ADT Inc.

of our higher editions. We're also benefiting from the execution of two of our early 2020 strategic initiatives. Our consumer financing program, launched during the first quarter, continues to deliver great results. And the integration of our Defenders acquisition, which will be completed in a few months, is driving more efficient customer acquisition. Both initiatives are helping to create sustainable improvements to our efficiencies and costs. Now I'll turn to customer retention, which we continue to improve in the third quarter. As of September 30th, our trailing 12-month attrition is at a record-best 12.9%. The improvement of 60 basis points versus the prior year was widespread across our residential business. I'm proud of our care centers and our work-from-home performance, which actually started strong earlier this year and has steadily improved over time. During the pandemic, ADT monitoring maintained healthy customer satisfaction and net promoter scores. We're obviously very pleased with our improvements in customer retention. The magnitude of the change underscores our performance, as well as the ADP value proposition to our customers. I would note, though, as we've shared in the past, we don't look at attrition in isolation. We weigh it with other metrics, such as revenue payback and growth. We're focused on optimizing the entire economic equation for capital-efficient growth. Although we're beginning to see early signs of an uptick, our sales to commercial customers have clearly been impacted by the pandemic. On a sequential basis, total commercial revenue improved modestly in the third quarter. Monitoring and service revenue has been stable, and we've grown our RMR from commercial customers on a year-to-date basis. New installation volume is improving, and we're encouraged that our third quarter sales increased from second quarter levels, and our backlog for both installation and recurring monthly revenue ended the quarter at their best position of the year. Dollar Tree Family Dollar is off to an excellent start, and Operation Warp Speed, the federal program associated with the distribution of potential COVID-19 vaccination, was a recent win for ADT Commercial. We've been entrusted to secure distribution centers on behalf of one of the government-authorized distributors for a vaccine, and this is yet another clear validation of our business. Looking ahead, while there are still a number of economic and political uncertainties, we're optimistic about our ability to compete in the commercial space and returning to growth in 2021. High-quality commercial tuck-in acquisitions will continue to be a part of our playbook, and as the economy recovers, we remain optimistic about this part of our business. Turning to our Google partnership. We're off to an excellent start and have two important updates to provide. First, through the coordinated efforts of a number of our existing partners, Google and ADT Associates, we will be accelerating the timing of when we roll out our first ADT plus Google professional Do It For Me offering. The second update is that we finalized our interactive platform strategy. ADT will develop and own our next-generation platform. I'll share a bit more on both updates. First, the accelerated offering. We now plan to go to market with a first-generation do-it-for-me or professionally installed offering in partnership with Google in the second half of 2021. The offering will feature co-branding with Google, integrate Google Nest products, and offer their extraordinary video analytics platform. This offering will leverage our recently introduced and very well received command and control platform to the end of 2022. With this first-generation offering, we'll pull many of what we described as Horizon 2 benefits expected to occur in 2022 into 2021, allowing us to go to market as ADP plus Google much sooner. This, combined with the momentum we are already seeing in our core business, will accelerate our ability to capitalize on the growth of the home automation market. Now more about our platform decision. When we first announced the Google investment in ADP and the long-term strategic partnership, we shared that one key outcome of the relationship would be a next-generation platform with new home security and automation, products and peripherals, deeper device integration, and enhanced alarm verification. Following a comprehensive review of our alternatives, we concluded that ADT should and will own our next-generation platform, which will be developed entirely within Google Cloud. Further, the platform will be developed in coordination with Google to leverage native integration and the multitude of works with Google integration already available. Our decision allows ADT to have full control of our future roadmap and will enable ADT plus Google to deliver operational and efficiency benefits better long-term economics, and ensure that we continue to be the leader in home automation and security into the future. Our development work is already well underway with teams from both ADT and Google engaged. As a reminder, our partnership includes a commitment for Google to contribute $150 million subject to certain milestones toward the development of new technology marketing investments, customer acquisition, and related employee training and other expenditures. In summary, we're very pleased with the partnership and early progress we've made with Google. And as I already described, we're also excited about the momentum of our current business, which we expect to continue into the fourth quarter and into 2021. With that, I will now turn the call over to Jeff to cover our financial results and improve 2020 financial outlook. Jeff?

