ADT Reports Third Quarter 2015 Results

Published July 29th, 2015 | By

Drives Strong Revenues, Increases Gross Additions, Improves Retention and Lowers Subscriber Creation Multiples

Launches Commercial Integration with Nest and New ADT Pulse App

“We delivered our sixth consecutive quarter of improving operational metrics and solid financial results,” said Naren Gursahaney, ADT’s CEO. “Our plan called for reduced attrition, lower SAC, higher gross adds, and we are delivering on these key elements. We remain committed to investing in quality growth initiatives and aligning with the right partners to drive long term value for ADT.”

THIRD QUARTER 2015 FINANCIAL HIGHLIGHTS

  • GAAP: revenue of $898 million, net income of $75 million, diluted EPS of $0.44, operating cash flow of $424 million
  • Recurring revenue of $834 million, up 6.2% or 6.8% in constant currency(1)(2)
  • Pre-SAC EBITDA before special items of $560 million(1), up $16 million(2)
  • EBITDA before special items of $451 million(1), down $1 million vs. prior year
  • Diluted EPS before special items of $0.49(1) vs. $0.55(1) in prior year
  • Operating cash flow before special items of $435 million(1), up 6%(2)
  • Steady-state free cash flow before special items of $936 million(1), up $2 million over prior year

THIRD QUARTER 2015 BUSINESS HIGHLIGHTS

  • Increased gross additions to 262 thousand, up nearly 5% from prior year
  • Improved revenue attrition to 12.4%, a year-over-year improvement of 150 basis points
  • Improved unit attrition to 12.3%, a year-over-year improvement of 120 basis points
  • Increased new and resale revenue per user to $48.19, an increase of $1.15 or 2.4% over prior year
  • Reduced direct channel net SAC creation multiple excluding upgrades to 30.7x, a 0.4x improvement over prior year
  • Drove ADT Pulse take rates to 57%; Total interactive customers comprise 21% of the total customer base
  • Drove over a 15% increase in gross additions in ADT Business channel over prior year
  • Repurchased approximately $51 million in shares since last quarter
  • Announced an incremental 3 year, $1 billion share repurchase program

BOCA RATON, Fla. (BUSINESS WIRE), July 29, 2015 – The ADT Corporation (NYSE:ADT) today reported its financial results for the third quarter of 2015. The Company reported total revenue of $898 million, an increase of 5.8%, or 6.2% in constant currency(1), compared to the third quarter of 2014. Recurring revenue, which made up approximately 93% of total revenue in the quarter, was $834 million, up 6.2% compared to the same period last year and up 6.8% in constant currency(1). Recurring revenue growth in the quarter was driven by an increase in ADT’s new and resale revenue per user, which rose 2.4% over last year to $48.19, the addition of Reliance Protectron Inc. (“Protectron”), strong revenue growth by ADT Business and improved customer retention. Revenue attrition for the quarter improved to 12.4%, an improvement of 10 basis points sequentially and 150 basis points year-over-year. Unit attrition for residential and business improved 20 basis points sequentially, and 120 basis points from last year, ending at 12.3% for the quarter. ADT closed the quarter with 6.6 million customer accounts, a 4.9% increase over last year. Pre-SAC EBITDA before special items increased by $16 million to $560 million(1), a 2.9% increase over the prior year, and pre-SAC EBITDA margin before special items was 66.0%(1). EBITDA before special items decreased by $1 million to $451 million(1), while EBITDA margin before special items was 50.2%(1) for the quarter. EBITDA before special items includes the impact of approximately $6.3 million pre-tax related to the previously disclosed change in the way the Company accounts for dealer payments for leads generated through its marketing efficiency program.

The Company reported diluted earnings per share of $0.44 versus $0.47 in the prior year. Excluding special items, diluted earnings per share was $0.49(1) versus $0.55(1) in the prior year. The diluted earnings per share of $0.49 also includes the quarterly impact of approximately $0.02 per share related to the previously mentioned marketing efficiency program. Using the Company’s cash tax rate, diluted earnings per share before special items was $0.68(1).

