Q1 2023 ADT Inc. Earnings Call
Speaker 1: free earnings conference call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer session. If you'd like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one once again.
Speaker 1: Elizabeth Landers, Senior Director of Investor Relations, you may begin your conference.
Speaker 2: Thanks, operator, and good morning, everyone. We appreciate you joining ADT's first quarter 2023 earnings call. Speaking on today's call will be ADT's president and CEO , Jim DeVries, and our EVP and CFO , Ken Pippora. Following the prepared remarks, we'll take analyst questions.
Speaker 2: Also joining us for Q&A are Don Young, EVP and Chief Operating Officer, and Jill Greer, 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.com.
Speaker 2: 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. Some of the factors that may cause differences are described in our SEC filings.
Speaker 2: We will also discuss non-GAAP financial measures on the call. The most directly comparable GAAP measures along with the reconciliation to those measures are available on the ADT investor relations website. And with that, I'll turn the call over to Jim. Thanks Elizabeth. Good morning, and thank you to everyone for joining us today.
Speaker 1: This morning ADT released our first quarter earnings. I'm pleased to share that we had a solid start to the year with growth in revenue, adjusted EBITDA, adjusted free cash flow, and adjusted EPS, each growing nicely year over year.
Speaker 3: while concurrently, our net leverage ratio continued to decline. Our total top line grew 4% with commercial delivering very strong growth at 15% and we ended the quarter with a record recurring monthly revenue balance of $378 million.
Speaker 3: Our revenue payback now stands at a record low of two years, down from 2.3 a year ago, with gross attrition remaining at a record 12.5%. These factors are driving better capital efficiency and drove a year-over-year increase in the costs for Man ASL.
Speaker 3: and adjusted free cash flow, including interest rate swaps of over 70 million dollars versus Q1 last year. This improvement is consistent with our goal of growing this cash flow metric by 20 percent for a second consecutive year.
Speaker 3: Looking forward, the resiliency of our business is evident. There are many favorable factors that have ADT well positioned to meet our 2023 guidance. First, the market is showing strong spending and supply chain pressure is easing, boosting our commercial segment to outperform our expectations and capture market share.
Speaker 3: While commercial revenue grew 15%, our installation backlog remained steady at approximately $420 million, demonstrating the enormous strength of recent sales and reinforcing a strong pipeline for continued revenue growth.
Speaker 3: Equally impressive within Commercial was our profitability. EBITDA margins exceeded 12% for the quarter. Second, overall customer retention rates are stellar and ending RMR continues to grow at a healthy rate.
Speaker 3: As a reminder, when homeowner relocations are down near the levels experienced recently, there's an inverse relationship between existing customer retention and new customer ads. Worth mentioning, we're benefiting in retention from both the macro move trends and the new trend.
Speaker 3: and the continuous innovations to improve the customer experience. Third, in partnership with State Farm, we've just launched our initial offering in three states with plans to expand to six more states before the end of the year. Next,
Speaker 3: Our Google partnership is helping improve our product offering and increasing our installation revenue per unit, which is up $150 over the prior quarter and $300 over the prior year period.
Speaker 3: We continue to see high attachment rates on nest doorbells and cameras compared to our previous offering and customers are buying more devices, increasing the average device per system by more than 20% year over year. In February we launched ADT Self Setup.
Speaker 3: The first system to integrate our internally developed ADT Plus app with Google's Nest products. The launch of these products led to over a 30% increase in DIY sales this quarter versus the first quarter of 2022. We're driving more awareness of our integrated product offerings.
Speaker 3: with our new No Worries marketing campaign, which is being partially funded by Google Success Funds.
Speaker 3: We anticipate receiving the first $50 million of success funds this year and are working collectively to unlock the next $50 million tranche. Most of this fund will be spent in various forms of marketing to accelerate subscriber growth. We expect our Google partnership to accelerate even more.
Speaker 3: We expect to generate meaningful cost savings through these efforts and believe our efforts will lead to increased speed and efficiency.
