ADT Inc. (ADT) Earnings Call Transcript & Summary

Hello. Thanks for taking the time to learn more about ADT today. Although I've presented here a number of times with Tower International, this is the first time I have the pleasure to present as the Vice President of Investor Relations at ADT. On Slide 3 of today's presentation, we have provided some key takeaways. ADT's first half 2020 results were solid. We had unit growth, improved revenue payback and better customer retention, all of which fueled results. This performance in the current environment confirms the resilience of our business. Our strong 2Q cash flow enabled us to clear $220 million off of our revolver. And with the refinancing we did earlier this month, we now have no meaningful debt maturities until 2022. We have been very successful on navigating the COVID-19 crisis while positioning the business for 2021 and beyond. Consumers' basic needs for safety and security, combined with the emerging de-urbanization trends, favor ADT's business model. Importantly, our long-term strategic partnership that we announced earlier this month with Google elevates ADT's position in the rapidly growing smart home market and expands our do-it-yourself reach. Slide 4 presents our Q2 results and some recent highlights in the business. It's important to note that our revenue was up 4% year-over-year. This was despite the sale of our Canadian operations and a reduction in sales in our commercial volume. The higher mix of outright sales to residential customers due to our revenue model change and the Defenders acquisition aided results. Adjusted free cash flow was $232 million for the quarter and $405 million to date. Adjusted EBITDA of $563 million was up 4% sequentially. Our customer retention improved to 13.1% from 13.5% sequentially. We strengthened our residential platform with our Google partnership, and we continue to make progress in integrating Defenders. We also signed a contract with D.R. Horton, the largest U.S. homebuilder. Commercial sales were down in the quarter, reflecting the shutdown -- COVID-19. But on the bright side, we were awarded our largest contract ever with Dollar Tree, Family Dollar. We continue to make improvements in the efficiency of acquiring new customers. The trailing 12-month revenue payback improved from 2.4x to 2.3x on a year-over-year basis, and we've seen continued success with our national pricing and consumer financing program. Slide 5 provides an overview of ADT. We have a little over 6.5 million customers, over 3 million of which are on interactive systems. We provide professional service to them 24 hours a day, 365 days a year from our approximately 20,000 colleagues, including 5,000 service professionals. We generate about $5 billion in revenue with about 80% of that contractually occurring. Slide 6 shows ADT's recent history. The IPO happened in January 2018 at the price of $14 per share. In December of 2018, we acquired Red Hawk, increasing our position in the commercial space. In January of 2019, we launched Command and Control, our new panel, which replaces the Pulse system. In February, we acquired LifeShield, which got us back into the do-it-yourself market space. In October of 2019, we acquired I-View Now, which is a technology that allows us to better understand if alarms are real or if they're false alarms. And in January of this year, we relaunched our do-it-yourself under the ADT Blue brand and acquired Defenders. In February, we rolled out our national consumer financing program. And then just this month, we announced our long-term strategic partnership with Google. ADT is the #1 smart home security provider. It's a large and growing market for security with approximately 120 million single-family homes in the U.S. The penetration rate is about 20%. But smart homes have been a very quickly growing portion of the market, expected to grow at a 20% CAGR between 2018 and 2023. And ADT has done a great job of capturing these customers. We've -- we're -- nearly 50% of our customers now are in interactive platforms. We've managed well through the 2020 events with the COVID-19 pandemic. There's been a heightened awareness for security needs by people. Commercial demand has been a little bit slower, and some of the small businesses have been negatively impacted, but our results have held up quite well. Longer term, our focus is to position the business for continued growth. The Google partnership will assist with this, and we've done a nice job of retaining our colleagues here at ADT. And we look to leverage Defenders as well as e-commerce to improve our go-to-market approach going forward. There are numerous macro trends that are assisting our results at the present time. The de-urbanization or suburbanization should assist us to grow our customer base. There's a continued acceleration of smart home adoption, and we've seen an increase in demand for security as of late. And with fewer relocations, that should help our attrition numbers as well. Slide 10 (sic) [ Slide 9 ] provides a brief overview of the Google partnership. As part of the agreement, Google has agreed to invest $450 million in equity. And there's a co-commitment of $150 million from Google and from ADT for training, marketing and technology solutions. This long-term partnership is an exciting thing for our business. We're looking to provide an unmatched customer experience, profitable growth, innovation and bringing 2 real leading brands together. We think that this will solidify our long-term growth opportunities moving forward. You can see that on Slide 11 (sic) [ Slide 10 ]. The first thing