ADT Inc. (ADT) Earnings Call Transcript & Summary

Greetings, and welcome to the ADT and Google Partnership Announcement Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Derek Fiebig, Vice President, Investor Relations. Thank you. You may begin.

Thank you, operator, and thank you, everyone, for joining us on today's call. This morning, we issued a press release announcing ADT's partnership with Google. The press release and supporting materials for today's call are available on our website at investor.adt.com and were also included in a filing with the SEC this morning. In the 8-K, we also provided commentary regarding our financial results and recent business performance. We look forward to discussing these results and our financial outlook in further detail on our earnings call this Wednesday after the market closes. Our remarks today will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we've described in today's press release and in our filings with the SEC. Please note that we disclaim any obligation to update our forward-looking statements, which speak only as of the time they are made. Joining me in the room today are Rich Rot, SVP of Business Operations; Don Young, EVP of Field Operations; Jeff Likosar, our CFO; and Jim DeVries, our Chief Executive Officer. With that, I'll turn the call over to Jim.

Thanks, Derek, and thanks to all of you for joining our call this morning. I'm excited to share that ADT has entered into a strategic, long-term partnership with Google. Together with Google, our vision is to create and deliver an exceptional end-to-end experience for our customers while advancing our leadership in smart home security and safety solutions. Our partnership will leverage Google's award-winning hardware and technology combined with ADT's trusted security, including installation, monitoring and support to create a more secure and helpful home. The combined solution created by ADT plus Google will unlock access to new customers seeking premium technology, end-to-end smart home service and trusted security in simple and affordable solutions. And finally, the long-term nature of our partnership will enable deep collaboration to deliver the next generation of smart home and automation for our customers' evolving security needs. ADT has earned the right to be America's most trusted security brand with an unmatched base of more than 6 million customers who we support via our workforce of 20,000 experienced monitoring and customer service agents, installers, service technicians and distribution professionals. Google is one of the most recognized brands in technology, known for helpful products and services such as Search, YouTube, Gmail and its broad portfolio of smart home devices. Our complementary strengths and shared long-term vision positions this partnership for sustained success. Google is making a $450 million equity investment in ADT, representing approximately a 7% ownership stake. The investment was made at market utilizing the 15-day VWAP, which is $8.22. We will use the proceeds to fuel growth as well as reduce debt. Additionally, during the coming years, Google and ADT will each commit to an additional $150 million, subject to achieving certain milestones, which we will use for joint marketing, training and development of technology solutions. Google's financial commitment to our partnership underscores the importance of the growing smart home and security market, and ADT's leading service offerings and capabilities. Importantly, we're proud to be partners with such exceptionally talented professionals at Google and appreciate their trust and the expertise and capabilities of our ADT team. Today's partnership announcement is both a continuation of and an accelerator on ADT's focus on capital-efficient growth and innovation. Google's products will not only provide our customers with the best in technology and design, but our partnership will also enable us to continue to improve upon our subscriber acquisition cost efficiencies. By improving products and developing new distribution opportunities, we'll be better positioned to attract new customers to ADT and Google. The security industry has long demonstrated consistent growth even through challenging and recessionary periods. In addition, the U.S. smart home market is experiencing more explosive gains and is projected to grow 20% annually. Together, the combined smart and secure market represents a tremendous opportunity for ADT and Google. And enhanced professionally installed offering, premium do-it-yourself offering, and an advanced add-on products and solutions for existing customers will enable us to become the clear leader as curator of the smart and secure home, significantly solidifying ADT's long-term growth opportunities. Now that we have announced this partnership, our focus shifts to the work required to create and further develop our shared vision. The first horizon is integration. This will introduce the Nest portfolio of products and Google's video analytics solution into the ADT existing platforms. Essentially, this is about taking the existing products and services from both companies and beginning to offer them in new ways to provide enhanced solutions to customers. Horizon 2 is innovation focused and will involve the development of a next-generation platform for customers who seek professional installation, will also enhance alarm verification capabilities and initiative we've already begun with our prior acquisition of I-View Now. Horizon 3 is what we're calling re-imagination. While these outcomes are further out, we'll begin from day 1 to develop innovative new solutions and capabilities to serve the future needs of our customers. And during each of these horizons, we'll be looking to attract new consumers to ADT. Before concluding, I'd like to share just a couple of comments for those of you who may be new to the ADT story to provide some background on our company and our strategic progression during the past few years leading up to today's announcement. We have also included a summary of our business in today's presentation. ADT enjoys unparalleled brand recognition and serves more than 6.5 million customers, as measured by our subscriber base, were 4x larger than our nearest residential competitor. Having launched our first interactive system several years ago, and our Command and Control security and automation platform during 2019, more than 3 million of our customers currently enjoy our interactive services. Roughly 80% of our approximately $5 billion of 2019 revenue was of a recurring nature. Approximately 20% of that revenue came from sales to our largest commercial customers. While we're incredibly excited about the opportunities ahead for our commercial business, today's partnership announcement focuses primarily on residential customers, including those who choose professional installation and DIY solutions as well as small business customers. We've consistently communicated ADT's focus on our customers. Over the last several years, we've improved the customer experience through better technology, more seamless interactions and a much faster service standard. We have consequently improved our customer retention while simultaneously improving our acquisition efficiency, utilizing technology, hardware and installation productivity, along with other initiatives such as our recent national launch of a consumer financing program. In conclusion, we're very excited about ADT's next chapter of industry-defining leadership. ADT and Google are committed to build something special together. We'll remain laser-focused on capital-efficient growth. We couldn't be more optimistic about our partnership, the future and our ability to create exceptional value for our customers. We're looking forward to building on the momentum of our Google partnership and discussing second quarter results during our earnings call later this week. We included a few comments on our second quarter in an 8-K, which we filed today, and I can share that we're pleased with our overall operational and financial performance, which we'll discuss in detail when we release our earnings this Wednesday, August 5. In the meantime, our focus today will be on this extraordinary announcement and answering questions related to our new partnership. This concludes our prepared remarks, and we'll now open the lines for Q&A.

