ADT Inc.

My name is Jennifer, and I'll be your moderator today. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you'd like to ask a question, press star 1 on your telephone keypad. I would now like to pass the conference to our host, Elizabeth Landers, with investor relations. You may proceed.

Thanks, Operator, and good morning, everyone. We appreciate you joining today's call to discuss ADT's third quarter 2023 results. Speaking on today's call will be ADT's Chairman, President, and CEO, Tim 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 a press release and slide presentation of our financial results. These materials are available on our website at investor.adt.com. Before we begin, I'd like to remind everyone that as of the third quarter 2023, the commercial business is being reported as discontinued operations. Financials and metrics for current and historical periods discussed on this call will be for continuing operations, except for cash flows, which include amounts related to the commercial business through the date of sale. Today's remarks also include forward-looking statements that represent our beliefs or expectations about future events. These forward-looking statements are subject to risks and uncertainties that cause actual results to differ materially. Some of the factors that may cause differences are described in our SEC filings. We will also discuss non-GAAP financial measures on the call. The most directly comparable GAAP measures, along with the reconciliation to those measures, can be found in our earnings presentation on ADT's 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 our third quarter call with an update on ADT's business portfolio, share how we continue to sharpen our focus for the path ahead, and I'll wrap with our third quarter performance. I'll then turn our call over to Ken Papora, our CFO, for details on our third quarter financial results, more on our commercial divestiture, and ADT's 2023 outlook. 2023 is proving to be a pivotal year for ADT as we fine-tune our portfolio and streamline our business. Our focus remains on growth catalysts, reducing our overhead costs, and strengthening our balance sheet. Going forward, our team will focus on the future of our core cash-flowing consumer businesses with emphasis on the optimal allocation of capital between growth, debt reduction, and returns to shareholders. Related to growth, we'll remain primarily focused on organic, but we'll continue to keep an eye on inorganic opportunities within our core smart home business which have the potential to increase market share and efficiencies. I'd like to briefly share four updates which underscore our continued commitment to unlocking shareholder value. First, as planned, we formally closed on ADT's commercial divestiture since we last spoke, immediately unlocking a significant amount of value while positioning us to focus on the continued strength and opportunity in our core consumer business. As previously announced, the transaction successfully closed on October 2nd for a purchase price of just over $1.6 billion, or 11.2 times EBITDA. Second, we've taken decisive action to streamline the solar business. We're restructuring our solar footprint by aggressively rationalizing the infrastructure and overhead to improve profitability. I'll share more on this in a moment. We continue to focus on operating efficiencies through cost reduction in our business. Last quarter, we highlighted that we had identified $75 million of costs to be eliminated this year. We have further identified an additional $10 million of savings for a total of $85 million of costs structurally reduced in our systems. We foresee the run rate of these cost savings to be impactful to full year 2024 in the amount of over $100 million, a significant wind in our backs. And finally, we are reducing our debt using both net proceeds of $1.5 billion from our commercial transaction and an additional $300 million from cash on hand to end the year and an expected net leverage ratio continuing the downward trend, approaching three times. The successful execution of these strategies has enabled ADT to be more nimble to the larger macroeconomic environment as it continues to unfold this year. The residential and small business security and smart home market remains resilient and continues to grow and redefine itself through new offerings. To capitalize, we're continuing the expansion of our sales channels to include convenient e-commerce options in addition to our exceptional in-home consultation. We have re-evaluated and are innovating the way we offer and bundle products, service, and the related pricing alternatives which we will continue to position us as the preferred provider for even more consumers who are seeking the peace of mind and convenience of ADT home security. And while higher mortgage rates have caused many homeowners to delay relocating, which historically would be a catalyst for new customers, we have actually benefited with continued high retention in our existing customer base and are focused on providing incremental security and smart home offerings to these customers. Our teams are working to deliver new technologies and product offerings in the coming months. Longer term, we feel confident that household formation, driven by the continued wave of millennials and Gen Z generations, will support the need and desire for a safe and tech-enabled living experience. These consumers have grown up with the technology and smart