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Vivint Smart Home, Inc. (VVNT) Q1 2020 Earnings Call Transcript

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VVNT earnings call for the period ending March 31, 2020.

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Vivint Smart Home, Inc. (VVNT)
Q1 2020 Earnings Call
May 8, 2020, 9:30 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Ladies and gentlemen, thank you for standing by, and welcome to the Vivint Smart Home First Quarter 2020 Earnings 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, VP, Investor Relations. Thank you. Please go ahead, sir.

Nate Stubbs -- Vice President, Investor Relations

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 ended March 31, 2020. 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 also 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; Dale R. Gerard, Vivint's CFO; and Scott Hardy, Vivint's COO.

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 risks, 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 our annual report on Form 10-K for the fiscal year ended December 31, 2019 and our quarterly report on Form 10-Q for the quarterly period ended March 31, 2020, as such factors may be updated from time to 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. 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, which are available on the Investor Relations section of our website or on the Financial Information page of the Investor Relations portion of our website.

I will now turn the call over to Todd.

Todd R. Pedersen -- Chief Executive Officer

Thanks, Nate, and good afternoon to everyone joining the call. I hope everyone is staying safe in the current environment. And today, we will cover three main topics. Discuss our financial and operating results for the first quarter; review our customer engagement and the performance of our platform during this difficult time; and highlight key elements of our business and actions we've taken that give us confidence in our performance for the remainder of 2020 and beyond.

We've had a great start to 2020 and we are pleased to see significant improvements in our key metrics year-over-year. Revenue and total subscribers continue to grow and EBITDA margins continue to expand, despite the challenges related to the current environment. Dale will provide more specifics on the financials during his remarks as well as share updated thoughts about our full year 2020 performance. The remainder of my commentary will focus on the Vivint Smart Home story in the context of COVID-19; why our customers value our services even more during difficult and uncertain times like these; why we think our financial model is built to withstand the current environment; what proactive operational measures we have taken to protect our employees, our customers and our business; and how we plan to get back up to speed with our direct-to-home sales teams. Our services qualify as essential under the guidelines issued by the U.S. Department of Homeland Security in a time when we're asked to stay at home for an extended period. There is no better time to have a comprehensive smart home system.

Vivint Smart Home provides essential services to nearly 1.6 million customers across North America. Vivint services include life-saving and life protecting 24/7 professional monitoring for emergency situations such as medical, fire, carbon monoxide and burglary alerts. Our vertically integrated model includes dedicated customer care and monitoring teams to ensure that we respond to these alerts from our customers within seconds.

Our cloud platform and proprietary technology also allows customers to seamlessly manage and protect their homes, whether they're sheltering in place or away. Vivint takes care of our customers and their families, while providing the peace of mind that people demand during times of heightened awareness, anxiety, crime and uncertainty. We've been securing and creating smart homes for over 20 years. So I can tell you from experience that Vivint has a history of exhibiting strength and resiliency through challenging economic times.

For example, we only witnessed a slight increase in customer attrition in 2008 and 2009 during the global financial crisis. Although the current pandemic poses a unique set of societal problems compared to then, we are confident that our customers will continue to value home security and smart home technology. In fact, the case could be made for pent-up demand forming as a result of this crisis. We have long believed the total addressable market for Smart Home presents a massive opportunity. And in the not-so-distant future, the vast majority of 150 million homes in North America will be running on a comprehensive Smart Home operating system.

We believe Vivint is the best position provider to take advantage should demand accelerate in this way. We are confident in our value proposition, because it has been proven over two decades. Today, we have over 21 million connected devices on the Vivint Smart Home proprietary cloud-based platform and we are uniquely qualified to help our customers deal with the current environment across the various smart home devices we support, from door locks, cameras, security monitoring, thermostats, lighting controls, smart speakers and many other connected devices. All of these innovative products are designed to work together seamlessly through our elegant platform that homeowners can control from their in-home touchscreen hub through a single app on their phone or other devices or by simply using their voice. Even prior to the current health and economic crisis, we already have the 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 cloud platform.

During the current pandemic, our platform has continued to seamlessly handle all daily interactions, as our customers have relied even more on their smart home systems for various and often evolving use cases. Some of these use cases are very intuitive, such as our next generation doorbell camera that intelligently detects packages and actively helps protect them from porch pirates. With more than 1 million packages that are still on a go missing from porches every day, our newest doorbell camera helps provide homeowners with peace of mind by helping to prevent crime before it happens.

Other use cases will become increasingly important, while we've been sheltering in place, such as using indoor smart cameras to keep a watchful eye on elderly parents, while social distancing, or to make sure kids are doing their homework during the sudden era of distance learning. Customers are relying even more on smart smoke detectors, as more home cooking takes place. And they are recognizing the value of our AI-powered outdoor cameras that recognizes potential lurkers and can sound and alert to scare away potential thieves.

Whatever it may be, our customers have been more reliant on the various smart devices that we professionally installed for them in these ways and more, and they continue to lean on our nationwide team of dedicated Smart Home employees for a more urgent interaction, such as real-time security monitoring or to get help in the event of medical emergency.

The bottom line is that frequent engagement in the Vivint system is a very good indicator for us and it's happening across our customer base during this pandemic. Although our value proposition is clear and we fully expect that our current customers will continue to make the most of what the Vivint System offers them, we also acknowledge that our ability to capitalize on any near-term demand for new smart home systems is limited, particularly in light of state sheltering in place coupled with our own decision to pause all direct-to-home sales in mid-March.