[Operator Instructions] Our first question comes from the line of Manav Patnaik with Barclays.

This is actually Greg calling on. I was just hoping to get a bit of color on how you're thinking about the time line, specifically on the integration and the innovation. You guys just launched the Blue platform and the Command and Control platform. So just wondering how you guys are thinking about those transitions and what that ends up looking like?

Yes. Thanks for the question, Greg. It's Jim. So later this year, we'll have several Google hardware items available for installation. So that will be integrated into the new command system. That includes Google Home, many Google Nest thermostats, Nest Wifi. And then as the product development and the joint road map continues, we'll be building product together and begin rolling out that product in 2021. The thing that probably has us most excited here in addition to the hardware is -- are all the things that we can do around home automation and really transforming the customer experience. And leveraging the machine learning and AI, data analytics, video analytics that will be available to us via the partnership.

And then I know you talked quickly about the new distribution opportunities and e-commerce has been a focus for you guys. Can you just talk about how you are thinking about what Google unlocks there?

Yes. There's -- I mean we're excited about the partnership on just about every dimension. And from an e-commerce perspective, there's pretty meaningful opportunity for us to unlock. Earlier this year, we launched, in a significant way, e-commerce, and we like our progress there. And I think that we'll have a pretty meaningful opportunity to leverage Google as a partner to do even better in e-commerce.

Our next question comes from the line of Toni Kaplan with Morgan Stanley.

Congrats on getting the partnership done. Jim, I was hoping you could tell us a little bit more about the go-to-market strategy, just following this partnership on the interactive side but also the DIY side. I guess do you see this more as an opportunity on the professional install side of your business? Or does this strengthen your position in DIY? I could sort to see both. So just wanted to understand how you were thinking about it.

Thanks, Toni, and thanks for the congrats. As you know, we're really excited about it. I think that the partnership is an accelerator for us both in DIY and do-it-for-me. We'll be distributing Google devices in both those segments. The partnership's centered on high-volume so that's residential DIY and Pro and our small businesses. It doesn't directly impact commercial, but it does impact hardware and video services, Nest Aware in the residential space. And the way that we're looking at it at a high level, Toni, is the partnership for us is really the best possible devices and the best possible services with all the advanced analytics that Google brings. And we're confident we're going to be able to build something that's pretty special for customers.

That's great.

And Toni, it's Jeff. One thing I'd add, too, is we're very attracted to the partnership with Google for all the reasons that Jim just described. One of the things that makes us attractive to Google is the capability to accelerate on the professionally installed side because of the network we have and the capabilities we have across the country to manage solutions that, in some cases, are more complex than some consumers are able to install on their own. So we're excited about both, but I'd emphasize especially the network we have on the professionally installed side.

