Q4 2022 ADT Inc Earnings Call
Speaker 2: Greetings and welcome to the ADT fourth quarter and full year 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. To ask a question please press star then the number one on your telephone keypad.
Speaker 2: To withdraw your question, press star 1 again. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Elizabeth Lipid Landers, Senior Director of Investor Relations. Thank you, you may begin. Thanks operator, and good morning everyone.
Speaker 2: We appreciate you joining ADT's fourth quarter in full year 2022 earnings call. Speaking on today's call will be ADT's president and CEO , Jim DeVries, and our EVP and CFO , Ken Pappura. After the prepared remarks, we'll take analyst questions. Also joining us for Q&A are Don Young, EVP and Chief Operating Officer.
Speaker 2: and Jail Greer, SEP of Finance and Investor Relations. 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.com. 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.
Speaker 3: Our conciliation of those measures are available on our website at www.investor.adt.com. And with that, I'll turn the call over to Jim. Thank you, Elizabeth. Good morning. Thank you, operator, and thank you to everyone for joining us on our earnings call today.
Speaker 3: ADT released our fourth quarter and full year results this morning. 2022 was a very strong year as we delivered our financial commitments, strengthened our foundation and advanced the transformation of our business from a traditional security company.
Speaker 3: towards an innovative business poised to accelerate growth in new markets. I'd like to begin by sharing some of our growth highlights.
Speaker 3: For the full year, we grew revenues, earnings and cash flows. Our total revenue was up 21% to 6.4 billion generating adjusted net income of $218 million or 24 cents per deluded share. We also posted improved adjusted EBIDA up 11% year over year.
Speaker 3: and over $550 million of adjusted free cash flow up 20% year over year. Importantly, we met our commitments to our shareholders delivering total revenue and adjusted EBITDA at or above the top end of our full year guidance and met our adjusted free cash flow guidance.
Speaker 3: As part of growing the business, we've also focused on diversifying our revenue streams. To this end, during the last several years, we've expanded our commercial business as well as acquired a residential solar business. These actions resulted in meaningful tam expansion in both of these fast growing markets.
Speaker 3: Our commercial revenues grew 10% for the full year, and our solar business ended just under $800 million in revenues for 2022. For yet another consecutive quarter, our recurring monthly revenue balance, or RMR, was at a record level, and we maintained our record revenue
Speaker 3: is improving our free cash generation, allowing us to invest in innovation and improve our balance sheet. We've now reduced our leverage ratio to below four. We delivered these impressive results while simultaneously driving transformation. We're effectively managing our business as we've transitioned from the traditional own traditional own.
Speaker 3: I'd like to highlight specifically the strategies we're implementing to address our customers' needs in the home. With the launch of our 80T Plus platform and next-gen hardware expected this year, we are putting all the pieces in place to expand and customize choices for our customers.
Speaker 3: Our vision includes customers choosing which distribution channel best meets their individual needs, including choosing not only our signature in-home options, but expanding other customer alternatives and choices. Virtually assisted, online, and retail options.
Speaker 3: We'll also be customizing our pricing and packages, offering customers options that include attractive entry price points with greater contract flexibility. This allows our customers to determine the right combination of personalized options that will provide them with the best value for their needs.
Speaker 3: Another choice customers will have is customizing installation and service. We're leveraging advanced technology to give customers more virtual options for sales, service, and installation. To date, our virtual assistance initiatives have been a huge success as well as valued alternative to our customers.
Speaker 3: allowing ADT to deliver higher quality services at a lower cost. ADT partnerships also continue to play an important role in our transformation and two of our most significant partnerships are with Google and State Farm.
Speaker 3: In distinctive, yet complimentary ways, both of these partnerships are expected to broaden our distribution reach and our customer offerings, giving customers even more reasons to choose ADT. Google Nest products have proven to be a great addition to our ADT offerings. After nearly a year in market, our attachment rates for video doorbells have doubled...
Speaker 3: products, which integrates the Google Nest product set.
Speaker 3: We launched this just a few weeks ago, an exciting accomplishment and we expect to do the same for our Pro install products later this year.
