ADT Inc (ADT) 2022 Q1 法說會逐字稿

Greetings. Welcome to the ADT First Quarter 2022 Earnings Conference call. (Operator Instructions)

Please note this conference is being recorded.

I will now turn the conference over to your host, Elizabeth Landers, Senior Director of Investor Relations.

Thanks, operator, and good morning, everyone. We appreciate you joining ADT's First Quarter 2022 Earnings Call.

Speaking on today's call will be ADT's President and CEO, Jim DeVries; and our CFO and President of Corporate Development, Jeff Likosar. Jim will provide a overview of our recent performance and how links to the mission and long-term strategies we've laid out in our Investor Day in March. Jeff will then cover our financial performance.

Joining us for Q&A are Don Young, Chief Operating Officer; Ken Porpora, EVP of Finance; 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.

And before we start, I do need to tell you that today's remarks include forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to materially differ from those forward-looking statements. Some of the factors that may cause differences are described in our SEC filings.

We'll also include non-GAAP financial measures on the call. For a complete reconciliation of our non-GAAP financial measures, please refer to our earnings press release.

And with that, I'll turn the call over to Jim.

Thanks, and welcome, everyone, to our call. ADT released our earnings results this morning, beginning the year with solid first quarter momentum, delivering strong year-over-year improvements in total revenue and adjusted EBITDA and a $52 million net profit. We continue to see solid demand for ADT products and services, helping drive our subscriber growth and producing the highest RMR balance in our history. We're also seeing good traction with SAC efficiency in our Consumer and Small Business segment, with record high installation revenue per unit that was up more than 30% versus prior year, aided by higher attachment rate for our Google Doorbell sales and increased pull-through of additional products.

The extraordinary service provided by our employees is reflected in improved customer satisfaction rates and enhanced brand loyalty. Gross customer attrition over the last 12 months was 12.9%, a record low, down 20 basis points versus prior year and sequentially from the fourth quarter. This trend is consistent with expected retention characteristics of our interactive customers with more advanced and larger systems.

I want to express my gratitude to our employees and dealer partners for a tremendous start to the year. Our people are ADT's greatest asset, and our results are evidence of what can be achieved when 25,000 of the best professionals in the industry focus on taking great care of our customers.

At our Investor Day in March, we presented our mission and laid out our long-term strategy. ADT is a trusted brand and synonymous with safety and peace of mind. We are positioned to drive growth across all our business segments by leveraging our unique strategic advantages, our innovative offerings, unrivaled safety and premium customer experience.

The strategy we outlined at Investor Day focused strongly on our customers, growing our subscriber base, expanding the share of wallet from each customer and strengthening our brand loyalty and customer retention. Simply stated, we are giving customers even more reasons to choose ADT, stay with ADT and spend more with ADT.

We are already demonstrating progress against our plan with several achievements in the first quarter that I'd like to highlight.

Our Google partnership remains positioned to help accelerate the transformation of our business. We launched the Google Nest Doorbell in early January and have seen great success with over 60,000 Nest Doorbell sales as of the end of the first quarter. Additionally, offering the branded Google product is driving higher attachment rates, higher pull-through of other devices and higher installation revenue that we were seeing with our previous white-label doorbell.

Moving quickly to maintain our momentum, we rolled out mesh WiFi a few weeks ago, and we're targeting to launch the Google indoor and outdoor cameras by the end of Q3. In our dealer channel, we're expanding distribution and also beginning to introduce global products throughout the network. So while we're still in the early innings of our full Google product rollout, we're very encouraged by our early successes.

Based on favorable customer feedback, we are also expanding our ADT virtual service platform. Today, almost half of our service visits are now being successfully conducted virtually. Virtual visits are delivering high customer satisfaction. And in the first quarter alone, we eliminated over 165,000 truck rolls, reducing not only our expenses but also our carbon footprint. We are continuing to evaluate and expand this program with additional ADT services.

We are also continuing the rollout of our next-generation monitoring technology. Our patented technology delivers unrivaled safety by helping to prioritize response events and sending data directly to emergency response centers. Obviously, this is a -- critically important in situations where every second matters. We are also expanding this capability for our Commercial customers. Today, our technology is in approximately 70 emergency response centers, and our goal is to be in 1,000 centers by the end of the year.