Perfect. And can you talk about what potential there is for cost savings opportunities on both the software and hardware side? I could see there being some -- down the line, some opportunities for you.

Yes. I mean I think we're excited about what this relationship does for us on lowering subscriber acquisition cost. A driver for that reduction is growth for us. So as our fixed costs are leverage because of growth that the partnership brings, that will result in lower and improved unit economics. And then more broadly for subscriber acquisition cost, improved marketing efficiency, device costs, ease of installation, will all be drivers to lower our subscriber acquisition costs over time.

Our next question comes from the line of Pete Christiansen with Citi.

Congrats on the partnership. I just want to touch upon Toni's question a little deeper here. I guess if we think about subscriber economics and some of the broad-brush pressures of this. Obviously, it's a TAM opportunity. But would this be accretive to your ROI on subscriber assets? And then my follow-up question is, does this have any implications for the relationship that you currently have with Amazon? And will Google be exclusive to ADT?

Pete, it's Jeff. On the ROI question, we think, for sure, over time, it helps us in a variety of ways, including efficiency taking on new subscribers, including both DIY and the professionally installed. So I'd add, too, it also expands the breadth of offerings that we can bring to market. We, at our core, are a security company. This helps propel us through the partnership more into smart home and helpful on -- in addition to that. And then in addition to the things that we have in the initial agreement, there's other opportunities in places we can expand the partnership over time. So the art is a possible. We're really, really excited about. And we think over time, this helps drive better economic returns, both for ADT and for Google.

Pete, to your second question -- this is Jim. To your second question about the Amazon relationship. That relationship has really orbited around Alexa and Alexa Guard. Alexa Guard being the use of the voice assistant is another sensor device in the home. And we will continue to integrate our systems when customers request it with the Alexa device. So for us, that part of the relationship with Amazon will continue.

Our next question comes from the line of Kevin McVeigh with Crédit Suisse.

Again, congrats, really nice outcome. Can you just help us understand how -- was there any thought as to potentially merging into Google overall? And then just how long is the partnership -- as it's currently constructed, how long is it kind of currently structured to be?

Yes. So thanks, Kevin. I'll give you a little bit of color at a high level and then try to get to your specific question. So we've been engaged with Google since 2019. And it was increasingly apparent to us that we could do something special together for customers. The scope grew as conversations progressed, and it's evolved to a point where there's a pretty large contingent of team members, marketing product, et cetera, on both sides, working together to move this forward. I can't answer for Google on the investing question, but I can say it's a long-term partnership. We both wanted alignment. Their investment essentially demonstrates skin in the game by Google. The investment was made after an extensive month-long due diligence by Google, and we feel good about the present alignment. And because it's such a deep integration, we feel good about the fact that it's a long-term partnership as well.

That's helpful. And then just real quick, is there any way to think about how it impacts the longer-term growth targets? And what I mean by that is, it sounds like you're much better positioned, if I have it right, in the smart home as opposed to just core security. So is that right? And then ultimately, what does it do to your existing installed base? Like do all those clients ultimately get reset with Google mesh product? Or just any thoughts on that within the context of growth? And then just the smart home versus just your traditional security?

Yes. I mean, absolutely, this helps us. The Google partnership will be leveraged to accelerate our ability to compete in smart home. We're -- we feel really confident about sort of the core security needs of our customers, especially as peace of mind needs accelerate across the country. We think that will continue to serve as the demand catalyst for our services. But the opportunities available to us through a deep partnership with Google for the broader home automation market. And that growing market, we're excited about and working with them.

Our next question comes from the line of Gary Bisbee with Bank of America.

I guess let me start here. So I'm still a little fuzzy about exactly what the partnership entails. So it sounds like initially, you'll be marketing Google Nest and other products into your customer base and to new customers. Is there -- what exactly is happening from a branding perspective? Are you holding your brands in? Are you calling it -- how integrated is it? Is your Blue offering still out there as a stand-alone? Just trying to understand what's really going on that will -- beyond creating products that you can market that's there?

