Q4 2020 ADT Inc Earnings Call
[music].
Good afternoon, ladies and gentlemen, and thank you for standing by.
Welcome to the ADT fourth quarter, 'twenty and 'twenty earnings Conference call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Should you require operator assistance during the conference. Please press star zero to signal and operator. Please note. This conference is being recorded.
I will now turn the conference over to your host Derek Fiebig, Vice President of Investor Relations for ADT. Thank you you may begin. Thank you operator, and thank you everyone for joining Adt's fourth quarter, 'twenty and 'twenty earnings Conference call. This afternoon, we issued a press release and slide presentation of our financial results. These materials are.
Available on our website at Investor Day, ADT Dot com.
Our remarks today will include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such forward looking statements.
These risks include among others matters that we've described in our press release issued this afternoon and in our filings with the FTC.
Please note that all forward looking statements speak only as of the time. They are made and we disclaim any obligation to update these forward looking statements.
During today's call, we'll make reference to non-GAAP financial measures are historical and forward looking non-GAAP financial measures include special items, which are difficult to predict and to work maybe mainly dependent upon future uncertainties for a complete reconciliation of historical non-GAAP to the most comparable GAAP financial measures.
Please refer to our press release issued this afternoon and our slide presentation, both of which are available on our website.
With me on today's call are Adt's, President and CEO, Jim Debride, and our CFO, Jeff and look at SAR.
Also joining us in the room and available for Q&A is Don young our CIO and EVP of field operations and Jason Smith, Senior Vice President of finance and with that I'll turn the call over to Jim.
Thanks, Derek and thank you to everyone for joining us today I'd like to begin our first call of 2021 with some comments, reflecting on our 2020 overall performance and then share some thoughts regarding our new partnerships and current growth momentum for.
Lee I'll offer some perspective on ADT as priorities as we advance into 'twenty and 'twenty. One I'll, then ask Jeff to cover our financial results as well as our 2021 outlook.
With the world walks into and unexpected pants and denim at 'twenty and 'twenty was an extraordinarily challenging year for so many and impacted everyone's lives and different ways and it was also a year, which brought us and ADT gift.
Kicked off perspective, we were reminded more than now for all the importance of protecting one's home and family for all of us at ADT 'twenty and 'twenty brought a newfound appreciation for the essential role we play partnering with first responders and serving our customers and communities.
And continuously and reliably.
After witnessing the tremendous collaborative efforts of our team during the past year I'm humbled to be able to lead such a great organization and couldn't possibly be more proud of the collective performance of our more than 20000, ADT associates and our dealer partners.
During our first call last year on March <unk>.
And you are to the impact of the pandemic, even being understood and.
T provided our full year 'twenty and 'twenty financial outlook. Our guide was five to $5 3 billion for revenue to one seven and five to 225 billion for adjusted EBITDA and 630 to 670 million for adjusted free cash flow.
Because of the resiliency of ADT business model and the outstanding performance of our team and despite the challenges and volatility of the economy, we exceeded the upper range of our revenue delivered in range and adjusted EBITDA and perform just above range on adjusted.
Free cash flow as I would explain we also set the table for accelerating our growth and continuing momentum going into 2021.
Further in 'twenty and 'twenty, we grew our net subscribers for the full year, our new U S. RMR additions started off solid and Q1 at plus seven per cent, but then in Q2 were down 11% as most of the country began shutting down however, we can.
Tenured to drive sustainable internal improvements to our subscriber acquisition engine.
Fisher and see contributed to not only favorable results, but for a positive momentum for our business, especially when combined with secular trends and external demand catalysts, such as new household formation beer, but innovation.
Desire for increased home security and the acceleration of smart home adoption and growing consumer spending on home improvement and more generally.
RMR additions increase year over year, 10% and the third quarter and 15% in the fourth quarter.
Further our interactive take rate increased to 86 per cent and we reached the milestone and a 3 million residential interactive customers and.
Just this month ADT and at our one millionth customer and the command platform as we've mentioned in the past our DIY business continues to grow nicely as well and we're excited about this complementary part of our business.
We remain anchored to capital efficient growth and the cost of acquiring subscribers also improved with a record best revenue payback of 2.2 years. This is they shouldn't see was driven by our successful consumer pricing and financing and initiative as well as better.
And from the defenders acquisition.
Exceeding our expectations, our gross attrition metric improved by 30 basis points to $13 one per cent as relocations across the country, where less common than normal and the second and third quarters and importantly, our customer satisfaction was strong.
We also delivered on our commitment to drive strategic partnerships and alliances to expand our reach and offerings and ultimately to better serve our customers and the residential front, we entered into a long term relationship with D. R. Horton.
