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spk05: Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the ADT fourth quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Should you require operator assistance during the conference, please press star zero to signal an operator. Please note this conference is being recorded. I will now turn the conference over to your host, Derek Fiebig, Vice President, Investor Relations for ADT. Thank you. You may begin. Thank you, operator, and thank you, everyone, for joining ADT's fourth quarter 2020 earnings conference call. This afternoon, we issued a press release and slide presentation of our financial results. These materials are available on our website at investor.adt.com. Our remarks today will include forward-looking statements within the meaning of the Private Security Litigation Reform Act of 1995.
spk04: These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such forward-looking statements.
spk05: These risks include, among others, matters that we've described in our press release issued this afternoon and in our filings with SEC.
spk04: Please note that all forward-looking statements speak only as of the time they are made, and we disclaim any obligation to update these forward-looking statements.
spk06: During today's call, we'll make reference to non-GAAP financial measures. Our historical and forward-looking non-GAAP financial measures include special items which are difficult to predict and or may be mainly dependent upon future uncertainties. For complete reconciliation of historical non-GAAP to the most comparable GAAP financial measures, please refer to our press release issued this afternoon and our slide presentation, both of which are available on our website.
spk05: With me on today's call are ADP's President and CEO, Jim DeVries, and our CFO, Jeff Likasar.
spk06: Also joining us in the room and available for Q&A is Don Young, our CIO and EVP of field operations, and Jason Smith, Senior Vice President of Finance. With that, I'll turn the call over to Jim.
spk05: Thanks, Derek, and thank you to everyone for joining us today. I'd like to begin our first call of 2021 with some comments reflecting on our 2020 overall performance and then share some thoughts regarding our new partnerships and current growth momentum. Finally, I'll offer some perspective on ADT's priorities as we advance into 2021. I'll then ask Jeff to cover our financial results as well as our 2021 outlook. With the world blocked into an unexpected pandemic, 2020 was an extraordinarily challenging year for so many and impacted everyone's lives in different ways. It was also a year which brought us, at ADT, the gift of perspective. We were reminded more than ever of the importance of protecting one's home and family. For all of us at ADT, 2020 brought a newfound appreciation for the essential role we play partnering with first responders and serving our customers and communities continuously and reliably. After witnessing the tremendous collaborative efforts of our team during the past year, I'm humbled to be able to lead such a great organization and couldn't possibly be more proud of the collective performance of our more than 20,000 ADT associates and our dealer partners. During our first call last year on March 5th, prior to the impact of the pandemic even being understood, ADT provided our full year 2020 financial outlook. Our guide was $5 to $5.3 billion for revenue, $2.175 to $2.25 billion for adjusted EBITDA, and $630 to $670 million for adjusted free cash flows. Because of the resiliency of ADT's business model and the outstanding performance of our team, and despite the challenges and volatility of the economy, we exceeded the upper range of our revenue, delivered in range on adjusted EBITDA, and perform just above range on adjusted free cash flow. As I will explain, we also set the table for accelerating our growth and continuing momentum going into 2021. Further, in 2020, we grew our net subscribers for the full year. Our new U.S. RMR additions started off solid in Q1 at plus 7%, but then in Q2 were down 11% as most of the country began shutting down. However, we continue to drive sustainable internal improvements to our subscriber acquisition engines. This efficiency contributed to not only favorable results, but the positive momentum for our business, especially when combined with secular trends and external demand catalysts, such as new household formation, de-urbanization, the desire for increased home security, the acceleration of smart home adoption, and growing consumer spending on home improvement more generally. U.S. RMR additions increased year-over-year 10% in the third quarter and 15% in the fourth quarter. Further, our interactive tape rate increased to 86%, and we reached the milestone of 3 million residential interactive customers. And just this month, ADT added our one millionth customer on the command platform. As we've mentioned in the past, our DIY business continues to grow nicely as well, and we're excited about this complementary part of our business. We remain anchored to capital efficient growth, and the cost of acquiring subscribers also improved with a record-best revenue payback of 2.2 years. This efficiency was driven by our successful consumer pricing and financing initiative, as well as benefits from the defender's acquisition. Exceeding our expectations, our gross attrition metric improved by 30 basis points to 13.1% as relocations across the country were less common than normal in the second and third quarters, and importantly, our customer satisfaction was strong. We also delivered on our commitment to drive strategic partnerships and alliances to expand our reach and offerings, and ultimately to better serve our customers. On the residential front, we entered into a long-term relationship with DR Horton, the nation's