Vivint Smart Home, inc (VVNT) Q3 2021 Earnings Call Transcript

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Vivint Smart Home, inc (VVNT)
Q3 2021 Earnings Call
Nov 19, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, and welcome to the Vivint Smart Home, Inc. Third Quarter 2021 Earnings Call. My name is Robyn, and I'll be coordinating your call today. [Operator Instructions]

I will now hand you over to your host, Nate Stubbs, VP of Investor Relations for Vivint Smart Home. Nate, please go ahead.

Nate Stubbs -- Vice President of Investor Relations

Good morning, everyone. Thank you for joining us to discuss the results of Vivint Smart Home for the three and nine-month periods ended September 30, 2021. Joining me on the conference call this morning are David Bywater, Vivint Smart Home's Chief Executive Officer; and Dale R. Gerard, Vivint's Chief Financial Officer.

I would like to begin by reminding everyone that the discussion today may contain forward-looking statements, including with regard to the company's future performance and prospects. Forward-looking statements are inherently subject to risks and uncertainties that could cause actual outcomes or results to differ materially from those indicated in any such statements. We describe some of these risks and uncertainties in the Risk Factors section in our annual report on Form 10-K/A for our fiscal year 2020 and our Form 10-Q that will be filed today and in other filings we make with the SEC from time to time. 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 to the most comparable measures calculated and presented in accordance with GAAP, to the extent available without unreasonable effort, are available in the earnings release and accompanying presentation, which are available on the Investor Relations section of our website.

I will now turn the call over to David.

David Bywater -- Chief Executive Officer

Thank you, Nate, and good morning, everyone. I've enjoyed connecting with many of you since our last earnings call, and I really appreciate your interest in the company. Today, we are excited to give you an update on our strong performance for the third quarter, remind you of why we are a leader in the smart home and provide additional insight on two of our strategic initiatives. After my remarks, I will turn the call over to Dale to take you through the finer details of the third quarter, along with our guidance for the remainder of the year, which we are updating, given the positive momentum in the business.

Before I get into the strong results for the quarter, let me remind you of why we are a leading smart home company and what differentiates Vivint from others in the marketplace. Our mission is to redefine the home experience with technology and services to create a smarter, greener, safer home that saves our customers money every month.

What is the smart home? We know that single device such as the doorbell, camera or thermostat doesn't make a home smart rather a smart home has multiple devices, properly located and installed, all tied into an expandable platform that incorporates AI and machine learning in its operating system. Similarly, we don't believe that having smart speaker in the home is the same as having an AI-driven machine learning operating platform and equipment. While DIY products and companies get a lot of press and many believe that DIY is a faster-growing segment of the industry versus the professionally installed and monitored segment. Survey show that many DIY products purchased never get installed and over 20% of the products that do get installed are by some other than the purchaser.

While DIY might have higher sales growth, we believe it represents only a small percentage of the profit pool. Meanwhile, our growth, which we believe is 7 times to 8 times greater than professionally installed and monitored segment's annual growth, is delivering 40% plus adjusted EBITDA margins.

I'm very pleased with our third quarter results as we had double-digit year-over-year growth in both revenue and adjusted EBITDA. Our revenue growth was more than double the growth rate in the prior year period, reflecting the robust demand for the products and services we deliver. Many of these underlying metrics of the business showed strong improvement year-over-year.

Our last 12-month attrition came in at 11.4%, which was our 13-quarter low and 140 basis point improvement versus the prior year period. While the enhancements in our underwriting criteria and product performance are part of the story, I believe our lower attrition rate is also driven by our smart home platform, delivering our mission of providing value and peace of mind to our customers.

Another metric we are pleased with is nearly $78 million in net cash from operating activities during the quarter. Operating the business with positive net cash from operating activities has been a focus of the entire organization, and we expect to achieve that goal again in 2021.

Our belief is that Vivint's business model is superior to others in the industry, both in terms of unit economics as well as the ability to adapt to the changing economic environments, including the recent pandemic and the current labor and supply chain challenges. We believe Vivint is truly in Category of One. What do I mean when I say we're in Category of One? We believe Vivint is the only company with a proprietary cloud-based platform, a differentiated end-to-end distribution model, strong growth with compelling economics, and multiple levers for sustained profitable growth. Expanding on that, our proprietary cloud-based AI and machine learning platform that we designed, engineered and continue to home, forms the nerve center of a truly differentiated end-to-end platform. We believe we can integrate the new customer offerings from large adjacent markets that logically link back to our smart home platform, compounding the value that we already delivered along with 1.8 million customers. With an average of 15 devices installed per home, we own a rich first-party data environment that helps us not only protect our customers, but also improve the efficiency at the homes and elevate their peace of mind.

Our confidence in our strategy stems from Vivint's unique focus on the importance of owning the entire technology stack in complement with the end-to-end distribution model that leads to an exceptional customer experience. We believe this is absolutely critical by continuously enhancing our platform, we can delight our customers at every point of interaction with them. As our customer satisfaction increases, their trust in us builds, and this creates multiple potential levers for sustained profitable growth for years to come.

Our strategic priorities are focused on leveraging the trust to redefine the home experience with the best-in-class technology and services to create smarter, greener, safer home that will save our customers money every month. As we do this, we believe we can transform long-term customer relationships into lifetime customer relationships. We believe this will allow us to extend our average customer life of more than eight years today to something much longer in the future. Even the moderate success in that transformation has the potential to meaningfully decrease the attrition of our customer base and increase the lifetime value of our customers.

We have a layered strategy for pursuing growth and achieving this vision. Our flagship product offering is smart home. Over the years, we have developed a best-in-class solution that levers what we believe is the premier smart home offerings to the masses in a global competitors definition of the smart home begins and ends with the do-it-yourself doorbell, we notice so much more. DIY customers end up with homes that are inaptly protected by partial solutions and that isn't smart. We believe customers are better served by having the right system scoped, installed and monitored to protect their homes and their families. But to be in a true Category of One, the platform within the home must allow homeowners to give much more. It should enable them to benefit from new products and services that leverage the smart home ecosystem. That is why we are investing in the development of two linked markets: smart energy and smart insurance. Until now, we've been light on details surrounding the two growth opportunities. Today, I want to expand your understanding of why we believe smart energy and smart insurance are perfect extensions to our smart home offering and worth our focus and investment.