will be the combined and do-it-yourself offerings between ADT and Google. It will unlock new opportunities for ADT and Google customers. The next-generation intelligent professional installation offering will be a great product in the marketplace. The $300 million of combined go-to-market funding will assist our results. And we'll look to become the curator of the smart and helpful home, and there should be some real new and exciting future products that will come about as part of the partnership. On Slide 12 (sic) [ Slide 11 ], we have provided some indicative partnership milestones. The horizon 1 is integration. This expands ADT's home automation product set through the additional Google Nest product offering. Also, integration of these within existing ADT platforms and the introduction of Google's video services to ADT customers. The second horizon is innovation, where we'll develop the next-generation professional install platform, new home security products and peripherals and enhance our alarm verification. And then Slide 3 (sic) [ horizon 3 ], which we have dubbed reimagination, really represents the future of automation and security with new and intelligent products, services, enabled by new technologies. And a new generation of customers can be serviced by those. Slide 13 (sic) [ Slide 12 ] shows the smart and secure home. On the left, you'll see a number of data points regarding ADT's presence in the existing home. We have over 2 billion system events that happen per year. You can see those marked in terms of what they are. Typically, in our new installs, we're doing about 14 devices per home, but there are several limitations to the current environment. You have many connected devices, but there's limited integration. Oftentimes, people will have 3 different applications on a phone or a tablet that they're using to control their home. This obviously is frustrating for people over time. And the future solution that we're looking to create would have everything in just one app where everything can be controlled there. So we believe that the Google partnership underscores the importance of our position at the center of smart and secure home. Slide 14 provides our operating and financial metrics for the second quarter compared with a year ago. Revenue is down slightly on the monitoring service. That reflects the disposition of Canada. Total revenue, though, was up $48 million. Adjusted EBITDA was off from a year ago. That reflects the sale of Canada as well as the treatment of the accounts that we acquire through Defenders. Previously, those were purchased from Defenders, and we capitalize those on the balance sheet. Now it's coming through as an expense item in the near term for what they spend on advertising and marketing and whatnot. You can see that the gross attrition improved by 20 basis points on a year-over-year basis. And as I mentioned earlier, the revenue payback was 2.3 versus 2.4. We ended with $339 million of recurring monthly revenue, which was down from a year ago. But you can see on the bottom, looking at the U.S.-only, it was actually up $4 million. Slide 15 looks at results on a sequential basis. And this is important, obviously, with what happened late in the first quarter with the impact of COVID-19. You can see revenue is down a little bit sequentially on monitoring and service, about $5 million on a large base of over $1 billion. Total revenue is down a little bit more because we saw a reduction in our installation revenue. Adjusted EBITDA was up $24 million sequentially, and adjusted free cash flow increased $60 million. The attrition improved, and this is last 12-month gross revenue attrition number, it improved by 40 basis points on a sequential basis, which is a massive increase just given the fact that it's a 12-month metric. Revenue payback was flat at 2.3, and recurring monthly revenue was flat as well at $339 million. Slide 16 shows our gross customer attrition. As I mentioned, it's down to 13.1%. Total revenue is shown on the right, where you can see that it was up 4%. We continue to acquire our customers efficiently. 2.3x last 12 months is the metric for customer revenue payback. And our net subscriber acquisition costs, or SAC, was down 19% from $375 million to $305 million. We had strong free cash flow generation, which is presented on Slide 18. You can see that the total is $232 million for the second quarter and $405 million for the first half of the year, which is up from $292 million in the same period a year ago. Slide 19 (sic) [ Slide 20 ] provides a snapshot of our business. We present the information regarding residential, small business as well as large and multisite, which is more or less the commercial side of things. A few things to point out here. The M&S revenue for both the residential as well as small business is the majority of the sales, whereas the large multisite, you see a lot more revenue that comes through in terms of installation. And so that's where we're seeing a little bit of pressure here on the business. But what we've referred to the commercial side of the business is being deferred, but not diminished. And with the recent win that we had with Dollar Tree, Family Dollar and an expected recovery in the market, we should see these numbers start to come back over time. Likely, you'll see it more of an impact in 2021 than here in 2020. The business is well positioned. We've got the strong recurring monthly revenue, and we did grow our unit count during the first half of the year. That concludes our presentation, and we look forward to speaking with you at the conference. Thank you.