Q3 2022 ADT Inc Earnings Call
Greetings and welcome to the ADT third quarter 2022 earnings conference call. At this time, all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
My pleasure to introduce your host Elizabeth.
You get your after Investor Relations. Thank you you may begin thanks, operator, and good morning, everyone. We appreciate you joining adt's third quarter 2022 earnings call speaking on today's call will be Adt's, President and CEO , Jim Devries, and our EVP and CFO Ken Sephora.
And we'll provide an overview of our recent performance and how this links to the mission and long term strategy, we laid out at our Investor day in March.
Ken will then cover our financial performance after.
After the prepared remarks, we will take analyst questions 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 Dot com before we start I do need to mention that today's remarks include forward looking statements 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 some of the factors that may cause differences are described in our SEC filings. We'll also discuss non-GAAP financial measures on the call. The most directly comparable GAAP measures along with a reconciliation to those measures are available on our website at www Dot investor got ATT Dot com.
And with that I'll turn the call over to Jim. Thanks, Elizabeth Good morning, and thank you to everyone for joining us on our earnings call. Today ADT released our strong third quarter results. This morning, driving top line growth, 22% to $1.6 billion and generating adjusted net.
Income of $83 million or 10 cents per share our quarter also resulted in improved adjusted EBITDA up 12% year over year and strong adjusted free cash flow for another consecutive quarter, our recurring monthly revenue balance or RMR is at record.
Levels, and we've lowered our revenue payback to our best ever 2.1 years customer retention also continues to improve with gross attrition at a record low of 12, 6% as our results demonstrate consumer demand for Adt's products and services.
Remain strong we are effectively growing our business driving innovation building brand loyalty and improving capital efficiency a highlight for the quarter was the announcement of Adt's New partnership with state farm together, we are committed to revolutionizing.
The value proposition for home insurance policyholders by leveraging smart home technology to detect and mitigate losses related to water fire intrusion and other home ownership risks.
The combination of ADT and state farm creates a one of a kind partnership to legacy brands. Each possessing over 100 years of trust and experience with a common mission and vision centered on protecting our respective customers our partnerships aspiration to.
Bring state of the art protection to state farms, 14 million plus customers, reducing the risk and severity of common perils for homeowners delivering measurable net loss reductions for state farm and accelerating subscriber and revenue growth for ADT. Additionally, two.
Advance and enabled the partnership state farm has committed up to $300 million towards product innovation technology and marketing our teams have already begun cross functional work streams on our first integrated offering and we anticipate having a pilot offering in several key markets.
In the spring of 'twenty 'twenty three underscoring their confidence in our partnership State farm made a $1.2 billion equity investment and ADT and we also welcome state farms, Chief Operating Officer, Paul Smith to our board of directors, both our companies are aligned and committed.
To a long term strategic and mutually beneficial partnership as of today State Farm is now our second largest owner at 15% and as Paolo was position is currently just under 55% Adt's third largest owner is Google who has committed.
An additional $150 million in success funds towards growing this new line of business related to Google Our Google partnership is continuing to show tangible benefits to our results customer preference for Google nest products is driving stronger demand for these branded.
Devices compared to our previous White label offerings. For example, Google nest doorbell attachment rates are now more than 50% nearly double what we experienced with non branded products in August we expanded our Google nest offerings to include indoor.
An outdoor cameras as well as the latest Google nest Thermostats, we're now realizing a greater than 30% uplift in cameras per home versus our baseline, notably each month, we're seeing sequential improvements in residential installation revenue per unit as our marketing.
Advertising ramps up on all these products and as our sales teams gain more proficiency with our new product offerings, we remain committed to delivering a superior experience for our customers, which we strongly believe as underpin the success, we've achieved so far with.
With the customer experience is our north star our next milestone will be in the first quarter. This particular launch is a meaningful one as it will include our ADT plus app and self setup of the ADT product suite, including Google nest offerings, the new ADT plus.
<unk> will also integrate Google nest video capabilities, our joint marketing and advertising campaign. We will now begin in 2023, our campaign, which will be partially funded by the first $50 million tranche of Google's success funds.