ADT Commercial showcased several innovations at the recent ISC West conference. We specifically showcased the capabilities and uses of robots and indoor drones, innovations we believe provide opportunities for disrupting the traditional man-guard industry. Commercial also received three SAMMY awards recognizing our best-in-class marketing and advertising efforts.

I would like to take a moment to comment on ADT Solar, our newest business segment.

Following ADT's acquisition of Sunpro in December, we have now completed our first quarter with ADT Solar reporting as part of our business, and we are very pleased with our performance. The cutover to the ADT Solar brand is now complete, and you'll begin seeing branded vehicles and uniforms out in the market soon.

ADT Solar installed 5,500 systems in the quarter, an increase of approximately 80% versus legacy Sunpro in the first quarter of last year. We have begun to launch our Solar dealer program to existing ADT dealers, and we're seeing the early benefits. Between our dealer launch and other cross-sell initiatives, we're already seeing about 20% of solar sales generating from the ADT ecosystem.

As I discussed at Investor Day, we are integrating ESG into our business operations. Just this week, we published our first corporate ESG report, which outlines all that ADT is doing to embed ESG into our business. We truly believe that our ESG principles underpin our core mission: empowering people to protect and connect what matters most.

In closing, I am encouraged by our performance this quarter. We are delivering on the plan we laid out at our Investor Day a few months ago, and I am increasingly excited about the opportunities ahead.

And now I'll turn the call over to Jeff to cover our financial performance and the quarter in more detail.

Thank you, Jim, and thank you, everyone, for joining our call today. As Jim described, we started the year with solid momentum across the business and are pleased with our first quarter results.

Total company revenue in the first quarter was $1.55 billion, up 18%, which includes the benefit of our Solar acquisition. Excluding Solar, our revenue grew approximately 4%. Importantly, our recurring monthly revenue, or RMR, base grew to $365 million, the record level Jim mentioned, and was $16 million higher than last year. This is the result of the cumulative effects of our recent growth in customer retention progress. Our gross new additions to RMR were down slightly in the first quarter, as planned, due to last year's initial Ackerman account acquisitions.

Our revenue growth, combined with efficiency improvements, especially within our CSB segment, generated an 11% increase in adjusted EBITDA at $601 million.

On a segment basis, Consumer and Small Business, or CSB, delivered total revenue of $1.063 billion, an increase of 2% or $24 million versus last year. This performance was largely driven by the increase in monitoring and service revenue from the higher RMR balance I mentioned earlier. We continue to see an increasing number of customers choose interactive, integrated and more comprehensive systems. In addition to the retention benefits Jim described, the resulting mix shift has also helped improve our average revenue per subscriber. We expect this pace of interactive customers to grow as we add more Google products to our portfolio.

CSB adjusted EBITDA increased by more than $40 million, representing the largest contribution to our overall improvement. This was driven by the higher revenue combined with strong cost performance. A key driver of this cost performance was the virtual service initiative Jim mentioned, which allowed us to service our growing and increasingly interactive customer base while keeping our service costs relatively flat.

We are also seeing continued improving performance in our Commercial segment. First quarter Commercial revenue grew by 9% to $290 million, with increases in both installation and monitoring and services revenues. We have continued to recover from COVID-19 challenges and capture market share as conditions have improved.

Commercial adjusted EBITDA was up slightly as these higher revenues were offset by some inflation-driven challenges on parts, labor and fuel. The Commercial team has moved quickly to take actions to offset much of this inflation.

Our new Solar business also delivered strong results in the first full quarter since our December acquisition of Sunpro with revenue of $192 million and adjusted EBITDA of $17 million. Solar installation revenue included a $30 million headwind from the amortization of the pre-acquisition backlog which will not affect subsequent quarters. Like Commercial, Solar has moved quickly to recover cost inflation pressures.

As Jim described, we are pleased with some early indicators of cross-selling opportunities, and we remain very excited about our new Solar business as we continue to integrate within our ADT ecosystem.

Turning to cash flow and the balance sheet. Adjusted free cash flow was negative $42 million, which was slightly better than our internal plan for the quarter. We remain on track for our full year guidance for adjusted free cash flow, in addition to our guidance for adjusted EBITDA and revenue.

