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Edited Transcript of ADT.N earnings conference call or presentation 7-May-19 9:00pm GMT

Q1 2019 ADT Inc Earnings Call

May 14, 2019 (Thomson StreetEvents) -- Edited Transcript of ADT Inc earnings conference call or presentation Tuesday, May 7, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Donald M. Young

ADT Inc. - Executive VP of Field Operations & Chief Information Officer

* James D. DeVries

ADT Inc. - CEO, President & Director

* Jason Smith

ADT Inc. - SVP of Finance & IR

* Jeffrey Likosar

ADT Inc. - Executive VP, CFO & Treasurer

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Conference Call Participants

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* Andrew Garth Schmidt

Citigroup Inc, Research Division - Senior Associate

* Gary Elizabeth Bisbee

BofA Merrill Lynch, Research Division - Analyst

* Jeffrey Ted Kessler

Imperial Capital, LLC, Research Division - MD

* Keen Fai Tong

Goldman Sachs Group Inc., Research Division - Research Analyst

* Kevin Damien McVeigh

Crédit Suisse AG, Research Division - MD

* Manav Shiv Patnaik

Barclays Bank PLC, Research Division - Director & Lead Research Analyst

* Seth Robert Weber

RBC Capital Markets, LLC, Research Division - Analyst

* Toni Michele Kaplan

Morgan Stanley, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the ADT First Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Jason Smith. Thank you. You may begin.

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Jason Smith, ADT Inc. - SVP of Finance & IR [2]

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Good evening, everyone, and thank you for joining us for ADT's First Quarter 2019 Earnings Conference Call. This afternoon, we issued a press release and a slide presentation on our quarterly results. Both 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 that could cause actual results to differ materially from those that are expressed or implied by such forward-looking statements. These risks include, among others, matters we described in our press release issued this afternoon and our filings with the SEC.

Please note that all forward-looking statements speak only as of the date of this call, and we disclaim any obligation to update these forward-looking statements. During today's call, we'll make reference to non-GAAP financial measures. Our historical and forward-looking non-GAAP financial measures exclude special items, which are difficult to predict and mainly dependent upon future uncertainties. For a complete reconciliation of historical non-GAAP to GAAP financial measures, please refer to our press release issued this afternoon and our slide presentation, both of which are available on our website at investor.adt.com, and on the SEC website.

Joining me on today's call are our President and CEO, Jim DeVries; our CFO, Jeff Likosar; also joining us and available for Q&A is Don Young, our CIO and EVP of Field Operations.

I'll now turn the call over to Jim.

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James D. DeVries, ADT Inc. - CEO, President & Director [3]

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Thank you, Jason, and welcome, everyone, to this evening's call. I am pleased to bring you up to date on our progress across a number of fronts.

Let's start with our first quarter results, which included total revenue growth of 11%, or 4% excluding the Red Hawk acquisition. This top line growth was driven by increased residential interactive penetration and the higher associated average prices, improved trailing 12-month attrition and higher installation revenues in our existing commercial businesses, which further benefited from Red Hawk.

Our adjusted EBITDA at $621 million was modestly improved year-over-year despite approximately $17 million of favorable legal settlements in the prior year's quarter, which we were able to offset with higher revenue and continued strong execution on cost efficiencies.

Our free cash flow before special items was also strong at $171 million, our best performance on this important measure since the first quarter of 2018. These results were driven by our focus on key operating metrics, or KPIs, which during the first quarter continued to show year-over-year improvement.

Our gross revenue attrition on a trailing 12-month basis was 13.3%, which, consistent with our guidance for the year and in conjunction with our acquisition of LifeShield, excludes the effect of attrition from existing and new DIY customers. This compares to 13.6% in the first quarter of last year; including DIY customers, would have added 6 basis points to our attrition.

While attrition improvement remains a key focus area for us, we did not make sequential progress during the first quarter, nor as much year-over-year progress as we would like, due partially to tough comparison resulting from a strong prior year Q1 performance, which I mentioned on our last call.

Attrition improvement will not always be linear, and we expect improvement ahead as we continue to emphasize high-quality customer selection and superior customer service in all aspects of our business.

We also saw an improvement in our customer revenue payback, which at 2.4 years on a trailing 12-month basis was an improvement relative to 2.5 years in the year-earlier period. This marks our seventh consecutive quarter of year-over-year improvement.

During the quarter, we continued to drive efficient RMR additions of approximately $12 million, excluding wholesale customers. Our total SAC in the quarter was up 3% driven by higher capitalized SAC from dealer account purchases, some advertising investment and a higher volume of interactive customer upgrades and add-ons.

