Q2 2021 ADT Inc Earnings Call

Greetings and welcome to ADT, Inc. Second quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the presentation for.

For anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

Please note this conference is being recorded.

I'll now turn the conference over to your host Derek Fiebig, Vice President of Investor Relations you may begin.

Thank you operator, and we appreciate everyone joining Adt's second quarter 2021 earnings conference call speaking on today's call will be Adt's, President and CEO, Jim Debride, and our CFO and president of corporate development, Jeff look US are Jim will provide an overview of our recent performance and our progress against the company's strategic objectives.

Jeff will then cover in more detail.

Our financial performance and outlook for 2021.

Also joining us for Q&A are Don young our EVP and C. O L can for poor executive VP of finance and Joe Greer Senior Vice President of Finance. This afternoon, we issued a press release and slide presentation on our financial results. These materials are available on our website at investors thought ADT dotcom.

<unk> 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 and some other 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.

Thanks Derek.

Welcome everyone to our call we're off to a very solid start through the first half of the year on I want to thank our entire ADT team and our dealer partners for serving our customers, so diligently and delivering solid results for our shareholders.

During our February call I outlined several key priorities for 2021, including calling our RMR additions and all recurring monthly revenue base, improving the performance of our commercial business and driving innovation, both through our internal expertise and.

Through our strategic partners, Joe will walk you through our second quarter results in a few minutes.

In summary, a number of areas within our business are performing exceptionally well our small business channel our commercial segment DIY and our dealer channel are all delivering strong results in the second quarter across the business. We grew gross Ara.

<unk> additions by 28% versus last year.

We also see from opportunities we're working to further increase volume in our direct residential channel and on the expense side, we're making progress on addressing service cost pressures, we experienced in the quarter.

Overall, we feel very good about our results for the first 6 months and have good momentum going back going into the back half for the year.

This evening I would like to share perspective about what we've achieved as well as where we're headed not just in 2021, but into the future.

During the past several years, we have grown revenue by more than 20 per side from just over $4 billion for more than $5 million with approximately 80% of that revenue from recurring monthly service to our customers.

We've established a sizable commercial business through acquisitions and organic growth now approximately $1 billion of revenue.

We've pivoted to include more smart home products increased in the number of devices installed per customer from 14 to almost 22 day, which correlates to an increase in average revenue per unit.

And we've improved our service levels, increasing customer satisfaction with gross revenue retention improving from approximately 84 per cent for legacy ADT to just under 87 per cent.

And we have increased our revenue generation and strength in customer satisfaction, which was translated into an improvement in our trailing 12 month revenue payback from 2.7 years to 2.2 years and importantly, we've capped.

These positive outcomes, you know financial results growing our cash generation capabilities. During the same time, we've adjusted free cash flow on $675 million last year.

As for the direction, we are heading in.

Total core ADT is a mission driven company and that mission is dedicated to making our customers' lives safe as well its simple from other so secure app offering free protection options to residential customers, who have made us the most trusted name in the smart home.

Security space to multimillion dollar commercial installations, when we deliver on our mission every day to over 6 million customers ADT scale and breadth of offering is unmatched in the marketplace.

Our path forward is focused on 3 areas. The first is driving revenue growth for differentiated service to our larger customer base in our core business day.

U S smart home and commercial protection markets are expected to grow steadily.

The total revenue opportunity north of $100 billion in the next 5 years from just under $75 billion today.

Through our direct channels, our dealer network and our partnerships with leading homebuilders like D. R. Horton, we're connecting with more customers than ever before as we respond to increased customer demand for smart home automation.

Of note, our new customers are increasingly choosing more integrated offerings and we firmly believe that the more a customer interacts with their system. The greater the opportunity we have to build a longer term rewarding relationship with them.

This relationship has further solidified by the premium service ADT provides from installation by best in class technicians to always their customer service to operating the industry's highest certified monitoring centers no 1 takes better care of customers than ADT.

Team of 20000 people.

We remain focused on the customer experience and continually research areas, where we can modernize and refresh.

Hi, invent investing in our digital capabilities, we will deliver the level of service customers value, most and provide it in a more streamlined cost effective way.