largest home builder. And in mobile, we introduced ADT to a broader set of potential customers through the national rollout of our partnerships with Lyft and Instacart. Certainly, our most transformative partnership of 2020 was with Google. ADT's long-term strategic relationship with Google significantly enhances our growth opportunities. The foundation for our partnership is a shared vision for the future of the smart and helpful home and a steadfast commitment to our customers. As a reminder, Google invested $450 million of equity in ADT, and it's committed $150 million in matching dollars to fund marketing, product development, and employee training. Our partnership facilitates the development of new offerings, both services and products, as well as new technologies, which will power ADT's leadership in the rapidly growing smart home market. I'm pleased to share that our partnership with Google is off to a tremendous start. We'll be rolling out product integration beginning in the second quarter, and we're on track to introduce a first-generation ADT plus Google solution in the second half of this year. Finally, ADT and Google have agreed on an exciting new joint go-to-market branding strategy, which we'll share later in the year. Summarizing a unique and unexpected 2020, we purposely and strategically played the long game and will continue to do so. ADT navigated amid the pandemic with resilience and as a whole avoided any material adverse business impacts while building a strong foundation for growth in the years ahead. We committed to persevere through the COVID-19 crisis with a goal to ultimately become a stronger company, and we've done so. Our momentum going into 2021 is real, and I'm excited to share a few comments about the year to come. We've invested a significant amount of time over the last few years improving our operating KPIs, driving improvements in customer service, better operating metrics, improved efficiencies, and field performance. Having made substantial progress in many areas, we begin to focus our improved internal growth capabilities and the pursuit of strategic alliances and partnerships. As mentioned, we developed a relationship with D.R. Horton, and more recently, with Google as a catalyst, we've added new partners such as Ackerman Security and DISH. Ackerman, a successful company over many years with customers in the southeast part of the country, Atlanta in particular, will join forces with ADT as a new residential dealer. Ackerman also provides ADT with some commercial assets. The strategic partnership with DISH expands our total addressable market to additional ex-urban and more rural geographies of the country. Many of the DISH technicians have experience with the installation of Google products and will be a great asset for ADT as we grow. Our operating improvements, the partnerships we've developed and will continue to pursue, the many macro tailwinds and demand catalysts are all converging as we focus more intently on allocating capital to the vast array of growth opportunities we're now presented with. 2021 represents an exciting pivot point for ADT. We'll leverage our strengths. our trusted brand, our operating excellence, our outstanding customer service, our talented field force, our national scale, and our capital efficiency to lean further into high return growth opportunities before us. With these in mind, I'd like to provide three markers to evaluate our progress in 2021. First will be the continued growth in RMR additions, After a strong 2020, we're targeting 2021 growth rates in RMR additions in the mid-teens. As such, you will see a higher aggregate dollar level of SAC investment, which we're allocating toward this high return growth. We'll continue to be disciplined in our approach with high credit standards, and we'll remain focused on efficient SAC investments with high IRRs in the high teens and above keeping these high roi standards we plan to deploy between 150 and 250 million dollars of incremental residential sac in 2021 versus 2020. second we will drive innovation highlighted with the launch of the first generation adt plus google smart home solution during the second half of the year We will also invest significantly in our next generation end-to-end ADT-owned technology platform and continue to pursue meaningful partnerships in mobile safety. Third, while COVID-19 and its continuing impact provide some uncertainty, We expect to return to low double-digit revenue growth and substantial year-over-year improvement in profitability levels for commercial customers during the course of the year. Our early optimism is heightened because the backlog of commercial customers was actually higher at the end of 2020 than the prior year, and the pipeline for new business is healthy. We have an outstanding leadership team in commercial, and we're very excited about this part of our business. In summary, our current momentum is strong, and we're encouraged about our future. 2021 is positioned to be an exciting year for ADT, one where our growth is more significant than in the past and where investments executed well will result in attractive, sustainable growth for years to come. I'll now hand the call over to Jeff. Jeff? Thanks, Jim, and thank you, everyone, for joining our call this evening. As Jim described, we performed very well in a highly unusual 2020 environment. Like most companies, we encountered many unexpected dynamics, and we are very pleased that we were able to execute on opportunities to offset several of the unplanned challenges we faced. More importantly, we maintained our long-term focus and continued our strategic progress and are especially encouraged by the trends we saw in the second half of the year into 2021. As a reminder, during 2018 and 2019, our priority centered on enhancing our service culture, improving our operations, and