Our quarterly cash flows are uneven for a variety of reasons, including especially the timing of interest payments, which are much higher in the first and third quarters. Additionally, this year's first quarter included the effects of a variety of working capital and timing items, including our annual incentive compensation payments. We expect second quarter adjusted free cash flow to be around $200 million higher than the first quarter, about half of which is due to lower interest payments.

We remain very comfortable with our capital structure and our liquidity overall. Our next significant maturity is our $700 million first lien note due next year. We plan to access the capital markets later this year to refinance that debt with the exact timing, amount and structure dependent upon market conditions. As a reminder, we plan to reduce our net debt by $1 billion by 2025.

Before concluding, I want to touch on a couple of noncash items.

Our depreciation and amortization expense was up slightly in the quarter as we have grown our business. However, we expect year-over-year reductions of $50 million to $75 million for each of the next 4 quarters. This is the result of the roll-off of intangible assets acquired in 2015 and 2016 transactions associated with Apollo's acquisition of Protection 1 in ADT.

Additionally, our GAAP interest expense was down year-over-year, with the decline driven by mark-to-market adjustments on our interest rate swaps, which have increased in value with rising rates. The resulting $145 million reduction to interest expense net of the associated tax effects drove our first quarterly GAAP profit since 2017.

To conclude, I want to reiterate that we are executing on the strategy and committed to delivering the financial targets we laid out during our Investor Day in March. While only a couple of months have passed, we are very pleased with the progress we made in the first quarter this year as we continue to balance near-term results with building for the longer term. I want to add my thanks to all the ADT employees, dealers, suppliers, customers, communities and investors who have enabled our progress. Thank you for joining our call, and thank you for your support of our company.

Operator, please open the call for questions.

(Operator Instructions) And our first question comes from the line of George Tong with Goldman Sachs.

Can you discuss how you're seeing inflation impact the business and then steps that you're taking to mitigate the impact? I know you're rolling out virtual services which should help drive some savings and then pricing as well. If you can elaborate on those factors, that'd be great.

It's Jeff. So like all companies, we're working our way through the macro environment and navigating inflation, especially parts, labor, fuel, managing it quite well in our residential business, where we have a smaller number of SKUs and very strong relationships with a more concentrated number of suppliers. It's more complicated and challenging in our Commercial business, where we have much, much longer tail of lower-volume parts with a much greater number of suppliers. So more challenging there. And then your -- our Solar business, of course, is new and subject to the same pressures.

We're navigating it with a host of actions, including qualifying alternate suppliers in a number of cases, including having strategically built some inventory and then including some actions that we've taken to attempt to pass along some of those challenges via pricing and other actions. So it's a challenge for sure, spending a lot more time on it than we were a year and certainly compared to 2 years ago, but we think we're navigating it well.

George, my comments -- it's Jim here. My comments mirror Jeff's, but I'll just share a couple of other things quickly.

We have already taken price actions in Solar and taken price actions in Commercial. To Jeff's point, the markets are absorbing those increases, and we've not had any impact from a growth or retention perspective.

Very helpful context. And then secondly, with respect to the Google partnership. You talked about rolling out the doorbell earlier in January, you have the mesh WiFi launched several weeks ago and then indoor/outdoor cameras to come in 3Q. Can you discuss what you have planned beyond 3Q? What are the next major milestones for the Google partnership? And how would you expect that to impact your operating and financial performance?

Yes. So I'll share some perspective on Google overall and then get specifically to your question, George.

We feel great about the relationship with Google. We had earlier expanded our home automation product set with the Hub and Hub Max and voice assistant. The Google video doorbell was launched in January. We have an attachment rate that is approaching 50%. We just launched the mesh WiFi product.

Specific to your question, indoor and outdoor cameras will be next. We'll launch those in Q3. And then I'll mention as a reminder, we're going to be going to market co-branded with Google. Our marketing teams are already working together on some creatives. And then on the engineering front, both organizations are working toward full integration with the next-generation app and technology platform that we'll have in 2023. But the next milestone for us will be some work we're looking forward to on co-branding and the cameras in Q3.

Our next question comes from the line of Pete Christiansen with Citi.

Really nice trends here, guys. Jim, I was just wondering if -- on the attrition number coming down. Any recent attribution deeper in the numbers there that gives you confidence that the value proposition transformation is really occurring? That would be helpful.

