ADT Inc
NYSE:ADT
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ADT Inc
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Greetings. Welcome to ADT's Fourth Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded.
I would now like to turn the conference over to your host Mr. Derek Fiebig, Vice President of Investor Relations. Thank you sir. You may begin.
Thank you operator and thank you everyone for joining ADT's fourth quarter 2019 earnings conference call. This afternoon we issued a press release and slide presentation on our financial results and preliminary 2020 outlook. These materials are available on our website at investor.adt.com.
Our remarks today will include forward-looking statements within the meaning of the Private Security Litigation Reform Act of 1995. These forward-looking statements are subject to risks that could cause actual results to differ materially from those expressed or implied by such forward-looking statements.
These risks include among others matters that we've described in our press release issued this afternoon and in our filings with the SEC. Please note that all forward-looking statements speak only as of the day of this call and we disclaim any obligation to update these forward-looking statements.
During today's call, we'll make reference to non-GAAP financial measures. Our historic and forward-looking non-GAAP financial measures include special items which are difficult to predict and mainly dependent upon future uncertainties. For a complete reconciliation of historical non-GAAP to GAAP financial measures, please refer to our press release issued this afternoon and our slide presentation, both of which are available on our website.
I'm joined today by our President and CEO, Jim DeVries; and our CFO, Jeff Likosar. Also joining us and available for Q&A are Don Young, our CIO and EVP of Field Operations; and Jason Smith, Senior Vice President of Finance.
With that, I'll turn the call over to Jim.
Thank you, Derek and welcome to ADT. It's great to have you on Board. As some of you already know Derek is our new Vice President of Investor Relations and I know he's looking forward to meeting many of you in the year ahead.
I want to welcome everyone to today's call. We're glad you can be with us. The fourth quarter of 2019 capped a strong year for ADT successfully balancing financial, operational, and strategic objectives. I'll lead with our financial results.
Full year revenue of $5.1 billion was $544 million higher representing a 12% increase from 2018. Growth, when adjusting for the acquisition of Red Hawk and the sale of our Canadian operations, was approximately 5%. Adjusted EBITDA increased $30 million to $2.483 billion.
Full year free cash flow before special items was $590 million, up 10% from $538 million in 2018. Each of these measures was either in line with or ahead of our outlook despite the fourth quarter sale of our Canadian operations. Our trailing 12-month revenue attrition was nearly flat at 13.4%.
Additionally we ended the year with an improved revenue payback of 2.3 years versus 2.4 years in 2018. Jeff will cover the fourth quarter results shortly, but I'd like to take a moment and provide an overview of the actions we've taken during the past year to position ADT to be the continued leader in security and automation in 2020 and well into the future.
First, I'll start with our core residential do-it-for-me security and home automation offerings where our revenues are about four times larger than our nearest competitor in a highly fragmented market.
We continue to be exceptionally positive in residential where we enjoy strong recurring revenues, high gross margins, and a brand position that is overwhelmingly the industry leader. We're not just resting on our laurels though. In 2019, we focused on strengthening our base of U.S. residential customers through our new product enhancements consistent growth in our interactive take rate and an increased use of new technology and automation in the home.
We began 2019 with the launch of an all-new panel and app that's called Command and Control which has led to measurable increases in our interactive take rate and in the number of customers using automation and video. We completed the year with a more engaged higher quality highly profitable customer base. Significantly, while making those improvements, we were able to also lower our overall net cost to acquire new customers.
We also launched and expanded our consumer financing pilot throughout 2019, while optimizing our customer experience and economics, all leading to a successful national launch just last month.
Consumer financing provides customers more options to enjoy the advanced security and home automation technology they desire, while providing ADT with attractive financial benefits.
In addition to rolling out our new hardware and introducing consumer financing, we also enhanced our core residential capabilities just this January with the acquisition of Defenders, our largest dealer. The overall impact will be improved efficiencies with strong returns on invested capital, lower cost to create subscribers and better control of the customer experience. We also expect the acquisition of Defenders will allow us to better leverage our brand and marketing investments to accelerate growth.
