ADT Inc. (ADT) Earnings Call Transcript & Summary

I want to thank everybody for joining us for the Southwest IDEAS Virtual 2020 Conference. My name is Phillip Kupper. I'm with Three Part Advisors. I'd like to thank Derek and ADT for presenting with us today. ADT is traded on the New York Stock Exchange under the symbol ADT. With us presenting for the company today is Derek Fiebig, Investor Relations for ADT. Derek, I'll hand it off to you.

Thanks, Phillip. It's a pleasure to be here. I'd like to thank all of you for joining us to learn a little bit more about ADT today. I'd like to thank all the Three Part team for the wonderful job they do on these conferences every year. It's a pleasure to be back at the Southwest IDEAS Conference albeit virtually. And I look forward to seeing many of you again in the live conference tours as those start up. We plan to be in Dallas in March of this year, actually, on the 17th and 18th. But as the COVID pandemic ramped up, we had to cancel the trip. In late September, we went back. And Stephen was able to put together basically the same MDR that we had set up for before, and Jim DeVries and I went out and met with people in person. And it was just really refreshing. I think the general reaction was Zoom and Microsoft Teams are okay, but it's great to meet in person again. And for a few of us who spent a little too much time in front of the computer and not enough time at the gym, we were glad that we had some suits in the back of the closet that still seem to fit. But great to see people again in person and really looking forward to the day when we can interact in a broader way, but happy that you're here to learn a little bit more about us virtually. The investment highlights for ADT are included on Slide 3. First and foremost, we're a mission-driven company with a passion for protecting and serving our subscribers, our platform and team members in support of first responders to help save people's lives. Just last week, Jim shared with our corporate leadership the [indiscernible] family that had been subscribers of ADT for nearly 30 years. And they e-mail the man who owned the house, said he really never had used the system. But when his house caught on fire, he credited the fact that he had ADT for alerting him of the fire, helping him get out of the house and saving his dog, his beautiful yellow Lab that he had. And it's stories like that, that we have that really help us in terms of what we do. We interact with our 6-plus million customers on a regular basis and the things that we do help to save their lives, and we take that really quite seriously. ADT is a leading brand in a growing industry. Traditionally, we've been in the security portion of the market. But more and more, we're seeing where it's shifting to smart home markets. Our business model is durable and recession-resilient with 80% of our revenue recurring, and we have exposure to favorable market trends. We have a diverse and growing customer portfolio offering and routes to market are expanding as well, and a solid track record of operational execution and meaningful and sustainable cash flow generation. With that, we have a capital deployment, which is a model which is flexible and focused on the optimization of returns for shareholders. And finally, we're poised and experienced accelerated growth, which is underpinned by our recently formed long-term partnership with Google. On Slide 4, we lay out ADT's mission. It's pretty simple. It's to help our customers protect and connect with what matters most, their families, homes and businesses. Slide 5 provides a financial snapshot as of September 30. LTM revenue of $5.3 billion, including $4.2 billion of monitoring service (sic) [ monitoring and related services ] revenue, with adjusted EBITDA of $2.3 billion and revenue payback of 2.2 years, which was a record low. Our LTM free cash flow is more than $660 million, and this represents a CAGR approaching 20% since 2017. Two weeks ago, we released our financial results and the key takeaways from the Q3 call are included here on Slide 6. We gained additional momentum during the quarter. We grew our net subscriber base, and trailing 12-month attrition was a record low at 12.9%. Our recurring monthly revenue additions in the U.S. increased by 10%, and this was attained while doing so with an efficient subscriber acquisition model as our revenue payback was a record low of 2.2 years. We announced that we are accelerating the first generation of our co-branded do-it-for-me professional install solution with Google and gave some details about the development of our next-generation ADT-owned solution. All this adds up to a powerful long-term growth engine with multiple growth channels. Q3 results and recent highlights are included on Slide 6. As mentioned, we grew our RMR and subscribers during the quarter. Adjusted free cash flow was $127 million for the quarter and $532 million year-to-date, up 16% from year-to-date a year ago. Our retention on a year-over-year basis improved by 60 basis points from a year ago on an LTM a basis. We continue to strengthen our residential platform, which I'll cover in more detail. Our commercial platform is improving, and we continue to acquire customers in a capital-efficient manner. Also, there are a number of macro and company-specific drivers that