And then as a follow-up, the virtual service ticket number looked really, really good, and certainly great traction towards your goal of targeting a 40% increase in virtual service tickets overall. How do you think about that feature changing the labor intensity of the business going forward or maybe longer term?

Thank you, Pete. I'll take out the first question on attrition. And then Don Young, who's leading the efforts around virtual service, will take your question on the service front.

On attrition, yes, we feel great about it. Ended the quarter at 12.9%, a decrease of 20 bps. That's an all-time record for ADT. We see continued momentum. We know that the more customers use a system, the higher the retention. We know the more customers invest in the system, the higher the retention. We know that our interactive customers retain at a higher rate, and all of those trends bode well for us.

We're getting more sophisticated in our save efforts reactively and proactively. And then there are some lead indicators that are positive. The mix of credit scores, our service backlog is at a historical low.

So retention is going to move around from quarter-to-quarter, but we're long-term bullish about the metric. And we think that there's just a whole host of positive trends that should serve as tailwinds for us.

So Pete, this is Don. On the virtual side, hard not to get excited about this. It was really borne out of necessity last year when our costs were exceeding our plan. We leaned into it slightly with basically 1,000 virtual appointments per day. We're up to 4,000 virtual appointments per day now. The reality is that the customers have a large appetite to go in and get immediate satisfaction, which is obvious, but also education on how they can go and enhance the value of the solutions that we give them, whether it's safety or convenience.

The reality is that most of the problems that customers call us for are either door window sensors or broadband issues. Well, both of those can be solved easily given the trend in wireless equipment that we've been delivering to our customers over the years, and all we need is access to the customers' eyes and hands to resolve their problem remotely. They don't particularly want us in their homes to resolve their problem if it could be done satisfactorily a lot quickly without them -- us entering the home. And literally, this is just the launching pad at 4,000 to a lot of other areas of the business that we could see ourselves doing virtually, and then really just kind of kickstarting our whole plan all along to digitize the experience.

And Pete, to Don's credit, I have to react to his beautiful equation there. As you see, the CSB segment is up about almost 300 bps year-over-year in margin. Virtual services is the star in that show. We hit that a little bit in Investor Day. But we're really happy with the immediate tangible results we're seeing.

Our next question comes from the line of Ashish Sabadra with RBC Capital Markets.

This is John Mazzoni filling in for Ashish. Maybe quickly on Solar. Other installers have indicated strong demand for residential solar across the U.S., largely driven by increase in utility rates and homeowners' desire for energy independence. Could you talk about the demand environment? And any trends you're seeing there?

Yes. This is Jim. The -- so we're -- we feel really good about Solar. The team is fantastic. We're out of the gates nicely. We think that the demand is going to continue to be a catalyst for growth in this space. There's only 3.5% penetration, and we think that we can get more than our fair share of the growth.

We mentioned earlier that our first quarter was up 80% year-over-year versus legacy Sunpro, and we're just -- really just getting started. We're beginning to rebrand to ADT Solar. We're at a point where about 20% of the sales volume is coming from ADT sources. And we're going to be disciplined about our growth, keep our eye on the customer. But we think that this is going to be a very meaningful business for us and the growth catalyst is real.

Great. And maybe quickly on labor. Is there any other comments you could share on the hiring environment and perhaps what you're doing these days? It seems like the virtual servicing will help. But on the technician side and other hiring fronts, it would be great to get an update there.

We've got -- so we're seeing some inflationary pressure from labor. I'd say it's not material at this time. Labor and staffing overall are absolutely a focus area for us. We're seeing in the marketplace record turnover, job vacancies across the country. It's obviously a tight labor market.

Like many employers, we're working through talent acquisition strategies across a broad range of our positions. We're focused also on training because that's part of the equation. It's not just a lack of candidates, but it's a lack of candidates with the skill set that we need.

We're helped by the fact that our employee turnover is actually down this year versus last year, about 400 basis points down. And we are just beginning to look at some offshoring for some of our more transactional roles. That will provide us some savings, but the real driver for that decision is access to talent.