expanding our cash generation capabilities. More recently, we have focused on strengthening our foundation and executing initiatives to drive efficient, sustainable growth in addition to recurring monthly revenue, or RMR. We are pleased with the progress we saw during the second half of 2020, with U.S. RMR additions up 12% following a 3% first half decline driven by challenges arising from the COVID-19 pandemic. On a full-year basis, U.S. RMR ads grew by 5%. We concurrently grew our full-year adjusted free cash flow by 14% to $675 million. By comparison, and as evidence of our cumulative progress in recent years, adjusted free cash flow in 2017, the year prior to our IPO, with just over $400 million. As Jim mentioned, other full-year 2020 highlights include gross revenue attrition at 13.1%, down from 13.4% in 2019, and significantly below the 16-plus percent attrition for legacy ADT prior to the Apollo acquisition. And revenue payback at a record 2.2 times in 2020, compares to 2.3 times in 2019 and 2.7 times on a pro forma basis in 2015. As a reminder, some of our core financial measures were affected by the disposition of our Canadian operations in 2019 and the acquisition of Defenders in early 2020. Despite their favorable economics, these transactions reduced our adjusted EBITDA, which was $533 million in the fourth quarter of 2020 and just under $2.2 billion for the full year. Our total year 2020 revenue was $5.315 billion, up 4%, driven by growth in installation revenue, primarily due to a higher volume of outright sales transactions to residential customers, which includes volume from the defender's acquisition. This increase was partially offset by lower sales to commercial customers, which, while down for the year due to COVID-19, improved sequentially in the third and fourth quarters. For the fourth quarter, total revenue was $1.315 billion, up 1% versus 2019, despite the effects of the Canadian disposition and lower sales to commercial customers. The strong 2020 adjusted free cash flow I already mentioned, up 14%, was the result of several factors, including some offsetting dynamics related to COVID-19. A key contributor was efficiency in net subscriber acquisition costs, or SAC, which was down year over year despite our growth in our MRX. Other noteworthy items affecting cash flow included our participation in the CARES Act, payroll tax deferral program, and the offsetting acceleration of a portion of 2020 annual incentive plan payments. In addition to strong cash generation, we built on our 2019 refinancing transactions to further improve our capital structure during 2020. In January of 2020, we refinanced our second lien notes. In August, we replaced our 2021 first lien notes with new 2027 notes. In December, we repaid $300 million of our term loan, which we then repriced in January of 2021. Our resulting lower borrowing costs and extended maturities provide us with greater flexibility to deploy capital to high return growth opportunities. In 2021, we are eager to build on our substantial progress from the past several years. We have strengthened our business fundamentals, enhanced our service culture, grown our cash generation capability, improved our capital structure, and developed new and more efficient routes to market. We are enthusiastic and optimistic about our future, and you can see on page 8 in our deck a summarized framework of our strategic priorities. The next chapter for our company is focused on driving more RMR growth, creating new innovative offerings, further enhancing our overall customer experience, and continuing our commitment to generating shareholder returns. We plan to share more detail on our long-term strategic plans and objectives, including our ADP Google branding and products during investor day later in the year. Our teams across the business are energized by our strategy and our growth prospects for 2021 and into the future. As Jim mentioned, we anticipate 2021 RMR additions in the mid-teens, which reflects a significant increase from our growth rates during the past few years. We are also investing to support our strategy with our new interactive platform. The development of new offerings in collaboration with Google upgrades to our infrastructure and the launch of the ADT Google Marketing Program. You can see our resulting 2021 financial outlook in our investor deck. It includes total revenue in the range of $5.05 to $5.25 billion, adjusted EBITDA in the range of $2.1 to $2.2 billion, and adjusted free cash flow in the range of $450 to $550 million. While many factors affect our cash flow, implicit in our guidance is $150 million to $250 million higher cash set spending in support of the strong RMR growth I just mentioned. As a reminder, our reported revenue and adjusted EBITDA are affected by the defender's acquisition and the different accounting policies applicable to accounts generated via differing channels and under differing ownership models. These different accounting policies do not affect cash flows, and we describe more detail in our investor deck in 10-K. As you can tell from our 2020 progress and our 2021 outlook, we are well-positioned to capitalize on our improved capabilities and several favorable secular trends. Our focus is decidedly long-term, the long game Jim mentioned, and our teams have never been more excited by our future. Before concluding my comments, I want to express my appreciation for our more than 20,000 employees, our dealers and growing list of partners, and our investors for the continued support of our company. Thank you, everyone, for joining our call today. Operator, please now open the line for questions. Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. If at any time you wish to remove your question from the queue, please press star 2. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Peter Christensen with Citi.