Overall, uncertainty at the macro level remains at historic highs and we are closely monitoring how that continues to impact the credit markets and unemployment rates. There are very real risks that the world could be hit with additional waves of the virus causing more social and economic disruption before a reliable vaccine is ready for widespread use. Fortunately, we benefit from a highly predictable and recurring revenue model in which roughly 90% of our expected revenue for 2020 was under contract at the beginning of the year. Vivint has also implemented a number of operational changes and safety procedures to continue to protect the health and well-being of our employees, while still providing the exceptional service levels, our customers have come to rely on. All of these considerations give us great confidence in our ability to weather the current economic environment.

To give you a sense for the actions we've taken, we have transitioned our highly nimble workforce, including all corporate employees and more than 1,500 of our customer care professionals to effective work from home environments, where they continue to provide uninterrupted customer service and maintain our high quality standards. We are maintaining our geographically dispersed central monitoring stations to provide 24/7 professional monitoring services for all emergencies. Furthermore, we are now conducting daily fitness for duty assessments for all customer-facing employees, which includes a temperature and symptoms check. We are contacting customers before a visit to determine if anyone in the home is experiencing signs of illness or has been exposed to COVID-19 and rescheduling appointments when necessary.

We are closely following CDC guidelines for social distancing and hand washing, including cleaning workspaces and surfaces and not shaking hands with customers. And of course we're using protective sanitary equipment during service visits such as disposable gloves, masks and hand sanitizers. We have implemented detailed business continuity plans intended to ensure the health, safety and well-being of our customers, employees and communities and to protect the financial and operational strength of the Company.

Dale has more of the details that he will share during his remarks around these efforts. But rest assured that we're remaining judicious around overhead spend, budgets, projects and everything else related to our goal of getting to cash flow neutral. That philosophy has not changed as a result of the pandemic and we are tracking ahead of our previously stated timeline of 18 months to 24 months.

Moving now to our plans to resume direct-to-home sales, which account for about 50% of our new subscriber ads. Our sales teams are ready to hit the ground running and they have received extensive training on proper interactions with customers in light of the current environment. The key gating factor is that we must follow individual state guidelines and ramping our sales teams across the country. At this point, many states have reopened and we estimate that our direct-to-home sales teams are operating at about 70% of their full capacity. In time and assuming no further major setbacks from COVID-19, we're optimistic that the upcoming summer sales period will proceed. While all of this is happening, our priority remains to take all appropriate steps to protect the health, well-being of our employees and customers. Our other sales channel, national inside sales, which on-boards nearly half of all new accounts in a normal environment, has continued to operate without material interruption throughout the pandemic.

While we anticipate eventually reaching a full deployment of our direct-to-home sales channel in the U.S. over the next few weeks, in Canada -- in Canada because of the lack of consumer financing options and that each account sold there historically has required a significant cash investment by the Company. Vivint will no longer originate new customers through the direct-to-home channel. We will continue to sell [Technical Issues] through our national inside sales channel. Furthermore, we remain committed to our customers in Canada and we'll continue to operate there with dedicated support and services.

We anticipate that funding the vast majority of our new customers via the Vivint Flex Pay program will continue to be a key driver in our strategy of profitable subscriber growth. Our external customer financing partners have expressed their commitment to maintaining their current underwriting standards of new smart home customers through the current economic downturn. We believe that we are widening our lead over the competition in enabling customers to easily finance the full smart home experience while also dramatically improving Vivint's unit economics in the Company's cash flow dynamic.

I will now turn the call over to Dale, to go through specifics of our first quarter results as well as to provide our updated thoughts on the remainder of fiscal 2020.

Dale R. Gerard -- Chief Financial Officer

Thanks, Todd. I'll walk through the financial slide portion of the presentation that we posted today in conjunction with our earnings release.

On Slide 8, we will highlight our revenue, adjusted EBITDA and covenant adjusted EBITDA for the quarter. For first quarter 2020, revenue grew by 9.8% to $303.2 million. The growth in revenue is attributable to a 7.1% increase in total subscribers as well as a 2.3% increase in the average monthly revenue per user.

In the center of Slide 8 adjusted EBITDA has scaled nicely for the first quarter. The primary drivers were lower net service costs and continued scaling of our general and administrative expenses. For the quarter, we are proud to have scaled adjusted EBITDA margins by 570 basis points to 44.5% of revenue compared to 38.8% in the first quarter of 2019. Meanwhile covenant adjusted EBITDA, which is the calculation used for our debt covenants, scaled by 840 basis points to 62.6% of revenue compared to 54.2% in the first quarter of 2019.

As you look on Slide 9, we highlight a few data points for the subscriber portfolio which were strong across the board. Total subscribers at quarter end grew from 1.45 million to 1.55 million or 7.1%. Average monthly revenue per user or AMRU, also increased to $65.27, up 2.3% year-over-year. AMRU has been moving up nicely due to recognition of deferred revenue and effective cross-selling of new products such as our newest generation of outdoor and doorbell cameras.

On the next slide, Slide 10, we highlight a few points on new subscribers. New subscriber originations were 50,053 for the first quarter, which is strong considering the direct-to-home sales were paused in mid-March. We continue to refi and improve the underwriting requirements of our business, decreasing the number of retail installment contracts or RICs. We saw favorable year-over-year trends in subscriber financing mix during the first quarter, highlighted by a 53% reduction in the number of subscribers financed through retail installment contracts.