<unk> largest homebuilder and and mobile we introduced ADT to a broader set of potential customers through the national rollout of our partnerships with lyft and instant cart.
Certainly our most transformative partnership with 2020 was with Google Adt's long current strategic relationship with Google and significantly enhances our growth opportunities.
Foundation for our partnership is a shared vision for the future of the smart and help for home and a steadfast commitment to our customers.
As a reminder, Google invested $450 million of equity and the ADT and it's committed $150 million and matching dollars to fund marketing product development and employee training our partnership facilitates the development of new offerings, both services and products as well as new.
Technologies, which will power ADT leadership, and a rapidly growing smart home market.
Pleased to share that our partnership with Google is off to a tremendous start we'll be rolling out product integration and beginning in the second quarter and we're on track to introduce a first generation ADT plus Google solution and the second half of this year finally ADT and.
<unk> will have agreed on and exciting new joint go to market branding strategy, which will share later in the year.
Summarizing a unique and unexpected 'twenty and 'twenty, we purposely and strategically played the long game and we will continue to do so ADT.
ADT navigated amid the pandemic with resilience and as a whole avoided any material adverse business impacts while building a strong foundation for growth and the years ahead, we are committed to persevere through the COVID-19 crisis with a goal to ultimately become a strong.
Longer company and.
And we've done so our momentum going into 2021 is real and I'm excited to share a few comments about the year to come.
We've invested a significant amount of time over the last few years, improving our operating kpis and driving improvements and customer service better operating metrics improved efficiencies and field performance, having made substantial progress in many areas we begin to focus.
Our improved internal growth capabilities, and the pursuit of strategic alliances and partnerships.
As mentioned, we developed a relationship with D. R Horton and more recently with Google as a catalyst we've added new partners, such as <unk> security and dish and.
For men a successful company over many years with customers and the southeast part of the country Atlanta, and particular will join forces with ADT is a new residential dealer Ackermann and also provides ADT with some commercial assets.
The strategic partnership with dish expands our total addressable market to additional ex urban and more world geographies of the country. Many of the dish technicians have experience with the installation of Google products and will be a great asset for ADT as we grow.
Our operating improvements the partnerships, we've developed and will continue to pursue the many macro tailwind and demand catalyst are all converging and.
And we focus more intently on allocating capital to the vast array of growth opportunities. We're now presented with 20.
2021 represents an exciting pivot point for ADT.
We will leverage our strengths, our trusted brand and our operating excellence.
Our outstanding customer service, our talented field force, our national scale, and our capital efficiency choline and further into high return growth opportunities before us.
With these and mind I'd like to provide free markers to evaluate our progress in 2021 for.
<unk> will be the continued growth and RMR additions to staff for a strong 2020, we're targeting 2021 growth rates in RMR additions and the mid teens as such you will see a higher aggregate dollar level.
Investment, which we're allocating towards this high return growth will continue to be disciplined and our approach with high credit standards, and we will remain focused on efficient sack and investments with high Irr's and the high teens and above.
Deeply needs high ROI standards, we plan to deploy between 150 and $250 million of incremental residential sac and 2021 versus 2020.
Second.
We will drive innovation highlighted with the launch of the first generation and ADT plus Google Smart home solution. During the second half of the year. We will also invest significantly and our next generation and to and ADT, one technology platform and continue to.
Pursue meaningful partnerships and mobile safety.
Third while COVID-19, and its continuing impact provides some uncertainty we expect to return to low double digit revenue growth and substantial year over year improvement and profitability levels for our commercial customers. During the course of the year or early optimism is heightened.
Because of the backlog of commercial customers was actually higher at the end of 2020 than the prior year and the pipeline for new business is healthy.
And outstanding leadership team and commercial and we're very excited about this part of our business and summary, our current momentum is strong and we're encouraged about our future 2021 is positioned to be and exciting year for ADT, one where our growth is more significant than in the past.
And were investments executed well and will result in an attractive and sustainable growth for years to come and I'll now hand, the call over to Joe Joe.
Thanks, Jim and thank you everyone for joining our call. This evening.
As Jim described we performed very well and are highly unusual 'twenty and 'twenty environment.
Like most companies we encountered many unexpected dynamics and we're very pleased that we were able to execute on opportunities to offset several of the unplanned challenges we faced.
More importantly, we maintained our long term focus and continued our strategic progress and are especially encouraged by the trends, we saw and the second half of the year into 2021 and.
As a reminder, during 2018 and 2019, our priority centered on enhancing our service culture, improving our operations and expanding our cash generation capabilities.