And finally, we're continuing to focus on creating strategic alliances, such as the new home automation partnership with HHHunt announced earlier this year as well as a number of other successes in the multi-family and builder markets. In addition to growing in the high volume do-it-for-me space, we have two significant opportunities in adjacent lower capital intensity areas namely commercial and residential DIY.
First, we have rapidly grown our sales to commercial customers and exited the fourth quarter with a run rate in excess of $1 billion, representing more than 20% of our total ADT 2019 revenues. We started 2019 with Red Hawk and the ADT Fold, which added talented leadership, expanded our footprint and added a new leg to our business with fire protection. We continue to execute our growth channel for disciplined tuck-in transactions, adding a number of small businesses that included great local leaders and a technological expertise in key markets.
As I shared at the beginning of 2019, our approach would be to integrate these businesses in a pragmatic way with a focus on avoiding customer disruption, while developing core best practices. With the success of 2019 as a foundation will now leverage a larger base from which to continue to grow, while also accelerating our integration efforts. Overall, we're still in the early innings of a very large and exciting growth opportunity and we look forward to building our commercial capabilities as a market leader in 2020 and for many years to come.
The second low capital intensity area we're pursuing is DIY. We began 2019 with the acquisition of LifeShield giving us the chassis or foundation for our growing in DIY offerings and then rebranded at this year's Consumer Electronics Show as Blue by ADT, a key early step in our DIY expansion. The DIY market is growing fast and ADT possesses the brand, expertise and scale to participate in this attractive market where we anticipate generating high returns. Along with commercial DIY will be a strategic growth opportunity growth priority for our organization.
Finally, 2019 also brought some exciting new opportunities to ADT. We acquired new technology with the I-View Now acquisition, which further -- furthers our opportunity to differentiate our monitoring via prioritized alarms for first responders. We expect the I-View Now acquisition to extend our ability in setting the standard for our professional monitoring into the future. And we expanded our consumer platform and mobile safety to include a new partnership with Lyft that is currently operating live as a pilot across 10 U.S. cities. Our partnership with Lyft we see as the first sizable proof case to leverage our brand in the nascent market of mobile safety and we're excited about the future in this space.
Overall, 2019 was a year of great progress on multiple fronts. Our best-in-class employees and dealer organization together made strong progress on our operating initiatives. We also generated significant free cash flow. We returned more than $700 million to shareholders via dividends and share repurchases, and we improved our debt structure by significantly lowering our borrowing costs and extending maturities.
In 2020, we'll continue to enhance our core residential platform and pursue more assertively related smart home opportunities. We're bullish on the Defenders acquisition as well as the benefits of our growing partnerships and investment in new technology.
In summary, we have many exciting initiatives in motion in core residential and we couldn't be more excited about the growth opportunity in commercial and DIY. We'll continue to focus on enhancing our leadership in security and automation to expand our trusted service and drive efficient growth leading to higher cash flows.
With that, I'd like to turn the call over to Jeff, who will walk us through the fourth quarter results and share our outlook for the year.
Thank you Jim and thank you everyone for joining us today. I will take a few minutes to summarize our fourth quarter results and to provide some perspective on 2020 before opening the call to questions. Overall, we had a strong fourth quarter in which we grew revenue and continue to generate strong free cash flow before special items. Our total revenue grew 10% year-over-year with 2% growth in monitoring and services revenue and 65% growth in installation and other revenue driven by commercial.
Our total commercial revenue grew by 58%, including the benefits of acquisitions. Excluding the effects of the Red Hawk acquisition and our November disposition of Canada, our total company revenue grew by approximately 6%.
Our adjusted EBITDA of $607 million was down 1%, with our sale of Canada adversely affecting year-over-year adjusted EBITDA by approximately 2%. We remain especially focused on cash generation and are pleased that we again delivered strong free cash flow, before special items, which drove full year total to $590 million, up 10% compared to 2019.
