ADT Inc.

Greetings and welcome to today's call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If you'd like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one once again. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Elizabeth Lippett-Landers, Senior Director of Investor Relations. Thank you. You may begin.

Thanks, Operator, and good morning, everyone. We appreciate you joining today's call to discuss ADT's second quarter 2023 earnings and the transaction we announced this morning to sell our commercial business. Speaking on today's call will be ADT's President and CEO, Jim DeVries, and our EDP and CFO, Ken Papora. Following the prepared remarks, we'll take analyst questions. Also joining us for Q&A are Don Young, EDP and Chief Operating Officer, and Wayne Thorson, EDP and Chief Business Officer. Earlier this morning, we issued our earnings press release and a separate press release on the sale of our commercial business. as well as an accompanying slide presentation. These materials are available on our website at investor.adt.com. Before we start, I do need to mention that today's remarks include forward-looking statements that represent our beliefs or expectations about future events. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of the factors that may cause differences are described in our SEC filings. We'll also discuss non-GAAP financial measures on the call. The most directly comparable gap measures, along with a reconciliation to those measures, can be found on our earnings slide presentation on the ADT Investor Relations website. And with that, I'm excited to turn the call over to Jim.

Thanks, Elizabeth. Good morning, and thank you to everyone for joining us today. I'll begin the call talking about the announcement we made pre-market to divest ADT's commercial business. I'll then share some perspective about the exciting road ahead. And finally, I'll share some comments about our second quarter results. I'll then turn the call over to Ken Papura for details on our second quarter financial results. A bit more on the divestiture and our 2023 outlook. This morning, ADT announced it entered into a definitive agreement to divest our commercial security, fire, and life safety business unit to GTCR, a leading private equity firm for a purchase price of just over $1.6 billion. The transaction was approved by our board of directors and is expected to close in the fourth quarter of this year, subject to customary closing conditions, including regulatory approvals. There are five key benefits of this transaction that will significantly unlock shareholder value. First, the divestment enables more focus for ADT to facilitate the pursuit of significant residential and small business growth opportunities in the smart home and solar markets. Second, the sale price represents an attractive enterprise value and at just over $1.6 billion, is equivalent to a multiple of 11.2 times the commercial trailing 12-month adjusted EBITDA, including an estimated allocation of corporate costs. Third, ADT will have a meaningfully lower leverage profile following the close of the transaction. The entirety of the net proceeds will be used to pay down debt, reducing our net leverage ratio from the current level of 3.7 down to 3.3 times, accelerating the achievement of our debt reduction goal by two years. Fourth, the transaction strengthens ADT's financial profile. We expect higher adjusted EBITDA margins and cash interest savings from debt pay down to offset the impact of divesting the commercial business. We will be better positioned to prioritize investments that will drive profitable, capital efficient revenue growth for the long term. And finally, the commercial divestiture clearly monetizes value from the business transformation. The valuation is a testament to ADT commercial strong growth in revenue, healthy sales backlog, and improving adjusted EBITDA margins. To conclude, beyond these five key benefits, We're confident this is the right time and a great price to maximize the value for our shareholders. I'd like to take a moment to thank Dan Bresingham, Mike McWilliams, and the entire ADT commercial team for their dedication, support, and service excellence. The culture you've built inside the commercial business and your overall commitment has led the business to where it has grown today. Now turning to our road ahead. The total addressable U.S. market for residential and small business security, smart home, and residential solar is approximately $75 billion today and is expected to grow at a combined 10% CAGR through 2027. To capitalize, we're expanding our sales channels to include retail and convenient e-commerce in addition to our exceptional in-home consultation. ADT's commitment to customer choice is driving new innovation in pricing, product, and installation options to continue to position us as the preferred provider for more people seeking the peace of mind and convenience of ADT smart home security. Consumers are already experiencing a transformed ADT and refreshed advertising campaigns that increase awareness and differentiate our capabilities further driving customer demand. There are a number of growth catalysts driving our transformation. Product development and innovation