ADT Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 1, 2024

Key Takeaways

  • Revenue grew 3% in Q2 while adjusted free cash flow rose 14% to $251 million, and management reaffirmed its full-year financial guidance.
  • The new ADT plus platform is now live nationwide for professional installs, with a Q3 launch of the Trusted Neighbor feature and deeper Google Nest integration.
  • Net debt fell by about $2 billion year-over-year to $7.4 billion, debt/EBITDA hit the 3× milestone, borrowing costs were cut, and $257 million of share repurchase capacity remains.
  • Adjusted EBITDA declined 2% year-over-year, driven by an unfavorable $40 million legal settlement that ADT is seeking indemnification for from its supplier.
  • ADT is taking a disciplined approach to subscriber acquisition spend, balancing organic growth, dealer channels and a planned bulk acquisition in Q3 to optimize returns.
AI Generated. May Contain Errors.
Earnings Conference Call
ADT Q2 2024
00:00 / 00:00

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Operator

Thank you for standing by. I'd now like to welcome everyone to the ADT Second Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press Star and the number 1 on your telephone keypad. If you'd like to withdraw your question, press Star 1 again. Thank you. I'd now like to turn the call over to Elizabeth Lamers. Please go ahead.

Elizabeth Landers
Elizabeth Landers
Head of Investor Relations at ADT

Thank you, operator, and good morning, everyone. We appreciate you joining today's call to discuss ADT's second quarter 2024 results. Speaking on today's call will be ADT's Chairman, President, and CEO, Jim DeVries, and our Chief Financial Officer, Jeff Likosar. Wayne Thorsen, Chief Business Officer, will also join us following the prepared remarks as we take analysts' questions. 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 both the former commercial and solar segments are 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 and solar through the second quarter of 2024.

Elizabeth Landers
Elizabeth Landers
Head of Investor Relations at ADT

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 could 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 the reconciliation to those measures, can be found in our earnings presentation on the ADT Investor Relations website.

Jim DeVries
Jim DeVries
Chairman, President and CEO at ADT

Good morning, and thank you to everyone for joining us today to discuss ADT's second quarter results. As we've passed the midpoint of the year, ADT is well positioned to deliver the full-year financial guidance we outlined in February. I am pleased with our overall performance this quarter and our first half, particularly against the current macroeconomic backdrop, which includes higher interest rates and fewer relocations, a traditional catalyst for new subscribers. We continued to grow revenue, up 3% versus the prior year, while remaining focused on balancing profitability and investments for the future. And importantly, we again delivered very strong Adjusted Free Cash Flow at $251 million, up 14% from the prior year. Gross Revenue Attrition was 12.9% for the quarter, with revenue payback at 2.2 years.

Jim DeVries
Jim DeVries
Chairman, President and CEO at ADT

This performance is a testament to the durability, resilience, and flexibility of ADT's business model. Jeff will provide more details about our financials and full-year outlook in a few moments, but I first would like to share a few comments about our business and strategic progress. I'd also like to take a moment to highlight a pivotal point in ADT's history. This month, ADT will be celebrating an extraordinary milestone, our 150th year in business. We are among just a few iconic companies to have been founded in the 1800s and still thriving today. The key to ADT's enduring success has been our exceptional ability to adapt and innovate. It goes without saying that our people have driven our business, and I want to thank the dedicated teams of professionals that have built and driven this company over several generations.

Jim DeVries
Jim DeVries
Chairman, President and CEO at ADT

We now stand at a pivotal moment in our company's history, ready to write the next chapters of the ADT story, fueled by thoughtful innovation and our current industry-leading team. I could not be more excited about this chapter and remain humbled by the opportunity to lead this great company. Today, as we progress into the chapters to come, we are focused on investing in the next generation product and experience ecosystem and creating even more reasons for customers to choose ADT and stay with ADT. A key component of our future is our new and proprietary ADT Plus platform, which I'm pleased to share is now available across the country for a growing portion of our professionally installed residential customers. This follows our rollout for self-setup customers last year.

