ADT Inc (ADT) 2017 Q4 法說會逐字稿

Greetings and welcome to the ADT fourth-quarter and full-year 2017 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Jason Smith, Senior Vice President of Finance and Investor Relations. Please begin.

Good morning and thank you for joining us on ADT's fourth-quarter 2017 earnings conference call. This morning we issued a press release with our fourth-quarter 2017 results. A copy of the release is available on our website at investor. ADT.com.

Today's call is being webcast and is accompanied by a slide presentation which is also available our website. Please refer now to slide 2 of that presentation. Our remarks and answers will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward-looking statements.

These risks include among others matters that we have described in our press release issued this morning, the prospectus related to our initial public offering filed with the SEC, and other filings we make with the SEC. Please note that all forward-looking statements speak only as of the date of this call and we disclaim any obligation to update these forward-looking statements.

During our call today we will make reference to non-GAAP financial measures. Our forward-looking non-GAAP financial measures exclude special items which are difficult to predict and are primarily dependent on future uncertainty. For a complete reconciliation of historical non-GAAP to GAAP financial measures, please refer to our press release issued this morning and our slide presentation, both of which are available on our website at investor. ADT.com. Joining me on the call today are our CEO Tim Whall; our President Jim DeVries; as well as our CFO Jeff Likosar.

I will now turn the call over to Tim.

Thanks, Jason, and good morning, everybody. Welcome to our first call as a public company. And personally for me, it's my first call as a CEO of a public company. So happy to be with you.

I'd like to thank the current shareholders for the trust you've placed in us. It was a pleasure meeting many of you out on the roadshow. On this end, it looks like we are doing the roadshow with some of you here. I am sitting around with Jeff and Jim again. But we look forward to sharing the results and being able to talk about how the actual business is doing. So it's a pleasure to be with you.

Fourth quarter for us capped a very strong 2017 fiscal year. If I look at it in a baseball term for spring training, I think we went five for five. Revenue was up year over year, earnings were up year over year, cash flow was up year over year, attrition came down year over year, and subscriber acquisition cost was reduced year over year. So feeling good about how 2017 looked and what we will share with you in 2018.

This morning, Jim and I will briefly share a view of the Company, give you a little high-level operating approach on how we drive shareholder value. I think you guys know it's not our first time with this model and playbook. We will share our progress to, date, and then Jeff of course is going to share financial results with you. And then we will open up for Q&A.

So as you know, ADT has a lot of attractive Company characteristics, and we are five times the next largest competitor in a fragmented and growing market. I think we are uniquely positioned at the center of security and smart home automation with 2-million-plus interactive customers already.

90% of our business is contractually recurring high-margin revenue, and we operate in a recession-resistant industry. This may be my first public CEO call, but it's not my first day doing this. I literally grew up in this business since I was 13 working in a small family business. I've had a chance to compete with ADT almost my entire life.

It's truly an honor and a privilege to be able to lead the ADT team at this point in my career. It's an iconic brand and one that everyone in the space is well aware of. So our team has made significant progress to date. Probably the highlight of the show, as Jim will talk about, is 200-plus basis points of attrition, regardless of how you measure that. Sustainability -- or substantially reduced our subscriber acquisition spend. And that results in change in substantially the cash flow profile of the business.

So we are in a very early part of the opportunity. Most of us have been in this less than 24 months as we get going. We had a heavy focus on integrating two companies last year, and now, of course, most of that work has been done.

We are just now using one common set of data to drive decisions. ADT, as you know, is out of the commercial space for several years, but obviously we are back in it now. It is a well-known name and we are accelerating our reentry.

As you move along with the slide deck, if you go to number 5, a good slide for us. At the core, we are a service provider. We are out there with our technicians in homes and businesses with an unmatched footprint, unmatched capabilities and scale.

Our mission is to protect what matters most to people. Trust is the key attribute of our service. Our typical customer buys professional installation and maintenance of those homes.

We are not a manufacturer. It works well for us because we are product-agnostic. Jim and the team have done a terrific job expiring some of the contracts that we inherited as legacy equipment and have done a great job partnering with some manufacturers to deliver what is kind of best-in-class products that we will roll out in 2018.

We do partner with a lot of brands you know, whether it's Amazon for the Alexa or whether it's Google with their Nest. Schlage with their locks, Honeywell, etc. We are in a unique position because we can partner with the largest brands, whatever's popular in that home for security or home automation. We are compatible as we move forward.

Our average install, just to give you some facts and figures, takes us about 6 hours. And we put in 15 to 30 devices in that time. And we maintain those systems after we do the initial installation, whether that is with scheduled maintenance service, preventive maintenance, or service on demand. Those are all things that we provide.

As a service provider, we have got a couple main goals. One is to continue to improve the level of service we provide our customers. In 2017, we did a lot with speed of answer and moving our call centers to live answers and people picking up the phone in one ring and two ring.

We also did a great job delivering our technicians out inside of 24 hours to respond when a tech was needed. Obviously as we go forward, we will look to improve those levels of service. You can picture a day when a customer can go to their app and pick the time they'd want our tech to show up and have us show up in that window for them.

So also as a service provider, hey, how do we bring new services to bear into the marketplace? This has gone very well for us. Early in 2018, we introduced our security on the go service. And we can talk about that a little longer.