Yes. So Gary, it's day 1. So there's a good bit of work to still do on the product side, the go-to-market side, marketing and co-branding. As a framework, what I mentioned earlier, this will be -- we will be exclusively selling the -- some of the devices for Google on the Pro Install side. On the DIY side of the business, it will be both Google product and ADT Blue. So you can think of it as exclusive on do-it-for-me and alternative on the DIY side. We've been, historically, product agnostic, as you know. And now we will be working more in alignment with Google on their hardware. From a marketing perspective, the intent is to go-to-market together. And so we will work in cooperation with Google to put meat on the bones and develop those plans. A source of funding for those go-to-market and product development plans will be $150 million commitment from Google as well as a $150 million commitment from ADT, and those dollars come in based on us meeting certain milestones.

And I would add. Jim made the point that we're on day 1. And the initial focus is almost, by definition, going to be to use existing products between the 2 parties in different ways, distribute differently. And we think there's some near-term opportunity. But the really exciting part is the development of capabilities, products, services, technologies that don't yet exist. And because we're still so early in this, we don't have a whole lot to share about exactly what those specifics look like nor the exact timeline, other than to tell you, we're very excited about the long-term opportunities that will come from this partnership, which is just back to the earlier question about why this is a long-term partnership. It's to develop things that don't yet even exist.

So if I could just follow-up on that. From the branding perspective, how will Google's name or Nest, however, it's going to be -- how's that going to go with ADT? I mean is it going to be sort of ADT selling Nest or offering Nest product? Or is it going to be like your slide deck, ADT + Google? I'm just trying to understand -- so I think that's really key in terms of how much it could help brand awareness and drive the growth and the efficiency that you're hoping for. And I guess the other side of that, from their perspective, how are they going to work in ADT in professional install when they're marketing their capabilities? Has that worked out yet? Or do you have a timeline as to when you're targeting getting that -- those 2 messages out?

Yes. Great question, Gary. The brands are the source of -- one of the things that's most exciting about this because we get the benefit of Google as tech forward and contemporary. And then the ADT brand is representing trust and peace of mind. And we think by bringing those together, there's a real halo effect. ADT + Google really is a placeholder for now. Both sides, Google marketing folks and our marketing folks are doing some research, and we're testing into what we're going to use as branding for our customer-facing strategy. So we'll let the data drive the decision. And for now, we're just a placeholder with ADT + Google.

And any sense on the timeline of that?

I'd say we'll start to get clarity on the go-to-market in probably early 2021.

And Gary, like anything to with branding and marketing and the messaging thereof, we potentially or maybe even likely would test our way into various concepts. And then you land on the concepts that have the most resonance with the customers and more importantly, prospective customers.

Our next question comes from the line of Jeff Kessler with Imperial Capital.

Congratulations on the transaction, or I -- yes, it should be very interesting, guys. First question is, you've already said that this is just a 1, but I'm going to ask a day 2 question. Clearly, one of the things that has to be done in this industry is to make sure that when you come up against other companies or other installation companies that have said that their products are already integrated and that everything just works together first time and with -- almost intuitively. How quickly can you create a group of products and a group of services that are fully integrated so that you don't have to have call 1, call 2, call 3 and the second truck roll, things like that?

Yes. Thanks for the question, Jeff. We're -- we've got a high-level product road map built. And it will really be weighing into the water. So this year, we'll start with selling some devices. And then in 2021, begin to develop and roll out that full customer experience that you're referencing, where we have integration of Google devices and integration of the interactive platform, touching the third-party devices. So we have a 1 customer seamless experience. It's on the road map. I expect we'll have a lot of progress in 2021, and we'll begin legging into it here in the -- in what remains of 2020.

Okay. Second question is a little bit probably one of -- probably a touchy one at this point. But you've been -- you have an existing platform partner for a lot of your technology going out to the residential side right now, Alarm.com. Have you discussed this with them? Or are they part of this plan? Or are they going to be a sideline? Or are they out? I mean can you give me some idea of how you're going to be, let's just call it, modifying your platform to accommodate Google so that, again, there is no confusion over who's using what?

Yes. So Alarm.com has been a terrific partner and continues to be a terrific partner. We have almost 3 million -- a little more than 3 million customers on an interactive platform that they support. We're obviously going to have conversations with them on what the future looks like. It's early in the process and hard to comment with -- in a concrete way, Jeff. But we'll obviously be talking to them and working through how we're going to work into the future.

