ADT Inc. (ADT) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us, and welcome to the ADT Second Quarter 2026 Earnings Conference Call. After today's prepared remarks, we will host a question-and-answer session. [Operator Instructions] I will now hand the conference over to Elizabeth Landers, Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining us today to discuss ADT's Second Quarter 2026 results. Speaking on today's call are Jim DeVries, our Chairman, President and Chief Executive Officer; and Jeff Likosar, our Chief Financial Officer. Following their prepared remarks, we'll be joined by Omar Khan, our Chief Business Officer, and will open the call for analyst questions. Earlier today, we issued a press release and an earnings presentation summarizing our results. Both are available on the Investor Relations section of our website. During today's call, we'll reference certain non-GAAP financial measures. Reconciliation to the most comparable GAAP measures are included in the earnings presentation on our website. Unless otherwise noted, all financials and metrics discussed reflect continuing operations. Our remarks today also include forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act. These statements are subject to risks and uncertainties that are described in the earnings presentation and in our SEC filings. Actual results may differ materially. Please refer to our SEC filings for more details. And with that, I'm happy to turn the call over to Jim.

Thanks, Elizabeth. Good morning, everyone, and thank you for joining us today. I'll focus my remarks this morning, mainly on the key highlights in the second quarter and our continued progress on the strategic priorities we shared earlier this year. Then I'll turn the call over to Jeff to walk through our financial results and outlook in more detail. Let me start with a few key takeaways from the quarter. We delivered a solid second quarter with continued strength in cash flow and disciplined execution across the business. Cash generation was again a highlight with adjusted free cash flow, including interest rate swaps, up nearly 50% versus last year. Through the first half of the year, our strong cash generation has supported significant returns to shareholders totaling $684 million. During the second quarter, Apollo sold its remaining holdings in a secondary offering and following the closing of that offering is now no longer an ADT shareholder. ADT repurchased 29 million shares in connection with that secondary offering, reflecting our conviction in the value of our business and our disciplined approach to capital allocation. Total second quarter revenue grew 2% to $1.3 billion, and our end-of-period recurring monthly revenue was $360 million. Adjusted earnings per diluted share was $0.23, flat to last year. Based on our first half financial performance, we are modestly raising our full year outlook which Jeff will describe in more detail later on our call. Turning to our operational metrics. Trailing 12-month attrition remains at approximately 13%. Subscriber and recurring revenue trends remain consistent with the first quarter with softness in our dealer channel and relatively stronger performance in direct. Also during the quarter, we completed a bulk purchase of approximately 10,000 accounts. By comparison, last year's second quarter included a bulk purchase of approximately 50,000 accounts. As we've shared previously, the pipeline for quality bulks can be episodic and will continue to evaluate bulk and other acquisition opportunities with a focus on attractive economics. We're operating well in a dynamic and competitive environment, and our priority remains on generating strong economic returns while improving core metrics. This includes balancing growth, retention and cash generation in a way that drives long-term value creation. We remain focused on the strategy we laid out earlier this year. we believe ADT is well positioned as the leader in smart home security with a differentiated model built on our trusted brand, professional monitoring and integrated technology platform. We continue to invest in 3 priority areas during 2026: Product technology, service excellence and customer acquisition efficiency improvement. Let me briefly walk through how we're executing against our key initiatives. First, on product technology. We continue to expand the capabilities of our ADT+ ecosystem and advance our road map to include more intelligent connected solutions. As part of that evolution, we broadened our reach this quarter with the launch of ADT Blue, a lower-cost self-installed security solution that pairs the convenience of do-it-yourself set up with the flexibility of the ADT's platform and professional monitoring. While it is very early, we are pleased with the customer receptiveness and reviews. Separately, our third-party dealer network which has historically represented more than 1/3 of our gross additions is beginning to transition to the ADT+ platform. We expect to migrate dealers onto our proprietary ecosystem in phases over the next year. Through the first half of this year, approximately 30% of our new customer additions were on ADT+. We are also making progress on our path to commercialization of a new present sensing offering based on the technology we acquired earlier this year. We advanced manufacturing and integration of a WiFi-based smart plug that will bring privacy-preserving presence sensing into the ADT+ platform for security and aging in-place use cases. We expect customer pilots to begin this fall ahead of a planned launch in early 2027. Next on our initiatives is service excellence, where we remain focused on improving both customer experience and operating efficiency. We are seeing good momentum from our AI initiatives. During the quarter, we combined AI-driven call routing with our virtual AI agents to improve first call resolution and reduce transfers. As a result, we handle nearly 20% fewer customer contacts through human agents and reduce service tickets by a similar amount, all while achieving improved customer satisfaction. Our deployment of these technologies is generating both a better customer experience and more efficient service model, including cost savings. Looking ahead, we will be expanding AI across the enterprise. In the third quarter, we will begin transcribing and analyzing our sales and service calls, enabling customers to engage with our virtual agents through SMS and rolling out AI-enabled fleet safety technology across our technician fleet. These efforts are designed to improve responsiveness, increase containment and ultimately drive better outcomes for both our customers and our business, including customer retention and sales conversion. We believe we're still in the early stages of this opportunity and that these initiatives will be a meaningful contributor to both growth and margin expansion. Importantly, ADT employees continue to handle situations where human expertise matters most, such as during emergencies or when an on-site, highly trained service technician is the best way to resolve a customer issue. In the third area, customer acquisition efficiency, a key objective this year is migration to lower cost sales tactics and channels. A highlight in our quarter that I already mentioned was our ADT Blue launch, which is now available through phone and online channels, including Amazon. This offering broadens ADT's reach to more value-conscious and DIY-oriented customers, a market segment we have not historically targeted. Over time. It also gives us a path to convert a subset of these customers to our professionally monitored solutions. During the second half of the year, we will scale our presence on Amazon and build ADT Blue momentum through additional advertising. We expect volumes to begin to grow in the third and fourth quarters. Beyond ADT Blue, we're continuing to drive efficiency across our go-to-market activities, including rationalizing spend at highest cost channels. As we've said, some of these changes may temporarily affect subscriber additions but are designed to improve our long-term returns. We're working to improve the economics in our most costly channels as we optimize long-term economics. Through these changes, our direct DIFM sales engine continues to perform well with residential adds up in the high single digits and SMB up mid-single digits for the quarter. Across all of these key initiatives, our focus is consistent: driving better customer engagement, improving efficiency and ultimately supporting more sustainable growth. In closing, our financial performance demonstrates the resilience of our model with strong cash generation, disciplined cost management and consistent capital allocation. I want to thank our employees, partners and customers for their dedication and their contributions through the first half of the year. I'm excited about the opportunities ahead. With that, I'll turn the call over to Jeff.