As the first company -- as the first smart home company to expand in smart energy, we are working to deliver deeper customer value by offering a comprehensive bundle that subsidizes the cost of smart home and helps protect customers from rising energy costs, while being better stewards of the environment. The vision is to create bundled offerings of smart home and smart energy that integrate energy production and consumption data in the Vivint app, allowing customers to intelligently manage their homes' energy use.

A study performed previously by a premier consulting firm show that many homeowners are interested in bundling smart home and smart energy, and we are seeing that with our customers as well. We are approaching this opportunity through a dual path strategy that is asset-light and sales lead based.

Back in July, we announced a partnership with solar finance partners, Sunrun and Mosaic, as well as with Freedom Forever, one of the country's largest and fastest-growing solar installers. This partnership will enable Freedom Forever to include a Vivint's smart home system with each other solar cells, which will deliver immediate value for the customer. And of course, we expect this to lead just more smart home installs for Vivint. In addition, through our partnership with Freedom Forever and other solar installers, we can offer smart energy to our current customers as well as new customers. We are on pace to generate nearly 45 megawatts of installed solar this year, bringing smart energy to about 5,000 homes. In some markets, we are seeing many instances of smart home customers bundling with smart energy. We believe we will do significantly more in 2022 as we methodically expand our bundled solution in the markets where customers depends at residential solar. Over time, as we integrate the production data from the solar panels with customer behavior patterns, we believe smart energy can drive material savings that will reinforce the value of the Vivint platform. As discussed, we believe consumers across the country will view our bundled solution of smart home and smart energy as a clear differentiator.

I would note that adjusted EBITDA margins in smart energy are lower than in smart home. So while we'll see incremental growth in adjusted EBITDA dollars, overall margin percentages will be a bit lower as the revenue from smart energy comes in a lower margin. We are OK with this, as we believe our ability to leverage subscriber acquisition costs and increase the lifetime value of our customers by addressing an obvious market demand to bundle these two solutions presents a very compelling growth opportunity.

Another benefit is that our bundled differentiated smart home and smart energy offering will provide our sales channels with the ability to offer greater value in the products they sell and provide more opportunities to interact with current and potential customers. We will share more details on this opportunity in the upcoming months. But trust me, we believe this is a good adjacent market for us to invest in.

Now let me discuss smart insurance. We've been selling our insurance to a limited number of customers for a while now. The logic we mentioned here is that the $600 billion plus property in casualty insurance market has been looking for homeowners analog to the smart driver discount that auto insurance carriers deliver through their telematic solutions in automobiles. We believe that they've enhanced that analog given the rich first-party data that comes from our average customer interaction with our system over 11 times per day and 15 smart devices in home that protect them against water damage, fire and theft. As we have worked with several of these insurance carriers, we have been encouraged by their evenness to help us create a home insurance solution that leverages our smart home ecosystem. We believe our platform can help insurance companies better price the risks of a customer that has a professional installed system in their home that is monitored and used consistently to mitigate the severity of claims events. In short, we should be able to demonstrate to insurers that Vivint customers present a lower risk than homeowners without a smart home system or the DIY system that was inadequately built and installed.

To-date, we have been operating as an agency, reselling insurance products from a few large carriers, and we're on pace to sell approximately 8,000 insurance policies in 2021 to better leverage our smart home platform and provide the opportunity for additional savings for consumers. We are working to become financial and material agent, which will allow us to develop specific homeowner coverages for our customers. We believe we can potentially double the number of policies sold in 2022 and provide a higher level of customer-specific coverages through our MVA insurance offerings in some of our larger states.

As we demonstrate the savings and benefits of our proprietary coverages, we believe we can expand into most states over the next several years. We will expand in a thoughtful and deliberate manner as we prove to our customers the benefits that insurance provide in protecting their homes, their families and their wallets.

We're focused on accelerating long-term growth through each of these adjacencies. Meanwhile, we will maintain a sharp focus on our core smart home business. We consider the opportunity in natural extensions of our core smart home offering. We believe we have the tools, technology, and capabilities to not only deliver value to an elegant smart home experience, but to save our customers money through our innovative energy and insurance solutions.

Our vision is to be the preferred operating system in the home and a true platform play. We believe customers trust us to protect their homes, their families, and the environment while also helping them save money. As we do this, we believe we will benefit from scaling subscriber acquisition costs, increasing the lifetime value of each customer, and increasing the number of years customers on the Vivint platform. We are excited about the road ahead and remain confident that the robust growth potential of our core business model, along with the adjacencies we're pursuing will put us in a position to deliver long-term sustainable value for our shareholders.

I will now turn the call over to Dale to discuss the details of the third quarter financial results as well as our updated guidance for the full year. Dale?

Dale R. Gerard -- Chief Financial Officer

Thanks, David. Good morning, everyone, and thanks for joining the conference call. This morning, I will provide detail of our third quarter and year-to-date operating and financial results. I'll also provide updated thoughts on our guidance for the full year. We will open the call for a Q&A session after my prepared remarks.

Before I dive into the numbers, I want to address the delay in reporting our third quarter results. While reviewing certain customer contract transactions during the quarter ended September 30, 2021, we identified a material weakness in our internal controls over financial reporting related to the timing of revenue recognition resulting in certain and material errors we previously reported amounts of revenue. Specifically, we found that we did not properly design and maintain effective controls in the quarter ended September 30, 2021, as well as prior reporting periods to accurately determine appropriate period to recognize revenue associated with certain transactions. These transactions primarily related to monthly service charge adjustments in contract modifications, which resulted in errors in reporting revenue and other income and balance sheet items in certain prior periods.

The company assessed the material healthy of the misstatements by both quantitatively and qualitatively and determine that the correction of these errors to be immaterial to all prior consolidated financial statements. Taken as a whole and therefore, amending previously filed reports to correct the errors was not required. However, the company concluded that cumulative effect of correcting the errors in the quarter ended September 30, 2021, would materially reinstate the company's unaudited consolidated financial statements for the three and nine-month ended September 30, 2021. Accordingly, currently as it reflects the corrections of the immaterial errors and the results for prior periods included in the financial statements in its unaudited earnings release, accompanying presentation as well as its quarterly report on Form 10-Q that will be filed today. The company will also revise such information in future forms to reflect the correction of the errors. I refer you to our Form 10-Q that will be filed today for more details.