Steady-state free cash flow before special items grew to $936 million(1) this quarter, $2 million above prior year. Operating cash flow was $424 million, up 4% from $408 million last year. Excluding special items, operating cash flow was $435million(1), a $25 million increase over prior year. Free cash flow before special items was $99 million(1) in the quarter, up $1 million when compared to the same period last year, despite an increase in gross subscriber additions of approximately 5%.

“I’m pleased with the progress we’re making and the encouraging trends we see developing creating opportunities for profitable growth in the future,” said Naren Gursahaney, ADT’s chief executive officer. “Gross adds were up versus prior year, revenue growth is strong, and we’re continuing to improve the efficiency of adding new customers. Our primary focus continues to be on enhancing the customer experience, and our efforts are paying off as we again improved revenue and unit attrition. We’re investing to capitalize on growth opportunities by launching new products and services, building capabilities to participate in new market segments, and establishing exciting new partnerships. This quarter we announced a new partnership with Nest Labs, expanding our Pulse ecosystem and giving our Pulse customers the security they need along with the smart home technologies they desire, all powered by our newly released ADT Pulse mobile app. And, earlier this month, our Board authorized an incremental 3 year, $1 billion share repurchase program, reinforcing our confidence in future cash generation and in our long term strategy.”

PROGRESS ON 2015 PRIORITIES: DELIVERING ON GROWTH INITIATIVES

  • Improving customer retention – The Company continued to improve attrition, including reducing the percentage of voluntary and lost to competition disconnects compared to last year. Revenue attrition in the quarter improved to 12.4% – a 10 basis point improvement sequentially and 150 basis points below prior year, and unit attrition in our residential and business channel was 12.3% – a 20 basis point improvement sequentially and 120 basis points below the same period last year.

    • Tenure screening and non-pay initiatives continue to deliver improvements in non-pay disconnects. Company screened out approximately 4,000 lower quality potential customers in the quarter.
    • Stronger resale efforts have led to a 30% improvement in resales over the prior year.
    • Driving increases in ADT Pulse – Pulse customers grew to 1.4 million in the quarter and total interactive customers now make up 21% of ADT’s customer base. In our residential direct channel, over 75% of new customers purchased a Pulse system resulting in approximately 140,000 Pulse customer additions in the quarter along with upgrades of almost 30,000 existing customers to Pulse, including selected current 2G customers in-line for conversion to 3G. Pulse drives higher RPU and delivers a better customer experience, resulting in stronger retention characteristics. In particular, Pulse customers choosing Automation tiers have nearly 40% better attrition on a cumulative basis after 36 months, and a significantly higher resale rate when compared to non-Pulse customers.
    • Enhancing customer experience
      • New Pulse app: The Company released its new Pulse app, enhancing the mobile experience for Pulse customers. The new Pulse app, available for free through the Apple App Store or Google Play, is an intuitive and contemporary experience that makes managing home automation and security more effective – especially for on-the-go lifestyles. In addition, ADT’s changes to the Pulse app reflect the Company’s open API strategy for further integration with best-in-class third-party solutions, such as Nest, and to equip consumers with a smart and secure home platform that will evolve to meet their changing needs.
      • New product integration: ADT announced that it has rolled out its integration with Nest Labs. The Nest Learning ThermostatTM is now supported by ADT Pulse® – the first such commercial integration by a North American home security automation provider – and is available now for current ADT customers in Atlanta, Chicago, Denver and Miami. A nationwide rollout of the Nest thermostat is planned by the end of the year.
      • Improving service levels: The Company continued to invest in customer care and service personnel in order to reduce the time required for service and repair. The average time for repair has improved 30% compared to last year.
  • Quality gross add growth driven by multi channel approach – In-line with efforts to drive stronger, high-quality gross adds in both the direct and dealer channels, the Company delivered a 4.8% increase in gross customer additions over the prior year despite implementing tenure screening in its direct channel.
    • Strong telesales and solid close rates helped increase gross adds in the direct channel by 4% over the prior year. Telesales increased 12% and self-generated sales increased by 14%. Demand for ADT Pulse continued to increase, resulting in a 63% take rate when considering both new and resale Pulse customers in the residential direct channel.
    • The dealer channel continued to deliver new customer growth as its production increased more than 6% year-over-year, driven by higher production from existing dealers, the inclusion of Protectron’s dealer channel, and new dealers that have joined ADT. Pulse demand in the dealer channel continued to rise, as evidenced by a 54% Pulse take rate, up from 43% in the same period last year.
  • Business channel gains traction in small business and making progress in commercial expansion activities – The Company is executing on growth initiatives in the small business and commercial market.
    • Included in the total Company growth, the small business channel is driving strong year-over-year organic growth with gross additions up nearly 14%, while new and resale revenue per user increased by 5% over last year in the US. Following the expiration of a prior non-compete agreement, the Company has increased sales coverage which is contributing to the accelerated growth. Strong sales of hosted video and a year-over-year increase in Pulse sales also contributed to this success.
    • The Company continues to build its commercial presence by adding to its sales force and expanding its product line and capabilities. Commercial gross adds increased by 34% and total revenues increased by 74% from the second quarter, while adding a strong backlog for the coming period.
  • Health channel accelerates growth driven by several key initiatives – The Company implemented several growth initiatives to reposition the health channel for future success.
    • ADT’s health channel has undergone several changes since the start of fiscal 2015, including the launch of a health-specific advertising campaign and the new, on-the-go mobile PERS product, which is offered through several retailers and ADT.com. Gross additions in the quarter grew nearly 29% and new customer RPU increased 10% when compared to the same period last year, much of this driven by the new mPERS product, which made up over one-third of gross additions after its mid-February launch.
  • Progress on efforts to serve new non-traditional market segments – ADT previously announced its alliance with LG Electronics to deliver a new all-in-one security product and service for the North American “DIY” market. The new product, scheduled to be launched later this year and targeted at a market segment outside of ADT’s traditional business, will be manufactured by LG and “secured by ADT.”

