Vivint Smart Home, Inc. (VVNT) Q1 2021 Earnings Call Transcript

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Vivint Smart Home, Inc. (VVNT)
Q1 2021 Earnings Call
May 13, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the Vivint Smart Home First Quarter 2021 Earnings Call. This time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to Nate Stubbs, Investor Relations. Please go ahead.

Nate Stubbs -- Vice President, Investor Relations

Good afternoon, everyone. Thank you for joining us to discuss the results of Vivint Smart Home for the three months ended March 31, 2021. Joining me on the conference call is Todd Pedersen, CEO; and Dale R. Gerard, CFO.

I would like to begin by reminding everyone that today's discussions 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 and you should not put undue reliance on these statements. I would direct your attention to the risk factors detailed in the amendment to our annual report on Form 10-KA for the year ended December 31, 2020, which we filed with the Securities and Exchange Commission on May 11, 2021. Please be aware that these risk factors may be updated from time to time in the company's periodic filings with the Securities and Exchange Commission and that the realization of any such factors could affect our future results and could cause those results or other outcomes 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.

During today's call, management 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 [Technical Issues] on the Investor Relations website at investors.vivint.com. [Technical Issues]

Todd R. Pedersen -- Chief Executive Officer

Thanks, Nate, and good afternoon to everyone. I hope the life is starting to get back to normal for all of you as vaccine rollouts accelerate and total case counts decline. Today, we will cover the following topics. Discuss our strong financial and operating results for the quarter, review our robust customer engagement and the performance of our platform, talk about our excitement over the near-term outlook for Vivint's premier end-to-end smart home platform as we gear up for what we expect to be a normal summer selling season, and as our customers engagement levels remain high, regardless of whether people are spending time inside or outside their homes.

The momentum around our business that we saw in 2020 is carried into the first quarter of 2021, and we are pleased to report continued improvements in our key metrics year-over-year, including an accelerated revenue growth of 13%, along with 60,000 new smart home originations, which represented a 20% increase, all while producing an adjusted EBITDA margin of 47%. As of March 31, 2021, Vivint's total subscribers grew 10% from the same period in 2020 to more than $1.7 million.

Along with the highlights, I previously mentioned, we also saw solid improvements across the board and other key metrics for the quarter, including another steep decline in net subscriber acquisition cost per subscriber and the lowest LTM attrition rate in the past nine quarters. I believe that these strong results speak to the fact that our core value proposition proven over two decades of reliably taking care of our customers and their families is as relevant today as ever. Dale will provide more specifics on the financials during his remarks as well as share our thoughts about our full year 2021 guidance.

If the past year has taught us anything, it's that there is no better time for homeowners to have a comprehensive smart home system. The 1.1 billion daily events processed per smart home operating system across more than 23 million connected devices are the best indicator of the frequent engagement of Vivint's customer base. We are uniquely qualified to help our customers deal with any environment across the various smart home devices we support from door locks, cameras, security monitoring, thermostats, lighting controls, garage door controls 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 by simply using their voice.

Vivint services also include life-saving and life-protecting 24x7 professional monitoring for emergencies 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 alerts within seconds. Our cloud platform and proprietary technology also allows customers to seamlessly manage and protect their homes regardless of whether they're socially distancing inside the home or from somewhere outside of it. Vivint takes care of our customers and the families while providing the peace of mind that people demand during times of heightened awareness, anxiety, uncertainty and mobility. We've been securing and innovating smart homes for over 20 years, and our experience since the onset of the pandemic has only cemented in our minds the fact that our customers will continue to value home security and smart home technology during challenging economic and societal times, underscoring the strength and resiliency of the Vivint model in any type of environment.

With attention now turning to the reopening of the economy and having this coincide with the onset of summer selling season, we remain bullish about the near-term demand for the business. Given that approximately 50% of the adult population in the US have now received at least one dose of the vaccine and that by the end of the month, we anticipate that all states will have lifted mandatory quarantine restrictions and try to enter process of selling door to door and installing new Vivint systems inside of homes is getting back to normal.

We believe the pent-up demand for travel also plays right into our hands. To the extent, last year's shelters' became this year's travelers, they still have every reason to remain highly engaged with the smart home systems.