In conjunction with this call, we posted a presentation to our Investor Relations website to provide additional context on the quarter.

On Slide 10 of the presentation, we highlight a few of our key subscriber portfolio metrics. Total subscribers grew nicely from September 30, 2020, up 9.2% to 1.84 million as of September 30, 2021. Average monthly recurring revenue per user, or AMRRU increased by 4.7% versus the prior year period, driven by customers purchasing more smart home and security products at the point-of-sale. The combination of the growth in total subscribers and the growth in AMRRU, along with a few other items, lifted total monthly recurring revenue by 15.1% year-over-year to $121.5 million.

Now moving to revenue for the three-month and nine-month periods ended September 30, 2021 on Slide 11. For the third quarter of 2021, revenue was $386.7 million, a 21.3% increase from the prior year period. The primary drivers of the year-over-year revenue growth were an increase in total subscribers, an increase in the average monthly recurring revenue per user and contributions from our smart energy and smart insurance initiatives. The 21.3% revenue growth in the third quarter of 2021 was more than double the 9.6% growth rate in the third quarter of 2020.

Revenue for the nine-month ended September 30, 2021 was $1.08 billion, an increase of 17.6% from the nine-month period in the prior year. Similar to the third quarter, the key drivers of growth in the nine-month period were growth in total subscribers, growth in AMRRU and contributions from our smart energy and smart insurance initiatives.

Now turning to Slide 12. I will discuss adjusted EBITDA for the third quarter and year-to-date periods. For the third quarter, adjusted EBITDA grew 10.7% to $170.4 million with an adjusted EBITDA margin of 44.1%. I would note that adjusted margins in smart energy and smart insurance are lower than our smart home margins. We are very pleased overall with the solid EBITDA margins achieved in the face of inflationary pressures in today's economic environment. I would note, included in the third quarter results are approximately $9 million of investments in brand awareness, new product and service innovation and IT enhancements.

Moving to the nine-month ended September 30, 2021, adjusted EBITDA grew 13% from the same period in 2020. This includes approximately $20 million of investment spend associated with brand awareness, new product and service innovation and IT enhancements. Since 2020 results have a lot of noise related to the COVID-19 pandemic, we believe it's instructive for investors to look at the comparison of adjusted EBITDA growth in the three and nine months of 2021 versus the same period in 2019. Adjusted EBITDA in the three and nine months of 2021 grew by more than 64% compared to the same period in 2019. We have also been able to expand our adjusted EBITDA margin from the mid-30% range in 2019 to the mid-40% range in 2021.

Now moving to Slide 13. I'll highlight a few metrics around new subscriber originations. New subscriber originated during the third quarter of 2021 were 114,056. Our direct-to-home sales channel was lower than the previous third quarter, driven largely by the impact of COVID that filled the have timing of the selling season in 2020 as the 2020 selling season was extended in September of last year.

Our National Inside Sales channel, or NIS, had year-over-year growth of 7.6% in the third quarter of 2021 compared to the third quarter of 2020. For the nine-month period ended September 30, 2021, NIS originations grew by over 18%, and the company added 295,782 new subscribers, up 3.8% from the same period in 2020. We are pleased with the consistent growth in the NIS channel over the past few years and believe it is a strong indicator of the value that customers see in the Vivint Smart Home platform.

Within all of the origination channels, we continue to focus on underwriting high-quality profitable customers. For the third quarter of 2021, more than 99% of new subscribers either paid in full or financed the purchase of their equipment through one of our financing partners.

I will now cover net service and net subscriber acquisition costs on Slide 14. Net service cost per subscriber for the third quarter of 2021 was $10.49, up slightly from a record low in the third quarter of 2020, but down almost $4 from the same period in 2019. Net service margin in the third quarter of 2021 remained robust at 77.7%. I'm pleased that our customer experience and field operations groups have been able to provide our customers a delightful experience, while managing costs as customer interactions in our call centers and in-home service business rebounded from the abnormally low levels during the height of the pandemic last year.

The introduction of the Flex Pay model has allowed us to achieve a significant reduction in net subscriber acquisition cost per new subscriber over the past few years. Net subscriber acquisition cost per new subscriber for the period ended September 30, 2021 decreased by 52.2% to $100. This is a $109 reduction from the prior year period, while the average proceeds collected at the point-of-sale increased to almost $2,200.

Moving to Slide 15. Our last 12-month attrition rate was 11.4% for the period ended September 30, 2021, 140 basis points lower than the same period last year and at a 13-quarter low for customer attrition. We believe the continued improvement in attrition is related to our enhanced underwriting standards and the increased interactions of our customers with the platform.

In terms of cash for operating activities, we had another solid quarter at nearly $78 million. I would note that our cash in operating activities in the quarter in the nine-month period includes the impact of the change in the timing of payments to one of our financing partners as well as our investments in brand awareness, new product and service innovation and IT enhancements. At the end of the quarter, we had a solid liquidity position of approximately $635 million.

In July, we completed a global refinancing of our existing debt structure, which decreased our total debt outstanding by approximately $90 million, lowered our average cost of debt by nearly 200 basis points and increased our revolving credit facility from $334 million to $370 million. We expect the refinancing to save the company approximately $50 million in annualized interest expense.

Before providing an updated cost on guidance, I want to give a little bit more perspective on our expectations for cash flow from operating activities. As we have discussed over the last year, we plan to operate the business on a cash flow positive basis. We will use the excess cash flow to, among other things, fund sales growth initiatives, pursue new adjacencies such as smart energy and smart insurance, invest in new products and service innovation, and reduce outstanding debt.

When comparing cash flow in 2021 to 2020, it's important to note that cash flow and operating activities in 2020 benefited from COVID-induced cost productions, some permanent and some temporary. In 2021, we have seen many of the temporary cost reduction initiatives come back into our run rate, and we have seen inflationary pressures in labor and material costs.