Speaker 3: There are many positive outcomes in our business, but we're also cognizant of and monitoring the external environment we're operating in.
Speaker 3: For example, in our CSB segment, consumer economic pressures are resulting in somewhat higher non-pays in our attrition. The solar business has experienced some continued pressure as well. At an overall industry level, higher interest rates are pressuring growth as financing for solar.
Speaker 3: revenue is not the performance we expect. And we're executing a number of strategic actions to improve operations, customer experience and financial results. These actions include scaling our cross selling, launching a new dealer program.
Speaker 3: implementing and streamlining the business to improve cost and efficiency.
Speaker 3: In light of these actions and our efforts to strengthen our foundation for growth, we anticipate meaningful improvement in ADT solar performance by the end of the year. In closing, we remain focused on achieving progress among all our segments and advancing toward our 2025 goals.
Speaker 3: We believe ADT has a recession resilient business model and we have plans to manage the challenges presented in our solar business and across the broader macro environment. We have encouraging momentum in our CSB and commercial businesses and great partners in Google and State Farm.
Speaker 3: ADT's impressive results reflect the dedication and determination of our 20,000 plus employees and dealer partners. I want to thank them for all they do to take care of our customers every day. I'll now turn the call to our CFO , Ken Pappora, who will take you through our results in more detail. Ken?
Speaker 1: Thank you Jim and thank you everyone for joining our call today. As Jim mentioned, we're off to a solid start this year. Total company revenue was 1.6 billion for the quarter, up 4% versus prior year, with CSB and commercial showing strength at up 7% and 15% respectively. Recoming monthly revenue or RMR.
Speaker 1: from our subscriber base was up 4% year-over-year to $378 million, a company record and outcome of our continued higher average pricing and improved customer retention. This translated to adjusted EBITDA of $625 million, up 4% versus prior year, with strong margins in both CSB and commercial.
Speaker 1: Adjusted net income for the quarter was $102 million, or $0.12 per share, our fourth consecutive quarter of positive adjusted net income. Moving to segment highlights, our consumer and small business, or CSB segment, delivered total revenue of $1.1 billion in the first quarter, up 7% versus prior year.
Speaker 1: CSB adjusted EBITDA increased by 34 million or 6% for the quarter, driven by increased revenue combined with cost discipline. We are continuing to see strong demand for Google Nest products, which have accelerated our SAC efficiency and are driving a record revenue payback of 2.1 years within CSB.
Speaker 1: improvement over 2.4 years from a year ago. Our installation revenue per unit for Pro install is now approximately $1,450 up 27% versus prior year. Our attachment rate for Nest doorbells is approximately 50% and realizing a roughly 20% increase in cameras per home versus the same time last year.
Speaker 1: Because new customers are buying larger interactive systems, the new RPU for residential pro install is over $4 per month or approximately 8% higher than our average existing customer base.
Speaker 1: We are also seeing benefits from the ADT Virtual Assistance Program, which continues to drive high levels of customer satisfaction, with roughly 50% of all service tickets currently being satisfied virtually. As committed in our investor day just over a year ago, we are improving returns in our CSB business by now generating an average core customer value of approximately $3,000 per subscriber.
Speaker 1: up about $500 since 2021. The ratio of customer lifetime value to net SAC per subscriber is up to 3.2 times versus 2.8 times in 2021.
Speaker 1: As a reminder, core customer value equals the estimated recurring revenue during the expected subscriber life, less net SAC and less expected service costs. Turning to our commercial segment.
Speaker 1: We delivered total revenue of $335 million in the quarter, up 15% versus prior year, with strength in both sales and installation revenue. This strong revenue performance drove commercial, adjusted EBITDA of $41 million, up 73% versus prior year, and margin expansion of 400 basis points.
Speaker 1: to over 12%. We continue to be very pleased with the momentum we have in our commercial segment. Our solar segment posted a revenue of $145 million in the quarter with an adjusted EBITDA loss of $11 million.