More recently, we have focused on strengthening our foundation and executing initiatives to drive efficient sustainable growth. In addition to recurring monthly revenue or RMR.
We are pleased with the progress we saw during the second half of 'twenty and 'twenty with U S. RMR additions up 12% following a 3% first half decline driven by challenges arising from the COVID-19 pandemic.
On a full year basis U S. RMR adds grew by five per cent.
We can currently grew our full year adjusted free cash flow by 14% to $675 million by comparison and as evidence of our cumulative progress in recent years adjusted free cash flow in 2017, and the year prior to our IPO with just over $400 million.
As you mentioned other full year 2020 highlights include gross revenue attrition at 13, 1% down from 13, 4% in 2019 and significantly below the 16 plus percent attrition for legacy ADT prior to the Apollo acquisition.
And revenue payback at a record $2 two times in 2020.
Compares to two three times from 2019, and two seven times on a pro forma basis and 2015.
As a reminder, some of our core financial measures were affected by the disposition of our Canadian operations, and 2019, and the acquisition of defenders and early 'twenty and 'twenty.
Despite their favorable economics these transactions reduced our adjusted EBITDA, which was $533 million and the fourth quarter of 2020, and just under $2 $2 billion for the full year.
Our total year 2020 revenue was $5 $315 billion up 4% driven by growth and installation revenue primarily due to a higher volume of outright sales transactions for residential customers, which includes volume from the defenders acquisition.
This increase was partially offset by lower sales to commercial customers, which while down for the year due to COVID-19 improved sequentially in the third and fourth quarters.
For the fourth quarter total revenue was $1 315 billion up 1% versus 2019, despite the effect of the Canadian and disposition and lower sales to commercial customers.
The strong 2020, adjusted free cash flow I already mentioned up 14% was the result of several factors, including some offsetting dynamics related to COVID-19.
A key contributor was efficiency and net subscriber acquisition cost for Sac, which was down year over year, Despite our growth and RMR adds.
Other noteworthy items affecting cash flow included our participation and the cares Act payroll tax deferral program and the offsetting acceleration of a portion of 2020 annual incentive plan payments.
In addition to strong cash generation, we built on our 2019 refinancing transactions to further improve our capital structure during 'twenty and 'twenty.
And January of 2020, we refinanced our second lien notes and.
In August we replaced our 2021, firstly notes with new 2027 notes in.
In December we repaid $300 million of our term loans, which we then repriced in January of 2021.
Our resulting lower borrowing costs and extended maturities provide us with greater flexibility to deploy capital to high return growth opportunities.
In 2021, we are eager to build on our substantial progress from the past several years.
We have strengthened our business fundamentals enhanced our service culture run our cash generation capability and improved our capital structure and develop new and more efficient routes to market.
We are enthusiastic and optimistic about our future and you can see on page eight and our debt are summarized framework of our strategic priorities.
The next chapter for our company is focused on driving more RMR growth, creating new innovative offerings and further enhancing our overall customer experience.
And our commitment to generating shareholder returns.
We plan to share more detail on our long term strategic plans and objectives, including our ADT, Google branding and products during Investor Day later and media.
Our teams across the business are energized by our strategy and our growth prospects for 'twenty and 'twenty, one and into the future.
As Jim mentioned, we anticipate 2021, RMR additions and the mid teens, which reflects a significant increase from our growth rates during the past few years.
We are also investing to support our strategy with our new interactive platform.
And the development of new offerings and collaboration with Google upgrades to our infrastructure and the launch of the ADT, Google marketing program.
And you can see our resulting 2021 financial outlook and our Investor day It and.
<unk> total revenue in the range of $5 <unk> to $5 billion to $5 billion.
Adjusted EBITDA and the range of $2, one to $2 $2 billion and.
And adjusted free cash flow and the range of $450 million to $550 million.
While many factors affect our cash flow implicit in our guidance is 150 million to $250 million higher cash tax spending and supported the strong RMR growth I just mentioned.
As a reminder, our reported revenue and adjusted EBITDA are affected by the defenders acquisition and the different accounting policies applicable to accounts generated via different channels and under different ownership models.
These different accounting policies do not affect cash flows and we describe in more detail and our investor day and 10-K.
As you can tell from our 2020 progress and our 2021 outlook, we are well positioned to capitalize on our improved capabilities and several favorable secular trends.
Our focus is decidedly long term the long game, Jim mentioned and.
Our teams have never been more excited by our future.
Before concluding my comments I want to express my appreciation for our more than 20000 employees are dealers and growing list of partners and our investors for the continued support of our company.
Thank you everyone for joining our call today operator, please now open the line for questions.