We also pushed through a price increase on our service pack at the beginning of the pandemic in 2020. Another significant change in cash flow from operating activities from 2020 to 2021 has do with the change in the way we paid financing fees and anticipated credit losses to one of our financing partners, switching from paying over the term of the loan to upfront at the time of the financing. This will also have an impact on cash flow from operating activities in 2022 as we layered the full impact of the change and over 2021 and 2022.

Finally, in terms of guidance for the full year, we believe there is a lot of positive momentum in our business, and we remain very optimistic about the rest of the year despite notable headwinds related to supply chain disruptions, inflationary pressure and labor constraints. We are updating our guidance for the full year as follows: total subscribers in the range of 1.84 million to 1.85 million versus previous guidance of between 1.8 million and 1.85 million. Total revenue in the range of $1.40 billion to $1.46 billion, above the previous guidance between $1.38 billion to $1.42 billion; and finally, adjusted EBITDA in the range of $650 million to $660 million versus previous guidance of between $640 million to $655 million.

Robyn, this concludes our prepared remarks. Please open the call for Q&A.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Rod Hall from Goldman Sachs. Rod, please go ahead. Your line is open.

Rajagopal Kamesh -- Goldman Sachs -- Analyst

Hi. This is RK on behalf of Rod. Thanks for taking my question and nice job on the results and all the color on the smart energy and smart insurance. So I want to start there. I wanted to ask on the economics of the smart energy offering. So how exactly will you generate the smart energy revenue? And how much lower are the margins? And on insurance, can you also talk about the business model you considered? Are you offering Vivint branded insurance, or will this be more of a partnership to third-party providers? And I have a follow-up. Thank you.

Dale R. Gerard -- Chief Financial Officer

Yes. So I'll take the margin stuff and then David can jump in here around how we're thinking about whether it's a business branded or not on the smart insurance. In terms of margins, as any kind of new initiatives that you go into, you start out, you've got to build some scale and those field in terms of gross margins. So we expect margins in smart energy and smart insurance to improve as we continue to build those out. What I would say is the revenue associated with kind of those two initiatives in the third quarter would approximately help contribute probably 5% to 6% of our revenue growth, of the 21% was related to those initiatives. And again, we're not probably ready to tell you all the economics around those. But as we continue to build those out, we will expand those. But as you can imagine, solar industry, this is kind of common work process, those margins are less than what we would see in our smart home industry.

And I think it's also important to realize -- we're in an asset-light business here. We're not doing solar installs. It's more of a sales approach as we're generating leads, and so we're getting paid for the leads that we generate across our platform and so forth.

So I don't know, David, if you have anything more on one of those two topics.

David Bywater -- Chief Executive Officer

I like our approach there. I mean, the customers are interested in value material. I'm excited to see a scaled acquisition cost more and, frankly, just give customers more value because they definitely see them as a bundled solution or many of them do. I think with regard to the second question around the branding, right now, it is branded in Vivint Energy and Vivint smart insurance and smart energy. We'll continue to evaluate that. I see a lot of branding differently. But as of right now, just given where it is in the incubation cycle, we've kept them on into Vivint brand, and we'll evaluate it, that makes more sense or less sense over time. But as of right now, they are Vivint branded with the option to change it, if it makes sense.

Rajagopal Kamesh -- Goldman Sachs -- Analyst

Thank you. Appreciate all the color there. And on the quarter itself, I wanted to touch on new subscriber growth, it's down 10% year-on-year and you mentioned that it's a difficult comp for DTH. So can you comment on linearity and how should we think about a normalized rate of growth for new subscribers? Thank you.

David Bywater -- Chief Executive Officer

I think -- so again, direct-to-home, I think when you go back and kind of do comparisons year-over-year, direct-to-home was a difficult comparison because, again, we got started late last year in terms of the inability to start service in May, extended all the way through September, kind of in the fall season, where it's normally the season ends toward the end of August. I think there's also a lot of pressure around difference in 2021 made in 2022 -- excuse me, 2020, is also the pure average. You've seen current average have come back to kind of what we saw historically back in 2019 versus 2020, it was slightly higher. Again, I think that was related to the fact that more people are at home, both decision makers in the home in '20 versus '21 as people starting to go back into their offices and go back to work from normal locations. So all those kind of come together.

Well I think we would expect to see how both our channels kind of 10% plus growth on annualized basis. That's what our targets are, kind of continue to grow those channels. We've seen really good growth in NIS and we've also seen good growth in direct-to-home in different periods. But when we look at this and think about 2022 and beyond, we like to see again 10% or greater annualized growth in both those channels.

Rajagopal Kamesh -- Goldman Sachs -- Analyst

Thanks, guys. Appreciate it.

David Bywater -- Chief Executive Officer

Thanks. Have a good day.

Operator

Thank you. Our next question comes from Paul Chung from JPMorgan. Paul, please go ahead. Your line is now open.

Paul Chung -- JPMorgan -- Analyst

Hi. Thanks for taking my questions and very nice top line here. So on your average monthly revenue, it's trended quite nicely this year. So what's -- what are customers buying more of today kind of driving the strength there? And then as we think about insurance and solar initiatives, how does that monthly revenue kind of per user accelerate from here? And then, are there any price increases that we should think about in the near term as well?

David Bywater -- Chief Executive Officer

I think I'll take the first part and then Dale, you can have the second half. You know, we continue to see really strong demand for cameras in particular and the smart home in our core business and we've invested heavily there. We see that the experience we have with our cameras are quite unique. I'm not sure if you have seen it or not, but we not only focus on recording events, but we also focus on determining negative events. This morning, as I came into the work, I had my camera, thought I was an intruder, as I was moving from the house earlier and I was at my house earlier than normal. And it's a very smart -- has AI and just smart camera, there's a light model, whistles and records you and then gives you a diagnostic as I have gotten to work, I saw -- I just it's safe. I had to look down my phone. It helps summarize that somebody intruded my house, because that is norm. That's some other things, there's just been much higher appetite for our customers, for our channels. So you've seen that average device in the home increase. So we're really focused on making sure that we deliver what they want, but also properties still at home and install the devices appropriately, but cameras that could be driving that nicely year-over-year.

Dale R. Gerard -- Chief Financial Officer

Yes, in terms of the way more recognize the smart insurance and smart energy revenue currently that will be recognized in period that's not reoccurring revenue. That's one-time revenue associated with those currently versus model set up there. So I think that answers your first question. Did you have another question Paul?