So net-net, we're -- talent, labor shortages are on our radar screen. Talent acquisition, ensuring we have an attractive employee value proposition has never been more important. And the inflationary pressure is real, but we've been able to offset it at this point and it's not material at this time.

Congratulations again on the strong results.

Our next question comes from the line of Philip Shen with ROTH Capital Partners.

As a follow-up in terms of Solar, there's this anti-circumvention case out there with a threat of a potential retroactive tariff. And with that as well as LG pulling out of the module market, I was wondering if you could talk through how your module supply looks for the rest of the year.

Yes, Phil, thanks for the question. It's Jim. So we are now working with three different module manufacturing partners. We don't anticipate disruption in the supply chain. We've seen an increase in panels of about $20 per panel, give or take, 10% increase in costs. on -- at the end of Q1, we increased our prices in Solar to help absorb the costs on the labor front and on the panel front. We think that it's not had an impact from a demand perspective. April was a record -- all-time record sales month for us in Solar. So we feel pretty good about managing the supply chain and absorbing the costs by increasing prices to maintain our margins.

Great, Jim. And then you had a really nice and strong year-over-year growth in Q1. What kind of volume would you expect, either revenue or megawatts or customers, to see in Q2, 3 and 4? What should we expect ahead?

Yes. So we had sort of intimated, Phil, that we would be right around $800 million in revenues for the business. That's about a 20% increase from 2021 for Sunpro. Obviously, on the heels of a fantastic first quarter, we're feeling really good about that. Our internal plans are obviously above 20%. We'll take it a quarter at a time, but couldn't be more bullish about the growth in Solar.

And one thing I'd add, too, this that I've mentioned in prepared remarks is that we had some headwind from a onetime purchase accounting where we were not able to recognize some revenue that was for the backlog at the time of the acquisition. So our run rate supports getting to the numbers Jim described. And we're holding our guidance for now, but very optimistic about the trends we see in Solar and, for that matter, the rest of the business.

Great, Jeff. One more, if I may, in terms of the EBITDA. You had a nice improvement there year-over-year. I was wondering if you expect to see that 9%-ish maintained for Solar as we get through the rest of '22.

Hey, it's Ken. Again, strong first quarter, especially as some of the...

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like they were in Q1, including Commercial and Solar. So we're not giving you an initial quarterly guidance. As you can tell, we're reaffirming the full year and really like where we came out in the first quarter. Again, that virtual service on top of some of the other initiatives that we have are increasing the margin and then are bolstering the top line stuff that we represented in Q1 as well. So we like that combination.

Hey, one thing I'd add, too, or really -- and really emphasize or reiterate is that we're navigating the year to deliver the guidance that we shared, but we're always making trade-offs between optimizing near-term results and making the investments for the longer term. So that's, of course, true in Solar, navigating supply chains and some of the things we're talking about earlier. True in Commercial. True in CSB also.

Our next question comes from the line of Brian Ruttenbur with Imperial Capital.

Great. First of all, easy question. Attrition at all-time lows, I believe, unless I haven't been tracking more than 20 years. Is there -- have you ever had anything lower than 12.9% in terms of attrition?

Yes, I think it's a record for us. It's -- I'll also mention that's a gross attrition number. So our net attrition i, give or take, 250, 300 basis points better than that. So we feel really good about it.

And Brian, I think important because, Brian, I've been here 23 years and Jim, for some reason, looked at me. When you Asked my question, I felt like the old guy in the room.

Is that maintainable and improvable from those levels?

Yes, we think so. I had mentioned earlier it's not going to be linear, but the retention improvement was really across the board. Relocation was a contributor. Our voluntary losses are improved. Our loss to competition is better. It's in all regions of the country. We've got a little bit of headwind on nonpay, but long term we feel great about it.

Brian, as you know, the more a customer invests in a system, the higher the retention rate. And we're also at record levels for customer investment upfront. Installation revenue per unit has never been higher. So I think there's cause for optimism on customer retention.

And 1 thing I'd add, too, that -- and this is a different flavor on the point I was making earlier about balancing long-term and shorter term is -- and we talk about this often, but your -- our IRR equation, and that's really what we're focused on. It's a combination of the margin rates and the -- that we're able to generate. It's how long we keep our customers or attrition/retention, and it's how much it cost us to take on customers, the SAC efficiency.