are enabling our growth, which I'll cover here starting on Slide 8. Deurbanization as people move from the cities to suburban location aids ADT's business model as there are a higher percentage of renters in urban areas and often very limited needs for the suite of products we offer. Overall demand for security has increased due to civil unrest, riots and other things, and increased crime in urban areas have heightened the awareness and desire for home monitoring offerings. Household formation is also increasing with millennials entering the housing markets in a more meaningful way. We also are witnessing the continued acceleration of smart home adoption. These macro trends line up well with our initiatives at ADT, including partnerships with companies such as D.R. Horton, the Texas-based and largest homebuilder in the United States; and there's a healthy pipeline of other partnerships that we're currently working on. We continue to enhance and improve our marketing efforts using data analytics. We have expanded our product offerings to include do-it-yourself or customer-installed solutions. Having purchased LifeShield early last year, rebranding it as Blue by ADT, we're experiencing very rapid growth in this segment of the market. Finally, our partnership with Google is a game changer for ADT going forward. Slide 9 depicts how we've expanded ADT's addressable market from the pro installed do-it-for-me market, which represents about 20% of U.S. households, and we see this expanding through do-it-yourself offerings, partnerships with homebuilders, multifamilies and attracting smart home buyers through the Google partnership. Slide 10 depicts the expected growth in the smart home market, which is expected to grow from $13 billion in 2018 to $33 billion in 2023. And in ADT, we have demonstrated our ability to capture that growth as our interactive customer space has grown from 35% in 2017 to 50% today. The ADT plus Google partnership will build the next generation of the helpful home and enable us to continue to perform well in this market. On Slide 11, we provide an overview of this. Google brings best-in-class hardware and optimal -- and is the optimal technology partner for ADT with their video analytics and data analytics. We also bring together 2 leading brands, and both parties are committed to spending $150 million each in support of the partnership. This will help us to define the home of the future -- or smart home of the future and overcome many of the limitations that we see in today's experience, including a simplified user experience that will be seamlessly integrated, utilizing artificial intelligence and machine learning to create a more helpful home. Earlier this month, we announced that we're accelerating the ADT Google platform, which will launch in the second half of next year. Our co-branded professional install offering will be available and will integrate leading Google devices and introduce Google video analytics service, while leveraging ADT's successful Command platform. We also continue to develop the ADT-owned next-generation platform, which will launch in early 2023. Development for this platform is well underway and will include native integration of automation and security. And the platform will integrate customer in-home experience with customer service experience and back-end ADT support. Needless to say, we're very excited about the new platform and the acceleration of the ADT plus Google offerings. Turning to our commercial business on Slide 14. This has been a business that had been experiencing significant growth prior to the pandemic. Much of the business is tied to installation revenue, which has been hampered by COVID-19. Things have started to turn around. And in the third quarter, we saw a sequential improvement from where things were in the second quarter. Earlier this year, we signed our largest contract ever with Family Dollar, Dollar Tree. We commenced work on this and had converted 6,000 sites in about 19 weeks. We've also been awarded Operation Warp Speed contract, which will help in the distribution of the vaccine for the COVID-19 virus. We'll be taking care of some of the warehouses there. Our backlog in the commercial space is the highest it's been this year and rebounding significantly. We've completed the integration of Red Hawk, our -- in the commercial space and are very well positioned for recovery as things continue to turn around. All this adds up to a powerful, long-term growth engine across many channels. We have the core Pro Install, do-it-for-me, the do-it-yourself, commercial and then also new metrics as we look at things like SoSecure by ADT. This includes partnerships with Lyft and Instacart. Not going to be big movers right now in terms of the financials of the company, but it increases our brand awareness and gets us into different parts of the market. Slide 16 shows some of the financial performance for the 3 months ended in September, and we showed this versus where we were for 6 months. You can see revenue was basically flat on the monitoring and service (sic) [ monitoring and related services ] side. Total revenue was down just a little bit. Net loss essentially unchanged. Adjusted EBITDA stayed relatively flat at $564 million. Adjusted free cash flow was down a little bit. I'll explain why in a moment. We did