Paul Chung -- JPMorgan -- Analyst

No, that's good. And then just a follow-up on the insurance, how large can that business can contribute over time? Your data is there, so the cost side doesn't seem too incremental. But how the margin in this part of the business, how material can this be as a part of their overall user base?

David Bywater -- Chief Executive Officer

Yes, so as I mentioned in my comments right now, we're just doing agency model and helping them work with brighter customers and make sure they got the right best price solution out there. So we move toward this MVA model, where you actually leverage that ecosystem that we have, meaning that, with all the sensors that we have in the home, we can tell the state of the home better than anything else, around occupancy and then just how well developed ecosystem is in the home around flood, fire or theft, we think we can protect it better.

So as the consumer has a right system, is probably scoped and installed, I mean, use our system quite a bit and you know that there are occupancy in the home, we can determine the occupancy at the time. We believe that we can fundamentally change the risk profile of what they're buying around P&C insurance. So if we prove that out, we think we can drive material savings to them.

So I can assure that because the adoption rate seems to be quite material. Once again, it looks so beautiful while it is reinforcing as you show a customer that as they use the system correctly, it should reduce their insurance premiums. So use the system more, the more you use it, the more savings they have and the more likely that they will remain customers with us for a long time. So we really like that reinforcing mechanism between the two. And I don't know, we'll know more next year. I like to prove it before I talk about it, but we think it will be a pretty high, a pretty material attach rating as we -- as we demonstrate that item.

And what we've seen so far is the high appetite for customers, the one's we've approached that they trust us and they -- we're helping to make a better selection and they see the logic in connection with the smart home. How fast we'll grow depends on state by state, it's a highly regulated industry, and so you got to watch state by state correctly with rate controls and we'll be thoughtful, moving on our bigger states first and then we'll work across the entire country. So we believe over the next three to four years, it should be in most if not all states.

Paul Chung -- JPMorgan -- Analyst

And last thing for me, I mean, so similar question for the solar, what penetration rate do you expect for your existing subs and new subs over time? And then your near peer made a large acquisition here. So you're seeing this kind of secular shift with you guys and your competitor for a bundled solution here. So how can you capture share in a more competitive environment and then how are you making the purchase decision very simple for customers which sometimes can be somewhat complex? Thank you.

David Bywater -- Chief Executive Officer

Good question. On the smart energy side, we think that we were the first one out there in a material way that with what we announced with Sunrun, Mosaic and Freedom. We've had very strong demand for that with our customers. I know solar energy quite well, obviously given my five years over at Vivint Solar before we sold that to Sunrun. And you have to be really mindful of the economics for the customers. Unfortunately, solar isn't penciled nicely in every state. There is now 20 or so states that pencils in a pretty good way for the customer. So we're going to focus on those states. We're following -- obviously where both Sunrun and Mosaic and Freedom are, to around 25 states today. It's growing as we continue to reduce the cost and customer acquisition costs. You can make it potentially nicely in different states. So I think that your first guide there should be kind of what are the states where those were still being sold today, it's roughly 24, 25 states. We're differentially focusing in states where you have the deeper savings, but we have a very large customer base in the southern states, which is also a nice overlay, it makes a lot of sense for solar. And once again, we think the penetration there to be, the bundle there to be material for us, it would be less than 15%, but definitely more than 10%, so will be in that range and we will have more detail as we prove it out over time. But the momentum we've seen thus far has been nice. It has only been with a partial focus on it. We really haven't opened it up for broad-based adoption with our sales force. We will see throughout 2022 and we will open that up more and more and more. And what we're seeing is people dealing with smart home and live by the smart home. And then if at any second close -- easier said and closed on the solar side and the combination of those two is resonating with fair number of customers. Anything you want to add there, Dale?

Dale R. Gerard -- Chief Financial Officer

No, the only thing I would add is our partnership with Freedom Forever for example, everyone of their customer's that buy solar, so they're actually selling solar and including a business smart home system in that. So we expect growth coming out of that. It's outside of our sales force, but through that partnership. So you kind of see both sides where we can go to our current customers and potentially new customers that we are smart home, plus pick up this smart home growth from previous -- solar to other customers.

What's so compelling about this and we talk about the logical adjacencies, and we will share more detail in 2022, but we're seeing a substantial increase in the number of customers that stay sticky on the solar side, and we call it same day solar. So what's so nice about this is like sell and we install our smart home within a day or two of the sale. And the customer sees the value from that and then we say that the install started and then when the solar is installed, depending upon jurisdiction, whether it's 30 days, 45 days, or 60 days, they vary by state and by municipality, they get the second half of the install. And so let's see value much earlier the propensity to follow through and that is much higher. The overall customer experience is higher. So we're seeing material benefits from a customer perspective. And when you think about you have a higher yield on your funnel and we able to subsidize the cost of that smart home.

So we're seeing a true win, win, win and it's definitely benefiting customers and certainly benefiting our cost and the cost of the company, and then obviously benefiting our shareholders. So very encouraged by that. We'll definitely see that develop more. We believe we got a good lead on others that are trying to enter the space and we're very, very, very pleased with our partnerships and how they're evolving.

Paul Chung -- JPMorgan -- Analyst

Great. Thank you very much.

Dale R. Gerard -- Chief Financial Officer

Thank you, Paul.

Operator

Thank you. Our next question comes from Ashish Sabadra from RBC Capital Markets. Ashish, please go ahead. Your line is now open.

Ashish Sabadra -- RBC Capital Markets -- Analyst

Thanks for taking my question, and let me add my congrats as well to the strong momentum in the quarter. Maybe just a quick clarifying. We've heard about the tight labor market and supply chain constraint. I was just wanted to confirm, have you seen any impact on your ability to add new customer, upgrade your customers because of the labor market and the supply chain constraints?

David Bywater -- Chief Executive Officer

Ashish, this is David. So they're definitely real, both supply chain and labor constraints are real. So I don't want to discount that at all. Our team has done a really good job of being proactive and thoughtful on both fronts. We were up substantially on, for instance our field professions, our recruiting team and operations team, I think we're up 200 heads since we were at the end of summer. So really done a good job of working to make sure people understand our value proposition, what we stand for. I think our mission of protecting families, protecting homes, protecting their wallets is resonating and they like our platform for what we're going. So definitely a challenge, but that's what we are paid to do. We just work through the challenges and I'm really proud of our team on how they're managing through that.

