ADT Inc. (ADT) Earnings Call Transcript & Summary

Good afternoon, everyone. Thanks for joining. I'm Ashish Sabadra, and I cover business and information services companies at RBC Capital. I'm really excited to have Jim, CEO of ADT, join us today. Jim, can you just kick it off, providing a quick overview as well as just talking about the last earnings call? And then we'll jump into Q&A.

Thanks, Ashish, for having me today. Thanks, everybody, for calling in. So a couple of introductory comments on the quarter. Of course, Ashish, we announced Sunpro. We're super excited about getting into the solar space and really excited in particular about this company. It provides an adjacent market for us, a large and growing TAM. It's a fragmented business. I imagine we'll spend some time during the question session talking about it. But we think that it is an absolute significant opportunity for us to accelerate our growth, capital-light lots to be excited about here. The Google partnership continues to progress. Doorbell will be rolled out in January, cameras in late first quarter, early second quarter. Google is our most significant partner, a key partner to help us grow in the smart home space. The quarter itself was a strong quarter. We had a modest speed on revenue, modest speed on EBITDA guided to the high end of the range on both. We guided to the low end on free cash flow, but the reason for the guide is the opportunity to invest at SAC capital to continue to grow. The demand for our product is strong. The commercial business recovery continues, 18% year-over-year increase in revenue, real strong EBITDA quarter and essentially back to pre-COVID levels in our commercial business. In residential and small business, gross RMR additions were up 7% for the quarter, 19% for the year. monitoring and service revenue up 5% and essentially on track to meet our financial commitments for the year. So felt great about the quarter and feel really good about the Sunpro acquisition.

That's a great overview, and thanks for -- we will drill down further into a lot of these topics we'll start off with Sunpro. Obviously, it seems like a very exciting opportunity. You mentioned ability to accelerate growth. Can you just talk about how that is -- you will drive accelerated growth? And maybe -- on the call, you had also mentioned opportunity to lower the leakage, improve retention. So maybe if you could address all of those questions.

So I'll start with -- we've been attracted to the solar industry for a long time. There is some -- as you know, Ashish, some pretty significant macro and micro trends driving demand. Energy costs are increasing, climate concerns are increasing. The industry is highly fragmented. We think there is an opportunity for a well-branded company to play in this space. The profit pools are significant. I couldn't be more excited about the industry itself. And then Sunpro as an organization is a company that's vertically integrated. So they do marketing, sales, install and post-installation service. And as a result of being vertically integrated, they control their customer experience. And the customer experience is outstanding. A very significant percentage of Sunpro customers are via referrals from existing customers. They do a really nice job in customer satisfaction. We felt the cultural match was great. We thought that Sunpro could live into a premium brand like ADT, and the management team, including the founder, Mark Jones, are intending to stay with our organization. Not unimportantly, they took a significant portion of the consideration in stock. The cash portion of the deal is essentially to pay down debt, and pay taxes. And we were -- we built confidence based on the conviction that the management team had to take consideration in stock with a pretty lengthy lockup period. So pleased with the segment. Solar, pleased with Sunpro, the company. Crazy about the management team. And then to your question about the opportunity to leverage the assets that ADT has to help solar grow. I think it really orbits around 3 things. The first is the brand. We've done a lot of brand research to get a better sense for whether ADT could play in the space, whether we had brand permission to play in the space, and we do and think that in a marketplace that doesn't have a strong brand leader, we can really leverage the ADT brand. One of the important takeaways from the research is that customers who are comfortable -- consumers who are comfortable trusting ADT for their residential smart home system are equally comfortable trusting ADT for their residential smart energy system. So leverage of brand is a big opportunity. Second is the opportunity to cross-sell both to our base of 5.5 million residential customers as well as the 1 million or so new subscribers that we'll add next year. A handful of our dealers are already cross-selling, of course, non-ADT on solar, but they've demonstrated an ability to cross-sell. We're excited to roll it out to more of our dealers and our direct business, and as I said, cross-sell to the existing base and cross-sell to our new subscribers. And then lastly, ADT is a meaningfully larger company than Sunpro, and we have an opportunity to leverage our scale to help them. Everything from supply chain and contracts, essentially leveraging the size of ADT and letting them piggyback on those contracts and then helping them on everything from operations management to sales to talent acquisition and HR, essentially giving them access to the professionals at ADT.