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Ma'am, please go and poll for questions.
Our first question is from Peter Christiansen with Citi.
Ladies and gentlemen, and thanks for the question and nice execution and a tough year.
Jim It's really good to see that and are positioned to up the offense and in 'twenty one.
And it makes it makes a ton of sense, but I wanted to dig a little bit into the cadence and how you're thinking about.
And the incremental sac throughout the year and introducing new products, particularly the the next the next phase of Google.
It.
Is that something that you've kind of save your powder for a little bit and then.
Act, a little bit more aggressively once that comes out and.
As a quick follow up.
It sounds to me that the.
This joint product could have a much higher value proposition for the customer. So is there any preliminary thoughts on on pricing and and.
Relative to the current interactive offering that you guys provided the residential side. Thanks again.
Yes, thanks, Pete So I'll give a little bit of context to the pivot for growth and then ask Jeff to address your question.
And a little more detailed way.
Much of the last several years, we've been focused on operational excellence, our retention improved 300 basis points customer satisfaction improvements.
As Youre aware better operating kpis across the board.
Revenue revenue paybacks come down 27222 years and and.
And at the same time, as we're getting and our operational house and order, we have macro trends and the demand catalysts that we've been talking about and and discussing as tailwind.
Essentially our products.
We see our products and services are in demand and.
And then in addition to getting our operational house and order and the macro tailwind.
We have worked really hard on building strategic relationships and it's a long list D. R. Horton dish Ackerman.
Some relationships and the insurance space and.
And when you combine all of those factors operational excellence macro trends, new new partnerships and now Google, we're able to allocate capital to high return growth and pivot more assertively to capital efficient growth, Jeff do you want to add some yes, I'd just add that.
And it's energizing for the whole organization.
B and a and a growth mode. So there is a lot of enthusiasm across the company.
A lot of fun.
And your specific question about about the cadence the comparisons will be odds because last year was it was odd so second quarter of course it was the most depressed quarters. So the compares are easy.
And the Ackerman Alliance and initial.
<unk> purchases from that agreement will be helpful and the first quarter, but the way I would think about it is our pace of adds or our pace of sac spend and setting aside the ackerman purchase and the.
And the first quarter, we would expect to be relatively normal with historic patterns, excluding last year, so a little bit higher and the summer season, when there tends to book more and more activity, but aside from that we're modeling and as it returns to a more normal cadence and of course of the year on year it will be affected by that.
Normal cadence in 2020.
Great. So not really like a first half second half story pretty normal cadence throughout the year.
Yeah, we were expecting to layer where you.
And for things and as we go through the year, but we exit 2000 and.
'twenty with really strong momentum haven't grown and U S RMR and by 15%.
And the in the second half of the year. So we're entering the year with momentum we have we have.
Additional benefit coming from even the recent partnerships, we've announced just over the past several days.
With the easiest comparables and the second quarter.
2021, because of the soft 2020, and then the tougher compares in the second half of the year.
That's great. Thanks, gentlemen, very very helpful.
Our next question is from George Tong with Goldman Sachs.
Hi, Thanks, good afternoon.
Wanted to dive deeper into your plans to deploy 150 to 250 million of residential Sac in 2021 can you elaborate on which customer segments. You plan to go after with this incremental spend and what returns we expect from the investment.
Yes, George it's Jim.
So there's a handful of different opportunities in front of US most of the incremental SAP will be spent and the residential business.
And we've got the demand catalyst. So we've talked about since the third quarter, bringing some pretty significant headwind or a tailwind for us and.
And.
Some unique opportunities to really allocate capital for that business and grow.
The returns are high teens.
And above.
And and we will also allocate some of that capital to opportunities and the commercial space, but most of the incremental capital will be and residential.
And George one other thing I would add one thing I'd add is that if you look at our historical financials only included a slide in our deck that shows back 2017, and a year prior to the IPO, but we're planning to generate these RMR adds still with more free cash flow generation adjusted free cash flow as.
To 2017, which is just a testament and kind of a quantitative test and then to some of the points. Jim made earlier about all the progress we've made in recent years, becoming more efficient and better attrition and better sac efficiency, improving our capital structure. So we're very excited to be in a position to have the capital structure and the cash generation capabilities to be able to grow at a higher rate.
Got it that's helpful and just as a follow up do you view the increase and Sac is a permanent slash structural step up or do you expect it to reverse and then perhaps related to that question.
And what kind of payback period.
Do you expect is it a two year payback. So in other words you'd get back this $1 50 to $2 50.
Two years down the line how are you thinking about that.
