Q1 2021 ADT Inc Earnings Call
By pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask the question. Please note. This event is being recorded.
I would now like to turn the time from talk to Derek Fiebig, Vice President of Investor Relations go ahead.
Thank you operator, and we appreciate everyone joining adt's first quarter 2021 earnings conference call.
Speaking on today's call the Adt's, President and CEO, Jim degrees, and our CFO and president of corporate development, Jeff Lucas are.
Jim will provide an overview of our first quarter performance and our progress against the company's strategic objectives.
Jeff will then cover more detail on our financial performance and 2021 outlook.
Also joining us for Q&A are Don young, our EVP, and COO and Jason Smith, and Jill Greer, who our senior Vice President of Finance.
This afternoon, we issued a press release and slide presentation.
And our financial results. These materials are available on our website at Investor day.
Dot com and.
And our materials Youll see that as of the first quarter. We have now begun to provide operating segment information, our two segments, our consumer and small business, our CSP and commercial.
Today's remarks include forward looking statements. These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those forward looking statements.
Some of the factors that may cause differences are described in our SEC filings.
Today's call will also include non-GAAP financial measures for a complete reconciliation of our non-GAAP financial measures. Please refer to our press release with that I'll turn the call over to Jim.
Thank you Derek and welcome everyone to our call our year is off to a great start and I want to think of the entire ADT pain and our dealer partners for their dedication and taking such exceptional care of our customers while conditions are still challenging as we work through the COVID-19 pandemic.
And then focused on making our customers' lives safe and simple at home at work and on the go.
And our call last quarter I outlined several key priorities for 2021, including calling our RMR additions.
Monthly revenue base and improving the performance of our commercial business and driving innovation, both internally and through our partnerships and our first quarter results reflect the progress we're continuing to make and each of these fronts, we're off to a strong start and.
And on our growth objectives, and our consumer and small business segment, we're seeing solid customer demand for our products and services.
Gross subscriber additions increased by more than 30% versus the year ago quarter, and 86% of our internally generated new customers opted for our interactive services of four percentage points from the start of last year.
Currently our total company customer attrition held sequentially at just over 13% net.
Next subscriber growth combined with rising average revenue per unit and internally generate and new customers drove 25% growth and overall RMR additions or 14%. Excluding this year's initial ackerman account purchases.
And the smaller bulk account purchases, we mentioned on our first quarter results last year.
With the strong start to the year, we're firmly on track to achieve our full year target of mid teens RMR growth to get there we still plan to spend of 150 million to 250 million and the incremental investment in subscriber acquisition and the majority of that incremental.
It'll investment is expected to hit and the first half of the year, including a $116 million and the first quarter.
And we continue to take a disciplined approach to growth. This quarter, we increased net subscribers and grew our RMR additions, while also maintaining our revenue payback of 2.2 years of.
Our path to achieving all of our.
Book.
Target involves a number of important tactics with two of the more important ones. The first to increase the reach of our products and services and secondly to expand the value proposition for customers and our partnerships with D. R Horton lift and into the car placed 80.
<unk> products into the hands and homes of more customers every day.
And our dish partnership along with the App per minute is a new dealer is expected to expand our reach into more geographies as we further build national scale that no other provider can offer.
We also continue to expand and strengthen our commercial capabilities with tuck in acquisitions.
We're also developing partnerships that allow customers to receive even more value from the relationship with ADT. For example, we joined forces with both established and new insurance Tech firms like branch and Hippo to give customers more options to protect their law.
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The <unk> family and assets and save money on their homeowners insurance, we are regularly engaging with potential new partners.
Meet customers, increasing demand for smart security product across all aspects of their personal and professional lives.
So as we think about our key priority of capital efficient and RMR growth not just this year, but also into the future and we believe our initiatives around subscriber acquisition of efficiency and customer value will be boosted by external demand catalysts, we expect the increase and.
Homebuilder.
