I think revenues is going up as we continue that to add more customers and we're adding more customers that are taking more hardware. So, we're recognizing more kind of the hardware revenue or time, while at the same time we're taking, we're scaling our costs. I mean, if you think about it, G&A for example, as a percent of revenue was going down 350 basis points from 2018 to 2019. And as Todd said, we just recently took some actions that we think that would continue. There's a downward trend here that we can continue that in 2020 and then the other side of that is servicing costs. We continue to drive down servicing costs. I think over the last 21 months, when it peaked back in first quarter of 2018, I believe we're at the $17.04 range come in and the $13.53 range, roughly we're $51. That's like almost $4 a month in servicing cost. And so if you think about driving to the bottom line, that's $50 million, $60 million of additional margin as that goes flows right to the bottom line.

Yes. So, it's not really, it's not really 90% EBITDA margin. It's all dollars, we're getting more margin out of dollars and service cost reduction as that flows across all of the revenue. And then scaling the G&A or leveraging G&A, we're actually reducing G&A year-over-year on a real basis. And as a percentage of revenue, going down - in nice way. So, we're just getting the operational leverage in business to tell you the truth. On the service side, the important thing to note is actually, most important question to ask is how are we doing that? And the reason that we're doing, we're able to reduce the servicing costs because we own the entire technology stack. Is this a proprietary operating system that we manage and operate, the firmware, the software, the product development, the installation processes.We control it. If we did not, and let's say we rented our operating system from worm.com and products from Honeywell and other people, we could accomplish this. This is critically important as on it's own revenue standard. We own our entire technology stack. That doesn't mean that we won't partner with Amazon or Google some of the hardware pieces, but we control the entire process. So, this is a very large scale concerted effort from all parts of our business to drive down servicing costs and software upgrades, installation protocols, service deployment protocols and there is a whole myriad of data we've gotten to focus on it. We're not done, we're constantly trying to make sure that's happening because the truth of the matter is, if our servicing cost going down, the products are working better, it's more reliable, it's online more. And it leads to customer satisfaction. That's a core driver right there. Great quality service. And we work slowly position to do that.

Your next question comes from the line of Kunal Madhukar with Deutsche Bank. Your line is open.

Hey, thanks for taking my questions. A few, if I might as well.One with regards to the guide, and the guide is likely to work to what you had initially talked about in November of 2019. Should I take it that, the difference is basically just the potential impact of coronavirus as you kind of look at it? The second would be when you look at the tech stack and completely get that this you cannot accomplished the margin improvement and the user benefits or user satisfaction if you didn't own the tech stack. How much is the cost of that tech stack? I mean, I couldn't quite figure out exactly where the product development expenses were, and how much the product development expenses were on a per year basis? Let's talk about it if we could. Thank you.

So I think if I understand your question, first on the 2019 guidance in terms of where we came in. One I'd say on adjusted EBITDA we start there for example. I think we guided 414 and we actually came in at 421.4. So it was above expectations there. And then in revenue, we've kind of signaled in the third quarter we did third quarter back in November, and we had some revenue adjustments related to the treatment of the retail summer contracts. And that was about $9 million to $10 million in 2019. One that will flow through kind of impact those projections that we had out there around 2019. And then you see a little bit that flow into 2020. And then also, there's a little bit more flows into 2021. So that's kind of the impact there.In terms of '20. I think the other question was around the coronavirus. We did kind of take '20 that impact again, as Todd says, taking what we know today and pulling all that together in terms of our salesforce being able to go out knock doors our installers building on people's homes and installer systems. We kind of took what we know again today and put that into our guidance. And that's kind of why you're probably see a little bit of a probably lower in terms of the net new total subscribers not new starts but total subscribers on the folio and then also the revenue guidance that we put out there.And then I think the second question was around the cost of the platform and the technology stack if that's correct. And regarding the cost of the technology stack. So you'll see and we don't disclose how much we spend specifically on product development within our G&A but those costs are embedded in our overall G&A expenses. And they're important expenses for us. We're very focused, I think, we produce as much as anybody per dollar spent in the industry. And so they're embedded there. And then the second piece was the operating costs of the platform that we have included in our servicing cost.

And we don't we don't break those out. So what I would say is, we definitely improvements in terms of service costs and margins and improvements. It's a massive, massive advantage to own and control the entire stack.And it's not just the technology stack. It's the operational expertise, being able to consult do the consulting of selling home and just as importantly the actual installation process. Owning can show that with our own employees, trained by us, sales system, sales platform and the ongoing sales, it all kind of works in concerts. It's all incredibly important.

Okay. And then as a follow up, wanted to understand the whole client, the Amazon Dream X -- announcement of with regard to home automation, home security, when they said that, something is becoming later this year through authorized dealers and what have you. Have you seen any chatter in the industry with regard to, you know, what Amazon maybe trying to do there and what their strategy could be?