spk04: Good evening, gentlemen. Thanks for the question. And nice execution in a tough year. Jim, it's really good to see you guys in a position to up the offense in 21. It makes a ton of sense. But I want to dig a little bit into the cadence on how you're thinking about the incremental sack throughout the year and introducing new products, particularly the next phase of Google and Is that something that you kind of save your powder for a little bit and then act a little bit more aggressively once that comes out? And as a quick follow-up, it sounds to me that this joint product could have a much higher value proposition for the customer. So is there any preliminary thoughts on pricing relative to the current interactive offering that you guys provide on the residential side? Thanks again.
spk05: yeah thanks pete um so i'll give a little bit of context to the pivot to growth and then ask jeff to address your question um in a little more detailed way uh much of the last several years we've been focused on operational excellence uh our retention improved uh 300 basis points customer satisfaction improvements As you're aware, better operating KPIs across the board, revenue paybacks come down 2.7 to 2.2 years. And at the same time as we're getting our operational house in order, We have macro trends and the demand catalyst that we've been talking about and discussing is tailwind. Essentially, our products, we see our products and services are in demand. And then in addition to getting our operational house in order, and the macro tailwinds, we have worked really hard on building strategic relationships. It's a long list. D.R. Horton, Bish, Ackerman, some relationships in the insurance space. And when you combine all those factors, operational excellence, macro trends, new partnerships, And now Google, we're able to allocate capital to high return growth and pivot more assertively to capital efficient growth. Jeff, do you want to add something? Yeah, I'd just add that it's energizing for the whole organization. to be in a growth mode. So there's a lot of enthusiasm across the company, a lot of fun. Your specific question about the cadence, the comparisons will be odd because last year was odd. So the second quarter, of course, was the most depressed quarter, so the compares are easy. The Ackerman alliance and initial account purchases from that agreement will be helpful in the first quarter. But a way I would think about it is our pace of ads or our pace of SAC spending. Setting aside the acronym purchase in the first quarter, we would expect to be relatively normal with historic patterns, excluding last year. So a bit higher in the summer season when there tends to be more activity. But aside from that, we're modeling as if it returns to a more normal cadence. Of course, the year-on-year will be affected by the abnormal cadence in 2021.
spk04: Great. So not really like a first half, second half story, pretty normal cadence throughout the year.
spk05: Yeah, we're expecting to layer things in as we go through the year, but we exit 2020 with really strong momentum, having grown the U.S. R&R ad by 15% in the second half of the year. So we're entering the year with momentum. We have a additional benefit coming from even the recent partnerships we've announced just over the past several days, you know, with the easiest comparables in the second quarter of 2021 because of the soft 2020, and then the tougher compares in the second half of the year.
spk04: That's great. Thanks, gentlemen. Very, very helpful.
spk05: Our next question is from George Tong with Goldman Sachs. Hi, thanks. Good afternoon. I wanted to dive deeper into your plans to deploy 150 to 250 million of residential SAC in 2021. Can you elaborate on which customer segments you plan to go after with this incremental spend and what returns we expect from the investment? Yeah, George, it's Jim. So there's a handful of different opportunities in front of us. Most of the incremental SAP will be spent in the residential business. We've got the demand catalyst that we've talked about since the third quarter bringing some pretty significant headwinds or tailwinds for us. and some unique opportunities to really allocate capital to that business and grow. The returns are high teens and above, and we'll also allocate some of that capital to opportunities in the commercial space. But most of the incremental capital will be in residential. Hey, George, one thing I would add is that if you look at our historical financials, and we included a slide in our deck that shows back 2017, the year prior to the IPO, we're planning to generate these RMR ads still with more free cash flow generation, adjusted free cash flow as compared to 2017, which is just a testament, kind of a quantitative testament to some of the points Jim made earlier about all the progress we've made in recent years, becoming more efficient, better attrition, better stock efficiency, improving our capital structure. So we're very excited to be in a position to have the capital structure and the cash generation capabilities to be able to grow at a higher rate. Got it. That's helpful. And just as a follow-up, do you view the increase in SAC as a permanent slash structural step-up, or do you expect it to reverse? And then perhaps related to that question, what kind of payback period do you expect? Is it a two-year payback? So in other words, you get back this 150 to 250 two years down the line. How are you thinking about that? I would think about it, and we plan to share more in an investor day in the second half of the year, but I would think of it as we are raising the water level with respect to the quantity of new subscribers and or new RMR that we add each year. So we would expect to continue to grow more. of course we will seek to become more SAC efficient and improve revenue payback over time. And then in terms of your question on payback, I would describe that in the context of IRRs, we target IRRs in the teens and higher. And as we've talked about many times in the past, the IRR is a combination of the upfront cost to acquire the customer, the profitability of the customer on an ongoing basis, and then how long the customer stayed with us. So we're always looking at each of those variables, among others, with an eye on optimizing the return on the capital that we deploy. Two quick points of elaboration, George. The first is that as a philosophy, we'll continue to pursue our growth in a very disciplined way. We won't retreat from our standards on credit. We'll continue to be disciplined and ensure that this growth is good growth. And then specifically on your question on payback, I think we'll continue to have a revenue payback that's in the zone of where we are now. It might move a bit up. It might move a bit down. But we'll be in a range that will facilitate the returns that Jeff just mentioned on IRRs and in a revenue payback range consistent with those higher IRRs. Got it. Thank you. Very helpful. Our next question is from Toni Kaplan with Morgan Stanley.
