ADT Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 10 speakers on the call.

Operator

Good morning. Thank you for attending today's ADT Third Quarter 2023 Earnings Call. My name is Jennifer, and I'll be your moderator today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference I would now like to pass the conference to our host, Elizabeth Landers with Investor Relations.

Operator

You may proceed.

Speaker 1

Thanks, operator, and good morning, everyone. We appreciate you joining today's call to discuss ADT's Q3 2023 results. Speaking on today's call will be ADT's Chairman, President and CEO, Jim DeVries and our EDP and CFO, Ken Purpura. Following the prepared remarks, we'll take analyst questions. Also joining us for Q and A are Don Young, EDP and Chief Operating Officer and Wayne Thorson, EDP and Chief Business Officer.

Speaker 1

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. Before we begin, I'd like to remind everyone that as of the Q3 of 2023, the commercial business is being reported as discontinued operations. Financials and metrics for current and historical periods discussed on this call will be for continuing operations except for cash flows, which include amounts related to the commercial business through the date of sale.

Speaker 1

Today's remarks also include forward looking statements that represent our beliefs or expectations about future events. These forward looking statements are subject to risks and uncertainties that cause actual results to differ materially. Some of the factors that may cause differences are described in our SEC filings. We will also discuss non GAAP financial measures on the call. The most directly comparable GAAP measures, along with a reconciliation to those measures, Can be found in our earnings presentation on ADT's Investor Relations website.

Speaker 1

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

Speaker 2

Thanks, Elizabeth. Good morning, and thank you to everyone for joining us today. I'll begin our Q3 call with an update on ADT's business portfolio, Share how we continue to sharpen our focus for the path ahead, and I'll wrap with our Q3 performance. I'll then turn our call over to Ken Popora, our CFO for details on our Q3 financial results, more on our commercial divestiture And ADT's 2023 outlook. 2023 is proving to be a pivotal year for ADT as we fine tune our portfolio and streamline our business.

Speaker 2

Our focus remains on growth catalysts, reducing our overhead costs and strengthening our balance sheet. Going forward, our team will focus on the future of our core cash flowing consumer businesses with emphasis on the optimal allocation of capital between growth, debt reduction and returns to shareholders. Related to growth, We'll remain primarily focused on organic, but we'll continue to keep an eye on inorganic opportunities Within our core smart home business, which have the potential to increase market share and efficiencies, I'd like to briefly share 4 updates, which underscore our continued commitment to unlocking shareholder value. 1st, As planned, we formally closed on ADT's commercial divestiture since we last spoke, immediately unlocking a significant amount of value While positioning us to focus on the continued strength and opportunity in our core consumer business, As previously announced, the transaction successfully closed on October 2 for a purchase price of just over $1,600,000,000 Or 11.2 times EBITDA. 2nd, we've taken decisive action to streamline the solar business.

Speaker 2

We're restructuring our solar footprint by aggressively rationalizing the infrastructure and overhead to improve profitability. I'll share more on this in

Speaker 3

a moment.

Speaker 2

3rd, we continue to focus on operating efficiencies through cost reduction in our business. Last quarter, we highlighted that we had identified $75,000,000 of costs to be eliminated this year. We have further identified an additional $10,000,000 of savings for a total of $85,000,000 of costs structurally reduced in our system. We foresee the run rate of these cost savings to be impactful to full year 2024 in the amount of over $100,000,000 A significant wind at our backs. And finally, we are reducing our debt using both net Proceeds of $1,500,000,000 from our commercial transaction and an additional $300,000,000 From cash on hand to end the year at an expected net leverage ratio continuing the downward trend Approaching three times, the successful execution of these strategies has enabled ADT to be more nimble To the larger macroeconomic environment as it continues to unfold this year.

Speaker 2

The residential and small business security and smart home market of our sales channels to include convenient e commerce options in addition to our exceptional in home consultation. We have reevaluated and are innovating the way we offer and bundle products, service and the related pricing alternatives, Which we will continue to position us as the preferred provider for even more consumers who are seeking the peace of mind and convenience of ADT Home Security. And while higher mortgage rates have caused many homeowners to delay relocating, Which historically would be a catalyst for new customers, we have actually benefited with continued high retention in our existing customer base And are focused on providing incremental security and smart home offerings to these customers. Our teams are working to deliver new technologies And product offerings in the coming months. Longer term, we feel confident that household formation driven by the Continued wave of millennials and Gen Z generations will support the need and desire for a safe and tech enabled living experience.