Based on the interaction, volumes with our platform before COVID, during COVID and now as the country begins to look beyond COVID, our systems and services have proven to be just as relevant in all of these environments. We are still respectful of the fact that we continue to operate in a world actively dealing with COVID-19. We have increased the preparedness of our direct sales team as they head out to markets across the US at full capacity, and they'll be ready to go with all the right training and necessary PPE to interact with current and new customers.

As a reminder, last year at this time, we had to swiftly move our call centers and corporate employees to a work from home environment, paused our entire direct home sales teams for about six weeks during the first wave of the pandemic, delaying the start of the summer selling season. At this point, we fully expect to return to a more normal summer sales season this year. Meanwhile, our other sales channel, National Inside Sales, which onboards nearly half of all new subscribers in a normal environment has turned in robust results due to the pandemic and we believe that momentum will continue in 2021.

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 the 150 million homes in North America will be running on a comprehensive [Technical Issues] with the most robust service offering, and as such, is the best position provider to take advantage of this opportunity. We believe in order to take advantage of the growth opportunities in smart homes, it's important that we increase our focus and investment in our brand, technology and new product development. On this front, I'm pleased with the early returns we've seen from [Technical Issues] and how we can add value to people by delivering the security and peace of mind they desire. But beyond the brand, we also think now is the time to step things up in terms of technology and our product vision to maintain our position on the leading edge, new product development and to continue pushing new boundaries by delivering a transformative smart home experience to every home.

Before I turn the call over to Dale to go through specifics of our first quarter results, as you may have seen, Vivint recently resolved the matter with the US Federal Trade Commission related to certain historical instances of violations of the company's policies by sales employees. We are pleased to put this matter behind us. Vivint takes matters of compliance seriously, particularly as customers across the country put their trust in us to protect their homes and families. We had already taken steps before the FTC began its review to strengthen our compliance policies and we will continue to make this a focus going forward. To that end, we are deeply committed to operating with integrity, doing right with our customers, delivering on our commitments to stakeholders and providing exceptional service to our customers.

I will now turn the call over to Dale.

Dale R. Gerard -- Chief Financial Officer

Thanks, Todd. Before I get into the results for the quarter, just a quick comment on the recent statement by the SEC related to the accounting for warrants issued by SPAC companies. Following the issuance of the statement, we reevaluated our historical accounting for both the public and private placement warrants assumed in conjunction with our merger with Mosaic in January 2020. Like a majority of SPACs, we've previously recorded these warrants as equity, however, based on our evaluation, we determined that the warrants should have been classified as liabilities and measured at fair value with the closing date of the merger, with subsequent changes in fair value reported as non-operating income or expense in our consolidated statements of operations of each reporting period. By Tuesday of this week, we filed an amendment to our 2020 Form 10-K to restate our previously filed financial statements. As a result of this restatement, we recorded a $109.3 million non-operating loss related to the warrants and our warrant liability was $83.6 million as of December 31, 2020.

I'll now walk through the financial portion of the presentation that we posted today in conjunction with the earnings release. Looking on slide six, we highlight a few metrics for the subscriber portfolio, which continue to be strong across the board. Total subscribers grew 10.2% from 1.55 million to 1.71 million. Average monthly revenue per user or AMRU increased to $67.24, up 3% year-over-year. The increase in AMRU was driven by additional sales of new products, such as our latest generation of outdoor and doorbell cameras as well as the recognition of deferred revenue.

On slide seven, we cover revenue and adjusted EBITDA for the quarter. For the first quarter of 2021, revenue grew by 13.2% to $343.3 million. The revenue growth is attributable to previously mentioned double-digit increase in total subscribers as well as the increase in the average monthly revenue per user. Adjusted EBITDA grew nicely in the first quarter. The primary drivers were the scaling of service and expense subscriber acquisition costs. For the quarter, we increased our adjusted EBITDA margin by 270 basis points to 47.2% of revenue compared to 44.5% in the first quarter of 2020.

Moving to slide eight, we will highlight a few points on the subscribers originated in the first quarter of 2021. New subscriber originations led by a 29% year-over-year growth in our National Inside Sales channel were 60,127 for the quarter. How and which subscribers we onboard is important to our success today and in the future and we continue to redefine and boost the underwriting requirements and process to qualify and onboard new subscribers. One of the policies of the enhanced underwriting requirements is that we are able to reduce the number of retail installment contracts or RICs that are financed on the company's balance sheet. For the first quarter of 2021, we saw a 77% reduction in the number of subscribers financed through retail installment contracts. By shifting a greater proportion of our subscribers away from RICs and toward third-party financing partners and paying full arrangements, we're able to reduce our net subscriber acquisition cost and improve the company's cash flow dynamics.

