ADT Inc. (ADT) Earnings Call Transcript & Summary

ADT Jim DeVries, and his moderator will be Eric Beder from Small Cap Consumer Research.

Good morning. My name is Eric Beder from Small Cap Consumer Research. It's a pleasure to be here for the SHARE Series. We are here with Jim DeVries, CEO of ADT. Just a few quick housekeeping items, first of all, you can't throw it up here, I do need to do the disclaimer before we start. I do need to mention that today's remarks may include forward-looking statements, safe harbor provisions. Additional information regarding non-GAAP financial measures and other risk factors can be found on the ADT's Investors website. Also, we're going to be a little tight for time. If you have any further questions, please contact Elizabeth Landers over here. She is the IR person for ADT. So with that, Jim, I think probably more than three people use your product in this group I would hope. I know we're one of them. Could you kind of explain where ADT is in their evolution? It's been 150 years since you started? Not you started, but since the business started how do you look at 150 years? This is right now and where it's going?

Yes. So first, thanks for managing the Q&A. Thanks, everybody, for joining today, and for the event planners for putting it on. It's a pleasure to be here. We don't get a great number of opportunities to talk directly to retail investors like this. So this is a great forum for us and appreciate the time. So ADT, 150-year-old company. We are in the -- we are in the residential and small business space. If there's been any evolution for our organization over the last few years, it's morphing from a security-centric company to a smart home company. There's been a renaissance in video and video analytics and interest in cameras and video doorbells and the number of devices that we install in a system is much more smart home device focused. We haven't lost our history and security. We're still about protection, but the evolution has been increasingly towards Smart Home and about 6.4 million customers.

Okay. Yes. So let's talk a little bit about the world has changed. You obviously have always been involved in the home, getting a home now has gotten harder. People are staying in their homes more. How does the economic shifts affect you? And how should we be thinking about your ability to withstand the ups and downs in an economy here?

We've talked, I've been with the organization, it will be 8 years in May, and we've always talked about a recession resilient company. And now I think regardless of your definition of recession, we're in a troubled time a challenging economy, and we're holding up well. We have about 80%, 85% of our business is recurring revenue. We're a subscription business. That's high-margin, resilient, sticky business. Our customer retention has never been higher than it is today. And so we're weathering this economy pretty well. There's, at a very high level, relocations when customers move, that's the biggest cause for attrition for us. Sometimes they're moving into retirement homes, sometimes out of the country. But whenever a customer moves, that's a chance to lose that customer. And when relocation is down, that provides a terrific tailwind for our company to retain customers. It's a headwind when it comes to adding customers because you have fewer bites at the apple, fewer people are moving. But net-net in an economy where there's less relocation, that's a good guy for ADT.

And you talked about the technology changes here from -- there have been alarms around since, basically the beginning of time. But if you look at the last 10 years, the amount of technology change in this segment has just erupted. How are you impacting by that? How are you offering your own proprietary systems competing against some of these other players here?

Yes. We, so no doubt, Eric. The changes from a technology perspective are most significant in video analytics. That is using the camera as a virtual assistant of sorts in your home. And we partner very closely with Google. Google, by the way, owns 6% of our company. They're an equity holder. I should mention State Farm owns about 15% of our company, and we're still 54% owned by Apollo, and the rest is public float. But the partnership with Google is a key aspect of how we're delivering contemporary, modern technology to make the experience better for our customers. I'll give you a couple of examples of how that's emerging. Cameras, the analytics behind the consumption of video are getting more and more sophisticated and the experiences that a customer can curate using that video, using that sensor data is getting more and more valuable. So for example, you can be notified when your child comes home from school. That's been -- we've been able to do that for a long time. But now through facial recognition, we can notify you if your child is home with somebody who perhaps has never been in the house before. So they are home at 3:00 when they should be, but they're not necessarily there with their best friend because the video analytics picks up that this is somebody who has not been here before. I can get notified if my child is playing by the pool. I can get notified if my child is in the pool. I can build all of these, sort of curate these notifications to pay more to be able to observe what's occurring in-house ways that I never could before. And in a more sophisticated sort of alert event-based way. I can set up experiences where if I leave the house, forget to close the garage door, I know via precision GPS that I'm a mile away or 2 miles away, I can set up my system to close the garage door automatically for me because clearly, I didn't intend to do that. So the experiences are getting more and more integrated into the life of the customer and making the home more convenient, what Google calls a more helpful home.

