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Edited Transcript of ADT.N earnings conference call or presentation 6-Aug-19 9:00pm GMT

Q2 2019 ADT Inc Earnings Call

Sep 5, 2019 (Thomson StreetEvents) -- Edited Transcript of ADT Inc earnings conference call or presentation Tuesday, August 6, 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 ADT's Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded. I would now like to pass the conference over to your host, Jason Smith, Senior Vice President of Finance and Investor Relations. Sir, you may begin.

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

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Thank you, operator, and thank you, everyone, for joining us this evening for ADT's Second Quarter 2019 Earnings Conference Call. This afternoon, we issued a press release and 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 expressed or implied by such forward-looking statements. These risks include, among other, matters that 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 include special items, which are difficult to predict and mainly dependent upon future uncertainties. For a complete reconciliation of historical non-GAAP to GAAP financial measures, please refer to our press release issued this afternoon and our slide presentation, both of which are available on our website at investor.adt.com.

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

With that, 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 our call. We're pleased to be able to share with you our strong second quarter results as well as our progress on a number of key initiatives.

Let's start with our second quarter financial performance. We grew our top line 13% to $1.3 billion, accelerating from last quarter's 11% growth. Excluding the Red Hawk acquisition, which was completed in the fourth quarter of 2018. We grew our business 5%, also slightly above our first quarter growth rate, led by very strong organic commercial growth of 19% and an increase in our residential interactive take rate.

Taking a closer look at our commercial business. Revenue from business customers accounted for 29% of our year-to-date total revenue. Indicative of our progress during the quarter, our sales team was awarded a Fortune 100 National Retailer with over 1,000 sites and a broad spectrum of product and service needs, including monitoring, CCTV and fire.

We also continued to make progress integrating Red Hawk and completed 3 smaller commercial tuck-in acquisitions. We remain confident in the bright prospects for this part of our business. We have a strong pipeline and expect to generate additional total and organic growth through the balance of the year before lapping the Red Hawk acquisition, which occurred last December.

Turning for a moment to our residential business. Driven by our recent launch of our new Command & Control panel, over 80% of second quarter installs included interactive services, bringing the percent of our total residential and small business customer base to 43% as of the end of June, up from 38% a year earlier. This is a positive outcome. We expect to continue to improve even further, given the robust adoption rates today.

Our adjusted EBITDA at $630 million expanded 3% over the prior year period, driven by the higher revenues as well as our continued focus on cost efficiency, particularly in our field service operations. Our quarterly free cash flow before special items remained strong at $121 million, roughly consistent with the year-ago quarter. Year-to-date, as of June, we generated nearly $300 million of free cash flow before special items, which is in line with our expectations.

To support continued growth and profitability, we remain focused on improving and balancing our key performance indicators or KPIs. Beyond the large increase in our interactive take rate, our gross revenue attrition on a trailing 12-month basis improved 20 basis points versus the prior year to 13.3%. Despite the year-over-year improvement, we've adopted a neutral outlook for the balance of this year, as reflected in our updated guidance that Jeff will share in a few minutes.

We continue to make strides in customer service levels and have not experienced a meaningful increase in attrition attributable to competition. Over the long term, we expect to drive continued attrition improvement as we deliver a superior customer experience and emphasize optimizing the acquisition of high-quality customers such as those that are now embracing Command & Control.

Continuing with our operating metrics. During the quarter, we generated efficient RMR or recurring monthly revenue additions of $13 million, consistent with the increase during Q1 this year, growing our end-of-period RMR to $351 million. Our total SAC or subscriber acquisition cost was up 1% in the quarter to $370 million, primarily attributed to higher upgrade and add-on volumes and advertising investment. Looking ahead, we expect to continue to drive underlying net SAC improvements through higher installation revenues as well as increased sales and installation productivity. We also expect to continue our current higher investment rate for upgrades to meet strong existing customer demand for the Command & Control panel and incremental home automation services.

Summarizing our second quarter performance, we're pleased with our overall progress in driving strong revenue growth, balancing our core operating metrics and delivering healthy levels of adjusted EBITDA and free cash flow, all while continuing to position and invest in our business for the future.

Next, I'd like to provide an update on our progress converting our 3G radios, the count of which is now approximately 3.6 million units. Since our last call, we made significant progress advancing and deploying our replacement strategy. While our estimates are subject to change, I'll provide a few key points as you think about the 3-year life of the program.

First, there are many variables involved: retention levels, system upgrades, revenue opportunities and even potential technology solutions that impact the outcome. Second, we estimate 50% or more of the replacements could be conducted while we are there, already assisting our customers in their homes. In other words, a separate truck roll would not be required. Third, we are continuing to test and develop a variety of initiatives to reduce or offset the gross expenditures associated with these conversions. Our estimated range of the net cost for the 3G conversion is between $200 million and $325 million. While we have entered the execution phase, we remain in the relatively early stages and we'll continue to evaluate ways to make the onetime replacement costs even more efficient.