Higher upgrade and add-on activity is, in part, a reflection of increasing consumer awareness, both of home automation solutions and of the tremendous potential of ADT Pulse and now, ADT Command and Control at the center of home automation. Upgrades also allow us the opportunity to marginally reduce the number of 3G radios we would otherwise have to replace.

And speaking of 3G, since receiving notice of the 3G sunset in February, we have made good progress advancing our conversion strategy, which includes piloting various upgrade approaches during the next few months. As we learn from these activities, we'll formulate a more definitive upgrade plan to minimize the near-term cost while maximizing the lifetime value of our customer base, and we will share more detail with you on our next call.

As we move further into 2019, we expect to drive higher installation revenues and cost efficiencies while looking to balance our profitability, cash flow goals and invest in our customer base. I'd like to share 2 brief examples of how we expect to balance and achieve those objectives as we enhance our go-to-market approach for residential during 2019.

First, this quarter, we successfully completed our national launch of our newest home automation system, ADT Command and Control. As a reminder, ADT Command is our innovative wireless panel with extensive smart home capabilities, while ADT Control is the interactive application that allows customers to protect and automate their homes from anywhere at any time.

Utilizing the first month of results from the national rollout and the results of our pilot rollout in the southeastern United States, we've been able to draw some initial, but highly encouraging conclusions. Command and Control has resulted in a slightly higher RPU, larger total system sizes and higher associated installation revenue, along with some positive signs for installation efficiency. We also see a stronger take-rate trend for our interactive services, including a very strong video adoption rate with Command. The percent of our total revenue base using interactive services has now surpassed 40%. I encourage you to view our quarterly slide presentation for more background on Command and Control, as well as more disclosure on our interactive customer base.

The second example. In April, we launched a pilot program in 5 cities with Citizens Financial Group as part of their merchant partnership platform. Under this consumer financing arrangement, consumers will be able to finance the upfront costs of becoming an ADT customer, which we believe has favorable long-term growth and capital efficiency implications for us. As we measure the pilot's success, we plan on expanding the program.

Now I'd like to turn to our commercial business, which is expanding nicely and has received an additional boost from our December acquisition of Red Hawk. As a reminder, Red Hawk brought to ADT an expanded product portfolio and extended geographic reach and nationwide customer service capabilities. During the quarter, we experienced continued strong commercial revenue growth, both with and without Red Hawk. Additionally, we sold our first joint Fire & Security contract for a large national retailer with over 1,000 stores. As a result of this strong growth, our revenue from business customers now accounts for approximately 27% of total revenue. Again, you can refer to our latest quarterly slide presentation for more disclosure around ADT Commercial.

Another of our strategic initiatives is our penetration of the do-it-yourself or DIY market as another way to leverage the ADT brand and reputation. In February, we announced the acquisition of LifeShield, a pioneer in advanced wireless home security systems, that will serve as a platform for us to address the approximately 80% of U.S. households that do not have professionally installed and monitored home security. We're excited about the long-term potential of LifeShield and look forward to sharing more in the future as we develop this business.

Rounding out our update on strategic pursuits. Last year, we announced the expansion of our relationship with Amazon. As a reminder, this involves supporting the integration of Amazon's Alexa Guard feature with ADT's professionally installed security and automation systems, helping our customers enhance their home security via audio detection when they're away from home. As such, this partnership extends our footprint in the security and automation space and potentially opens up new sales and marketing opportunities for us. Through our continued close work with Amazon, we are looking forward to a second quarter launch date.

In summary, our year is off to a great start, and we're reaffirming the full year guidance ranges we shared during our March call. We're excited by our many strategic endeavors that leverage our strengths and serve to diversify our business while adding to our growth profile.

I'll now turn the call over to Jeff to walk us through our financial performance in greater detail.

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Jeffrey Likosar, ADT Inc. - Executive VP, CFO & Treasurer [4]

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Thank you, Jim, and thanks, everyone, for joining our call today. During the next few minutes, I will share a little more perspective on our financial results and outlook, summarize our recent capital structure enhancements, highlight a couple of other items, and then we will open the call for Q&A.

As Jim mentioned, our first quarter reflects a solid start to the year with revenue growth of 11% or 4%, excluding the December acquisition of Red Hawk. We were able to grow EBITDA slightly despite approximately $17.5 million of favorable legal settlements in the prior year quarter, and our free cash flow before special items continues to be robust at $171 million for the quarter.

Our top line performance included monitoring and services revenue growth of 5% driven by a combination of Red Hawk's contribution along with higher average prices and better attrition. Installation and other revenue grew more than 70% driven by our expanding commercial business. In addition to the contribution of Red Hawk and smaller tuck-in acquisitions, we also continue to see strong commercial growth on an organic basis.