You talk -- let's talk about State Farm. You mentioned that this is a little bit different. Most people get -- many people go do it yourself or they buy these systems to lower their insurance rates because they'll get a discount here. State Farm is a little bit of a twist on that is that State Farm wants you to do this for them so they can get a better piece, talk a little bit about how that's going? And kind of where it is in terms of rollout?

Yes, you bet. So I've mentioned State Farm as a key partner for us, a 15% equity holder in our company. And the reason for the partnership, there's a couple of central reasons for the partnership. The first is, State Farm, the thesis in the partnership is that State Farm will be able to use our devices to mitigate large claims. State Farm loses billions of dollars in fire claims a year. They lose billions of dollars a year in water damages. And give or take, call it, $1 billion from Intrusion and Burglary. And so if we install systems in their customers' homes, we can be proactive -- that insurance becomes proactive in avoiding the loss and reactive if a loss does occur, you'll be reimbursed your insurance proceeds. But the systems that we're installing in the homes of State Farm customers are systems that are not necessarily the smart home that I've been talking about that are cameras and video doorbells, et cetera. Instead, it's water detection, smoke detection, intrusion, all with an eye towards mitigating claims loss. And then the next generation of opportunity for State Farm is to use our devices to provide insights into what's occurring in the home. Some of you very likely have a device in your car that gives insight to your insurer on driving behavior. You get it -- if you drive well, you get a discount. I'm judging Eric, you might have a little higher insurance bill from -- on that reaction.

Devices even.

But there's -- in the home, there's not a great deal of data that the any insurer can use to build into their pricing algorithm to better price risk. And there is an opportunity in the future with customer opt-in, explicit customer opt-in, to potentially use data that sensors gather in the home to better price risk. So it's an exciting opportunity for us working with State Farm. They're an amazing partner, largest P&C company in the country. Incredibly customer-centric, and we're off to a pretty exciting start with this.

So actually, just give us some statistics here. When did that start? How many states can you go in right now? And I mean, I'm going to ask some of the obvious question. Is this an opportunity to upsell this? Because to your point, you mentioned these are not things that normally, if I'm sitting there buying -- putting wiring my home, I would want these things or even pay for these things?

Yes. We're in the deal for a little over a year. We're in 10 states, in earnest in 5. We'll double that or so over the course of the next year. The number of states that we'll be in by the end of '24 represents 65% of the 14 million homes that State Farm insures. And to your question on upselling, that's the intent. So, part of the package, if you will, is that mitigate that claims mitigation package, I talked about water detection, smoke detection, intrusion. When our technician goes to the home to install those devices, they're engaged with the customer, talking about what the customer might be interested in. Video doorbells, we have a take rate on video doorbells of about 50%. On average, we're selling a little over 2 cameras, indoor and outdoor cameras per home. So when the purchase is made, it's about avoiding losses, avoiding claims in my house when the technician leaves about 2/3 of the time they've upsold cameras, thermostats, et cetera.

It's an interesting point. You guys have a very personal relationship with your customers. How -- can you talk about the stickiness of that? How long does a customer actually in general, if they don't move, keep the product? And what's the ability during their life to expand them? You talked about Google with the cameras. There are probably a lot of customers that 4 or 5 years ago before that had your system and those things did not even exist. How do you get them to move forward with this?

Yes. significant opportunity for us to upgrade customers and it's an active part of our playbook, Eric. The average customer is a little over 8 years with ADT.