Speaking of our third-party financing partners, I'm pleased to announce we've recently completed a successful renegotiation of our agreement with Citizens Bank, our primary financing partner under the Vivint Flex Pay program. This renewal resulted in a contract extension of three years and the implementation of a new line of credit finance offering to our consumers, which will streamline the initial sales process and facilitate up-sales and upgrades of additional and new equipment during a customer's lifecycle. Moving to the new line of credit finance offering changes the timing of when the merchant discount rate and loss share fees are incurred, which will impact the amount of cash in the near-term. That said, we are fully committed and intend to operate the business on a cash flow positive basis this year and going forward.

Moving to slide nine, we will cover service cost per subscriber and new subscriber acquisition cost per subscriber. We continued our trend of year-over-year improvements in net service cost per subscriber moving from $11.76 in the first quarter of 2020 to $10.77 in the first quarter of 2021. This reiterates 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 these areas, we're seeing positive trends in both the cost of service as well as customer satisfaction. Our net service margin continued to be in the high 70% range at 77.7% for the first quarter of 2021. A drop in service cost per subscriber is driving a significant portion of the increase in adjusted EBITDA dollars as well as adjusted EBITDA margin percentage.

On the right hand of slide nine, we highlight net subscriber acquisition costs for the last 12-month period. For the period ended March 31, 2021, net subscriber acquisition cost per new subscriber decreased to $66, that's 93% lower year-over-year as we continue to drive down the number of new subscribers that are financed via RICs and shift to a higher mix of customers utilizing our financing partners or paying in full the purchase of their smart home products. During the quarter, we also continue to benefit from pricing leverage on the point of sale purchase and installation of equipment.

Slide 10 depicts our typical subscriber walk that illustrates the changes in total subscribers at quarter-end. One [Technical Issues] at a nine-quarter low. Our portfolio continues to perform better than expected in terms of both attrition and other leading indicators. In terms of cash flow, we saw a nearly $19 million improvement in net cash used in operating activities during the quarter. We finished the first quarter with $274 million of cash on hand and a very strong liquidity position of approximately $600 million.

Finally, moving to our guidance for the year on slide 11. The top of the page highlights several fundamental characteristics of our financial model, including reoccurring monthly revenue from long-term subscriptions, a highly predictable business model and the ability to thrive in all economic environments. We are pleased with the momentum in the business on the strong start to the year and we're bullish about our ability to operate the direct-to-home sales team during this summer selling season at full capacity. We are also aware of potential supply chain disruptions, inflationary pressures and hiring constraints that could limit further upside.

Taking all of these factors into consideration, we are confirming our original guidance as follows. We still expect to in 2021 with 1.8 million to 1.85 million total subscribers. Our estimate for 2021 revenue continues to be $1.38 billion to $1.42 billion. And finally, we affirm our previous 2021 adjusted EBITDA guidance of between $640 million and $655 million.

This concludes our prepared remarks on the first quarter. Operator, please open the call for Q&A.

Questions and Answers:

Operator

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

Paul Coster -- JPMorgan Chase & Co. -- Analyst

Yeah, thanks very much for taking my question. So it sounds like the guidance implies that supply chain risks prevent upside perhaps, but factored into the guidance so [Indecipherable] from a downside, anyone one would first to sort of tilt in that kind of way. Can you just talk to us about what your biggest sort of component risks are and how it is that you seem to be managing through this problem so well on a relative basis?

Dale R. Gerard -- Chief Financial Officer

Hey Paul, this is Dale. Thanks for joining the call. We look at it, a big part of our growth initiatives and some of the stuff we're trying to do is really around camera attach rates. And as you know, we think that's one of the big selling points and why people really like smart home is one of the big advantages we think our systems have over others because they're integrated with very analytics and different things that we can do with that in terms of notices and so forth with customers.

And so part of what we're doing with our pricing, how we're selling and what we're seeing in terms of take rate or adoption of additional cameras, we are in good shape we believe right now, but if adoption rates are higher than we think and if there is any disruption in terms of chip manufacturing and/or -- the big thing really -- one of the big things is logistics frankly supports and getting them from the ports, it could be some or we may have to limit the number of cameras we sell in the second maybe late third quarter or fourth quarter, but we think we've addressed that, we're doing some stuff with airfreight and shipping and so we're just calling that out, to say, hey, based upon -- we're off to a good start, we think that the year we're going to have a good year, but with some stuff around supply chain like there are some inflationary pressures out there, there's some hiring constraints, so we're probably no different than other companies as we try to continue to ramp up, especially in the field and hire in the markets that we service and been able to hire enough installers and service professionals to be able to take care of the customers the way we want to take care of them.