Trends toward the urbanization and evolving interest and security and in particular growing smart home adoption will all contribute to long term revenue growth.
Our second priority is to improve the performance of our commercial business.
After a challenging 2020, largely as a result of the pandemic, we returned to revenue growth and margin expansion during the first quarter and generated a $20 million increase and EBITDA we.
We still have work to do both on revenue growth and margin rate, which remains below 2019 levels and we will continue to invest and the commercial business throughout the year and importantly, our backlog and this part of the business remains at record levels.
We've expanded ADT commercial footprint with the acquisition of state electronics and through our exclusive partnership with WG security products of technology, driven provider of shoplifting prevention solutions. This acquisition and partnership combined with the prime.
And service and.
Premium services, our team provides and the gradual reopening of customer of promising post COVID-19 are producing great momentum and our commercial business.
We're also making progress on priorities around innovation can ballpark partnerships and our own internal efforts.
All of our Google partnership will provide more customers access for rapidly evolving smart home services by combining the best of both worlds Google's best in class Smart home products and analytics and ADT and best in class premium service and Smart and say Paul Miller.
Patients.
And we shared our plans to gradually rollout Google hardware and the the ADT ecosystems, our customers can now purchase Google products the.
And Google voice assistant the nest hub and the Max hub can all be purchased and integrated into our customers' smart home system by ADT is unrivaled network of technicians.
While we expect to rollout more integrated products and our joint go to market branding as we move through this year and into 2022 I want to underscore that this is a long term relationship.
And our initial focus on.
And building a solid foundation that will allow both the ADT and Google to drive the most long term value for our customers.
This partnership approach and the transformation it will drive across ADT positions the company to compete and win and the rapidly growing smart home market.
In addition, we have a long and proud history of innovation at ADT with a robust and growing internally developed portfolio of patents and other valuable intellectual property as well as the developers engineers and other innovators, who will help turn.
And our proprietary data and insights and the innovative new services and products for our customers. We are increasing our innovation investments. This year of planning and initial $50 million and next generation solutions that will power, our future services products and customer experience.
With ADT owned and developed solutions combined with Google's hardware and technology, we can further differentiate our company and the eyes of customers.
And while we have strong momentum in our business, we like most companies also faced challenges.
And while access to customer premises is much improved today versus last year the pan.
And Denmark is still affecting our operations and we're managing customer interactions carefully with a focus on safety.
Our <unk> radio conversions and remain on schedule. So far this year. However, the worldwide chip shortages affecting many industries are adding some complexities, including limited and the benefits we can achieve with our <unk> product.
While we have meaningfully increased our technician capacity during the past year were also faced with recruiting challenges and labor markets, which are increasingly tight.
And we're focused on managing these challenges as we did and the first quarter and excited by the ongoing by the ongoing pool, we intend to deliver through 2021.
In closing 2021 is off to a very strong start and we're excited about the continued evolution of ADT, we have a durable revenue model.
And our focus on growth is producing a better top line with the trusted brand national scale, and the best technicians and the industry, we have and unmatched set of competitive advantages.
And we are driving innovation and transformation across all aspects of the business.
Just for 2021, but for many years ahead with that I'll turn the call over to Jeff for a more detailed review of our first quarter results and our outlook for the year.
Thank you again and thank you everyone for joining our call today.
And I'll reiterate Jim's comment that we are off to a solid start to 2021 the.
A highlight of our first quarter was a very strong growth and recurring monthly revenue additions or RMR, which include the acumen and account purchases. These.
These growth trends are as planned with positive net unit additions and increased and average pricing and strong the tricky performance.
Our resulting base of RMR grew by approximately $6 million compared to the fourth quarter and $10 million.
The prior year.
Overtime, we expect these trends will lead to more growth and monitoring and services revenue, which grew by 2% and the first quarter compared to last year.
Our adjusted EBITDA at $542 million was essentially flat year over year and slightly better than our internal plan.