Jim DeVries
Jim DeVries
Chairman, President and CEO at ADT

Our ADT Plus platform includes a new app, refreshed hardware, and offers a number of advantages, including enhanced installation, flexibility, and configurability. Importantly, it also offers additional and stronger integrations with smart home devices, such as Google's Nest ecosystem. Our ADT Plus platform is the foundation on which we will innovate to build future unique experiences tailored to our customers' individual needs. The first of these experiences will be what we have branded Trusted Neighbor, an innovative new feature offering both convenience and security to our customers by leveraging Nest's Familiar Faces to seamlessly grant trusted individuals secure and temporary access to their homes, either on a defined schedule or for specific events such as package delivery or water leaks. We anticipate this offering will become available for ADT Plus customers during the third quarter.

Jim DeVries
Jim DeVries
Chairman, President and CEO at ADT

Facilitating this experience, we're pleased to announce we have recently entered a partnership with Yale Lock to provide our customers this innovative and secure solution, which also builds on our existing Google relationship. We will continue to add more features to the ADT Plus platform over time and look forward to the enhanced capabilities and flexibility we will enjoy with our owned and proprietary ecosystem. I also want to share that concurrent with this rollout, we're offering more flexibility to our customers in their buying choices, including more disaggregated offers, installation options, and payment and contracting terms. Additionally, we continue to make progress in our second-to-none commitment to safety. Again, a hallmark for the past 150 years, with our Alarm Scoring capabilities, which are now live nationwide.

Jim DeVries
Jim DeVries
Chairman, President and CEO at ADT

This technology allows us to classify alarms based on predicted severity, which leads to a reduction in false alarms, and importantly, enables us to share more precise alarm information for our customers with first responders. Additionally, as I've shared previously, we have expanded our Google relationship to include their cloud artificial intelligence technology platform, and are currently exploring several opportunities across our business with early efforts focused on call center operations. We also remain focused on advancing our State Farm partnership. Both installation and new customer RMR were up 7% on a unit basis in the second quarter. We're also focused on a self-setup alternative in select states. The first state where we've rolled out this offering just this month has been Georgia, with another state expected in the third quarter.

Jim DeVries
Jim DeVries
Chairman, President and CEO at ADT

We're obviously very excited about the overall progress we've made in developing new and innovative products and services for our customers, and the foundation this provides for the future. Supporting this progress, we recently introduced our new brand promise: When every second counts, including the launch of a new advertising campaign, Always There. We've refreshed our media across a variety of outlets, including placements during the Olympics. In closing, I want to highlight that the top priority of our team remains to deliver on our commitments for our shareholders, customers, and partners. I'm incredibly proud of our ADT team and our recent accomplishments, as well as our achievements over the course of our company's 150-year history. I'm even more excited for the opportunities that lie ahead. With that, I'll turn the call over to Jeff.

Jeffrey Likosar
Jeffrey Likosar
CFO at ADT

Thanks, Jim, and thank you everyone for joining our call. As Jim mentioned, we continued our progress during the second quarter, delivering a very strong first half, consistent with our full-year objectives, and we are reaffirming our full-year guidance today. Before summarizing our results, I want to reiterate that, as Elizabeth mentioned, we have substantially wound down our solar operations. Results for solar, along with the commercial segment we divested last year, are reflected in discontinued operations. My comments will therefore focus mainly on our core CSV Business. I will start with our cash flow performance, which remains a highlight through the first half. As Jim mentioned, we delivered very strong Adjusted Free Cash Flow, including interest rate swaps of $251 million, which was up 14% compared to last year.