Speaker 1: In the quarter, we also took a non-cash goodwill impairment charge of $193 million associated with the solar segment. This charge was a result of current macroeconomic conditions and operating results of ADT solar relative to expectations and has been excluded from adjusted EBITDA.
Speaker 1: As Jim mentioned, we anticipate our actions will improve solar's growth and profit performance by the end of this year. Turning our attention to cash flow.
Speaker 1: Adjusted free cash flow, including interest rate swaps, was $16 million in the quarter, up $71 million versus prior year as lower SAC from efficiency and lower volume of customer additions was partially offset by higher technology investments.
Speaker 1: strong EBITDA growth in our CSB and commercial segments, and improved capital efficiency, helped us overcome the shortfall in our solar segment.
Speaker 1: Our improved efficiency enabled us to grow our ending RMR by 4% on 27% lower year-over-year SAC spend, which is reflected in our record two-year revenue payback. We continue to focus on strengthening our balance sheet.
Speaker 1: As of the end of the first quarter, our net leverage ratio declined to 3.8 times, down substantially from 4.4 times at year end 2021.
Speaker 1: This gets us closer to that ratio being at or below three times by the end of 2025. In March, we used the Senior Secured Term Loan Aid Facility to redeem 600 million of 2023 notes.
Speaker 1: We plan to redeem the approximately $100 million remaining outstanding balance at or prior to maturity in June 2023 using proceeds from our term loan borrowing and cash on hand. Following that repayment, we have no meaningful maturities left this year allowing us to shift our focus to maturities coming due next year. And today-
Speaker 1: we are redeeming $150 million of the $750 million 2024 notes with cash on hand, reflecting our confidence in our continued cash generation.
Speaker 1: By the end of the second quarter, we will have completed approximately $220 million in debt pay down this year. We are planning to reduce total debt by over $400 million in 2023, a solid step to achieving our goal of $1 billion in net debt reduction by 2025.
Speaker 1: 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 remain on track to achieve the full year 2023 guidance metrics that we first announced on February 28th, as we continue to expect the momentum of our business to overcome.
Speaker 1: guidance illustrating continued progress towards our 2025 long-term goals. And with nearly 11% free cash flow yield we believe our stock represents an attractive opportunity for investors. Operator, please open up the call for questions. Thank you. At this time I'd like to remind everyone in order to...
Speaker 4: Jim, obviously you've shown quite a bit of improvement in efficiency in the last many quarters actually in the latest situation. That looks particularly nice. At the same time though, you are seeing...
Speaker 4: CSB new unit growth declining. I'm just curious, how are you thinking about the balance between...
Speaker 4: efficiency versus growth and perhaps I guess once we get into the do it for me Google release later this year and into 24 do you think that that balance could shift thank you
Speaker 3: on the gross ad side was most definitely impacted by the macro environment. As you know well, relocations represent a significant portion of our ads, and that coin is a two-headed coin. It benefits us from a retention perspective, provides a little bit of headwind when it comes to gross ads, and we experienced some of that in Q1. I feel good about the product launch that you just mentioned coming later this year when we integrate.
Speaker 3: our DIFM product with Google. And I'm bullish, continue to be bullish about State Farm. I think some of our dealers are coming around nicely. So I think we can offset it, but the relocations, the lack of relocations is definitely an impact from a macro perspective.
Speaker 4: Thanks. That's helpful. And then just as a follow-up, I want to dig a little bit into solar. Obviously we know California was 40 percent of the market pre-changes in net metering and it's likely a sore spot today. I was just wondering if you could juxtapose – Because of data- nest materials, the
Speaker 3: There are some puts and takes there. The Inflation Reduction Act, as you know, will be a nice tailwind for this business. And as utility rates increase, energy prices increase, that is somewhat of an offset as well. We're long-term bullish on solar, Pete. We've got some work to do from an operations perspective to get our legs under us, but I continue to think, we continue to think that this market is a significant growth market for us going forward. Really helpful. Thank you, Jim. Take care. We'll see you next time.