This increase was driven by reduced net subscriber acquisition spend, our full year increase in adjusted EBITDA and lower cash interest. A highlight in our cash performance was improved efficiency in net subscriber acquisition cost and we are pleased that our trailing 12-month revenue payback declined from 2.4 times to 2.3 times. This improvement was due to higher installation revenues on outright sales, reduced product cost and installation efficiencies.
Our fourth quarter net subscriber acquisition cost of $318 million was 14% lower than the prior year. We generated approximately $12 million of additions to recurring monthly revenue, or RMR, which was down 1%, excluding Canada. Our RMR balance at the end of the year was $336 million, up 2% versus the end of 2018, excluding Canada.
Turning to our capital structure. We executed several improvements during the past year and you can see our well-laddered debt maturities on slide 13 in our quarterly earnings deck. During the fourth quarter, we completed the sale of our Canadian operations for approximately CAD 700 million. Additionally, we paid a special per share dividend of $0.70 and a regular dividend of $0.035. This January we completed a new offering of second lien notes due 2028 with a 6.25% coupon, enabling us to redeem our 9.25% 2023 notes.
Also in January, as Jim mentioned, we acquired Defenders, our largest dealer. The purchase price included approximately 16 million shares of equity in cash of $260 million, which we funded partially from our revolving credit facility. We also, today, declared a fourth quarter dividend of $0.035 per share, payable on April 2 to shareholders of record on March 19.
Before addressing our preliminary outlook for 2020, I want to expand a bit on Jim's brief mention of our consumer financing program. As we have discussed during our past quarterly calls, during 2019 we piloted a consumer financing program, enabling certain customers to finance their upfront system cost via a consumer loan from a third-party bank. And in other cases, offered our customers a retail installment contract with ADT.
Based on learnings during the pilot, we modified the program as we rolled it out nationally to focus predominantly on a retail installment contract model, rather than third-party consumer loans. This approach enables us to offer our customers a seamless experience in which they need to interface only with ADT to finance their upfront system cost for up to 60 months.
We are now partnering with a large international bank to securitize these customer receivables, enabling improved economic benefits for us in a way that does not require each customer to acquire and administer an individual loan with a third party. We're excited by this program and encouraged by the early results of the first few weeks of the national launch. Over time, we expect these options will lead to higher installation revenues and more comprehensive systems.
Now I will turn to our preliminary outlook for 2020, which you can see on slide 14 of our slide deck. Our primary planning focus for 2020 is on cash generation and we expect adjusted free cash flow, before special items, to be in a range of $630 million to $670 million. As always, we will balance near-term cash generation against longer-term growth and return objectives.
We expect full year total revenue to be in a range of $5.0 billion to $5.3 billion, the midpoint of which implies an underlying growth rate of 5%, excluding the 2019 results of Canada, driven by expected continuation of growth in installation revenue, including strength in commercial along with more modest increases in monitoring and services revenue.
We expect our 2020 EBITDA to be in the range of $2.175 billion to $2.250 billion. As you consider our preliminary outlook ranges for revenue and adjusted EBITDA, I want to remind everyone that Canada represented approximately 4% of our business in 2019 prior to the sale in November.
Additionally, as we have previously shared, the acquisition of Defenders will cause certain costs that were previously capitalized as part of dealer account purchases to now be expensed in our P&L, which will meaningfully reduce our reported adjusted EBITDA.
I also want to point out one item that does not affect our cash flow, but will affect our 2020 reported revenue and adjusted EBITDA. As a reminder, ADT has historically retained ownership to most residential equipment. The Defenders model is to sell equipment outright to customers and also our pilot financing program required outright sales to enable third-party loans.
With our new securitization partnership we intend to transition the bulk of our residential business back to our historic ADT model. During the transition period, most customer additions will result in outright sales and will therefore generate installation revenues and associated costs upfront, which are recognized over time under the company-owned model.
I also want to point out that we are not providing a quantitative outlook for attrition or any other operational measures. We, of course, will continue to report attrition in conjunction with our earnings releases in the future. As we have previously discussed, we expect attrition will be modestly higher in the near term due to dealer mix dynamics and the acquisition of Defenders.