living devices at their fingertips, so it is second nature for them to expect to live in a smart and secure home. There are several catalysts supporting our objective of being the premier provider of smart home solutions. First, we are delivering on our innovation and product offering with the development of our ADT Plus platform and smart monitoring, which we believe will emerge as unique differentiators. Our controlled launch of this product will begin later this quarter. Developing our own platform lays the foundation for future innovation and incremental product and service offerings to our current and future customers. Additionally, our Google Nest partnership is helping improve our product offering, expanding our share of wallet and driving the increase in the number of smart home devices per home. Larger, more connected home systems translate to higher device take rates and help to increase our installation revenue, which remains approximately $1,400 per home. We also continue 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. While early, the ADT Plus app ratings in the iOS app store achieved an admirable 4.8 stars. As a reminder, the record revenue payback and attrition measures we're delivering have a strong correlation to the unlock provided by our upsell of these devices, producing higher customer RPUs and leading to greater and more frequent system usage and customer stickiness for many years ahead. Our offer for state farm homeowners continues to ramp and has just recently expanded to 13 states which is ahead of our expected schedule. Though still early to extrapolate, we're seeing positive trends and very high customer satisfaction. We've used the first few markets to test and learn different offers and buy flow approaches, and we continue to optimize opportunities with our State Farm colleagues. One of the early proof points, which is central to our thesis, is ADT's ability to upsell customers to a more robust system. We're pleased to see approximately two-thirds of the customers transacting are purchasing additional hardware and services packages. As mentioned earlier, I'd now like to circle back to the solar portfolio update. We have been disappointed by our solar performance, which has not lived up to our expectations. In addition to navigating our operating challenges, the solar industry itself continues to see pressure from higher interest rates, which is impacting consumer behavior and lender practices. To address and navigate this changing solar landscape, we've taken action to streamline the business, focusing on our top performing markets and rationalizing the infrastructure and overhead of the business accordingly. As part of this plan, we are taking immediate steps to restructure our solar footprint. We will be reducing from 38 branches in 20 states to 16 branches in nine states with the remaining branches representing approximately 70% of our current revenue. In these remaining higher performing geographies, we are expanding our product offering to include third-party owned or leased systems. This offering helps us to more effectively compete in these markets The launch of our lease product in mid-October has been encouraging. Albeit with a small sample size, we're seeing third-party-owned product share of over 50% in several states with some promising incrementality. We expect the financial impact of these restructuring actions to be sizable and beneficial to overall financial results. We expect solar cash flows to show considerable improvement in the first half of 2024, and to turn positive in the second half. We just announced these changes internally as well as to our supply chain partners. We remain attracted to the solar space, which we estimate growing at approximately 8 percent annually. However, we plan to evaluate our performance, in particular the results of the lease offering and the success of the branch restructuring in Q1 of next year. At that time, we'll be evaluating our path forward, including strategic alternatives available. Finally, I'd like to turn to our third quarter financials. We continue to post very solid performance in our core business with year-over-year growth and adjusted free cash flow, including interest swaps of 20% for the quarter and over 50% year-to-date. while growing our ending recurring monthly revenue book by 3%. Total revenue was approximately $1.2 billion, with revenue in consumer and small business increasing by 6%. Adjusted EBITDA was flat year over year, with CSB up 6% in line with the revenue growth in the segment. Our year-to-date adjusted EPS was 25 cents, more than double versus prior year, continuing our trend of positive adjusted net income each quarter since over a year ago. We ended the quarter with a record recurring monthly revenue or RMR balance of $350 million. Our revenue payback now stands at a record low of two years, down from 2.2 years a year ago, with gross attrition remaining at 12.9%. In summary, we continue to make progress in streamlining and focusing our business model and capital structure. With our industry-leading scale, brand recognition, and premium customer experience, dovetailing with a strong balance sheet and strong cash flow, we continue to feel bullish about the future of ADT. All of this is driven by ADT's dedicated and determined team of associates and partners who work with great purpose to keep customers happy, healthy, and safe, so a sincere thank you to everyone. I'll now turn the call over to our CFO, Ken Papora.