Speaker 2

These consumers have grown up with the technology and smart living devices at their fingertips. So it is second nature for them to expect to live in a smart and secure home. There are several catalysts supporting our objective Of being the premier provider of smart home solutions. First, we are delivering on our innovation and product offering With the development of our ADT plus platform and smart monitoring, which we believe will emerge as unique differentiators, Our controlled launch of this product will begin later this quarter. Developing our own platform lays the foundation for future innovation is helping improve our product offering, expanding our share of wallet and driving the increase in the number of smart home devices per home.

Speaker 2

Larger, more connected home systems translate to higher device tape rates and help to increase our installation revenue, Which remains approximately $1400 per home. We also continue to see attachment rates On Nest doorbells of approximately 50% and video take rates remain impressive And our integrated experience through ADT plus for new DIY customers. While early, the ADT plus app ratings And the iOS App Store achieved an admirable 4.8 stars. As a reminder, the record revenue Payback and attrition measures we're delivering have a strong correlation to the unlock provided by our upsell of these devices, Producing higher customer RPUs and leading to greater and more frequent system usage and customer stickiness for many years ahead. Our offer for State Farm Homeowners continues to ramp and has just recently expanded to 13 states, Which is ahead of our expected schedule.

Speaker 2

Though still early to extrapolate, we're seeing positive trends and very high customer satisfaction. We've used the first few markets to test and learn different offers and buy flow approaches and we continue to optimize opportunities With our State Farm colleagues, one of the early proof points, which is central to our thesis is ADT's ability to self customers to a more robust system. We're pleased to see approximately 2 thirds of the customers transacting Our purchasing additional hardware and services packages. As mentioned earlier, I'd now like to circle back to the solar portfolio update. We have been disappointed by our solar performance, which has not lived up to our expectations.

Speaker 2

In addition in navigating our operating challenges, The solar industry itself continues to see pressure from higher interest rates, which is impacting consumer behavior and lender practices. To address and navigate this changing solar landscape, we take an action to streamline the business, Focusing on our top performing markets and rationalizing the infrastructure and overhead of the business accordingly. As part of this plan, we are taking immediate steps to restructure our solar footprint. We will be reducing from 38 branches in 20 States to 16 branches in 9 states with the remaining branches representing approximately 70% of our current revenue. In these remaining higher performing geographies, we are expanding our product offering to include 3rd party owned or leased systems.

Speaker 2

This offering helps us to more effectively compete in these markets. The launch of our leased product in mid October has been encouraging, Albeit with a small sample size, we're seeing 3rd party owned product share of over 50% in several states With some promising incrementality, we expect the financial impact of these restructuring actions to be sizable And beneficial to overall financial results, we expect solar cash flows to show considerable improvement in the first half of twenty twenty four And to turn positive in the second half. We just announced these changes internally as well as to our supply chain partners. We remain attracted to the solar space, which we estimate growing at approximately 8% annually. However, we plan to evaluate our performance, in particular the results of the lease offering and the success of the branch restructuring In Q1 of next year.

Speaker 2

At that time, we'll be evaluating our path forward, including strategic alternatives available. Finally, I'd like to turn to our Q3 financials. We continue to post very solid performance in our core business with year over year growth and adjusted free cash flow, including interest swaps of 20% for the Quarter and over 50% year to date, while growing our ending recurring monthly revenue book by 3%. Total revenue was approximately $1,200,000,000 with revenue in Consumer and Small Business increasing by 6%. Adjusted EBITDA was flat year over year with CSP up 6% in line with the revenue growth in the segment.

Speaker 2

Our year to date adjusted EPS was $0.25 more than double versus prior year, Continuing our trend of positive adjusted net income each quarter since over a year ago. We ended the quarter With a record recurring monthly revenue or RMR balance of $350,000,000 our revenue payback now stands at a record low of 2 years down from 2.2 years a year ago with gross attrition remaining at 12.9%. In summary, we continue to make progress in streamlining and focusing our business model and capital structure with our industry leading scale, Brand recognition and premium customer experience, held tailing with a strong balance sheet and strong cash flow, We continue to feel bullish about the future of ADT. All of this is driven by ADT's dedicated and determined team of associates and partners Who work with great purpose to keep customers happy, healthy and safe, so a sincere thank you to everyone. I'll now turn the call over to our CFO, Ken Popora.