We do not manage the business to any single KPI and our focus remains on optimizing customer lifetime value more holistically. Through the coordinated management of several KPIs, including attrition, revenue payback and cost to serve, we expect to drive increased capital efficiency and improved unit economics over time.
Before turning to Q&A, I'd like to cover a few housekeeping items. First, as a reminder, we recently passed the one-year anniversary of our Red Hawk acquisition, which contributed meaningfully to 2019 revenue growth. Second, we expect to incur approximately $65 million associated with our January 2, lien notes transaction.
Additionally, due to refinancing activities, the quarterly timing of our cash interest will differ from 2019 with expected first and third quarter outflows approximately twice the size of second and fourth quarter outflows. Finally, consistent with prior years, we expect a first quarter cash outflow related to annual bonus payments.
To conclude, we are increasingly excited about our competitive positioning and our strategic initiatives that leverage our strengths and increase our capacity to generate positive free cash flow in shareholder returns. We are pleased with our 2019 financial and operational performance, and we look forward to providing further updates on our progress during 2020. Thank you again everyone for being on today's call.
We will now be happy to take questions. Operator, please open the line.
Thank you. [Operator Instructions] Our first question comes from the line of George Tong with Goldman Sachs. Please proceed with your question.
Hi. Thanks. Good afternoon. Your attrition rate increased 10 bps to 13.4% this quarter. You touched on some of the near-term impact on attrition from Defenders. Can you discuss other underlying trends you're seeing with attrition including puts and takes?
Yeah George, it's Jim. Thanks for the question. I'd tell you that most of the headwind on the attrition front tends to be from the dealer channel. We talked about that, I think on the last call and that continues to be the case. We believe that attrition going forward will be slightly higher in the near-term. And again, primarily due to the impact of the dealer channel, we've got some short-term headwinds there. The – we're optimistic about gross attrition going forward. We're confident that we can continue to manage it down over time. We talked about new tools, data analytics, voice analytics continued improvement in customer experience. So we're bullish over the long-term and some short-term headwinds principally due to dealers.
Got it. That's helpful.
George, it's Jeff. I'd add to that. We manage customer lifetime value in a holistic way. And attrition of course is, one of many measures. But just like having confidence with long-term attrition trends, we also have confidence in opportunities to acquire certain kinds of customers more efficiently and drive lifetime value that way as well.
Got it. That's helpful. You've owned Defenders now for two months. Can you comment on your ability to improve the credit quality of new subscribers after this acquisition and talk about the progress in achieving free cash flow benefits from the transaction?
Yes of course. I – so I'll give you just a little bit of context and then get to your question. We saw Defenders as an opportunistic acquisition. The owners needed to sell, Defenders was our largest dealer. And we thought no more natural owner than ADT. Financially the transaction, we think stands on its own, cash flow accretive in 2020, more so in 2021, as we realize synergies. And then many strategic and operational benefits as well. We're off to a good start. The team is engaged. We're looking at ways that we can leverage the leadership, and talent, as well as a second-to-none marketing engine. We've already implemented some changes in terms of customer acquisition process that we think over time will help us improve attrition.
Got it. Thank you.
You bet.
Our next question comes from the line of Toni Kaplan with Morgan Stanley. Please proceed with your question.
Thank you. Just on the topic of coronavirus, how shall we think about supply chain impacts and other factors? And also just from a point of view of, could you see a scenario where technicians say they won't go to people's houses or you tell them not to go? And what kind of business insurance sort of kicks in at that point? And just all the implications that we could think about in scary scenarios?
Yeah. Thanks Toni. The – so the virus to-date has had no measurable impact on our business. We're working very closely with our equipment suppliers. As you can imagine, sometimes daily working with them, to-date we've had no disruptions. We have a healthy inventory as well. It's difficult to – obviously, difficult to predict the ultimate impact of coronavirus, but we're monitoring it closely. Don't anticipate supply chain disruptions. And to-date haven't had any issues from a technician perspective in managing that side of the business.