As Jim mentioned, our latest 12-month gross revenue attrition was 13.3%, exclusive of DIY customers. This compares to 13.6% in the year-ago figure driven by our higher quality customer base and our strong focus on customer service. Our trailing 12 months revenue payback improved to 2.4 years due to higher installation revenue and our focus on efficient sales and installation spend as well as other productivity actions we've undertaken. Our net subscriber acquisition costs were up approximately $11 million or 3% driven mainly by capitalized SAC due to an increase in dealer and bulk generated account purchases, along with higher upgrades and add-on volume and some increases in advertising expenditures.

Our end-of-period RMR increased by $13 million to $349 million, reflecting a 4% increase over the prior year period, or 2% excluding Red Hawk.

Turning to the balance sheet. We are pleased with some enhancements we have made to our capital structure during the first few months of this year. Specifically, we redeemed $300 million of second lien notes in February. Then in April, we issued $1.5 billion of new first lien notes, which we used to repay $1 billion of second lien notes and $0.5 billion of our term loan. This will generate more than $35 million of annualized interest savings. Additionally, we swapped $725 million of variable-rate debt to fixed debt.

We will continue to explore refinancing opportunities incremental to these to reduce our interest expense, defer maturities and/or reduce debt, all of which will depend on market conditions and other capital structure considerations.

From a capital allocation standpoint, we completed the acquisitions of LifeShield and Advanced Cabling Systems during the quarter for total aggregate consideration of approximately $54 million in cash.

We also initiated the share repurchase program we described during our last call, under which we bought back approximately 3.3 million shares for $22 million during the month of March. Our remaining authorization for future share repurchases was approximately $128 million at quarter-end. We expect to continue our repurchase activities during the second quarter. While the timing and amount of our share repurchases will depend on a variety of factors, we continue to believe that share repurchases at recent trading levels represent a compelling capital investment opportunity for the company, given our strong free cash flow and multipronged growth strategy that builds on our leadership position in the industry. As such, our rate of repurchases may increase.

Subsequent to the quarter, in April, we paid a dividend of $0.035 per share, of which we paid roughly $4 million in cash and issued approximately $23 million in shares under the DRIP program we announced during our last earnings call. Earlier today, we declared a second quarter dividend payable on July 2 to shareholders of record on June 11. Similar to the first quarter, Apollo has informed us of their intent to receive their dividend in shares under the DRIP program.

We ended the quarter with a net leverage ratio, defined as total net debt over trailing 12-month adjusted EBITDA, of 4.0x and a 93%/7% fixed to variable debt ratio. Pro forma for our capital structure activities subsequent to the quarter, these same metrics stood at 4.1x and 98% fixed to 2% variable. We now have only $1.3 billion of debt maturing before the year 2022, and we continue to view our capital structure as a source of strength.

As for our overall 2019 outlook, it remains our intention to drive balanced revenue, adjusted EBITDA and free cash flow growth while also making strategic investments to enhance our future growth prospects as we described a couple of months ago. As Jim mentioned, our 2019 guidance is unchanged from what we shared in March, and I'd invite you to view our quarterly presentation for details on the various elements of our outlook.

I'd also like to remind everyone of the investment priorities we described on our last call. These include: positioning our DIY platform for growth following the acquisition of LifeShield; selective brand investments to further enhance ADT's position as a leader in home automation and security; the integration of Red Hawk and some investments in our own organic sales engine to establish a leading commercial platform. Our investment in these areas was light during the first quarter, but we expect it to pick up beginning in the second quarter through the rest of the year. These investments are contemplated in our 2019 full year guidance.

Before we open the call to Q&A, I'd like to briefly mention a few other items you will be able to read more about in our 10-Q as well as some other housekeeping items.

The first is that on a GAAP basis, our first quarter 2019 loss per share was $0.09, which included the loss on extinguishment of debt of $22 million related to the $300 million second lien redemption.

Second, beginning this year, I want to point out that we will no longer provide the non-GAAP metric of adjusted net income. Published media articles have often made incorrect comparisons containing this measure, and after proactively considering various solutions, we have decided that we will no longer be providing this metric. For per-share results comparisons, we have previously and we will continue to report GAAP EPS and GAAP EPS before special items.

Third, as a reminder, our full year guidance excludes 3G replacement costs and other special items. As Jim mentioned, we expect to share more on our 3G to LTE conversion plans as we assess the results of the various pilot approaches we are testing during the second quarter.

Finally, I want to call out that after our successful refinancing transactions in April, we expect our cash interest expense for the full year to be roughly $570 million. The quarterly timing of cash interest will remain similar to the prior year through the first half, with second quarter cash interest much higher than the first quarter's. During the second half, cash interest will be more evenly distributed between the third and fourth quarters.

