Retail Attrition Improves
Wholesale Additions Increase 25%
Conference Call Scheduled for 10 a.m. Eastern Time Today to Review
Results
LAWRENCE, Kan., Aug. 8, 2008 (PRIME NEWSWIRE) -- Protection One, Inc. (Nasdaq:PONE), one of the leading providers of security monitoring services in the United States, today reported financial results for the second quarter ended June 30, 2008. All comparisons below are to the quarter ended June 30, 2007 unless otherwise indicated.
Richard Ginsburg, Protection One's president and chief executive officer, commented, "In a period of economic uncertainty, I am pleased to report that our Retail segment lowered attrition while increasing RMR additions from a combination of new sales and price increases. In addition, our Wholesale segment generated exceptional growth in additions from its key dealer customers. With the assimilation of IASG largely complete, we continue to work on process changes to improve profitability of our monitoring and service operations across all segments."
Consolidated second quarter revenue declined less than 1% to $92.4 million. Consolidated RMR increased to $26.9 million as of June 30, 2008 from $26.8 million as of June 30, 2007. The Company's net loss for the quarter ended June 30, 2008 increased to $(9.1) million, or $(0.36) per share, from $(8.1) million, or $(0.32) per share in 2007 and adjusted EBITDA declined to $27.2 million from $29.5 million. This decrease was in part due to our significant planned investments in new marketing initiatives and higher service and legal expenses, offset by $2.3 million of G&A efficiencies.
Adjusted EBITDA, Recurring Monthly Revenue ("RMR") and Net Debt, as described in this release, are all non-GAAP financial measures and are described in greater detail in the attached schedules. For a reconciliation of these non-GAAP measures, see the attached schedules.
Segment Results
Retail
The Company's Retail segment directly sells, installs, monitors and maintains electronic security and life safety systems for residential and commercial customers. As of June 30, 2008, the Company served approximately 590,000 retail customers, generating approximately $20.6 million RMR.
Total Retail segment revenue in the second quarter of 2008 decreased 1.2% to $72.9 million, driven by a decrease in monitoring and service revenue due to high attrition over the last 12 months on the acquired IASG base. Attrition on the IASG base has improved since peaking in the fourth quarter of 2007.
The Retail segment's operating income declined by $0.2 million to $1.8 million. The impact of lower gross margins and anticipated increases in selling expenses was mitigated by economies realized in G&A expenses and the absence of merger-related severance.
Retail RMR decreased by $89,000 or 0.4%, from the year ago period. The Retail segment added approximately $0.6 million Retail RMR in the second quarter consistent with the second quarter of 2007. Outside the Southeast, Protection One increased residential additions by 5%, reversing a prior trend of decreasing residential additions in non-BellSouth alliance areas and providing an early positive indicator of the impacts of the Company's new marketing initiatives and its distinctive e-Secure offering. Annualized Retail gross attrition in the second quarter of 2008 was 12.9% compared to 13.6% in 2007.
Wholesale
The Company's Wholesale business, CMS, contracts with independent security alarm dealers nationwide to provide alarm system monitoring services to residential and business customers. As of June 30, 2008, this unit served approximately 4,600 dealers by monitoring approximately 970,000 homes and businesses on their behalf.
In the second quarter, Wholesale delivered $452,000 of RMR additions, up 25.6%, ending the quarter with nearly $4.0 million RMR, 7.8% higher than one year ago. As a result of strong RMR additions, Wholesale monitoring and service revenue in the second quarter of 2008 increased 5.2% to $11.7 million. Wholesale reported an operating loss of $0.2 million compared to income of $0.8 million in the second quarter of 2007 due to higher selling expenses and increased staffing costs to enhance service levels and to assist in upgrading its monitoring platform, the initial milestone of which was completed at the beginning of July.
Multifamily
The Company's Multifamily reporting unit provides monitoring and maintenance of electronic security systems for tenants of multifamily residences under long-term contracts with building owners and managers. As of June 30, 2008, Multifamily had $2.4 million of RMR arising from approximately 265,000 units in more than 1,600 rental properties.
Multifamily total revenue decreased 6.9% in the second quarter of 2008 compared to 2007, and monitoring and related services revenue declined by 4.8%. RMR decreased 5.1% from $2.5 million versus the year ago period. Principally as a result of lower revenues and increased selling costs, Multifamily operating income declined to $1.2 million in the second quarter of 2008 from $1.6 million one year earlier.