Kevin will share more specific details in a few minutes, but strong demand for Google nest products is a key contributor to our improved revenue payback and Sac efficiency.
Overall, we are very pleased with how the consumer and small business segment is performing I'll spend just a few minutes now on ADT solar and ADT commercial two smaller but significant segments that play important roles in the future growth of our ADT portfolio approximately a year of.
So we announced our son pro deal and launched ADT solar.
The overall solar market remains robust with industry revenues expected to grow nearly $30 billion by 2030. The recently passed inflation reduction Act is definitely a positive for this market, providing more affordable access to renewable energy for more customers.
<unk>, while we're working through some near term pressures on the business from rising interest rates and operational integration, we remain bullish over the horizon for ADT solar.
We are confident demand is there and will grow its imperative on us to stay disciplined to deliver operationally and converting that demand and to obtain financial returns on that growth within the third quarter. We were encouraged with solar September exit rate demonstrating EBIT profit.
Ability that said within our solar segment, we're taking a noncash goodwill impairment charge that Ken will share more details on our near term goal is to position ADT solar as the premier operator in the solar market and to improve our margin profile as we close the year.
Finally, turning to ADT commercial this segment is continuing to perform well with revenues up 12% in the third quarter and 9% year to date. The exceptional service provided by our commercial team continues to result in big wins parts.
Early within National accounts, we're also seeing very strong retention rates in this segment through a combination of pricing actions and cost initiatives, we've been able to fully offset margin headwinds from inflation and part delays. Our commercial segment has been affected by supply chain challenges.
<unk> more than any other part of our business, which youre seeing partially reflected in our installation backlog growing by 25% year over year to $445 million.
Overall, it was a terrific quarter for the commercial segment and team.
Summarizing ADT maintained strong momentum in our business and we continue to produce growth in revenue and earnings we remain on track to meet our guidance metrics for the year and we're taking that momentum into 2023, where we will again look to grow revenue grow earnings on <unk>.
Absolute and per share basis, and grow cash flows advancing us towards our 2025 goals.
All of this success is a direct reflection of the hard work and dedication of our 22000 employees and our 200 plus dealer partners I want to thank all of them for what they do for ADT and for our customers each and every day I'm now going to turn the call over to Ken <unk> as many of you.
No just after last quarter's call, we announced Ken's promotion to CFO I am pleased to officially welcome him to our earnings call in this new role congratulations Ken and handing it over to you I appreciate that Jim. Thank you and thank you everyone for joining our call today.
As Jim indicated we have solid momentum across the business and we are extremely pleased with the results delivered by our team in the third quarter <unk>.
Total company revenue was 1.6 billion up 22% versus prior year, including the benefit of our solar acquisition excluding.
Excluding solar our revenue grew approximately 8% our recurring monthly revenue or RMR subscriber base grew to $372 million or 4% year over year, a record for the company and a strong reflection of the benefits of a higher average pricing growth initiatives and improved customer retention.
Adjusted net income was 83 million or 10 cents per share an improvement from a loss of 54 million last year.
Stronger revenue and margin expansion translated into higher adjusted EBITDA, which increased 12% versus prior year third quarter and is up 11% year to date.
Our GAAP results included two notable noncash special items.
First a 158 million noncash charge associated with our tender offer where the proceeds from state farms equity investment were used to repurchase an equal number of shares offsetting any dilution for accounting purposes. This was considered a financial instrument.
Based on the share price at closing of the tender we will see a partially offsetting noncash gain in Q4 of 95 million. The second special item was 149 million noncash goodwill impairment charge associated with our solar business. This charge is based on the solar segments operating performance and reflects changes to macroeconomic.
Unmik conditions.
Moving to our segment highlights our consumer and small biz or C. S. B segment delivered total revenue of 1.1 billion, an increase of 7% or 75 million versus last year.
This performance was driven by a 5% increase in monitoring and services revenue, resulting from higher average pricing subscriber growth initiatives and improved customer retention.
CSB adjusted EBITDA increased by $63 million or 12% and was driven by this increased revenue combined with strong cost performance EBITDA.
