ADT Inc.

Greetings. Welcome to ADT Inc. 7th Quarter 2021 Earnings Conference Call. At this time, all participants are on a listen-only mode. A question and answer session will follow the phone presentation. If anyone should require operator assistance during the conference, please press Start Zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Derek Feebig, Vice President, Investor Relations. You may begin. Thank you, operator, and we appreciate everyone joining ADP's second quarter 2021 earnings conference call. Speaking on today's call will be ADP's president and CEO, Jim DeVries, and our CFO and president of corporate development, Jeff Likasar. Jim will provide an overview of our recent performance and our progress against the company's strategic objectives. Jeff will then cover in more detail our financial performance and outlook for 2021. Also joining us for Q&A are Don Young, our EBP and COO, Ken Purpura, Executive VP of Finance, and Jill Greer, Senior Vice President of Finance. This afternoon, we issued a press release and slide presentation of our financial results. These materials are available on our website at investors.adt.com. Today's remarks include forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those forward-looking statements. Some of the factors that may cause differences are described in our SEC filings. Today's call will also include non-GAAP financial measures. For complete reconciliation of our non-GAAP financial measures, please refer to our press release. With that, I'll turn the call over to Jim. Thanks, Derek, and welcome everyone to our call. We're off to a very solid start through the first half of the year, and I want to thank our entire ADT team and our dealer partners for serving our customers so diligently and delivering solid results for our shareholders. During our February call, I outlined several key priorities for 2021, including growing our RMR additions and our recurring monthly revenue base, improving the performance of our commercial business, and driving innovation both through our internal expertise and through our strategic partners. Jeff will walk you through our second quarter results in a few minutes. In summary, a number of areas within our business are performing exceptionally well. Our small business channel, our commercial segment, DIY, and our dealer channel are all delivering strong results. In the second quarter, across the business, we grew gross RMR additions by 28% versus last year. We also see some opportunities. We're working to further increase volume in our direct residential channel. And on the expense side, we're making progress on addressing service cost pressures we experienced in the quarter. Overall, we feel very good about our results for the first six months and have good momentum going back, going into the back half of the year. This evening, I would like to share perspective about what we've achieved as well as where we're headed, not just in 2021, but into the future. During the past several years, we have grown revenue by more than 20% from just over $4 billion to more than $5 billion, with approximately 80% of that revenue from recurring monthly service to our customers. We've established a sizable commercial business through acquisitions and organic growth, now approximately $1 billion of revenue. We've pivoted to include more smart home products, increasing the number of devices installed per customer from 14 to almost 20 today, which correlates to an increase in average revenue per unit. And we've improved our service levels, increasing customer satisfaction with gross revenue retention, improving from approximately 84% for legacy ADP to just under 87%. We have increased our revenue generation and strengthened customer satisfaction, which has translated into an improvement in our trailing 12-month revenue payback from 2.7 years to 2.2 years. And importantly, we've captured these positive outcomes in our financial results. growing our cash generation capabilities during the same time with adjusted free cash flow of $675 million last year. As to the direction we are heading in, at our core, ADT is a mission-driven company, and that mission is dedicated to making our customers' lives safe as well as simple. From our SoSecure app offering free protection options to residential customers who have made us the most trusted name in the smart home security space to multimillion-dollar commercial installations, we deliver on our mission every day to over 6 million customers. ADT's scale and breadth of offering is unmatched in the marketplace. Our path forward is focused on three areas. The first is driving revenue growth through differentiated service to a larger customer base in our core business. The U.S. smart home and commercial protection markets are expected to grow steadily, with a total revenue opportunity north of $100 billion in the next five years from just under $75 billion today. Through our direct channels, our dealer network, and our partnerships with leading home builders like D.R. Horton, we're connecting with more customers than ever before as we respond to increased customer demand for smart home automation. Of note, our new customers are increasingly choosing more integrated offerings, and we firmly believe that the more a customer interacts with their system, the greater the opportunity we have to build a longer-term rewarding relationship with them. This relationship is further solidified by the premium service ADT provides. From installation by best-in-class technicians to always their customer service to operating the industry's highest certified monitoring centers, no one takes better care of customers than ADT's team of 20,000 people. We remain focused on the customer experience and continually research areas where we can modernize and refresh. By investing in our digital capabilities, we will deliver the level of service customers value most and provide it in a more streamlined, cost-effective way. We had an excellent quarter on the commercial side of the business. Our growth is largely attributed to higher market share. We continue to seek tuck-in acquisition opportunities where we can increase our market footprint and expand the offerings we provide to our customers. The second area of focus on our path forward is driving adjacent growth. This includes building relationships with our strategic partners in spaces such as multifamily property management, building and construction, insurance, and ride-sharing. We're also actively looking at ways to further capitalize on consumer confidence in ADT's brand, which has earned tremendous trust with our customers and maintains over 95% brand awareness. The opportunities afforded to us run the gamut from expanding to new commercial verticals or beyond the home to new opportunities like automotive or solar. These adjacent markets provide potential growth and expand the market opportunities for ADP. Additionally, a number of the adjacent opportunities provide for deepening relationships with our current customers. The final area of focus is shaped by increased innovation, both through our internal expertise and through our strategic partnerships, especially through our relationship with Google. ADT was founded nearly 150 years ago, and we are proudly one of the longest tenured companies in American business. But I'm even more proud of ADT's growing culture of innovation and reinvention, which is crucial to continuing to thrive in the future. Related to our commitment to innovation, it's been almost a year since we announced our Google partnership along with their equity investment in ADT. And over that time, we've made progress while