spk00: Thanks so much. Just wanted to understand the revenue impact versus the RMR growth. So I understand the equipment financing shift, but excluding that, I guess revenue would maybe be up about 4%. And your RMR estimate, looks like more of a high teens growth. So is that largely due to a decline in installation revenue? Just why doesn't the RMR addition flow more through to the top line?
spk05: Yeah, it's definitely that. It's a somewhat complex topic, but because We are in the process of converting legacy defenders to our historic AUT ownership model, and because last year we, for a portion of the year, had legacy AUT in an outright sales model, we had meaningfully more installation revenue last year. We included some description of this in our earnings materials. we estimate it's about $350 to $400 million of lower revenue. It will predominantly be lower install revenue, which is worth about seven points. So if not for that pressure, then we'd have additional... revenue, the drivers of that additional revenue is a recovery in the commercial part of our business, which we expect to get back to something that looks more like the trajectory pre-COVID-19, and then the flow through of our M&S revenue growth that comes from the RMR ads that we had last year and expect to continue into this year.
spk00: That makes sense. And I wanted to ask about attrition. So just given the fewer customer relocations during COVID, that was a real benefit to the attrition this year. And of course, it's a trailing 12-month metric. So just help us out with how you're expecting attrition to trend this year. I just want to make sure that we have a good sense as the year goes on, just expectations for what you're thinking there.
spk05: Sure, Tony. The retention for us in 2020 was a real strength. Ending the year at 13.3, down 30 basis points from last year. Some companies report net attrition. If we use that metric, we're actually closer to 10%. attrition level, and so we feel good about the progress that we've made. We saw improvement in most categories and had a record low in Q3. In the fourth quarter, we continued to improve in the categories of lost competition and non-pay, but real estate activity, as everybody knows, picked up late in the year and we saw pressure on relocations in particular. So we're long-term, we're optimistic about customer retention. especially as we enter the smart home space more aggressively. We know the more our customers use our systems, when devices are more plentiful, when the devices and the system is integrated in the daily activities of our customer, then we know that retention improves. So we think that we'll trade in – we think that we'll be in a range here for attrition with some relocation headwinds and some smart home and interactive rate trades. tailwind that will carry through 2021. One additional thing to mention to you, when we acquired Defenders, we continued to receive a chargeback benefit for accounts sold prior to the acquisition, and that benefit expired over 12 months. And with a slight metric headwind in 2020, the impact of the chargeback change in 2021 is about 40 basis points.
spk00: Very helpful. Thank you.
spk05: And, Tony, one other point that I don't believe I mentioned, when I talk about the change in revenue recognition because of the ownership model for residential customers, that is a non-cash change. So we're still collecting the same amount of revenue from customers. In fact, we're collecting even more revenue because of the success of our pricing and our financing initiative. But we capitalized that revenue netted against the equipment costs, and then we recognized that revenue over time. So this is a different accounting treatment because of a different ownership model. It had nothing to do with cash. And in fact, more install revenue is one of the contributors to the improved acquisition cost efficiency or revenue payback improvement efficiency.
spk06: And Tony, this is Derek. If If you look at page 25 in the deck, we provide some of the changes on it. It could be helpful to the community as well as the community model.
spk00: Great. Thank you.
spk05: Our next question is from Kevin McVey with Credit Suisse.