Also protecting the network. And if Jamie, our CMO, was on the phone with us right now, she would tell us hey, listen, we're trying to redefine security so it's not just the premise, but it's the premise, the network, and the person when they are outside the home. So again, a big key to us is great service, trust provider, and owning that last five piece into the home.

Six is kind of our high-level operating approach. It's a playbook that we have used in all previous companies. The goal is to drive cash flow. Three components of that: retain the existing customers, acquire new customers more efficiently, and obviously optimize adjusted EBITDA.

Take the first one at the top: gross attrition. The customer is at the center of all we are doing. Jim is going to talk more about this. We do measure gross versus net attrition. Some conversation about that. To me, it's simple: gross attrition just is what it is.

The fact that net attrition can improve if gross attrition actually goes up, that's not intuitive to me. Gross attrition: how many dollars left, how many customers left. It's a very pure; it's true north. And I don't know about you, but I like to read the stats with as few footnotes as possible. And again, this one does it for me.

Number two, in terms of acquiring customers more efficiently. Again, for us, this is RMR. And again, another discussion in terms of unit versus total dollars. I have never looked at it as unit. Whether we've got our general managers out there in the field and they are paid and compensated to grow their market. Whether they bring me one customer that pays me $1,000 or 100 customers that pay me $10 a month, it's still $1,000 for them.

And again, we don't limit the way they go to market. Each one of those people runs their own business. They understand where the sweet spot is and how to achieve that for us. RMR growth is a core to what they are expected to deliver for us.

When you look at EBITDA, this has been a good story. We have improved by 500 basis points since 2015. Outlier management is the key for us here. Understand the differences in terms of how our branches perform against one another.

When you look at the numbers at ADT, each of those numbers is basically the combination of 150 to 200 smaller numbers built up into that. And our ability to identify and isolate the smallest numbers, manage small, and move it to the middle has been a key tool for us that's been very successful. Jim and the team have done a great job shrinking the variances in each one of these areas, whether it's with attrition, subscriber acquisition cost, or EBITDA itself.

As I mentioned earlier, our daily scorecard is our primary tool that we roll out that allows the branches to see accumulation of all the transactions they did yesterday. And again, they are measured against budget, they are measured against themselves. They are ranked in terms of top to bottom across the Company as we go forward. Great tool as we continue to drive efficiencies inside the business.

At this time, I'd like to turn the call over to Jim and let him talk more about attrition and customer acquisition cost.

Thanks, Tim. We had a number of operating improvements in the fourth quarter and throughout 2017. And I'd like to share some brief thoughts on one of them: customer retention.

As many of you know, we are focused on key customer retention metric and that metric is gross attrition. This is defined as recurring revenue lost due to customer cancellations divided by current recurring revenue in force. Focusing on gross attrition enables our organization to view any single customer loss as an opportunity to improve. Or better said, an opportunity to save.

On the other hand, net attrition, because it includes resales, can dilute or even overshadow the real opportunities that exist to improve customer attrition. In short, gross attrition is a truer and more accurate reflection of customer sentiment.

You can read on slide 7 that legacy ADT gross attrition was consistently above 16% on a trailing 12-month basis. And we are now below 14%, finishing the calendar year at 13.7%. Admittedly, we had the benefit in Q2 of 2016 of combining legacy ADT with Protection 1, which had much better attrition levels. But you also see on the chart that since then, we've continued progress each and every quarter on this key customer retention metric.

This improvement can be attributed to two strategic actions. First: smarter, more disciplined customer selection. This primarily includes credit screening and a greater focus on the upfront payments from customers. The higher the customer's initial cash outlay in a system, the greater their retention.

The second parallel lever we've used to improve attrition is related to customer service. Most notably, nothing short of transformational improvements in our call center performance as well as field service. That is, on-site service to the customer's home or place of business.

And while we have already made significant strides, all of us are confident and committed to continued improvements in customer retention. Every year we add customers under the parameters of our smart growth initiative, we will add stickier customers to our base.

Plus, we will continue to advance our operating and customer service improvements. While we acknowledge the improvements going forward may not be as rapid as those delivered in the last 18 months, we remain quite optimistic that meaningful improvements lie ahead.

Moving to slide 8, we wanted to share a little more color than we described on the roadshow as to how we approach subscriber acquisition, including some additional detail on the mix of our business. Different types of customers have different characteristics and our focus is on maximizing the returns and cash flows for every customer we acquire.

A key measurement of customer acquisition efficiency is revenue payback, which is simply our net cost of customer acquisition and installation expenditures divided by the recurring revenue we acquire over time. Compared to 2015, the payback has improved from 2.7 to 2.5 years.

You can see a summary of our customer profile in the upper-left corner of slide 8, approximately 7.2 million customers with the majority of our revenue base generated by residential customers. Within residential and small business, we've improved revenue payback results by focusing on three goals: higher upfront revenue, more efficient marketing spend, and productivity improvement.

Within large commercial and multisite, we've been able to leverage the proven playbook from Protection 1. Now under the brand and larger scale of ADT, we continue to trend positively. These customers tend to have better attrition and revenue payback characteristics compared to residential customers.