So we just kind of put all that stuff together and said, hey, based upon where we are today and what we see, we think confirming our guidance which we think is really good guidance for the year to begin with is the best path at this point.

Todd, I don't know if you just want to --

Todd R. Pedersen -- Chief Executive Officer

Yeah, no. I would just say, and Paul, you kind of comp that which is based on supply chain issues that Dale mentioned, the potential for upside beyond where we sit is limited to product being delivered to the US and being able to install that. So it's not impossible that we could see some upside, but it's going to be quite difficult, just like everyone else, there's supply chain issues out there, chips mean kind of front and center driving most of that. But we do feel very comfortable with this number. We're fortunate that we have a seasonal business in some regards because we pre-order a lot of the hardware and had done that last year and so a lot of what we need to obtain these numbers we already know we have kind of insight.

Paul Coster -- JPMorgan Chase & Co. -- Analyst

Got you. And a quick follow up, the -- I think investors have been working really hard to try and figure out what's going wrong, because the stock has been going down and we're all sort of very anxious, but something obvious here. Let me just sort of try my luck, is the -- it sounds like you've entered into an extended term with Citizens Bank, but as part of that term has different allocation of the credit risk, does that relate back to this FTC issue. And then passing, Todd, can you just tell us what is actually the FTC issue identified and when it occurred?

Dale R. Gerard -- Chief Financial Officer

Yeah, I'll take the first part, Paul. [Technical Issues]. In terms of the extension work there is, we're very, very pleased with our partnership with Citizens, they've been a very good partner. We've had a relationship, doing consumer finance with them since early 2017 and so we were glad to be able to extend it. The changes that we're making in that program with Citizens really has [Technical Issues] part of the negotiation [Technical Issues] to a, what we call [Technical Issues] long term and better for our customers. It's easier for the onboarding process and then really where we'll see the benefit is the additional sales of hardware either additional products that customers want to take or as we roll out new products that customers will have those new systems, their line of credit allows for that in a way that the installment loan which was a kind of a fixed loan given.

And so in reality, the way the terms are set with the line of credit are more standard terms. Our terms that we have with installment loan were probably not what was standard in the industry. We were able to do that, I think early on and so by moving to the line of credit, one of the things that was, what was part of that, we had kind of go-to more standard terms around how the users of these products pay for that the credit offering from Citizens or from other banks first.

And then Todd will take this [Indecipherable]

Todd R. Pedersen -- Chief Executive Officer

Yeah. I mean, the first thing I'd say is, we're glad to have this FTC settlement done. You now know why we have not -- we've been asked about refinancing, paying down debt and we were not able to do that, they feel like it was good timing in the middle of that FTC settlement happening. So we're glad to have that past due some in the past. Secondly, we're a company that we want to provide great service, take care of consumers, our customers. And so we -- this behavior that's not consistent with some integrity and doing right by consumers has no part of this company. But back in 2017, we did have some salespeople that got around some systems that we found out and let those people go and that was part of this investigation by the FTC. And the thing is, when we found out, we just let those -- we term those people let them go, but again that's in the past and done. We're glad to have that behind us. We've definitely made and we do this every year, enhance improvements on compliance and systems and controls to ensure that underwriting the negatives up to par and again compliant with laws of the United States from a financing perspective. So again glad to have that behind us and done and settlement over.

Paul Coster -- JPMorgan Chase & Co. -- Analyst

All right. Thanks so much, Todd and Dale. Thanks.

Todd R. Pedersen -- Chief Executive Officer

Thank you, Paul.

Operator

Thank you. Your next question comes from the line of Jeff Kessler from Imperial Capital. Your line is now open.