On the supply chain, same thing. They're real, we deal with this week to week. We've been dealing with our -- with many of our suppliers as we lay out for them our roadmap of where we're going, the product that we're bringing to market, how innovative they are. Our vendors have been saying, "Hey, you purchase very differently. We love your roadmap, we love what you're doing." And they want to partner with us in the future, which is not very far off. Our new products will come out in 2022. We are very excited, and I think that helps us better with regard into with regard to current supply.

So once again, these are real challenges. I don't mean to discount that. But our team is exceptional. I've been very, very impressed with how they've managed through this and team managed to this. They include me and Dale, selectively with certain vendors and those partnership conversations have been very, very positive. Once again, they did see our roadmap, our momentum, the robustness of our model, our growth and it's really helped us I think manage through this better than I had expected when I first took over five to six months ago. So still have challenges, I think it is not over. We think these challenges will continue to manifest themselves throughout 2022. I hope by at some point next year, it will be alleviated much more than they are today, but our team -- kudos to them, they've done an incredible job.

Ashish Sabadra -- RBC Capital Markets -- Analyst

That's very helpful, color, David. And maybe Dale, a quick question for you on the cash flow. I understand there are some one-off items weighing on the cash flow in '21, some investments and changes and you talked about some of those changes in the financing agreement weighing on '22. But as we think about the midterm, is there a way to think about EBITDA conversion or how do you think about cash flow from operations over the midterm? Thanks.

Dale R. Gerard -- Chief Financial Officer

Yes, I mean I think -- it's a good question, I think for '21, we just had $78 million in the third quarter. Fourth quarter, if you go back historically it has always been a use of cash, and that's when we pay our backend commissions and so forth. I think for the whole year, I think we were looking at that and probably full year cash flow from operating activities is in that kind of call it $60 million to $75 million range, and then I think we look to grow that going into 2022. Again, it's a focus of the whole organization. This is just a finance initiative across the organization. All of our leaders, leadership, it's something that part of a kind of -- I'd like to use this word, kind of our core DNA and say, "Hey, we want to operate our business for sustained profitable growth that generates cash flow from that." And so that's kind of where our focus is, if you look across whether it's investments that we're making here today or in the future. Thanks to the adjacencies. That's why we're so high on smart energy and smart insurance. We believe these adjacencies, well, it comes with really good cash flow dynamics. And so they are incremental or accretive to the adjusted cash flow and not -- and so when we look at new adjacencies, new products, new services, those are the type of -- it's one of the factors that we factor in as we think about it, A, where we want to go? What do we want to offer to our customers? So that's kind of where we are, to give you an update kind of on cash flow from operating activities.

I mean, when you think about our DNA and what we focus on, we're really focusing on growth above market in our segments. So this professionally installed, monitored market would be majority of the profit pool in this smart home arenas. We want to show consistent growth above market. We definitely want to continue to scale the business and so we are trying to help make sure that those economics flow through to the bottom line and we're very interested in growing the lifetime value of customers, right, demonstrating the platform play here that we talked about. It's very exciting for our company internally to see the platform play taking hold and growing, and we love smart home, we love how well that's performing and the adjacencies. It is exciting for our employees, as they see the platform play manifest as well through the lifetime value of the customer.

And then the last point, cash flow generation. Guys, we can grow like crazy, reporting the economics and poor cash generation. That's not how you want to grow a business, right? You want to grow the business, but we're also showing to you guys that the cash flow generation improves from year after year after year as you get the machine stronger to stronger to stronger. So, really it's above market growth that has a really scale business model, truly LTV and the platform play and its cash generation. Those are things that we're focused on as a company and I think as investors you do want us to focus on.

Ashish Sabadra -- RBC Capital Markets -- Analyst

That's very helpful color. Thank you very much and congrats once again.

Dale R. Gerard -- Chief Financial Officer

Thank you, Ashish.

Operator

Thank you. Our next question comes from Erik Woodring from Morgan Stanley. Erik, please go ahead. Your line is now open.

Erik Woodring -- Morgan Stanley -- Analyst

Thank you so much and congrats on the good quarter, guys. Just wanted to get to -- you guided the year roughly kind of early August. So what did you see kind of in the last two months of the quarter that allowed you to materially outperform and raise your full year expectations? And then I have a follow-up. Thanks.

Dale R. Gerard -- Chief Financial Officer

Yes, I think -- Erik, this is Dale. I think, we said at the Q2 earnings call in early August that we are -- we were bullish on what the year will look like, but there were still some headwinds out there around supply chain, labor constraints. I think they have been certainly managed really well through those in the third quarter and even early here in the fourth quarter. And so we ran into this half, well, I think was a really good third quarter in terms of all of our performance across our metrics and so that gives us kind of the insight, where we were sitting here, I guess, 55 days or whatever it is -- 50 from the end of the year. We feel really good about where we think the full year will be and that's why we turned our guidance.

So again if you look at things, attrition continues to perform really well. So subscribers through end of the year subscribers is going to come in the high end of the range. We've able to -- even with even with all of the different things going on, we will be able to keep our EBITDA margins in that mid 40% what we're seeing in the growth, to go to increased sales of EBITDA ranges of up $660 million. So again revenue with the addition of the smart home seems to grow, I mean we've seen really good growth year-over-year and you look into smart home revenue from that business and then you add in the these two adjacencies that are really starting to contribute to in a meaningful way, to our revenue that allows to go back and look at that and say, "Hey, based on where we are today, we feel very confident in finishing that sort of guidance also."

So just pulling all those impact together, I think where we were selling in August, again David has been here at that point, maybe 60 days, maybe 75 days, as we still are thinking about strategy and how we are executing for the rest of the year, looking at some of those headwinds that are out there, we've been able to navigate and built where again where we are for the rest of 2021 and frankly we're working on what we 2022 will be, and we're excited where we're headed in terms of the momentum we have going in to 2022.