The key positive adjusted EBITDA drivers included growth and monitoring and services revenue and commercial improvement, which were offset by the non cash effect of our ownership model change.
Before going into more detail I want to add some color to our segment change.
Effective and the first quarter of this year, we adjusted our operating structure and our reporting the segregate, our consumer and small business or CSD operations from our commercial operations.
The resulting separation of the segments will add transparency to our results.
The commercial segment, which comprised approximately 20% of first quarter revenue was composed of the large commercial customers with expansion of facilities and <unk> multi site operations, which often require sophisticated integrated solutions.
The DSD segment is made up of all other customers, including residential homeowners and small business operators and other individual consumers.
Are these segments and services include our core premise based security and Smart home solutions, and addition to other offerings, such as health and mobile security.
You can see our first overview of the two segments and our earnings debt, including some of historical detail and the appendix.
The highlights for the first quarter in our DSD segment was a strong increase in addition to units and RMR.
Beyond the Acme and account acquisition.
It was especially strong overall and the first quarter.
We also continue to sell more interactive services, which is becoming the norm from new subscribers.
Interactive customers now make up more than 50% of our total CF the subscriber count.
The result, the mix shifts and stuff and produce a modest increase in revenue per unit for the segment.
The highlight for our commercial segment is the return to year over year growth after a challenging 2020 pandemic driven environment.
Both the revenue and adjusted EBITDA increased and the first quarter as gradual reopening of customers' locations increased demand and fulfillment of our services.
Commercial EBITDA grew by around $20 million due to the stronger revenue and margins, including the benefits of net improvement and provisions for credit losses and.
And overall cost discipline.
We have strong backlog for commercial demand and expect results to continue to recover with an objective of returning to 2019 run rates during the course of 2021.
Turning to cash flow and the balance sheet and.
Adjusted free cash flow of $64 million was ahead of our internal budget, driven mainly by timing items, but down from last year due mainly to the $116 million increase and net subscriber acquisition cost and stack.
The tire stack investment of that plan is consistent with our growth focus and includes approximately $73 million from our initial act and the account purchases.
Our trailing 12 month revenue payback held flat to last quarter at two two times and is down compared to last year's two three times. Despite the mix shift towards the dealer generated accounts, which are slightly more expensive on the incremental basis the direct accounts.
Our balance sheet remains and healthy position to fund our growth initiatives.
A highlight in the first quarter was our January 1st lien.
The repricing transaction, which reduced the spread by 50 basis points and LIBOR floor by 25 basis points, which translates to about $20 million and lower annual interest costs.
Combined with other refinancing transactions and 2019 and 2020, we have collectively reduced our annual cash interest by well more than $100 million.
As we look to the rest of 2021 based on demand trends and early results of our growth initiatives, we remain confident and the full year guidance, we shared in February which we affirmed and today's press release included in our debt.
I also want to point out that our adjusted free cash flow will not be evenly achieved by quarter due to cash and interest timing and the acumen and account purchases and the first quarter.
Our adjusted EBITDA will likewise, not be consistent by quarter due to our ownership model change and investment and time.
We shared in February that our full year guidance includes RMR growth and the mid teens.
And we're off to a very solid start.
Other things equal more growth and RMR additions of leads to more staffing revenue.
As always we are managing several potentially offsetting items and we will update you on our guidance in August.
One other note is that we made solid progress on <unk> conversions and the first quarter during which we converted more than 500000 radios with.
We continue to estimate the range of $225 million to $300 million of total net cost for the program, which is excluded from our adjusted free cash flow measure.
We have incurred a net of approximately $136 million on the program to date, including $59 million and the first quarter.
Finally, we announced on our last call that we are planning and Investor day and this year.
We look forward to seeing many of you there hopefully in person.
At that event and we plan to lay out of our strategic vision that underpins, our excitement and confidence and the future along with the longer range financial framework.
In conclusion, I'd like to the joined Jim and thanking the entire ADT team for their great work and I want to thank all of you for your support and for joining our call today.