Allow me to provide an update on a few of our new business initiatives, starting with Amazon and Alexa Guard. As previously discussed, ADT supports the integration of Amazon Alexa Guard feature with our professionally installed security and automation systems. Benefits for us include allowing ADT customers to enhance their home security via audio detection when they're away, and the addition of new sales and marketing opportunities. I'm pleased to share that Alexa Guard launched during the second quarter, and we have completed more than 15,000 customer integrations with ADT Pulse and Command & Control.

Also during the quarter, we entered into a new partnership with BH Management Services, a leading national multifamily home provider. Partnering with BH, we built out approximately 6,000 new units in the second quarter with smart home capabilities, including smart locks, thermostats as well as security.

Finally, subsequent to the quarter end in July, we entered into a future pilot agreement with Farmers Insurance to offer professionally monitored home protection and smart home solutions for their policyholders.

A final noteworthy strategic initiative is our launch during the second quarter of a 5-city pilot program with Citizens Financial Group as part of their merchant partnership platform. In July, we expanded the program to an additional 3 cities. This consumer financing arrangement allows consumers to finance upfront costs of becoming an ADT customer. Early indications have been encouraging and it resulted in strong unit economics with meaningfully higher upfront revenue. During the pilot, we will continue to work through refinements to our pricing model and sales experience to optimize the program before rolling out a consumer financing program on a national level in the coming quarters. We're excited about the implications of the program, which we believe will benefit both our capital efficiency and long-term growth opportunities.

In summary, we generated strong financial results during the second quarter, continued to make solid progress on our KPIs and rolled out many exciting strategic business initiatives that will help drive ADT's future.

With that, I'll turn the call over to Jeff.

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

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Thanks, Jim, and thank you, everyone, for being with us today. As Jim mentioned, we had a strong second quarter overall with revenue growth of 13%, or 5% excluding the Red Hawk acquisition; $630 million of EBITDA, up 3%; and free cash flow before special items of (inaudible) and other tuck-in acquisitions combined with the organic growth, our commercial business is now nearly double the size of a year ago.

As Jim described, our net subscriber acquisition cost, or SAC spending, was up 1%, primarily due to higher upgrade and add-on volume plus advertising investment. This 1% growth was outpaced by our growth in new recurring monthly revenue or RMR additions of $13 million, which was up 4% over the prior year.

Our resulting customer revenue payback at 2.4 years on a trailing 12-month basis was consistent with the prior year figure.

Turning now to the balance sheet. We ended June with a net leverage ratio defined as total net debt over trailing 12-month adjusted EBITDA of 4.1x. We meaningfully improved our debt structure during the quarter, issuing $1.5 billion of new first lien notes, which we used to repay both $1 billion of second lien notes, plus $500 million of our first lien term loan.

In addition, we are pleased to have returned some capital to shareholders during the quarter. We mentioned on our first quarter earnings call in May that we and our Board believe our stock to be attractively valued at recent levels, and that subsequent to the first quarter, we may accelerate our rate of share repurchases under the $150 million authorization we announced in March.

During the second quarter, we repurchased approximately 21 million shares for approximately $128 million, which, combined with our first quarter repurchases, substantially completes our share repurchase program.

In early July, we paid our first quarter dividend of $0.035 per share, which was comprised of $3 million in cash and $23 million worth of shares issued under our dividend reinvestment plan. Today, we declared a second quarter dividend also at $0.035 per share, payable on October 2 to shareholders of record on September 11.

We remain focused on returning capital to stockholders and increasing stockholder value over time.

I will now provide an update on our outlook for 2019, which continues to reflect our sharp focus on driving balanced revenue, adjusted EBITDA and free cash flow growth, while also making strategic investments to further enhance our future growth profile. These investment priorities principally 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, and continuing our commercial expansion.

There's no change to our priorities, and our original outlook for approximately $40 million in spend in these investments during 2019 still holds, with the vast majority of that spend occurring during the second half of the year. I invite you to view our slide presentation for an overview of our updated full year outlook.

We are pleased with our overall first half performance and have improved the full year ranges for both total revenue in EBITDA, while providing a more neutral outlook for attrition, as Jim shared earlier. Our free cash flow before special items outlook is unchanged.

Before we open the call to Q&A, I will provide a couple of housekeeping items for the quarter and balance of the year.

First, our net loss of $104 million in the quarter included approximately $67 million of costs associated with the $1.5 billion refinancing during the second quarter that I mentioned earlier. Second, with our 3G radio replacement program now underway, we incurred some nominal expense during the second quarter. For the full year, we expect to incur approximately $25 million to $35 million in special items related to 3G conversions, which is not included in the guidance ranges I just shared.

In summary, our business is performing well overall, evidenced by our strong revenue and adjusted EBITDA results through June and continued positive cash flow generation. We believe this is a reflection of our focus on the right key performance indicators, the many profitable growth initiatives we have in place and our strong financial position.