have accelerated in the past few years, and with the development of our ADT Plus platform and smart monitoring emerging as unique differentiators. Our partnership with Google distinguishes our hardware products with premium Nest devices powered by industry-leading AI. Google products have enabled us to increase the number of devices in the home, expanding our share of wallet, and representing a key variable correlated to higher customer engagement and retention. These larger, more connected home systems translate to higher device take rates and help to increase our installation revenue per home, which is up 17% over the prior year period. In the second quarter, we continued to see attachment rates on Nest doorbells of approximately 50%, and video take rates remain impressive in our integrated experience through ADT Plus for new DIY customers. We anticipate our Google partnership to accelerate even more when we introduce an integrated pro-install solution. We also anticipate that our State Farm partnership will broaden our reach in the new customer markets and lower subscriber acquisition costs. We expect our offering in partnership with State Farm to be available to policyholders in up to 13 states this year. Though it's early in the opportunity, we continue to be excited about the runway for future capital-efficient subscriber growth. I'd like to now turn to the second quarter. I'm pleased to share we continue to deliver solid results with year-over-year growth in adjusted EBITDA, adjusted free cash flows, and adjusted EPS. Total revenue was approximately $1.6 billion, with revenue in consumer and small business and commercial increasing by 7% and 17%, respectively. Adjusted net income was $148 million, or 16 cents per diluted share, and we posted improved adjusted EBITDA up 9% year over year. We ended the quarter with a record recurring monthly revenue balance of $382 million. Our revenue payback now stands at a record low of 1.9 years down from 2.2 a year ago. with gross attrition remaining at a record low 12.5 percent. The combination of greater retention and lower SAC per sub translates to a rate of return on new subs that is more attractive than any time previously. These factors continue to drive better capital efficiency, producing adjusted free cash flow, including interest rate swaps, up 27 percent versus second quarter last year. The consumer market for smart home security remains resilient, evidenced by our high customer retention and continued growth and ending recurring monthly revenue. And the commercial segment continued to deliver with robust revenue and impressive double-digit margin performance. We continue to see pressure in our solar division, partially driven by consumer price sensitivity related to higher interest rates. While we're not With the financial results, we are encouraged by the progress on the operations side of the house. The backlog issues shared in previous calls are steadily improving. With the stabilization and improvement in operations, we've now turned our focus to sales growth. We've had good success hiring and training sales reps, and we've partnered with two of our key smart home dealers to sell ADT solar as well. We've just added additional financing alternatives to help diversify our offerings. ADT Solar customers who want to switch to renewable solar energy can now access loan financing from our banking providers and are expected soon to have a lease option as well. The attractiveness of the options depends on a variety of factors, including utility costs in the customer's location. Last week, we announced an agreement in principle to enter into a lease team partnership with SunPower Financial. Portions of the market have shifted from loan to lease, and offering this alternative to customers is an important development. We feel very good about both the leadership team and capability of SunPower Financial. To diversify our loan programs, we also just announced a receivables facility through Mizuho to allow for in-house financing with access to the ABS capital markets. Finally, just last week, we began to cross-sell solar to smart home customers, and we're monitoring this progress closely. We're investing in the solar business, not with a blind eye to realities, but with focus on the long term versus the next several quarters. Even with much improved cycle time, the sale-to-install cycle is still several months, so we expect pressure on revenue and adjusted EBITDA in the second half. In summary, we're excited about our growth catalyst in smart home security, as well as capturing more share in residential rooftop solar. We are positioned to provide innovative, premium experiences for our customers in the residential small business and multifamily markets. As our penetration in the smart home and residential solar markets grows, our flywheel continues to accelerate. We continue to see significant upside opportunity in these markets, and we're confident they will serve us well over the long term. Finally, ADT's resilience and positive results reflect the dedication and determination of our 20,000-plus employees, and dealer partners. I want to thank them for all they do to take care of our customers every day. I'll now turn the call over to our CFO, Ken Papora.