We had an excellent quarter on the commercial side of the business. Our growth is largely attributed to higher market share. We continue to see tuck in acquisition opportunities, where we can increase our market footprint.

And expand the offerings, we provide to our customers.

The second area of focus on our path forward is driving adjacent growth. This includes building relationships with our strategic partners in spaces, such as multifamily property management building and construction insurance and ride sharing.

We're also actively looking at ways to further capitalize on consumer confidence and ADT brand, which has earned tremendous trust with our customers and maintained over 95% brand awareness the opportunities afforded to us.

1 the gamut from expanding to new commercial verticals or be on the home to new opportunities like automotive or solar.

These adjacent markets provide potential growth and expand the market opportunities for ADT.

Additionally, a number of the adjacent opportunities provide for deepening relationships with our current customers.

Final area of focus is shaped by increased innovation, both through our internal expertise.

And through our strategic partnerships, especially through our relationship with Google 80 team was founded nearly 150 years ago, and we are probably 1 of the longest tenured company, an American business, but I'm, even more proud of adp's growing culture of innovation.

And reinvention, which is crucial to continuing to thrive in the future.

Related to our commitment to innovation, it's been almost a year since we announced our Google partnership along with their equity investment and ADT and over that time, we've made progress while simultaneously learning from each other along the way.

We're now offering integrated Google products, such as the voice assistant on Max and piloting mesh Wi Fi and shortly we'll be including the Google Doorbell and a portfolio of products with expanded offerings planned, including a wheat flashed DIY lineup.

In early 2022.

Additionally, we're working closely with Google to develop our joint marketing plans, we've already begun some marketing and promotions, which feature Google product and were working with Google closely to develop our joint advertising plans, which we expect to deploy in 2022.

During our planned fourth quarter Investor day presentation will present, our long term strategy for the company. We're looking forward to providing a holistic update then on our partnership with Google.

In the context of our current transformation efforts and our long term strategy.

I'll now turn the call over to Jeff to take you through our second quarter financial results.

Thanks, Jim and thank you everyone for joining our call today.

As Jim described we delivered a solid quarter, continuing our progress on many objectives, especially including growth. In addition to recurring monthly revenue or RMR and improved commercial performance.

For the second quarter gross RMR additions increased by 28 per cent compared to 2020, reflecting our investment in customer acquisition and our continued focus on differentiated service and offering and pandemic related weakness last year.

On a year to date basis, we have grown our RMR additions by 26 per cent or 20%. Excluding this year's initial ackerman account purchases and the smaller bulk account purchases in the first quarter of last year.

Our resulting RMR base grew to $352 million, an increase of $14 million versus last year.

Overtime, we expect RMR growth to lead to more in monitoring and services revenue, which increased by 4% in the second quarter.

We are fortunate that our portfolio includes a variety of customer segments and routes to market.

Our dealer channel has been especially strong he contributed a larger percentage of new RMR additions than we planned in the second quarter and the first half of this year.

While they come at somewhat higher incremental acquisition cost compared to direct addition dealer generated accounts and deliver solid returns.

Importantly, we have remained disciplined in what we're doing with early attrition on recent customer additions trending favorably.

Our trailing 12 month revenue payback remained at 2.2 years through the second quarter. Despite this mix shift towards dealer.

Total second quarter revenue was just over $1.3 billion with adjusted EBITDA at $542 million, both slightly exceeding our internal budget.

RMR growth improved commercial performance lower bad debt expense and general cost controls all contributed positively to our results.

Offsetting headwinds versus 2020 included the non cash effect of our ownership model changes and higher service costs.

As you will recall, we changed our segment structure effective in January of this year and I will share a couple of comments on our segment results.

The highlight in our <unk> segment continues to be strong RMR additions.

We again also grew our net subscriber count in the quarter and customers are increasingly selecting more integrated smart home systems.

Interactive customers now make up more than 55 per cent of our total CSB subscriber base, which contributes to a modest increase in average revenue per unit.

Our CSB monitoring and services revenue at $965 million increased by 3% versus last year.