EBITDA margin expanded year over year by 200 basis points for the third quarter and nearly 300 basis points year to date, our virtual service program is continuing to drive high levels of customer satisfaction. In addition to significant cost efficiencies. This initiative is allowing us to service our growing subscriber base by using technology and.
Video as an alternative to more costly in person visits we have completed over 650000 virtual service visits this year and in person service tickets decreased by 26% in the third quarter versus the prior year.
Turning to our commercial segment, we delivered solid revenue growth of 12% to $314 million or sales remains strong. However supply chain delays are driving a growing backlog. We view the growing backlog is a pipeline for future revenue and margin as supply chain continues to decongest.
Commercial adjusted EBITDA was $34 million, reflecting a double digit margin rate as our increased revenues. In this segment were partially offset by some inflation driven challenges our solar segment posted revenue of 179 million and an adjusted EBITDA loss of $6 million driven by installation delays associated with a.
Third party lenders and solvency in the June quarter, and cost inefficiencies from lower install throughput with.
With these near term pressures on the business and additional headwinds from rising interest rates. We've taken several recent actions to improve operating margins and solar these.
These include process improvements and scheduling and labor planning workforce, right sizing and pricing adjustments and as Jim mentioned earlier, we're starting to see the improved margin benefits in recent results switching our attention to cash flow adjusted free cash flow is $145 million up from 62 million last year on higher recurring revenue flow through.
And lower net subscriber investments, partially offset by higher cash interest our core ADT adjusted free cash flow is essentially on plan for the year with outperformance in the consumer business offsetting solar pressures.
The recent sharp rise in rates. However is pressuring our cash interest, which will be approximately 20 million higher in the second half of the year compared to the first half of the year.
We are nearly fully hedged on our variable rate debt, though this offsetting benefit flows through cash from financing activities and therefore outside of adjusted free cash flow.
This cash flow geography is an important contributor to why our 2022 free cash flow guidance is trending towards the lower end of the range, while our revenue and EBITDA is trending towards the higher end our top priority for cash is capital efficient growth, we delivered meaningful improvement in net subscriber acquisition cost efficiency in the quarter as we.
Cheese, 11% lower sac spend while growing our overall customer base by 2% to more than 6.7 million customers.
A big improvement driver was a 22% increase in installation revenue per unit of measure we've seen trend higher as our Google nest product Rollouts have progressed.
Another critical capital allocation priority is strengthening our balance sheet, we've lowered our net leverage ratio to four times this quarter down from 4.4 at year end 2021.
As a reminder, our goal is to have that ratio at or below three times by the end of 2025 during the quarter, we repaid $80 million against our revolving credit facility ending the quarter with no outstanding revolver borrowings. We also entered into a new debt commitment letter for up to 600 million of term loans under a senior.
Our term loan a facility.
We expect to use the proceeds of this facility together with cash on hand to repay next year $700 million maturity with this action. We have now addressed all of our significant maturities in 2023.
Our manageable debt maturity schedule combined with our strong recurring revenue mix and limited variable rate exposure reduces balance sheet risk and makes our company more resilient against rising interest rates and any potential recession I'll wrap up now so we can transition to Q&A by simply sharing that we are very pleased with adt's performance this quarter.
And I too would like to add my personal thanks to our entire team.
As Jim mentioned, our performance to date gives us confidence in achieving our full year guidance and importantly meeting the long term goals that we laid out at our Investor day, operator, Please open up the call to questions.
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For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys, one moment. Please poll for questions.
Our first question is from George Tong with Goldman Sachs. Please proceed with your question.
Hi, Thanks, Good morning wanted to start with state farm Ah Congrats on the partnership.
Can you talk about your milestones with Goldman.
Going to market together with joint product offerings. One you expect to see benefits from that partnership materialize and how you expect adroitly to deploy some of the co investments into products and marketing.
Sure George its Jamie Thanks for the question, so a little bit of background on state farm.
Sure a couple of high level comments and then for <unk>.
Contracts and you can get to get to your specific question.
