ADT Inc

NYSE:ADT

Earnings Call Transcript 2020-Q4

[Operator]

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the ADT Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]

I will now turn the conference over to your host, Derek Fiebig, Vice President, Investor Relations for ADT. Thank you. You may begin.

[Derek Fiebig, Vice President, IR]

Thank you, Operator, and thank you, everyone, for joining ADT's Fourth Quarter 2020 Earnings Conference Call. This afternoon we issued a press release and slide presentation of our financial results. 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 Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such forward-looking statement. 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 time they are made 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 historical and forward-looking non-GAAP financial measures include special items, which are difficult to predict and/or mainly dependent upon future uncertainties. For a complete reconciliation of historical non-GAAP to the most comparable GAAP financial measures, please refer to our press release issued this afternoon and our slide presentation, both of which are available on our website.

With me on today's call are: ADT's President and CEO, Jim DeVries; and our CFO, Jeff Likosar. Also joining us in the room and available for Q&A is 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.

[Jim DeVries, President and CEO]

Thanks, Derek, and thank you to everyone for joining us today. I'd like to begin our first call of 2021 with some comments reflecting on our 2020 overall performance, and then share some thoughts regarding our new partnerships and current growth momentum. Finally, I'll offer some perspective on ADT's priorities as we advance into 2021. I'll then ask Jeff to cover our financial results, as well as our 2021 outlook.

With the world [indiscernible] into an unexpected pandemic, 2020 was an extraordinarily challenging year for so many and impacted everyone's lives in different ways. There was also a year which brought us at ADT the gift of perspective. We were reminded more than ever of the importance of protecting one's home and family. For all of us at ADT, 2020 brought a new-found appreciation for the essential role we play partnering with first responders and serving our customers and communities continuously and reliably.

After witnessing the tremendous collaborative efforts of our team during the past year,. I'm humbled to be able to lead such a great organization and couldn't possibly be more proud of the collective performance of our more than 20,000 ADT associates and our dealer partners.

During our first call last year on March 5, prior to the impact of the pandemic even being understood, ADT provided our full-year 2020 financial outlook. Our guide was $5 billion to $5.3 billion to revenue, $2.175 billion to $2.25 billion for adjusted EBITDA, and $630 million to $670 million for adjusted free cash flow. Because of the resiliency of ADT's business model and the outstanding performance of our team and despite the challenges and volatility of the economy, we exceeded the upper range of our revenue, delivered in-range on adjusted EBITDA and performed just above range on adjusted free cash flow.

As I will explain, we also set the table for accelerating our growth and continuing momentum going into 2021. Further, in 2020, we grew our net subscribers for the full year. Our new U.S. RMR additions started off solid in Q1 at plus 7%, but then in Q2 were down 11% as most of the country began shutting down. However, we continue to drive sustainable internal improvements to our subscriber acquisition engine. This efficiency contributed to not only favorable results with the positive momentum for our business, especially when combined with secular trend and external demand catalysts such as new household formation, deorganization, the desire for increased home security, the acceleration of smart home adaption and growing consumer spending on home improvement more generally.

U.S. RMR additions increased year-over-year 10% in the third quarter and 15% in the fourth quarter. Further, our interactive take rate increased to 86% and we reached the milestone of 3 million residential interactive customers. And just this month, ADT added our one-millionth customer on the Command platform. As we've mentioned in the past, our DIY business continues to grow nicely as well and we're excited about this complementary part of our business.

We remain anchored to capital-efficient growth and the cost of acquiring subscribers also improved with a record-best revenue payback of 2.2 years. This efficiency was driven by our successful consumer pricing and financing initiative, as well as benefits from the Defenders acquisition. Exceeding our expectations, our gross attrition metric improved by 30 basis points to 13.1% as relocations across the country were less common than normal in the second and third quarters and importantly, our customer satisfaction was strong.

We also delivered on our commitment to drive strategic partnerships and alliances, to expand our reach and offerings and ultimately to better serve our customers on the residential front, we entered into a long-term relationship with DR Horton, the nation's largest homebuilder and in mobile, we introduced ADT to a broader set of potential customers through the national rollout of our partnerships with Lyft and Instacart. Certainly our most transformative partnership with 2020 was with Google. ADT's long-term strategic relationship with Google significantly enhances our growth opportunities. The foundation for our partnership is a shared vision for the future of the smart and helpful home and a steadfast commitment to our customers.

As a reminder, Google invested $450 million of equity in ADT and its committed $150 million in matching dollars to fund marketing, product development and employee training. Our partnership facilitates the development of new offerings both services and products as well as new technologies, which will power ADT's leadership and our rapidly growing smart home market.

I'm pleased to share that our partnership with Google is off to a tremendous start. We'll be rolling out product integration beginning in the second quarter and we're on track to introduce a first generation ADT plus Google solution in the second half of this year. Finally, ADT and Google have agreed on an exciting new joint go-to-market branding strategy, which we'll share later in the year.

