Q2 2022 ADT Inc Earnings Call
Okay.
Greetings and welcome to.
A D cheese.
Good quarter.
2022 earnings conference call at this time, all participants are in a listen only mode.
A question and answer session will follow.
Today's presentation.
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As a reminder, this conference is being recorded.
It is now my pleasure to introduce Elizabeth Landers Senior director of Investor Relations. Thank you you may begin thank.
Thanks, operator, and good morning, everyone. We appreciate you joining adt's second quarter 2022 earnings call speaking on today's call will be Adt's, President and CEO Jim Devries.
CFO and president of corporate development Jeff.
Kim will provide an overview of our recent financial performance and how that links emission long term strategy you laid out at our Investor Day in March Jeff will then cover our financial performance in detail.
After the prepared remarks, we will take any other questions.
Also joining us for Q&A.
EVP of finance and Joe for your SVP of Finance Investor Relations and communications.
Earlier. This morning, we issued a press release and slide presentation of our financial results. These materials are available on our website at Investor ADT Dotcom.
And before we start I do need to mention that today's remarks include forward looking statements that represent our beliefs or expectations about future events.
These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially.
Factors that may cause differences are described in our SEC filings.
We'll also discuss non-GAAP financial measures on the call.
It's directly comparable GAAP measures along with a reconciliation to those measures are available on our website at investor ADT Dot com and with that I'll turn the call over to Jim.
Good morning, and thanks to everyone for joining today's call. We released our strong second quarter results. This morning, showing substantial year over year improvements in total revenue and adjusted EBITDA solid free cash flow generation and for the first time since our IPO positive.
The net income of $50 million or six cents per share.
We demonstrated continued progress on our key initiatives outlined earlier this year during our Investor day and delivered what I believe is our best quarter ever at ADT, we have great momentum in our core engine, the consumer business and solid demand for ADP products and services is driving subscriber growth higher.
Average pricing and a record RMR balance while also improving our operating efficiency. In addition, our unrivaled focus on the customer is producing enhanced brand loyalty along with record high retention.
We remain committed to the plan, we laid out for you at our Investor day.
Long term strategy to grow our subscriber base expand the share of wallet from each customer and strengthen our brand loyalty and customer retention.
Simply stated we are giving customers even more reasons to choose ADT, staying with ADT and spend more with ADT.
We are driving numerous positive trends in our business that give us increasing confidence in achieving our long term strategic plan.
First of course is Google partnership, which.
As a catalyst to accelerate growth.
We reached another major milestone milestone earlier, this week and with the national rollout of more Google nest products, including indoor outdoor cameras.
After our West region launch a few weeks ago I can't fully express the level of excitement we've seen from our customers our sales teams and installation technicians for these global products.
We anticipate that excitement to grow, especially with the rollout of our new eight inch T plus app in concert with the self setup, Google product suite before the end of the year.
To support these product Rollouts will be launching our first joint marketing and advertising campaigns with Google in the fall partially funded by the first $50 million in success.
Google.
Momentum from our Google partnership and product rollout underpins, an improving trend in capital efficiency from both higher installation revenue per unit and stronger customer retention.
Our residential installation revenue per unit increased 23% year over year in the second quarter and 7% versus the first quarter on the strength of the doorbell launch earlier this year.
We expect that trend to continue to improve with the additional Google camera and thermostat rollout you'll begin to see this in the third quarter with further expected improvements in the fourth and subsequent quarters.
One of the strongest drivers of customer retention and our economic returns.
This initial investment customers make in their system.
Another important factor is the frequency of interaction with their system with the extension of the Google products, We now see more ADT customers choosing interactive integrated and more comprehensive systems. We're already seeing these two factors and others start to flow.
Through took better customer retention.
Gross customer attrition over the last 12 months was 12, 7% a record low.
Continued improvement from the first quarter, and a 60 basis point improvement versus prior year.
Net resales, it's even more impressive at 10, 1%.
All of this combined to produce more capital efficient growth with our revenue payback dropping to two two years.
As our results demonstrated in the second quarter, the consumer business is hitting on all cylinders.
Turning to our commercial segment the momentum in commercial sales has been very strong with both new account wins and solid customer retention.