Erik Woodring -- Morgan Stanley -- Analyst

Okay. That's really helpful. And then obviously, amazing job on the attrition side. Where do you guys think that can end this year and then directionally, how should we think about that going into 2022?

David Bywater -- Chief Executive Officer

There two things that -- so our operations teams, kudos to them, they've executed really, really well, I appreciate all they do. There's always two big factors here. There's always where you are in the cycle with customers, so what cohorts coming out of contract, what cohorts will ensure what the growth rate back then, so that's one thing. And then the second thing is, what we're trying to do here, which is you can provide more value to those customers. The more you can provide value to them, the better off you are. And the thing that our company is super excited about is we've always been great. We've been phenomenal at protecting family and homes, right, just really, really good. But it's seen on costs, and we think that we earned that and better than anyone with sourcing the products. But now we can bundle in other logical adjacencies that would fit nicely with the platform. If you roll in solar, you should save the customer's money, you roll in EV charger, you should save them money. If you roll in insurance and it should benefit on with our overall ecosystem at home, we should save the money.

So in some situations you may offset a portion of that expense to save the family and protect the family in home. In other situations you may far exceed that. You now have a positive savings proposition. If you are in that situation where you're saving and protecting the family, the home, the earth and the wallet, they will not go anywhere, they shouldn't go anywhere, right. If you execute well and take care of that customer, they should say, "Wait a minute, I'm protecting all of this and I'm better off financially."

So as we work that, especially that into the overall portfolio and deliver consistently across all the customers, we hope that lessons have a great positive impact on attrition, a stitch in time, right. I don't think that would be done overnight, the stitch in time. But the roadmap as you help the customer see that, I mean, continue to execute nicely, we hope that the net-net of those two things will benefit us over time. So, Dale, you may have some more.

Dale R. Gerard -- Chief Financial Officer

I think that's exactly right, David, and that's kind of how one really feel that all this customer interaction, customer experience on our platform resulting along with as we mentioned the underwriting and the some of the changes we've made over the last few years. Again, even said this earlier, we can open that underwriting funnel back up and grow multiples of labor going on today. But we don't believe that's the right thing for the business, for the shareholders. And so we continue to tweak that underwriting because it may have sense around that.

Erik, when you look at attrition for the rest of this year, we're probably somewhere in the range we are right now I would say. And then I think we have said, attrition will probably go up a little bit as we go into 2022. When I say a little bit, probably gets into the high 11s, may be low 12s. If that's got to change in the -- that's a cohort in the term, and so you're end of term in terms from higher attrition. That's historically that's across what we've seen, but attrition is actually not changing. It's just the mechanics of where, as David mentioned, the cohorts are in the term, what the number of cohorts that were active in the term because of the growth rate we had in that year versus other years. But we're really excited about where our attrition is and where we think you go as we add other adjacencies, bring more value to consumer, where Vivint is not only part of protecting their families but it's also helping them with savings on insurance, bringing energy to their home and helping them manage their energy usage inside their home which drives other savings. We think there's lots of benefits across this model and that, as David said, we believe that over time, that will prove out in our attrition rates.

Yes. So what we're trying to do is structural changes that will help us over time and materially impact attrition. But if you go back to the mission statement, right, we're trying to redefine the home experience, the technology services is the door, with technology services to create a smarter, cleaner, safer home that saves our customers' money for everyone. That's a fundamental shift, a positive shift for our customers. And then, you heard us already, we're trying to transform which we already think of long-term customer relationships and the lifetime customer relationships. That's pretty aspirational for us, but that's what gets us motivated, right. We don't to have -- having a customer right now eight to nine years is remarkable when it can't touch five, awesome. So grateful for that. But as we execute on this, could we see our average lifetime going up by a multiple of that? Absolutely, we could.

So we've got to go execute flawlessly. We've got to make sure that we are bringing the right solutions in delivering every day. But as we do that, we think which we will redefine its experience and it is platform playing the home will actually bear inventory. And that is what's got us as the company everyone focused on making that happen on a scalable basis. So that's what we got to go and execute on.

Erik Woodring -- Morgan Stanley -- Analyst

No, that's great. I really appreciate the color, guys. Thanks, again, and congrats on the great color.

David Bywater -- Chief Executive Officer

Thanks, Erik.

Operator

Thank you. Our next question comes from Amit Daryanani from Evercore. Amit, please go ahead. Your line is now open.

Amit Daryanani -- Evercore -- Analyst

Thank you. Dale, I guess I have a couple of questions. First off, you talked about the EBITDA margin to be lower for new offerings like energy and insurance. Can you maybe just talk about where are they versus the 44% number you just printed? And then, are they lower because these are sub-scale assets or revenue stream that you have or are we going to be structurally lower even if we get to scale?

Dale R. Gerard -- Chief Financial Officer

So I think I'll take these questions. But the margins from the revenue generated from the smart insurance and the smart energy are included in the 44%. So if we didn't have that, our smart margins would have probably been a little higher. Again, we're building up these kind of new initiatives. So we're not at scale with the start-up costs associated with getting these initiatives up and going. And so those are in the model today that we expect over time that you will see that we build scale and improve those margins associated from those businesses.

Again, I'm not going into the exact margins today. What I will say is we're excited about where those adjacencies have taken it. We think there is more value in this, the margin to the bottom line in terms of overall customer relationship and David said, if we can extend the relationship with the smart home customer that have 78% service margins, and whether it's a year or two, five more years, we think that incrementally adds to the overall business and the profitability of the business. So I think that's kind of where we are based. We will give more details as we go and continue to scale up these two initiatives or some of unit economics. But today, where we are, the LTV, a lot of value, that's really focused on.

Amit Daryanani -- Evercore -- Analyst

I guess traction of extending the duration of these customers by these new offerings, right, there is logic to that. I was wondering if you as a company you have finite resources, money to deploy. Why not double down and expand the number of subs you have from 1.8 million to something bigger, kind of in the core of what you do versus going to adjacencies where it sounded it's a more margin proposition, aiding some [Indecipherable] why not go after new subs more aggressively rather than expanding new offerings?