Based on this higher second quarter cash interest, seasonally higher SAC spend in the summer months and the timing of other cash expenditures, we would expect the quarterly phasing of our free cash flow before special items to be the lowest in the second quarter of this year relative to the other quarters in 2019.

So in conclusion, we are encouraged by our strong start to the year in our core financial metrics and by the enhancements we have made to our capital structure during the first few months of 2019. We are excited by the opportunities in front of us, for the rest of this year and beyond.

With that, I want to again thank you for joining us today. And now Jim, Don and I would be happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from George Tong from Goldman Sachs.

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Keen Fai Tong, Goldman Sachs Group Inc., Research Division - Research Analyst [2]

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Attrition improvement, you've indicated, will not always be linear. Can you talk about the puts and takes that could affect the trajectory of attrition improvement this year specifically?

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James D. DeVries, ADT Inc. - CEO, President & Director [3]

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Yes, George. Thanks for the question. Last year on our earnings call, I think we talked about Q1 2018, and it included our best month ever on attrition, and so, on the one hand, it's important to acknowledge that our year-over-year comparison is difficult. But no excuses, we would have liked to have seen more progress in the first quarter.

And to your question, progress won't always be linear, but we continue to be confident in our ability to drive improvement. Four or 5 factors that will influence that improvement, some of which we've mentioned on the calls in the past, are data analytics, voice analytics. We still think there's some opportunity in our traditional playbook. Everything from various performance management, to improved save rates, to higher capture rates, we're optimistic about the progress in Canada. And we think lastly, that there's more opportunity to improve our overall service levels. We think that the service levels are markedly improved from the past, but they're not to the world-class levels that we think we can drive. And as a result of that improved service level, we think that can round out additional improvements on the attrition front.

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Keen Fai Tong, Goldman Sachs Group Inc., Research Division - Research Analyst [4]

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Got it. Very helpful. And as a follow-up, you'd indicated you're planning to launch with Amazon in the second quarter. Could you elaborate on what this launch will entail? And how you expect the partnership to have an economic impact on the financial model?

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James D. DeVries, ADT Inc. - CEO, President & Director [5]

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You bet. I'll share what I can about Amazon. We have an agreement with Amazon, which sets parameters on precisely what we can share, but I'll try to speak to your question and provide some more color.

I'll start with just a moment reminding everyone that through an Echo device today, we've had deep integration with Alexa voice for our customers that are in the home. Voice commands for the Pulse system had been in place since 2017. And now we're rolling out with our Command and Control system additional use of Echo via the Alexa Guard when the customer is out of the home.

In terms of an update, our teams continue to work closely with Amazon engineers. We have extraordinarily high safety standards and security standards. We and Amazon share those high standards. We've been working to ensure that from a product perspective, this is locked down tight, and we're at a stage where we have been trialing product with great customer feedback. And we're at a stage, George, where we're looking forward to a Q2 launch.

We feel good about the launch. We haven't shared specific economics on precisely what we think it can deliver, but we feel good about the partnership. We remain upbeat about the co-marketing and promotional opportunity, working together with Amazon.

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Jeffrey Likosar, ADT Inc. - Executive VP, CFO & Treasurer [6]

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And George, it's Jeff. To your specific question about how you see it in the financial model. Ultimately, it's another sales and marketing channel for us, so it's that. And then, it gives us that much more of a comprehensive offering to take to our customer base in concert with Amazon's customer base.

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Operator [7]

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Our next question is from Manav Patnaik from Barclays.

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Manav Shiv Patnaik, Barclays Bank PLC, Research Division - Director & Lead Research Analyst [8]

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I just wanted to ask, Jim, maybe if you could walk us through the -- how the pilot with the Citizens Financial is going? Like how that -- how you see that benefiting you guys, just the mechanics there, because it obviously has helped one of your competitors. So I was just curious, when that could be beyond pilot and how that would impact you guys?

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James D. DeVries, ADT Inc. - CEO, President & Director [9]

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Yes, you bet, Manav. Thanks, and I will -- I'll just offer a headline on the Citizens' pilot. We're excited about it. Our -- I think we're in 5 markets. We've just launched. And the executive that is leading that work is Jeff Likosar, and he's probably best positioned to answer your question, so I'll ask Jeff to chime in.

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Jeffrey Likosar, ADT Inc. - Executive VP, CFO & Treasurer [10]

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Yes. Thanks, Manav. So with Citizens, the concept is to use a third-party financing source. We've talked a little bit in the past about the fact that we've been evaluating changes to our offer or pricing structure for some time in response to consumer needs changing a bit, technology evolving, with really 2 objectives.