Installation and other revenue declined as planned reflecting the noncash effect of ownership model changes.

Our broad offerings and best in class service set the foundation for future CSB growth.

In our commercial segment, we continued performance improvements after a pandemic can do set of challenges in 2020.

Second quarter revenue grew by 23 per cent in aggregate with installation and other up 32% in monitoring and services up 12%.

Our commercial segment also delivered strong EBITDA margins.

We are very encouraged by our first half progress on commercial and our strong backlog gives us confidence entering the second half.

We also are pleased with our cash generation, which remains a priority even as we invest in subscriber acquisition cost in our next generation platform.

Adjusted free cash flow was $227 million through the first half of this year in line with our internal plans.

We also continued to improve our capital structure to support our growth objectives, including the completion of 3 transactions during the past month, we renewed and improved our receivable securitization agreement, we extended our revolver to 2026 and upsize the capacity to $575 million.

And most notably we refinanced our $1 billion 'twenty 'twenty 2 notes with a new 2029 net.

As a result of these and other transactions over the past several quarters, we have address near term maturities strength and liquidity and reduced our borrowing cost.

We remain very comfortable with our overall capital structure and liquidity position, which enable us to invest in our future.

As we look for the rest of the year, we are maintaining our full year outlook ranges, we shared in February it for.

First half trends continue we may be at the lower end of our adjusted free cash flow range due to more spending on subscriber acquisition costs.

However, our full year Sac spending depends on second half RMR additions, which are affected by residual dynamics from COVID-19, and other factors that have altered normal seasonal trends and quarterly comparisons.

We continue to expect full year RMR additions growth in the mid teens with a lower growth rate in the second half compared to the first half as we originally planned.

As always we remain focused on the efficient deployment of capital to generate strong returns over time.

In summary, we're entering the back half of the year with solid momentum our overall revenue and growth initiatives are expanding our RMR base in our commercial business is performing well.

We also continued to advance the longer term objectives that will shape our next chapter.

We remain excited by our future and we are well positioned to deliver positive results for our employees dealer partners customers communities and investors both in 2021 and in the years to come.

Thank you for joining our call today and thank you for your support of our company operator, Please open the call for questions.

And at this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star 1 on your telephone keypad.

Information on tone will indicate your line is in the question queue. You May Press Star 2 if you like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

1 moment, please while we poll for questions.

And our first question is with Kevin Mcveigh from Credit Suisse. Please proceed with your question.

Great. Thanks, So much Inc. Congratulations hey, Jeff just to follow up on the guidance question I noticed the slide wasn't in the debt are you reaffirming the revenue and EBITDA guidance as well for the full year and any reason why why it's not an attack or are in the press release the guidance.

No no no no pay just because there's really no news beyond what I said on the call. We are running the business so well in line with our ex day in.

In line with expectations. So far we expect to be within the same ranges that we shared at the beginning of the year and as I described on the call. The ultimate cash will depend a bit on the RMR adds in the second half of the year and then the seasonal trends are affected of course by Covid dynamics last year, yes.

Some of which are continuing to affect the trend this year, but our full year guidance remains in the same ranges as it was at the beginning of the year.

Yeah.

Great room, just on there.

Our retention I think the retention.

I guess can be probably about 30 basis points on.

Any thoughts on that and really think about had on rent bumps from fits.

With smart home customers relative to the core residential in terms of the delta on that.

Sure Kevin So yeah, we ended the quarter at 13.3 attrition.

A little bit of color, we were favorable and lost to competition and non pay a relocation cancels like last quarter were a little worse year over year.

Think some of that is the COVID-19.

Fact of delaying relocations.

We also experienced the expected headwind from the absence of the defenders our charge back on it.

K 12 basis, that's about 35 to 40 pips.

So some of that was offset by our save efforts.

And then to your point there is some really good there. There's some really good lead indicators in terms of the shift in product mix.

Should be a tailwind to retention. So for example, we know that customers with cameras and video services have better retention characteristics and sales of command and video are at their highest level ever in 2021.

Not unimportant lake not unimportant.

<unk> credit score correlates pretty heavily to attrition.

