Q3 2020 ADT Inc Earnings Call
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<unk> described in our press release issued this afternoon and in our filings with the SEC.
Please note that all forward looking statements speak only as of the time, there me and we disclaim any obligation to update these forward looking statements.
Hold formation Colson, smart home adoption and escalating consumer demand for security.
We're also leveraging our strong operational execution and driving internal initiatives, leading to our growth. Our progress has led to year to date net positive subscriber growth and were positive for the third quarter on a completely organic basis.
Okay bold initiatives are helping to create sustainable improvements to our efficiencies and cost.
Now I'll turn to customer retention, which we continue to improve in the third quarter as of September 30th or trailing 12 month attrition is that a record best 12.9%.
At their best position of the year.
Customer acquisition and related employee training and other expenditures.
In summary, we're very pleased with the partnership and early progress we've made with Google and as I already described we're also excited about the momentum of our current business, which we expect to continue into the fourth quarter and into 2021.
With that I will now turn the call over to Jeff to cover our financial results and improved 2020 financial outlook Jeff.
Thank you Jim and thank you everyone for joining todays call.
As Jim mentioned, we have performed very well during a challenging 2020 macroeconomic environment and we are very pleased with our overall third quarter results and our improved outlook for the full year.
So you can continue to focus on service the effectiveness of our retention initiatives and some of the environmental tailwind Jim described including fewer relocations.
Are adjusted EBITDA, a $564 million was up slightly on a sequential basis compared to the second quarter.
Our cash generation remained very strong both in the third quarter and year to date, despite higher cash interest due to a shift and coupon timing, which will reverse in the fourth quarter.
We generated $127 million of adjusted free cash flow during the third quarter.
And through the first nine months of 2020 are adjusted free cash flow of $532 million is up more than 15% from the $459 million during the same period in 2019.
Are strong year to date cash performance comes from a variety of factors.
That more than offset the higher catchy interest, including subscriber acquisition cost efficiency and the benefits from some favorable cost based trends in our current operating environment, along with some timing items.
Highlight of our strong cash performance is that we have been currently grown our subscriber and RMR base, which has been enabled by improved efficiency in net subscriber acquisition costs or sac.
We intend to use the proceeds from the Google transaction for a combination of growth funding and debt repayment and to that end. We are announcing today, our intent to repay a minimum of $300 million of debt during the fourth quarter of this year.
Before moving to Q anyway, I want to share a brief update on our outlook for full year 2020.
As Jim mentioned, our business continues to perform well and exceeded our expectations during the third quarter.
We consequently, our once again revising our full year outlook higher.
Our new revenue range is $5.2 billion to $5.35 billion up from $5.05 billion to $5.3 billion.
Our revised adjusted EBITDA range is $2.15 billion to $2.225 billion and improvement from $2.1 billion to $2.2 billion previously.
And our refreshed adjusted free cash flow range is $650 million to $725 million compared to the prior range of $625 million to $725 million.
As always we will continue to balance short and longer term objectives with a focus on the pursuit of selected incremental growth investments to generate future period returns some of which we are considering during the remainder of 2020.
As we developed our 2021 plans we are focused on investing in and positioning our company for long term growth and building on our progress from the past few years.
We look forward to sharing more on our next earnings call in early 2021.
To conclude my comments today I want to emphasize that we are very pleased with our strong results through the first nine months of 2020, we.
We are thankful for our committed team of 20000 employees and their perseverance and performance during a challenging year and we are excited by the progress. We have made positioning 80 for the longer term and by the resulting opportunities in front of us.
Thank you again, everyone for being on todays call.
Operator, we will now open the line for questions.
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And our first question comes from the line of George Tong with Goldman Sachs. Please proceed with your question.
Hi, Thanks, good afternoon.
Celebrating the launch of a professionally installed a co branded offerings with Google into two new wind Warren sack and congrats.
Could you elaborate on that.
Sure.
I will now have approximately nine you're going to ship with alarm pulse.
Hi, George we didn't.
Some interference on our end could you repeat that question.
Sure sure. Thanks.
Command as Weve already talked or Jim are you talked about we'll have fully integrated in that second half that invites all the Google product suites into kind of our ecosystem, but regarding our new platform just to add a little bit to what Jim said, we're looking not just going to make our smart platform smarter. We are looking to make it more helpful and thats leveraging.
Googles prowess in AML and AI to fuel, what Google clause, Andy and computing and if you can imagine for a moment in today's world, we have to educate our customers make them smarter, so that really to leverage their system in different ways with rules and automation that kind of thing what we want to do is we want to make our customers not.