I would think about it and we plan to share more in an investor day, and the second half of the year, but I would think of it as as we are raising the water level with respect to the quantity of new subscribers and new RMR that we add each year. So.
And would expect to continue to grow.
Of course, we will seek to become more efficient and improve revenue payback over time and then in terms of your question on on payback I would describe that in the context of IRR as we target IRR is and the teams and higher and as we've talked about many times in the past the IRR is a combination of the upfront.
Cost to acquire the customer the profitability of the customer on an ongoing basis and then how long the customer stays with us. So we're always looking at all and each of those variables among others with an eye on optimizing the return on the capital that we deploy.
Two two quick points of elaboration George.
First is.
That is a philosophy will continue to pursue our growth and a very disciplined way.
We wont retreat from our standards on credit.
And we'll continue to be disciplined and ensure that this growth is good growth and then specifically on your question on payback.
I think we'll continue to have a revenue payback that's in the zone of where we are now it might move a bit up it might move a bit down, but we'll be in a and a range.
That will facilitate the returns as Jeff just mentioned.
And Irr's and and a revenue payback range consistent with those higher IRR.
Got it thank you very helpful.
Okay.
Our next question is from Toni Kaplan with Morgan Stanley.
Thanks, So much and just wanted to understand the revenue impact vs. The RMR growth. So I understand the equipment financing chest, but excluding that I guess revenue would be up about 4%.
And your RMR estimate looks like more of a high teens growth. So is that largely due to a decline and installation revenue just why why it does and the RMR addition flow Morris through to the topline.
Yes, it's definitely that.
And some somewhat complex topic, but but because we are in the process of converting legacy defenders to our historic ADT ownership model and because last year, we for a portion of the year had legacy ADT and and outright sales model, we had meaningfully more installation revenue last year.
We included some description of this in our earnings materials, we estimate it's about $350 million to $400 million of lower revenue. It will predominantly be lower install revenue, which is where which is worth about seven points.
So it's not it's not for that pressure than we would have.
We have additional.
Revenue the drivers of that additional revenue is is a recovery and the commercial part of our business, which we expect to get back to something that looks more like the trajectory free COVID-19, and then the flow through of R&M and that's revenue growth that comes from from.
From the RMR adds that we had last year and expect to continue into this year.
That makes sense and I wanted to ask about attrition and so just given fewer customer and relocation staring COVID-19 that was a real benefit to the attrition this year and of course, that's a trailing 12 month metric and.
So just help us out with how you are expecting attrition to trend. This year I just wanted to make sure that we have a good sense.
And as the year goes on and you know just expectations for for what you're thinking there.
Sure Tony.
Retention for us and in 2020 with real strength and ending the year at 13 three.
Down 30 basis points from from last year.
From some companies report net attrition if if we use that metric were actually closer to 10% attrition.
Attrition level and.
And so we feel good about the progress that we've made we saw improvement in and most categories.
And they had a record low in Q3 and.
And the fourth quarter, we continued to improve and the categories of lost.
Last competition and non PE real estate activity as everybody knows picked up late in the year and we saw pressure and relocations in particular.
So we're long long term, we are optimistic about customer retention, especially as we enter the smart home space more aggressively we know the more our customers use our systems when devices are more plentiful when the devices and the system is integrated in a day.
Daily activities of our customer then we know that retention and crews.
So we are so so we think that will trade and we think that will be and a range here for attrition.
Some relocation headwinds and some smart home and interactive rate tailwind.
And that will carry through two.
21, one additional thing to mention to you when we acquired defenders.
We continue to receive a charge back benefits for accounts.
So prior to the acquisition and that benefit expired over 12 months and was a slight metric headwind in 2020, the impact of the charge back change and 2021 and is about 40 basis points.
Very helpful. Thank you.
And Tony one other point that I I don't believe I mentioned, when I talk about the change and revenue recognition because of the ownership model for residential customers that that is a noncash change. So we're still collecting the same amount of revenue from customers in fact book, reflecting even more revenue because of the success of our pricing.
And our financing initiative, but we capitalize that revenue netted against the equipment cost and and we recognize that revenue over time. So this is a different accounting treatment because of the different ownership model and nothing to do with cash.
Cash and in fact more install revenue is one of the contributors to the improved acquisition costs efficiency and revenue payback equivalents that you see.
And Tony This is Darren if you look at page 25, and the deck, we provided some of the changes on it.
And the vessels and the community.
Great. Thank you.
Okay.
Our next question is from Kevin Mcveigh with credit Suisse.
Could you just give us a little more context and with the $50 million.
And.
And what do you expect how do you expect that.
Longer term.
Yes.
So.