Speaker 4

Thank you, Jim, and thanks to everyone for joining our call today. I'll first focus on our Q3 financial performance, then provide an update on the recent and exciting balance sheet improvements, and finally provide an updated guidance range As Jim mentioned, we closed on the commercial business divestiture on October 2nd, and consequently I've recast our historical financials to reflect this business unit as discontinued operations in our Q3 as well as historically. As we discuss the business, we will primarily be referring to the continuing operations of the company unless otherwise noted. Total company revenue was $1,200,000,000 for the quarter And recurring monthly revenue or RMR from our subscriber base was up 3% year over year to 350,000,000 A record for CSB and an outcome of our strong customer retention and higher average pricing. Within the growing RMR balance, Gross attrition remained at 12.9%.

Speaker 4

Adjusted EBITDA was $583,000,000 flat versus prior year With very solid margin in CSV of approximately 53%, offsetting some of the operating losses from our solar business. Adjusted net income for the quarter was $69,000,000 or $0.08 per share. We hit the inflection point on adjusted net income 5 quarters ago and look forward to remaining in the black. Adjusted free cash flow, including interest swaps, was 171,000,000 Up 20% in the quarter versus prior year. Year to date, the same measure is up 56% to $408,000,000 on growth in adjusted EBITDA, Improved SAC efficiency and lower growth investment in gross adds.

Speaker 4

The use of proceeds from the sale of our commercial business has accelerated our debt reduction With our net leverage ratio now at 3.3 times, we were pleased to receive a corporate credit rating upgrade by Moody's After a similar positive upgrade by S and P earlier this year, as Jim mentioned, we anticipate the net leverage ratio continuing to decrease towards 3 times or below. Shifting to segment highlights for the quarter, our Consumer and Small Business or CSB segment delivered total revenue of $1,200,000,000 in the 3rd quarter, Up 6% versus prior year. CSB adjusted EBITDA increased by about $34,000,000 or 6% for the quarter, Driven by increased revenue, aggressive cost fitness and eradication, continued virtual service adoption and receipt of Google Success Funds. Demand for Google Nest products remains strong, which has accelerated our stack efficiency and is driving a record revenue payback of 2 years within CSB, An improvement from 2.2 years just a year ago. At our Investor Day back in March of 2022, we shared our goal of achieving a revenue payback of 2 years or below by 2025.

Speaker 4

We're extremely proud to achieve this metric well ahead of that stated goal, which is helping to accelerate our cash flow results. Even with the macro backdrop, customers continue to choose larger, more connected home systems, which translates to higher device take rates to help to increase our insulation Revenue per home. We're also seeing strong customer support for ADT's self set up launched earlier this year, which integrates our internally developed ADT Plus app With Google's Nest products. We continue to drive awareness of these products through our marketing campaigns, which is being partially funded by Google Success Funds. This year, we have received $40,000,000 and are working to collectively unlock the next tranche of the Success Fund.

Speaker 4

We expect our Google partnership to accelerate even more With our integrated Pro Install solution, which is on track for a phased rollout to begin this quarter. We are making great progress on our cost efficiency efforts And are on track to achieve $85,000,000 in cost reductions this year, surpassing the $75,000,000 goal mentioned last quarter. In addition to those cost reduction efforts, We continue to see benefits from the ADT Virtual Assistance Program, which continues to drive high levels of customer satisfaction with roughly 50% of all service tickets Currently being satisfied virtually. We achieved a new milestone in August with over 100,000 virtual jobs closed in the month. And since the program launch in July of 2021, we have now completed more than 1,900,000 service inquiries Virtually.