Speaker 1: Thank you. And next we'll go to George Tong with Goldman Sachs. Your line is now open.
Speaker 3: Hi, thanks. Good morning. You talked about launching the new joint State Farm offering in three states and then planned to launch in six more states this year. Can you talk about traction that you're seeing with customer adoption with the offerings that you've launched so far and some of the terms that are involved with the joint offering? Sure, George. Thanks for the question. So the vision here …
Speaker 3: intrusion and water detection devices to help mitigate claims. We rolled out in Indiana a few weeks ago. We rolled out in Illinois and Pennsylvania last Thursday where we're very early on in in the experience.
Speaker 3: The traction, it's early in the game but feels pretty good. We're still working on buy flow and training agents and the upsell process, but we're out in the wild. It's early in the game. Feel good about it, George.
Speaker 5: on some of these plans, what your key milestones are, and how long it'll take you to improve overall underlying performance of solar to the point of where you would like to see the business grow at.
Speaker 3: You bet. So we're playing the long game in solar. I mentioned this on our last call. We're going slow now so we can go faster later. Mid-year last year we ran into some challenges around permitting. One of our dealers liquidated. We went through a name change.
Speaker 3: a panel supplier change, and all of that caused solar to grow less rapidly than what we would have liked. It also exposed some operational challenges.
Speaker 3: we made the decision to invest in our reputation. We made the decision to invest in customer experience, clean up our backlog. Incompletes are down 50%. Inspection backlogs down 50%. So we're in the process of rebuilding our operations for scale.
Speaker 3: We opted, frankly, for short-term pain for the long term. The sales cycle in solar is longer than in our CSB business. It's from sale to install, call it three to four months sometimes. And for the improvements in our operations to start to show.
Speaker 3: That's going to be later in the year. I think we start to turn the ship more materially in Q3 and expect more positive output in Q4, George.
Speaker 6: Very helpful. Thank you.
Speaker 1: Next we'll go to Tony Kaplan with Morgan Stanley .
Speaker 7: I wanted to actually follow up on that last question with the solar actions. I guess is there an analogy, Jim, that you could give on have you had an example of operational challenges in the past where you could point to that you've been able to turn it around. This is question from Jim to assailant, so I guess unaknow.
Speaker 3: just give us confidence that solar will improve by the end of the year. That would be very helpful. Yeah. So much of the work that we're doing now, Tony, is around process improvement on the operation side of the house.
Speaker 3: We are investing in infrastructure. We're improving cycle time. We're reducing leakage. We're doing a great deal of work in data analytics so that we can have better reporting. I mentioned a couple of the improvements earlier. Our backlog.
Speaker 3: PTO to permission to operate. And so I like the early signs of improvement in solar. We've got a great team out there. And like I shared with George, because of the cycle time, it's gonna take, it's gonna take a lot of time.
Speaker 3: it's going to take some time before we start to see the financial results. We wanted to shore up the operation before we turn on marketing again and before we lean into cross-selling. And as we gain confidence that the customer experience will be what we need it to be.
Speaker 7: then we'll turn on the jet fuel. Great. Wanted to ask about commercial as well. I thought that that looked pretty good this quarter. Maybe just talk about sustainability there, any sort of drivers in the quarter in particular to call out and...
Speaker 3: the profitability was very good as well. So maybe just any any additional color on commercial. Yeah, so commercial is hitting on most every cylinder. We're doing well in our day-to-day blocking and tackling. We're developing capabilities. I've mentioned this before in new verticals.
Speaker 3: They are starting to show green shoots in energy and education and government. Q1 was rock solid, revenue up 15 percent against a solid quarter last year. EBITDA was up very significantly.
Speaker 3: not unimportantly we didn't do we didn't grow that way at the expense of drawing down our backlog. Our backlog both in IR and RMR are still at record levels. This Tony is a business it's about service. We provide excellent value to our customers.
Speaker 3: and the business has been rewarded for it. On the margin front, we continue to improve productivity. The team has done a great job from a cost management perspective, and the EBITDA expansion is a result of that.