And you were breaking up a little bit there, Kevin but I'll.
I think you were asking about the 50 million value.
About the platform in which we're investing 50 million, yes, that's right.
Give us some insight on the platform just just for context, and then and I'll ask Don to describe a bit more but the two areas of investment and that we've called out is the is the higher sac spending that goes with the RMR adds and the teams and and the second we noted in our materials is approximately $50 million associated with the develop.
And one of our next generation platform, which we described on our last call. There is of course lots of other puts and takes that go into our cash flow guidance, but those are a couple that are noteworthy and malls bond for the to describe a bit more about the platform itself yes.
Yes, so Kevin.
And actually inherited and some nice ITM project engineers from from three acquisitions Red Hawk.
And I feel then defenders and addition to that simple Google announcement.
Double the number of engineers that are specifically working on this platform and we are targeting another third on top of that and that's equal by the number of engineers by the way that we're working with Google, but it's meant to basically move us to a more advanced platform and we have right now with command and control and that platform is also meant to serve both Gis and and.
And why customers and the future.
Thank you.
Our next question is from Gary Bisbee with Bank of America.
Hey, guys good afternoon.
Jeff I Wonder if you could just be real clear with us because it's it's been it's been difficult to know what was revenue growth.
Ex the accounting different accounting treatment for install revenue if we pull that out of 2020, what was the revenue growth for the year and what does 2021 guidance imply for revenue growth, if that normalizing and and that revenue not recurring what's the clean number both backwards and.
Forwards.
So so far.
Forward.
There's about seven points.
Revenue pressure that.
That comes from the change associated with the with the ownership model.
And backwards a bit more complex because of the interplay.
And with defenders with the Canada disposition.
And with the ownership model change.
But I would point you to our install revenue.
And the predominant driver of our install revenue growth.
Was more install revenue associated with the ownership model change.
So if we just take the actual revenue the midpoint of the guidance range.
Calculate the growth rate that implies at seven points and that's what the growth rate would imply or is that and yes, I'm just trying to get that day.
Clean Okay, Yes fair.
Fair enough and and then.
On on the on and two small ones.
On the Google investment for $150 million do you have any more insight on timing of when you spend it and what's capex versus opex and and the other small one just you you've had a couple of press releases out about this technology that could.
Eliminate or reduce the impact of the three G conversion because people could just plug and play like what's the update on that and what's implied in your guidance and cash flow for spending related to the conversion.
Thank you.
I'll take both of the loans, Gary and then ask for Dan to elaborate on the technology associated with the radio conversion and on.
Google as a reminder, both parties agreed to invest an incremental $150 million and the partnership. So there's a total of 300 million the Google funds can be used for marketing.
Product and employee training and are generally earmarked for those three categories. We haven't yet agreed with Google on the on the specific expenditures.
And we'll likely make a meaningful investment and the launch campaign, the ADT plus Google launch campaign later, this year and and expect to invest an incremental $50 million and that's built into our guide.
And on radio conversion when we started the year with.
$3 6 million conversions.
Shared and initial range of 200 million to $325 million net of revenue.
Our replacement plans are essentially on pace despite.
Despite the pandemic will finish Q1 with about $1 3 million radios.
Meaning new convert we've updated the range to $2 25 to 300 million. The majority of that will be spent this year. So they're short or short answer on the radio conversion is that we're on track and I'll ask John to comment on your question related to the technology.
And we acquired called sell boxes for sure and quick correction and I think James said $3 6 million to start off and there was actually $1 6 million to start off and go with but for me.
Sure.
We're calling it sell bridge internally for our ADT slipping and something to buy so balanced externally because we do it and agreement with AT&T and it provides us device for those.
And the industry, but we have successfully tested the survivable and the lab and at a handful of homes. We are looking to go out and watch this as we started and the last call nationally this quarter and and were exceptionally.
Our size as you go out and see how well it wasn't until some of the panels that all day long systems are particularly more difficult than others to be able and willing to swap out the radio and so we're very bullish on how it's gone and we're looking for the first quarter rollout.
And then if I could sneak one more and Jim.
And you become CEO, you've obviously pivoted hard towards investment flow.
For your partnerships you invest a lot and commercial the DIY the ADT.
ADT mobile stuff and and obviously, Google and there's just been a lot of activity what I hear from from many of your investors is well each one of these on their own.
No makes sense and in and it's logical.
And I'll understand exactly what the vision is in particular, because you haven't really given any color on sort of what's the end game. What are you what are you aiming for here.
Is the return for ADT and its and its shareholders from this flurry of activity I guess one.