Summarizing a unique and unexpected 2020, we purposely and strategically played the long game and will continue to do so. ADT navigated amid the pandemic with resilience and as a whole avoided any material adverse business impacts, while building a strong foundation for growth in the years ahead. We committed to persevere through the COVID-19 crisis with a goal to ultimately become a stronger company and we've done so. Our momentum going into 2021 is real and I'm excited to share a few comments about the year to come.

We've invested a significant amount of time over the last few years improving our operating KPIs, driving improvements in customer service, better operating metrics, improved efficiencies and field performance. Having made substantial progress in many areas, we begin to focus our improved internal growth type capabilities and the pursuit of strategic alliances and partnerships. As mentioned, we developed a relationship with DR Horton and more recently with Google as a catalyst, we've added new partners such as Ackerman Security and DISH.

Ackerman, a successful company over many years with customers in the southeast part of the country, Atlanta in particular will join forces with ADT as a new residential dealer. Ackerman also provides ADT with some commercial assets. The strategic partnership with DISH expands our total addressable market to additional ex-urban and more rural geographies of the country. Many of the DISH technician have experience with the installation of Google products and will be a great asset for ADT as we grow. Our operating improvements, the partnerships we've developed and will continue to pursue the many macro tailwinds and demand catalysts are all converging as we focus more intently on allocating capital to the best array of growth opportunities we are now presented with.

2021 represents an exciting pivot point for ADT we'll leverage our strengths, our trusted brand, our operating excellence, our outstanding customer service, our talented field force, our national scale and our capital efficiency to lean further into high return growth opportunities before us. With these in mind. I'd like to provide three markers to evaluate our progress in 2021. First will be the continued growth and RMR additions. After a strong 2020, we're targeting 2021 growth rate in RMR additions in the mid-teens. As such, you will see a higher aggregate dollar level of SAC investment which we're allocating towards this high-return growth. We'll continue to be disciplined in our approach with high credit standards and will remain focused on efficient SAC investments with high IRRs in the high-teens and above.

Keeping these high ROI standards, we plan to deploy between $150 million and $250 million of incremental residential SAC in 2021 versus 2020. Second, we will drive innovation, highlighted with the launch of the first generation ADT plus Google Smart Home solution during the second half of the year. We will also invest significantly in our next generation end-to-end ADT owned technology platform and continue to pursue meaningful partnerships in mobile safety. Third, while COVID-19 and its continuing impact provide some uncertainty, we expect to return to low double-digit revenue growth and substantial year-over-year improvement in profitability levels for commercial customers during the course of the year. Our early optimism is heightened because of the backlog of commercial customers was actually higher at the end of 2020 than the prior year and the pipeline for new business is healthy. We have an outstanding leadership team in commercial and we're very excited about this part of our business.

In summary, our current momentum is strong and we are encouraged about our future. 2021 is positioned to be an exciting year for ADT, one where our growth is more significant than in the past and we're investments executed well will result in attractive sustainable growth for years to come.

I'll now hand the call over to Jeff. Jeff?

[Jeff Likosar, Chief Financial Officer]

Thanks, Jim, and thank you, everyone, for joining our call this evening. As Jim described, we performed very well in a highly unusual 2020 environment. Like most companies, we encounter many unexpected dynamics and we are very pleased that we were able to execute on opportunity to offset several of the unplanned challenges we faced. More importantly, we maintain our long-term focus and continued our strategic progress and are especially encouraged by the trends we saw in the second half of the year into 2021.

As a reminder, during 2018 in 2019, our priority centered on enhancing our service culture, improving our operations and expanding our cash generation capabilities. More recently, we are focused on strengthening our foundation and executing initiatives to drive efficient sustainable growth in addition to recurring monthly revenue or RMR. We are pleased with the progress we saw during the second half of 2020 with U.S. RMR additions up 12% following a 3% first half decline driven by challenges arising from the COVID-19 pandemic on a full year basis, U.S. RMR ads grew by 5%.

We concurrently grew our full year adjusted free cash flow by 14% to $675 million. By comparison and as evidence of our cumulative progress in recent years, adjusted free cash flow in 2017, the year prior to our IPO were over $400 million.

As Jim mentioned, other full-year 2020 highlights include gross revenue attrition at 13.1%, down from 13.4% in 2019 and significantly below the 16 plus percent attrition for legacy ADT prior to the Apollo acquisition. In revenue payback at a record 2.2x in 2020 compares to 2.3x in 2019 and 2.7x on a pro forma basis in 2015. As a reminder, some of our core financial measures were affected by the disposition of our Canadian operations in 2019 in the acquisition of Defenders in early 2020. Despite the favorable economics, these transactions reduced our adjusted EBITDA, which was $533 million in the 4th quarter of 2020 and just under $2.2 billion for the full year.

Our total year 2020 revenue was $5.315 billion, up 4% driven by growth in installation revenue primarily due to a higher volume of outright sales transactions to residential customers, which includes volume from the Defenders' acquisition. This increase was partially offset by lower sales to commercial customers, which while down for the year due to COVID-19 improved sequentially in the third and fourth quarters.