Smarter necessarily but more comfortable sharing information there Gordon fuel that ambient competing opportunity and actually create the rules automatically without the customer having the intelligence.
To do it themselves and we see that as a way for the customers are gold value in their system without the necessary investment of additional devices or even educating them on how to write rules themselves.
Got it Thats helpful.
You generated positive net subscriber growth organically in the quarter can you discuss the sustainability of this of this growth in net subscribers in the top.
Factors flash initiatives to fuel this growth going forward.
Yes, Thanks, George its Jeff So we feel really good.
About our performance in the quarter, we talk often about balancing various objectives in pursuit of strong ROI over the long term and in this quarter. We delivered on all of those objectives, we reduced our sac spending we improved our customer acquisition efficiency, we exceeded our EBITDA objectives and as I said in my prepared remarks were really excited that.
We did that while generating strong cash flow. So so there's a whole variety of factors that goes into that many are to do with their own performance is also benefited from some of the macroeconomic and macro environmental factors and we think many of those rules will stay with us and that we will have some wind at our back for a period of time.
And continuing to drive improvements in the business as we head into into 2021, and that's where we're focused on doing.
Got it thank you.
And our next question comes from the line of Seth Weber with RBC. Please proceed with your question.
Hey, guys. Good luck good evening.
I guess just first on the Google announcement can you just I'm just trying to make sure im understanding is the pull forward.
Is that a.
Product development, but uhm exactly how much is yet to be determined.
Okay and then.
Maybe maybe if I could just switched to the commercial side for a second I mean, your your commentary was pretty positive about the backlog and sort of sequentially improving trends. There can you talk to you know that was.
Part of your business I was growing you know double digits pretty nicely pre covid do you envision that getting back to sort of a double digit revenue growth once the environment kind of settles back down.
Absolutely what we're very optimistic about the commercial business total revenue was up sequentially. In Q3, we believe will return to growth in 21. The business includes a large recurring revenue base 30, 35% of the revenue in that.
Business is recurring so it's buoyant and and durable highly diversified stuff I think where it just shy of 250000 customers and the commercial business, we have upside in new and growing vertical health care education government.
Critical infrastructure and as we've talked about a number of times before we have the best service in the space and that's the most critical source of differentiation.
So we're we're optimistic about the commercial space and expect to grow again next year.
Perfect I appreciate guys. Thank you very much.
And our next question comes from the lineup <unk> Pet night with Barclays. Please proceed with your question.
Hi, this is actually quite calling on maybe to stick on the car. So side I. Just wondering what you think I'm at a small business customers as we go further along here I kind of the the stimulus wears off L are those guys hanging in.
What's the outlook.
Yeah, we we feel good about small business. Your question with regard to how they're doing is the stimulus wears off.
We we so far feel good about attrition level delinquency in that area of our business is held strong and generally speaking, we we feel great about about the S. M B business and it's continue to.
To perform in a healthy way for us.
Yeah, well I went away I might describe it is in our small business customers in general have performed more analogous to a residential customers into our larger commercial customers.
Okay that makes sense and then maybe it again on that they could real partnership I think he said that you know very nearly what you anticipate it for for 2022.
Any color on you know what'll be the things that need to be added from there or what what's missing versus initial expectations and and how do you continue to where I went to get the product out and 20th 21.
Yeah. This is Don so so we had mentioned before we're gonna have the Google privacy fully integrated with our command and control impulse platforms.
On the newer platform. We're looking to go beyond just device integration. We're looking to go ahead and let me know.
M L. A I mentioned before nanny competing in addition to something I I didn't mention which is alon verification is too great opportunity to go in and collect data to analyze it and how verify even score alarm activity in the future. We think that's an added value to our customers as a result of some of the things that got please.
Department five across the country first responders and and we're excited about that there's also a bit of an imagination days that begins in 2022 kind of you know the opportunity of the possible and I'm I'm really looking forward to that.
Okay. Thank you.
[noise]. Our next question comes from the line of Gary busy with Bank of America. Please proceed with your question.
Hey, this is J N on for Gary Tonight.
My first question just you.
You earmarked 300 million of the the 450 for them to Google investment for debt reduction is it safe to assume the remaining 150 will be used all set up for these two initiatives you guys have coming with Google.
Yeah. So we said a minimum of $300 million, we we feel really good.
About our capital structure and the progress we've made over the last couple of years. We've done I think it's for refinancing transactions between 2019 2020 collectively reduced our cost of that by a homeless the full point and and.