The one objective is to drive lower net subscriber acquisition costs by collecting more revenue at the time of install. And then the second objective is to be able to sell a richer mix of stuff, more devices to the average customer that go beyond core security to automation and other ancillary kinds of devices without having to subsidize it.

So what that really means is seeking to collect more revenue at the time of install. We've been piloting a variety of ways to do this during most of last year, including some financing options that we've financed ourselves using our own balance sheet. So what we recently did is in 5 pilot markets, we plugged Citizens into those markets so that we're able to offer customers that meet the credit requirements a third-party financing source. And it's too early to draw conclusions because we're only a couple of weeks into it, but we're very encouraged by the opportunity and what we've seen so far. But the net of this is lower subscriber acquisition costs over time by shifting some more of the install cost to the consumer instead of subsidized by us.

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Manav Shiv Patnaik, Barclays Bank PLC, Research Division - Director & Lead Research Analyst [11]

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Okay. Got it. And then just maybe broadly, I mean, I understand the attrition improvement's not going to be linear, but is there kind of some sort of a target or longer-term range to think about where you could get to?

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James D. DeVries, ADT Inc. - CEO, President & Director [12]

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Yes. Tough one to answer with specificity, Manav. There have been times in the past where best-in-class organizations were in that 11% or 12% range. It's, I would say, highly dependent on mix. National accounts, as I think you know, tends to have a very low attrition rate. Commercial tends to be a bit lower than residential. But at some stage of the game, we'd be targeting those longer-term sort of best-in-class rates in that 11% to 12% range.

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Operator [13]

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Our next question is from Toni Kaplan from Morgan Stanley.

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Toni Michele Kaplan, Morgan Stanley, Research Division - Senior Analyst [14]

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Jim, you mentioned that you're analyzing different approaches for the 3G conversion. And Jeff, I know you mentioned at the end that you'll share the results when you have them, but I just wanted to understand -- make sure I understood correctly. Does that mean that you couldn't be adding some incremental expense for that this year that's not included in the guidance? Is that fair? Or is that reading too much into it?

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James D. DeVries, ADT Inc. - CEO, President & Director [15]

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Toni, I'll give you a little bit of context on 3G, and Jeff, if I miss anything, please jump in here.

So in terms of the kinds of things that we're testing, we're really looking at 3G as part of a broader upgrade strategy. And we are testing, I think, in 8 different markets, a handful of pricing alternatives, product alternatives, different packages to see what is most effective with -- resulting in conversions.

Everything that we're doing so far, Toni, has been while-you-were-there work. So in other words, we will service this year something in the neighborhood of a little north of 2 million customers. And while we are doing service calls for existing customers, we think that's the opportune time to do a radio upgrade. So the work to date has been -- as I said, has been part of a broader upgrade strategy and embedded in the service call process, testing different price points and product offerings to see what's most effective for us.

Jeff, do you have anything to add?

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Jeffrey Likosar, ADT Inc. - Executive VP, CFO & Treasurer [16]

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Yes. I would just add. Our objective is to minimize the cost to us by getting certain of our customers to help offset a portion of that cost and, in some cases, just by replacing the radio, in other cases, by upgrading the customer to a new system. And because we're just out with this brand-new Command and Control system, it's early days testing receptivity to that as an upgrade offer, and then it's early days testing the while-we're-there-anyway price that we might be able to charge a customer as part of upgrading just the radio.

And as I said in my prepared remarks, we did not build any costs associated with that into our 2019 guidance. It's possible there will be some in 2019. We have 3 years to work our way through this. And as we digest the results from these pilots, we will share more on our next call.

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Toni Michele Kaplan, Morgan Stanley, Research Division - Senior Analyst [17]

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Okay. That's helpful. And then my second question. Just given that China tariffs are in the news again, can you remind us what kind of risk you see there? Like basically, what percent of your costs come from suppliers that might ultimately source their products from China? Just what's the sort of exposure to that?

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James D. DeVries, ADT Inc. - CEO, President & Director [18]

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Sure, Toni. The exposure -- we've worked in a more or less continuous basis with our procurement group, the exposure as a result of the tariffs are de minimis for us.

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Operator [19]

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Our next question is from Jeffrey Kessler from Imperial Capital.

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Jeffrey Ted Kessler, Imperial Capital, LLC, Research Division - MD [20]

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Can you go through a little bit more on the Citizens, the -- I'm sorry, on the Citizens' action, because right now, I've got my assistant probably asking the exact same question to your competitor who's having their conference call at the same time here.

