ADT Inc. (NYSE:ADT) Q1 2024 Earnings Call Transcript

ADT Inc. (NYSE:ADT) Q1 2024 Earnings Call Transcript April 25, 2024

ADT Inc. reports earnings inline with expectations. Reported EPS is $0.16 EPS, expectations were $0.16. ADT isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. Thank you for attending the ADT First Quarter 2024 Earnings Conference Call. My name is Victoria, 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. [Operator Instructions] I would now like to pass the conference over to your host, Elizabeth Landers, Senior Director, Investor Relations. Thank you. You may proceed, Elizabeth.

Elizabeth Landers: Thanks, operator, and good morning, everyone. We appreciate you joining today’s call to discuss ADT’s first quarter 2024 results. Speaking on today’s call will be ADT’s Chairman, President and CEO, Jim DeVries; and our Chief Financial Officer, Jeff Likosar. Following the prepared remarks, we’ll take analyst questions. 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 beginning in the third quarter of 2023, the commercial business is reported as discontinued operation. 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 could cause actual results to differ materially. Some of the factors that may cause differences are described in our SEC filings. We also discuss non-GAAP financial measures on the call. The most directly comparable GAAP measures along with a reconciliation to those measures can be found in our earnings presentation on the ADT Investor Relations website. And with that, I’m excited to turn the call over to Jim.

James DeVries: Good morning, and thank you to everyone for joining us today to discuss ADT’s first quarter results release this morning. ADT had a very good start to the year financially with strong CSB performance, driving top line growth, improved segment EBITDA and positive adjusted free cash flow all of, which Jeff will describe shortly. First, I want to share a few comments, about why I remain excited about the opportunities that lie ahead, the positioning of our company and what we believe, to be a compelling investment thesis. Our streamlined business model focusing on our consumer-oriented core security and smart home business, serves a large and growing market, and ADT is the clear industry leader with a unique set of assets, including our trusted brand, and national footprint and scale.

We have a flywheel-like model, where we are increasingly able to use, the stable and predictable cash flows, from our RMR base to service and reduce our debt obligations, and return cash to our shareholders, while also continuing to invest in growing the RMR base. That growth is further enhanced by our extraordinary combination of concierge-like professionals, blue-chip partners and expanded capabilities, to further penetrate even more customer segments and U.S. households. And we’ve never felt more confident, about our overall capital structure and the related flexibility, to deliver on our commitments for all of our stakeholders. During 2024, our focus remains on methodically rolling out our new ecosystem of customer offerings and experiences as well as related back-office infrastructure.

As we launched our new ADT+ platform for professionally installed customers in select markets last December, following the rollout of our ADT+ app to self-setup customers earlier last year. We are expanding to more geographies and customers throughout 2024, and are confident in the differentiated capabilities, our new platform will enable in future years, especially as we develop additional use cases, tailored to our customers’ unique needs. We will plan to make the first of these available on our platform later this year. ADT’s new platform, continues to leverage our Google Nest partnership, which has already enabled us to expand our offerings particularly around the fast-growing area of camera and video analytics. Our State Farm partnership also remains a catalyst for the business, and illustrates our continued evolution and innovation.

We continue to see month-on-month growth in our existing 13 states and remain on track to begin new pilots in four more states in the coming months. We remain optimistic in the growth opportunity with State Farm, to drive significant benefit to our combined customers’ need, for proactive risk detection and prevention. We will further unlock the power of our ecosystem, with the full scaling of our ADT+ platform, new hardware and refreshed IT infrastructure, including advancement on our digital journey, to provide more personalized offerings with greater efficiency, while providing best-in-class service. In that vein, we have broadened our strong Google relationship beyond Nest hardware, with a sharp focus on efficiency and customer experience, utilizing Google’s AI technology platform to explore several opportunities across our business, with early efforts focused on call center operations.

Our virtual assistance program has already been a key driver of our efficiency, allowing us to better service our subscriber base, while simultaneously lowering our costs, by utilizing technology and video, in place of more traditional in-person service visits. Customers increasingly value the convenience, and speed of our virtual capabilities, which also contributes to reducing our carbon footprint. While still early in our implementation, we anticipate significant call deflection using AI-led efficiencies, and customer care. And we’re looking more broadly across the organization at ways to leverage AI in areas such as churn propensity modelling, to help us improve customer retention. Obviously, there’s a lot more to come in this area. As we announced in January, we’ve made the decision to exit our residential solar operations, which is progressing as planned.

We’ve ceased all sales and marketing activities, we’re closing branches, selling inventory and installing what remains of our pipeline. The headcount in solar continues to decline, and we expect to discontinue substantially all field operations as planned, by the end of the second quarter. Finally, I have just a few brief comments regarding the secondary offering executed in March. Overall, we were pleased with the completion of Apollo’s offering of approximately 75 million shares of common stock taking their ownership to below 50%. We view this as a positive for liquidity. And over a period of time, we expect the larger public float, to attract even more high-quality investors to ADT. We concurrently repurchased 15 million shares of common stock, using $93 million of our $350 million share repurchase authorization, to further bolster our value proposition.