Like improvements in our attrition metric, the efficiency in SAC has driven better unlevered cash returns over the last 24 months. While the economic characteristics of our channels are different, the returns are very healthy.

And as with attrition, we see a path of continued opportunity to improve these returns by focusing on the three levers Tim mentioned earlier: retaining existing customers, improving our cost to serve margins, and acquiring customers more efficiently.

With that, let me turn it over to Jeff Likosar.

Thanks, Jim, and thanks, everyone, for joining the call today. While Jim just shared some detail on customer dynamics beyond what we described during our roadshow, I am going to spend the next few minutes summarizing our fourth-quarter results and will focus on the core metrics we use to evaluate and monitor progress against the top objectives Tim and Jim mentioned earlier.

I also will want to note that we will be filing our 10-K later this afternoon, which will include more detail. First on slide 10, we are very pleased to have continued our strong progress, lowering attrition by 110 basis points year over year, as Jim described. As a reminder, every 100 basis points of attrition equates to an approximately $100 million reduction in the annual costs we'd otherwise incur to replace lost revenue. So this is a key value driver for us.

Our total revenue grew by 5% in the fourth quarter to $1.106 billion. Our monitoring and services revenue of $1.012 billion grew 2% during the fourth quarter, consistent with the rest of 2017. As a result of our attrition improvements, we have been able to maintain this revenue growth despite our tighter customer selection process.

Installation and other revenue grew by more than 50%, about half of which was driven by improvements in outright sales revenue across our business, with the remainder split between new revenue from our 2017 acquisitions and incremental amortization of deferred installation revenue.

I also want to mention that, as required, we are adopting the new ASC 606 revenue accounting standard in the first quarter of 2018, which we do not expect to material -- in a material way affect our overall revenue. It will, however, result in a very small amount of revenue shifting to installation rather than monitoring and services during 2018.

Slide 11 highlights our progress in customer acquisition efficiency. The left side shows our customer revenue payback, which we have reduced from 2.7 to 2.5 years. As Jim explained, this metric reflects the number of years it takes us to recover our net subscriber acquisition costs, or SAC, through the generation of new recurring revenue in a period.

SAC is comprised of our expenditures to acquire new customer revenue and install equipment net of revenue we collect upon installation. The right side of the page shows our SAC spending for the fourth quarter.

As many of you heard us explain on the roadshow, the majority of this spend is on capitalized subscriber system assets where we retain ownership of the equipment or where we purchase accounts generated by our dealer network. The remainder is expensed as incurred.

This portion of SAC is comprised of the installation cost associated with outright sales of equipment net of upfront revenue, along with other period costs such as advertising and certain selling expenses. In aggregate, you can see that we reduced our SAC spend by 4% during the fourth quarter while we grew our recurring revenue additions by 2%.

Our progress results from improved effectiveness in advertising selling activities, efficiencies in labor installation, and actions to generate more upfront revenue at the time of installation. We are encouraged by the progress we made during 2017 in this area.

Moving to slide 12, you can see we generated $598 million of adjusted EBITDA in the fourth quarter, 8% higher than last year. Our performance was driven by margin on increased revenue, the lower expense net SAC I described, and other cost reductions, partially offset by some service-driven investment. As a percentage of monitoring and services revenue, we improved to 59.1% in the fourth quarter of 2017 compared to 55.6% in the prior year.

We are also happy with our cash net income performance, as you can see on the right side of the slide. Cash net income is adjusted EBITDA less capitalized SAC, cash interest, and cash taxes. We grew from $11 million last year to $76 million this year, and we similarly improved our free cash flow before special items.

Our cash generation progress is evidence of the strength of our business model and results from the effective balancing of our core objectives to reduce attrition, improve customer acquisition efficiency, and optimize our EBITDA.

Slide 13 summarizes the same key metrics I just described on a full-year basis. And we are very pleased with our overall total 2017 performance, which exceeded our internal plans. We improved attrition by more than 100 basis points, improved our revenue payback from 2.7 to 2.5 years, and grew our EBITDA by 8%.

We also substantially reduced our SAC spend and we grew cash net income by more than 20%. We achieved these results while also integrating our legacy ADT and P1 field operations in several related IT systems and platforms throughout the Company. And while also making meaningful improvements in our customer service culture and capabilities, all of which we expect to generate benefits in 2018 and beyond.

I will be brief on slide 14, which shows our cash net income and free cash flow in a bit more detail. As Tim said, we are focused on optimizing cash generation over time. And towards that end, we generated more than $400 million of free cash flow excluding special items in 2017, which was up more than 20% compared to 2016 despite only a partial year's interest expense in 2016.

Page 15 highlights our capital structure. As you know, we generated $1.47 billion from our January IPO. We used the proceeds to redeem $594 million of principal on our second lien notes and escrowed $750 million to redeem our preferred securities later in the year. Pro forma for the transaction and preferred securities redemption, our net debt is $9.75 billion and we are levered at 4.1 times.

As we described during the roadshow, we plan to deploy the cash we generate in 2018 and subsequent years towards a combination of the things you see on the right side of the slide. We will invest in organic growth as we see strong opportunities and we will selectively pursue acquisitions, especially in the commercial space.