It appears that they have been able to already do the things that you're trying to do. Is there something that is different about -- or what types of tweaks and what types of differences do you think you would have been -- not necessarily your competitor, but then, let's call it, other companies in doing what you're doing with Citizens? And also, are you talking to Citizens about what the potential exposure that they have to with -- in terms of attrition, things like that, as you get more and more into the weeds over time with regard to how many customers are [attriting] who have been financed by Citizens?

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Jeffrey Likosar, ADT Inc. - Executive VP, CFO & Treasurer [21]

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Yes. Thanks, Jeff. I'll share a couple more comments. So I mentioned earlier that our main motivation here is reducing the cost of taking on new subscribers, reducing the cash out of pocket.

We also see an opportunity to upgrade more customers either at the time of initial sale, you're selling them more widgets as I described a moment ago, but also, over the life of that customer, so at the end of a customer's contract. For example, you're having access to a credit line. We're encouraged that over customer lifetime will lead to more upgrade opportunities.

We're also encouraged by the attrition characteristics of customers who use third-party financing for a couple of reasons. One is, is they have a relationship with a bank that we think is likely to reduce nonpayment behavior, in some cases. And secondly, because we expect we can sell those customers more components to their system, that they'll interact with the system and use the system more, which is also associated with improved attrition.

You asked for the differences between us and our competitors. I'm not going to comment and, of course, Citizens is limited in the information that they share with us. But I would say that some structural differences between us and other participants, a, is we have a larger existing customer base than anyone else. Consequently, b, we have certain customers who are reinstating equipment or using equipment already in the home so that leads to some slightly different characteristics. And then relative to other participants in the industry, we have more customers who are in -- who we're taking on as part of a relocation process. Those are all opportunities with Citizens as well, but just responding to your questions as far as some things that are different, I'd say those are somewhat different compared to other players in the industry.

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Jeffrey Ted Kessler, Imperial Capital, LLC, Research Division - MD [22]

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Okay. I've got about 10 questions for Don, but since I'm not going to ask him now, I'll just -- let me get to one other thing. And that is, you mentioned up above with regard to, I guess, attrition and just general financial results. 3 words: progress in Canada. I have not heard the word -- I have not heard the phrase progress in Canada since this company was sold to Tyco in 1997. What is going on in Canada right now that gives you the confidence that good things are actually finally happening in Canada?

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James D. DeVries, ADT Inc. - CEO, President & Director [23]

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Jeff, it's Jim. I'll give it a shot at answering your question.

Progress in Canada. So a little bit of a recap for those on the call. Canada represents about 5% of our revenues. Over the course of the last 2, 3 years, we've had relatively less focus on Canada compared to the United States. We're confident that the playbook that we've deployed in the U.S. will be successful in Canada. We've installed a new leader in Canada with turnaround experience, and the team's off to a good start.

We know that Canada will be a drag on our EBITDA for 2019 on a year-over-year basis. But from the early signs on attrition, early signs on mitigating the EBITDA headwind, focus on positioning the business for a turnaround, there's some good progress that has been made in Canada. And I would say we're bullish, Jeff, that, that progress will continue.

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Operator [24]

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Our next question is from Kevin McVeigh from Crédit Suisse.

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Kevin Damien McVeigh, Crédit Suisse AG, Research Division - MD [25]

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Any thoughts as to what drove the Q1 upside in the EBITDA? It was obviously a nice result there. Was it less loss than kind of the DIY? Or just better fundamentals? Just any thoughts around that?

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Jeffrey Likosar, ADT Inc. - Executive VP, CFO & Treasurer [26]

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Yes. I'd tell you, Kevin, the key drivers of EBITDA are the drop-through of revenue, of course, and we did a nice job in the quarter relative to our internal plans, just executing on spend across the company, really across most functions of the company. No one specific thing I would call out, but across the board, we executed well from a cost perspective so it's the revenue drop-through and cost execution.

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Kevin Damien McVeigh, Crédit Suisse AG, Research Division - MD [27]

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Got it. And then just within the context, so we're clear, you don't have any Amazon benefit in the '19 guidance, so anything you sold would be incremental. Is that fair?

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James D. DeVries, ADT Inc. - CEO, President & Director [28]

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It's fair. I think we have a very small lead flow that's built in, Kevin, but it's a modest number, and any meaningful pickup for Amazon would be all upside. So I think it's fair to answer your question, we view it as a call option. It's upside for us.

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Kevin Damien McVeigh, Crédit Suisse AG, Research Division - MD [29]

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Cool. And then just real quick, on the attrition improvement, Jim, 30 bps, is there any way to think about this split, how much was credit versus operational? Or was it all kind of just operational improvement that reduced it? Or just any thoughts around that?