Like many businesses, we're managing the impact of supply chain challenges, we're experiencing some installation delays due to lack of parts availability, which has proven a roughly $40 million increase or about a 10% increase in our installation backlog.
Additionally, our commercial margins are pressured by cost inflation on hardware some of which we have already offset with price increases, which we've successfully implemented.
These dynamics have affected some efficiency in translating revenue into profit, which we expect to improve in the second half.
In our solar segment, we remain extremely enthusiastic and continue to see very strong demand for residential solar systems, resulting in a 50% increase in systems installed year over year.
We also made progress in the quarter with cross selling with approximately 15% of solar sales generating from our ADT ecosystem.
And we launched a successful pilot with them.
Woes for additional solar sales in the retail space.
With all this growth momentum we faced some temporary challenges during the quarter as we continue to build the requisite infrastructure and processes to manage this rapid growth.
This was exacerbated as one of our financing partners began winding down operations and commenced an out of court liquidation and unexpected event, which is isolated solely to this later.
We have confidence our other solar financing partners remained healthy and we have been working to transition impacted customers to these alternative financing partners.
We continue to be very confident about the long term strategy and successful with solar business and we're encouraged by the incredibly strong demand we're seeing in this segment.
Summarizing on the whole it was a fantastic quarter for ADT.
I have four headlines to leave you with first we have incredible momentum and strength in our core CSP business.
Second.
<unk> partnership is taking more shape and will serve as a catalyst for accelerated growth.
Third our pipeline for future revenue and profit is strong in commercial and the supply chain challenges are being managed well and finally, our solar business is experiencing terrific growth, we expect profitable growth and remain confident that this segment will add.
Totally become a material contributor to overall ADT.
I want to thank all of our employees and dealer partners for an outstanding quarter. These results are a direct reflection of your great work and now I'll turn the call over to Jeff to cover our financial performance in the quarter in more detail.
Thank you Jim and thank you everyone for joining our call. Today is Jim described we've continued our solid momentum across the business and are very pleased with our exceptionally strong overall second quarter results.
Total company revenue was $1 6 billion up 23%, including the benefit of our solar acquisition.
Excluding solar our revenue grew approximately 6%.
Importantly, our recurring monthly revenue or RMR base grew to $369 million the record level, Jim mentioned, which was $16 million higher than last year.
This reflects the benefits of our growth initiatives improved customer retention and higher average pricing.
Our revenue growth combined with efficiency improvements drove a 10% increase in adjusted EBITDA to $597 million.
The highlight for the quarter was the outstanding performance of our core consumer and small business, where CSP segment, which delivered total revenue of $1 1 billion, an increase of $66 million or 6% versus last year.
This performance was driven by the monitoring and services revenue, resulting from the RMR growth I just mentioned.
DSP adjusted EBITDA increased by $71 million or 14% and was driven by this increased revenue combined with strong cost performance.
Our virtual assistance program has been a key driver of our efficiency.
As a reminder, this initiative is allowing us to service, our growing and increasingly interactive subscriber base, while lowering our service costs by utilizing technology and video in place of more traditional in person service visits.
Year to date, we have conducted almost a half million virtual visits which also reduce our carbon footprint and improve satisfaction as customers increasingly value the convenience and speed with which we respond to questions and resolve problems.
In our commercial segment, we delivered solid revenue growth of 6% to $297 million on an increase in monitoring and services revenue.
Commercial adjusted EBITDA was $31 million, reflecting a double digit margin rate.
This was relatively flat versus the prior year as the higher revenues were offset by some inflation driven challenges and as Jim described delays in fulfilling our strong demand.
Our solar segment posted revenue of $215 million and an adjusted EBITDA loss of $15 million driven by reserves for the lender and solvency and challenges converting sales to installs as we solidified processes and structure to manage our rapid growth.
Turning to cash flow and the balance sheet adjusted free cash flow was $185 million up 13% in the quarter on higher recurring revenue flow through and lower net subscriber investments.
We delivered meaningful improvement in net subscriber acquisition cost efficiency in the quarter generating a 7% increase in gross RMR additions on 10% lower sac year over year.
This was driven by enhancements to our securitization program higher installation revenue and other net cost and mix efficiencies.