Jeffrey Likosar
Jeffrey Likosar
CFO at ADT

On a year-to-date basis, we have generated $362 million, which is more than 50% higher than last year. This growth is driven by our overall profitability and lower cash interest due to our debt reduction. Working capital management, including some timing items, also contributed. Adjusted net income for the quarter was $156 million or $0.17 per share. On a year-to-date basis, we have generated earnings per share of $0.36, up 38% compared to the first half of last year. Total revenue was $1.2 billion for the quarter, up 3%. Monitoring and services revenue was up 2%, driven by our recurring monthly revenue, or RMR, from our subscriber base. Ending RMR was at a record $355 million, also up 2%, driven by strong customer retention and higher average pricing.

Jeffrey Likosar
Jeffrey Likosar
CFO at ADT

We generated 212,000 gross new customer additions, adding $12.5 million of new RMR. This was down somewhat from the prior year as we remained disciplined with SAC expenditures in the current environment. While fewer relocations generally lead to less consumer demand for new systems, they also provide some tailwind for customer retention. Our overall attrition was 12.9%, approximately flat, reflecting this benefit and our continued commitment to delivering superior service and some offsetting challenges driven by somewhat higher payment delinquencies and related cancellations. Installation revenue increased by 9% in the quarter, driven by higher deferred revenue amortization. As we've described previously, we expect installation revenue to grow as we evolve our model to transfer equipment ownership to our customers. Adjusted EBITDA for the quarter was $629 million, down 2%.

Jeffrey Likosar
Jeffrey Likosar
CFO at ADT

Our results included an unfavorable legal settlement in the current year, while the prior year quarter included a favorable legal settlement. The net effect of these unrelated items is approximately $40 million or 6% year-over-year. I will note that we are seeking indemnification for this year's settlement. Otherwise, a key driver of our EBITDA performance is the higher revenue I mentioned earlier. Additionally, we remain focused on operating profitability and benefited from strong field and call center cost performance. Offsetting dynamics include credit loss allowances, consistent with the payment delinquencies I mentioned. And we also continue with our planned product and technology investments, supporting the initiatives Jim described in his remarks. During the quarter, we returned $50 million to shareholders via dividends, and year to date, we have returned $175 million, including our March share repurchases.

Jeffrey Likosar
Jeffrey Likosar
CFO at ADT

We repaid the final $100 million to retire our April 2024 notes and the $50 million drawn on our revolving facility. We also completed a repricing of our Term Loan B, reducing associated borrowing costs by 25 basis points, and we upsized our Term Loan B to retire our Term Loan A. Our overall net debt of $7.4 billion is down approximately $2 billion from this time last year. We now have no significant debt maturities until 2026, with a weighted average cost of debt of approximately 4.5%. I'm especially pleased that our net debt to adjusted EBITDA ratio is at 3x, achieving the milestone we set for this year. We have approximately $257 million in remaining share repurchases authorization, and we continue to think our stock is very attractive at recent prices.

Jeffrey Likosar
Jeffrey Likosar
CFO at ADT

We remain very confident in our overall capital structure, liquidity, cash generation capability, and the resulting flexibility in capital allocation. As we look to the rest of 2024, we are reiterating the guidance we shared at the beginning of the year. I will note that we have updated our Adjusted EPS guidance to reflect the solar business presented as a discontinued operation. Due mainly to the legal settlement I described, we expect third quarter Adjusted EBITDA to look more like the first quarter than the second, and we expect third quarter Adjusted Free Cash Flow to be in line with, if not a little lower than, the first quarter. This is mainly because our cash interest payments are much lower in the second and fourth quarters than the first and third. Additionally, we anticipate some higher SAC spending in the third quarter due to a potential bulk account purchase.

Jeffrey Likosar
Jeffrey Likosar
CFO at ADT

We have considered these factors in our full year ranges, and we remain focused on disciplined execution to achieve this year's objectives and to position for 2025 and beyond. Overall, we are very pleased with our strong first half and excited to be building on our 150-year legacy, writing the new chapters Jim described. I want to thank our teams, including our partners, for all their contributions to our success. And thank you again, everyone, for joining the call today. Operator, please open the line to questions.