spk06: Could you just give us a little more context on what the $50 million investment is in next-gen technology platforms? How do you expect that to impact the business longer term?
spk05: So you were breaking up a little bit there, Kevin, but I think you were asking about the $50 million? About the platform in which we're investing. Yes, that's right. Give some insight on the platform. Yeah, just for context, and then I'll ask Don to describe a bit more. Right. The two areas of investment that we called out is the higher SAC spending that goes with the RMR adjunct teams. And then the second, we noted in our materials, is approximately $50 million associated with the development of our next generation platform, which we described on our last call. There's, of course, lots of other puts and takes that go into our cash flow guidance, but those are a couple that are noteworthy to describe a bit more about the platform itself. So, Kevin, we actually inherited some nice IT and product engineers from three acquisitions, RedHawk,
spk06: uh light shield and our defenders but in addition to that since the google announcement we've doubled the number of engineers that are specifically working on this platform and we're targeting another third on top of that and that's equal by the number of engineers by the way that we're working with google but it's meant to basically move us to a more advanced platform than we have right now with command and control and that platform is also meant to serve both dism and diy customers in the future
spk05: Thank you. Our next question is from Gary Bisbee with Bank of America.
spk03: Hey, guys. Good afternoon. Jeff, I wonder if you could just be real clear with us because it's been difficult to know. What was revenue growth X the accounting, you know, different accounting treatment for install revenue? If we pull that out of 2020, what was the revenue growth for the year and what does 2021 guidance say? for revenue growth if that normalizing and that revenue, you know, not recurring? What's the clean number, both backwards and forwards?
spk05: So, forward, there's about seven points of revenue pressure that comes from the change associated with the ownership model. Backwards, a bit more complex because of the interplay with defenders, with the candidate disposition, and with the ownership model change. But I would point you to our install revenue and the predominant driver of our install revenue growth was more install revenue associated with the ownership model change.
spk03: So if we just take the actual revenue, the midpoint of the guidance range, you know, calculate the growth rate, that implies add seven points, and that's what the growth rate would imply, or is that not? Yes. I'm just trying to think if that's the clean. Okay. All right. Fair enough. And then... On the two small ones, on the Google investment, $150 million, do you have any more insight on timing of when you'd spend it and what's CapEx versus OpEx? And the other small one, you have had a couple press releases out about this technology that could eliminate or reduce the impact of the 3G conversion because people could just plug and play. What's the update on that and what's implied in that? your guidance in cash flow for spending related to the conversion. Thank you.
spk05: I'll take both of those, Gary, and then ask for Don to elaborate on the technology associated with the radio conversion. On Google, as a reminder, both parties agreed to invest an incremental $150 million in the partnership, so there's a total of $300 million. The Google funds can be used for marketing, product, and employee training and are generally earmarked. for those three categories. We haven't yet agreed with Google on the specific expenditures. We'll likely make a meaningful investment in the launch campaign, the ADT plus Google launch campaign later this year. and expect to invest an incremental $50 million, and that's built into our guide. On radio conversion, we started the year with 3.6 million conversions, shared an initial range of $200 million to $325 million net of revenue. Our replacement plans are essentially on pace. despite the pandemic. We'll finish Q1 with about 1.3 million radios remaining to convert. We've updated the range to 225 to 300 million. The majority of that will be spent this year. So the short answer on the radio conversion is that we're on track. And I'll ask Don to comment on your question related to the technology company we acquired called Cellbounce.
spk06: Sure. And quick correction. I think Jim said $3.6 million to start off the year with. We're actually $1.6 million to start off the year with.
spk05: But we're calling it Cell Bridge internally for our ADP recipients of the device.
spk06: Cell will balance externally because we do have an agreement with AT&T to provide this device for those elsewhere in the industry.
spk05: But we have successfully tested this device both in the lab and at a handful of homes. We are looking to go out and launch this, as we said on the last call, nationally this quarter.
spk06: And we're exceptionally excited to go out and see how well it's working with some of the panels of the alarm systems that are particularly more difficult than others to be able to go out and swap out the radio with. So we're very bullish on how it's gone, and we're looking forward to the first quarter rollout.