And customers acquired in the first half of 2021 had the highest mix of credit scores in the past 5 years.

So we felt pretty good about the quarter and as you know long term, we feel bullish on retention.

That's great. Thanks, so much ill get back on acute.

Our next question is from Ashish for Badger with RBS.

Capital markets. Please proceed with your question.

Thanks for taking my question.

I just had a question on the Google partnership.

<unk>.

Introduced some integration integrated products debt and launched joint marketing I was wondering if you can shed any early results are what kind of traction have you seen from the joint product and drive marketing. Thanks.

Sure.

I'll give it a little bit of color on Google and anticipating this question I really want to start by giving.

Sharing some context with you.

So for most much of our work this year is about building a foundation for future growth.

So were developing our own software platform, we're improving our DIY offering were.

We're making investments in our commercial business and essentially.

Putting putting the pieces in place to leverage the Google partnership over the long term. So it's in that context of building a foundation that I'll share a couple of comments about Google and how things are coming along.

As you'd expect we continue to feel good about the relationship.

With Google.

Got several products that are already integrated into the ADT ecosystem. The many.

On the hub to hub Max mesh Wifi is in pilot, we will have the doorbell and our product portfolio still this year.

We anticipate DIY product in our Q1 of next year.

And as with a lot of our partners not just Google we're navigating our supply chain.

Our dates are are based on successfully navigating the supply chain, but so far it's gone well I've.

I've seen some of the early advertising work and it's very good we're already in market with some light co branding with Google and we're working closely with them on quality testing and basically ensuring that the infrastructure on the supply chain and the.

<unk> experience is all in great shape.

That's great good to hear that.

The solid progress that you're making on debt Frank.

Maybe just if I can ask a question on the commercial side, obviously really strong growth significantly beat our expectations and you highlighted strong backlog as though you also mentioned share gains. There I was just wondering if you could for any provide any color on some big wins. Obviously you won that older business last year any big wins.

Debt and within the commercial it's any products in particular that are gaining more traction any incremental color on would be helpful. Thanks.

Sure. So I wouldn't point to any single individual win it's a lot of successful business across a pretty broad spectrum of customers. Our national account business is doing exceptionally well.

We have just an outstanding team in that space.

I'd say the success is largely due to market share gains and and it was across a significant customer base and across all of our products fire intrusion card access on video.

I you know, we we we had a solid Q2 with revenue EBIT is recovering well.

As I shared on on the call our backlogs on June 30th for at another record level. Ashish. There's continues to be a business, where we're confident we can compete and win we've.

We've got an addition to a strong backlog and we've got a strong sales pipeline and we're pleased with our progress growth and margin improvement.

We'll always be linear and this business.

We're playing for the long day and investing in a number of new verticals health care government education, but we think this business has a lot of runway and we feel great about the quarter.

That's great. Thanks, once again and congrats on a good quarter.

Yeah.

And again as a reminder, if you have any questions you May press star 1 on your telephone keypad doing similar maturity can you answer the question queue.

Next question is from Brian Rittenberry with Imperial capital. Please proceed with your question.

Yes. Thank you very much a couple of quick questions first of all on attrition it was up slightly from the previous period on.

And that's not necessarily indicative of anything but I wanted you to address that and then talk about where you see attrition by year end of 2021 and are we getting a hold on that low 13 can we break 12 ended for the 12.

Can you talk a little bit about that and then I have a follow up.

Sure. Thanks for the question so the there's there's not.

A great deal to add beyond what I shared already.

Hum.

The favorability for US was largely around lost to competition and and non pay I'm hesitant to predict where we're going to be at the end of the year. We've got a a headwind as I mentioned from the absence of the defenders chargeback that's.

About 35 to 40, Bips, but there's just a number of of positive lead indicators.

Our customer metrics are improving our service backlog is currently at a 6 month low we had fewer service request in July than any other last 9 months.

Our our customers save efforts are tracking nicely, Brian So I.

I feel good about it over the long term.

Love to get it.

The 12, and even lower than that over the long term, but are hesitant to predict how how well we'll end the year.