Operator

Thank you very much. As a reminder, if you'd like to ask a question, please press star and the number one on your telephone keypad. Your first question comes from the line of George Tong from Goldman Sachs. The line is open.

George Tong
George Tong
MD and Senior Equity Research Analyst at Goldman Sachs

Hi, thanks. Hi, thanks. Good morning. You mentioned you're taking a disciplined approach with respect to subscriber acquisition cost spend, which helps preserve cash flow in the current environment, which is good, but it also, it does come with the effect of impacting gross adds. How do you balance the investments of SAC versus your priorities to drive growth? And what markers externally would you need to see to be more aggressive with SAC investments?

Jim DeVries
Jim DeVries
Chairman, President and CEO at ADT

Thanks for the question, George. It's Jim. I'll share some perspective. So we have some pressure in our organic business from fewer housing relocations. We also tightened up credit standards in DIY, and marketing costs, frankly, for affiliates and even things like direct mail are a little bit higher. So we have been very disciplined about our growth. We're not going to chase growth when it doesn't meet our return standards. And something that Jeff mentioned, we're keeping some gunpowder dry for a potential bulk opportunity in Q3. As you know, there's ample opportunity for us to buy bulk deals. We've done that in most of the last handful of years.

Jim DeVries
Jim DeVries
Chairman, President and CEO at ADT

We sort of view it as a capital allocation dynamic, bulk versus dealer versus organic. So we anticipate using some of that SAC, some of that dry gunpowder, for a bulk in Q3. It's actually from the same seller that we acquired the bulk from last December. It's got great characteristics out of the gates and returns in the zip code of what we have for our dealer business.

Jeffrey Likosar
Jeffrey Likosar
CFO at ADT

George, I would add, too, just... George, sorry, it's Jeff. Just a reminder that, you know, as we're evaluating these, we're always focused on the IRR, which is driven by, how much does it cost to acquire the customer, what do we expect to be the profitability of the customer, and how long do we expect that customer to stay with us? So, the mix between those factors may vary, but it's always in pursuit of that objective. And I also would highlight that in our guidance, you know, we at the beginning of the year said we expected SAC on a full year basis to be approximately flat. You know, fourth quarter was our largest SAC quarter last year, on a year-to-date basis, we're tracking right in that range.

Jeffrey Likosar
Jeffrey Likosar
CFO at ADT

So as we work through the second half of the year, you're consistent with Jim's comments, you know, that remains the way we're looking at it.

George Tong
George Tong
MD and Senior Equity Research Analyst at Goldman Sachs

Got it. That's helpful. And then with respect to the State Farm partnership, can you talk a little bit about how that's progressing, milestones, and expectations for incremental revenue contributions from joint offerings?

Jim DeVries
Jim DeVries
Chairman, President and CEO at ADT

Sure. So I'll, I'll give you some operating perspective on the State Farm partnership. The vision remains intact. We together want to want to essentially transform the homeowners business from purely restoration to include prediction and prevention to avoid losses. We've made good progress in the first half. Some areas have been a little slower than we had hoped. We have a great deal of regulatory and compliance work that's accomplished. I think I mentioned last during the last call, George, we're in 13 states. We had 6,000 sales in 2023. We're at 9,000 sales year to date. On a unit basis, both RMR and install revenue per unit are up 7%, sequentially.

Jim DeVries
Jim DeVries
Chairman, President and CEO at ADT

So it's improving in terms of in terms of the economics. And about two-thirds of the installs that we have include an upsell. Customer satisfaction's very high as well. So we're tracking, moving along, making progress. I'll mention one last thing for you. We're testing DIY currently in Georgia. We anticipate rolling out a DIY alternative in Washington in Q3. And then in addition to that, we're looking at a water-specific test that we hope to launch later this year as well.

George Tong
George Tong
MD and Senior Equity Research Analyst at Goldman Sachs

Got it. Very helpful. Thank you.