Jeff Kessler -- Imperial Capital, LLC -- Analyst

Thank you. And it's been great working with all of you guys, as I will hopefully will continue to talk for just not in the position I am, that's all. I've got a couple of questions here. Firstly, what are the -- it looks as though this year from the sound of it, it look, you're going to have to -- the economy looks like it's opening up. Are you making investments you're talking about and you've already started with in branding the company. Now can you talk about what other types of investments and how much that may cost you that you are going to be involved with assuming that some of the other -- the overall economy opens up, it is probably on [Technical Issues] some improving home automation [Technical Issues] trying to do things in terms of maybe improving, I don't know, improving your training or focus on how you onboard your new salespeople, spending more money there. Can you just talk about the various types of increased investments that you'll be doing in addition to branding?

Todd R. Pedersen -- Chief Executive Officer

So -- and by the way, it's been great to work with you through these years. We're going to miss I guess [Technical Issues] hopefully relationship continues.

Jeff Kessler -- Imperial Capital, LLC -- Analyst

I'm sure we'll with my other guys.

Todd R. Pedersen -- Chief Executive Officer

That sounds great. Well, so a couple of things. We agree that investments in continued product enhancement and quality and technologies is critical so that we can keep our lead in the market and deliver the best services that we can to consumers and that's first and foremost. The quality has got to be, the value is has to be there and we'll continue to drive that. We are investing in new tools and technologies from on-boarding customers, underwriting customers. We've built these tools over the years, some of them we feel need to be refreshed. We will probably end up seeing within a year or so a platform kind of reinvestment in the platform, again that we built out our operating system seven, eight years ago and we believe that there is some updates that can be done and will be done to enhance that experience for the consumer, allow us to do more upgrades, have more content for consumers, information to consumers that allow us to kind of deliver service spend through those -- to be enhanced operating system.

So that's going to happen. Now we are super pleased with the results that have been or it's early, I mean, we started doing branding and marketing really in Q4, but as you saw with our Q1 numbers, 13% top line revenue growth compared to [Technical Issues]. We're starting to see some momentum there. Now we have already mentioned earlier that with some supply chain constraints we're not going to be off to the races because we have to be -- if we do add customers we need product and hardware to be able to install. So although [Technical Issues] and we think the numbers and projections we have are strong, the cash flow dynamics of the business, the attrition numbers, our net operating margins, our net SaaS are all super strong and improving year-over-year. So we're really excited about how the company is positioned and what the future looks like for us.

Jeff Kessler -- Imperial Capital, LLC -- Analyst

Okay. Does this include an increased investment in SAC?

Dale R. Gerard -- Chief Financial Officer

Can you maybe explain what do you mean?

Jeff Kessler -- Imperial Capital, LLC -- Analyst

You talked to that, new tools for onboarding customers and getting customers trained and things like that.

Dale R. Gerard -- Chief Financial Officer

Yeah. I mean, it's really within our information technology, so that area which we do allocate out SAC, some of that SAC, some of that service, so, yeah, there'll be some of that there and then some of the brand spend that's directly contributed to the media that we're doing is actually being [Technical Issues] but it's part of like -- as we said early when we did the fourth quarter call and talked about kind of what we expect 2021, said, hey, we're going to make investments in really three areas that Todd just talked about, you're going to see those -- really you'll start to see any impact of those [Technical Issues] in Q2 in terms of where we're kind of really starting to get some of the spend in terms of brand as we kind of rolled out the summer sales force and then as we've hired up for some of the stuff we need to do in technology and product development, you'll start seeing that kind of come through Q2, Q3.

Jeff Kessler -- Imperial Capital, LLC -- Analyst

Okay. Second question actually is on attrition and going through the various components of attrition, obviously percentage of customers coming forward is an important one, people who don't like you sitting still or whatever is somewhat important. These are all move around depending on the times we are living in and the ability of your firm to create a better value proposition for your customers. What is going on with attrition, because clearly you've been saying that your sweet spot is probably going to be somewhere in the 12 or maybe the higher than to 12 to 13 area for some time to come. In the past, you seem to have may be underestimated how far attrition can go up, but now you seem to be underestimating how far attrition can come down?

Todd R. Pedersen -- Chief Executive Officer

Well, so here's a couple of things. We deem that we are fully integrated platform end-to-end solution. We continue to make improvements in the hardware, the installation process, the firmware, we've got this incredible feedback loop that we've talked about. So we continue to make improvements and enhancements from that perspective, that if these products work and we have 14 or 15 devices on average per home, if they work consistently and the used case are relevant to consumers they keep the product. Now there are obviously circumstances where people lose their jobs or have financial hinges in their lives that they call some of these people to cancel. We hope to bring people, it's not because people don't like our systems, but maybe that happens occasionally.