Speaker 3: To support this shift, we've recently launched a new advertising campaign to increase the continued awareness and differentiation of our new capabilities, further igniting customer demand. The success of our Google Nest products is also driving substantial increases.
Speaker 3: and our installation revenue per subscriber which in turn is improving our sacrificancy.
Speaker 3: The Google Nest Product Edition simply said provides us with a higher quality customer offering.
Speaker 3: Complimenting this success is our State Farm partnership. With an existing customer base of approximately 14 million homeowners, State Farm has the potential to provide a significant increase to ADT's overall reach.
Speaker 3: The partnership will also facilitate state farm customers obtaining access to ADT's best-in-class protection. Together, ADT and state farm are revolutionizing the value proposition for home insurance policy holders by leveraging smart home technology to detect
Speaker 3: and mitigate losses related to water, fire, intrusion, and other homeowner risks. We expect to begin launching in a limited number of states, our first exclusive state farm offer during the first half of this year and anticipate growth from this partnership.
Speaker 3: to be reflected into 2024.
Speaker 3: We had many things to be proud about throughout 2022 and during the fourth quarter. And as we begin this year, we're poised to navigate a challenging economic environment. While the macro environment remains uncertain, our business model has consistently demonstrated it is recession-
Speaker 3: our products. Within our consumer and small business segment or CSB, I'm really pleased with the drivers we're seeing for increased customer stickiness.
Speaker 3: More devices per home, higher up front customer investments, remarkable credit score mix, and higher video take rates all bode well for our future. While the demand environment appears to be steady, we're still ensuring that if we experience any material changes in demand, we're staying nimble and able to move quickly.
Speaker 3: in our CSB segment.
Speaker 3: This mirrors similar actions made last year in both our commercial and solar segments. This streamlining will allow us to better focus our investments in growth and innovation while improving our speed to market and ensuring that more of our revenue growth drops to the bottom line.
Speaker 3: in customers. Higher interest rates also influence our solar business, where most purchases are financed through long-term, low-interest loans. This impacts both sales, as customers are seeing higher rates year over year, and also expenses, as any cost to buy down the rate gets passed through to us. And of course, the biggest potential impact...
Speaker 3: could be on our cash interest. And fortunately, most of our variable rate debt is hedged.
Speaker 3: This has underscored our intent, which we shared in our investor day last year to actively reduce our debt levels.
Speaker 3: Our net leverage ratio at the end of 2022 was 3.9, a meaningful improvement from 4.4 just a year ago.
Speaker 3: Our goal is to get that under three times by the end of 2025, consistent with our long-term financial plan.
Speaker 3: The final item we are focused on is the performance in our solar business.
Speaker 3: We've analyzed the business from top to bottom, instituting changes to improve the overall operation, customer experience, and financial outcomes.
Speaker 3: As part of this effort, we have pointed long time ADT veteran Jamie Hange as our new executive vice president of solar leading this growing segment.
Speaker 3: While these changes have improved results in ADT solar, we know we still have work ahead of us to drive and sustain the level of performance we expect this segment of our business to deliver. So in closing, we're optimistic for 2023. We have a recession, resilient business model, and a plan to mitigate the challenges we may have.
Speaker 3: and we have action plans in place to capitalize on the growth available to us in the solar market.
Speaker 3: We have a strong plan and commitment to meeting both our 2023 objectives and the 2025 goals we laid out at investor day just a year ago. I'll now turn the call over to our CFO , Ken Popora, who will take you through the details of our financial results, including guidance for 2023.
Speaker 4: Thank you Jim and thank you everyone for joining our call today. As Jim mentioned we have delivered on our financial objectives for 2022 and have clear momentum across each of our business segments
Speaker 4: I am excited with these results delivered by our team.
Speaker 4: Total company revenue was 1.6 billion for the quarter and 6.4 billion for the full year, up 21% versus prior year, including the benefit of our solar acquisition. Excluding solar, our revenue grew approximately 7% in 2022. Are we carrying a monthly revenue or RMR from our subscriber base grew to 374 million?
Speaker 4: or up 4% year-to-year. A record for the company and a strong reflection of the benefits of a higher average pricing, growth initiatives, and improved customer retention.