Multifamily's annualized gross attrition rate in the second quarter of 2008 increased to 12.9% from 12.2% in 2007. As of June 30, 2008, Multifamily's backlog of sold but uninstalled units and installed units not yet billed was nearly 7,600 compared to 4,200 one year ago.
Net Debt
The Company's net debt decreased slightly to $484.1 million at June 30, 2008 from $485.0 million at December 31, 2007, as free cash flow was mostly offset by fees and expenses associated with the first quarter refinancing. At current LIBOR, the Company's annualized cash interest expense is approximately $48 million.
See "Non-GAAP Reconciliations" in the attached schedules for a reconciliation of net debt to reported debt and cash and equivalents.
Conference Call and Webcast
Protection One will host a conference call and audio webcast today at 10:00 a.m. Eastern time to review these results. The call may be accessed by dialing (877) 397-0286 (inside the United States and Canada) or via a webcast at www.ProtectionOne.com. The reference code associated with the call is 4759659.
A webcast replay will be available shortly after the call at www.ProtectionOne.com. A telephonic replay of the call also will be available until Aug.15, 2008. To listen to the telephonic replay, dial (719) 457-0820 or (888) 203-1112 and enter the following passcode: 4759659.
Forward-looking Statements: Certain matters discussed in this news release are "forward-looking statements." The Private Securities Litigation Reform Act of 1995 has established that these statements qualify for safe harbors from liability. Forward-looking statements may include words or phrases such as "we believe," "we anticipate," "we expect" or words of similar meaning. Forward-looking statements may describe our future plans, objectives, expectations or goals. Such statements may address future events and conditions concerning customer retention, debt levels and debt service capacity. Our actual results may differ materially from those discussed here as a result of numerous factors, including our significant debt obligations, net losses and competition. See our Quarterly Report on Form 10-Q for the period ended June 30, 2008, which is expected to be filed with the SEC on August 11, 2008, for a further discussion of factors affecting our performance. Protection One disclaims any obligation to update any forward-looking statements as a result of developments occurring after the date of this news release.
Protection One is one of the largest vertically integrated national providers of sales, installation, monitoring, and maintenance of electronic security systems to homes and businesses and has been recognized as one of "America's Most Trustworthy Companies" by Forbes.com. Network Multifamily, Protection One's wholly owned subsidiary, is the largest security provider to the multifamily housing market. The company also owns the nation's largest provider of wholesale monitoring services, the combined operations of CMS and Criticom International. For more information about Protection One, visit www.ProtectionOne.com. (PONENR)
The Protection One, Inc. logo is available at http://www.primenewswire.com/newsroom/prs/?pkgid=5001
PROTECTION ONE, INC.
and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Loss
(unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
(in thousands, except per
share amounts) 2008 2007 2008 2007
------------------------- ---- ---- ---- ----
Revenue
Monitoring & related
services $ 83,003 $ 83,689 $ 165,829 $ 145,782
Installation and other 9,398 9,432 18,149 16,023
--------- --------- --------- ---------
Total revenue 92,401 93,121 183,978 161,805
Cost of revenue (exclusive
of amortization and
depreciation shown
below):
Monitoring & related
services 27,388 26,213 55,818 44,994
Installation and other 11,762 10,197 22,972 19,042
--------- --------- --------- ---------
Total cost of revenue
(exclusive of
amortization and
depreciation shown
below) 39,150 36,410 78,790 64,036
Selling expenses 14,056 11,402 27,486 22,519
General & administrative 19,844 21,460 39,109 37,508
Merger related costs -- 2,418 -- 2,418
Amortization and
depreciation 16,601 17,037 33,634 26,558
--------- --------- --------- ---------
Total operating expenses 50,501 52,317 100,229 89,003
--------- --------- --------- ---------
Operating income 2,750 4,394 4,959 8,766
Other expense (income)
Interest expense 12,096 13,251 24,658 23,148
Interest income (259) (1,096) (578) (1,466)
Loss on retirement of debt -- -- 12,788 --
Other (23) (22) (45) (45)
--------- --------- --------- ---------
Total other expense 11,814 12,133 36,823 21,637
--------- --------- --------- ---------
Loss before income taxes (9,064) (7,739) (31,864) (12,871)
Income tax expense 26 327 304 490
--------- --------- --------- ---------
Net loss $ (9,090) $ (8,066) $ (32,168) $ (13,361)
Other comprehensive loss,
net of tax
Unrealized gain on cash
flow hedging instruments 2,057 170 2,124 8
--------- --------- --------- ---------
Comprehensive loss $ (7,033) $ (7,896) $ (30,044) $ (13,353)
========= ========= ========= =========
Basic and diluted net loss
per common share (a) $ (0.36) $ (0.32) $ (1.27) $ (0.62)
Weighted average common
shares outstanding 25,307 25,076 25,307 21,715
(a) - Options are not included in the computation of diluted
earnings per share because to do so would have been antidilutive
for each of the periods presented.