As you read in our press release, we also today declared a quarterly dividend of $0.035 per share to begin returning some capital to shareholders. We will also use excess cash to pay down debt and delever over time with an objective to reduce leverage into the 3s during 2018. Overall, we are comfortable with our leverage and liquidity position.

Turning to page 16, I will share some perspective on 2018. We will continue to execute our strategy to drive additional progress in each of our key objectives this year. We are planning on continued attrition improvement, moving us into the lower 13%s.

We expect total revenue growth of 3% to 5%, the result of lower attrition combined with new recurring revenue additions and more installation revenue during the year. As in 2017, we expect installation revenue to grow more quickly than monitoring and services.

We are guiding to EBITDA in a range of $2.415 billion to $2.335 billion (sic - see slide 16, $2.435 billion) as a result of revenue growth and continued efficiency improvements. Also, as you see on the slide, we expect free cash flow to be in a range or $475 million to $525 million at our budgeted level of new revenue additions.

One specific cash-related item I want to mention is cash taxes. We finished 2017 with $3.7 billion of net operating losses. And after analyzing effects of the 2017 tax reform package, we still expect to be a very low cash taxpayer for the next several years as we described in our S-1. Overall, we are very optimistic about our prospects to deliver another strong year in 2018.

I want to conclude by reiterating my excitement for our business and the progress we made during 2017, along with my enthusiasm for the opportunities in front of us.

Now I'm going to return the call to Tim, who will share some thoughts on our growth framework.

Thank you very much, Jeff. And as guidance reflects, we expect 2018 to be another five-for-five year as we execute on the strategy. Earnings to go up, revenue to go up, cash flow to go up, attrition to continue coming down, and subscriber acquisition costs to keep coming down.

Talk a little bit about growth. You guys are familiar with the three basic buckets that we put it in. Obviously, the core business is our consumer business; growing out our commercial plans; and then what we call our new markets area.

You see a little bit of the puts and takes that's been illustrated for you with A, B, and C below to kind of get you into a 4% to 5% annual growth, along with some percentages of how they go in each of those buckets. Of note is we don't really put anything into the new markets and market growth. We put it into the core business as well as commercial expansion.

Obviously on the core side, no different than in our operations, which have gone very well. Plenty of variance between performance, and whether that's in sales gens in a particular branch office or a closing rate or amount of leads generated, we've got work to do to really start to fine-tune that.

We've got some outstanding players at the top of the house. We've got some great folks in the middle and we are going to work hard to get those lower numbers into the middle to continue to grow this part of the business.

Commercial expansion is just how fast, how much, and we are going to stay disciplined as we move forward. You saw some small acquisitions where we acquired some talent. Most of that goes when they sell products. And then we come in there and show them some of the services we are able to provide and then we grow from there at very low cost RMR to create.

So we will continue to push forward. Our national accounts group had an outstanding year in 2017 and our commercial growth was above plan as well.

So if I look at new markets and new growth, this is again where we bring new services to bear. So if you think of our ADT Go feature, that's that security outside the home. Great feature; if you have children, you want to keep an eye on them, you want to know where they are, they got to school, they got home, etc., that's great.

You can picture all the colleges across the country and students out there having easy access to ADT's SOS. So you've got -- press of a button, you've got help in a minute's notice out there. Also gets the young people thinking about ADT in a different way than their parents might have as they go forward.

You look at that cyber offering, we've done a great job. You saw we bought Datashield in the fourth quarter. It gives us a nice platform. Jay Darfler and his team have also been working very hard on our consumer offering.

You can imagine you are going out there with your iPad, your laptop, your cell phone, etc., into the different places and logging onto public WiFi. Imagine if we were able to give you your own private WiFi as part of ADT. And again, as Jamie would say, redefining the security to be not just the premise, but the premise, your network, and then people outside the home. So this is what they have been working on.

Obviously made a strategic partnership with Samsung last year for the less-sophisticated systems in the DIY market. And again, for us, we continue to think for the small apartments, getting those buyers to think ADT in an earlier point in their purchasing careers. Not someone who is going to put 20, 25 points of protection in, but 2, 3 points of protection that may provide the security that they need. We'd love that if they started that relationship with ADT earlier in their lives and built on it from there.

As we go forward, optimistic about 2018; excited about what we have been able to do in 2017. Good chance for me to say thank you to the great men and women at ADT for what they've delivered to date, the improvements they have delivered to the business. And again, we are looking forward to getting on these calls and talking about the performance of the business for the rest of this year.

So with that, I will turn the call back to the operator and we will open up for question and answers.

(Operator Instructions) Toni Kaplan, Morgan Stanley.

Hi, good morning. Could you talk about the potential impact that you see from Amazon's acquisition of Ring? Do you think that this increases the threat from new tech offerings, just given Amazon's scale?

Are you able to go after the monitoring for those contract? And just maybe discuss how you see your positioning in the market, just given that Amazon and Google are in this home automation space and just sort of encroaching into home security. Thanks.

Yes, I think you see a little difference -- a little change in the competitive landscape. When we were trying to put this deal together a few years ago, it was more AT&T, Verizon, Time Warner, Comcast coming in more of a service offering.

Now you see Google Nest coming out there with products. You see Amazon, potentially Apple coming out more on the hardware side and kind of getting things started with more of a DIY offering, if you will. Some of what I would term a less-sophisticated system with a few devices that comes out there.