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James D. DeVries, ADT Inc. - CEO, President & Director [30]

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Year-over-year, the 30 bps improvement, I would say at this stage of the game, Kevin, is principally -- the tailwind that we have on attrition at this point is principally through service improvements. Much of the credit checking has sort of worked its way through the system. The exception to that, I would say, would be Canada, where it's maybe a little bit more of a -- of an even mix between the 2, from an attribution perspective. But I'd say at this stage of the game, we're starting to see more of an impact on the service side than the credit checking and the Smart Growth that we implemented a couple of years ago.

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Operator [31]

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Our next question is from Gary Bisbee from Bank of America Merrill Lynch.

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Gary Elizabeth Bisbee, BofA Merrill Lynch, Research Division - Analyst [32]

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So I guess, first question on the commercial business. You've got a slide here showing a bit more detail, and how should we think about the growth prospects over time there? Is that 8% organic revenue growth in the quarter in commercial, is that a reasonable run rate assumption of what you think you can deliver over time?

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Jeffrey Likosar, ADT Inc. - Executive VP, CFO & Treasurer [33]

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Yes, we want our commercial growth strategy to continue to include bolt-on type acquisitions along with organic growth. We expect commercial to grow more quickly than our residential business. We haven't guided to a particular growth number, but when you look at what we've said for the full year guidance, we would expect commercial to be on the higher end of that range or even above the total company's full year guidance range and residential to be on the lower end. So we're really excited by the 8% organic growth in addition to the inorganic growth you see.

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James D. DeVries, ADT Inc. - CEO, President & Director [34]

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And just to layer on a little bit, Gary. We're super optimistic about commercial. The revenue number, the organic revenue number that we put on the board in the first quarter, we feel good about, but not unimportantly, the backlog is very strong as well, and so the pipeline continues to grow. The opportunity to take share is based on service, and that's right in our wheelhouse. And so I'd say as we are here in early May, we're incredibly optimistic about the commercial business.

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Gary Elizabeth Bisbee, BofA Merrill Lynch, Research Division - Analyst [35]

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Okay. And then for the Command and Control offering, how does that, from both a pricing and for you a cost perspective, compare to the Pulse system, and even more broadly, your sort of legacy offerings? Are you getting more revenue? And is there any discernible difference in cost structure?

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Donald M. Young, ADT Inc. - Executive VP of Field Operations & Chief Information Officer [36]

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So Gary, this is Don. Yes, thanks for that question. So we're seeing a little bit of a revenue uplift. It's so new, it's tough to go in and forecast or measure it going forward, but on average, on par. It's a little bit more than what we've seen with Pulse.

From a cost standpoint, it's early, so we're obviously having to adopt. But on the sales side, we're at 90% adoption, which was really an incredible number to hit this early in the game.

And on the install side, we're actually at the high 80% power range for installing the same system that was actually sold. So another number that compares very favorably to what we attempted to do in 2014 when we rolled out the predecessor to the command panel called TS.

As far as the installation timing, that's also so far showing itself to be fairly impressive. And so it was about 4 months for us to kind of hit our stride with the TS costs for installing. We're already at that stride in month 1 with the Command and Control. So a lot more to learn, and a lot more to share with what our costs will level out to, but right now, we're really excited about what it looks like out of the gate.

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Jeffrey Likosar, ADT Inc. - Executive VP, CFO & Treasurer [37]

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And the one thing I'd add that we're encouraged by as well, that ties into what I was describing on pricing is that, it's just a better product. And because it's a better product, customers are more excited by it, and we're encouraged by early signs of the potential to sell the customers more components that goes with it, which we think long term has the opportunity to drive better customer retention over time too, because again, the more the customers use the system, the more likely they are to stick with us. So a lot of -- it's very early, but we're very excited and encouraged by the initial response.

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Operator [38]

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Our next question is from Peter Christiansen from Citi.

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Andrew Garth Schmidt, Citigroup Inc, Research Division - Senior Associate [39]

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This is Andrew on for Pete. So I just wanted to ask you about the growth in revenues. I mean even ex Red Hawk, it's still a nice acceleration in that growth. Could you guys just give us some more color as to what's really driving that?

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Jeffrey Likosar, ADT Inc. - Executive VP, CFO & Treasurer [40]

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Yes. Well, for us, our revenue is a combination, as you know, of monitoring in-service revenue and install revenue. And obviously, install revenue is what's driving the growth rate off of a smaller base, and the key driver there is the acquisition that you already described, especially Red Hawk, but then the strong organic growth we were talking about just a couple of moments ago.