That's great. That's a great overview. Maybe 2 additional questions on Sunpro. One was, how about -- can you just talk about the retention? Your average life of a normal ADT customer is around 7 years. I guess the solar customer is much longer. So how does that help you on the retention front? And then we'll talk about the leakage as well, but can you also help understand how the smart homes also help lower the leakage on the solar side? So 2 different questions.

Yes. I think we are convinced that it will help us improve on retention. Most of the solar systems that are installed are financed and that's usually long money that's 20, 25-year loans. And our average customer, as you point out, is right around 7 or 8 years. And so we think that the bundling of our product, the Smart Home system and the solar system has the result of a tailwind for us on customer retention. And then in terms of the leakage issue, solar companies from the time of sale until the time of install, that can be lengthy, 30 days, 60 days, sometimes 90 days if permitting gets a little challenging. And as a result of that, the time period from sale to install results in customer leakage. And one of the tactics that we're contemplating is selling in a bundle, installing the smart home system in day 1 or 2 or 3 and having, sort of, half of the system installed, so that we secure the customer and reduce the leakage of that solar install from sale to install. So it's sort of a secondary, tertiary benefit, but it's a real benefit. And we think having that smart home bundle will prevent customers from reneging.

That's great color. And maybe just if I can drill down further on bundle for just a quick minute. So can you just give us an example of what the customer would look -- bill would look like? Would it have like one single bill [ computing ] everything, like, from your security, smart home automation, all the way till energy efficiency?

Yes. There's -- so we're early in the process, still working it through. We have [ Hart-Scott ] approval over the course of the next 30 days, anticipate closing in early December, and still working through what the bundle will look like. But I would say, Ashish, there's all kinds of ways that we think we can integrate the customer experience to have a more seamless way to interact with their home, including things like billing, including things like the ability to control lights, locks, doors, your security system and to get information on your energy consumption via the solar system. So it's an opportunity, we think, to make the customers' lives just less complex.

That's great. And that's going to be my segue to the next question where you talked about having everything fully integrated. And the question there is currently, you use a third-party hardware and software, and you've talked about building your own end-to-end system, I think, I believe, by 2023. And obviously, Google is also helping you on that effort. But can you just talk about this integrated system? And then is there a potential -- maybe if you can weave in potential to also have the energy efficiency part integrated within it. And maybe it is already with Nest Thermostat, but if you can build on that one.

Yes. So today, you're exactly right. We partner on the hardware side with a handful of terrific partners as a result of our relationship with Google going forward, things like Google Mesh WiFi, the Google Hub voice assistant, the Nest thermostat, the doorbell, indoor and outdoor cameras, floodlights, all that hardware that Google makes, we will be selling. And so effectively, Google will become our hardware provider. There's room in the ecosystem for other providers. Google doesn't make all of the products that we'll be using. And so we are working with other third parties right now to join that ecosystem, but the branded hardware will be Google hardware, Google Nest hardware. On the software side, we use a platform today that is also done for us by a terrific partner. But we think that controlling our own destiny on software is the way to go. And to your point, Ashish, we're building that platform now, working very closely with Google and Google engineers to ensure that we have deep integration that a customer of that -- of ours can do in our app, anything that they could do in a Google Nest App or a Google Doorbell App same functionality but integrated with their security system. This year, our 2022, late '22 is when we expect to have that product fully designed. At that time, it won't include energy outside of Nest integration, but it's absolutely on the road map to include the solar system into that platform.

Well, that's great. So one single interface for customers to have everything, security, home automation and energy efficiency, energy, all of that in one single experience, so that's good.

That's right.

And then maybe just following up on the back end as well as the Google partnership. Maybe I'll first focus on the back-end piece. Is there also an opportunity to leverage some of the video analytics capabilities that GCP offers. Obviously, Google has been significantly ahead in that space. Is that an opportunity for ADT as well?

It is, Ashish, I'm excited. I'm excited about going to market as ADT plus Google. I think the brand is powerful. I think it communicates a more contemporary, more tech-forward brand attribute than what we have with ADT alone. I'm incredibly excited about the hardware, the aesthetics are beautiful, fantastic hardware, but I'm most excited about the analytics that Google brings to the partnership. The video analytics and the data analytics and the way that both can be used to make the home smarter. So the short answer to your question is, absolutely, video analytics is on the radar screen and something we look forward to leveraging.

Okay. That's great. And so the way we think about the benefit to the consumer is it's just better experience like when you combine the video analytics with sensor technology, just fewer false positives, all of those good things?