Great. That's helpful. And then just in terms of the free cash flow guidance, it suggests an incremental $16 million at the midpoint in 2020. Can you help us with some of the puts and takes around what's lost from the Canadian divestiture? Or what's coming from Defenders? What's from commercial? SAC expectations? Just what are the drivers leading to the increase in free cash flow year-over-year? Thanks.
Thanks Toni. It's Jeff. There's a whole lot of puts and takes of course that goes into free cash flow. Just as we did in 2019, we were pleased with our performance. We intend to balance it throughout the year to optimize the balance between 2020 cash flow growth and growth in our additions and investments in our business. So the positive factors I'm not going to closely quantifying some of the positive factors implicit in our guidance is our core EBITDA and operational growth just from running the business, but we'll have some modestly lower interest expense as a result of some of our successes with the recent refinancing activities.
We'll have some near-term benefit from Defenders, which we expect to be greater as we get into the subsequent years, some near-term benefits that are somewhat hard to predict precisely but some benefits that will come from our pricing and our financial -- and our financing model along with some working capital improvement initiatives that we're working.
In the other direction, we do intend to spend a bit more on net SAC in 2020 to drive more additions. We do as you point out lose the contribution of Canada and then there'll be places where we have working capital necessary to fund growth. And then as always there's some uncertainties in cash flow that we'll manage as we work going through the year.
Thanks so much.
Our next question comes from the line of Manav Patnaik with Barclays. Proceed with your question.
Hi. This is actually Greg calling in. I was just hoping to get some further clarification on the decision to not do the third-party financing and doing your own retail financing and just some clarity on how that flows through on the P&L? And then along those same lines, how big you could imagine this financing securitization program could be, and kind of what you're thinking about for 2020 there?
Okay, Greg it's Jeff. I'll just maybe start in remind of a couple of objectives of what we're trying to accomplish here when we began piloting different tweaks to our pricing model in our offer to our customers that included financing. What we're trying to accomplish over time is more install revenue, ability to manage discounting more effectively and maybe most importantly encouraging customers and our sales force for that matter to build more comprehensive systems.
So we piloted this in a variety of different ways. We talked last year about a third-party consumer loan program. That actually worked quite well in terms of the financing part, but what we found is that it introduced some quickness with our go-to-market process in as much as the customer had to interface with two separate parties go through the credit check process ultimately would have had two builds.
And we -- through some work you came upon another idea to accomplish basically the same economic outcome, but in a way that's much more seamless and way more transparent to our customer allows the customer to only deal with a single party being ADT, single credit review process. We'll get a single bill easier to administer for our sales team. And then it gives us more flexibility with respect to the nature of offers and different configurations that we might offer over time.
So that led us to transition to this model that will be in partnership with Mizuho Bank that will have the same economic effect, actually a little bit better economic effect given a way that we will be much sooner for our customer base. And I'm going to stop short of predicting exactly how much comes from this is we're just too early still but we're encouraged by our near-term results.
Okay, fair enough. And then maybe a little color on the progress with the 3G conversions. It seemed like it was pretty much in line with what you were expecting for 2019. Just some color on how the -- how you expect that cost to ramp up and successes or lessons learned as you've kind of gone through the process the last few quarters? Thanks.
Yeah. So Greg this is Don. We've kind of gotten through most of our experimentation in 2019. The lessons that we've learned is there's opportunities both on revenue offsets as well as some technology things that can then do for commercial reasons. But we're going to approach 2020 a little bit on the high end of our $100 million to $150 million range, but that's on purpose to go in and be intentionally pragmatic and conservative and probably introduce a more proactive radio swaps as opposed to the reactive ones that we do while we're at the friend doing a service call. But we're feeling very comfortable that by the 2022 sunset, AT&T sunset we're on track.
Our next question comes from the line of Kevin McVeigh with Credit Suisse. Proceed with your question.
Hi. I wonder is there any way to think about within the context of the business, how are you thinking about kind of commercial versus DIY versus residential longer term? Just given, obviously, there's been some investment on the DIY side on the commercial and in the core business. And then just within the context of DIY, Jeff can you give us a sense of what the EBITDA impact was in 2020 from DIY overall?