Operator

Thank you. The next question comes from the line of Ashish Sabadra from RBC Capital Markets. The line is open.

Ashish Sabadra
Ashish Sabadra
MD and Senior Equity Research Analyst at RBC Capital Markets

Thanks for taking my question. So, congrats on the ADT Plus launch. Just wanted to follow up there and wanted to see what initial feedback you might have received from ADT Plus, particularly on the self-install side, but also as you've rolled it out for the professional install, any feedback in terms of from the installers or from the customers in terms of experience, but also efficiencies and installation and any color on that front? Thanks.

Jim DeVries
Jim DeVries
Chairman, President and CEO at ADT

Thanks for the question, Ashish. Wayne, you want to take this one?

Wayne Thorsen
Wayne Thorsen
Chief Business Officer at ADT

Yeah. Thanks, Ashish. Thanks for the question. We, you know, we just completed the national rollout in June, so it's now available in all regions. So we're incredibly excited about that. We're thrilled with what we're seeing initially. We are seeing, as an example, one quality score that we use a lot is, how often do installers have to go back? And the quality here since around our late spring, as we're rolling it out, has surpassed our other offerings, so we're really, really happy about that. We're also seeing month-over-month efficiency gains, which this was designed to be efficient, 'cause this is both a pro installation methodology, as well as the equipment can be installed in a DIY fashion. So we're really, really pleased with it.

Ashish Sabadra
Ashish Sabadra
MD and Senior Equity Research Analyst at RBC Capital Markets

That's very helpful color. Just for the quarter, would it be possible to get what the EBITDA was, excluding the legal settlement? And then just for the full year, just wanted to better understand if there are any other puts and takes that we need to be cognizant of for the rest of the year. Thanks.

Jim DeVries
Jim DeVries
Chairman, President and CEO at ADT

I'll comment on the lawsuit, Ashish, and then Jeff will have some more color to share for you. You know, as Jeff mentioned, our EBITDA was negatively impacted this quarter by the settlement. It was a patent infringement case. The terms of that settlement are confidential, so it's difficult to comment with detail. I can share that the case is completely resolved. Virtually all of the impacted products were supplied by one of our hardware suppliers. We believe strongly that the supplier is contractually required to indemnify us. That supplier, to this point, has been unwilling to do so, and so we've filed a lawsuit to essentially enforce our contractual rights. And, Jeff, did you have some additional comment?

Wayne Thorsen
Wayne Thorsen
Chief Business Officer at ADT

Yeah. There's no specific thing I would highlight. You know, there's always puts and takes, but, you know, we're very happy to be in a position through the first half of the year, you know, even including the legal settlement and everything else we're aware of, to affirm the guidance that we put forth earlier. And, you know, we're confident that we will manage the second quarter to achieve those objectives... or the second half, I'm sorry, to achieve those objectives.

Ashish Sabadra
Ashish Sabadra
MD and Senior Equity Research Analyst at RBC Capital Markets

Thank you. Thanks for the call.

Operator

Thank you. Next question comes from the line of Toni Kaplan from Morgan Stanley. The line is open.

Toni Kaplan
Toni Kaplan
Executive Director and the Lead Analyst at Morgan Stanley

Thank you. Thanks so much. You mentioned the sort of AI opportunities with regard to Google and looking at sort of your call center to try to find efficiencies there. You know, I guess, how should we think about the timeframe of, you know, your development there? Are you sort of far along yet, or are you still at early stages? How long should we expect it to take? And, you know, I guess any sort of return or margin improvement or anything we could think about in terms of, what the implications could be from, that initiative?

Jim DeVries
Jim DeVries
Chairman, President and CEO at ADT

Sure, Toni, it's Jim. I'll add a couple of comments on the timing and then ask Wayne to share some additional perspective. Our AI opportunities are largely anchored in a Google Cloud partnership. We expanded that partnership late last year or early this year. As you mentioned, our first opportunity lies in customer care largely around call deflection. I think we'll begin to see some impact late this year. And then second on the docket for us is some propensity modeling, propensity to churn modeling. In terms of financial impact, I think that's more 2025 than it is 2024. But both of them bring what we expect to be, you know, pretty meaningful opportunity for us. Wayne?