Thanks, Jim, and good morning, everyone. I'll start by adding some detail on our second quarter results and then share an update on our outlook for the remainder of the year. . As Jim noted, we again delivered solid financial performance with very strong cash generation as a continued highlight. Adjusted free cash flow, including interest rate swaps, was $406 million, up $133 million or 48% compared to last year. On a year-to-date basis, we have generated $820 million, up more than $300 million or 64% versus the prior year. This result was driven primarily by working capital timing, lower cash taxes and interest and lower subscriber acquisitions spending. Our cash flow was also stronger than we expected entering the quarter due to the benefits of tax planning progress and working capital management as we repurchased shares, including an Apollo secondary offering. On the top line, we delivered total revenue of $1.3 billion, up 2%. Monitoring and services revenue was down 1% with a in recurring monthly revenue balance of $360 million, reflecting the revenue loss from the multifamily business we divested last October. Installation revenue was $230 million, up 17% due to a high mix of outright equipment sales. Adjusted EBITDA for the quarter was $671 million, and adjusted income from continuing operations was $180 million or $0.23 per diluted share. On a year-to-date basis, our adjusted EPS is $0.47, up $0.03. Beyond the effect of revenue and gross margins, our earnings reflect ongoing efficiency actions and cost controls, some offsetting investment in growth initiatives and increased amortization, including from our Origin acquisition. On a per share basis, we also benefited from lower share count due to the repurchases enabled by our cash generation and efficient capital structure. We added 190,000 gross new subscribers in the quarter with $11.9 million of RMR. As Jim mentioned, we had fewer bulk account purchases than last year, along with softness in our dealer channel which we partially offset with growth in direct subscriber and RMR additions. Net cash SAC was $345 million, down 7%, driven primarily by fewer bulk purchases, partially offset by the timing of consumer financing flows. Attrition was 13.1%, flat to last quarter with revenue payback also holding at 2.3 years. Now turning to capital allocation. A core attribute of our business is consistently strong cash generation, and we continue to deploy that capital in a disciplined manner to drive returns. Through the first half, we directly returned $684 million to shareholders, including $594 million to repurchase and retire 86 million shares and $90 million of dividends. Through this week, we have repurchased approximately 89 million shares, and we have approximately $885 million remaining under our $1.5 billion 3-year repurchase authorization. Our overall capital structure and liquidity position remains strong with our $800 million revolving credit facility undrawn. In May, we secured an additional $100 million of borrowings under our 2030 Term Loan A. While we used these proceeds to fund repurchases, we expect this incremental debt to ultimately support our August 2027 notes refinancing. We ended the quarter with net debt of approximately $7.4 billion with leverage of 2.8x adjusted EBITDA at a weighted average cost of approximately 4.3%. We remain very comfortable with our capital structure and our overall capital allocation priorities are unchanged. We will invest in the business where returns are compelling, both organically and through periodic acquisitions. We will return capital directly to shareholders. And we will maintain healthy balance sheet with an objective of further reducing leverage, targeting 2.5x. Turning to our expectations for the rest of the year. We are modestly raising our full year 2026 outlook based on our year-to-date performance and share repurchases and expected progress in the second half. We now expect total revenue to grow approximately 2%, mainly reflecting installation revenue trends. We expect adjusted EPS to also grow 2% with the improvement a result of the timing of share repurchases. And we expect adjusted cash flow to grow approximately 30% with the improvement driven primarily by tax planning and working capital management. While we are very pleased with our full year 2026 cash generation, we do expect higher cash taxes and cash interest in 2027. As Jim outlined, our primary focus during the second half is execution of our investments and growth initiatives and improvement in our new subscriber additions and retention. Within the second half, we expect fourth quarter income to be somewhat higher than the third quarter due to the timing of some of these investments, seasonal dynamics and other items. We expect revenue and cash to be similar in the third and fourth quarter. Our full year outlook and our performance through the first half reflect the resilience of our model and our disciplined execution, while we also continue to invest in our business for the long term. I'm very excited by the advancement in our technologies and capabilities and the new ways we will be able to serve our customers to deliver peace of mind with innovative offerings, unrivaled safety and the premium experience. Thank you again for joining us and for your continued support. Operator, please open the call for questions.