That's exactly right, yes.

And then just jumping on to the way you started off talking about the Google partnership going to market together. Again, you provided some good color on what your expectations for '22 are. But can you just talk about how we should think about that opportunity over the next -- not just in '22, but over the next 3 to 5 years, how does this bundled offering help you from top line growth perspective? We've already seen RMR improve to mid-single digit. But how should we think about the growth profile over the midterm as you bring together complementary brand as well as cutting-edge products, which resonate really well with your customer base?

Yes. There's -- I mean, everything about the Google relationship it inspires opportunity for us. On the -- we know that the more hardware customer has, the more devices in their home leads to higher levels of interaction. And we know that the more a customer interacts with their home via the app, the higher the retention. We are now at a level of almost 20 devices per home in the smart home systems that we install. And when we have access to the suite of Google products, we're convinced that customers will have even more devices in the home, cameras, in particular, where there has just been a renaissance in technology and a pretty significant increase in demand on camera and video services. And so from a retention perspective, we expect tailwinds from Google and increased devices. On the top line, in terms of pure subscriber growth, we feel really optimistic about the brand, Ashish. We're already in the very early stages on branding, uniforms, wrapping trucks will start to do more external media and advertising and marketing as the year goes on, and we include more and more Google products in our suite of offerings. But the optimism that we have around Google plus ADT is super high. We're working together long term on everything from product road map to next-generation smart home, and it's probably a little early to share some of that planning, but the planning is done -- but the planning is being done together and with a long-term outlook on how we can really change the definition of smart home beginning to integrate ambient computing, the video analytics that you talked about a little earlier, the intersection of video analytics and data analytics, smarter and smarter and more sensors to really transform what Smart Home means.

Yes. Absolutely. That's great. Maybe just branching out and talking about other growth opportunities. We've talked about a number of them already, but also if you can talk about your recent deal with DoorDash, plus, you've announced several other partnership with Lyft, DISH, so can you just talk about the partnership on the gig economy side, and then we will also want to talk about the partnership with homebuilders as well as other providers like DISH, so all 3 partnerships?

Yes. So the recent announcement with DoorDash is one that we're really excited about. There are now, I think, 1.5 million dashers that do, on average, 4 dashes a day. they're moving from just food delivery to last mile delivery, growing pretty significantly, and we now have a partnership with them where ADT will be embedded in the Dashers app. I think it's being marketed as Safe Dash, but has ADT branding. And what we're doing is essentially virtual protection via the GPS in the Dashers phone, we know the Dashes location and will have an opportunity to be a -- provide emergency protection should they get in way. So they hit a button. We interact with the police to determine if they need help. And if they do, we send it. It's essentially a virtual chaperone. We have a product that's not dissimilar from that, that we use with Lyft. I think Lyfts up to something in the neighborhood of 2 million drivers, that's nationally available and it's a similar product where we provide passengers and riders of virtual protection, sort of a virtual companion, if you will, to ensure that they get -- that they arrive safely where they intend. DISH is a relatively new relationship, probably 4, maybe 6 months old, and we're working with them to essentially cross-sell our products to DISH customers. It's -- the DISH folks are a good partner. We're early in the game, still testing on what works and what doesn't work. Still doing a lot of training. And so it doesn't -- it hasn't had a material impact on our numbers, but it's not fully rolled out, and we are looking forward to seeing what happens with DISH in 2022. And then the last one you mentioned was builders. We have a number of builder relationships. The largest is with D.R. Horton. And that is a relationship that we have via one of our best dealers, a company called Safe Haven. It's growing quickly, doing quite well. And the ADT Safe Haven D.R. Horton partnerships working well for us. Every home that D.R. Horton builds has an ADT smart home system installed at the time of build and then we work to convert the new buyer to be an ADT customer, an ADT monitored customer when they move in.

That's great. And so maybe, hopefully, in the future, we will also have an opportunity to install solar panels on their home as well, looks like that could be additional opportunity in the future?

Yes, we'll see.

Today. Just moving gears and -- shifting gears and moving on to commercial recovery. Commercial business has recovered really well. As you mentioned, it's back to the pandemic levels. You've seen some pretty good accelerated growth there. How do you think about that opportunity again in '22, but also in the midterm as we continue to see the reopening increased focus on security, all of those secular team behind you in addition to the cyclical, obviously.