Wayne Thorsen
Wayne Thorsen
Chief Business Officer at ADT

Yeah, and thanks, Toni. We're super excited about the partnership with Google Cloud and we're now into the execution phase, which is terrific. So great progress there. The early focus is absolutely on the call centers, specifically to bring virtual agents and agent assistant tools. The great thing about this is these are hardened products like CCAI and using Vertex within that are hardened products versus new technology. So we have really high confidence in the outcomes, and there are, you know, numerous examples where people have reached, you know, very significant deflections using these same products, and we expect to see similar outcomes.

Toni Kaplan
Toni Kaplan
Executive Director and the Lead Analyst at Morgan Stanley

Great. And I wanted to just ask a little bit of a broad question about the environment. I guess, what kind of trends have you been seeing with regard to health of the consumer, you know, through the end of second quarter or through July? Just any change there, any change in competitive landscape, any change in how you're thinking about marketing and stuff like that? Thanks.

Jeffrey Likosar
Jeffrey Likosar
CFO at ADT

Hey, thanks, Toni. It's Jeff. There's no specific change that we'd highlight, you know, beyond what we said in our prepared remarks and a couple of the earlier comments. The higher interest rates, the lower moves is the most noteworthy. There's no particular competitive thing we would call out. I would just reiterate the excitement of the new equipment and the offerings and the app, and some of the capabilities that we have forthcoming, that we think strengthens our position, irrespective of what any competitors are doing. And as Wayne described, it's off to a really good start. So that was probably the main point I'd offer in response to your question.

Toni Kaplan
Toni Kaplan
Executive Director and the Lead Analyst at Morgan Stanley

Thank you.

Operator

Thank you. Your next question comes from the line of Manav Patnaik from Barclays. The line is open.

Ronan Kennedy
Ronan Kennedy
Equity Research Analyst at Barclays

Hi, good morning. This is Ronan Kennedy on for Manav. Thank you for taking my question. Just to further, expand upon Tony's question, and I guess elements of George's as well. If there were to be a further deterioration in the strength of the consumer or the demand environment, can you expand on how we should expect to see the durability, resilience, and flexibility that you spoke of in the model be demonstrated, should there be further weakness?

Jeffrey Likosar
Jeffrey Likosar
CFO at ADT

Yeah, we think we're very well positioned. You know, I've been at the company for something approaching eight years now, and I remember joining the company, you know, seeing the company having said that, never having experienced it myself, but, having been through a couple of cycles. We, we've generally found that in challenging economic times, people often value security more, the peace of mind that comes with it. Additionally, you know, we've, we've seen and found that, that customers who, who do value it, if times are tough and they look at, at the, the bills that they seek to reduce in their personal budgets, security is, is not generally among that list. And then on top of that, in challenging times, there tends to be fewer relocations, as we've already mentioned a couple times.

Jeffrey Likosar
Jeffrey Likosar
CFO at ADT

So we think we're well positioned, and then in the couple down cycles in the time I've been with the company, you know, that's been proven out. And then maybe one last plug, you know, the same point as before, plus, we have all this new stuff coming that we think puts us in an even better position.

Ronan Kennedy
Ronan Kennedy
Equity Research Analyst at Barclays

Got it. Thank you. And then on the topic of investments, are you seeing the benefits you expected, around efficiency, customer experience, better and faster insights to meet customer needs from the recently implemented CRM platform, the Reflect cloud-based CRM? And then how should we think about the current level of spend for the investment for all these innovative, solutions and experiences?