“The third quarter was further evidence of continued improvement in our core operations, while strategically positioning ADT for a bright and profitable future through targeted growth investments,” said Michael Geltzeiler, ADT’s chief financial officer. “We are delivering upon the commitments we outlined earlier in the year and at our recent investor day meeting, driving increases in gross adds, improving our operating metrics and investing in growth initiatives in commercial, customer experience, and the DIY market. Overall, we drove 5% gross add growth year-over-year, reduced attrition and lowered our direct SAC creation multiple net of upgrades, while generating higher levels of operating cash flow. We continue to improve our subscriber acquisition costs, driving net SAC in our direct channel lower on a sequential basis despite increased Pulse take rates. EBITDA before special items(1) was nearly flat with last year largely driven by the negative impact of the marketing efficiency program and increased maintenance and service costs targeted at improving customer service levels, as well as the investments we are making in growth initiatives such as commercial, our DIY offering and the new Pulse mobile app. Pre-SAC EBITDA before special items(1) grew 3% over last year. Free cash flow before special items(1)was modestly higher despite a 5% growth in customer additions. We also continued to invest in what we believe is the best investment in the security industry, by repurchasing approximately 1.3 million shares in the quarter.”

PROGRESS ON 2015 PRIORITIES: DRIVING COST EFFICIENCIES

  • Subscriber acquisition cost (SAC) / Creation multiple – Total net SAC creation multiple, excluding the impact of Pulse upgrades, was 30.7x, a year-over-year improvement of 0.3x. Direct net SAC, excluding the impact of Pulse upgrades, fell below $1,500 to $1,477, and the creation multiple was 30.7x, an improvement of 0.4x over the same period last year. The Company reduced net creation multiples by lowering installation costs and realizing higher RPU generated from new customers additions.
  • Total Company operating expenses before special items(3) were up 11.2% over last year driven primarily by the consolidation of Protectron and the expense recognition from the marketing efficiency program. Depreciation and amortization (“DA”) before special items(3) expenses rose 9.3% largely related to the consolidation of Protectron, transitioning a portion of our customer base to Pulse, and the implementation of certain infrastructure investments to separate from Tyco and improve our operating efficiency. Excluding Protectron and the impact of the marketing efficiency program, total operating expenses before special items(3) were up by 5.8% from last year, as the Company made additional investments in customer experience, expanding its commercial business and health channel, rolling out its new Pulse mobile app and developing a new all-in-one product targeted at the DIY market. Excluding Protectron, DA before special items(3)rose by 5.8%.