By shifting a greater proportion of our subscribers away from RICs and toward our third-party financing partners and pay in full, we are able to reduce our net subscriber acquisition costs and improve our cash flow dynamics. As we look 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 11, we will cover our net service cost per subscriber and net subscriber acquisition cost per new subscriber. The reduction in net service costs continued to be a significant driver of our earnings improvement during the first quarter of 2020. We've continued our trend of year-over-year improvements in net service cost per subscriber, moving from $17.04 in the first quarter of 2018 to $13.83 in the first quarter of 2019, and now to $11.76 in the most recent quarter, a $5.28 improvement versus 2018. This represents the lowest service cost per subscriber in the last five years by a significant margin, and demonstrates the advantage of Vivint's vertically integrated smart home cloud 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're seeing continued positive trends in both the cost of service and customer satisfaction. The result is that our net service margin continued its increasing trend moving from 68.6% in the first quarter of 2018 to 74% in the first quarter of 2019 and now to 77% in the most recent quarter. These efforts largely explain the improvements seen in our adjusted EBITDA.

On the right hand side of Slide 11, we highlight our average net subscriber acquisition cost in the last 12-month period. For the first quarter ended March 31, 2020, net subscriber acquisition cost per new subscriber decreased to $960, that's 16% lower year-over-year as we continue to drive down the number of new subscribers that are financed on a Vivint retail installment contract and shift to a higher mix of customers, utilizing our financing partners or paying in full for the purchase of their Smart Home products.

During the quarter, we also benefited from pricing leverage on the point-of-sale purchase and installation of equipment. Before the recent pandemic hit, we had already put in place a number of cost reduction initiatives that were completed during the first quarter and then are expected to meaningfully reduce G&A and overhead cost by streamlining operations focusing engineering and innovation and driving better customer satisfaction in addition to these actions and because analyzing how we can operate more efficiently is a continuous exercise of Vivint. We initiated another round of cost cutting post COVID-19 to further reduce our discretionary spend.

Slide 12 covers the lifetime value of our customers and the benefits of a reoccurring 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 for attrition that we expect to recognize over the lifetime of a customer. Backlog at quarter end was $5.73 billion, up 9% compared to $5.24 billion a year ago.

Slide 13 depicts our typical subscriber walk that illustrates the changes in total subscribers at quarter end. As expected, our attrition has trended higher than our historical averages, given the higher percentage of customers that are in the term life cycle phase.

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 as 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 have shared in past earnings calls, the cohort attrition curves remain fairly steady.

The second factor that affects attrition is the percent of total customers in each stage of the lifecycle. The percent of customers in the end of term phase rose in 2019 and will stay elevated in 2020, before falling again in 2021. In the first quarter, attrition trended slightly higher sequentially by 20 basis points to 14.1%. This remains higher than our long-term trend for attrition, but it's in line with our expectations given the higher percentage of customers that are in the end of term phase.

Now we know there is a lot of curiosity out there regarding how we think our attrition curve may change the result of the pandemic. Echoing Todd's commentary about our past experiences through severe economic downturns as well as propensity for customers to focus inward and prioritize home security during times of crisis. At this point, we have no reason to think the same structural curve that we've discussed previously, won't continue to hold with the lifecycle impact that I spoke about being the primary driver.

As a case in point, our portfolio has performed slightly better than expectations in terms of attrition and other leading indicators, through the end of April. That's a good segue into Slide 14 where we will address our business activity in the interim period since our first quarter ended in March. The key takeaway on the sales front is that we continue to see robust demand for our products and services, and we have continued to acquire new Vivint Smart Home customers primarily via our national inside sales team despite the challenges posed by COVID-19.

On the cost side of the equation, we have curtailed discretionary spending to preserve cash and improve a highly variable cost structure. And as a result of these actions, some of which were initiated as normal course prior to COVID-19, we have achieved greater than $30 million in annualized fixed cost reductions. We have also fully drawn down on our revolving credit facility as a precautionary measure to increase our cash position, which stood at $305 million as of April 30, and preserve liquidity and flexibility in light of current uncertainty in the global financial markets resulting from the COVID-19 pandemic. Overall, we remain on track to achieve our goals regarding cash use and are aiming to get to cash flow neutral ahead of our previously 18-month to 24-month timeframe.

Finally, moving to our financial outlook for the year on Slide 15. I'll first share some of the fundamental characteristics of our financial model. Over 95% of our 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 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. That said, most companies have been impacted by the COVID-19 pandemic. And although we believe our reoccurring model makes us resilient to the full impact of the pandemic, it will affect our outcome for the year.

In terms of revised guidance, we expect to end 2020 with 1.55 million to 1.62 million total subscribers. Our estimate for 2020 revenue is $1.2 billion to $1.25 billion versus previous guidance of $1.25 billion to $1.29 billion. And finally, we are reaffirming our previous 2020 adjusted EBITDA guidance of between $525 million and $535 million.

Operator, please open the line for Q&A.


Thank you. [Operator Instructions] Your first question comes from the line of Rod Hall with Goldman Sachs. Your line is open.

Rod Hall -- Analyst

Yeah. Hi, guys. Thanks for taking the question, and nice job here in the midst of this turmoil. I wanted to -- I guess, I wanted to start with the subs growth guidance. You've reduced that growth expectation by quite a bit in percentage terms, not by much in terms of absolute number of subs. But I wonder what assumptions you're making on distribution there? Are you thinking that all of the distribution now from now until the end of the year, it's going to be from inside sales or do you think at some point, you'll be able to get back out again or just what kind of assumption is built into that in terms of selling motion?