David Bywater -- Chief Executive Officer

Well, we're not. We're doing both. I mean absolutely, smart home, it our flagship business. We're absolutely doubling them. I mean, you see about the new products we're bringing in on, absolutely doubling them. We're not taken up to put off that at all. We think this differentiates us immensely and provides us a great opportunity to go bring on more customers. So if we gave that impression, we didn't mean to. We're absolutely doubling down on smart home and the product suite and the channels we're going after and growth on every channel. So absolute full for us. But we focus on delighting the customer. And when you think about delighting the customer, they want to bundle more and we see what's going to transition to build to help to save money and protect their family, their home, the earth as logical, and the wallet, we think it's a superior solution. So with smart home, we're investing in absolutely growing these adjacencies. Now let me get stickier for those customers, but also introduce you to the smart home.

So solar is great. Solar helps it make sticker. Those are 30-year contracts, 35 year contracts of saving money. And it's integrating to see both. I mean, think about it. If you're in California where kind of these rates are changing all the time and our system can actually help that customer lay on with high quality, especially to get to home, they can do the math on how the U.S. rates. We can have them consume better as they produce, very target, very sticky. But also, now you have customers that investing in solar, saying, "Wait a minute. I want smart home." So it should be the "and" not the "or" for us.

Same thing with insurance. So like, wait a minute, I got to get insurance I need before ever, right. I want to protect my home as the insurance about. Why not enjoy it more and why not leverage ecosystem that will allow me to gets even a better rate over time. It's the and, not the or. So definitely doubling down the core. I mean, think the adjacency will helpful low-value customers, maybe sticker analysis and new stuff. So thanks for your question. I hope that's right color.

Amit Daryanani -- Evercore -- Analyst

No, that's great. And just a final one from me. Maybe I missed this, but new subscribers, especially the direct-to-home piece was down quite a bit. Could you just maybe call on what drove the drop? Does it normalize or maybe help explain what happened over there?

Dale R. Gerard -- Chief Financial Officer

We got this a little bit earlier, covered a little bit. It's really kind of largely driven by the fact that you had in 2020, we started with some season later, we extended all the way through end of September versus this year and you're kind of back to the historical selling season. This really around for middle of April to kind of middle to end of August. That was really a big driver of that on a year-over-year. Again, as David said, we're investing in smart home. We'd like both those channels continue to grow double-digits and that's really where we're focused to make sure that that's what we're seeing out of the smart growth from direct to home and going forward.

Amit Daryanani -- Evercore -- Analyst

Perfect. Thank you.

Dale R. Gerard -- Chief Financial Officer

Thank you.

Operator

Thank you. And our final question comes from Brian Ruttenbur from Imperial Capital. Brian, please go ahead. Your line is now open.

Brian Ruttenbur -- Imperial Capital -- Analyst

Yes. Thank you very much. Congratulations on the quarter. I have a couple of questions around D&A as a percentage of revenue is not 39% this quarter. Last quarter is around in the '40s, 42%, last year was 45%. Is this decrease in D&A as a percent of revenue due to the Citizens Bank agreement? And do you expect D&A to continue to decrease as a percentage of revenue at current levels? And then kind of finally to throw it all at once, in last periods, you provided the Citizens Bank these, I think it was 10.2 million last quarter and how much of that this quarter?

Dale R. Gerard -- Chief Financial Officer

Yes. Brian, if it's OK, I'll have Nate follow-up with you on the percentage between D&A. I don't have all those figures in front of me. But Nate will give you the answer correct.

Brian Ruttenbur -- Imperial Capital -- Analyst

Yes, that's fine.

Dale R. Gerard -- Chief Financial Officer

And you may also follow-up in terms of Citizens Bank. It should be actually executed later today, for everyone to have.

Brian Ruttenbur -- Imperial Capital -- Analyst

Okay. So then we can just follow-up with those and then let me just flip over then and ask a broader question. You talked about eight-year life and extending that eight-year life with these new offerings. What about going into existing homes and upgrading? Is there a process that you're -- because eight years ago, technology was much different. I would imagine that's going to be the same thing eight years from now, but those new smart homes are not going to be so new anymore. Is there a process where you go in and upgrade anid charge more and provide the latest greatest hardware?

David Bywater -- Chief Executive Officer

Great question. Absolutely. It's -- our core business, the beginning of a long time. So we have a systematic plan and methodical upgrade program today. We go after customers before. They get to end the contract. We want to upgrade them, show them the latest and greatest. And that is -- it's core of what we do. Our operations teams are very focused on that, have been for a long time. It's part of the reason why we think our attrition rate in the residential space, we think it's lower than our peers. So we're proud of them. And that is a systematic program that we do and have been doing and continuing to do going forward.

Dale R. Gerard -- Chief Financial Officer

Yes, I'll just add. It's one of the actual benefits of the change we made into Citizens financing agreement was move that to a line of credit, which makes it a little easier for our operations team as they're reaching out, upgrading these customers, so the customers can actually finance the piece of the hardware that's part of the upgrade. And so that is a focus and we'll continue to not only do from operation side to make sure that we've got the tools there, for a lot of our customers to upgrade platform and build on finance through one of our financing partners or other services.

Brian Ruttenbur -- Imperial Capital -- Analyst

Great. Thank you very much.

Dale R. Gerard -- Chief Financial Officer

Thanks, Brian.

Operator

Thank you. This now concludes our Q&A session. I will now hand over to David Bywater for any closing comments. Thank you.

David Bywater -- Chief Executive Officer

Appreciate that. Thank you so much for joining our call. Hopefully, this was helpful for you guys and you understand where we are and what we're going. We're very excited about the future. We've got a lot of work ahead of us. We're focused on that, but you can rely on us to continue to be thoughtful, methodical and strategic as well as with operations in the Western state. So appreciate it and we'll see you later. Bye.

Operator

[Operator Closing Remarks]

Duration: 72 minutes

Call participants:

Nate Stubbs -- Vice President of Investor Relations

David Bywater -- Chief Executive Officer

Dale R. Gerard -- Chief Financial Officer

Rajagopal Kamesh -- Goldman Sachs -- Analyst

Paul Chung -- JPMorgan -- Analyst

Ashish Sabadra -- RBC Capital Markets -- Analyst

Erik Woodring -- Morgan Stanley -- Analyst

Amit Daryanani -- Evercore -- Analyst

Brian Ruttenbur -- Imperial Capital -- Analyst

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