Okay. Thank you.

Then about the commercial recovery that's the next.

Question.

Can you address you guys are gaining a lot of market share can you maybe say what youre doing in terms of gaining that market share.

Is any other than new office or is it you know retrofitting offices.

Talk a little bit about that because I'm I'm seeing out there on the market.

With a lead gen or not others suppliers as well as providers that new office is dead on.

Retrofitted on the way up.

And I want to know where you are gaining traction in the commercial space.

Yeah, it's it's it's a it's a credit.

The business.

There is for sure. Some retrofit work there is there are some.

New construction I think that accounts for about 10 or 12% of our revenues.

But it is a business that for us is hitting on a lot of cylinders and it's tough to tie it to a particular sector.

Shared this earlier, we've got a fantastic leadership team and commercial.

Great commercial technicians and you win in this business by Great service and building a reputation for great service and.

And Brian that's what that's what the team's doing day in and pay out and we're being rewarded for it.

Right. Thank you very much.

Yeah.

And our next question.

Moving on with Goldman Sachs. Please proceed with your question.

Hi, Thanks. Good afternoon. Your gross RMR additions were strong this quarter up 28%, which actually accelerated from <unk> and I think the prior indication is that once you would be the peak for.

Gross RMR additions so could you talk about perhaps was there any pull forward Inc.

Gross RMR additions in the quarter.

And if not would you say you have an improved outlook from what you had previously for full year gross RMR additions given your strength so far in the first half of the year.

Hey, George it's Ken I agree we have 28 per cent year over year growth in the quarter for Q2.

As Jim mentioned, the high quality of performance for the credit scores and in the number of devices. So it was a great installation corridor for us. So I like to do is back out last Q2 and look at 2019, just to kind of normalize from for Covid, especially in Q2 last year, that's really when it pops up versus 2019 Q2, it was actually up 13%.

Over the same period, so pretty healthy RMR growth, we did see that across multiple channels dealers, probably the first 1 that comes to mind that both DIY small business as Jim mentioned net loss of residential direct show that year over year growth. So Q1 was boosted by a by Ashland in Q2 was heavy organic growth and.

But we are bouncing up against that.

Pretty easy compare Q2, yes.

Jeff mentioned in his comments that we don't anticipate the same level of growth in the second half on a year, but we like where we're at from for growth perspective, especially with our RMR base ending at 4% higher for the quarter.

And George just follow up to Kevin's question, you again, no change to our perspective on the full year, where we've shared previously we expect our full year growth rate to be in the mid teens and that goes with a financial ranges that we share.

And as.

As we grow more we'll invest a bit more sack and vice versa.

Growth because in other direction that debt to reduce the sac and generates more cash flow.

Consistent with our full year guidance unchanged from what we shared back in February.

Got it that's helpful. And then you know we're getting closer to the Google joint product launch in the second half for the year.

Could you perhaps elaborate on what the remaining milestones are in order to make that a successful launch and at this point do you have enough visibility to contemplate, including some benefit or impact from the launch into your full year guide.

George This is Jim we won't include or I'd say very minimally include any incremental revenue as a result of Google.

We have a handful of our products in play there.

Significant advertising for Google and ADT together will be next year.

In addition to the products that we have now the only new product and an important product and a product that we're anxious to have in the portfolio.

The only new product will be the doorbell.

And so there's light touch a promotion promotional work today.

There is some light touch co marketing today, but nothing incremental this year as a result built into our plan as a result of Google.

Got it very helpful. Thank you.

Thank you.

And our next question is from Kenneth Williamson with J P. Morgan.

I'm, sorry, we actually have.

We reached the end of our question and answer session I'll now.

Turning on conference back over to management for closing remarks.

Okay. Thank you operator.

And in closing I'd like to extend my appreciation to our ADT employees.

Our dealers, we had a terrific first half of the year I'm proud of your collective efforts.

Thanks, as well for everyone joining our call. This evening, we're optimistic about the second half of the year and Adt's future and I'm looking forward to the growth of pet growth I had have a good night everybody.

And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.

Okay.

Okay.

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Yeah.

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Sure.