Thank you, Jim, and thank you, everyone, for joining today's call. As Jim mentioned, we have performed very well during a challenging 2020 macroeconomic environment, and we are very pleased with our overall third quarter results and our improved outlook for the full year. We're even more excited about the actions we have taken and progress we have made during 2020 to position ADT for long-term growth and success. Our strong performance this year continues to demonstrate the resilience of our business and the fortitude of our team who have risen to the challenge and remain passionately focused on delivering for our customers in both the near and longer term. I will summarize some of our key financial and operational measures along with a brief update on our outlook and we'll then open the call for questions. Our total reported revenue in the quarter was essentially flat year over year, despite the 2019 disposition of our Canada operations, which previously represented approximately 4% of our revenue. Installation and other revenue increased by $46 million, driven mainly by higher reported residential outright sales revenue resulting from the defender's acquisitions. This increase was partially offset by lower installation revenue to commercial customers, resulting from the COVID-19 driven economic challenges we have encountered in that part of our business during 2020. Monitoring and services revenue declined by 4% on a total company basis and was up slightly year over year, excluding the effect of the Canada disposition. Our ending recurring monthly revenue, or RMR balance, a primary driver of monitoring and services revenue, grew by approximately 2% in the U.S. compared to the prior year, including an increase in commercial RMR. A highlight in the quarter, which Jim already mentioned, was improvement in our gross revenue attrition, which declined by approximately 60 basis points versus the prior year to a record low of 12.9%. Our improvement here was again driven by several factors, including continued focus on service, the effectiveness of our retention initiative, and some of the environmental tailwinds Jim described, including fuel relocations. Our adjusted EBITDA of $564 million was up slightly on a sequential basis compared to the second quarter. Our cash generation remained very strong, both in the third quarter and year to date, despite higher cash interest due to a shift in coupon timing, which will reverse in the fourth quarter. We generated $127 million of adjusted free cash flow during the third quarter. And through the first nine months of 2020, our adjusted free cash flow of $532 million is up more than 15% from the $459 million during the same period in 2019. Our strong year-to-date cash performance comes from a variety of factors, that more than offset the higher cash interest, including subscriber acquisition cost efficiency and the benefits from some favorable cost base trends in our current operating environment, along with some timing items. A highlight of our strong cash performance is that we have concurrently grown our subscriber and RMR base, which has been enabled by improved efficiency in Net Subscriber Acquisition Cost, or SAC. During the third quarter, we decreased our net stack by 1% while growing our additions to RMR by 7%. Excluding the effect of the Canada disk addition, our U.S. RMR additions grew by 10%. This substantial RMR growth on lower net stack led to our best-ever revenue payback at 2.2 years on a trading 12-month basis, down from 2.4 years a year ago. As Jim shared earlier, the benefits of our consumer financing program, better pricing, and other sales and marketing efficiencies, including benefits from the Defenders acquisition, contributed to this improvement. After two full quarters of our new pricing and financing model, we are very pleased with the progress we have seen in higher installation revenue per unit from our residential customers. Additionally, the mixed shift towards non-capitalized SAC, driven in the third quarter mainly by legacy Defenders outright sales, was less pronounced than during the first half due to our ongoing transition to our historical ADT ownership model, which will continue as we further integrate defenders. Overall, we delivered very solid operational and financial results during the quarter despite the COVID-19 challenges, and we did so while also improving our longer-term position due to progress on the Google partnership and several other initiatives. Turning now to the balance sheet, We also continue to improve our capital structure during the third quarter. A highlight is that we issued a billion dollars of new 2027 notes and used the proceeds to redeem our 2021 notes. We priced this issuance with a 3.38% coupon substantially lower than the 6.25% coupon on our 2021 notes, which will result in run rate interest savings of almost $30 million. Collectively, after a series of transactions during 2019 and 2020, we have decreased our average borrowing cost by approximately 100 basis points. Additionally, with the closing of the Google transaction, we received $450 million in cash for Google's investment in approximately 55 million shares of ADP Class B common stock. As we have described, we intend to use proceeds from the Google transaction for a combination of growth funding and debt repayment. And to that end, we are announcing today our intent to repay a minimum of $300 million of debt during the fourth quarter of this year. Before moving to Q&A, I want to share a brief update on our outlook for full year 2020. As Jim mentioned, our business continues to perform well and exceeded our expectations during the third quarter. We consequently are once again revising our full year outlook higher. Our new revenue range is $5.2 to $5.35 billion, up from $5.05 to $5.3 billion. Our revised adjusted EBITDA range is $2.15 to $2.225 billion, an improvement from $2.1 to $2.2 billion previously. And our refreshed adjusted free cash flow range is $650 to $725 million, compared to the prior range of $625 to $725 million. As always, we will continue to balance short and longer-term objectives with a focus on the pursuit of selected incremental growth investments to generate future period returns, some of which we are considering during the remainder of 2020. As we develop our 2021 plans, we are focused on investing in and positioning our company for long-term growth and building on our progress from the past few years. We look forward to sharing more on our next earnings call in early 2021. To conclude my comments today, I want to emphasize that we are very pleased with our strong results through the first nine months of 2020. We are thankful for our committed team of 20,000 employees and their perseverance and performance during a challenging year, and we are excited by the progress we have made positioning ADT for the longer term and by the resulting opportunities in front of us. Thank you again, everyone, for being on today's call. Operator, we will now open the line for questions.

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