simultaneously learning from each other along the way. We're now offering integrated Google products such as the voice assistant, hub max and piloting mesh wi-fi and shortly we'll be including the google doorbell in our portfolio of products with expanded offerings planned including a refreshed diy lineup in early 2022. additionally we're working closely with google to develop our joint marketing plans We've already begun some marketing and promotions which feature Google product, and we're working with Google closely to develop our joint advertising plans, which we expect to deploy in 2022. During our planned fourth quarter investor day presentation, we'll present our long-term strategy for the company. We're looking forward to providing a holistic update then on our partnership with Google. both in the context of our current transformation efforts and our long-term strategy. I'll now turn the call over to Jeff to take you through our second quarter financial results. Thanks, Jim, and thank you, everyone, for joining our call today. As Jim described, we delivered a solid quarter, continuing our progress on many objectives, especially including growth in additions to recurring monthly revenue, or RMR, in improved commercial performance. For the second quarter, gross RMR additions increased by 28% compared to 2020, reflecting our investment in customer acquisition, our continued focus on differentiated service and offering, and pandemic-related weakness last year. On a year-to-date basis, we have grown our RMR additions by 26%, or 20%, excluding this year's initial Ackerman account purchases and the smaller bulk account purchases in the first quarter of last year. Our resulting RMR base grew to $352 million, an increase of $14 million versus last year. Over time, we expect RMR growth to lead to more monitoring and services revenue, which increased by 4% in the second quarter. We are fortunate that our portfolio includes a variety of customer segments and routes to market. Our dealer channel has been especially strong and contributed a larger percentage of new RMR additions than we planned in the second quarter and the first half of this year. While they come at somewhat higher incremental acquisition costs compared to direct addition, dealer-generated accounts deliver solid returns. Importantly, we have remained disciplined while growing, with early attrition on recent customer additions trending favorably. Our trailing 12-month revenue payback remained at 2.2 years through the second quarter, despite this mixed shift towards dealer. Total second quarter revenue was just over $1.3 billion, with adjusted EBITDA at $542 million, both slightly exceeding our internal budget. RMR growth, improved commercial performance, lower bad debt expense, and general cost controls all contributed positively to our results. Offsetting headwinds versus 2020 included the non-cash effect of our ownership model changes and higher service costs. As you will recall, we changed our segment structure effective in January of this year, and I will share a couple comments on our segment results. The highlight in our CSB segment continues to be the strong RMR additions. We again also grew our net subscriber count in the quarter, and customers are increasingly selecting more integrated smart home systems. Interactive customers now make up more than 55% of our total CSB subscriber base, which contributes to a modest increase in average revenue per unit. Our CSB monitoring and services revenue at $965 million increased by 3% versus last year. Installation and other revenue declined as planned, reflecting the non-cash effect of ownership model changes. A broad offering and best-in-class service set the foundation for future CSB growth. In our commercial segment, we continued performance improvements after a pandemic-induced set of challenges in 2020. Second quarter revenue grew by 23% in aggregate, with installation and other up 32%, and monitoring and services up 12%. Our commercial segment also delivered strong EBITDA margins. We are very encouraged by our first half progress in commercial, and our strong backlog gives us confidence entering the second half. We also are pleased with our cash generation, which remains a priority even as we invest in subscriber acquisition costs and our next generation platform. Adjusted free cash flow was $227 million through the first half of this year, in line with our internal plans. We also continue to improve our capital structure to support our growth objectives, including the completion of three transactions during the past month. We renewed and improved our receivable securitization agreement, We extended our revolver to 2026 and upsized the capacity to $575 million, and most notably, we refinanced our billion-dollar 2022 note with a new 2029 note. As a result of these and other transactions over the past several quarters, we have addressed near-term maturity, strengthened liquidity, and reduced our borrowing costs. We remain very comfortable with our overall capital structure and liquidity position, which enable us to invest in our future. As we look to the rest of the year, we are maintaining the full-year outlook ranges we shared in February. If first-half trends continue, we may be at the lower end of our adjusted free cash flow range due to more spending on subscriber acquisition costs. However, our full-year SAC spending depends on second-half RMR additions, which are affected by residual dynamics from COVID-19 and other factors that have altered to normal seasonal trends in quarterly comparisons. We continue to expect full-year RMR additions growth in the mid-teens with a lower growth rate in the second half compared to the first half as we originally planned. As always, we remain focused on the efficient deployment of capital to generate strong returns over time. In summary, we're entering the back half of the year with solid momentum. Our overall revenue and growth initiatives are expanding our RMR base and our commercial business is performing well. We also continue to advance the longer-term objectives that will shape our next chapter. We remain excited by our future, and we are well positioned to deliver positive results for our employees, dealer partners, customers, communities, and investors, both in 2021 and in the years to come. Thank you for joining our call today, and thank you for your support of our company. Operator, please open the call for questions. And at this time, we'll be conducting a question-and-answer session. If you'd 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. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys. One moment, please, while we call for questions. And our first question is with Kevin McVeigh from Credit Suisse. Please proceed with your question.

Great. Thanks so much. And congratulations. Hey, Jeff, just to follow up on the guidance question, I noticed the slide wasn't in the deck. Are you reaffirming the revenue and EBITDA guidance as well for the full year? And any reason why it's not in the deck or in the press release, the guidance?

No, no page just because there's really no news beyond what I said on the call. We are running the business so well in line with our expectations so far. We expect to be within the same range as we shared at the beginning of the year. And as I described on the call, the ultimate cash will depend a bit on the RMR as well. in the second half of the year. And then the seasonal trends are affected, of course, by COVID dynamics last year, some of which are continuing to affect the trends this year. But our full-year guidance remains in the same ranges as it was at the beginning of the year.