In closing, ADT’s core focus remains on delivering safe, smart and sustainable solutions to our customers, with an emphasis on innovative offerings, unrivaled safety and a premium service experience. Collectively, we expect these efforts will improve our efficiency and customer experience, while also enabling better and faster insight, to meet our customers’ needs. The immediate priority for our team is to deliver on our commitments as we remain confident in our plan for 2024. I’d now like to turn the call over to Jeff Likosar. Jeff had been serving as our Interim CFO since December, and he’ll now officially return to the CFO seat. Jeff has been a great partner to me. And as many of you on the call this morning know, he’s a tremendous executive leader for ADT.

I’m thrilled to be working with Jeff in this capacity again. With that, I’ll turn the call over to Jeff.

Jeffrey Likosar: Thanks, Jim, for the kind words, and thank you, everyone, for joining our call today. I’ll take the next few minutes to share some additional comments on our first quarter financial performance and our outlook for the rest of 2024. A highlight is that total company first quarter adjusted net income was $151 million, or $0.16 per share, well above last year’s $0.11. Additionally, we delivered very strong adjusted free cash flow, including interest rate swaps, which was almost $100 million ahead of last year. As a result of our decision to exit the solar business, I’ll focus mainly on our CSB segment, where revenue of approximately $1.2 billion grew 5%. Monitoring and services revenue was up 3%, driven by our $353 million RMR balance, which was also 3% higher year-over-year.

We generated gross customer additions of 187,000 and $11.4 million of new RMR additions. This level was generally consistent with our approximately flat SAC. Importantly, we’ll remain disciplined in subscriber acquisition spending, especially in a challenging macro environment, including fewer relocations. Installation revenue increased by 22%, driven by higher deferred revenue amortization and higher outright sales. As we’ve described previously, we expect continued outright sales growth, as we more often transfer equipment ownership to our customers. Installation revenue per unit remained strong at nearly $1,400. The trend towards larger system sizes, contributed to our efficient revenue payback of 2.1 years. Additionally, larger systems are correlated, with strong customer retention, supporting our 13.1% attrition rate.

As a reminder, our attrition metric reflects the trailing 12 months rate of RMR cancellations, on professionally installed systems. It does not include self-setup customers, or the attrition offset of customers relocating their service. CSB adjusted EBITDA was $638 million in the quarter, an 8% increase versus last year. Our margin rate increased, by approximately 200 basis points as we remain focused on cost, and efficiency improvements. We continue to fund the investments in the ecosystem and infrastructure priorities Jim described. We also benefited modestly from the timing of advertising spending, some of which we deferred to coincide with our new platform rollout. This CSB profitability was a significant contributor, to the solid cash flow growth I mentioned earlier.

Adjusted free cash flow, including interest rate swaps of $111 million, compared to $16 million in the prior year quarter. Lower interest on reduced debt, payroll items and some favorable timing versus our plans, all contributed to this performance. These benefits were partially offset, by the sale of our commercial business, which contributed positive cash flow last year. During April, we repaid the remaining $100 million due on our 2024 notes, leaving us with no significant debt maturities until 2026. We also completed a repricing of our $1.4 billion term loan B, reducing the associated borrowing cost by 25 basis points. Our debt remains at 3.2 times adjusted EBITDA. Following the $93 million share repurchase Jim described, we have $257 million in remaining authorization.

Due to interest rate swaps, substantially all our debt is fixed at a weighted average rate of 4.5%. We are very confident in our overall capital structure, cash generation capability, liquidity and resulting flexibility in capital allocation. As Jim mentioned, our solar wind down is progressing as planned, with all sales and new installation activity having ceased. Solar segment revenue was $20 million in the quarter with an adjusted EBITDA loss of $24 million. We expect total exit costs, which are not included in our adjusted EBITDA or cash metrics, to be within the ranges we provided in February. We incurred $75 million of these charges and $11 million of cash expenditures in the first quarter. As we look to the rest of 2024, we are affirming the guidance we shared in February, which we anchored on strong cash flow growth.

As a reminder, due to our solar exit, revenue and adjusted EBITDA guidance, for the full year is for our CSB segment. As mentioned earlier, we benefited in the first quarter from some timing items, and expect the second quarter to reflect some offsets. In general, we expect our guided metrics, to be relatively flat in the second quarter, compared to the first quarter. A noteworthy exception is that we expect approximately $70 million lower cash interest in the second quarter, versus the first. Overall, we are very pleased with our start to the year and our progress towards our 2024 and longer-term objectives. Before turning to questions, I’d like to thank our customers, our employees, our dealers, suppliers, partners, communities and our investors.