PROGRESS ON 2015 PRIORITIES: CAPITAL STRUCTURE OPTIMIZATION

  • Share repurchases – The Company repurchased 1.3 million shares of its common stock at an average price of $35.56 per share during the third quarter and completed an additional $6 million in share repurchases subsequent to the end of the quarter. Year-to-date, the Company has repurchased 5.6 million shares of its common stock at an average price of $33.53 per share. In July, the Company’s Board of Directors approved a new incremental share repurchase program authorizing the Company to purchase $1 billion of its common stock over the next 3 years, expiring in July 2018. The previous share repurchase authorization has $192 million remaining and expires on November 26, 2015.
  • Debt/Capital Structure – Long-term debt totaled $5.2 billion at the end of the quarter, maintaining the Company’s leverage ratio, based off of trailing twelve month EBITDA before special items at 2.9x(1) and 2.3x trailing twelve month pre-SAC EBITDA before special items(1). The Company’s average cost of borrowing remained below 4% in the quarter.
  • Quarterly dividend – The Company paid a quarterly dividend of $0.21 per share on May 20th, an increase of 5% versus last year.

                                             

THIRD QUARTER 2015 RESULTS HIGHLIGHTS

                                              ($ in millions, except per share amounts)   Q3 2015   Q3 2014   Change   YTD 2015   YTD 2014   Change Recurring revenue   $ 834     $ 785     6.2 %   $ 2,488     $ 2,333     6.6 % Other revenue   $ 64     $ 64     — %   $ 187     $ 192     (2.6 )% Total revenue   $ 898     $ 849     5.8 %   $ 2,675     $ 2,525     5.9 % EBITDA before special items(1)   $ 451     $ 452     (0.2 )%   $ 1,348     $ 1,309     3.0 % EBITDA margin before special items(1)     50.2 %     53.2 %  

-300

bps

    50.4 %     51.8 %  

-140

bps

Net income   $ 75     $ 82     (8.5 )%   $ 215     $ 222     (3.2 )% Diluted earnings per share   $ 0.44     $ 0.47     (6.4 )%   $ 1.24     $ 1.20     3.3 % Diluted earnings per share before special items(1)   $ 0.49     $ 0.55     (10.9 )%   $ 1.46     $ 1.47     (0.7 )% Diluted weighted-average shares outstanding     172       175     (1.7 )%     173       185     (6.5 )%

(1)Reconciliations from GAAP to non-GAAP financial measures can be found in the attached tables.

(2)All variances are year-over-year unless otherwise noted.

(3)Operating expenses in Q3 2015 include (i) $29 million from Protectron before special items, $10 million of which is depreciation and amortization, (ii) special items totaling $12 million, which is comprised of $8 million in cost to serve and $4 million in depreciation and amortization, and (iii) $6 million related to the marketing efficiency program discussed above; Q2 2015 operating expenses include $28 million from Protectron before special items, $8 million of which is depreciation and amortization, and special items totaling $21 million in cost to serve; Q3 2014 operating expenses include special items totaling $30 million, which is comprised of $29 million in cost to serve and $1million in separation costs.

CONFERENCE CALL AND WEBCAST

Management will discuss the Company’s third quarter 2015 results during a conference call and webcast today beginning at 8:30 a.m. (ET). During the conference call and webcast management will refer to a slide presentation hosted on and accessible at http://investors.adt.com. Today’s conference call for investors can be accessed in the following ways:

  • At the investor relations section of ADT’s website: http://investors.adt.com
  • By telephone: For both “listen-only” participants and those participants who wish to take part in the question-and-answer portion of the call, the telephone dial-in number in the United States is (877) 276-8173, enter pass code 61613417 when prompted. The telephone dial-in number for participants outside the United States is (678) 562-4231, enter pass code 61613417 when prompted.
  • An audio replay of the conference call will be available at 1:30 p.m. (ET) on July 29, 2015, and ending at 11:59 p.m. (ET) on August 5, 2015. The dial-in number for participants in the United States is (855) 859-2056, enter pass code 61613417 when prompted. For participants outside the United States, the replay dial-in number is (404) 537-3406, enter pass code 61613417 when prompted.