Speaker 4

To increase ROIs and customer experience, we also rolled out the ADT WiFi Fix app through this virtual assistance program. This tool allows our customer service agents to diagnose and address any Wi Fi issues impacting customers' ADT equipment or other devices. As Jim addressed, our solar segment continues to face pressures and we are taking decisive action to streamline the business. In the 3rd quarter, ADT Solar posted revenue of $58,000,000 with an adjusted EBITDA loss of $41,000,000 Through the reduced geographic footprint and customer acquisition cost reduction, We're removing more than $80,000,000 of annualized costs from the solar business. In the quarter, we took a non cash goodwill charge of $88,000,000 associated with the solar segment, Which eliminates the remaining goodwill balance.

Speaker 4

This charge was a result of continued challenges for our solar business and continued deterioration of macroeconomic and industry conditions And has been excluded from adjusted EBITDA. Turning to balance sheet and cash flow. As I briefly mentioned, adjusted free cash flow, including interest swaps, Which includes discontinued operations was $171,000,000 up 20% in the quarter versus prior year, driven by increased CSB operating profitability And improvement in SAC efficiency from the record low revenue payback. We used proceeds from the commercial divestiture to quickly and efficiently accelerate our debt reduction goals. For this reason, we are reiterating that we do not foresee a change in cash flow post the commercial divestiture given the dramatic reduction of our interest cost.

Speaker 4

As a reminder, our debt is now fully fixed until 2026 as a result of our timely interest rate swaps. The primary benefit of these swaps are reported in the financing section of our cash flow statement. This is why we focus on free cash flow including the swap impacts. Year to date, we redeemed approximately $1,500,000,000 of debt. These actions have reduced our current net leverage ratio to 3.3 times on a trailing basis, Down from 3.9 times at the end of 2022.

Speaker 4

Furthermore, with 2 rating agency upgrades at our backs, We entered the financing markets to refinance and extend the maturity of our approximately $1,400,000,000 Term Loan B from a 2026 maturity 2,030. Not only were we able to reduce our borrowing costs, we now have no significant debt maturities for several years. Additionally, we have notified debt holders that we intend to pay down an additional $500,000,000 of our April 2024 debt maturities by this year end, Bringing our total 2023 debt reduction to approximately $2,000,000,000 With these significant balance sheet initiatives, You will benefit in 2024 from a reduction in interest expense by over $110,000,000 Our average cost of debt is approximately 5% until 2026. After using proceeds from our commercial divestiture to significantly pay down debt and line of sight excess capital to deploy, Our capital allocation priorities are as follows: 1st, funding growth and CapEx to yield attractive returns 2nd, continuing to pay down additional debt and achieve an optimal net leverage ratio. And finally, exploring capital deployment alternatives Such as dividend policy and stock repurchase with the objective of maximizing shareholder returns.

Speaker 4

I'll close with our outlook for the remainder of the year. Today, we are providing updated full year guidance to reflect the sale of our commercial business as well as updating for operating performance, The timing of our related interest savings and certain accounting adjustments, specifically reallocated costs, items that did not qualify for discontinued operations, It is expected to have a modest one time negative impact in 2023. On the revenue front, due to solar underperformance primarily offset by the strength in our core business, We now expect total revenue to range from $4,950,000,000 to $5,150,000,000 This range implies a full year growth rate for CSB of 7% At the midpoint, we expect an adjusted EBITDA range of $2,350,000,000 to $2,400,000,000 This range implies a full year growth rate in CSP of 8% at the midpoint, Reflecting our ongoing cost management and efficiency efforts. We are forecasting adjusted earnings per share of $0.40 to $0.45 for the year Versus $0.19 for 2022. We also expect adjusted free cash flow of $525,000,000 to 575,000,000 And adjusted free cash flow including the benefit of interest rate swaps is expected to be $600,000,000 to $650,000,000 or growth of approximately 16% at the midpoint.

Speaker 4

Remember these cash flow measures unlike our revenue, adjusted EBITDA and adjusted earnings per share guidance include cash from the commercial segment through the date of sale. As we look forward, given the acceleration of our balance sheet improvement and cash flow characteristics of our business, we expect to be in a healthy position to both invest in the future And grow our business as well as have incremental capital to allocate prudently to maximize shareholder value. I'll now turn it back to Jim for some closing comments.