For the fourth quarter, total revenue was $1.315 billion, up 1% versus 2019 despite the effect of the Canadian disposition and lower sales to commercial customers. The strong 2020 adjusted free cash flow I already mentioned, up 14% was a result of several factors including some offsetting dynamics related to COVID-19. A key contributor was efficiency in net subscriber acquisition cost or SAC which was down year-over-year despite our growth in RMR ads.

Other noteworthy items affecting cash flow included our participation in the CARES Act, Payroll Tax Deferral program and the offsetting acceleration of a portion of 2020 annual incentive plan payments. In addition to strong cash generation, we built on our 2019 refinancing transactions to further improve our capital structure during 2020. In January of 2020 we refinanced our second lien notes. In August, we replaced our 2021 first-lien notes with new 2027 notes. In December, we repaid $300 million of our term loan, which we then repriced in January of 2021. Our resulting lower borrowing costs and extended maturities provide us with greater flexibility to deploy capital to high return growth opportunities.

In 2021, we are eager to build on our substantial progress from the past several years. We've strengthened our business fundamentals, enhanced our service culture, run our cash generation capability, improved our capital structure and develop new and more efficient routes to market. We are enthusiastic and optimistic about our future and you can see on Page 8 in our deck a summarized framework of our strategic priorities.

The next chapter for our company is focused on driving more RMR growth creating new innovative offerings further enhancing our overall customer experience, and continuing our commitment to generating shareholder returns. We plan to share more detail on our long-term strategic plans and objectives including our ADT Google branding and products during Investor Day later in the year. Our teams across the business are energized by our strategy and our growth prospects for 2021 and into the future.

As Jim mentioned, we anticipate 2021 RMR additions in the mid-teens, which reflects a significant increase from our growth rates during the past few years. We are also investing to support our strategy with our new interactive platform, the development of new offerings in collaboration with Google, upgrades to our infrastructure in the lots of ADT-Google marketing program. We can see our results in 2021 financial outlook in our Investor Day. That includes total revenue in the range of $5.05 billion to $5.25 billion, adjusted EBITDA in the range of $2.1 billion to $2.2 billion and adjusted free cash flow in the range of $450 million to $550 million.

While many factors affect our cash flow, inflicted in our guidance is $150 million to $250 million higher cash SAC spending in support of the strong RMR growth I just mentioned. As a reminder, our reported revenue and adjusted EBITDA are affected by the Defender's acquisition and the different accounting policies applicable to accounts generated via different channels and under different ownership models. These different accounting policies did not affect cash flows and we describe more detail in our Investor deck in 10-K.

As you can tell from our 2020 progress and our 2021 outlook, we are well positioned to capitalize on our improved capabilities in several favorable secular trends. Our focus is decidedly long term, the long game Jim mentioned and our teams have never been more excited by our future.

Before concluding my comments I want to express my appreciation for our more than 20,000 employees, our dealers in growing with the partners and our investors for the continued support of our company. Thank you everyone for joining our call today.

Operator, please, now open the line for questions.

[Operator]

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Peter Christiansen with Citi.

[Peter Christiansen, Citi]

Good evening, gentlemen. Thanks for the question and nice execution in a tough year. Jim, it's really good to see you guys in a position to up the offense in 2021. That makes a ton of sense, but I want to dig a little bit into the cadence on how you're thinking about the incremental SAC throughout the year and introducing new products, particularly the next phase of Google. Is that something that you kind of save your powder [ph] for a little bit and then act a little bit more aggressively once that comes out? And as a quick follow-up, it sounds to me that this joint product could have a much higher value proposition for the customer. So is there any preliminary thoughts on pricing and relative to the current interactive offering that you guys provided in the residential side? Thanks again.

[Jim DeVries, President and CEO]

Yes. Thanks, Pete. So, I'll give a little bit of context to the pivot to growth and then ask Jeff to address your question in a little more detailed way. Much of the last several years, Pete, we've been focused on operational excellence. Our retention improved 300 basis points, customer satisfaction improvement as you're aware, better operating KPIs across the board, revenue paybacks come down 2.7 to 2.2 years and and at the same time as we're getting our operational house in order, we have macro trends and the demand catalysts that we've been talking about and in discussing is tailwinds are essentially our products, we see our products and services are in demand. And then in addition to getting our operational house in order and the macro tailwinds, we have worked really hard on building strategic relationships. It's a long list -- DR Horton, DISH, Ackerman, some relationships in the insurance space, and when you combine all those factors, operational excellence macro trends, new partnerships and now Google, we're able to allocate capital to high return growth and pivot more assertively to capital efficient growth. Jeff, do you want to add some?

[Jeff Likosar, Chief Financial Officer]

Yes. I'll just add that that it's energizing for the whole organization to be in a growth mode, so there's a lot of enthusiasm across the company -- a lot of fun. Your specific question about about the cadence, the comparisons will be odd, because last year was odd. So the second quarter of course, was the most depressed quarter, so the compares are easy. The Ackerman alliance with an initial account purchases from that agreement will be helpful in the first quarter. But a way I would think about it is our pace of ads has are our piece of SAC.

[Operator]

This does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.