On the monitoring and service side, the key to growing monitoring and service is the quantity of customers we have and the price of those customers. On average, as you know, we focus mainly on the RMR, so it's really the recurring monthly revenue base. And the driver there is the improved attrition that we have talked about along with increases in higher average pricing, and the increases in higher average pricing largely are attributable to shifting the mix towards service levels that include more components. You have more service with the service level, more video, more automation, which again, is tied into the transition towards a larger percentage of our customer base having automated-type services. So we feel good about where we are on the top line overall.

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Andrew Garth Schmidt, Citigroup Inc, Research Division - Senior Associate [41]

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Okay. No, that's helpful. And with regards to LifeShield. Obviously, you've had a full quarter with that acquisition. Is there anything that kind of stands out more now than it did prior? And are you still planning for that around $20 million in investment throughout the year?

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James D. DeVries, ADT Inc. - CEO, President & Director [42]

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Andrew, I'm not sure what stands out materially different than what we knew a couple of months ago. I'd say that the team is outstanding. We continue to be incredibly excited about this opportunity. As you likely know, this is -- we're going after the 80% of the market who don't have pro install customer. As we redirect leads, either for customers that are out of our footprint or who don't meet our credit standards, the recycling of those leads is proving to be an opportunity with LifeShield. We've launched e-commerce. We're testing into brand and marketing decisions. And especially through the lens of a customer lifetime value, we continue to be bullish about the DIY market.

In terms of specific things we know today that we didn't know before, I'd probably be in the realm of marketing insights or brand insights that we're testing, but probably wouldn't have detail that we'd share on the call on that front.

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Operator [43]

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Our next question is from Seth Weber from RBC Capital Markets.

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Seth Robert Weber, RBC Capital Markets, LLC, Research Division - Analyst [44]

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I was intrigued to hear about the cross-selling between the Fire & the Security business. I mean is there any more color you can give us there? How aggressively you're pushing that? Do you have special sales guys kind of going after those types of accounts? Or how big do you think that opportunity could be for you?

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James D. DeVries, ADT Inc. - CEO, President & Director [45]

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Seth, I will offer a couple of comments and then ask Don to weigh in as well.

At a high level, the answer is yes, we're going after this market hard. The win that we had on the 1,400 store customer was a takeover. It was a revenue synergy that would not have occurred had we not had Red Hawk and fire products in our -- as another arrow in our quiver. They're not necessarily specialized sales folks, but they are commercial sales reps who are intimately familiar with fire that are going after this market. The biggest opportunity for us tends to be in our national account business, where we will go after this cross-sell opportunity.

I don't know, Don, if you have anything to add?

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Donald M. Young, ADT Inc. - Executive VP of Field Operations & Chief Information Officer [46]

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Yes. Everything that Jim said, but also the engineering prowess that we gained with the Red Hawk acquisition was really important to plug a necessarily hole. Plus just for us to get a seat at the table with the decision-makers at some of these customer headquarter locations and national accounts plays right down the fairway with that opportunity for us.

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Seth Robert Weber, RBC Capital Markets, LLC, Research Division - Analyst [47]

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Super, that's helpful. And then just as a follow-up. I think I heard you talk about the $40 million of incremental costs that you guys called out last quarter. I think you said first quarter was a little bit light and it's going to ramp here through the rest of the year. Is that a fair -- did I hear that correctly? Is there any way we should think about the cadence of that $40 million, relative 2Q through 4Q here versus the first quarter?

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James D. DeVries, ADT Inc. - CEO, President & Director [48]

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Yes. I think it is fair to conclude that, Seth. The investment is principally in the DIY space, and that represents, give or take, about $25 million of the $40 million. And the more significant spend will come in the back half of the year when we're focused on a brand launch and more assertive marketing. Right now, much of the volume that is coming into LifeShield is through the recycled leads that I mentioned earlier and when we start the marketing spend later in the year, in addition to the new brand that we have for LifeShield, that's where we'll see some more of that spend. So it's definitely weighted towards the second half of the year.

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Operator [49]

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This concludes the question-and-answer session. I'd like to turn the floor back to Mr. DeVries for any closing comments.

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James D. DeVries, ADT Inc. - CEO, President & Director [50]

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Thank you, operator, and I also want to thank everyone for being with us on today's call. As always, I'm deeply appreciative of the dedication and ongoing efforts of our many ADT colleagues and our dealer partners who continue to drive our ongoing growth in our platform and ultimately, our success with millions of ADT customers. We're making great progress in 2019. We're excited about the many growth drivers we see for our business.

Thanks again for being on the call. We look forward to updating you in the near future, and we wish everyone a good evening. Thank you.

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Operator [51]

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This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.