Speaker 2

Thanks, Ken. I'd like to close our opening remarks by reiterating ADT's investment proposition through our medium term target framework, Including revenue growth in line with market growth with mix adjusted for our lines of businesses, Adjusted EBITDA and adjusted free cash flow growth exceeding revenue growth, internal rate of return for new CSV subscribers A 20% plus net leverage ratio less than 3 times and annual adjusted free cash flow with interest swaps of approximately $1,000,000,000 by the end of 2025. Operator, please open up the call for questions. Thank

Speaker 3

you. Thank

Operator

Our first question comes from the line of Peter Christiansen with Citi. Your line is now open.

Speaker 3

Thank you. Good morning. Thanks for the question. Tim, I wanted to dig a little bit more Into the solar business a bit here, I mean considering there's likely been a lot of rationalization industry wide In an industry that we know is quite fragmented, just curious of what your thoughts on what could the ADT's relative Competitive position even with this downsizing if things were to normalize, I would imagine You and some of the larger players would be in a position of strength if we were to see solar demand come back. Just curious on your thoughts there.

Speaker 5

Good morning Pete and thanks for the question. Absolutely, I think There's going to be some industry consolidation. The ability to withstand a tough market, We think is improved by going slow now to go fast later. As we said on the call, we have a pretty major restructuring going from 38 or 39 branches down to 16. But not unimportantly, those 16 branches represent 70% of our revenue.

Speaker 5

And we've been hurt like Others because of interest rates and the loan product. And now that we have the TPO, the lease product, We're watching the results closely, Pete. That's the partnership that we have with SunPower. So our plan is to execute the restructuring, focus very closely on TPO We focus very closely on TPO sales and our ability to get the sales Turned on again and we'll review this as a team in Q1 and figure out the path from there.

Speaker 3

No, that makes a lot of sense. I just want to follow-up with, I guess, the initial rationalization for the Sunpro acquisition was cross sell certainly. And on paper, it certainly seems like The cross sell opportunity was interesting and certainly a great opportunity. Just curious, I mean, granted we've been in a very tough market for this business. Just curious if you've seen any evidence to the contrary That goes against that cross sell pieces.

Speaker 5

Yes, it's a little bit difficult to tell because the product that we had This year and the back half of last year was a loan product. And we bought a company, we acquired a company that was Either loan or cash, interest rates are give or take double what they were at the time of acquisition. So it's been a little bit Tough to test the thesis, Pete, because the product wasn't built for this kind of interest rate environment. A loan product just doesn't pencil out. And when you're looking at Payback periods of 8 or 9 or 10 years or longer, whether cross sell works or not is just super difficult To determine.

Speaker 5

So we're going to get some better swings at the bat with the TPO product and get some insight into the deal thesis So around cross sell, I'll quickly mention a second aspect of the deal thesis was our ability to leverage the ADT brand. Essentially, if customers trust us for smart home, will they also trust us for smart energy? And I'd say on that front, we're feeling pretty good, Especially as consolidation occurs and the brand is of more value on a national basis.

Speaker 3

Thanks, Jim. That's super helpful. Just one last housekeeping item and congrats again on the sale of the commercial business Certainly an attractive multiple. Ken, I was just curious, should we expect any type of impact to working capital With the removal of the commercial business up or down, just curious there. Thank you.

Speaker 6

Nothing significant, Pete. As we mentioned, the interest savings that we're receiving, we had $110,000,000 of savings Anticipate in 2024. So overall, the other cash flows that we release with the divestiture get equal to or more than With the interest savings, so within that on the working capital front, pretty immaterial, Pete. So we look forward to essentially the same cash flow that we had prior to the deal, Given the significant interest savings that we're we'll start we'll actually have started on October 2nd.

Speaker 3

Great. Super helpful. Thank you, Jim and Ken. Thank you.

Speaker 5

Thanks, Pete.

Operator

Thank you. Our next question comes from the line of George Tong with Goldman Sachs. Your line is now open.

Speaker 7

Hi, thanks. Good morning. You outlined initiatives to improve operating performance in solar. Can you talk a little bit more about when you expect These various actions may have an impact on solar revenue growth and also how ADP solar performance compares With the broader industry, in other words, how much of the growth performance is specific to the company and addressable by your various actions?

Speaker 5

Yeah. Thanks for the question, George. It's Jim. On the loan side of the equation, the market is very much For a comparison point for you, the sit to close rate, This is when a sales rep has an opportunity at the kitchen table to interact with a customer when interest rates were give or take half What they are today, that sit to close conversion was something in the neighborhood of 20%. Now it's Single digit and in some markets low single digit where utility prices are low.