Beyond growth funding the top priority for our cash flow is improving the balance sheet.
Our debt to adjusted EBITDA ratio was four two times this quarter down from $4 four at year end 2021.
Our debt to recruiting revenue ratio was 2.2 down from two three at the end of last year.
We remain committed to reducing our net debt by $1 billion by 2025.
During the quarter, we repaid $90 million against our revolving credit facility, bringing the total drawn amount down to $80 million.
Our next upcoming maturity is the $700 million first lien note due next June .
We plan to access the capital markets to refinance some or all of that debt with the exact timing amount and structure dependent upon market conditions.
We expect to use our strong cash generation to repay the remaining revolver draw and are also considering paying down a portion of the 2023 maturity when it comes due.
Regarding our outlook for the full year, we're focused on improving the key value drivers of our core business, adding new subscribers, improving retention and increasing the amount of each customer spends with ADT.
This is producing strong momentum in the business, we've described and gives us increasing confidence in achieving our full year guidance, which we are affirming today.
Our revenue trajectory remains strong and we continue to balance growth investments with near term cash generation across our business.
You have many of our full year guidance will reflect meaningful improvements over 2021, and further demonstrates the resilience durability and flexibility of the ADT franchise.
I also want to note that as macroeconomic conditions are challenging and uncertain. Our business is built to succeed in any scenario.
We have several recession resisting characteristics that set of offerings that customers highly value a durable $4 billion plus recurring revenue stream diversification across our business segments and significant capital flexibility.
Building on that solid foundation, we are executing on the strategy, we laid out at Investor day to drive growth stronger customer loyalty improve profitability and higher cash flows.
We are very pleased with the progress we've made through the first half of this year.
This progress would not be possible without our customers employees dealers suppliers partners communities and investors all of whom I would like to thank for their continued support of ADT.
Thank you everyone for joining our call. This morning, operator, please open the line for questions.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session.
If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is there any question in queue.
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First question comes from the line of George Tong with Goldman Sachs. Please proceed with your question.
Hi, Thanks, good morning.
You mentioned seeing some installation delays in the quarter due to labor market tightness could you elaborate on what you saw there and how much of an impact that had on the quarter.
Good morning, George It's Jim.
In terms of.
The impact of labor on installations, it's relatively minor.
Some labor challenges in the solar business, which impacted throughput, but in the course CSP business. It was it was not particularly material.
And it all also contributed in our commercial segment to some of the backlog build that Jim described.
Got it that's helpful.
You also mentioned seeing some installation margin impact associated with rising hardware costs.
You talk a little bit about those trends, whether youre seeing evidence of stabilization in those input costs and what their pricing throughput is sufficient to offset that.
Yes, So short, Georgia, Jim Mckenzie.
Inflation pressure that we see is mostly in the commercial space.
That's pricing pressure related to fuel.
Wages products and hardware delays our manufacturing partners.
Are putting through price increases and that puts pressure on margins in the commercial space, we've done well with increasing prices to offset these inflationary pressures.
Team has done a great job, we came in with EBITDA margins.
A little bit south of 11% up from the first quarter. So we feel pretty good about our pricing power to offset the inflationary pressure on the residential side.
We feel very good around the inflation pressures. We recently reached an agreement in principle with residual to amend our agreement with them they've been an outstanding partner.
Together with our with our own supply chain team.
We've navigated through supply chain challenges and inflationary pressure in the core very well.
That's very helpful. Thank you.
Just to stay on.
Are you seeing also in the results of the CSB segment. That's the residential promise of Jim was mentioning you're seeing margin expansion at 53% for the quarter and you see a sac efficiency. There. So not just are we offsetting the pricing increase but as greater efficiencies flowing through on both the sac efficiency side as well as our operating margins.
Great. That's very helpful. Thank you.
Our next question comes from the line of Toni Kaplan with Morgan Stanley . Please proceed with your question.
Okay. Thanks.
I wanted to ask a question on the macro environment.
Have you seen any changes in client conversations may be more towards the end of the quarter or maybe into July .
Just wanted to understand if there's any difference in.
Converting customers into buying more things and if this is impacting that the solar business in particular at all or not.
Hi.