So again, our typical buyer is -- our technician is in the home for 6 hours with 15 to 30 devices. So I think it provides -- our hope is that it gets people buying systems sooner. And with more people in apartments, and some of these applications are very good. That's why we have partnered with Samsung to make sure ADT was participating in that market space as well.

But the idea that someone can buy a couple pieces of gear, put it in themselves, and get started and then perhaps even want to get the professional monitoring, we think that's positive. Haven't had a conversation with anybody about doing the monitoring for them at that point. Have been in conversation with Amazon with Amazon Key and some of the other features.

But again, I think this is positive. You see a change going from a service provider to trying to sell equipment at a DIY in kind of an entry-level offering. So hopefully that's the thing that -- for years we've talked about driving penetration rates past 20% and perhaps this is one of the things that will help us with that.

Okay, great. And then I really like the disclosures on slide 8 with the sort of customer count broken out within residential and commercial. And basically, one of the themes that I've been hearing from investors since January is they'd like to see subscriber count and ARPU. That would help with their modeling.

So could you just talk about whether it would make sense to provide these on a regular basis? And just directionally about your expectations for the year. So should we expect a modest or a deliberate decline in subscriber count, but that's offset by pricing and attrition? Or is that not the right way to look at it? Thanks.

And again, when we look at our model out there, we run a general manager model as opposed to a siloed model by our sales channels. We look for RMR growth. Obviously plenty of feedback in terms of what are the subscriber counts.

I think as we shared on the roadshow, we specifically instituted tougher credit checks. I think you saw kind of a 9% drop in adds from 2015 to 2016, and 2016 to 2017, it was 5%. But very pleased in the fourth quarter. It was kind of up 2%. So we feel like we got where we needed to go with that piece of the business.

And I really was answering a comment, a question that was being brought to us out there. In terms of how we look at the business, RMR growth is what I am anchored on, Toni. That is what we ask our branches to deliver. And if they are particularly good in small biz versus commercial or national in their area versus resi, what they are accountable for is deliver RMR growth for us.

So Jeff, anything you'd add on that with guidance?

Yes, so we were just trying to be responsive to some of the questions we got on the roadshow and since. And therefore provide a little bit more information to show some of the dynamics between our different customer sets.

And then also on the page Jim talked about as well to describe a little bit of the comparison between the way legacy ADT looked at attrition on more of a net basis compared to the way we look at it on a gross basis, which was another question we got. So hopefully those additional disclosures help everybody understand our business a little bit better.

Thanks a lot. Appreciate the color. Congrats.

(Operator Instructions) Manav Patnaik, Barclays.

Yes, thank you. Good morning, gentlemen. My first question is more on the commercial side. It's nice you've already done two tuck-ins since the IPO. And I think you talked about a pretty healthy tuck-in M&A pipeline.

I was just curious if -- what the appetite would be for a larger asset. Because it sounds like some of the multi-industrial guys who own some of those might be willing to part with them. And I was just curious what your thoughts there would be?

Yes, it's an interesting dynamic for us to contemplate, Manav. Obviously, we share most of what we do with an acquisition every day with our resi accounts, commercial, and national. Frankly, a lot of the accounts Bobby brings us at the national level are bigger in scope than some of the acquisitions we are actually doing.

But we have typically tried to get count and finding where we can deploy greater talent that wants to join us across the country and build out our footprint. What you are suggesting would be very interesting to us were we to be able to have those conversations. We saw some of those assets come out on the marketplace. It could be very interesting for us.

Got it. That's helpful. And then the broader question is in terms of the improvement over the next three to five years -- the continued improvement I should say. I know you haven't set any targets, but if we looked back at what you and your team did at P1 and HSM and so forth, would you characterize the opportunity here at ADT to be as good or better than what you did at those companies?

Listen, I'd say it's as good because there's no reason. There's nothing different. It's a little better because there's more opportunity with more branches. And when you use a tool like we do in terms of earnings performance management and outlier management, always going for, hey, why is it a little different here? And our ability historically to move those bottom numbers into the middle.

We are very encouraged and we have got some good benchmarks of what we've been able to do in the past that we've set at targets for the team. And it's a competitive team; they want to do best in class for us.

All right. Thanks a lot, guys.

One thing I would add there, too, just to remember is that we are very early days on a lot of these improvements. Through 2016, the companies came together; a lot of time and effort focused on integrating back-office G&A functions.

Last year a lot of effort integrating the field operation and these tools like the scorecard we've talked about, the concept of variance performance management and the cultural changes to get the organization more focused on the customer. Those happened during the course of 2017 and aren't even complete yet. So we think there's a lot of opportunity in front of us.

Got it. Very helpful. Thanks, guys.

George Tong, Goldman Sachs.

Hi, thanks. Good morning. Your free cash flow guidance at the midpoint for 2018 is $500 million. In 2017, you generated $403 million in free cash flow, so the increase is approximately $100 million. I would have estimated interest expense savings alone to generate about $85 million in an increase in free cash flows.

And then the attrition rate guidance of 13.2%, call it, for 2018 is improved from 13.7% in 2017. So 50 basis points of improvement, and that alone should translate into another $50 million in free cash flow increase. And that doesn't yet include benefits from margin expansion or SAC leverage. So can you elaborate on the bridge for free cash flow growth going from 2017 to 2018 and what the specific components are?