Speaker 4: This stronger revenue translated it into higher adjusted EBITDA, which for the full year was 2.45 billion, up 11% versus prior year.
Speaker 4: Adjusted net income was 92 million or 10 cents per share in the fourth quarter, an improvement from a loss of $25 million last year. For the full year, we delivered a adjusted net income of 218 million or 24 cents per share, representing our first full year positive adjusted net income
Speaker 4: since IPO. Moving to our segment highlights, our consumer and small business or CSB segment delivered total revenue of 1.1 billion in the fourth quarter, and for the full year this segment delivered 4.4 billion in revenue in increase of 6% or 233 million versus last year. This performance was driven primarily by a 5% increase in monitoring and related services. service.
Speaker 4: 2022 expanded year by 200 basis points. Our virtual service program is continuing to drive high levels of customer satisfaction and significant cost savings.
Speaker 4: Since launch in 2021, we have completed over 1 million virtual assistance appointments. Nearly 40% of all service requests in 2022 were satisfied virtually, which drove reduction in net service costs of 8%, despite year-veer growth in our subscriber base. Strong demand for the Google Nest products?
Speaker 4: has been an accelerator for our sack efficiency and a record revenue payback of 2.1 years. Just a year ago, our revenue payback was 2.3 years. Our installation revenue in our direct residential business, acted a Q4 over $1300 per home, up 21% year-over-year.
Speaker 4: Turning to our commercial segment, we delivered total revenue of 328 million in the fourth quarter of 15% versus prior year. And for the full year, the commercial team delivered 1.2 billion in revenue. Our commercial sales and installation revenue was strong in the fourth quarter, and we got beginning to turn the backlog from earlier in the year to revenue.
Speaker 4: Installation backlog remains robust at 420 million, providing a continued pipeline for future revenue and margin. This strong revenue performance drove a justity of 127 million per year, up 32% with expanded EBITDA margins per bolt the quarter and full year. I am very pleased with the momentum we have in this segment. Our solar segment posted a revenue of 200 million in the fourth quarter and 786 million for the full year.
Speaker 4: year. In line with our guidance range, and up 20% versus prior year. Strong EBITDA growth in our CSB segment and the improved capital efficiency, help us overcome a shortfall our solar segment.
Speaker 4: Our improved efficiency enabled us to grow our ending RMR by 4% with a 12% year-rear decline in subscriber acquisition spend, which you can see in our record 2.1 year revenue payback. We have also been focused on strengthening our balance sheet. Our actions this year have driven our leverage below 4 times, an important step in our path to reduce that ratio at or below 3 times by the end of 2025. Our net leverage ratio now stands at 3.9 times.
Speaker 4: down from 4.4 times at year end 2021.
Speaker 4: We expect to reduce our net debt balance by more than 200 million this year. As part of this effort, we have given notice to holders that we will repay the upcoming 700 million, 2023 maturity, with the 600 million senior secured term loan a facility we closed on last year, along with cash on hand. Following this repayment, we have no meaningful maturity left this year and will turn our focus to addressing the 750 million due next year.
Speaker 4: with manageable debt maturities, limited variable rate exposure, and our strong recurring revenue mix, we are well positioned against rising interest rates. And finally, turning to guidance, we expect the momentum in all segments of our business to overcome macro trends, and resulting growth in revenue, earnings, and cash flows in 2023.
Speaker 4: More specifically, we expect total revenue of 6.6 to 6.85 billion representing growth of approximately 5% at the midpoint. With margin expansion in all three segments, this top line growth translates to adjusted EBITDA of 2.525 billion to 2.625 billion, also representing growth of approximately 5% at the midpoint.
Speaker 4: And in a newly added guidance metric, we are also forecasting adjusted earnings per share of 30 to 40 cents for the year versus 24 cents in 2022. To help with the transition for modeling EBITDA to EPS, we'd like to provide some additional detail on selected 2023 expenses. We expect our DNA expense to decline by more than 200 million year-of-year.