Speaker 5

So we're We have some early positive signs with our lease product. It doesn't work in every single market, but the markets in which it's launched, We see some green shoots. And as I mentioned to Pete a moment ago, what we're going to measure very, very closely Is our success in selling the lease product, cross selling the lease product, and the execution of restructuring. We're going to keep a close eye on the business. As you know, it's been well below our expectations And we'll measure, reconvene and measure progress in January and make some decisions on the go forward path then.

Speaker 6

Hey, George, it's Ken. I just want to add one thing. We had something in the prepared remarks, George, that I wanted to hit on as well. As far as the timing We talked about on the solar business being cash flow positive in the second half of this year. That anticipates the wind down that we discussed in the branches that we are winding down Pretty quickly here.

Speaker 6

So we will, of course, satisfy the existing backlog in those markets to make sure the customer experience is strong, but the wind down is soon. So we started to turn the quarter in kind of first half of next year and then looking forward to cash flow positivity, essentially reducing the burn rate that we discussed On our prepared remarks earlier.

Speaker 7

Got it. That's helpful color. And then You completed the commercial divestiture about a month ago. Can you provide an update on how operationally the sale is affecting the remaining Businesses, how intertwined was commercial with residential, any stranded costs or additional functions that have to be stood up?

Speaker 5

Yes, great question George. The business, the commercial business ran semi autonomously. And so there were no shared sales folks, no shared There are some shared services and we're watching stranded costs in the shared services closely. Right now, there is a transition service agreement in place where we are providing support to the buyer That lasts for, in the main, about 12 months. Some services are just a couple of months.

Speaker 5

Some last as long as 24 months. And once that TSA is completed and we've met our obligations to provide support, We'll be taking a hard look at stranded cost and eliminating The majority of it.

Speaker 6

And George, specifically on the TSA that Jim mentioned, sorry to cut you off there, buddy. The overlap, again, between commercial and the consumer business was very slight given it was kind of its autonomous segment. So if you think about the stuff that we're providing service for over the time frame that Jim mentioned and the fees that we'll charge the commercial business, which has now left the mothership, They'll offset over the next couple of years and over time we'll pull additional cost out. So as we kind of back up and look at what's the impact of that service cost and the service revenue, We see that as immaterial going forward as we kind of right size the business as we release more of the function and service to the commercial business.

Speaker 7

Very helpful. Thank you.

Operator

Thank you. Our next question comes from the line of Toni Kaplan with Morgan Stanley. Your line is now open.

Speaker 8

Thanks very much. First, I just wanted to ask a clarification on the solar restructuring. You mentioned keeping the 16 branches and that was about 70% of revenue. Sorry if I missed it, but Did you also give how much of the EBITDA loss in 3Q was associated with the remaining branches? Just wanted to get that for our modeling purposes.

Speaker 6

Tony, good morning. It's Ken. What we did give is we've essentially Yes. I pulled out $80,000,000 of annualized cost reduction from those branches and from corporate. So if you think about kind of the existing run rate results you've seen, Yeah.

Speaker 6

We have kind of line of sight to $80,000,000 of annualized run rate and pulling that out pretty quickly. So that's why we kind of connected the dots with, hey, first half, we turn the corner, I'm sorry, turning the corner. And then second half starts turning free cash flow positive for solar, but $80,000,000 is the strict cost reduction That we see related to the wind down in those branches.

Speaker 8

Great. And then, you're talking about 7% growth at the midpoint for CSB this year. Could you just talk about how you're thinking about 2024 sustainability of that sort of level Or if the macro is sort of impacting that or maybe extra focus on it because Maybe you won't have to deal with solar as much the issues there. So just wanting to talk about Sustainability of that 7% top line growth for the CSB part. Thanks.

Speaker 6

Sure, Tony. It's Ken. I'll give this So again, we tried to give the color and the guidance for CSB given the actions in solar. So that's why we gave the midpoint of the 7%. We haven't given guide For 2024, we absolutely will on our next call.