As you know state farm invested $1 2 billion.
<unk> now owns 15% of our company.
The opportunity fund that you referenced a $300 million.
That will be invested together to advance the partnership.
Paul Schmidt Chief operating Officer at State Farm has joined our ADT board already providing value we're thrilled to have them in the boardroom.
The vision for.
Partnership George age two.
Evolve homeowners insurance from purely restoration to include a prediction and prevention to avoid losses.
We will be going to market with a offering that we call circle of protection.
That is.
Intending to reduce losses.
Related to water and intrusion and fire and smoke.
We had our first kickoff session a couple of weeks ago with state farm, and Google and ADT executives.
Setting up a governance structure to manage the opportunity fund we're planning to offer that circle of protection product that I just mentioned in two or three stage in the spring of 2023.
Jeff gave of those pilots is positive.
We prepare for a wider launch.
Cross the country.
<unk>.
Early to comment on the on.
The financial impact that it will have for us in 2023.
As you would expect Super excited to have state farm is a partner.
And we think that this partnership unlocks new Tam for ADT, where we're excited to get started.
That's very helpful and then as a follow up.
You delivered record attrition rates in the quarter can you discuss trends.
Contributing to that improvement and whether those trends are persistent.
And whether you expect additional improvement down the line.
The.
So the retention.
For us will always move a little bit from quarter to quarter.
As we've commented before and as you know.
George.
Linear for us.
That said, we continue to be bullish about this metric.
Quarter ended at 12, six that's a record for US an improvement of 10 bps from last quarter.
80 bps better than Q3 of last year.
<unk> was solid for us as well.
There is some modest headwind from non paid cancels I mentioned this on our last call.
Non pays a smaller percent of total cancels the positive momentum in all of the other categories is more than enough to offset it.
So to highlight highlight the point net cancelled accounts for us George.
For line pay was approximately $45 higher than Q3 of this year than Q3 of last year. So we posted a modest.
Don't want to lose anybody but in the Grand scheme unpaid cancels are pretty modest number for us and and there are just a host of positive indicators related to customer retention.
Devices sold at time of installation are up pretty significantly.
Getting more and more stable.
Save offers our service backlog hit a record low.
An uptick in credit scores.
Both our dealer and direct channels.
We've seen improvements in voluntary and last computation results.
And then as with last quarter, very importantly, the macro environments, leading to fewer relocations and so that continues to be a tailwind for retention. So it's a good story for us and we're feeling optimistic long term about customer retention.
Very helpful. Thank you.
Our next question is from Toni Kaplan with Morgan Stanley . Please proceed with your question.
Thanks, so much.
I know you mentioned Ken the.
Free cash flow expected to be towards the lower end of the range and you talked about a 20 million higher cash interest expense. So it sounds like that's the main driver there but is there anything else that's leading you to expect a little bit later free cash flow.
Tony that the interest piece and on the second half versus the first half is the main driver.
You can see some of the trends that we've talked about the operating performance the EBITDA performance flowing through from each of the segments.
We're happy how the businesses are performing.
But we just couldnt offset the interest piece, but the reminder, on the interest piece, we do have that fully hedged. So we're getting the benefit of those hedges that we put in place years ago, It's just happening in.
In the financing section so when we think about true cash flow, we feel really good where we're at it's just the adjusted free cash flow. We're measuring here does include the higher interest in the second half of the year.
Great.
And then.
Jim on the solar installations.
Installations, obviously below last year, you called out the macro environment and also the financing partners and solvency, which what you had mentioned last quarter. So I know you have a couple of new partners. There I guess, how long should we expect solar to be a little bit of a drag how quickly does that turn around.
And start growing like you had expected originally.
Sure Toni Thanks for the question.
In many respects, we're slowing down in salt and solar now so we can go faster later.
We're navigating the operating challenges.
You just mentioned the liquidation of a major financial partner was.
The speed bump for us I am pleased with the progress we're making each successive month is.
We're building an operating engine that stronger the.
The investment thesis is still intact. The brand is helping drive volume conversion rates are up.
We're excited about our relationship with Lowe's, that's just getting started.