Todd R. Pedersen -- Chief Executive Officer

This is Todd Pedersen speaking. Thanks for the compliment by the way on the quarter, we are super happy with it. So it's a result of our direct-to-home program, and being put on pause, which was about mid-March, obviously like anyone else, we're trying to be respectful around the states being shutdown. And here's the update on that. We've relaunched that program. We are -- by this weekend, we feel like we'll be at about 70% of what we normally would be from a sales rep perspective. There are still states that are not open to be -- to do business on the door-to-door program. We kind of -- we're making some adjustments on where they might change as far as markets go, so that -- so the number of subscribers is a result of that.

The thing I would say though is, the places that we have deployed and it's early still but the receptivity and the -- the per rep average, if we look at on a daily basis, on a per rep basis is very strong. So we're trying to -- we're optimistic because we are having great interactions with consumers. We've adjusted the process on how we sell in the neighborhoods, and I'm not going in people's homes, if they don't feel comfortable with that and trying to practice social distancing, but we're optimistic that trying to make sure that we're concerned -- conservative on the projection side.

Rod Hall -- Analyst

Okay. Yeah, that's great. I figured maybe people will just -- even though the sales force is operating, people wouldn't want them in their house and things like that, so that's good.

Todd R. Pedersen -- Chief Executive Officer

Good. It's actually just I'm going to be clear on this. It's been amazing the -- how welcoming people are. Again, we're wearing masks, gloves keeping our distance, they can actually e-sign through a cellphone or a tablet so, not to interact directly with the customer up in their homes, but the productivity per rep is really good, so the receptivity from consumer, the demands for our products and services at this time is quite amazing. So...

Rod Hall -- Analyst

Okay. Thanks, Todd. And then if I can follow-up on that. I -- your guidance now still implies EBITDA margin at least that's improving this year over last and I see the -- I see the big improvement in net service cost per sub which it seems like it's driving the nice margin improvement. Are you guys assuming that -- I guess, you're assuming that can continue on through the year. Is that correct? Are we interpreting that the right way of the guidance?

Scott R. Hardy -- Chief Operating Officer

Yeah. Rob, this is Scott. As we've shared, we continue to see impressive gains on service costs and that's a function of the vertically integrated business model that Todd talked about having the integrated software platform, the hardware, the diagnostic tools, and following installation process. That's really helped us drive some significant improvements, both on the cost side and importantly on the customer satisfaction side.

That said historically our service costs have been seasonally lower in Q1, our service costs tend to be highest in the early months of the customers' lifecycle. So given the seasonality of how we generally put new customers on early in the summer, we tend to see service costs increase in the back half of the year. So while we're really encouraged by the current trends on service costs in the Q1 results, and we would anticipate a sustaining full-year results of that level.

Todd R. Pedersen -- Chief Executive Officer

I want to add something to that. This is super important like this. We've been reporting publicly for about seven years now that people go back a few years back and we've had public shareholders, we had debt holders. Our service costs several years back was north of $18 per subscriber per month, which by the way the business still worked at that level. But the -- our decision to build out and own a proprietary technology stack the operating system, the firmware the hardware, the hardware development, again like Scott mentioned, the diagnostic tools.

This is an incredible and important note we've created and the capability that we have as a Company to continue to enhance and tweak these -- all of these functions of business to continue to improve that service costs, but really, really important is the delivery of the product and services customers. So customer satisfaction is way up. This is not -- and we reduced costs and our service levels are worse. This is -- our service levels are as good as they've ever been. So we're incredibly pleased with this results. Scott is being a bit modest.

Rod Hall -- Analyst

I'm just curious, is what drives that EBITDA margin expansion than in the guide, is it something else or is it probably service costs?

Dale R. Gerard -- Chief Financial Officer

It's -- so this is Dale. So it's going to be some service costs for sure. And then I think, as we said in the prepared remarks, we've done a lot of going through our cost structure. However we had -- taking out cost, so we feel really good about what we'll see that in the back half of the year. We did a lot of that in the first quarter, some of that in early April. And so that $30 million we talked about, we'll see -- on an annualized basis, we will see some of that throughout the next nine months or eight months of 2020. So it's really kind of holding -- the revenue come in, in terms of the subscribers and then servicing costs, and then taking up kind of cost. It's not only on the G&A and the service side, but we also took out overhead costs, and I think you saw that in the fact that our net subscriber cost was $960. Some of that's upfront, but we're also attacking expense overhead within the sales process.

Todd R. Pedersen -- Chief Executive Officer

Looking at that here is the reality, we're now starting to get the benefit of all the investments we've made in the technology stack and we're getting operational efficiencies there. But even from a corporate side because of the tools and technologies and our ability to deliver, and we're able to bring back some of those costs and get operational efficiencies from a corporate perspective also. So we're super pleased with all of this. And this -- all this process, you all noticed, we started this before COVID hit, so this is just a continuation of what we were already focused on.

Rod Hall -- Analyst

Great. All right, guys. Thank a lot. Appreciate it.

Todd R. Pedersen -- Chief Executive Officer

Thanks, Rod.


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

Michael Fisher -- Analyst

Hey, this is Michael Fisher on for Amit. I wanted to get into -- you mentioned the cash flow neutral target that is tracking ahead of the initial 18 months to 24 months. Can you talk about maybe any other drivers or what kind of shifted since you initially put that target out that's maybe enabling some upside?