[Operator Instructions] Your first question is from the line George Tong with Goldman Sachs.

Gross RMR additions fell 17% year-over-year in gross unit additions declined 22%, which you attributed largely to fewer dealer and bulk account purchases. How much of the current pressure reflects intentional changes to your acquisition strategy versus underlying end market demand? And what does the path back to gross additions growth look like?

George, it's Jim. I'll share a little bit of overall context on gross adds and ask Jeff if he has anything to contribute on this question as well. You're correct on the biggest difference between this quarter and Q2 of last year being related to unit bulks. We completed a 10,000 unit bulk this quarter, 50,000 bulk in Q2 of last year. And when comparing quarter to last year, absent the difference in bulk, we had about 10,000 fewer adds this quarter. that was attributable really to 2 things. The first is we talked about in earlier quarters, dialing back our reliance on expensive channels like affiliate channels. And so we've seen some decline in affiliate. And then we've had some softness in our dealer channel as well. One dealer actually in particular. But between affiliates and dealer and the bulk, that makes up more than the gross add shortfall versus Q2 of last year. worth mentioning our core DIFM business, our direct organic business is up high single digits year-to-date. SMB is up organically about 4% over last year. And so we feel good about the organic muscle. It's going to take a little bit of time to replace the volume from affiliate and some of the softness in dealer, but the underlying engine we feel excellent about. One last thing, and I'll give it to Jeff, also worth mentioning the per unit economics remain really strong for us. Installation revenue per unit net SAC is really solid.

Yes. So I'd add just a couple of comments. So we always want more adds, but focused on the strong economics, as Jim described, we feel really good about our overall quarter. And even the adds was generally consistent with our expectations and very excited about the growth initiatives that start to contribute later this year and into next year and even more pleased that we were able to raise our guidance across each of the 3 measurements, revenue and earnings per share and especially a really strong cash and our cash outlook for the rest of the year.

And then as a follow-up, as you think about improving retention rates and serve costs and customer economics, those attributes are basically central elements of the ADT+ thesis should help with all those things. And with the dealer rollout beginning in the second half of this year, when would you expect ADT+ platform adoption to become large enough to produce measurable improvement in attrition, service costs and customer lifetime value?

Omar, you want to take that one?

George, so we began at the beginning of this month rolling out ADT+ to dealers. We've launched our West region. We're in the process of actually launching our Eastern region. The initial feedback, George, from the dealer community has been very positive, both from the training and uptake as well as the installation progress on ADT+. It's going to be about a 3 to 4 quarter migration of the dealer community across the board. We're being very thoughtful and very intentional about that rollout. So -- and as you know, about 1/3 of our adds come from the dealer community, so it's going to be, like I said, about a 3 quarter to 4 quarter transition for the dealer community to ADT+. So you'll see that benefit phasing in over time, over the next, call it, 9 to 12 months.