Good morning, Paul Tony It's Jim I would say I mean, we're experiencing the same supply chain challenges that many businesses are are facing in the macro environment.
In terms of customer demand.
Demand is strong and consumer demand continues to be very strong in commercial as a result of the supply chain challenges, we've increased our backlog higher than what we expected it's been about a 10% increase or $40 million increase in the backlog in <unk>.
<unk> and that's generally supply chain, driven but on the demand side. It continues to be strong.
In solar demand is off the charts.
Growth year over year for Q2 is 50% 60% a.
15% of that is coming from lead through ADT.
The ADT solar brand is helping as well since rebranding ADT solar organic search for Sunpower.
Sun Pro ADT has tripled our website traffic has increased 60%.
So we think that the demand in solar is a strong and there is a potential tailwind via the inflation a reduction act, which you likely know extends tax credits for a rooftop solar all the way up to 3% for the next 10 years, so that could be.
Yet another catalyst for growth in that space.
Tony This is Jeff I'd I'd add too I mentioned in my prepared remarks.
We have several what we believe to be anti recession type characteristics. It is highly valued offering by our core customers.
Some evidence that they value even more highly during periods of uncertainty and we historically haven't seen.
Negative trends in recessionary times of periods, there's lots of other moving pieces you have many things going well in our business. So it's hard to isolate the individual causes but just when you look at our record attrition in our strong RMR adds with strong strong efficiency you can't Ken mentioned, we feel pretty good about navigating.
In the environment, we currently face so really any environment for that matter.
Also just on the supply chain constraints and commercial you definitely mentioned $40 million backlog.
Setting to be able to ultimately sign this business or do these clients really need this service now in and so they look to other.
Alternatives to be able to to meet that.
The demand that they're seeing now or all of the I imagine everyone is having the same issues too so not sure if others are able to meet the demand, but just how does that play out.
Yes, Tony.
We have had almost no cancels in the commercial business.
To your point to everybody in the commercial space is navigating through the same supply chain and product issues.
<unk>.
The backlog.
I'm not aware of any I'm sure. There is some but I'm not aware of any cancellations in the backlog. We view this as delayed business that will pick up will pick up.
As soon as the parts come in.
Super that's great. Thank you.
Okay.
Our next question comes from the line of Brian Rottenberg with Imperial Capital. Please proceed with your question.
Great. Thank you first of all on Iota acquisition.
And that.
That the move for you guys in the multifamily, but you havent been I don't believe historically very much involved can you talk about the size and the focus of moving into multifamily and what this acquisition means.
Yeah sure it's Jeff. So thanks. Thanks for the question. So I noticed is that it would we talk about the tuck in type acquisitions and that that's the sizing of it it's within our CSB business to accelerate growth Yeah. As you mentioned in the multifamily space there, there's something north of 40 million multifamily household.
<unk> in the U S. So I would say a compelling opportunity there in enterprise Smart home company for owners landlords and residents with locks and thermostats leak detection access control very very well known in this space and we're really excited to integrate it within within our CSP business.
<unk> for US in addition to the the opportunity from from customers. While they are in those kinds of dwellings. It also introduces us to customers often early in their lives that we think can be a ADT customers for many years to come.
Hey, Brian it's kind of just to add on to what Jeff mentioned this explosive growth in the multifamily market. The technology is almost table Stakes now us working with Iot now is within the <unk> family expanding our platform. There allows us to sharpen our skills with speed to market and technology with the platform specifically for the multifamily space.
We're excited about it.
Okay. Thank you very much I have a financial question on amortization it dropped $75 million.
Can you talk about the first quarter.
Second quarter.
Can you talk about that then going forward because that enabled you guys to be GAAP.
Positive E. Yeah, I just wanted to understand what youre looking for in terms of amortization going forward and and you talk about that drop from first quarter second quarter.
Yeah sure. It's just really the roll off of some of the purchase accounting related asset.
Ups that had been amortizing that goes back to the initial Apollo acquisitions of the <unk>.
Protection, one and ADT.
Okay, and then moving forward. This is the correct level to be using is.
Our second quarter numbers or should there be a further drop from here.
You used the most significant of those assets has rolled off so you should expect to see a few two quarters look like similar to the first quarter.