Jim DeVries
Jim DeVries
Chairman, President and CEO at ADT

Thanks for the question, Ronan. It's Jim. So we're in the relatively early days on the investment in ADT Plus. We're just now rolling it out in our DIFM to our DIFM customers, so early results are very positive. We're doing some testing with the Trusted Neighbor app and customer experience that we feel really good about. But it's early. And so it's hard to answer with precision what kind of return we expect. I will mention in terms of investments that 2024 will be a high watermark for us on the technology front. We've been investing pretty significantly over the course of the last handful of years.

Jim DeVries
Jim DeVries
Chairman, President and CEO at ADT

In 2025, we expect that those investments will be pulled back a bit. So we'll have a little bit of a tailwind from that standpoint. But on ADT Plus, a little early in the game, early results are positive, both from an efficiency perspective and a customer response perspective, but difficult at this point to quantify.

Ronan Kennedy
Ronan Kennedy
Equity Research Analyst at Barclays

Got it. Thank you.

Operator

All right. Again, if you'd like to ask a question, please press star one on your telephone keypad. Our next question comes from the line of Peter Christensen from Citi. Line is open.

Peter Christiansen
Peter Christiansen
Director and Senior Equity Research Analyst at Citigroup

Thank you. Good morning, Jim and Jeff. Nice trends there. I'm curious, as it relates to the idea of bulk purchases. Now that you have ADT Plus, all this great new stuff, does that change your calculus when you're evaluating potential bulk purchases? Whether or not, I guess you can upgrade potential users faster or, you know, maybe that helps accelerate rollout, anything of that nature. Is that a part of your decision-making process?

Jim DeVries
Jim DeVries
Chairman, President and CEO at ADT

It is. The ADT Plus app is, as I was mentioning to Ronan, Pete, it's early in the game, but it is increasingly part of our calculus, as is the path to upgrade. In terms of just generally speaking, how we look at the acqs, it's way more of a capital allocation exercise today than ever before. And we're looking at organic, we're looking at dealer, and we're looking at bulk. I'd mentioned that some of our marketing costs are up a bit, and so on a relative basis, it makes bulk more attractive. And we also had a very positive experience with the same seller selling us a bulk in December.

Jim DeVries
Jim DeVries
Chairman, President and CEO at ADT

So when we look at how we allocate our SAC, we're looking at each of those buckets, and allocating the dollars for the best return. I think that the organic opportunities for us will be more and more attractive over time. Some of these experiences, like Trusted Neighbor, are truly differentiated, and we think that there's gonna be solid demand for it, and we'll make that organic allocation a greater percent of our total overall SAC.

Jeffrey Likosar
Jeffrey Likosar
CFO at ADT

Pete, I'd add to that, too, just building on the capital allocation point and reiterating how good we feel about the progress we've made. Your debt down $2 billion compared to a year ago, down something closer to $3 billion compared to not long ago. You know, we got our leverage to the 3 times milestone that we set out to achieve this year. So what that flexibility allows us to do is, you know, there was a time where we would say the number one priority is debt reduction.

Jeffrey Likosar
Jeffrey Likosar
CFO at ADT

We're still focused on that, but always looking to optimize allocation of capital between normal organic growth, you know, bulks, as we're talking about, M&A, the very substantial increases in returning capital to shareholders between the dividend increase and the share repurchases earlier in the year. So having that flexibility gives us a lot more opportunities to generate returns, both for the company and for shareholders.

Peter Christiansen
Peter Christiansen
Director and Senior Equity Research Analyst at Citigroup

Right. Right. That's, that's super helpful, and right, you guys done a good job on the capital allocation, for sure. Maybe it's too early, but as you think about the upgrade opportunity to your existing user base on the do it for me side, any sense of what kind of uplift in terms of RMR or, like, on a per unit basis that you, that you have in mind, and target-wise for that organic kind of upgrade opportunity over the coming years?

Jim DeVries
Jim DeVries
Chairman, President and CEO at ADT

Yeah. Yeah. Go ahead, Wayne.