But the other is if you've noticed in the last year, we've made great enhancements to the underwriting, the reduction in RICs to the platform is going to have continued impact on efficient over-time. And again enhancements in every little detail of what we do to deliver service consumers is going to impact that much. So we're hopeful, we're not trying to be pessimistic, we continue to see potential gains on that side. This is a pretty -- for a consumer-facing business kind of 1% monthly attrition is pretty incredible. And then you add to that our net subscriber costs comes down substantially and our net service cost of $10.77, this is a really good story and real good build up from what we've been trying to accomplish over the last couple of years.

Jeff Kessler -- Imperial Capital, LLC -- Analyst

So if the sweet spot, are you changing at all your view of what maybe your long-term sweet-spot range should be for LTM attrition?

Dale R. Gerard -- Chief Financial Officer

No, Jeff. At this point, Jeff, no. I think with -- what like Todd said, I think as we get more time in here and we continue to see how attrition performs, we may have picked up, but at this point, I think we're going to stay where [Technical Issues]

Todd R. Pedersen -- Chief Executive Officer

[Technical Issues] I would say that we're super pleased with all of results. They're great. But the $10.77 per subscriber in net servicing cost that means people -- our systems are working. We're not going to have roll trucks to fix things as often as we used to replace hardware. So again, the better and more reliable the system is and the more elegant -- in fact, the more robust the system is the more we see attrition coming down [Indecipherable]. We're not done from an aspiration perspective, but we think we're feeling colder about what we projected to the market for the year and hope to make gains over that if possible.

Jeff Kessler -- Imperial Capital, LLC -- Analyst

All right. Great. Thank you very much. I appreciate it.

Dale R. Gerard -- Chief Financial Officer

Thanks again, Jeff. Good luck with your retirement.

Jeff Kessler -- Imperial Capital, LLC -- Analyst

Thank you.

Operator

Thank you. Your next question comes from the line of Rod Hall from Goldman Sachs. Your line is now open.

Alex -- Goldman Sachs -- Analyst

Hi, this is Alex [Phonetic] on behalf of Rod. Nice job on the results. Could you expand on the difference between the instalment lines versus the line of credit and how it's better for customers and you also mentioned some back to cash flow, so could you give us some color on that?

Dale R. Gerard -- Chief Financial Officer

Yeah, Alex. So the line of credit. I mean the line -- what we have with Citizens and what we've been putting out is kind of a fixed term installment loan. And so what that means once the customer finance what they finance at their initial point of the sale, that was fixed, and if the customer calls back six months later, said, hey, I really -- I only bought two cameras, I wish I bought about a third camera so I could put around on my back porch, we weren't able to actually add that to the finance, it means the line of credit it's more like a credit cards the way to think about it. And so that will allow us to actually go back and add to that system and make it sort of have to come out of pocket at that point for that camera and the install, they're going to add that to the line of credit. So that's the -- really the big difference, it just allows us that the customer and allows us as the company to be able to offer that product to them and the customer then to be able to finance that going forward as they want new or additional products installed in their homes.

In terms of the cash, the way the instalment loan product has worked, we paid the kind of the NDRP in the last year over-time. And so every month if there were -- the NDRP was paid every month and losses were paid as occurred up into the loss based on the loss arrangements that we have the caps that we had in place. The way it will move -- the line of credit will move eventually as we transition through the next kind of 24 months. It will move to that will be like a more standard where we'll pay the NDRP and then the expected losses upfront. And so it will be a net -- so very similar to how our program works with Fortiva or other financing partner.

Alex -- Goldman Sachs -- Analyst

Super helpful. I also wanted to ask about direct-to-home. So the subscriber growth sequentially is a bit weaker than historical trends, but I understand they're still operating in a COVID environment, but could you talk about how that -- why that is and expand on the environment there?

Todd R. Pedersen -- Chief Executive Officer

Yeah. Look, we're basically saying that we believe that we'll operate in a normal way from a deployment perspective. We deployed the majority of our direct-to-home sales people across the country. There are still some number of them that are still going out to market. We're obviously respectful of the social distancing still at this point even though that is changing somewhat with vaccinations and the percentage of people that have been vaccinated across the country and based on CDC guidelines and suggestions, but it feels like, it will be back to more of a normal type year for the summer selling season which we're excited about. Now we've made adjustments that -- based on COVID, it may be accelerated some of the adjustments on how we underwrite and do approvals for consumer [Technical Issues], we used to do it on our devices, the salespeople who travel on with an iPad, now it's done on the consumers device, so we can maintain the social distancing even in the future.