PROTECTION ONE, INC.
and Subsidiaries
Supplemental Financial Information
(unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
(in thousands) 2008 2007 2008 2007
---- ---- ---- ----
Segment Information
Retail
Revenue
Monitoring & related
services $ 63,732 $ 64,613 $ 127,250 $ 115,666
Installation and other 9,139 9,125 17,492 15,643
--------- --------- --------- ---------
Total revenue 72,871 73,738 144,742 131,309
Cost of revenue (exclusive
of amortization and
depreciation shown below):
Monitoring & related
services 18,542 18,849 38,290 34,574
Installation and other 11,206 9,427 21,771 17,820
--------- --------- --------- ---------
Total cost of revenue
(exclusive of
amortization and
depreciation shown
below) 29,748 28,276 60,061 52,394
Selling expenses 12,792 10,797 25,285 21,382
General & administrative
expense 15,460 16,607 30,424 30,145
Merger related costs -- 2,418 -- 2,418
Amortization of intangibles
and depreciation expense 13,081 13,626 26,577 21,391
--------- --------- --------- ---------
Total operating expenses 41,333 43,448 82,286 75,336
Operating income $ 1,790 $ 2,014 $ 2,395 $ 3,579
Operating margin 2.5% 2.7% 1.6% 2.8%
Wholesale
Revenue
Monitoring & related
services $ 11,669 $ 11,090 $ 23,187 $ 14,037
Other 144 -- 462 --
--------- --------- --------- ---------
Total revenue 11,813 11,090 23,649 14,037
Cost of revenue (exclusive
of amortization and
depreciation shown below):
Monitoring & related
services 6,937 5,337 13,740 6,568
Selling expenses 786 354 1,334 423
General & administrative
expense 2,354 2,793 4,634 3,438
Amortization of intangibles
and depreciation expense 1,985 1,823 3,988 2,000
--------- --------- --------- ---------
Total operating expenses 5,125 4,970 9,956 5,861
Operating income (loss) $ (249) $ 783 $ (47) $ 1,608
Operating margin -2.1% 7.1% -0.2% 11.4%
Multifamily
Revenue
Monitoring & related
services $ 7,602 $ 7,986 $ 15,392 $ 16,079
Installation and other 115 307 195 380
--------- --------- --------- ---------
Total revenue 7,717 8,293 15,587 16,459
Cost of revenue (exclusive
of amortization and
depreciation shown below):
Monitoring & related
services 1,909 2,027 3,788 3,852
Installation and other 556 770 1,201 1,222
--------- --------- --------- ---------
Total cost of revenue
(exclusive of
amortization and
depreciation shown
below) 2,465 2,797 4,989 5,074
Selling expenses 478 251 867 714
General & administrative
expense 2,030 2,060 4,051 3,925
Amortization of intangibles
and depreciation expense 1,535 1,588 3,069 3,167
--------- --------- --------- ---------
Total operating expenses 4,043 3,899 7,987 7,806
Operating income $ 1,209 $ 1,597 $ 2,611 $ 3,579
Operating margin 15.7% 19.3% 16.8% 21.7%
PROTECTION ONE, INC.
and Subsidiaries
Supplemental Financial Information (cont.)
(unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
---------------- ----------------
(in thousands) 2008 2007 2008 2007
---- ---- ---- ----
Supplemental Financial
Information
FAS 123(R) Expense in G&A
Retail $ 348 $ 472 $ 714 $ 743
Wholesale -- -- -- --
Multifamily -- -- -- --
------- ------- ------- -------
FAS 123(R) expense in G&A 348 472 714 743
Amortization of Deferred Costs in
Excess of Amort. of Deferred Rev
Retail $ 6,771 $ 4,773 $13,324 $10,502
Wholesale -- -- -- --
Multifamily 458 425 976 742
------- ------- ------- -------
Amort. of deferred costs in
excess of amort. of deferred
rev. 7,229 5,198 14,300 11,244
Investment in New Accounts and
Rental Equipment, Net
Retail $ 9,576 $ 8,379 $19,839 $15,372
Wholesale -- -- -- --
Multifamily 661 816 1,696 1,456
------- ------- ------- -------
Investment in new accounts and
rental equipment, net 10,237 9,195 21,535 16,828
Property Additions, Exclusive of
Rental Equipment
Retail $ 2,121 $ 1,561 $ 3,120 $ 2,528
Wholesale 306 228 588 228
Multifamily 84 4 118 247
------- ------- ------- -------
Property additions, exclusive of
rental equipment 2,511 1,793 3,826 3,003
PROTECTION ONE, INC.
and Subsidiaries
Supplemental Financial Information (cont.)
(unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
------------------ ------------------
(in thousands) 2008 2007 2008 2007
---- ---- ---- ----
Supplemental Financial
Information (Non-GAAP)
Recurring Monthly Revenue (RMR) $ 26,915 $ 26,845 $ 26,915 $ 26,845
======== ======== ======== ========
RMR Rollforward - Retail
Beginning RMR $ 20,469 $ 16,549 $ 20,628 $ 16,429
RMR additions from direct
sales 606 609 1,190 1,132
Additions from the Merger -- 4,133 -- 4,133
RMR additions from account
purchases 2 19 7 19
RMR losses (662) (702) (1,362) (1,151)
Price increases and other 157 53 109 99
-------- -------- -------- --------
Ending RMR $ 20,572 $ 20,661 $ 20,572 $ 20,661
RMR Rollforward - Wholesale
Beginning RMR $ 3,741 $ 961 $ 3,615 $ 963
RMR additions from direct
sales 452 360 769 421
Additions from the Merger -- 2,549 -- 2,549
RMR additions from account
purchases -- -- -- --
RMR losses (236) (191) (430) (253)
Price increases and other 8 -- 11 (1)
-------- -------- -------- --------
Ending RMR $ 3,965 $ 3,679 $ 3,965 $ 3,679
RMR Rollforward - Multifamily
Beginning RMR $ 2,412 $ 2,551 $ 2,463 $ 2,596
RMR additions from direct
sales 24 19 62 36
Additions from the Merger -- -- -- --
RMR additions from account
purchases -- -- -- --
RMR losses (77) (77) (184) (153)
Price increases and other 19 12 37 26
-------- -------- -------- --------
Ending RMR $ 2,378 $ 2,505 $ 2,378 $ 2,505
RMR Rollforward - Consolidated
Beginning RMR $ 26,622 $ 20,061 $ 26,706 $ 19,988
RMR additions from direct
sales 1,082 988 2,021 1,589
Additions from the Merger -- 6,682 -- 6,682
RMR additions from account
purchases 2 19 7 19
RMR losses (975) (970) (1,976) (1,557)
Price increases and other 184 65 157 124
-------- -------- -------- --------
Ending RMR $ 26,915 $ 26,845 $ 26,915 $ 26,845
Annualized
Three Months Twelve Months
RMR Attrition Ended June 30, Ended June 30,
------------------ ------------------
2008 2007 2008 2007
---- ---- ---- ----
RMR Attrition - Gross
Retail 12.9% 13.6% 13.6% 12.5%
Wholesale 24.5% 21.3% 21.9% 20.2%
Multifamily 12.9% 12.2% 12.3% 15.2%
RMR Attrition - Net of
New Owners
Retail 11.0% 11.6% 11.7% 10.4%
June 30, June 30,
Monitored Sites 2008 2007
---- ----
Retail Monitored Sites 590,523 617,325
Wholesale Monitored Sites 969,479 839,692
Multifamily Monitored Sites 264,699 285,020
PROTECTION ONE, INC.
and Subsidiaries
Non-GAAP Reconciliations
(unaudited)
Recurring Monthly Revenues (RMR)
RMR is the sum of all the monthly revenue we are entitled to
receive under contracts with customers in effect at the end of a
period.