Wayne Thorsen
Wayne Thorsen
Chief Business Officer at ADT

Yeah, thanks. And thanks for the question on that. We. So one of the things that we're evaluating, and this is one of the benefits we have from having our own platform, is now we can work through both hardware and software that allows us to integrate with equipment that we may even find in the home. So it starts to become super capital efficient than to be able to look at things like bulks or look at other ways to upgrade older equipment, either from us or from somebody else.

Wayne Thorsen
Wayne Thorsen
Chief Business Officer at ADT

Then once we do that, when you start thinking about, you know, even in some of the early stages of some of the products that we're rolling out, such as the first product experience we're rolling out on our new platform, which is Trusted Neighbor, you start to, you know, without being able to provide specific direction, you start to be able to look at some of the handles that you can add in there by having more equipment in there. I think we shared a few quarters ago, by having more equipment, you know, and in this case, you would have cameras and locks in addition to the equipment in there, we start to see improved churn characteristics right away.

Wayne Thorsen
Wayne Thorsen
Chief Business Officer at ADT

We end up with higher IRPU and higher propensity to take more premium packages when we have things such as cameras involved, which are often not in some of these older homes. And then also, kind of uniquely, one of the things that we're able to do when you have something, you know, like the Trusted Neighbor product that we're gonna be rolling out later this quarter, the Trusted Neighbors themselves start to download the ADT Plus app, and so as they assist and help our subscribers when they need it. So that leads to an opportunity for us to be able to earn many new subscribers from these new people who are actually the Trusted Neighbors themselves, but who are not our own customers. And so it creates a unique opportunity for us that we have an opportunity to earn.

Jeffrey Likosar
Jeffrey Likosar
CFO at ADT

And I'd add, it's too early to have firm conclusions, of course, but everything Wayne just said just gives us more levers to optimize the returns we generate from our customers. An outcome, almost for sure, will be a broader mix, you know, just different combinations of attributes. A lot of this is designed to pursue a broader TAM for different kinds of customers who have different needs, maybe different degrees of price sensitivity. And we are and will test our way into how to adjust those levers or knobs and dials to seek the optimal overall portfolio economic outcome. And I would emphasize or link back to what I was saying earlier, is the mix may be different.

Jeffrey Likosar
Jeffrey Likosar
CFO at ADT

It might be a different mix of upfront costs compared to attrition characteristics, compared to ongoing profitability, but the foundation with which we make all of those decisions is the return and the lifetime value of all these customers. And, you know, again, we're excited to be more attracted to or more attractive to a broader TAM.

Peter Christiansen
Peter Christiansen
Director and Senior Equity Research Analyst at Citigroup

That, that's great. Yeah, I can imagine adding an organic growth or organic user acquisition on top of a powerful brand name. It'll be exciting to watch. Thank you, all. That was helpful.

Jim DeVries
Jim DeVries
Chairman, President and CEO at ADT

Thanks, Pete.

Operator

Thank you. Seeing as there are no more questions, I will now turn the call over back to the ADT team for closing remarks.

Jim DeVries
Jim DeVries
Chairman, President and CEO at ADT

Okay. Thank you, operator. Thanks everyone for taking the time to join us today. As you heard, we've affirmed our guidance and delivered solid results in our core business. We're looking forward to a continued, strong 2024. I'd like to extend my appreciation to our ADT employees and, dealer partners. Our results are a reflection of their efforts. So thanks again, everybody, for joining us today, and, have a great day.

Operator

Ladies and gentlemen, that concludes today's call. Thank you for all joining. Have a pleasant day.

Executives
Analysts
    • Ashish Sabadra
      MD and Senior Equity Research Analyst at RBC Capital Markets
    • George Tong
      MD and Senior Equity Research Analyst at Goldman Sachs
    • Peter Christiansen
      Director and Senior Equity Research Analyst at Citigroup
    • Ronan Kennedy
      Equity Research Analyst at Barclays
    • Toni Kaplan
      Executive Director and the Lead Analyst at Morgan Stanley
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