spk03: And then if I could sneak one more in, Jim, you know, since you've become CEO, you've obviously pivoted hard towards investment, a flurry of partnerships. You invest a lot in commercial, the DIY, the ADT mobile stuff, and obviously Google. There's just been a lot of activity. What I hear from many of your investors is while each one of these on their own, you know, makes sense in its logical sense, You know, we don't all understand exactly what the vision is, in particular because you haven't really given any color on sort of what's the end game? What are you aiming for here? What is the return for ADT and its shareholders from this flurry of activity? I guess, you know, one of the challenges is you haven't given any long-term targets so that we could assess your performance. And so I guess I want to put that to you as a comment. I certainly hear the optimism, but what does this all mean for revenue growth? Two years, three years, four years down the road, what does it mean for profitability? What does it mean for cash flow? Because there's a lot of excitement, and certainly we understand it, but profits have been stagnant for years, and we haven't seen revenue accelerate. I think there's some frustration that it all sounds good, but we don't have a great sense what the return is. for the company and shareholders is from all this activity in the last two years. I don't mean that to sound critical if it does. I'm just trying to get some color on where this is heading and maybe what some targets might be to help us understand the vision you're aiming for. Thank you.
spk05: Yeah, I'll talk a little bit about the vision from a high-level perspective. We're going to have a chance to elaborate a good bit on this in an investor day that we do later this year. I'll ask Jeff to weigh in here as well. Gary, what might appear as a flurry of activity externally is all really engineering to get our organization positioned for capital efficient growth. I mentioned this earlier when I was answering Pete's question. The work that we've done over the course of the last 24, 30 months has been to get the operational house in order, get attrition where it needs to be, get our revenue payback where it needs to be, set the pins from a marketing perspective to more efficiently acquire customers, develop partnerships, Google being central to that. to facilitate growth and then to really take advantage of these macro headwinds that are out there. And I think that in 2021, the evidence that those pins are set and we're ready to knock them down is mid-teen RMR ads. I think over the course of the last four years or so, our CAGR on RMR ads was something like 3%. And we're talking in 2021 about the mid-teens. And that's before Google kicks in in a major way in the second half and in 2022. Jeff, additional comments? It's something we've spent significant time on internally. After spending the first three or four years or the past three or four years more focused on operational execution, our next chapter is going to be more about growth, being more innovative, taking action. the customer experience to an even better place, leveraging our brand, especially in partnership with Google, further differentiating our frontline service capability, which nobody else has, and then building, as part of the innovation point, more of the technologies that further extend the realm of the various offerings that we provide for smart home and security together. And we think nobody is positioned to do this better than ADT is. And as Jim alluded to, we plan to hold an investor day later in the year and go through that in more detail, including some perspective as to exactly your question, what that means in terms of economics over time with some longer term targets and objectives that goes with it.
spk03: Fair enough. Thank you. Appreciate the call.
spk05: As a reminder, please press star 1 to ask a question. Our next question is from Manav Paneik with Barclays.
spk02: Yeah, thank you. So just kind of a follow-up to Gary's question. I mean, you know, the partnership with Google, so I think you kind of answered it in that last statement, but on a high level, you know, you're just trying to get a foot into the door in the smart home and therefore hopefully expand the TAN. Is that how we should think about the real benefits of this partnership?
spk05: Much more broadly than that, Manav. We think we can leverage Google to not get a foot in the smart home space, but to grow significantly and be a major player in the smart home space. I've mentioned this before. We're super excited about the hardware that Google brings. The ADT plus Google branding is something that our marketing research reveals is pretty exciting. But I'm most excited about what the partnership does from an AI perspective, video analytics and data analytics perspective. We think that we can not only compete in the smart home space, but really be with Google as a partner, a technology leader, and provide customers services that don't exist today. That's all part of a second generation offering, some of which will be available in the second half of this year, but will be launched when we have our own interactive platform built in-house, combined with Google hardware and video analytics, to launch the next generation 1.1.23. Got it.
spk02: And, you know, another broad question, you know, the residential space obviously has been tough, and I think all the efforts you're doing make sense in order to, you know, grow better in that market. But, you know, commercial has always been the preferred area. And I'm just curious, like, at some point down the road, you know, you used the word pivot earlier. Like, is there a pivot to become just, you know, more exposed to commercial or, you Is residential just such a big animal for you that that's probably not something in the near future?
spk05: No, I wouldn't say it's not in our future. Commercial, we expect to return to growth in 2021 in commercial. I mentioned this in my prepared remarks, our backlog, both install and recurring revenue are higher at the end of 2020 than at the end of 2019. The pipeline's healthy. We've got incredible upside in some of the growing verticals, healthcare, education, government, critical infrastructure. Manav, we think the leadership team is outstanding. We provide the best service in the space. That's the most critical source of differentiation. And we expect to grow the commercial business in a capital-efficient way and get back to double-digit growth as we were prior to the pandemic.