Todd R. Pedersen -- Chief Executive Officer

Yes. So there is -- it's multiple fronts. Obviously, the net subscriber acquisition cost is something that we focused on. You've seen a gain there, and you're going to see continued improvement there. We've -- I think we show a reduction in RICs from last year to this year of about 50%. You're going to see that improve. In fact, it's going to be one of the biggest gains you'll see with this company.

So really important, we're trying to make sure that we're financing these product sales off balance sheet. We -- and again mentioned that we're now not on-boarding new customers from the direct-to-home side in Canada, which we have never found a partner to provide the consumer financing. So those subscribers were all again on-boarded on balance sheet. They're great subscribers, great credit scores, but it was a large amount of cash usage. We are still servicing the customer base up there and they are our customers [Indecipherable] consumer financing available, but we've chosen to halt that. Now we are still on-boarding customers that called in or referred in to the Company. So we have full capability of installation service up there.

And then just a point of reduction in expenses and costs and reducing some budgets and eliminating projects here and there. So we're just really fine-tuning the way we operate this business. We intend, just so everyone knows, to take some of those savings -- cash savings and start to focus on growing and building the brand, telling the story, but we have an incredible story to tell. We have an incredible technology and service that we could deliver to consumers, which is in very high demand right now, especially in this period of time. And just the quality of product and the design and the delivery of the services has now come to a point where like, OK, it's time to really focus on growing these businesses. We've taken advantage of this large market that we're part of.

Michael Fisher -- Analyst

Okay. And then just to dig a little bit on the permanent fixed cost savings of $30 million, is that mostly -- again, is that service cost savings as well flowing through or the drivers there? And then the $20 million in restructuring expense, is that part of the initiatives to generate the cost savings?

Dale R. Gerard -- Chief Financial Officer

Yeah. So we'll kind of break those down. $20 million really relates around the changes in personnel and cost reductions that we did at the beginning of March. So we've kind of -- we'd actually talked about on the fourth quarter call from 2019 and point out, and so that's really what is included in that restructuring charge there. Some of its severance and most of -- half out or so is related to stock-based comp which was as we -- those people allow [Phonetic] and their equity -- kind of their treatment of their equity changed.

And then the other costs, as Todd said, we're really focused on costs, whether it's in servicing, and again, really focusing on overhead and making sure that we have the right infrastructure, right cost structure that we're spending money in the areas that really provide either servicing customers or they're providing growth. And so as we think about service, how do we think about our leadership, our structure there, level -- kind of tiers of leaders in the field, tier people that are in the corporate and on the servicing side. And on the G&A and innovation is the same thing, it's like, hey, there's a lots of products and lots of different things we can go do, but let's focus in on what we really think the customers want. We can drive that kind of next-gen products.

And so it's really across all areas of the Company. It's not just one area. And we've actually -- I would say, for 2020, we've actually taken actions that are greater than the $30 million, but some of those will -- that will come back most likely in 2021 such as we've discontinued any type of merit increases for '20, we've actually stopped matching on 401(k). So we've taken some actions. Again, we want to be ahead of it. We think that when we've done a lot of these early April to make sure that we're in a good position to weather any kind of storm that comes at us here. But some of those will come back next year, but the $30 million is what we think are permanently is not coming back into the budgets and different things that we've been doing.

Todd R. Pedersen -- Chief Executive Officer

And the $30 million to be clear is not part of the service cost reduction. It's...

Dale R. Gerard -- Chief Financial Officer


Todd R. Pedersen -- Chief Executive Officer


Scott R. Hardy -- Chief Operating Officer

Yeah. You'll see some of it in the subscriber acquisition cost and a lot of it in the G&A.

Michael Fisher -- Analyst

Great, thanks. Thanks for taking my questions.

Dale R. Gerard -- Chief Financial Officer



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

Edward Mally -- Analyst

Great. Thank you. Just to go back to the attrition trends and away from where you are in the customer contract life cycle, have you seen over the last couple of months any changes in those trends with reduced relocations, for example or changes in the drivers of attrition? It's my first question. And then second question, just to clarify on the revolver draw, you noted that it was fully drawn with $305 million of cash on the balance sheet at the end of April. Does the $305 million represent the full revolver draw or was it a higher amount drawn on the revolver?

Scott R. Hardy -- Chief Operating Officer

Thanks, Edward. This is Scott. I'll tackle the attrition question and turn it over to Dale to address the question about the revolver drop. On attrition, certainly given the economic impact of the COVID virus, this is something that we're paying very close attention to. We're monitoring consumer credit and unemployment trends and candidly feel fortunate that we have a majority of our customer base that consists of homeowners that have a credit score of over 700.

So, as Dale shared, our Q1 attrition was in line with expectations, slightly better than what we'd planned. It reflects really the value we think consumers see and the services we're providing, particularly in times of uncertainty like this. Q1 was up over Q4 by about 20 basis points. That's a function of -- as we've shared in the past, cohort level attrition and then the percent of customers that are coming out of term, that percent is being going up. But overall, we're actually performing slightly better than we would have expected in Q1.

Todd shared, and I think, Dale did as well, we have a history of strength and resiliency during economic downturns. We saw that in 2008 and 2009. And through April and even the first week of May and we're seeing indicators in terms of notices of cancellation in terms of number of customers that are going into our collection process that are tracking normal, and in line with our expectations, which suggest an ongoing resiliency of the business model.