Our successes will not be possible without your contributions and support. Thank you, everyone, for joining the call today. Operator, please open the line to questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of George Tong with Goldman Sachs. Your line is now open.

George Tong: Hi, thanks. Thanks. Good morning. You’re continuing to roll out the ADT+ platform, which is great to see. Can you talk about what kind of financial benefits you anticipate to roll out? Is it more going to be ARPU? Is it going to be unit? Is it going to be retention? Just some idea around financial impact and traction that you’ve seen so far with the rollout?

James DeVries: Thanks, George, for the question. We’re super excited about ADT+. The initial rollout for ADT+ is really at parity with what we’ve been installing on both the hardware and software side to-date. What we’re most excited about with the platform, is the features that will be available in subsequent rollouts. Any of the upside that we have in 2024, is fairly limited. We’re rolled out in a couple of markets now. We’re going to be expanding nationally in the coming months. But the lift for us – the upside for us that we see in the ADT+ platform is really most evident in 2025.

Jeffrey Likosar: George, it’s Jeff. I’d add to your question, it’s somewhat all of the above. The rollout of the platform will coincide with some of the other changes that we’ve described, with respect to offer structure, different ways that customers may choose to purchase, more of a shift towards, a more efficient acquisition channels. So over time, we would expect it to make our offerings more attractive to customers that would lead to more customers, better economics, lower SAC, more efficiency serving those customers. But to Jim’s point, I would think of it for now as the foundation that enables all of those things.

George Tong: Got it. That’s helpful context. And then with the State Farm partnership, you’re continuing to push forward with penetration of the 13 states and additional rollouts in four states. Can you provide some additional details on selling progress with the states that you’re currently in? How much scale, that partnership is in terms of revenue generation and what the client feedback has been like?

James DeVries: Yes, absolutely. So the launch, as you know George, was March of ’23. We did 6,000 sales in 2023. In Q1 of ’24, we’re just under 5,000 sales. Customer satisfaction continues to be incredibly high. I think for the quarter, we were at 96% customer sat. Every month continues to be better than the month prior. Two-thirds of our installs include an upsell, which is pretty consistent with our expectations. And then in terms of upcoming things on the radar screen, we’re going to be testing a DIY offering in two states, and that will be in June. And then we’re exploring a water detection-led pilot, essentially marketed to State Farm customers, who have had water claims in the past. So net, companies continue to be aligned on the vision.

Things are going well. We would always like to see things go a little bit faster. But we liked our results in Q1. They were consistent with our internal budget. And we’ll look forward, to further penetration in the 13 existing states, and watching our DIY pilot closely, at the end of the quarter.

George Tong: Very helpful. Thank you.

Operator: Thank you for your question. The next question comes from the line of Ashish Sabadra with RBC. Your line is now open.

David Paige: This is David Paige on for Ashish. First Jeff, congratulations on the official CFO title role. It’s great to see. It’s fun to work with you. In terms of, I guess, other corporate actions, or rightsizing the portfolio, are you guys done now? Or is there anything that’s left that needs to be done, or anything that’s attractive to add in terms of an M&A standpoint or just more color in that regard? Thank you.

James DeVries: Yes. Maybe a couple of comments, and Jeff jump in to add. Thanks for the question, David. I would say, from an M&A perspective, we’ll continue to look at bulk acquisition opportunities. They’re fairly plentiful for us. And those are – I don’t know if we’d officially call that M&A, but it’d be an area where we have an opportunity to deploy capital that yields, really attractive returns. If we do any pure M&A, it would be in our core business. And in terms of any future divestiture, with commercial sold and solar in wind-down mode, I don’t see anything material for us that, we would be divesting going forward.

Jeffrey Likosar: And one thing I would add that’s maybe a little bit more general than your specific question, but just – we feel so good about all the progress we made on our capital structure having reduced debt over the past year or so, getting our leverage down to where it rounds to three instead of rounding to four, progress with our cash generation. And all that results in just more flexibility for us. So, we’ll certainly look at things opportunistically. To Jim’s point, no specific thing to talk about today, but balancing organic growth, longer-term investments in the company, return of capital to shareholders, and we’ll make adjustments as we go, and as we come across opportunities. But I just would emphasize the flexibility we now have.

Operator: All right. Thank you for your question. Our next question comes from the line of Manav Patnaik with Barclays. Your line is now open.

Ronan Kennedy: Hi, good morning. This is Ronan Kennedy on for Manav. Thank you for taking my question. I think you had referred to the macro as challenged. Could you just give us some further insight as to what you’re seeing, especially given the news release this morning, I think lower GDP or lowest GDP in almost two years, inflation higher than expected. So how you would characterize the macro, and more specifically, the customer – the strength of the customer as you see it, the ADT customer? And perhaps on resiliency, are there any trends you’re seeing in delinquency, 31 days past due, et cetera, please?