Google proceeds because of our strong cash generation as we said are available for a combination of debt repayment and growth and the reason for now, we're saying $300 million or minimum thereof is because we are continuing to evaluate you. Some of the questions that have already come up and the exact.
Amount and timing you. In addition to some some other things unrelated to Google that are on our radar screen for the fourth quarter headed into next year.
Okay.
So that is that could be that potentially be a reference to that account acquisition that room mentioned the slides.
Yes, I would.
Say, there's the normal course of business things you might pursue emanate that we may pursue and just trying to remain flexible and nimble you as we work our way through budgeting and planning for 2021, and you'll look out into the horizon, you'll not just for the fourth quarter that into next year.
And and you said.
And you'll get again, we we send amendments $300 million, but depending on how that plays out the exact timing the exact mechanics I need an exact amount is a little bit still to be determined.
Okay, and then just with regard to defenders Uhm could you give an update on how that can.
Guess helpings driver drive customer acquisition and two efficiencies.
Yeah, it's going it's only very well the immigration has resulted in us capturing both the cost synergies than the revenue synergies that we anticipated.
One of the great strengths of defenders was there direct marketing capability and together with our own marketing organization, we're seeing terrific benefits in terms of sack efficiency and and I'd say feel great. So far about the about the integration of defend.
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I had one one thing I would I would add and I love when people ask that question. We we can talk about it internally we have so many things that are working in the positive direction that it becomes difficult to disaggregate each of those things to figure out what's the precise contribution of each one but when you look at our improvement in our subscriber acquisition efficiency you you have to defend.
There's integration some improvements that we've made in marketing more generally have the benefits of our new pricing model that we rolled out just in the first quarter of this year and then and then also exposure to some of these trends that you see on the slide slide five on our deck you around the organization household formation in each of those dynamics. So so we feel real.
Good about all of them, but to be honest, we struggled to you precisely parse out our performance into the exact contribution from getting one of those factors.
Alright, alright, thank you.
Hi, ladies and gentlemen, as a reminder to register for a question. It is the one followed by the for our next question comes from the line of Jeff Chesler with Imperial Capital. Please proceed with your question. Thank you could I could I have a follow on with regard to.
Some of your metrics your cost to create and then again and your cost and you're close to serve.
And attrition some <unk> to some extent they are they are interrelated getting good customers. Obviously, you know potentially make some longer live but what I'm asking about is is beyond beyond defenders.
And and getting into and getting into your third party <unk>. Your third party Friday answering how are you using that.
And and how are you how are you finding.
The ability to.
Secondly, make it efficient that they take the right. They they they finance the right customers for Ya and you either take on or financed those other customers that don't that don't meet that don't meet the standards.
So that you don't have you know.
So you don't have upticks in in a in a in nutrition, so that everybody knows who's who's playing them I'm on what board here.
Oh, just this is Jim I'll I'll take the attrition question answer it a little more broadly and then come back to a point in time defenders and then you touched on consumer financing and how that's going to I'll ask Jeff fulfill comment on consumer financing.
Saw Saturday at a high level on nutrition, you know, we feel great about retention in the third quarter.
As we announced it was a record low $12, 90% for us to improve what was super widespread across geographies all categories across all business areas.
S M. B S. M. D was flat residential core commercial improved, but uhm, but but a couple of reminders on a Christian and one of them precisely Ah addresses your question. The first is.
Well I appreciate that important metric and all attrition bad attrition, it's only a part of the value equation, along with other measures cost to acquire probably the most important and then secondly, and to your question. When we acquired defenders, we continue to receive <unk>.
<unk> for account sold to the acquisition and that benefit expires over a 12 month period and will be a flight metric headwind and the subsequent 12 month period for us. So we feel great about customer retention were optimistic about it from.
I'm, a long-term perspective, especially as we enter the smart home space more assertively, we know more customers use their systems. The more devices are plentiful in the home the more of the systems are integrated into their daily activities that retention improves, but because that charge back from.
Defenders will go away in January it'll be a slight metric headwind and the and the subsequent 12 months.
And do you have you started your question, we talked about cost at great cost to serve and address and so kind of similar similar to Georgia question I mean, those things along the growth along with cats generation or what we seek to balance every period, you know and we talk about how we're not trying to optimize anyone but in the third quarter.
Like we achieved or or exceeded our objectives on every single one of those so we we feel really good about our performance in that regard and then and then the yeah. There. There's there's some noise in the year on year because of the candidate desk.
Canada disposition, the defenders acquisition rollout of the of the financing and the ownership model that goes with it but but really good about overall performance. The way we feel and then when you ask more specifically about financing and customer selection you I would I would <unk>.