Speaker 1: Thanks so much. Thank you. Thank you.
Speaker 8: Yes, thank you very much. Question on State Farm, can you talk a little bit about the structure that you have right now or ARPUs or anything that you can give us to grab on to as you're putting these systems in, you know, the fire leak detection. So you go into an existing State Farm homeowner policyholder.
Speaker 8: and you put these in and what is your ARPU? I assume it's lower than your normal or is it higher than normal? Give us something to reference.
Speaker 3: Yeah, Brian , the ARPU is lower as is the SAC. So the return on this Circle of Protection business is pretty good for us. And the way that the model works is it's a sort of...think of it as smart home light, where there's a handful of devices including water mitigation, but excluding some... The Fahrenheit
Speaker 3: to other devices and other services. And again, this is very early, so it's too soon to curtain bow. But I think that the early experience suggests that the thesis of being able to upsell is...
Speaker 3: Yeah, so the State Farm agent during the process of selling insurance introduces the customer to the alternative of the circle of protection. And customers of State Farm that have monitored fire and intrusion have a discount. That discount varies by state, but the intent is for that discount to provide an offset of sorts to the monitoring fee that the customer.
Speaker 3: continues to be a tailwind for us. But I'd say, Brian , like a lot of the
Speaker 3: lead indicators continue to be positive for us. Installation revenue per unit is right around $1,450. We know that the more a customer invests up front the stickier they are. Our service backlog is at just about a record low.
Speaker 3: momentum in the other categories to offset it.
Speaker 1: Right, thank you very much. Hey, Brian , just a quick add to that one. In the last couple of weeks, and I think we've seen that nationally as well, some of the delinquency rates have started to come down, which is a good sign. I think we've felt a little bit of pressure in the first quarter, specifically in the delinquency side, but starting to see some positive signs in the last couple of weeks. Great. Thank you for the additional color. Thank you.
And as a reminder, ladies and gentlemen, if you have a question, it's star one on your telephone keypad. Next we'll go to Ashish Chhababra with RBC Capital Markets. Your line's open.
Thanks for taking my question. I just wanted to better understand on the gross RMR edition, how does the Google partnership and the State Farm also help you drive an improvement in the RMR edition going forward, particularly as you unlock that $50 million of marketing fund on the Google partnership side and get 3000 agents from State Farm also onboarded onto the program. Thanks. Sure. Hey, Ashish, it's Ken. I'll grab this one if it's okay. So on the State Farm side and Google, a number of catalysts start to kick in this year and into next year as well, which has us bullish in the RMR going forward on the State Farm side as Jim.
exciting opportunity for us.
On Google, two main call-outs. The first one is we just launched a couple of months ago our new DIY product with Google. So this is the ADT self-setup product. We see that as an increasing opportunity to tackle some of that DIY tan that's been accelerating the last couple of years and this product is killer that we've designed essentially with Google.
and our partners. So that is just essentially fresh in the market. We're seeing some really nice signs and DIY growth. And then later this year, as we mentioned in the prepared remarks, we're launching our new next generation Pro install product with Google as well. That will be our next generation hardware that will offer some very cool services with our ADT plus app and that'll allow us to fully tap into all the marketing and opportunity and success fund there as well. So those couple of catalysts that we see with those key partners.
have us very excited over the near term and long term. That's very helpful, Carlo. Thanks. Thank you.
All right, and I show there are no further questions. I now would like to turn the call back over to management for any additional or closing remarks.
Thank you, operator, and thanks everyone for taking the time to join today. As you heard today, we're effectively growing our business, building brand loyalty, improving our capital efficiency. We have good momentum in our businesses, catalyst for growth with –
State Farm and Google, and we're off to a strong start in 2023. I'd like to extend my appreciation to our ADT employees and dealer partners for a terrific quarter. Our results are a direct reflection of your efforts. Thanks again everyone and have a great day.
This concludes today's conference call. You may now disconnect.