George, our cash flow model is generally driven by EBITDA less how much we spend on subscriber acquisition costs. As I mentioned, we are a very low cash taxpayer. And then interest expense, of course. We are estimating our interest expense going down by something on the order of $60 million year on year.

And then we have EBITDA growth. As you see, if you take the midpoint of the range, EBITDA goes up by about 70. The difference in free cash flow and part of the reason we have a range is the difference is how much we spend on subscriber acquisition costs.

And one of the things that we talked about on the roadshow, and Tim mentioned even just briefly, is we are kind of in the process of turning from being in a mode where we have taken on fewer new adds year over year towards a mode where we take on more -- marginally more new adds year over year. So we were up on revenue adds in the fourth quarter and we expect to be up on revenue adds as we go through the year.

So even though we will have some efficiency improvements on our subscriber acquisition cost relative to the revenue we take on, we do not expect to have the same reductions in absolute dollars of subscriber acquisition costs as we had in prior years -- in the last couple years.

Got it. Very helpful. And then as a follow-up, I wanted to go back to the question around the Amazon Ring acquisition and the potential there for a partnership. The Company decided to forgo a partnership with Nest earlier due to economic reasons and the contract ended up going to Monitronics. Can you comment on what economic terms you would need to see in order to strike a successful partnership with Amazon Ring?

We are a service provider with a brand. So again, there is some version of, hey, what we find to be attractive to us to provide that service as we go forward. As opposed to an equipment arrangement, if you would. So again, from our side, it's our ability to serve. Whether that's simply the 24/7 piece or whether that would be with technicians in the home, those are the things that we would strive to deliver.

Got it. Thank you.

Jeff Kessler, Imperial Capital.

Thank you. My first question is -- and I've asked this question of Verint, Verisure, and [My], so you guys are fair game for it. What you believe is the base case for excellent -- sorry, for base case for the customer experience that you are looking for to gain not just the reputation, but gain new customers through referrals? As well as improving the financials of those customers as they remain as your customers?

At what point does that customer -- do you get that customer because you are doing it? At what point does one lose a customer because they can't produce that customer experience? Where is that line?

Yes, so for us, as we said, what we like to have a best-in-class customer experience. A big part of our sales pitch right now is to have -- if you are looking at a competition or a competitor, just dial their 800-number and see what happens. And then say if that was an emergency what would you do.

So a lot of focus on our end in terms of our call centers answering the phones with live bodies in one or two rings. A lot of improvement in the past year under Jim's leadership to deliver technicians inside of 24 hours to the house.

This year what they are focused on is really every time the customer calls: why are they calling, what can we do to make that -- I think the word is a frictionless experience so that we are smooth in and out of the transaction. Customers typically don't want to be bothered with having to call about their electronic security systems or home automation system. So what can we do to really maximize that experience when we do get them on the phone.

And as we look out, we see technology helping us under Don Young's leadership. Can you go to your app, can you say I'd like a technician at 6:15 on Tuesday. I'd like to have a technician 11 a.m. Saturday. Get a quick response, here is your tech, etc.

So I think we have to keep raising the bar in terms of what our customers can expect from us from a delivery standpoint. And then, as Jamie keeps thinking through, what services can we bring them that make it more part of their daily lives.

And we've been focusing heavily in consumer and commercial on protecting people against cyber attacks. As we go forward, I think we have got some good things planned for 2018 in that arena as well as security outside the house.

I think it's a little bit of delivery, Jeff, as well as the services we provide. But we anchored in 2017 on the experience in the phone and with the technician at the home. This year, we are doing a better job with analytics: why are they calling, what can we do to stop the calls proactively?

As we look out a little further, it's developing the apps and the capabilities to extend our hours of service delivery and being more customer-friendly with when they'd like us to be there. When they are asking us as opposed to inside our schedule. That is how we are looking forward on this. And again, I think we should make it hard to compete with ADT on the service delivery. That is kind of our cornerstone.

Thank you. Then my follow-up is you've just made a couple of acquisitions of companies that I know really well: Aronson and Acme. And Phil, if you are on the phone, congratulations.

The problem, the difference is these are very, very specific cultures that have been built up over a long time, particularly at a place like Aronson. How are you going to manage the integration of those cultures? And I'm assuming you're going to be making more of these types of high-end or high-quality integrator acquisitions to build up your commercial base.

How do you integrate them over a period of time or through people to make sure that number one, they eventually do become ADT-ized, so to speak? And secondly, that you don't -- that they are very -- that they become productive sooner rather than later?

So a couple things is how we look at those. And again, Aronson is just a great reputation; terrific company out there in the Northwest. Really helped us with our footprint; expanded our capabilities. Done a great job. And there was a story in one of the industry trades last year that talked about our owners club and the last 10 deals that we've done and the owners all still work here.

Dan Bresingham has kind of led this initiative for us over the years. And again, we are very upfront with what our new partners can expect from us and what we expect from them. I think we do just a first-rate job of explaining that.

We were at dinner the other night with the guys from Camtronics, who was our first acquisition in 2012. And all three of the partners are still with us today. And if you look at Joe Nuccio at ASG and he could talk to how that integrated for us. And whether it's Ken Schafenberg with Integration Logistics, yes, we have a set model and a way we do this to bring the companies along.