We've always had a forbearance program for customers that are in some form of financial distress, and that's where we will defer payment for a period of months and then extend their contract by a meaningful amount. We did see during the -- in the last six weeks, a modest and temporary increase in the number of customers that were proactively calling in and asking for payment forbearance, that peaked really in late March and early April. But as of last week, the number of customers asking for forbearance was coming back into line with our historical run rates. Overall, during that period, it's well under 1% of our customer base that has done that. So we're feeling at this point that there is no real change to how we're seeing attrition for 2020.

Dale R. Gerard -- Chief Financial Officer

And then -- thanks, Scott. And then in terms of the revolver, so the revolving credit facility, we did amended that in mid-February when we did some refinancing efforts. So the revolver has a total capacity of $350 million. Last LCs, there's about $334 million that's outstanding that we've drawn, and we have $305 million in cash as of April 30, and thankfully today, we're still setting on about $305 million of cash.

So we really brought net revolver down. I mean I was around when last time there was these kind of disruptions in the market, so we brought that down is really -- in case there was some disruption in the financial markets and we could -- weren't able -- and we needed to draw it, we weren't able to, so we in the abundance of caution, we drew down all the revolver, get us setting in cash on our balance sheet. And like I said, we drew down total revolver outstanding drawdown is $334 million and we're setting up $300 million of cash, which you'll see when the Q comes out that we used about $30 million in operating cash flow for the first quarter.

Todd R. Pedersen -- Chief Executive Officer

And again, I think this was asked earlier, but we've given projections of being cash flow neutral on 18 months to 24 months. We are incredibly focused on trying to accomplish cash flow neutrality this year. There are factors that still remain with -- can we roll out our entire program, will it last if states get shut back down. But what I would say is it's our primary factor. I think just through some of the numbers Dale has thrown out now, we're doing substantially better than last year, and are pleased with where we're sitting right now, and I think we'll do a good job toward getting near that level this year.

Edward Mally -- Analyst

Okay. That's all very helpful. Thanks very much.


[Operator Instructions] Your next question comes from the line of Shweta Khajuria with RBC Capital Markets. Your line is open.

Shweta Khajuria -- Analyst

Great. Thank you. Going back to the resiliency of the business model, could you please talk about potentially worst-case scenario, should the economy enter into a deeper recession worse than let's say 2008, 2009, the beauty of subscription model is that it provides great resiliency and the average life of the subscriber here is pretty long. So, could you please talk about how you think about the worst case scenario and the resiliency of the business model?

And then the second question is on the strength in overall e-commerce, so how have you changed -- and I'm sorry if you covered this already, but have you changed the strategic sort of focus toward the strength in e-commerce and that is a channel given that in -- the in-person sales channel is paused for now? Thank you.

Todd R. Pedersen -- Chief Executive Officer

Sure. Thanks for the questions. I'm going to answer the first part of that. So knowing that unemployment rates are continuing to rise, we do understand that there is risk to -- some of our subscribers losing their jobs, not having the ability to pay as of yet, and I think we're kind of in the middle of it, but not at the end of it. We have not -- if you're hearing our numbers here, we are not -- we have not yet been affected by that. In fact we've seen slight improvements on all of the metrics in our business.

This is a product and service that provides safety and peace of mind, and with -- and this is a really important with the differentiation, with the platform that we've developed with camera technology and the software we have around our doorbell camera and package theft detection, deterrence, our outdoor cameras with lurker alerts. Just enhancing what we deliver, the demand is higher, whether it'd be someone who doesn't have anything at this point or that does have our services. And so it doesn't mean that we're completely protected from a continued downside scenario from a macroeconomic perspective, but we're in a very good position compared to most companies and most industries. We are doing an essential service from states for a reason. It's essential to customers and really depending on what their circumstances are with family or pets or children or elderly parents that need to be cared and provided for and watched over. So, we really -- in fact, we're very proud of the fact that we delivered such incredible services, especially in [Technical Issues].

But from a company perspective, here's what I would say, we've taken a lot of time and been very surgical about looking at additional potential downsides with and continued economic downturn. How we manage the business, how we manage costs in the field and otherwise how we spend budgets, prioritization of projects that we have, there are things that we can pull back on more. There is obviously overhead that could be either reallocated or readjusted to adjust to the current economic environment.

So I would say, this management team has a very organized and detailed structure plan in the event that economic downturn worsens and starts to affect us and that will either be through attrition or lack of demand from the consumers, which we're not seeing any -- either of those at this point. It doesn't mean that we can't or won't, but at this point we have not seen that. And again Scott mentioned a slight increase in the deferment program -- deferral program but that's back in line. It was slight and momentary. So we're -- again we're watching on a daily basis every important metric that there is, and you can watch in that regard.

Scott R. Hardy -- Chief Operating Officer

Yeah. From an e-commerce perspective, Shweta, certainly our two primary go to market channels are direct-to-home and inside sales, and we are testing and constantly piloting other forms of channel distribution to get to market e-commerce. E-commerce is one of those. I think certainly will see a continued trend accelerated by the COVID virus toward e-commerce. I mean, so that's an area we continue to test into to evaluate, it's not really built into our forecast at this point. So it's all upside for us as we're able to find the right fit and drive acquisition through those types of channels.

Shweta Khajuria -- Analyst

Okay. Thank you, both.

Todd R. Pedersen -- Chief Executive Officer

Thank you.