So I feel good about our ability to grow this business.
And when I think about.
The year to come in in many respects I think we will deliver in 2023, what we had intended to deliver in 2022.
The financial results are below expectations.
Each of those issues that were creating a log jam and throughput are being addressed.
And I would expect us to.
To deliver in 'twenty three what we anticipated in 'twenty two so another few months of shoring up operations or we should be in good shape.
Terrific. Thanks.
Our next question comes from Brian <unk> with Imperial Capital. Please proceed with your question.
Yes, thank you very much great quarter.
First of all on the competitive front can you talk a little bit about what youre seeing in terms of competition.
One tangent you could go down there's a couple you could go down but they haven't recently announced they're cutting ties with alarm dot com I know that you are moving forward with with Google can you talk about anything legacy that you have with alarm and what your plans are moving forward.
So.
Thanks for the question Brian on the.
I can't speak to.
An alarm I'm not sure of what their plans are or the relationship for us.
<unk> Dot com has been a great partner.
Made the decision.
Year, or so ago that we were going to build our own platform something we call ADT plus.
We're super excited about it will roll out that product in very early 2023 for DIY and mid year for DIY FM.
And that is the platform that we'll use.
For new customers, rather than continuing to use the alarm dot com product.
We will still have a relationship with alarm they will continue to support our existing customers.
And we have a long term contract with the organization that we're satisfied with what ADT plus by midyear next year, we'll replace them for all DIY and pro install customers.
Great and then as a follow up on a different tangent.
What are your plans in terms of going into other.
Areas out there you've gone solar you got insurance, you've got a great customer base can.
Can you give us a glimpse into direction, but you may be thinking about in terms of additional services you may be selling into your existing base.
Aye.
I would say the all of the tools for growth are available to us.
Great about the setting of the pins.
The state farm relationship the state farm partnership is going to be massive for us.
Know how optimistic we are about Google.
And so for US it really is an execution game more than a foray into any new areas.
We're excited about our JV with canopy.
And auto of security I think opens up some new Tam for us.
Outside of Whats before us Brian It is a focus and execute game and leveraging all the tools that we now have to help us grow so I don't anticipate I don't.
Interest paid a new foray or a new area.
Great. Thank you very much.
Yeah.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from Ashish <unk> with RBC capital markets. Please proceed with your question.
Thanks for taking my question.
Just wanted to focus on the consumer segment have you seen any kind of elongation in the sales cycle on any change in that that you need or are the products that are getting adopted by the consumer on the security side.
Thanks, Ashish for the question I'd say I mean the.
There's not a fundamental change.
We're continuing to see a Renaissance in video.
A number of cameras indoor and outdoor cameras video doorbell customers.
Desire continues to increase.
The Google products are selling well.
I had mentioned earlier Ashish.
George asked about attrition.
A positive.
Trends that we're seeing is that customers are just asking for more devices.
This year for example, the number of new customers with 10 or more devices in their system is actually double what it was last year.
And it is it bodes well from a retention perspective, and it's why you're seeing record installation revenue per unit.
And a lower revenue payback as a result of it.
The demand for devices to fill out the smart home ecosystem just continues to grow for us. So that's probably the most substantial trend that I see.
She is Ken if I could just add on a tiny bit to what Jim just said it we talked about in your <unk> up 22% year over year last quarter, we talked about around $1200 as our average in our residential segment.
We saw another $30 pop this quarter. So we continue to see this nice inching up of the installation revenue per unit and as a reminder, we just launched the indoor outdoor cameras for Google in the month of August we probably got maybe a quarter or I'm, sorry half a quarter benefit from some of the new devices that were offering so we like the trends that we continue to see the upside in <unk>.
As it helps that our sac efficiency.
That's great color, Thanks, Jim and Ken maybe just to follow up a similar follow up on the commercial side.
How much of the businesses.
Tied to new business starts versus existing businesses have you seen any kind of slowdown or elongation of sales cycles on the on the commercial front. Thanks.
So commercial commercial saw hitting on many cylinders Q Q3 was solid for us revenue up 12% against a very good Q3 last year.