No. So here's I would say. We've got a lot of people enter into the Smart Home space in different areas in different ways, single point solutions and most of them are gone and out of business. Others that are DIY platforms, which are different than, you know what we do in business like a professional, seamless, kind of easy button service for the consumer for a comprehensive Smart Home. Ring was purchased by Amazon. I think they've done a good job selling, the single point solution with the turbo camera. It's great. A very good brand. The launch into what we do actually entering people's homes, installing, this is what we do not what anyone else does. 15 pieces of hardware in every single home on average. It's a lot of work. We've been doing this for 20 years. So, I don't know what they're going to do. You always hear the chatter and we always pay attention to it. We're not immune to watching what the competition is doing. But we also understand the complexity of what we do and the focus that it requires to deliver an excellent service for our consumer base. So, we'll kind of watch and see but further we're the leading smart home provider, we've got the most experienced, the largest customer base in the Smart Home as a service world.We feel very confident about what we're doing, where we're going our path to our future. So, -- and get things in tune and actually haven't heard from chatter. The last thing I would say is, on a unit of one basis, and this is an interesting part of this business opportunity. You have to earn a customer one at a time. You don't just download an app and magically house is smart. We don't lose people on a face-to-face basis with a consumer. We're very, very good at what we do. We've got over 10,000 professionals working inside of our company that are hyper-focused on delivering the most comprehensive investment on the streets that's out there. So, there's some competition out there that is very good.

Great. Thank you so much.

Your next question comes from the line of Ed Mally with Imperial Capital. Your line is open.

Hey. Thank you. Just with respect to sourcing your hardware, what is your supply chain exposure to China specifically? And have you seen any disruptions in sourcing hardware? And then second half of the question is, do you also have any alternative and contingency plans in place for sourcing hardware if there is a disruption.

Yeah, this is Scott. We -- early on in the tariff discussions we moved effectively all of our finished goods manufacturing out of China. And so we have very, very little finished goods that comes out of that country. Of course, like the rest of the consumer electronics industry many of the subcomponents are made in China. But we plan for our summer ramp up, Todd talked about the seasonality of the business will tend to build buffer inventory going into that. So we're in relatively good shape and a lot of those components have been in inventory. Of course, we're watching it constantly. The only potential risk we may have is shipping costs to continue to expedite and get all the goods here on time for our summer season, that's built into our forecast.

Thank you. And beyond any issues of the trade war, have you seen any disruptions due to the coronavirus specifically.

No, we pay very close attention to what we're getting out of our suppliers. Everybody's been trying to see how quickly and the manufacturers are coming back to work with velocity is it's coming out of factories. And we've seen that stepping up over the last few weeks. And clearly it's been a little slow because of the coronavirus. And people taking longer some in the Chinese New Year to go back to work and they have figured out how to deal depending on the location within the manufacturing facility, how to deal with coronavirus? So we seen a little bit of delay that's well potentially drive some of the additional cost and freight for us. But we are seeing supply for now.

Okay, very good. Thanks very much.

Your next question comes from the line of Todd Morgan with Jefferies, Your line is open.

Thank you. Thanks for the question. Congratulations on being a public company. I was looking at Slide 24, which is the cash flow slide. And was hoping to ask if you could help me sort of bridge the Q4, 2018 - Q4, 2019 cash flow numbers operating cash flow and investing cash flow. It's roughly flat over that period. Your EBITDA was much higher, cash interest a little bit higher. I would presume that the SAC numbers were probably on a net basis lower given the progress you've made on that front. Were there special additional costs or something that came in this fourth quarter based on the IPO and the merger or were there other items that would have caused that to be again roughly flat year-over-year, despite the EBITDA growth.

We did have some cost related to the transactions going on in the fourth quarter. It's probably Todd we could take this offline, probably easier for me to go through the -- I don't have all the numbers in front of me in terms of the detail behind this.

I was just wondering if there's like -- for example, inventory build. You mentioned, trying to try to make sure that you had components on hand if there was something like that going on. But that's all right. I can certainly talk offline.Just secondly, quickly, you mentioned the cash flow goals in the next two years trying to move towards that positive timeline. Is there any different thinking about how you might go about financing any needs? I mean, given what you've done in the past is simply kind of periodically tap into that markets. Is there any other thoughts different than that? Thanks.

So, what you're going to see is -- we're going to continue to utilize the consumer financing model we have but in a much greater way changing kind of mix on what we're putting on our books what's being financed through citizens and few of our partners. We're just pushing forward cash to the company sooner and maybe I can talk about the percentage like the market is very positive. And, there is a potential for us to cap the markets and we are going to do some form of refinance this year of our '20 as markets will be strong 2020 beyond. And we hope and again this is our basis we wouldn't have to do, but in markets to refinance our debt or get new debt development business for the year. That's again I'm assuming this turned out to, compared to previous years and we've trended well, and continued improvement would be [indiscernible] we're very focused on it. If it’s not this year it'll be next year.

Great. That's helpful then. Thank you and good luck.

Thanks. Yeah. Just want to say thanks to everyone for joining the call. A lot of you on the phone have been with us for years and maybe on the debt side or if you just followed the company, those that are new to the company thanks for coming in and paying attention. We are excited to have you watch, see what we do again there're years to come. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.