Great. Thank you very much.
I'm sorry for it's similar to the second quarter I'm sorry.
Our next question comes from the line of Philip Shen with Roth Capital Partners. Please proceed with your question.
Hi, everyone. Thanks for taking my questions.
Wanted to see if you could share what you expect in terms of EBITDA from the solar business in Q3 and four.
And maybe you could talk through a little bit of.
The charge that you took in the solar business with that lender.
Maybe how much that was in and and how do you expect to.
The transition of that business how have you found.
No other lenders to work with and so forth.
I'll start Phil and then ask Jeff to add or tend to add to the answer.
I'll start with I had mentioned this earlier I think when Tony asked a question around the top line.
We couldnt feel better about the top line.
We had a thesis that said that if customers Trust us for smart home They trust us for smart energy and so it's been lights out from a growth perspective, and then the brand I've mentioned is helping.
<unk> significantly appointments are up our conversion rates are up because customers I have confidence in a trusted brand.
We just developed a relationship with Lowe's to sell solar at retail.
In 28 stores in North Carolina will be in Florida in the fourth quarter. So we feel great about our ability to grow this business.
To your question financial results, where we're obviously below expectations.
Central driver was was lender in solvency, a lender and solvency that impacted.
Throughput.
Major way about 2500 customers at varying stages of the installation process.
We were unable to convert effectively.
And we.
We have shifted obviously away from that lender there in liquidation we have two major dealer partners. One Phil is dividend you probably know those guys owned by fifth third bank.
And then the second is sunlight financial publicly traded New York Stock Exchange company.
And we've got good faith and both of those organizations Schaeffer 10th anything in.
Just to add we reserved 100% for the receivables from the from the lender insolvency that that's right at $11 million.
We believe that that circumstances are are isolated with other opportunities with other lenders to transitions relatively smoothly just just.
It takes a little bit of time as Jim Jim described we of course are continuing to pursue recovery, even though the accounting rules require us to reserve 100%.
Great. Thanks, guys. So looking.
Looking ahead to Q3 and four you know if you.
Looking at your slide you're you're down $15 million because of that charge and maybe some integration issues for Q2 of this year last year. Your breakeven when you think about the EBITDA outlook for the growth that you have.
Had for solar.
What do you see for EBITDA in Q3, and four do you see breakeven again do you see.
<unk> contribution thanks.
Yeah, we.
We don't arent going to guide to individual segments, we feel really good though about you having affirmed our guidance and the total company results you have very strong sales and revenue trends across all three segments. We all always have some allowances for contingencies and in the very very strong results.
<unk> that we see and CSB.
We.
You saw it in the current quarter offset offset the challenges in solar and we plan to continue to balance the portfolio through the rest of the year to land within the guidance ranges that we shared at the beginning of the year.
Great. Thanks.
Thanks, Jeff I'll pass it on.
Our next question comes from the line of Ashish.
So bedre with RBC capital markets. Please proceed with your question.
Thanks for taking my question. So a question on the Google partnership I was wondering if you could share any initial lesson from launches so little abandoned by site.
I believe you mentioned uptake and retention upsell and impact of an option, but just wondering if you could sell.
Could provide any quantitative metrics on thanks Frank.
Any color on that that to improve the attach rate and as you launched the Google campaign, you had expectations for the back half of the <unk> going into <unk> any color would be helpful. Thanks.
Sure she usage, Jim I'll provide a little bit of color on Google and then ask Ken to share his perspective on the <unk>.
Oh, it cascades through into our financials.
As you would expect we feel great about the relationship with Google.
We rolled out the video doorbell earlier this year that has resulted in an increase in doorbell attach rate from about.
27%, 28% to right around 50% in the second quarter.
Tax rate for the other devices hub hub Max mesh mesh Wi Fi is off to a really impressive start.
And that is helping drive record installation revenue per customer.
Now just just this week, we've launched the indoor camera outdoor camera floodlight and and the nest thermostat and we'll be supporting that launch by joint marketing, partially funded by the release of the first tranche of <unk>.
$50 million from the Google success Fund.
And as a reminder, we're going to market co branded with Google and our marketing teams already working together on the creative so net.