spk02: All right. Thanks a lot, guys.
spk05: Our next question is from Jeff Kessler with Imperial Capital. It's ironic. I feel like Obi-Wan having my two pupils go right in front of me. The first question I have is on Defenders. We've talked a bit about Defenders today, but Defenders has been a has been a growth company for basically its entire history, regardless of what it was selling. And, you know, right now it's focused just solely on security. And I'm wondering, you know, I'm wondering, given the fact that you've had, you know, we see the accounting adjustments having been made, what I want to know operationally, what are you doing to get defenders engaged And have they been already, has that group been already integrated into what we'll call the, not just the interactive platform, but the being able to, because they're able to sell, do they have and are they being trained on the IT level to be able to sell a new platform that you folks are going to be coming out with over the next couple of years? And how is this all how is this how is defenders going to come out in the wash since it hasn't doesn't come out in the accounting but it but it should come out in the way the operations are handled. yeah that's that's absolutely right um that's absolutely right jeff the uh so the the defenders integration is going well we're on track um parts of the team have been integrated into the adc branch infrastructure already We expect that the integration will be complete in the March-April timeframe. We are leveraging all of the skills that the Defenders organization brought to our company in a way that's incredibly efficient. We're training the organization in the ADT processes, and they're doing well. We had started using our command panel. Defenders had started using our command panel even prior to the acquisition, and now they're using the panel exclusively, just like core ADT. In terms of the future and the products that we'll be integrating with Google, both defenders and ADT technicians and customer care professionals will be trained on that new equipment, and it will be standardized as part of our offering. And, Jeff, one thing I'd add, we talk about this internally periodically, and even if you look in our deck on the slide, where we show our view as to RMR ad growth. We list on that page four factors, but the point I want to make is there's a lot of factors, and it's difficult to decompose the factors because they interplay with one another. So it's the macro drivers, it's changes to our pricing model, it's the financing stuff we've done to simplify our offers, advertising effectiveness, install efficiency analytics. But included in those internal initiatives is just the sharing of best practices between legacy AP and legacy defenders. So we would struggle to tell you precisely how much of the 15% growth in RMR ads that we're guiding to for next year comes from that. But it's an important ingredient into that mix overall. Okay. Very great. Second question, my follow-up is, you know, having gone through the earnings results of a lot of the industrial companies in security that I cover, like Allegiant and OpsOploy and those guys, Clearly, they are looking for a, you know, still kind of a slow first half of 2021, hopefully picking up in the second half. I'm not going to call it a vacation, but your commercial industrial guys who were killing it two years ago, obviously, let's call them they had a vacation or part of it while they could not get on the premises or they or they were unable to finalize deals that were put off. In the interim period, what have you done with your commercial industrial group to actually get them ready to be accelerating out of the box and not lose a step relative to some of your other large, you know, competitors so that when the market does come back, they will, you know, whether it's national accounts or whether it's specific large enterprise installations, you will be ready to essentially take over that growth that you had before and not fall behind these other companies whose only business is commercial and industrial. Yeah, four key areas, Jeff, that we took the opportunity when we couldn't have access to customer premises to really bolster up. The first is training. I don't think that we expended as much energy in training in the commercial space in any year like we did in 2020. And so we doubled down in a significant way in employee development. Number two is recruiting. From the start, we played the long game. And if organizations weren't as healthy overall as ADT, we took the opportunity to recruit some excellent talent in 2020, both at the technician level and the leadership level. The third is integration. You know, we've done a number of tuck-in acquisitions, Red Hawk a couple of years ago. And so we cleaned up the house from an integration perspective. And then lastly, we advanced the cause on IT systems and IT integration. So we feel good about the positioning of that business. And as I mentioned earlier, expect 2021 to be a really good year in commercial. All right, great. I have more questions to ask, but I'll ask them on the call back later. Okay, thank you very much. Thanks, Jeff. Ladies and gentlemen, we have reached the end of the question and answer session. I would turn the call back to management for closing remarks. Thank you, Operator. In closing, I'd like to, again, extend my appreciation to our employees and our dealers. 2020 was a unique year, an extraordinary year. I'm completely proud to be associated with all of you. Thanks to everyone for joining our call this evening. As you heard, we're exceedingly optimistic about ADT's future. Looking forward to the growth ahead. And have a great night, everybody. Thanks. This concludes today's conference. ADT thanks you for your participation. You may disconnect your lines at this time.
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