A reconciliation of RMR to Protection One, Inc.'s reported total
revenue follows:
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
(in millions) 2008 2007 2008 2007
---- ---- ---- ----
RMR at June 30 $ 26,915 $ 26,845 $ 26,915 $ 26,845
Amounts excluded from RMR:
Amortization of deferred
revenue 1,126 893 1,126 893
Installation and other
revenue (a) 2,804 3,413 2,804 3,413
--------- --------- --------- ---------
Revenue (GAAP basis)
June $ 30,845 $ 31,151 $ 30,845 $ 31,151
April - May 61,556 61,970 -- --
January - May -- -- 153,133 130,654
--------- --------- --------- ---------
Total period revenue $ 92,401 $ 93,121 $ 183,978 $ 161,805
(a) Revenue that is not pursuant to periodic contractual billings
The Company believes the presentation of RMR is useful to investors
because the measure is often used by investors and lenders to evaluate
companies such as Protection One with recurring revenue streams.
Management monitors RMR, among other things, to evaluate the Company's
ongoing performance.
Adjusted EBITDA
A reconciliation of Adjusted EBITDA to Protection One, Inc.'s
reported loss before income taxes follows:
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
(in thousands) 2008 2007 2008 2007
---- ---- ---- ----
Loss before income taxes $ (9,064) $ (7,739) $ (31,864) $(12,871)
Plus:
Interest expense, net 11,837 12,155 24,080 21,682
Amortization and
depreciation expense 16,601 17,037 33,634 26,558
Amort. of deferred costs
in excess of amort. of
deferred revenue 7,229 5,198 14,300 11,244
Stock based compensation
expense 348 472 714 743
Merger related and other
costs 239 2,418 311 2,418
Loss on retirement of debt -- -- 12,788 --
Less:
Other income (23) (22) (45) (45)
--------- --------- --------- ---------
Adjusted EBITDA $ 27,167 $ 29,519 $ 53,918 $ 49,729
Adjusted EBITDA is used by management in evaluating segment performance
and allocating resources, and management believes it is used by many
analysts following the security industry. This information should not be
considered as an alternative to any measure of performance as promulgated
under accounting principles generally accepted in the United States of
America, such as loss before income taxes or cash flow from operations.
Items excluded from Adjusted EBITDA are significant components in
understanding and assessing the consolidated financial performance of the
Company. See the table above for the reconciliation of Adjusted EBITDA
to consolidated loss before income taxes. The Company's calculation of
Adjusted EBITDA may be different from the calculation used by other
companies and comparability may be limited. Management believes the
presentation of non-GAAP financial measures such as Adjusted EBITDA is
useful because it allows investors and management to evaluate and compare
the Company's operating results from period to period in a meaningful and
consistent manner in addition to standard GAAP financial measures.
Net Debt reconciled to GAAP measures
June 30, December 31,
(in thousands) 2008 2007
--------- ---------
Senior credit facility,
maturing March 31, 2012,
variable $ 293,250 $ 294,750
Senior secured notes,
maturing November 2011,
fixed 12.00%, face value 115,345 115,345
Unsecured term loan,
maturing March 14, 2013,
variable 110,340 --
Senior subordinated notes,
maturing January 2009,
fixed 8.125%, face value 110,340
Capital leases 5,822 5,599
--------- ---------
$ 524,757 $ 526,034
Less cash and cash
equivalents (40,696) (40,999)
--------- ---------
Net Debt $ 484,061 $ 485,035
Net Debt is utilized by management as a measure of the Company's
financial leverage and the Company believes that investors also may find
Net Debt to be helpful in evaluating the Company's financial leverage.
This supplemental non-GAAP information should be viewed in conjunction
with the Company's consolidated balance sheets in the Company's report on
Form 10-Q for the period ended June 30, 2008. While not included in net
debt, the Company also had notes receivable due from its Wholesale
dealers of approximately $4.5 million and $5.9 million as of June 30,
2008 and December 31, 2007, respectively.