Net net with Google both organizations have worked well together, we've done a lot of work setting the pins to roll this out make sure the customer experience is excellent and it's terrific to see it come to fruition.
Ashish on the economic side, what you saw here in the quarter is 23% increase in installation revenue per unit that was largely driven by some of these Google devices that Jim just mentioned.
To put that in perspective, that's about $1200 per home.
Installation revenues again, that's the 23% increase year over year, so significant jump year over year and we've only lost a couple of devices. So we'll continue to see more of this upside installations per unit and that brings me back to what youre seeing on the Sac efficiency side.
Every $100 of net reduction in sac per home or business.
Drives in total $100 million.
Increased annual cash flow. So if you think about what this opportunity you can do for us on the installation revenue.
Yeah, hugely profitable and exciting for the consumer to get more of these products in the home as well.
That's great color.
Maybe just on.
The macro on Humira I was just wondering have you seen any kind of <unk>.
<unk> got any PS accretion among the lower income consumer as those consumers have been stretched.
Yeah, Ashish so attrition overall.
It's been a fantastic story for US we ended the quarter at 12, seven attrition I think thats an improvement from that is an improvement from Q1.
And about 60 bps better than last year.
July by the way looks strong as well that's coming in about 40 bps better than last year.
There is a handful of reasons for the success.
More were selling more equipment at install we know that that leads to more retentive customers, we're becoming more sophisticated in our save offers service backlog is at a record low.
And then in the macro environment there.
There are fewer relocations and so all of those are tailwind to improve attrition there has been a slight uptick.
And what we call non pays cancellations for non pays its relatively small.
All of the other positive influences have sort of easily overcome.
The headwinds on non PE, but to your question there has been a modest uptick in non paper.
That's very helpful color.
Congrats on Sunday.
Thank you.
Our next question comes from the line of Pete Christiansen with Citi. Please proceed with your question.
Thank you good morning.
A nice trends gentlemen, really nice.
Just two questions one.
On the average.
Install uptick.
And also the combine that with the the Sac efficiency that you're seeing in TSB. It is.
There's a lot of that attributable to two now offering Google equipment are just are just customers just.
After a poor for this.
Equipment outright and paying for more upfront is that a big contributor.
Hey, David it's Ken Thanks for the note there.
What you've seen so far in what I'll call. This first phase of Google is higher revenue quality and greater revenue quality. When we'll start to see is more quantity as we continue the rollout.
And co branded advertise but the immediate answer to your question, Yes, It's Google is helping to drive the revenue quality largely from the residential consumer base.
And by the way, we're seeing that.
Customers were excited to offer this to our existing customer base of over $6 million as well.
No that's really helpful.
And just.
Hopefully put a nail in the coffin on recession questions here.
Just to follow up on the previous questions I saw that provisions will only.
Up modestly quarter over quarter.
On bad debt.
And you said that no pay is up modestly.
How long.
Sure.
I guess bill pay delinquencies 30 D C. The roles looking.
In particular, just bring it up I think a lot.
A lot of clients, who just curious given the major telecom is having.
These types of initiatives and just wanted to dig further into it.
So it Hasnt just building on what Jim was saying earlier.
We've seen slight uptick you know, we think we're adequately reserved but there's no evidence that it's meaningful.
Problem and one thing I'd add to that also drives the sac efficiency and creates a bit of a flywheel.
Fact that I mentioned just briefly in my prepared remarks, with some enhancements to our securitization program, which effectively means I'm a little bit higher advance rate, which is evidence of the book overall, having performed quite well.
And part of that to our existing customer base has an average credit score of over 700 closer to 710.
This analysis.
The average customer and made a key service space tends to lean a little higher on the demographic side of discretionary spend especially.
No that's really helpful. Yeah Prime is fine.
Okay gentlemen, thank you very much great report.
Thanks Pete.
There are no further questions in the queue I'd like to hand, the call back to management for closing remarks.
Okay. Thank you operator, and thanks, everyone for taking the time to join US today I'd again like to extend my appreciation.
To our employees and to our dealer partners.
Your efforts are a direct threat.
<unk> reflected in a great quarter results, we continue to be optimistic about the year and and again appreciate everybody joining us today have a great day.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
Okay.
Yes.