One of the challenges is you haven't given any long term targets. So that we could assess your performance and so I guess I don't want to put that to you as a comment certainly hear the optimism, but what does this all mean for revenue growth for two years three years four years down the road what does it mean for profitability what does it mean for cash flow.
Hum.
Cause I, just there's a lot of excitement and certainly we understand it but profit had been stagnant for years and and we haven't seen revenue accelerate and so it's just I think theres some frustration that it all sounds good but we don't have a great sense, what the return for the company and shareholders is from all of this act.
And the last two years I don't mean that the sound and critical if it does and I'm just trying to get some color on on where this is heading and maybe what some targets might be to help us understand the vision you're aiming for thank you.
Yeah, I'll talk a little bit.
I'll talk a little bit about the vision.
And the vision from a high level perspective, we're going to have a chance to elaborate a good bid on this and the and and Investor day that we do later this year.
I'll ask Jeff to weigh in here as well, but.
Gary what what might appear as a flurry of activity externally is all.
Really engineering to get our organization position for capital efficient growth.
And I mentioned this earlier too when I was answering <unk> question.
The work that we've done over the course for the last 20 for 30 months has been to get the operational house in order.
Attrition, where it needs to be get our revenue payback, where it needs to be.
Set the pins from a marketing perspective to more efficiently acquire customers.
Bella partnerships, Google being central to that to facilitate growth and then to really take advantage of these macro headwinds that that are out there and I think that in 2021. The evidence that those pins are set.
And we're ready to knock them down and.
Is mid teen RMR adds.
I think over the course of the last four years or so our CAGR on RMR adds with something like 3% and we're talking in 2021 about.
The mid teens, and that's P for Google kicks in and and a major way and the second half and in 2022, just additional comments.
Yeah, and it's something we've spent significant time on internally. We you after spending the first three or four years over the past three or four years more focused on operational execution our net.
Chapter is going to be more about about growth being more and more innovative taken.
The customer experience Q2, and even better place leveraging our brand, especially in partnership with Google with further differentiating our frontline service capability, which nobody else has and then and then.
Building as part of the innovation point more of the technologies that that's further extend the the the realm of the.
Various offerings that we provide for smart home and security together and and we think nobody is positioned to do this better than ADT is and as Jim alluded to we plan to hold an investor day later in the year and go through that and more detail, including some perspective as to that.
Exactly your question you know what what that means and.
Terms of the economics over time with some some longer term targets and objectives that goes with it.
Fair enough. Thank you I appreciate the color.
Okay.
And as a reminder, please press star one to ask a question. Our next question is from Manav Patnaik with Barclays.
Yes. Thank you so just kind of from follow up to Gary's question I mean in a deep partnership with Google and so I think you've kind of answered it and and that last statement, but on a high level.
Yeah, just trying to get a foot into the door in the smart home and therefore, hopefully expand the Tam is that how we should think about the real benefits of this partnership.
Much more broadly than that and they're now.
We think we can leverage Google to not.
And not get our foot in the smart home space, but to grow significantly and be a major player and the smart home space.
And I've mentioned this before we're super excited about the hardware that Google brings.
The ADT plus Google branding is something that our marketing research.
Reveals is pretty exciting, but I'm most excited about what day.
And the partnership does from from and AI perspective video analytics and data analytics perspective.
We think that we cannot only compete and the smart home space, but really be a with Google as a partner and technology leader and provide customers services that don't exist today, that's all part of our second generation offering.
And some of which will be available and the second half of this year, but will be launch when we have our own interactive platform built in house.
Buying will come from hardware and video analytics to launch the next generation one $1 23.
Got it and and other another broad question.
The residential space, obviously has been passing and I think all the efforts you're doing makes sense.
Wanted to.
Go better and that market, but and a commercial has always been the fulfilment area and I'm just curious like at some point down the road.
Use the word pivot to India and like is there a pivot to become just more exposed to commercial or is residential just such a big animals for you that's probably not something in the near future.
No no I wouldn't say, it's not and our future commercial we expect to return to growth and 2021 and commercial.
And I mentioned this in my prepared remarks, our backlog both install and recurring revenue are higher at the end of 2020.
And then at the end of 2019, the pipeline's healthy.
We've got incredible upside and some of the growing verticals healthcare education government and critical infrastructure.
Manav, we thank the leadership team is outstanding and we provide the best service and the space that's.
And that's the most critical source of differentiation and we expect to grow the commercial business and a capital efficient way and get back to double digit growth as we were prior to the pandemic.
Alright, Thanks, a lot guys.
Our next question is from Jeff Kessler with Imperial capital.
And it's ironic I feel like Ob bonds and having my two pupils go right in front of me.
Yeah.