Kevin, it's Jim. I'll give you a little bit of context and then ask Jeff to answer your question more directly on the impact -- EBITDA impact in 2019 for DIY. But just overall context the headline for us is we're laser-focused on capital-efficient growth.
And we're positioning the company to drive capital-efficient growth and so all of these things that you see the acquisition of Defenders, the sale of Canada, consumer financing, even the rollout of the Command panel is all with an eye towards driving capital-efficient growth.
And then this alternatives that we're developing to deploy capital whether those alternatives are partnerships or growth in our core residential business or lower capital intensity operations like -- commercial which we're exceedingly bullish on and DIY we are positioning those alternatives to be options for us to deploy capital and drive long-term cash flow.
I'll let Jeff address your question specifically on DIY.
Yes. I don't think Kevin last year we ever specifically called out the amount, but we did at the beginning of the year last year talked about we were making some investments in our business. I believe we said about $40 million of DIY was the biggest driver of that a little bit more than half of that.
And we executed in 2019 about as we had planned. And then as we go into 2020, we expect to invest similarly in DIY. The first couple of years of getting into the space is, going to largely be spending on the creation of new customers and advertising and the like with the returns to come in subsequent years.
So it's part of balancing is that describing cash flow and EBITDA for that matter balancing near-term generation of cash with investments in being to pay off over a little bit longer time horizon.
Got it. And then just maybe Jim or Jeff, you mentioned kind of more benefit from upfront installation costs in terms of revenue contribution. Is that primarily coming from the commercial initiative or residential? Or I guess just what's driving that as well?
Yes it's a combination of both Kevin. The -- we have had some success in upfront revenue in our residential business. And then some of the benefit is just as you would suspect the mix as commercial continues to grow.
Yes. And just as a reminder there too traditionally historically in our residential business the install revenue serves to reduce the amount of what effectively will be upfront subsidy that we're providing the customer whereas in the commercial business in certain cases there's positive margin even at the time of install, not in all cases but typically necessity for residential is to earn a high-margin RMR over time whereas in commercial that subsidy model does not come into place at the same extent.
Helpful. Thank you all.
Our next question comes from the line of Gary Bisbee with Bank of America. Please state the question.
Hey guys. Good afternoon. A couple of questions, but the first one, I just wanted to go back to Defenders. And I realize it's still moving around. You're finalizing the accounting. But can you give us any color on sort of financial impact? You talked about a lot of positives between lower -- more capital-efficient, customer acquisition a bunch of other things you mentioned.
But I mean should we think that this is very much on the margin at this point? Or are some of these benefits going to be noticeable in 2020? And I mean all in how is it impacting profits? Can you just give us directionally any color?
Yes. So the way to think about Defenders is, as if we acquired a sales engine. I mean that's really -- as you know what they were -- we've talked about the fact that they were about half of our dealer channel. And that means that half of our dealer channel no longer a dealer now they're direct.
So the way that this shows up in terms of generating cash flow is, we think over time the cost to acquire those accounts is going to go down because we'll have some synergies. So in the very near term the benefit is whatever product Defenders used to earn now will be in cash flow to us offset by some near-term potential disruptions that we're working through.
But in the mean -- we expect it to be cash flow positive in 2020 and more so in 2021. Part of the reason we're not sharing a specific number for Defenders is because as we integrate it, it will be difficult if not impossible to distinguish the effects of Defenders from the effects of the rest of our business.
We just expect that our average cost to acquire new accounts will go down over time. So it really shows up as lower stack as opposed to higher P&L. And in fact as we've described it actually makes the P&L look a little bit worse.
And so is it that they were acquiring customers more efficiently? Or is it their $175 million of spend in yours doing a better job as you put that together? So -- and the reason I asked that question is, the comment that it will be accretive to free cash flow in 2020, I guess that would sort of imply, either you can get some of those savings quickly or that the profit they were making stand alone before you were involved is more than the incremental interest expense and I suppose any integration costs you will take on this year to integrate the business.
