ADT Inc.

advancing us towards our 2025 goals. All of this success is a direct reflection of the hard work and dedication of our 22,000 employees and our 200 plus dealer partners. I want to thank all of them for what they do for ADT and for our customers each and every day. I'm now going to turn the call over to Ken Papora. As many of you know, just after last quarter's call, we announced Ken's promotion to CFO. I'm pleased to officially welcome him to our earnings call in this new role. Congratulations, Ken, and handing it over to you.

Appreciate that, Jim. Thank you, and thank you, everyone, for joining our call today. As Jim indicated, we have solid momentum across the business, and we are extremely pleased with the results delivered by our team in the third quarter. Total company revenue was $1.6 billion, up 22% versus prior year, including the benefit of our solar acquisition. Excluding solar, our revenue grew approximately 8%. Our recurring monthly revenue, or RMR, subscriber base grew to $372 million, or 4% year-over-year, a record for the company and a strong reflection of the benefits of our higher average pricing, growth initiatives, and improved customer retention. Adjusted net income was $83 million, or $0.10 per share, an improvement from a loss of $54 million last year. Stronger revenue and margin expansion translated into higher adjusted EBITDA, which increased 12% versus prior year, third quarter, and is up 11% year-to-date. Our gap results included two notable non-cash special items. First, a $158 million non-cash charge associated with our tender offer, where the proceeds from State Farm's equity investment were used to repurchase an equal number of shares, offsetting any dilution. For accounting purposes, this was considered a financial instrument. Based on the share price at closing of the tender, we'll see a partially offsetting non-cash gain in Q4 of $95 million. The second special item was $149 million non-cash goodwill impairment charge associated with our solar business. This charge is based on the solar segment's operating performance and reflects changes to macroeconomic conditions. Moving to our segment highlights, our consumer and small biz, or CSB segment, delivered total revenue of $1.1 billion, an increase of 7% or $75 million versus last year. This performance was driven by a 5% increase in monitoring and services revenue, resulting from higher average pricing, subscriber growth initiatives, and improved customer retention. CSB adjusted EBITDA increase by 63 million, or 12%, and was driven by this increased revenue combined with strong cost performance. EBITDA margin expanded year-by-year by 200 basis points for the third quarter and nearly 300 basis points year-to-date. Our virtual service program is continuing to drive high levels of customer satisfaction, in addition to significant cost efficiencies. This initiative is allowing us to service our growing subscriber base by using technology and remote video as an alternative to more costly in-person visits. We have completed over 650,000 virtual service visits this year, and in-person service tickets decreased by 26% in the third quarter versus the prior year. Turning to our commercial segment, we delivered solid revenue growth of 12% to $314 million. Our sales remained strong. However, supply chain delays are driving a growing backlog. We view the growing backlog as a pipeline for future revenue and margin as supply chain continues to decongest. Commercial adjusted EBITDA was $34 million, reflecting a double-digit margin rate as our increased revenues in this segment were partially offset by some inflation-driven challenges. Our solar segment posted revenue of $179 million and an adjusted EBITDA loss of $6 million, driven by installation delays associated with a third-party lender's insolvency in the June quarter and cost inefficiencies from lower install throughput. With these near-term pressures on the business and additional headwinds from rising interest rates, we've taken several recent actions to improve operating margins in solar. These include process improvements in scheduling and labor planning, workforce right-sizing, and pricing adjustments. And as Jim mentioned earlier, we're starting to see the improved margin benefits in recent results. Switching our attention to cash flow, adjusted free cash flow is $145 million, up from $62 million last year on higher recurring revenue flow-through and lower net subscriber investments, partially offset by higher cash interest. Our core ADT adjusted free cash flow is essentially on plan for the year, with outperformance in the consumer business offsetting solar pressures. The recent sharp rise in rates, however, is pressuring our cash interest, which will be approximately $20 million higher in the second half of the year compared to the first half of the year. We are nearly fully hedged on our variable rate debt, though this offsetting benefit flows through cash from financing activities and therefore outside of adjusted free cash flow. This cash flow geography is an important contributor to why our 2022 pre-cash flow guidance is trending towards the lower end of the range, while our revenue and EBITDA is trending towards the higher end. Our top priority for cash is capital efficient growth. We delivered meaningful improvement in net subscriber acquisition cost efficiency in the quarter as we achieved 11% lower SAC spend while growing our overall customer base by 2% to more than 6.7 million customers. A big improvement driver? With a 22% increase in installation revenue per unit, a measure we've seen trend higher as our Google Nest product rollouts have progressed. Another critical capital allocation priority is strengthening our balance sheet. We've lowered our net leverage ratio to four times this quarter, down from 4.4 at year end 2021. As a reminder, our goal is to have that ratio at or below three times by the end of 2025. During the quarter, we repaid $80 million against our revolving credit facility, ending the quarter with no outstanding revolver borrowings. We also entered into a new debt commitment letter for up to $600 million of term loans under a senior secured term loan aid facility. We expect to use the proceeds of this facility, together with cash on hand, to repay next year's $700 million maturity. With this action, we have now addressed all of our significant maturities in 2023. Our manageable debt maturity schedule, combined with our strong recurring revenue mix and limited variable rate exposure, reduces balance sheet risk and makes our company more resilient against rising interest rates and any potential recession. I'll wrap up now so we can transition to Q&A by simply sharing that we are very pleased with ADT's performance this quarter, and I, too, would like to add my personal thanks to our entire team. As Jim mentioned, our performance to date gives us confidence in achieving our full-year guidance and, importantly, meeting the long-term goals that we laid out at our investor day. Operator, please open up the call to 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 that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. We ask that you limit yourself to one question and a follow-up so that others may have an opportunity to ask questions. You may reenter the queue by pressing star 1. 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 George Tong with Goldman Sachs. Please proceed with your question.