ADT Inc. (ADT) Earnings Call Transcript & Summary

Thank you for joining our Midwest IDEAS Virtual Conference. I'm Phillip Kupper with Three Part Advisors, and our next presenter with us is ADT. ADT provides security, automation and smart home solutions to consumer and business customers in the United States. ADT is traded on the New York Stock Exchange under the ticker symbol ADT. Presenting for the company today is Derek Fiebig, Vice President of Investor Relations. Derek, I'll now turn the presentation over to you.

Thanks, Phillip. Good day, and thank you all for joining us today to learn more about ADT. I'd like to thank the team at Three Part for the wonderful job they do on their conferences every year, and it's a pleasure for me to be back at the Midwest IDEAS conference, albeit virtually. This presentation has a number of non-GAAP measures. The reconciliations to those can be found in the back of the presentation and on our filings with the SEC. A financial snapshot of ADT is included on Slide 3. Our LTM revenue was $5.2 billion, with $4.2 billion in our consumer small business segment and $1 billion in commercial. Adjusted EBITDA of $2.2 billion, which is approximately at 50% margins as a percent of total. Our LTM revenue payback, which measures cash subscribers acquisition costs divided by recurring monthly revenue created, is at 2.2 years. The right side of the chart shows our interactive customers as a percent of our residential small business customer base, which now stands at 57%. Our interactive take rate is at 86% of new sales. Slide 4 shows ADT is at the center of the smart and secured home. As of the end of last year, our customer total of interactive security service subscribers represented more than 20% of the U.S. market share. We're about 2x the size of the second largest player and almost 3x the size of the third largest player. On the left, we show our various systems -- events on an annual basis. We have a total more than 200 billion events, including video clips, arm disarms, thermostats, door locks. In addition, we have more than 2 million in-home tech visits each year. Slide 5 provides an overview of highlights from our second quarter. Our focus this year has been on growing recurring monthly revenue additions. In the second quarter, RMR additions were up 28% from a year ago, representing our fourth consecutive quarter of double-digit growth. End-of-period RMR is up 4% from a year ago, $352 million. We continue to maintain strong customer satisfaction and retention with attrition at 13.3%. Recovery in our commercial business continues, with second quarter revenue increasing 23% from a year ago and expanding EBITDA margins to 11.3%. The strong RMR growth will provide us with the opportunity to invest in growth, technology and customer service. Finally, we continue to improve our capital structure, including the $1 billion refi of our 2022 notes. We are continuing to build on our position as the #1 smart home security provider through a number of initiatives, including technology and innovation, distribution partnerships and expansion of our total addressable market through do-it-yourself offering and our other on-the-go products. Our business has benefited from deurbanization, increased demand for security and greater household formation. While we continue to provide tailwinds, the long tail growth driver will be the adoption of more smart homes in the marketplace. Slide 7 shows financial metrics for the second quarter. You can see that M&S revenue increased by 4%. Total revenue was down largely related to accounting changes from a year ago. Adjusted free cash flow was $164 million for the quarter, down from a year ago, and this reflects the additional spending that we had as net SAC was up $104 million. This led to the gross RMR additions that I spoke of earlier. Slide 8 shows our CSB segment. You can see that revenues were down 7% overall, yet M&S revenue was up 3%, and EBITDA was down, reflecting the noncash impact of the ownership model change. Slide 9 presents our commercial segment. Here, you can see that revenue grew by 23% for the quarter, up to $282 million, and we saw a $20 million improvement to $32 million on EBITDA. On Slide 10, we present our higher RMR. The RMR additions were $14.5 million for the quarter, a 28% increase from a low number that was impacted by the pandemic a year ago. That helped increase our end-of-period RMR to $352 million, or 4% from $339 million, a year ago. As I said before, this is the fourth consecutive quarter of double-digit growth RMR additions in the U.S. Slide 11 presents our capital structure. As you can see, we've addressed a lot of our near-term debt. The recent financing of our 2022 first-lien notes extended the maturity of those to 2029. We recently upsized our revolver by $175 million and extended its maturity to June of 2026. We continue to pay a regular quarterly dividend, and we've extended the weighted average maturity of our debt from 5.1 years to 5.8 years. Slide 12 just shows, in conclusion, a little bit about our thoughts on capital allocation. Our durable model and recurring revenue base generate significant free cash flows. This cash flow gives us the ability to be flexible in our capital deployment. We can invest in organic growth, we can selectively pursue accretive acquisitions. We're also looking to optimize our capital structure debt level and returning capital to shareholders through the normal dividend. Over the last several years, we've reduced our annual interest expense by more than $100 million. We've continued to ladder our maturities, and our strong free cash flow puts us in a position where we can invest in growing our subscriber base and in technologies to better position ADT for the future. We thank you for your interest in ADT, more information about the company can be found on our corporate website. Have a great day.