Speaker 4: as we continue to see the benefits from wind down of purchase related accounting. However, this DNA benefit will almost entirely offset by the combination of higher book interest expense and higher tax expense. For modeling purposes, we are using a 28% tax rate assumption. Turning to cash flow, we expect adjusted free cash flow in 2023 of 525 to 625 million, which includes a roughly 180 million year-to-year headwind from cash interest. However, we do have meaningful portion of our variable rate debt hedged with the benefit of the hedge realized outside of adjusted free cash flow. At current rates, those interest rate swaps are expected to be approximately 75 million dollar benefit.
Speaker 4: to financing cash flow for 2023. As a result, our adjusted free cash flow, including the benefit of interest rates swaps, is expected to be 600 to 700 million, or growth of approximately 20% at the midpoint. And you will recall that our quarterly cash flows aren't even for a variety of reasons.
Speaker 4: particularly the timing of interest payments, which are much higher in the first and third quarters, with the first quarter typically the lowest cash generating quarter for ADT. As an example, for the full year 2022, our adjusted free cash flow grew by 20% year by year to 558 million, while the first quarter of 2022 was negative. As we transition to Q&A, I'd like to share my thanks to our employees and dealer partners for all they have done to enable our progress and these results. Thank you.
Speaker 4: I am confident that we are on a path to achieve our 2023 guidance, illustrating continued progress towards our 2025 long-term goals. Operator, please open up the call to questions. As a reminder to ask a question, please press star one on your telephone keypad. Our first question comes from the line of George.
Speaker 5: in what ballpark the impact you expect this will have on revenue and free cash full performance.
Speaker 3: Thanks, George. It's Jim. Appreciate the first question here at a high level just to set the question up the vision for the state-farm relationship is to really transform homeowners' insurance from purely restoration to include prediction and ultimately prevention to avoid losses. And the first offering that we're going to market with is called Circle of Protection. And the objective there will be to provide state-farm customers an offering that is centered on preventing fire, intrusion, and water claims. We will go to market in Indiana.
Speaker 3: possibly early April for that launch.
Speaker 5: Got it. That's helpful. You discussed the impact that the Google partnership has had on Nest Doorbell, Attachrates, Nest Camera Growth and overall residential installation revenue per unit. Can you elaborate on how much additional lift you would expect from Google in the years ahead and what inning the Google partnership is currently in with respect to its ramp cadence?
Speaker 3: Oh yeah, I mean we continue to feel great about the partnership with Google. Our marketing teams, as you know, George, are working together for a co-branded campaign. We'll be going to market as ADT plus Google.
Speaker 3: The teams have developed some excellent content recently. The Google Success Funds, where we're going to be tapping into for the first time this quarter and those success funds that first $50 million crunch we anticipate receiving.
Speaker 3: In 2023, the large majority of those funds will be invested in upper-frontal advertising and then to work on the product front. We feel great to be offering Google Nest products. Our installation revenue per...
Speaker 3: New install was just a tick above $1300 in the fourth order that is largely due to having Google in our lineup. So we feel good about the marketing. We feel good about the relationship overall and access to those Google success funds. And then from a product perspective, we're pleased with the products.
Speaker 3: Our customers are pleased with the products and we're seeing record levels of installation revenue per. Thanks for the color.
Speaker 6: Your next questions from the line of Peter Christensen would city please do ahead.
Speaker 7: Thank you. Good morning guys. Nice friends all around. Jim, I was worried.
Speaker 7: You can talk a little bit more about the setup in the housing market that we're all seeing right now. We are seeing some trade down, some of the home improvement retailers. I know you're seeing higher attach rates. It's contributing to lower attrition, things of that nature. Just wanted to point out, if you see any issues that relate to pricing, trade down.
Speaker 3: any of those impacts given where we are at the housing cycle. Thanks for the question Pete. So far, so good. We for sure have some pressure on gross ads because homes that are built can't have a system installed. But overall consumers are spending on home improvement. As I just mentioned to George, our installation revenue has been on a tear. Just about linear improvements over the last.
Speaker 3: 5 or 6 quarters. I think if we look back just a couple of years, that IRPU was at about $700. And as I mentioned, finished to $4,300. Importantly from an attrition perspective, about 40% of our attrition is due to movers.