Okay. And if I might, just quickly to throw this in. I know this -- I know you're not focused right now with Google on the commercial/industrial side. But where does -- in your high-level thought process right now, up to what point in the commercial -- in the SMB up to the midsized commercial area, can Google make a difference? Can their products and their technology make a difference for you? Because in some ways, the technology can make a difference for you all the way up to the top. But in other ways, some of their products are obviously meant more for the smaller premises.

Yes, absolutely. The -- so the early focus for us is on residential, do-it-for-me and DIY and small business. Today, right out of the gate, the Google relationship doesn't directly impact commercial. But I'd say, Jeff, there's literally dozens of other areas where we're excited about the relationship with Google. Their growing capabilities in ambient computing, we're really excited about working with them on false alarm reduction and verified response on what we can do in video and data analytics, launching products in our DIY segment, creating growth programs together. And I would also put on that list, to your question, seeing how there might be ways to work together in commercial. So we've got a long list of opportunities that includes commercial. But out of the gate, the partnership will be focused on our high-volume residential business.

And I'd emphasize again, it's come up a couple of times, but this is why we're so excited about the long-term nature of the partnership because there are some things that we have on the road map in the very near-term. And then a litany of other possible things and different places we could take the relationship over a period of time.

Our next question comes from the line of Seth Weber with RBC Capital Markets.

I just -- actually, I wanted to follow-up on that last question. I'm just trying -- looking at the slide with the Horizon 1, Horizon 2 and 3. And I'm just trying to understand what sort of time frame is that representing? And can you just talk a little bit more towards the $150 million? And what type of milestones that spending might be based on? Is it based on a subscriber's edge? Or is it based on a retention number or something -- anything you can share just about those 2 topics?

All right. So I'll start the answer, and if Jeff or others want to add to it, that's terrific. Seth, the -- I'll speak to the, what we call the funding growth fund, that's the $150 million. That is largely dedicated to 3 areas. The first is co-marketing, the second is joint product development. And then lastly, we're investing in training for our employees. Our customer care employees, our tax, sales on the products and services that are associated with this partnership. The -- in terms of the product road map, the timing and specificity is something that, for competitive reasons, we're not sharing. The road map is being codeveloped. It focuses on current-generation product and next-generation product. The next-generation product will largely be around leveraging AI and video analytics, data analytics, and that's about as much as we're willing to offer on the product side at this time.

Okay. Should we -- so should we think about the $150 million being front-end loaded to like a 2021-ish -- most of it in 2021? Or does that get spread over multiple years then?

Yes. Two answers related to that. The first and not unimportantly, the $150 million doesn't include the extensive internal investment that Google will be making. Engineers, talent resources, development resources are all separate from the $150 million. On the $150 million, the first $50 million will be coming soon. And then the next 2 tranches of $50 million are based on some milestones that we're confident we'll be achieving.

Okay. And then if I could just follow-up. On the -- hello?

Yes.

Sorry. I just heard there's some background noise. Now that you've had a chance to think about it or you've been deeper into the DIY market, can you just talk to us about how you're thinking about retention trends and DIY relative to the traditional business? Anything that you've gleaned over the last couple of years that you might share, whether that customer is stickier or less sticky?

Yes. You bet, Seth. I think that's probably a question better for Wednesday when we're able to talk about our second quarter results with a lot more specificity. I can share, at a high level, that Pro Install has pretty consistently had better customer retention trends. But I'll be happy to go into a little bit more detail on Wednesday for you.

And then I would add, just for anybody on the call who's maybe newer to ADT. Just as a reminder, we care about customer retention, for sure. We also care about the cost it takes us to acquire new customers. And then we care about the ability to service those customers in a profitable way. And we're always seeking to balance those 3 things in a way to optimize back to the IRR question, to optimize IRR over time and generate positive cash flow over time. So we, for sure, care about customer retention. But different kinds of customers, different segments have different characteristics between those 3 characteristics. And our job is to optimize those to generate strong IRR.

We have reached the end of our question-and-answer session. I'd like to turn the call back over to Mr. DeVries for any closing remarks.

So thanks for participating today. We're exceptionally excited about the partnership and our shared future. We think the deal has come exactly the right time. The partnership has come exactly the right time. Customers are focused on safety and home automation, and ADT is the trusted partner in the home. Along with Google, we're going to transform this customer experience. We're looking forward to talking more to you about our earnings call on Wednesday as well, and thanks again for calling in.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.