So if we were seeking to optimize any one of those measures, we, for sure, could do something or seeking to optimize the overall ecosystem. So we've made progress and we'll continue to make progress in each of them. But I just want to emphasize that what we're really focused on is generating strong returns on invested capital, including especially subscriber acquisition costs.

Great. And then just switching subjects real quick. Can you give us some kind of update on the new initiatives like insurance and maybe talk about potential structures? It may be too early for you to address that too much, but given Vivint is going down the road of the insurance route, I believe that you're open to the idea. Maybe you can give us an update on what your thoughts are on that front.

Yes. It's very early for us on the insurance front. I'd say we're open to it. It's not a priority, not today anyway. The -- and most likely, the way that we would enter would be via partnerships versus selling as an exclusive agent or an independent agent or MGA, selling insurance on our own. So if we enter, it'd be via partnership. But it wouldn't be a solo act. And for now, it's not a high priority for us.

And our next question comes from the line of Manav Patnaik with Barclays.

This is actually Ronan Kennedy on for Manav. On the back of that question with regards to insurance, just wondering if you could please give an update on some of the other partnerships, more specifically Canopy with Ford, Lyft, D.H. Horton (sic) [D.R. Horton] et cetera. Just an update on those partnerships and what the expected benefits are to be.

Yes. So generally going well. Our relationship with Lyft continues to deepen. The partnership with D.R. Horton is going well. That will be, give or take, about 100,000 home builds over the next 12 months. We'll convert something in the zone of 60% of those.

We feel great about Canopy. That's new for us. For those of you who aren't aware, ADT and Ford partnered to invest $150 million in a joint venture called Canopy. The intention is to service support vehicle security. And that will involve both an aftermarket product and an integrated product, both of which will be available in the first half of 2023. So no material impact. No impact at all in '22, but it will start to cut in, in '23 and '24 and thereafter. It opens up a pretty significant new TAM for us, and the largest customer of Canopy out of the gate will be Ford. So it's going to pay dividends long term. It's an exciting, new opportunity for us.

And then if I may as a follow-up, can you just comment on SoSecure, the rollout of that, potential benefits and any other noteworthy innovation?

So I'll comment on SoSecure and offer the mic to anybody else that wants to comment on innovation.

SoSecure is our product that essentially provides a virtual companion via GPS and the phone. We will be eventually integrating SoSecure into the application that customers use to control their homes, be interactive, what we're calling ADT+. So I can control my LifeLock stores, I can arm and disarm a system, and I'll also have SoSecure embedded in that application. So we think it's a really useful add-on feature for us, helps differentiate our application from everybody else.

Okay. And sorry if I may please just sneak in one more. Could you comment on ADT's recession resiliency and your assessment of how using ADT would perform if there were to be a recession?

Yes, we feel like we have a lot of characteristics that give us some recession resistance. One, of course, is just the recurring revenue base. During times of recession, there's a variety of macro factors that tend to move in our favor. People tend to move less frequently, which means that they don't tend to cancel their accounts because they're moving often. In recessions, people tend to be more concerned about things like safety and security. And then it's generally the case that if people take peace of mind from having a security system, that's not the first thing that they would cut in times of financial challenges.

We talked about this a lot. I'd -- in the whole time I've been with the company, we talked about this a lot, never having been through it. But I would also offer that the way in which we are able to navigate the challenges associated with COVID in 2020 and into '21 is almost a proof point that shows we're able to navigate through a challenging set of those conditions favorably. So we're hoping the best for the overall macroeconomic conditions, of course, but we think we're very well situated.

And maybe one other point I'd make, too, is that your -- or we have a lot of discretion in our capital allocation model. So even if -- even if some of what I said earlier were not to play out the way I describe it, and I fully believe it will, we have levers at our disposal to manage our liquidity and our financing and debt obligations even if things were to take a turn in a more negative direction. But we feel really good overall.

And we have reached the end of the question-and-answer session. I will now turn the call back over to Jim DeVries for closing remarks.

Okay. I'd like to extend my appreciation to our ADT employees and dealers. We had a very strong quarter. I'm proud of our collective efforts. Thanks as well to everyone joining our earnings call this morning. As you heard, we're optimistic about continuing the year strong and looking forward to the growth ahead. Have a great day, everybody.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.