ABOUT ADT

The ADT Corporation (NYSE:ADT) is a leading provider of security and automation solutions for homes and businesses in the United States and Canada. ADT’s broad and pioneering set of products and services, including ADT Pulse® interactive home and business solutions, and health services, meet a range of customer needs for today’s active and increasingly mobile lifestyles. Headquartered in Boca Raton, Florida, ADT helps provide peace of mind to nearly seven million customers, and it employs approximately 17,500 people at 200 locations. More information is available at www.adt.com or by downloading the ADT I

* $100 Visa Gift Card fulfilled by Protect Your Home through third-party provider, Mpell, upon installation of a security system. Shipping and Handling Fee applies. ADT Pulse Interactive Solutions Services, which help you manage your home environment and family lifestyle, requires the purchase and/or activation of an ADT alarm system with monitored burglary service and a compatible computer, cell phone or PDA with Internet and email access. These ADT Pulse Interactive Solutions Services do not cover the operation or maintenance of any household equipment/systems that are connected to the ADT Pulse Interactive Solutions Services/Equipment. All ADT Pulse Interactive Solutions Services are not available with the various levels of ADT Pulse Interactive Solutions Services. All ADT Pulse Interactive Solutions Services may not be available in all geographic areas. You may be required to pay additional charges to purchase equipment required to utilize the ADT Pulse Interactive Solutions Services features you desire. Installation starts at $199. Burglary, Fire, Carbon Monoxide and Medical Alert monitoring requires purchase and/or activation of an ADT security system with monitored Burglary, Fire, Carbon Monoxide and Medical Alert devices. Fire, Carbon Monoxide and Medical Alert services are an additional charge. Quality Service Plan (QSP) is ADT's Extended Limited Warranty. 36-month monitoring contract required from $51.99 per month, ($1,871.64), including Quality Service Plan (QSP). Additional charges may apply in areas that require guard response service for municipal alarm verification. Prices subject to change. Prices may vary by market. Some insurance companies offer discounts on Homeowner's Insurance. Please consult your insurance company. Local permit fees may be required. Satisfactory credit history required. Additional monitoring fees required for some services. Photos are for illustrative purposes only and may not reflect the exact product/service actually provided. $99 Customer Installation Charge. 36-Month Monitoring Agreement required at $36.99 per month (1,331.64), 24-Month Monitoring Agreement required at $36.99 ($887.76) for California, including Quality Service Plan (QSP). Form of payment must be by credit card of electronic charge to your checking or savings account. Offer applies to homeowners only. Local permit fees may be required. Satisfactory credit history required. Certain restrictions may apply. Offer valid for new ADT Authorized Premier Provider customers only and not on purchases from ADT LLC. Other rate plans available. Cannot be combined with any other offer. Licenses: AL-17-1104, AZ-ROC217517, AR-2008-0014, CA-ACO6320, CT-ELC.0193944-L5, DE-07-212, FL-EC13003427, DC-602513000006, GA-LVA205395, ID-ELE-SC-39312, IL- 127.001042, IN-City of Indianapolis: LAC-000156, IA-AC-0036, KY-City of Louisville: 483, LA-F1082, LA-F1914, LA-F1915, ME-LM50017382, MD-107-1626, MA-1355C, MI- 3601205773, MN-TS01807, MS-15007958, MO-City of St. Louis: CC354, St. Louis County: 84959, MT-247, NE-14451, NV-68518, City of Las Vegas: 3000002944, NJ-34BF00021800, NM- 353366, NY-Licensed by the N.Y.S. Dept. of State UID#12000317691, #12000286451, NC-1622- CSA, OH-53891446, City of Cincinnati: AC86, OK-1048, OR-170997, Pennsylvania Home Improvement Contractor Registration Number: PA022999, RI-3582, SC-BAC5630, SD-1025- 7001-ET, TN-1520, TX-B13734, ACR-3492, UT-6422596-6501, VT-ES-2382, VA-115120, WA- 602588694/PROTEYH934RS, WV-042433, WI-City of Milwaukee: PAS-0002790, WY-LV-G- 21499. 3750 Priority Way South Dr. Suite 200 Indianapolis, IN 46240