Operator, please open the call for questions.
We will now begin the question and answer session to ask a question you May press Star one.
On your cash downtown.
Using a speakerphone please pick up your handset before pressing the keys to withdraw.
Your question. Please press Star then Tim and Jeff.
Time will replace momentarily to assemble our roster.
Our first question is from Kevin Mcveigh from Credit Suisse go ahead.
Great. Thanks, So much Inc, and congratulations on the results.
Each of them are Jeff I Wonder.
Just given the strength of the EBITDA in Q1 relative to the full year.
Was that kind of as expected or does that allow you to maybe do some incremental investment over the course of the year I guess, just how should we think about the fee relative to the reaffirmed guidance and we worked our way through the balance of 'twenty one.
Hey, Thanks, Kevin.
All of US as expected it was a little bit better than our internal budget.
Market the strength included commercial recovery.
And services revenue that grew.
And we're pleased with our ads were pleased with our attrition on a year on year basis. It's affected of course as we've described by the ownership model change, but off to a good start and as always we incurred some challenges some of which Jim described but we were able to execute from opportunities to offset these challenges, but we feel really good.
The <unk> start to the year.
Awesome.
Just real quick because really the retention much really really good at 13 months is that.
Still I mean, there's probably still some COVID-19 impact of that but is that starting to open up a little bit and any other puts and takes it feels like theres a little more duration, there and is that maybe more operational or.
Just the commercial Remixing, just any thoughts around that as it relates to the retention.
Yes ill put sunblock Kevin.
And so.
How are you doing kind of and.
So we ended the year at 13 one.
Maintain that level and the first quarter.
The improvement of 40 bps from the first quarter of last year relocation cancels were worse year over year and favorable on what the competition and non pay.
So we shared we expected some headwinds from the absence of the defenders charge back what we were able to offset those headwinds underlying performance Kevin was strong Q1, 'twenty one NPS.
And is better than Q1, 'twenty, our some of our operating metrics first call resolution save rates are tracking nicely and.
And so we still think that we have some.
<unk> to face of principally through relocation and the lots of the.
Of the defenders charge back, but we feel pretty good about attrition.
That's great.
Kevin and Jeff one of the thing I'd add too on your question on EBITDA, which I said in my prepared remarks, but there are some unusual dynamics year on year, because of COVID-19 and some of which.
Jim touched on and the division.
The response, so so I wouldn't multiply.
First quarter by four.
All of our guidance as we put it out of originally sort of real good about where we are.
We expect it to be more and the first quarter and and our guidance of the things we share a couple of months ago.
Very helpful and congratulations Jeff on the new roles.
Thank you.
And then if you have a question please press <unk>.
And then run.
Our next question is from Jeff Kessler from Imperial Capital go ahead, Thank you and again and I congratulate you guys on.
And your new roles, including Dawn.
Can you go through.
You would see fairly quickly at the very beginning of your presentation Jim.
The.
The various the various sub.
Sub headings of RMR growth and how and how one one rolls into the other can you go through that again.
And clarify which part.
And I can provide more color Geoff just on.
And what sub segments of <unk>.
RMR are adding up of up to up to the larger.
Up to the larger mid teens total.
The total growth that you.
To get to.
Yes, so our overall and Jeff.
And Jeff our overall RMR AD growth was 25%.
And I exclude from that the initial acumen accounts purchased and and exclude from that the bulk account purchases that we mentioned last year, we would've been up 14% our full year guidance was to be up in the mid teens and implicit in that guidance of course was with acumen and redo of vacuum and we gave the guidance, which we are counting on a full year basis.
<unk> something in the mid single digits towards that mid teens growth.
Aside from Ackerman, our dealer channel was particularly strong so I would call that out as another driver of and and commercial recovery.
And with RMR of course, the tougher off of smaller base, but the commercial business coming back is encouraging as well.
Okay.