So again, they've got their identity. We are trying to get them to grow what they did on a bigger scale. And whether it's Robert McDonald and the team at Vintage, etc., they flourished with us. Because typically on the commercial side what we look for, Jeff, is you are selling more installation revenue and you are selling more product out there.

And then we bring a little different level of services and service capability. In this case, with Phil, he's got some core relationship with some great buyers. Is there a way we can take advantage of the relationships he's created and the trust he has with those buyers to deliver against a bigger footprint as we move forward?

And whether that's some of the larger names you know with the Microsofts and the Nikes out there in that part of the country, how do we bring our service capabilities across the country to bear. So this has been a key area of growth for us in the commercial space. But I think we are particularly good at integrating the teams as we go forward.

Thank you very much.

Gary Bisbee, RBC.

Good morning and congratulations on completing the IPO. First question for me. You've talked a lot about attrition as one of the key things. But one strategy we haven't heard as much about is just what exactly you're doing to improve the efficiency of the SAC spend?

I know part of it is you've spent less because you've put in tighter, more disciplined standards. And part of it is certainly with attrition improving, you have to spend less. But outside of those two factors, what exactly are you doing? And is there a runway to continue to deliver more efficiency in the per-household added type of costs going forward? Thanks.

Yes, so subscriber acquisition costs, four main buckets: what you do in marketing and advertising; your cost in the sales departments; your cost of product; and then the job cost and which is the technicians on the site.

Leaving the first two out that we have kind of talked through, product. Jim did a great job renegotiating a new contract for us as we go. So we get a little bit of a one-time pop in 2018. That is not something that we bake in.

But the other piece of this, Gary, is the job costing. As I mentioned earlier, we spend about 6 hours on average on our basic system with 15 to 30 devices. There is a big spread there between how that goes in each branch, how that goes with each technician, how that goes with each sales rep.

You may be a sales rep that when you sell 10 hours of labor, on average it takes us 12 hours to put yours in. I may be a technician that when I'm assigned 10 hours of work, it takes me 13 hours to get that in. You and I combined on a job, there's a good chance that job is going to run over.

Jeff is selling them and he sells 10 hours of labors and it takes on average 8, what is he doing in that regard? And if Jason is the technician and when he gets 10 hours of work, he does it in 9. We've got some efficiency.

So it's Don Young's ability to give us the data that lets us see those variances across the country. And this is one that just gets a little bit better all the time. At P1, for instance, I mean, this thing went down 6 turns in 6 years. And it's just the ability to be able to see those, highlight those differences between your different players, your different branches, whether it's on the sales side or the installation side. And data analytics is something that is a strength of ours as we move forward.

So again, this is one that kind of gets a little bit better. And we've never got to the bottom yet in terms of where it can go. So whereas attrition, you get some bigger pops when you do bigger initiatives, this is more kind of just blocking and tackling on a daily basis.

The things I would add, too. One, this is another example of what I described earlier as being early days on some of these improvement opportunities. So the job costing that Tim is talking about, that opportunity is very much still in front of us.

Second point is to date, we haven't really realized any material benefit in equipment cost. And we have opportunities as we go into 2018 and beyond to add equipment cost savings on top of the other things that we had helping us in 2016, 2017.

Great, thanks. And then Jeff, a follow-up for you. Given the leverage around 4 times pro forma for the IPO, you've got some really expensive debt still on the balance sheet. And I know that there is some timing issue around when you can call how much and when you can call the second-lien notes.

But it would strike me there is a massive opportunity to do a wholesale refinancing, even if there's some fairly meaningful short-term fees to take out the next five years of that at an exorbitant interest rate. So how are you thinking about the plan of attack from here? And we won't necessarily hold you to it, but is that a likely or are you thinking more chip away at that slowly over time?

Yes, well, the best opportunity to do that -- it becomes a whole lot less expensive to do that in the first part of 2019. So we are working through and evaluating different ways to address the debt structure over time.

But specifically, the second-lien notes, presumably what you are talking about, are more economical to do some kind of a refinancing transaction first part of next year.

But you are allowed to call 40% before then. You did only half that roughly in the IPO. Is there any reason you wouldn't? Just because the premiums are high that you wouldn't do that more quickly? I think one could argue rather than paying -- the delta and the interest versus what you could refinance it at is such that it might make sense to be fairly aggressive.

Yes, there is also some provisions related to the use of IPO proceeds and restricted payment in some of our other debt instruments that goes into the equation.

Okay, all right. Fair enough. Thanks, guys.

Kevin McVeigh, Deutsche Bank.

Great, thanks. I wondered, can you give us a sense -- and appreciate the range of the revenue and EBITDA guidance in attrition. What would cause you to come in at the low end versus the high end? And just any way to think about that?

It's just the multiple levers, Kevin. I mean, if you look at attrition, if you look at SAC, if you look at margin, if all three of those go at the better end, we are going to go -- obviously, it's going to be a terrific year.

Each of those levers moves independently. But again, if all three go in one way for us, that's how you get to the high end. Again, 2017 was great. We -- key improvement in our five measurables. Giving guidance that we are going to have improvement in all five measurables again in 2018. But you get to the high end when all three of those key drivers end up at the better end of the year for you.