Speaker 3: And with a softer housing market and fewer relocations, the net is a benefit to us. You know, we look at some pressures, like I said, on new ads, but far and away the benefit from improved retention advantage is 80.
Speaker 7: areas where you are seeing some positive momentum there, maybe by particular real state verticals, so on and so forth. But also, can you just chat about supply issues, those largely alleviated right now? Yeah, the momentum in this business is fantastic. The capabilities that we're building in new verticals,
Speaker 3: specific to the supply chain. You know, we're not out of the woods. I'd say I think the team would describe the environment as a bit better now than in the summer months of 2022. We've had some parts come in, so we're able to chip away at that back log a little bit.
Speaker 7: to get better and better for us. Thanks, Jim. Really nice turn.
Speaker 6: Thanks, Jim. Really nice turn. Thank you.
Speaker 7: Your next questions from the line of Brian Ruttenberg with Imperial Capital. Please go ahead. Yes, thank you very much. First of all, on attrition, you talked a little bit about what's going on. What is in your guidance in terms of attrition in 2023? Do you expect it to be at these levels? Do you expect some improvement in attrition? There's a lot of moving parts. I want to understand what your projections are.
Speaker 4: Brian , it's Ken from the question. We're not specifically guiding to attireional. We think about some of the high-level figures that we've shared, the CSL, the extra slide The predictors that we have going out with the new attributes that customers are joining are really excited about the new bigges that we're adding and the proposed digging is whether it's more devices for home, the higher IRPU that Jim mentioned.
Speaker 4: And in fact, it is that will drive long-term retention. And the piece that we don't control is a relocation and move market. We're really excited about the trends that we've seen here. And even a slight downtrend in the delinquency that we like to see with our high level of credit scores in our portfolio.
Speaker 7: Is that a correct summary?
Speaker 3: I think that's fair. Brian , super, super tough to predict, but all of the...
Speaker 3: Lead indicators that Ten mentioned really both well for us. You know, the device is, I think I shared this on the last call, the number of devices in a system correlates with retention. And our devices that are ten or more devices in a system is about double right now than it was a couple of years ago. Ten mentioned gone.
Speaker 3: an uptick in credit scores, service backlogs near a record low. We're getting more sophisticated on our own save offers. And so while we're planning to hold serve, come in right around where we are now, where we've got some cause for optimism given the positive lead indicators. Great. Then as a follow up on the Google rollout on ADT plus, I believe the plan was roll out, starting in first quarter. When do you expect it to be fully rolled out for all new customers?
coming on board, you know, is it going to be 2023? Is it going to be beginning of 2024? Maybe you can give us some rough guidelines. So the way that we're staging it is that the self-install or DIY product with Google is now launched. And that's with the immigrated app that you're familiar with Brian . Later this year, very late third quarter, maybe fourth quarter, the intent is to roll out the product offering for our professional install product as well.
So DIY is out and we'll say Q4 for DIFM.
Great. And then just one other quick question on solar. Are you seeing anything with the economy that's slowing adoption of solar? Are you on plan for seeing an improvement kind of year over year from 2022 levels?
Yeah, a lot of moving parts here, the housing market, the overall economy, the inflation or reduction act provide a bit of a tailwind. And I'd say net is probably a little softer demand than it might have been a year ago. But we're still long term bullish on solar. I mentioned this on our last call.
I mean, I'm pleased with the progress that he's making. Jamie's leadership is fantastic for us, but there's a lot of work to do here. And so I'm bullish on 2023, and even more so as we continue to set the operating foundation to scale this business to size. Thank you. Thank you.
Next questions from the line of a Monov Petnack with Barclays. Please go ahead. Monov please go ahead. Your line may be on mute. We'll move on to the next question and it's from the line of a Sheesh Sabajar with RBC Capital Markets. Please go ahead. Thanks for taking my question. I just had a multi-part question about the 2025 goals. I'll just ask them up front. So the like when we look at the midpoint of the 23 guidance and the 2025 goals it implies like 20% cargo for revenue and 24% 25% cargo for free cash flow. So can you just talk about how should we think about that trajectory going forward?