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

Kunal Madhukar -- Analyst

Hi, thanks for taking the question. A couple if I may, one with regard to the guide, especially on like subscriber net -- gross adds, what, -- what are the assumptions that are going into the guide, especially in terms of how much do you think the direct-to-home can kind of get? How much do you think the national inside sales can kind of get? And how does that change -- and especially in light of -- we may be headed into a new normal, which we don't even know what it could look like. And so what happens if -- if we have to be in a social distancing kind of an environment for the rest of the year. And then with regard to the financing on the upfront equipment, maybe you haven't seen it till now maybe credit is still easy. What happens in an environment where credit becomes tougher? And do you think -- how do you think that could potentially impact the subscriber growth for the rest of the year?

Todd R. Pedersen -- Chief Executive Officer

Yes, so on the first part of the question. This is Todd. We don't break out the numbers to the specific channels, but this is what I would tell you from an inside sales perspective, demand has been up over kind of our expected run rate in that channel. We obviously, we mentioned is that we put on pause the direct-to-home program, not all of the states, as you all know, not all of the states are open for any type of business, let alone someone going into neighborhoods and into homes. We've made -- what I can say is this in the markets that we're in, in the states that are opened up productivity per sales rep is up. And which again speaks to be the demand and the interest the people having the services that we deliver -- we do deliver.

And from a social distancing perspective, we've adjusted from a engagement perspective, social distancing perspective and then also tools perspective, we've changed how we interact and engage with the consumer if needs to be. Some -- in fact, some customers, we will not engage them directly, it will keep our social distance and they will ask why -- why not [Phonetic] enter their home. But we are not entering homes unless people ask us to and we obviously have done the physical checks on our sales force and our installation force every morning, making sure they have no signs of virus. And then also asking appropriate question to the family or homeowner that we're entering into. But even with the change in environment and how we engage with consumers, which also includes the ability to do video, we've all learned this. The ability to do sales call over video. We have that capability to now like anyone else with those supervision. We have adjusted and the performance is very good.

Now, the question would be, and this is that we pulled back on our gross subscriber ads, because we did pause the direct-to-home program and there are states that still are not open yet. So that would be the difference in the numbers. But as far as productivity goes and engagement goes, and if this is the new norm, we're OK with that because we can't accomplish what we need to accomplish with and continue to have social distancing and that type of thing. So we feel very confident in that regard.

On the credit side, Dale is going to talk about that.

Dale R. Gerard -- Chief Financial Officer

Yeah, just one more. So I think again, we don't give out guidance in terms of our channel, but I think what -- you could take Todd's, what Todd saying is on the direct-to-home, whatever you had on your model for the full year soon that we don't have very much for April because that channel was paused, that was paused kind of mid-March. So you could kind of say from mid-March until right now we're just starting to ramp back up, and as Todd said we're probably about 70% of where we would normally be at this point in terms of reps out on the doors. So you could kind of think through that as you are remodeling that.

In terms of financing, again we stay in very, very close contact with our two consumer financing partners that were primary and secondary financing partner. We've not seen anything at this point. It's something -- it's one of those metrics, I guess, as Todd said, we watch every day and every morning -- early in the morning I get the report and I look at those to see what was the -- what declines we were seeing yesterday, what were the reasons for declines on financing, what approval rates were -- all the different things by channel.

And so, again, we're in contact with these partners. They're very committed to the program. They still are open for business and looking to put on new business. And so, we're watching this, but we think that we have really good partners to partner with this year, and our customers, as Todd said, a lot of these customers -- the demand for the products there and customers, their FICO score and their financial situation is still allowing them to continue to purchase this and get financed for the product.

Todd R. Pedersen -- Chief Executive Officer

And look, anyone that's in the financial world that's lending money, whether it be corporation or an individual or consumer, they're going to lend into a space or an industry where they're going to get a consistent return. And if you look at our -- the financials and the numbers, and you think about the forbearance on our customers, as it stands right now, numbers are trending really well as expected or slightly better than that, and so, we believe that as long as our customer base is paying their bill and the demand is there, they can on-board more financing under their platform. And we're in good position. Again, like Dale said, we're in communication with Citizens constantly and we've been a great partner, and by the way, they partner up with some other really large scale companies that also depend on that financing. So, as it stands today, we feel great.

Now, if that changed and they -- Citizens went away, we do have a secondary financing partner. There are others out there we are not engaged with physically, but from a conversation perspective, there are other we're having conversations with. If it all went away and that may be the question you're asking, we would have -- we'd slow down growth. But as we stand today in this current -- and cut back costs and there are other measures that we would take as a business. But as it stands right now, we feel like we're in a good position.

Kunal Madhukar -- Analyst

No, that's really helpful. Thanks, Todd. Thanks, Dale. A quick follow-up on the ARPU, on the service ARPU. That declined precipitously on a year-over-year basis versus the declines that we'd been seeing previously. What happened there?

Dale R. Gerard -- Chief Financial Officer

Yeah. Again, this goes back to how we've talked about the pricing model and Flex Pay model where we're -- where ARPU and a little bit -- Todd talked about this a little bit in the fourth quarter call, we're actually looking as we continue to drive cash flow neutral goal here, we're pushing -- we're starting to leverage pricing upfront on some of the products and some of the sales at point of sale and what you're seeing a little bit of that is that we're giving -- our ARPU is coming down a little bit, our service ARPU is coming down a little bit as the customers are paying more for the equipment and financing more.