I mean is that – is it more of the savings from running it better? Or is there a real profit there that will offset those two items, the interest and the integration cost to be able to make that claim that it's free cash flow.
Yes. I think that the two primary reasons Gary are essentially – and Jeff sort of alluded to this. The first is that we eliminate the dealer margin. So the difference between what we were paying them for a new customer and their cost to acquire is essentially now eliminated. And that's the first big category. And the second category has to do with precisely your point and that is marketing efficiency.
Okay. I mean can you tell us what the dealer margin was? That's ultimately I think what we're all asking about.
Yes. So the first part of that, the dealer margin part is the part that we expect to see in the near term and then the efficiencies that come from smarter marketing spend, more effective marketing spend you expect to see over time. But we haven't shared and don't plan to share exactly what that amount is other than to say it's implicit in our overall free cash flow guidance. And again, part of it is because it will go into the soup and be indistinguishable from the rest of the company over time. Or said differently we don't anticipate being able to even track it that way once we get the thing integrated.
Okay. Maybe I'll sneak in one other if I could quickly. Just – obviously, commercially you've done a terrific job growing the business and you're looking for continued very strong organic revenue growth. Can you just give us a comment on how this is impacting profitability of the company? Obviously, we know it's much lower margin. But now that you have lapped Red Hawk and are delivering this kind of attractive growth, is there a profit stream there that you're expecting to grow similarly to the double-digit organic revenue you're calling for? And sort of how meaningful is it today? Thank you.
Yes. So it for sure depresses the overall margin rate for the company. And if you do the math on the midpoint of our guide on EBITDA and revenue, you'll see that it implies the EBITDA as a percentage of revenue to go down. That's driven by the defender dynamic that we talked about. It's also driven by commercial growing at a rate that we expect is greater than the rest of the company. So absolutely there's a profit stream that has grown nicely and we expect to continue to grow in commercial that generates positive EBITDA dollars, positive cash flows but it is at a lower rate as a percentage of revenue than our underlying residential business.
And Gary just a little more context that I want to add here. I know you had a specific question about financials but I want to take an opportunity to just provide a little color on commercial. This is a return on invested capital play for us. And the excitement in – within commercial is just palpable for 2020.
We've got the Red Hawk acquisition that's gone well. Integration's on track. Our national scale and brand can continue to be a source of competitive advantage for us. Pipeline's strong. Momentum is strong. We're targeting 10% growth for this business. And continue to be just exceptionally bullish on it.
Thanks for the color.
Our next question comes from the line of Ashish Sabadra with Deutsche Bank. Please proceed with your question.
Thanks for taking my question. So just a quick follow-up questions on the financing program. How do you manage the credit risk in that model, particularly given where we are in the cycle? And how will the company reserve for future losses? Thanks.
Yes. So the way this financing program will work is we will effectively securitize the receivables with a third-party bank on a non-recourse basis. And it's maybe worth pointing out that we're not changing anything with respect to the kinds of customers that we're taking on as a result of this. So it would be a book of business pretty similar to the book of business that we've acquired.
Also somewhat not exactly your question but maybe worth mentioning too when you talk about economic cycles is traditionally our business has – and our industry for that matter has weathered through economic cycles quite well. Of course, we haven't had a significant downturn in a number of years but most of the industry data says that even in challenging economic times people tend to not cancel their systems partially because things like the threat of Prime goes up also because people tend to move less frequently in more challenging economic times. So we do believe we have some antirecessionary characteristics of our business.
That's very helpful. And maybe just a question on the industry itself. Just Amazon is moving into the professional installation channel of their Ring ex product. Any implications of those for you?
We monitor our attrition and cause for attrition closely. We haven't seen Ring or any new competitors making a meaningful impact on attrition. We can – we monitor Amazon like we monitor all of our competitors Vivint, Monitronics et cetera. And we'll remain focused on our leading position in pro install and growth opportunities within DIY. But to answer your question directly, we've not seen an impact from Amazon in our attrition data.
And that's very helpful. Thanks.