The second thing that it really does for us is from a compliance perspective, it really tightens things up. So this is a net positive all the way around. We're again trying to be respectful of COVID-19 and making sure that we're not spreading anything. We are still checking people's health on a daily basis in market, wearing the appropriate masks and gloves and that sort of thing. But then from an underwriting and compliance perspective, with the adjustments that's going to be a net positive for the company.

Alex -- Goldman Sachs -- Analyst

Thanks, Todd. And last question from me. Could you give us an update on the insurance business?

Todd R. Pedersen -- Chief Executive Officer

Yeah. So we're still, I would say, we're still in test mode. We believe we have great upside potentially with that business and again it's a great thing about owning our platform and the data that we have. If you think about it super -- its hyper-local data inside of the home-based on consumer actions and interactions with the system, so usage patterns. We have all of that collected inside of our data that we collect on a daily basis. We're not quite ready to start announcing volume or future projections, but we're trying to make sure that we have everything from a compliance perspective to a financial perspective and underwriting perspective dialed in before we will extend that business out.

Alex -- Goldman Sachs -- Analyst

Great. Thanks guys.

Todd R. Pedersen -- Chief Executive Officer

Thanks Alex.

Operator

Thank you. [Operator Instructions] And your next question comes from the line of Erik Woodring from Morgan Stanley. Your line is now open.

Erik Woodring -- Morgan Stanley -- Analyst

Hey good afternoon, guys. Congrats on the quarter and again congrats on the attrition rate, really impressive stuff. I guess I wanted to ask an earlier question perhaps a different way and that was, would you say that through the end of the March quarter, there was still a bit of, what I call, COVID complacency driving that metric, meaning, I know you had less than 10% of your base reached the end of term in 1Q, but are people perhaps putting a decision to reevaluate their smart home provider on hold for now given the environment. Just curious your take on that and then I have a follow-up? Thanks.

Todd R. Pedersen -- Chief Executive Officer

Yeah. I mean look, that could be true with some of the consumers and then the other side of that is we had a better underwriting. Our systems are working and operating better as we continue to make improvements, like I mentioned earlier on, firmware, software, new hardware releases, installation protocols, just every little thing that we do. We've been through different types of downturns and issues in the past and it is kind of is proving out again the fact that what we deliver to people which is peace of mind in different ways for different people based on their situation and their living environment. This is something that people see value in and we continue to try to push those boundaries and make sure that we're more and more relevant from a consumer perspective every day.

Erik Woodring -- Morgan Stanley -- Analyst

Okay, that's super helpful. And then I guess my second question. Selling expenses were up more than 100% year-over-year, smart homes subscribers were up 20%. What drove that growth in selling expenses, should we interpret that as, meaning, it's getting more expensive to acquire new customers? And then how do I kind of tie that with net SAC that obviously continues to reach very impressive new lows? Thanks.

Dale R. Gerard -- Chief Financial Officer

Yeah. So couple of things. Last year in the first quarter, if you recall, we shut down kind of direct-to-home. So part of your year-over-year the fact that over the last, I don't know, over the last two or three weeks of the first quarter, there was no spend. When I say no spend we kind of said don't spend any more money on recruiting, training, anything. So that's a big variance or a variance kind of year-over-year in terms of that and then you have some of that brand spend also. As I've said, we're pushing some of the brand spend that's media directly tied to commercials and so forth into SAC also.

So I mean in terms of our growth costs and gross cost of SAC, it's in line with where we have been and again we keep driving down the net, because we're charging more for, sorry, we're selling more product. So the upfront, basically, the number of cameras number of devices we're selling is higher. I think the other thing to say, what I call, I actually look at selling expense or SAC, excluding stock-based comp, so stock-based comp is a big driver in that in terms of the legacy equity that we had that came through in the first quarter that also got expensed plus the new grants that are there. So that's kind of a double kind of whammy there in terms of that expense. But if you looked at, I think it's 11% I think without that stock-based comp charge, we're only up about 11%, around $5 million year-over-year.