When you look at it out of pocket for customer, it's still in that mid-$70 a month range, $72 a month to $75 a month the customer is paying. It's just that that bill now is split a little bit differently and a little bit more go into the finance partners, which by the way we get all that cash up front. So the economics on that customer and the return on that capital is much better for us. And so that's what you're seeing and you're seeing that kind of flow through.

Todd R. Pedersen -- Chief Executive Officer

So, this is very, very important. You mentioned the word precipitous, it's actually -- this is actually a good thing. We've talked about our objective to get the cash flow neutrality. This is one of those levers. Our old model and if you look at some of the other models in consumer finance -- or consumer-facing businesses, our old model was we got all $75, but we had to finance that entire SAC on our balance sheet.

Now we're having the consumer finance, more of the hardware upfront. We're getting that cash up front. And this is one of the drivers that's getting this toward cash flow neutrality. It's -- we're very, very pleased with the results and I think everyone on this phone call will feel the same when we kind of finish up the year and we see the results of that. And so, there is no reduction in demand for services. In fact, it's the opposite and there is an increase in demand for the hardware and services. We're just using finance as a lever to not have to go back to the debt market. So we're very pleased with this result.

Kunal Madhukar -- Analyst

Thank you so much. Thanks. That's more simple.

Todd R. Pedersen -- Chief Executive Officer

Thank you.


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

Todd Morgan -- Analyst

Thanks, and thanks for the question. I guess it's -- I must say, I think you guys are doing a pretty amazing job here. If I'm looking at this, you added 50,000 gross subscribers in the first quarter of this year when there was clearly issues. That was a couple of thousand more than a year ago and even before that. So that's pretty strong. It looks like if I'm doing some quick math that you think for the full year that the gross ads might be -- maybe 50,000 or so less than they were in 2019. Is it -- I mean, can I kind of simplistically extrapolate out and say the net subscriber acquisition costs that's probably close to $100 million of cash outlays that you would potentially avoid. Is it fair to think of things in that way? And I think you did say you might roll some of that back in the sort of brand enhancement. But -- I mean, that's a big difference in the cash uses if I'm thing about that right. Is that fair?

Dale R. Gerard -- Chief Financial Officer

Yeah, I think the cash usage, I mean, if you looked at -- we're still putting out about a $1,000 on a sub. So if you say we're going to do less than 50,000 subs despite closer to $50 million of cash savings, $50 million to $60 million, but I think -- you're exactly right. That is a large cash savings that we're not able to do that. And then to the brand question, I think Todd will give you what -- when we reinvest that money in the brand.

Todd R. Pedersen -- Chief Executive Officer

Yeah. So I mean, look -- we are interested -- we know that the services we deliver are very differentiated and special and people have them are raving fans and it's getting better and better with technology advancements and our innovation centers developing and enhancements in the software and the firmware and the deployment and we're just getting better at it. So we are laying out plans to begin to brand and market the business and services. Frankly, a lot of people just don't even know who Vivint is and we've got 1.5 million subscribers. And so, we intend to tell that story.

Now, we are not going to do that until we're confident that we have x beyond -- I'd say, we're not going to do until we're cash flow positive. We're not going to spend and borrow debt to start a big marketing and demand gen program. You're not going to see that. But we are feeling confident enough about the plans that we have laid out in the upcoming months that we need to prep for that, think about that, think about how to tell the story, integrate that into our kind of ongoing financials and investment. So we hope to do it, intend to do it, but we will not do it until we have excess cash beyond neutrality.

Todd Morgan -- Analyst

Okay, great. And then just, is there any change in the way you're sort of thinking about or processing sort of the second look customers that you're signing up now? Is there more or less of those you're doing differently? Thanks.

Dale R. Gerard -- Chief Financial Officer

Yeah. No, it's -- we rolled out -- [Indecipherable] second look financing partner rolled those out in April of 2019, that's low and still the same and it's always been. They are kind of taking a look at anything that doesn't kind of get financed by Citizens frankly flows down to them. So, really no change in that process at all.

Todd Morgan -- Analyst

Okay. Good luck, then. Thank you.

Dale R. Gerard -- Chief Financial Officer

Thanks, Todd.

Todd R. Pedersen -- Chief Executive Officer

Thanks for the question.


There are no further questions at this time. I will turn the call back to management for closing remarks.

Todd R. Pedersen -- Chief Executive Officer

Now, we appreciate everyone getting on the call. I know some people had a bit of a difficult time getting on. Thanks for the patience with that. Again management is incredibly pleased with Q1 performance. Although it's been a bit of a hectic last few months for us and other companies and individuals across the world, we felt like we've responded quickly and decisively and we look forward to a very good 2020 year. And you can expect us to deliver on the numbers. Thank you.


[Operator Closing Remarks]

Questions and Answers:

Duration: 62 minutes

Call participants:

Nate Stubbs -- Vice President, Investor Relations

Todd R. Pedersen -- Chief Executive Officer

Dale R. Gerard -- Chief Financial Officer

Scott R. Hardy -- Chief Operating Officer

Rod Hall -- Goldman Sachs -- Analyst

Michael Fisher -- Evercore -- Analyst

Michael Fisher -- Evercore ISI -- Analyst

Edward Mally -- Imperial Capital -- Analyst

Shweta Khajuria -- RBC Capital Markets -- Analyst

Kunal Madhukar -- Deutsche Bank -- Analyst

Todd Morgan -- Jefferies -- Analyst

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