Thank you.
With regard to your your commercial business.
Commercial seems to have a very strong backlog, maybe even a stronger a stronger pipeline and.
And again.
And we're hearing.
One of my mind.
My sources and the industry basically up and down the line of basically very very bullish about the.
This turning into revenue later on and the year or maybe the 2022 can you just talk a little bit about where your commercial and industrial business is at this point and time and being able to drive.
And and be able to drive the backlog and maybe the pipeline that's supporting that backlog.
And to revenue closing actually and when when are we going to see the result of that.
Jeff It's Jim.
And I'll share some perspective on that the we're also very bullish about the commercial business.
<unk> have been improving on a sequential basis and now we have improved on a year over year basis.
And we're pleased with our price for US we have a good bit of work yet to do.
A few headline per share with you we believe that we can compete and win and this business.
Outstanding Service, we think we of the best leadership team and the space.
<unk>, we are confident that we will return to double digit topline growth and 2021.
The good about our sales pipeline and our backlog.
Of our $3 31 backlog as of yet another record both for our IR and RMR.
And then and then lastly, we think we have some opportunity and improve margin.
And on a run rate basis, we're confident that we can get to 2019 levels by the end of this year and.
Longer term EBITDA margin rates and the 12% range. So.
Summary would be we're also very bullish here and we'll continue to invest and commercial.
The growing new verticals.
Like health care education and.
And government.
And just as we did during the pandemic here, we're taking the long term view of this business, but feel really good about it okay, and if I might just throw and one more since this is my last press conference.
<unk>.
Right.
One of the areas and obviously that I have been focused on for the last maybe five or 10 years has been.
And it's obviously been the false alarm rates being generated by new players in the industry as well as all players who aren't doing so well of our who have legacy systems as the industry kind of moves toward as police departments kind of try to move towards the scoring system. So that some people don't get serviced.
In two and.
10 minutes, and some people, who don't get service and get good service and some people get serviced and three hours.
Is ADT right now in the project.
Yeah.
Obviously with Google and other technology.
To bring some type of standard to this industry.
So Jeff this and this is Don I appreciate the question and there is no <unk>.
And talking about growth for a long time.
As usual ADT of moving from the front on the bolt on.
Helping to define the avs ones during the day, we just referring to the help score of ons differently and cruising along specifically at the same time of the standard being developed and 400 net from the entirety of the entire industry and the top.
We are working closely with Google as you know the develop the technology the run up to the standard everything from verifying and location information and for the timing of the alarm event. The Yo verification of number of days of things that we are using Google cloud to provide us to be able to provide a real time exploring and mechanism to live up to that standard.
We are excited about it we've seen some progress of the recently with the.
The rollout of signal chat.
Small small small backlog.
And we have simple chat deployed over a million customers and we're seeing of 50% reduction of false alarms just from that the customers that alone. So the already making waves on reducing false alarms and the next wave of really the leverage on the winter and so trying to live up to that smart and simple.
Alright, great. Thank you very much and.
Good quarter and Doug.
Good luck guys.
Jeff.
I think if I have <unk>.
<unk> been covering ADT since $19 83 and.
On behalf of the organization good luck and your retirement and thanks for your support over all of these years were looking forward to working with Brian and very much wish you luck and retirement. Thank you. Thank you.
And that leaves the whole industry, but even these conference calls.
And then.
And I'm out of the sell side.
Bye bye.
Yeah.
And then if you have a question. Please press Star then one.
At this time, we have no questions. So this concludes our question and answer session I would like to turn the conference back over to the company for any closing remarks.
Thanks Kate.
In closing I'd like to extend my appreciation and again to our employees and dealers.
And we had.
<unk> start to the year I'm proud of your collective efforts.
Thanks to everyone joining our call. This the optimistic about the year as well as ADT future and looking forward to the growth ahead and have a good night everybody.
The conference has now concluded. Thank you for attending to the presentation you may now disconnect.