I think while it's not linear, it's a step certainly in the trajectory for our 25 goals. And we still are in line with those 2020 goals. Things like $10 billion in revenue, over $3 billion in EBITDA, taking our net leverage ratio to under three. Some of those factors are some of the key factors there. Paying down a billion dollars of debt, some works you make, and it's not long-term goals.
That's very helpful color and if you don't mind if I can just follow up on that question around fee cash flow as well. How do we think about the drivers for free cash flow going forward? Yeah, sure. The OCR Guard this year is 600 to 700 million hours with including the benefits of the interest rates drops. So a midpoint of 650 which represents about 20% year-rear growth versus 2022. Our overall commitment to 2025 and part of about a billion dollars is not to free cash flow. So we think we're on that pace and we like that year via growth consistent with the 20% of the group in 2022. So I think we've proven in 2022 the ability to deliver the cash flow.
The movements in our sack year, year, and the revenue payback have us showing clear line of sight within those goals, but especially the sack, which is our biggest expense, the biggest cash out, we really like the revenue payback numbers are putting up. And some of the installation revenue is a big drawback of that, especially in the residential business. So when you add all those factors together, it makes us feel a bit about the guidance on our way to the long-term goal. That's very helpful, Heather. This is.
by business, but can I just recap the underlying assumptions and let the guidance come to place from the RACRIS standpoint, assuming the lower volume of housing relocations and higher interest rates. But what you know that the broad macroeconomic assumptions are, and then also any help in how to think about sequential growth and margin, given consideration to seasonality, etc. for 2023.
I'm not going to repeat the last part about the seasonality. I caught the rest of it though. The last part of your question about the finale. Can you repeat the last part of your question about seasonality?
Oh, yeah, yeah, just with regards to sequential growth and margin, and you know, how to think about that for the consideration of the guidance for full year 23 with any impacts of seasonality. God, okay. So overall, how do we think about 23 in the form of what's going on with the macro piece? I mean, as Jim mentioned, there's a bunch of different variables. As a thing about the consumer business, while the home market rebound may be starting out, let's assume it's just flattened and existing ideas again. That tends to be a net.
positive for us given the greater stickiness and the greater attachment to recurring revenue. Overall, to some of the pricing that we're seeing in the market, we've had some good trends, especially on the IRFU or revenue premium in the home. So you think about the consumer business.
We see the bucking most of the trends with the macro given the cuss report folder that we target. The commercial business, again, it given a robust back-laug of over $420 million. We feel really strong about the new verticals that we're in as well as the ability to knock down that backlog. And on the solar business, while there are a couple of headlines related to inflation costs and interest rates, you have the inflation reduction act as well as high utility expenses tend to bolster that business as well. So lots of pros and cons when you step back and think about our guide in the form of macro, I call it generally neutral given the markets that we plan. I'm a sequential basis in kind of how 2020 looks. The only thing to kind of keep in mind is...
I think solar is a little more back and loaded generally based on how we're improving that business. I think the timing of our free cash flow, as I mentioned in the prepared remarks, Q1 tends to be low for us and it kind of creeps you throughout the year. So I think 2022 is a good example of how our timing of free cash flow generally comes into the years. I think about the free cash flow along all those lines of our 2022 patterns. That's very helpful. Thank you. Appreciate it. And then may I just confirm?
We've had the opportunity in our consumer business that the trends have been pretty solid. As you can see, the metrics we put up last year and have guided to in 2023. So I would think of this more as pruning around the edges, sharpening our cost buckets for the consumer business, getting a little bit sharper in our pricing.
but also writes, I think, some of the pieces of the workforce. So I think a bit more of this pruning versus the more aggressive actions we took in the commercial and solar business. God, thank you. Appreciate it.
And at this time, there are no further questions. I will now turn the call over to the company CEO Jim DeVorees for any closing remarks. Great. Thank you, operator. And thanks, everyone, for taking the time to join us today. As you heard, ADT is effectively growing our business. We're driving innovation, building brand loyalty, and improving our capital efficiency. We've got Grapele Menum in the business with catalysts for growth and state farm in our approval partnerships. We're looking forward to a strong 2023. I'd like to extend my appreciation to our ADT employees and dealer partners.