Speaker 6

But we did give in our prepared remarks and the earnings deck on page 6 Was your overall medium term guide. It's kind of 2 to 3 years. So we see revenue in line with market growth. We see the market growth for the CSB business Or the consumer business around mid to 6% growth. So that kind of gives you a feel of how we're thinking about revenue growth.

Speaker 6

It is pretty consistent with our 2020 3 guide. And we see that for continuing the operation activities that we've talked about, But also activating the catalyst that Jim talked about in his prepared remarks related to growth in the CSV business specifically, whether it's activating our ADT plus platform And attaching innovation to that, whether it's activating more and more State Farm and expanding into more and more states there. And we have another other number of other initiatives as well to activate the growth catalyst. So if we're at kind of 7% today, that gives you a feel of how we're thinking about ourselves Sure, Tony.

Operator

Thank you. Our next question comes from the line of Ashish Sabadra with RBC Capital Markets. Your line is now open.

Speaker 9

Thanks for taking my question. If you don't mind, I just wanted to drill down further on the solar itself. And is there a way to think about how much is the impact to free cash flow from The solar headwind this year, so in a way to think about what the free cash flow would have been excluding the negative impact of solar? I

Speaker 6

can give you a feel, Ashish. Good morning. So far, we've in EBITDA, we're just under $90,000,000 negative For the 1st 9 months of this year for the solar business. So we don't disclose the exact solar free cash flow given we're, you know, our entanglement there, But assume that EBITDA is in the ballpark of free cash flow. So that's why I tried to connect the dots on the $80,000,000 cost out that relates to the solar restructuring, Put it in the context of, you know, we're down $89,000,000 of EBITDA 9 months in, taking out $80,000,000 But a key point that Jim mentioned in his script Was the we've left the higher performing market.

Speaker 6

So not only do we take out the cost, but the dynamics of the market that remain the 16 branches in the 8 or 9 states, Those are the higher performing branches. So I think that gives you a bit of color, Ashish, to connect the dots on your model.

Speaker 5

One thing to add, Ashish, is Just for context, the cash losses In solar this year have obviously been very significant. The CSB business is performing very well from a cash perspective And now that we'll have very significantly less interest expense, that is another tailwind for us next year. And part of our bridge for 2024, which makes the $1,000,000,000 in 2025 much more realistic Is putting a tourniquet, simply putting a tourniquet on the cash losses in solar. Had our cash losses this year in solar not been So significant, it just would have been an absolutely exceptional cashier for us and A much closer bridge to getting to that $1,000,000,000 in 2025.

Speaker 9

Yes, that's very helpful color. Actually that's what I was trying to get to is so that we better understand the normalized free cash flow in the business when we These issues and as you turn around the business next year or think about strategic optionality. Maybe just as a follow-up, I wanted to focus on the State Farm Partnership and the success that you're Things are trending ahead of your expectations and the success that you're having also in selling Hardware and Services. I was just wondering how should we think about given the success that you've had so far, how are you thinking about that going forward Particularly from the timeline perspective and ruling it out across the country. Thanks.

Speaker 5

Thank you Ashish. So State Farm, All the intangibles are positive. Everything from shared vision, an integrated insurance product, Very customer focused cultures. I mentioned this on our last call, the chemistry between project teams

Speaker 3

is outstanding. We feel

Speaker 5

great about the partnership. There's a Standing. We feel great about the partnership. There's a great deal of regulatory work to do. A great deal has been accomplished.

Speaker 5

We're now in 13 states. I think the preliminary plan for next year is in the range of 15 to 20 more states in 2024. I think that will put us in market overlap with 75% of the State Farm policies in force. We're up to about 3,600 systems sold now. And as I think Ken included in the prepared remarks, not unimportantly, about 2 thirds of the time That we install one of these systems, we're able to upsell to a broader security and and smart home offering.

Speaker 5

So the economics are living into what we had hoped they would at the time the partnership was created. So net net, feel good about it, anxious to get a little more traction on subscriber ads, but they're a terrific partner.

Speaker 9

That's great color and congrats on solid results.

Speaker 5

Thanks, Ashish.

Operator

Thank you. There are no questions waiting at this time. So I will pass Call back to the management team for any closing remarks.

Speaker 5

Thank you, Jennifer and thanks everyone for taking time to join us today.

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Earnings Conference Call
ADT Q3 2023
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