And.
The first question I have is.
<unk> is on the defenders.
Talked a bit about defenders today, but the defenders and has been a.
It has been a growth company for basically its and its entire history, regardless of what it was selling.
And you know right now and it's it's it's it's focused just solely on security and I'm wondering.
And I'm wondering given the fact that you've had.
We see we see the accounting adjustments having been made.
What I want to know operationally.
What is what are you doing to get defenders.
And have they been already.
As a group and already integrated into what we'll call the.
And what we'll call the not just the interactive platform, but the being able to because they're able to sell do.
Do they have and how they are they being trained on the on the I T level to be able to sell a new.
And new platforms that you folks are going to be coming out with over the next couple of years.
And how is this how is this how is defenders going to come out and the wash since it hasn't it doesn't come out and the accounting, but it but it should come out and the way the operations are handled.
Yeah, that's absolutely right.
That's absolutely right Jeff.
So the defenders integration is going well we're on track.
Part of the team have been integrated into the ADT branch infrastructure already.
We expect that the integration will be complete and the March April timeframe.
We are leveraging all of the skills that the defenders organization brought to our company and a way that.
And in a way that's incredibly efficient.
We're training the organization in the ADT processes and Theyre doing well.
We had started using our command panel defenders have started using our command panel even prior to the acquisition and now they're using.
The panel exclusively just like our core.
ADT.
In terms of the future and the products that will be and integrating with Google.
Both defenders and ADT technicians and customer care professionals.
It will be will be trained on net new equipment and it'll be standardized as part of our offering and.
And just Jeff one thing I'd add we talk about this internally periodically and even if you look in our deck on slide 10, where we show our argue as to RMR and growth.
And we listed on that page for factors, but the point I want to make is there's a lot of factors and it's difficult to decompose the factors because they enter they interplay with one another and the macro drivers of changes to our pricing model and it's the financing and stuff we've done to simplify our offers advertising effectiveness install efficiency.
Analytics, but included in those internal initiatives and just the sharing of best practices between legacy ADT and legacy defend yourself and so we would struggle to tell you precisely how much of the 15% and growth in RMR adds that we're guiding to for next year comes from that but it's.
And ingredient into that mix overall.
Okay, Great second question and my follow up is.
Having gone through that having gone through the the the earnings results for a whole lot of the industrial companies and security that I cover.
Allegiant and ISR boy and those guys.
Clearly they are looking for a.
Still kind of a slow first half of 2021, hopefully picking up picking up in the second half I'm not going to call and the vacation, but your commercial industrial guys, who were killing it two years ago obviously.
Let's call them, they had a vacation or a part of it but well they could not get on the premises or or or they were able unable to you know.
The finalized deals that were that were put off.
What was and in the interim period, what have you done.
With the commercial industrial.
And your commercial and industrial group.
And to actually get them ready to be to have to be accelerating out of the box and not lose a step relative to some of your other large.
Competitors, so that when the market does come back.
And they will.
Whether it's national accounts or whether it's other words specific large enterprise installations, you will be ready to essentially take over.
And that growth that you had before and not be enough and not for behind these other companies, whose only business and commercial and industrial.
Yeah for key areas Jeff.
And that we took the opportunity when we couldn't have access to customer premises to really bolster up.
The first and as training I don't think that we extended as much energy and training.
And the commercial space in any year like we did in 2020, and so we doubled down and a significant way.
And employee development number two is recruiting from the start we played the long game and.
And if organizations.
Arent as healthy overall as ADT, we took the opportunity to recruit some excellent talent and 2020 bolt and the technician level and the leadership level.
And third is integration and you know we've done a number of tuck in acquisitions, all Red Hawk, a couple of years ago, and so we cleaned up the house from an integration perspective, and then lastly, we advanced the cause on.
And it systems and integration. So we feel good about the positioning of that business and as I mentioned earlier expect 'twenty.
2021 to be a really good year and commercial.
Alright, great.
And I have more questions to ask but I'll add some on the call back later, okay. Thank you very much.
Thanks, Jeff.
Yeah.
Ladies and gentlemen, and we've reached the end of the question and answer session and I'd like to turn the call back to management for closing remarks.
Thank you operator, and closing I'd like to again extend my appreciation to our employees and our dealers 2020 was a unique.
A unique year and extraordinary year I'm completely proud to be associated with all of you.
Thanks to everyone for joining our call this evening.
As you heard we're exceedingly optimistic about ADT future looking for to the growth ahead and have a great night everybody. Thanks.
Yeah.
This concludes today's conference ADT.
ADT. Thanks for your for your participation you may disconnect your lines at this time.