Our next question comes from the line of Seth Weber with RBC Capital Markets. Please proceed with your question.
Hey, good afternoon guys. Just wanted to circle back on an answer to the 3G expense question. It sounds like you're kind of angling towards the upper end of the $100 million to $150 million range for this year. So should we think that you'll be kind of closer to the upper end for the full program cost? I think the ranges 200 to 325. I think it was $25 million last year, so you'd be at close to $175 million already. So should we move towards the top end of that 200 to 325 range?
No, I wouldn't draw that conclusion. I -- we did change the range because we still think that's the right overall range. There's a handful of things that we expect will play out over coming months that will allow us to refine that including the effectiveness of some of the things we talked about in the past such as revenue offsets from our customers with additional participation by suppliers or others in the value chain of possible technological alternatives that could make it less expensive. So more to come, but I would say that kind of the midpoint of our range is the same as it has been.
Okay. Thanks. And then just on the Defenders deal. I mean is there -- are there any other dealers of scale out there that might be additional opportunities for ADT to kind of continue to do another one of these transactions? And I guess just conceptually, should we think about using the dealer channel less kind of going forward just strategically? Thanks.
Thanks for the question, Seth. Dealers for us are a great partner, a very complementary part of our ecosystem. We don't have a change in our strategy. We have no plans to acquire additional dealers. The Defenders acquisition was opportunistic. Defenders is really unique. The Defenders organization in and of itself was larger than the rest of all of our other dealers combined. And so no change in strategy. No current plans to acquire additional dealers.
Okay. Thank you very much.
Ladies and gentlemen, we have time for one more question. Our final question comes from the line of Jeff Kessler with Imperial Capital. Please proceed with your question.
Well thank you I got in it here. I have time for -- I have 1.5 more questions. The first question is, can you go through more of I'm going to call day-to-day what actually happens? When somebody takes out, when you do the financing process with somebody on the equipment if you go through -- if you go through getting -- who sells it? Does the installation time change at all? How does your bill pop up? And at the end of the period, who owns -- who gets to own the equipment? Stuff like that?
Jeff, I would encourage you to order yourself and you can try this for yourself. But I think what you would find is that the process works really no different. So it's the same sales modes. You could be initiated over the phone. You could be initiated by a field sales rep. Part of the reason that we moved to this model that I described is because it made it way more transparent to the customer. So the way the customer would experience it would be similar to previous except that our salespeople would talk about things in terms of a cost per month.
In many cases, particularly when trying to describe additional features and capabilities to a customer and you can talk about "Hey would you like a cross door opener and an extra camera and maybe a thermostat? That would be $3 a month. Is that something that I can interest you in?" So that tool and the toolkit didn't exist previously. And that is the biggest change. The customer's bill would reflect a fee for the monthly monitoring and also a fee associated with the installment, but largely transparent to the customer.
Okay. And the second let's see my last half question is on the commercial business. Could you please go through look please go through what parts of commercial are you seeing as strong and is continuing to be strong? Or what parts of commercial are you beginning to develop? What parts of commercial are developing headwinds?
Hi. Jeff, we're hitting cylinders on all -- we're hitting all the cylinders in the commercial business. National accounts is doing well. Our core commercial is doing well. The Red Hawk acquisition is coming along nicely. As you can read, we concluded the year with 16% organic growth, put up 18% organic growth in the fourth quarter and continue to feel bullish about the business. The short answer to your question is, hitting on all cylinders.
All right. Well, thank you for taking my questions. I appreciate it.
Thanks, Jeff.
Thanks, Jeff.
We have reached the end of our question-and-answer session and I would like to turn the call back over to Mr. Jim DeVries for any closing remarks.
Thanks, Kevin. And as always, I'm deeply appreciative of the dedication and the ongoing efforts of our ADT colleagues and our dealer partners. I'd also like to once again extend a warm welcome to our associates from Defenders. We've made great progress on many fronts in 2019. We're excited about the growth drivers we see for our business going forward. Thanks, again, for being on the call. We look forward to updating you throughout the year. Have a good evening, everyone.
This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.