That's super helpful. And then just, again, really nice job on the attrition. As you look at the improvement going forward, should we think about that -- a combination of better underwriting standards and service? And is there any way to think about the split on that? And/or is there anything else you can do to continue to drive that forward as we look for continued improvement?

Again, I think in 2016 and 2017 we got most of the tighter credit screening and customer selection. And then it shifted into the customer service levels following tech delivery were the key focuses at the end of 2017 that they delivered on.

2018, you see much more focus between our branches and our centers in terms of managing each interaction with each customer and understanding why that interaction they have. And make sure there is no second calls, kind of doing this work. So again, a lot of work to do to bring our branches and our centers together throughout the year.

And then as we look forward, we look toward using technology from Don and the IT group to how to make dealing with ADT even easier. Tools that we have never been able to deploy before. So again, to the earlier question: is ADT equal to or better than the opportunities you've seen in attrition? We'd like to see it as better than what we've been able to do.

But 2018 is going to be a year of really managing through each of those conversations the customers are having, whether it's electronic or via phone or via with one of our people in their homes. And really getting below that so there's never a second conversation. And then, again, we expect -- we are giving guidance on a meaningful reduction in attrition again this year. But plenty of work to do and left it to accomplish in that area, Kevin.

Super. Thank you.

Peter Christiansen, Citi.

Thank you, good morning. Nice trend slide. So you have a general benefit here with attrition-wise, but I guess the majority of that proportionally of customers you are losing are the lower ARPU, more traditional packages. Can you talk about what that proportion is? Or maybe even perhaps outlay what the Pulse attrition rate is relative to the traditional? I think that would be helpful in describing that tailwind.

Yes, so for us, Pulse is our interactive service. That's those customers that want to be able to interact with their service from a remote location, a cell phone typically. The adoption of that has become more the norm in the last few years in terms of what people buy.

It's minimal in terms of any benefit we are gaining from the dollars of the prior cancels to the dollars of the new customers. There is some delta there, but it's not material in terms of the attrition metric.

What we are working toward is now better data analytics in terms of usage of the system. So because you have interactive, it doesn't necessarily bring different characteristics. But it does bring us the insight to see how you use your system.

And maybe you are a once on in the morning, once on at night. Maybe you are once on on the weekend; maybe you are on and off all throughout the day. But it will allow us to see changes in those patterns.

And we are hopeful that our ability to analyze those changes in patterns is going to allow us to be more proactive with customers to make sure that, hey, you are still getting the benefit that you thought you would get on day one when you purchased it. Then how do we use that with our insights. But that's in the early stages in terms of anything we are doing at this point.

That's helpful. And then could you remind us where ADT is with Amazon on the Amazon Key program? I know that you did some testing earlier last year. Do you see your DIY kit or even your traditional services being able to partake in like a partial delivery type of option, whether it's with Amazon or not?

Yes, there is a couple conversations going on with different providers in terms of that Key delivery. And again, taking advantage of ADT being a trusted brand. That's where most of the conversation has gone. Little too early to make any comments in terms of where those conversations go, other than to say it's not conversations just with Amazon.

There's several people delivering products to the homes that are interested in a service like that. And again, ADT is a trusted brand that could help with IT services, something that we are in active conversations with. But too early to give any guidance on that.

Thanks.

David Ridley-Lane, Bank of America Merrill Lynch.

Sure. So we've gotten a lot of questions about the longer-term opportunity for you on attrition. We are looking at ADT versus peers, ADT versus the independents, and so on. But I wanted to ask about the variance within ADT, sort of ADT versus itself. If you looked at attrition at the top 20% of your branches, top 25% of your branches, what is attrition at those branches today?

Through the fourth quarter -- I'll give you some general guidance. We started at a range of 10 to 24. I would say that current range is 8.5 to 16.5 is kind of where we are. So upper ones are -- again, it's current versus trailing 12 is the question. So I think trailing 12 would be a little higher. But I would say the upper ones are still in that 14, 15, 16 range as we continue to drive that down.

And again, we measure it as gross and there is a reason for that. Approximately 400 basis points better when you look at it. If you are going to deduct for many of the things that our competitors are saying is their net attrition that we don't use. So again, it's a gross attrition metric that we are using here.

Thank you. That's really helpful. And then maybe a question for Jeff. What's the level of contribution from the recent acquisitions that's embedded into 2018 revenue guidance?

For our overall revenue guidance, I mentioned that install revenue will grow more quickly than monitoring service revenue. The recent acquisition is not really material on monitoring and service revenue. But you can think of it as somewhere in the neighborhood of a point of total revenue can come from acquisitions. And then that could be more like 2 points depending on what acquisitions occur during the course of 2018.

Great, thank you very much.

Thanks. Ladies and gentlemen, at this time I would like to turn the call back over to Mr. Tim Whall for closing comments.

We appreciate the time, we appreciate the interest, and we certainly appreciate the investment from our shareholders. So I will close with saying thanks to the employees for the hard work for 2017 and what they are doing in 2018. And a shoutout to our dealer partners for providing a great year for us as well in 2017. So thank you very much for the time today, everybody.

Thanks, everybody.

This does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.