It's a business I feel good about. We have a second to none leadership team in commercial. We fill out a full suite of product products, fire, intrusion, video, card access, our customer service is outstanding. And Ashish in this space, you win by great customer service. It's fully penetrated, close to fully penetrated, and the way to win is to take share and you take share by second to none customer service, and that's our sweet spot. We feel good about where we stand as I mentioned, we had 18% year-over-year growth in Q3. It was over a not very difficult compare, but 18% is 18%. I think EBITDA doubled year-over-year and back to pre-pandemic levels. Our backlog is -- as high as it's ever been, both for recurring revenue and for install revenue. And the sales pipeline is outstanding. Our national accounts business has just hitting it out of the park. And so the pipeline is as strong as the backlog. So we feel good. We're pleased with the recovery. We're pleased with how we're positioned to grow this business going forward. We've had a nice EBITDA recovery and bullish about the business in '22.

That's great. And then maybe, Jim, if I can ask you a tough question on this one is, given the Google partnership, the Sunpro acquisition, you're definitely a lot more focused on the residential opportunity. And so the question here is when I look at some of the deals that have happened in the commercial security space, they've been trading at mid-teens or higher EBITDA multiple. And obviously, ADT is not getting that benefit. And so just given the focus on residential strong valuation for commercial business. Is there opportunity for some strategic optionality here?

Yes. I don't know. Ashish, are you going to do some of the parts analysis going forward with those...

I think we definitely should, given -- in order to give you the credit for the solar and the commercial business.

I think so too. I mean, I -- never say never. The multiples are certainly strong in the commercial business, but it's also a core opportunity for us to grow. It's more capital-light than residential, not quite as capital-light as solar, but it tends to be a capital-light business. We like the cost synergy that we realized because of being part of ADT at large. And so no concrete plans. We think it's an important part of our growth story, but never say never.

Okay. That's very helpful color. And maybe just a question on competitive positioning. You always hear that question. And again, I think investors are getting a lot more comfortable with the DIFM model. But I was just wondering if you could -- anything that you've seen from a competitive perspective from Amazon Ring X or anything else or any other DIY solution that you can shed any light on?

Yes. I mean DIY, a couple of things to share on DIY. We're in -- we have a DIY business. That business is growing quickly. It's especially attractive when you look at it through the lens of customer lifetime value. We want to have a relationship with a customer when they're a renter, right through when they become a homeowner. And DIY is an important component of customer lifetime value, customer lifetime value creation. And so the DIY business that we have is an important part of our growth story as well. I'll say that there's formidable competitors in the space, obviously, Amazon and others. And while it's quickly growing, I think much of the profit -- much of the profit pool is in DIFM. And so we want to participate in DIY. We know that our brand plays well there, but it's not an area where the profit pools are as deep as DIFM. And so our emphasis will continue to be do-it-for-me, but DIY will be an important, I'd say, complementary business to DIFM.

That's great. That's fantastic. And then maybe if I can ask you on the free cash flow. You mentioned the investment in SAC in order to accelerate growth. How do we think about the free cash flow over the midterm? How do you balance investment for growth versus giving back some of the cash back to the shareholders?

Yes. We've -- so it's obviously a balancing act. We're going to share -- we have a first quarter Investor Day where we're going to share a lot more color on capital allocation and our long-term financial plan. And I think, Ashish, the key is balance. We know cash flow is important to our investor base and that providing free cash flow is critical. At the same time, the SAC that we're deploying has around 20% IRR ranges sometimes a little higher than that. And so deploying capital for those kinds of returns, it's always a balancing act. And as the demand for our product continues to increase, especially on the heels of Google branding, it will become a capital allocation decision on how much cash we peel off and how much we deploy for growth capital. but we'll share more specificity on 2022 and long term at Investor Day.

That's great. I know I'm on the top of the 30 minutes, but definitely seems a very exciting time ahead with the Sunpro acquisition, the Google partnership, commercial recovery. So there are so many different things from a growth perspective. I was just wondering if you had any closing comments for us.

I'll start with -- I'll end with where I started. We're really excited about the growth opportunity for us. The residential business is doing well. We think the future is bright. Commercial is an important growth accelerator for us as well. We think we can grow that top line double digit, and couldn't be more excited about solar. So I agree Ashish, there's a lot of things going well for us. I appreciate your time today. Thanks for the questions. And thanks, everybody, for calling in.

Thanks, Jim. Thank you very much.

Right, Ashish.