<unk> that the growth that we've generated and are are more additions is coming at higher average install revenue per unit and a significant driver for that notwithstanding my earlier pointed out the difficulty parsing every factor, but one of the drivers is for sure our new pricing and our financing model. So so we're using that has a selling tool.
By and large as a selling tool for all customers, but all customers don't end up taking the financing option you in many cases, we use it as a cell into it but we ended up collecting upfront and cash and then your question about how we select it's based on a combination of the customer and the order size in the credit scoring and business. The same kinds of things that we've used <unk>.
Directly and then just a reminder, in terms of how it works the customers relationship is with ADT, we offer the financing V. A T and then we monetize it in partnership with with Missoula Bank with with an advance rate based on some of those same characteristics I just described but we're we're all we're only two four quarters in off to a really really good start in and we will.
Who will continue to fine tune exactly how we present and be offered to maximize the effectiveness and utilization overtime.
Okay. My my follow up is <unk>.
<unk> I found my fault, but obviously it could be with good done it would be a 10 minute discussion. So I don't want to do that at this point the.
The the the follow up question is actually on your commercial industrial business I noticed touched on a couple of times, but could you could you <unk> could you give us a little bit more clarity on which areas, maybe which verticals or which types of accounts. You know you have not you.
National account businesses, and then and then you have you <unk> and then you'll have like a large one one campus types types of businesses, where are you able to start seeing.
People will be being able to get on premises to start installing again or where are you able to negotiate agreements.
Agreements, where if if it if you know to to make it a little bit easier now that given the fact that this is this pandemic is not gonna go away anytime soon and yet companies are learning how to deal with it.
What are you doing to learn.
How to deal with it on the commercial side. So that you can you can keep those you know keep those numbers going.
To have Jeff as Jim I V.
V I P against customers learn to deal with the pandemic, we realize the benefits and to resolve and our ability to get on premise today is markedly better what are versus what our ability was three or four months ago. We think there's a ways to go for the over.
Wall market is is the pandemic and economy are still somewhat unknown.
But we finished cute three with strong backlogs, but the highest of the year roughly equivalent September 30th of this year to September 30th of last year, and we have solid sales and install on October as well so is broadly diversified much.
<unk> tied with getting access to the premises and as I mentioned earlier, we feel really good about about the commercial business and returning to growth next year.
Jeff how would I would add to that building a little bit on some of what I was saying earlier about all the factors that go into this year between Canada and descended the new pricing model. It's also of course, a higher degree of uncertainty with COVID-19, and some of the challenges to the top line, especially in a commercial business that partially offset by.
By some benefits from lower spending in other parts of the business. Our team's it performed very very well, it's increasingly clear that we have this exposure to these favorable environmental trends.
But as we go into 2021 planning for sure. There's a higher degree of uncertainty that we're managing through to build on those trends you manage the uncertain environment, including commercial recovery return to normal behaviors more more generally and we're really focused on strengthening our capability to grow our subscriber in autumn auditions for the long term.
Including consideration of an investment in the Google partnership platform. Other other initiatives and you will of course talk more about the future in 2021 on our our call early in the new year.
Okay great.
Thank you very much.
Next question comes from the line of Cat.
P Morgan.
Please proceed with your question.
Alright can I assist in the line of Cat.
Please keep with your question.
Hi, I'm wondering if you're going to take any steps to better align your compensation.
E S T metrics and execution and then there's a follow up to that I'm wondering what is being done at the board level with regard to the underperformance of the stock.
Thank you.
Yeah, I'll I'll answer the call.
<unk> V. So in terms of management compensation.
We have a a compensation program that is heavily weighted towards equity.
The the management team a exceptionally a wine to shareholders.
And and we think that the way that the annual incentive plan is designed so patiently incense management to drive lead indicators that will ultimately be realized in the stock price.
In terms of your question on the board we're not prepared on this on this call they talk about board interaction and planning.
Alright, and you have no further questions from the phone lines at this time.
Okay, Jim if you want to make some closing yeah, just a couple of things. So so needless to say, we're we're very pleased with our operational and financial results.
Ah 10% growth in RMR additions record low revenue payback of 2.2 years next upgrowth record low attrition. All served to underscore are strong operating capabilities and Ah really highly durable business model the Google partnerships.
Talk to an outstanding start and we're very optimistic about our trajectory going forward. So.
Thank you everybody for calling in Tonight and have a great evening.
That does conclude the conference call for today, we thank you for your participation ask that you. Please disconnect your line.
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