Erik Woodring -- Morgan Stanley -- Analyst

Okay. That's really helpful. And then I guess if I could just squeeze in a last one. I remember you guys kind of previously guiding to long-term adjusted EBITDA margins in the mid 40%, correct me if I'm wrong, but is that so how we should think about the long-term and I say that compared to obviously your current guidance, which would imply you're kind of already there? And that's it from me. Thanks again and congrats again.

Todd R. Pedersen -- Chief Executive Officer

Yeah, I think, again, a lot of things there we're seeing improvement across the board, right. We're seeing better servicing cost and as we can continue to drive down service costs, while still providing really exceptional service for our customers. Again, moderate -- being able to leverage G&A in terms of what we're spending there. I think overall, we still see kind of in the mid 40%s, whether that's 45% to 47% is really kind of where we see margins there. For the near term I think, as we continue to invest in the business and make decisions that we think will help the business long-term, be more successful in terms of products, technology, brand as Todd has mentioned and so that's kind of where we're shooting for today.

Erik Woodring -- Morgan Stanley -- Analyst

Okay. Thanks guys.

Todd R. Pedersen -- Chief Executive Officer

Thank you.

Operator

Thank you. Your next question comes from Marlane Pereiro from Bank of America. Your line is now open.

Marlane Pereiro -- Bank of America Merrill Lynch -- Analyst

Great. Thank you for taking my questions. I just have two very quick ones. One, can you share any thoughts on addressing the capital structure? And two, and I apologize if I missed this, but for attrition, how do you think about a normalized level or kind of a steady-state for the business? Thank you.

Dale R. Gerard -- Chief Financial Officer

Sure. I think it's [Indecipherable] Attrition, I think we kind of said we think 12 to 13, but if I had a group attrition, I'd say, attrition somewhere in the high 11s to probably low 13s. So maybe it's 12 to 12.5 is kind of where we think at this point. Again, as Todd said, as we continue to provide better service, better value to our customers that they really they look at this and say, hey, I need this every day as part of my life. I mean our interactions that we saw pre-COVID, during COVID and post-COVID continue to increase in terms of how many times people are interacting with their system via their app. And so that tells us that, and I think one of the things that we actually found there of course is that those interactions went up and I think part of that's being able to answer the door, gets your deliveries without -- touch-less deliveries, don't have to talk to the person but you talk to them through your video camera, your doorbell camera, those types of things.

So even when people go back to the office, which I think people will at some point, they've got these users where used cases that they discovered while they were at home that actually, it will be beneficial. And so we kind of again, attrition we're happy where it is -- and the thing I think important about attrition also is somewhere I mentioned earlier, we're less than 10% of our portfolio is that end of their initial term, if that goes up, that has to drop, that has an impact that will lift attrition even though attrition is not really performing worse. It's just as you -- the percent of customers at the end of term, you always see a little bit of a higher percentage of attrition related to those customers. If we can drive that down, then we can lower that long-term attrition number.

In terms of the cap structure, I think Todd said, we'll be looking to address that, I think sooner than later as we want to go ahead and take care of, I think we've got some 22s, 23s for sure that that we'd like to take care of the maturities and extend those. And so I think you'll see us look to be in it how in the market at some point in near future.

Marlane Pereiro -- Bank of America Merrill Lynch -- Analyst

Great. Thank you, Dale.

Dale R. Gerard -- Chief Financial Officer

Thank you. Have a good day.

Operator

Thank you. There are no further question at this time. I would now like to hand it over to Mr. Todd Pedersen for any closing remarks.

Todd R. Pedersen -- Chief Executive Officer

We appreciate everyone getting on the call with us today. And again, we're looking back at this past quarter, which was a buildup in the past couple of years, plans set in place. We're excited to see the acceleration in top line revenue growth, improvement in LTM attrition, net subscriber acquisition costs, servicing costs, everything the business is performing incredibly well, we're excited about the future of the business and look forward to getting on the phone call with you guys again at the end of next quarter. Thank you.

Operator

[Operator Closing Remarks]

Duration: 52 minutes

Call participants:

Nate Stubbs -- Vice President, Investor Relations

Todd R. Pedersen -- Chief Executive Officer

Dale R. Gerard -- Chief Financial Officer

Paul Coster -- JPMorgan Chase & Co. -- Analyst

Jeff Kessler -- Imperial Capital, LLC -- Analyst

Alex -- Goldman Sachs -- Analyst

Erik Woodring -- Morgan Stanley -- Analyst

Marlane Pereiro -- Bank of America Merrill Lynch -- Analyst

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