George, I'm going to add to that, not directly related to ADT+ but a couple of items we're sharing with you. Short term, I'd say, proof points for us. NPS Is modestly up over Q2 of last year. All of our operating metrics and customer service, first call resolution, digital self-service, are tracking nicely. Relatively speaking, retention team, we have lower employee turnover in the retention team than we've ever had before. And then a little bit longer-term influence here is we've tightened up our credit standards a bit. There's been some changes around how we do proactive save offers, some of the process changes that we made, I think, will start to layer in to help us move the needle on attrition and then to Omar's point in your question, I think, product experience essentially deeper, more frequent customer engagement bodes well for us longer term. .

Next question is from the line of Ashish Sabadra with RBC Capital Markets. Please go ahead.

Really strong momentum in free cash flow. I was just wondering if you could help parse out some of the tailwinds that we are seeing from some of the working capital, tax planning but also lower SAC. So if you could quantify that. But also if you could just provide some preliminary color on how should we think about some of the increased -- sorry, interest expense and cash taxes in '27. And just maybe a follow-up on this would be just how should we think about the free cash flow trajectory now over the midterm the free flow obviously has significantly exceeded our expectation and your original guidance as well. So how should we think about over the midterm?

Okay. I'll take that. It's Jeff. We feel, as already mentioned, really good about our cash performance. So far in the year, the most significant reason that we were able to increase our outlook is progress on some tax planning initiatives that we've undertaken. But setting that aside and just looking at the results we're up on a year-to-date basis, a little bit more than $300 million. About half of that is working capital management. There's a discrete item or 2 associated with timing of some payroll outflows. And aside from that, it's inventory and payables. We also benefit, as you'll see in our results meaningfully from not having made a material cash tax payment this year related to the point I earlier made. And then our interest is also lower year-over-year. driven by mainly coupon timing, along with the benefits of all of our recent refinancing activities. And then SACs is a little bit lower. There's always a lot of puts in cash flow and working capital timing specifically. And I'll also note that we -- while we always manage working capital tightly, we did so especially this quarter due to the attractiveness of our stock price support of Apollo secondary to be able to repurchase shares. Then your question about longer range outlook, we, of course, haven't given any particular guidance or specific guidance beyond the current year. But taxes we would expect to become a pure cash taxpayer next year. We exhausted our NOLs a couple of years ago, last year -- last year, our cash taxes were $142 million. We expect less this year, but probably more next year. We're always working to optimize and minimize but likely headwind there. And then likewise, on interest expense, this year, I mentioned lower than last year, but we do still have some attractive interest rate swaps that expire at the end of this year. And our upcoming refinancing next year is at 3 and 3/8% and unlikely in current market conditions, we won't be able to refinance at that rate. So both of those items are probably $50 million to $100 million each of headwind next year, but of course we will continue to work to optimize that and find other ways to continue to generate strong cash.

That's very, very helpful color. And maybe if I can just ask a quick question on ADT Blue. I was just wondering if you could share any initial feedback from the launch? And then as this scales, how do you think about the ARPU and SAC for ADT Blue compared to your traditional customer acquisition channel? .

Yes. So for ADT Blue, it's still very early from a progress perspective. We just launched. The ARPU is obviously lower because we have plans starting at around $10 per month for video only, but we're encouraged with the initial results. And it's going to play out over time as we expand our channels, but the initial results show a majority of customers adopting and engaging with us in the fully monitored security package, which tends to obviously price higher at $34.99 and above, depending on the choices of accessories. So we're seeing very good progress from an ADT Blue perspective. And while the overall ARPU is lower, we're trending higher than general market in terms of adoption of full security packages as well as fully monitored security. But that's going to play out over time. The initial results are positive.

Yes. A little context, Ashish, the -- for DIY, for ADT Blue, our launch was almost exclusively on the Amazon platform in the second quarter. And so the customer response to Omar's point, has been really positive. We feel great about customer receptivity, but we're really early in the process and just -- really just now starting to put some advertising fuel behind ADT+ that we're optimistic will get us some incremental volume.

And maybe worth mentioning, too, that the economics that we seek on our self-install offerings are very similar with respect to the returns that we will generate on the SAC that we deploy. So even though the average pricing is lower and other characteristics are different, it's important that the subscriber acquisition cost to take on these customers is also much lower.

Your next question is from the line of Manav Patnaik with Barclays.