improve our LTM gross revenue attrition by another 20 basis points as well as our revenue payback, and we did see growth in our ending period recurring monthly revenue. On Slide 17, you can see the reduction in attrition on a year-over-year basis. It went from 13.5% to 12.9%. We had lower rate of disconnects due to fewer relocations and strong customer service despite the challenges that COVID-19 has presented, and we've done a really nice job with our retention initiatives. Total revenue is essentially flat. We did see a decrease year-over-year in the monitoring and service (sic) [ monitoring and related services ]. Last year, in November, we sold our Canadian operations, which represented about 4% of our overall business. So that explains the decrease there. We saw an increase in install revenue. Some of that has to do with the way that we've gone to market. We have a methodology historically, which has been ADT-owned. Earlier this year, we started to sell things on an outright sales basis to support some of the consumer financing programs that we had in place. We've since relaunched that and moved to an ADT-owned model, which will -- which we like more than the outright sales methodology because it allows us to retain ownership on the products. And it's because it's a subsidized model, we think that, that makes sense. We continue to improve our customer acquisition efficiency. And you can see that here on Slide 18. From a year ago, our customer revenue payback decreased from 2.4 to 2.2, and our net subscriber acquisition costs were down slightly from 1 year ago from $377 million to $373 million, and that's with a very significant increase in our recurring monthly revenue. Turning to cash flow on Slide 19. You can see that at the bottom, we were $127 million versus $167 million a year ago. That's more than explained by an increase in cash interest during the period. We did some refinancings over the last 12 months, which has changed the cadence of our cash interest payment. And we took out our 2021 bonds, which were due in the fourth quarter. The payment would have been made, but because we took those out in September, we accelerated that into the third quarter, which led to a more cash interest. You could see that it was unfavorable $74 million and $40 million year-to-date, but we'll get the benefit of that here as we roll forward into fourth quarter. Turning to our capital structure on Page 20. You can see that our debt was at -- right around $10 billion. We've got EBITDA of $2.274 billion, which results in a leverage of about 4.2x. But on the bottom, you can see there's really a clear pathway here. Nothing due in significance until we get out to 2022, the note that we have there. So we're in good shape. Our covenants are -- we only have 1 covenant and it's essentially a pre-SAC EBITDA, so the EBITDA would be significantly higher than what you see here, and that's limited at 4.9x. So we're in good shape from a cap structure standpoint. As part of the Google partnership, we did receive an equity investment of $450 million. We've committed to use at least $300 million to pay out debt during the fourth quarter. Here on Slide 21, you see our capital deployment slide. We look forward to be flexible. And it's a multifaceted approach, investing in efficient organic growth is one thing that we've continued to do. We've built a track record there and our ability to do that. We've also selectively been making accretive acquisitions. This includes Red Hawk on the commercial side; LifeShield, which is do-it-yourself. We've done Defenders, which is our largest dealer, bringing that in-house. We did that earlier this year. I-View Now, which is a technology that is very helpful in looking at alarms. Alarm verification is something that's important in our industry. We're looking forward to continuing to work with Google on how we can enhance that technology. We've done a number of commercial tuck-ins as well. And then on the capital structure side, we've done a number of refinancings of our debt, which has lowered our average borrowing cost by 100 basis points. Our current maturity now is out at 2026, and we're going to continue to look to reduce leverage over time. And then return of capital to shareholders, we've paid out more than $600 million in cash dividends. We did some share buybacks last year earlier in the year. We do have an ongoing dividend that is -- amounts to about $100 million total each year. We have availability of about $75 million of share repurchase as well. So it's a balanced approach. We have been focused on growth, and I think we'll continue to be there. But cash flow generation allows us to deploy the funds in the most appropriate way. Our outlook is included here on Slide 22. For full year, revenue is projected to be $5.2 billion to $5.35 billion. That's up from previous guidance. Adjusted EBITDA, $2.15 billion to $2.225 billion, which was also increased. Adjusted free cash flow is at $650 million to $725 million. We didn't take up both sides of that. We did increase the bottom end of the range. We are evaluating a number of investments that we can make here in the fourth quarter that will help future returns. With that, that concludes the presentation. I do thank you for your interest in ADT, and look forward to speaking with many of you in the one-on-one meetings.