EBITDA Cigna.
Significantly.
We have looked like a lot of businesses Ashish, our commercial business had some supply chain constraints.
<unk> are impacting backlog and a long gating the cycle sales cycle installation.
Installation backlog now for US is at $445 million, that's a record and a $100 million of that is associated with parts delays.
So it's it's.
A longer sales cycle, but we're not seeing cancellations out of the.
How does the backlog.
Everybody has the same parts issues and so customers are hanging in there with us.
Lots of irons in the fire.
We have new verticals that we've talked about a handful of times Super excited about energy education.
We have some big wins in Oregon, Texas, I think Kentucky recently government, we're starting to get some traction there is some interesting work and innovation that but I'm pretty excited about so net net we feel good about the business. The leadership team is outstanding.
Supply chain organization at ADT is managing supply chain.
First we can and the business is doing really well.
Very helpful.
Hey, guys.
One of my one of my favorite charts is to add on that Jim was just talking about if I rattle off the last four quarters for commercial and EBITA, which is one of the measures. We look at for the business $16 million and 24 million 31 million and 34 million. So we love the shape of that chart.
That every quarter will be linear like that but we like the momentum in the business, even with the current congestion going on within supply chain.
That's very helpful color. Thank you.
Yeah.
Our next question is from Philip Shen with Roth Capital Partners. Please proceed with your question.
Hey, guys. Thanks for taking my questions first one is on <unk>.
What you think are the shape of our revenues look like as we get through 'twenty. Three I know you haven't provided full year guidance or anything but I was wondering if you could help us understand you do see a reacceleration from.
From a quarterly standpoint.
On a year over year perspective in Q1, or two or do you think we need a way to back until back half until we.
We see some reacceleration of the business. Thanks.
Yes.
So I'd say generally.
We see 23, consistent with our 2025 Investor day plans.
The only aberration to that would be that the.
The revenue expectation that we had for solar this year will be largely pushed to 2023.
But.
Outside of that I'd say, the overall share.
<unk> of the of the pie and the allocations between CSB commercial and solar are very much consistent with what we shared at Investor day.
Yeah. Thanks, Jim do you have a sense can you share which quarter do you think no EBITDA flips back positive can we.
We see it in Q4 do you think it's more likely a first half next year.
Phil we're not giving specific guidance for solar even the timing of them, but we were encouraged Jim mentioned in his prepared remarks that in the month of September exit rate, we saw EBITDA profitability for solar.
So we're happy with the turnaround we have there and the actions that the team has put in place give us confidence to improve that margin profile going forward. So we'll talk about in our next call kind of our 23 guidance in a little more color there, but for now I think the prepared remarks cover the.
The trending for solar.
Great. Thank you and and then historically you guys have been.
Working with the loan companies as a financing.
Source.
To what degree you know with the I R a being pretty rich for the lease and PPA options to what degree are you opening up to potentially partnering with the at least company.
Could.
Provide potentially healthier economics with the.
The ITC adders.
So we're looking at all the options there.
Diversity in our loan portfolio is important.
Given some of the volatility in the marketplace. We do have some great partners in this space that had been there for us, but we are I think the word there is diversity as we think about 2023 and making sure we have the flexibility to move quickly in these different opportunity. So I won't give share much more about a specific diversity plans, but know that we think of our lender.
Partners as key partners, but we want to make sure that we have the diversity to grow the market.
With our aligned with our plans and we think the financing piece is a very critical component even subject with the benefit of the IRA and the greater tax incentives. The financing piece is critical for such a large installation and purchase with the consumer. So we know that partnership is critical.
Great. Thanks to you both and I'll pass it on.
Thanks, Phil.
We have reached the end of our question and answer session I would now like to turn the floor back to Kim for closing comments.
Thanks, Operator, we've got great momentum in the business catalysts for growth with state farm and Google partnerships, we're optimistic about finishing the year strong.
I'd again like to extend my appreciation to our ADT employees and dealer partners for an outstanding quarter, and thanks again, everyone and have a great day.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Okay.
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