I want to thank you for joining us today, and we'll now start our Q&A session. And Jim, Don and I welcome your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Toni Kaplan of Morgan Stanley.

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Toni Michele Kaplan, Morgan Stanley, Research Division - Senior Analyst [2]

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You mentioned the attrition guidance very briefly, but I was wondering if you could -- the change, just wondering if you could talk about what changed versus your prior expectations just now that you're not expecting it to improve by as much as you thought last quarter? And just, I guess, going along with that, how much is left to do on the customer service side and the additional levers you have for improving attrition?

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

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Sure. Thanks, Toni, for the question. This is Jim. A couple of contextual points I'll make on attrition and then speak specifically to your question on what's changed and what we're seeing today.

At a high level, we are bullish over time. The improvement isn't always going to be linear, but we're optimistic that we're going to see continued improvement in attrition. As you know, attrition is a key KPI for us, one that the organization is incredibly focused on. We're going to continue to use the tools that we have been using, data analytics, voice analytics, the traditional playbook that you're familiar with, variance performance, management save rates, capture rate. And we think that there's still some opportunity to improve our overall service levels. In short, we've made pretty significant progress, but we're not satisfied.

In terms of the attrition over the quarter, we had a little bit of pressure from our dealer-acquired accounts. We set our funding multiple or the purchase price that we pay for these accounts based on credit quality. And so that essentially means that we're able to drive pretty good returns and cash flow simultaneously to having some pressure on attrition. And in the second quarter, the dealer-acquired accounts are what is causing some of the pressure that we saw in the quarter, and frankly, that we expect to see for the remainder of the year.

I don't want to leave you with the impression that we don't have good standards in place on credit. We do. We'll try to continue to optimize attrition to drive free cash flow. And the organization is still focused on attrition as a central metric that we're driving, just not a single KPI that we're balancing.

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Toni Michele Kaplan, Morgan Stanley, Research Division - Senior Analyst [4]

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That's helpful. And then on my follow-up, the RMR additions were up 4% in the quarter year-over-year, which was a really nice improvement. Was this a result of the strong take rate of Control? And was there anything onetime in the quarter? And can you also talk about how ARPU is trending on like-for-like customers?

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Jeffrey Likosar, ADT Inc. - Executive VP, CFO & Treasurer [5]

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Toni, it's Jeff. So yes, we're pleased with our RMR performance. We're also pleased that our SAC grew by a lesser amount than RMR, which speaks to our increasing efficiency with revenue payback.

The thing I'd remind you is Red Hawk is in there. So Red Hawk year-over-year contributed a portion of the growth. And then commercial generally continues to perform well. You'll see some of the headlines, which is mainly installation, but also some RMR adds with our commercial business. And then we have RMR up in the residential side as well. And to your revenue per unit point, that's really driven by pricing, which is definitely related to our take rate on interactive and our rollout of our new Command & Control platform.

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Operator [6]

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Our next question comes from Manav Patnaik with Barclays.

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Manav Shiv Patnaik, Barclays Bank PLC, Research Division - Director & Lead Research Analyst [7]

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My first question is just on the commercial account growth of 19%. I guess how sustainable is that? And is that -- I guess, is it competitive win? Just maybe some more color there, please.

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James D. DeVries, ADT Inc. - CEO, President & Director [8]

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Yes. Thanks for the question, Manav. It's Jim. So terrific, terrific quarter for us, 19% organic. The first quarter was at 8%. I think it's reasonable to assume that, that first quarter performance is about a 4%, and 19% is going to be a difficult one to match. I think that it's probable that the growth rate will be between those 2. The team is -- we're doing really well in commercial. Dan Bresingham, Mike McWilliams, Bobby Dale, the entire leadership team are hitting on all cylinders. We've -- our acquired tuck-ins are doing well. Red Hawk is doing well, core commercial and national accounts. And we feel great that we can win in this space. Service is the lever for growth. We like the financial profile, 10% to 15% cash flow margins, lower capital intensity and continue to feel pretty optimistic about the success and really proud about the second quarter.

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Manav Shiv Patnaik, Barclays Bank PLC, Research Division - Director & Lead Research Analyst [9]

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Okay. Got it. And then just on the guidance raises. So I was just hoping you'd help me understand the $50 million to $100 million revenue guide. Is that all because of this commercial growth? And then on the EBITDA side, the $10 million lower end, does that include some of these recent settlement payments? Because I think in last year, you had included that in your EBITDA. I just wanted to clarify that.

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

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Manav, it's Jeff. So the first part of your question, yes, revenue, the main driver is the commercial performance. We've also had a couple small tuck-in acquisitions, don't add a material amount of revenue or EBITDA, but that is generally the revenue driver is the -- increasing the EBITDA ranges is really the drop-through on that higher revenues that comes predominantly from commercial, and then there's some uncertainty sitting here only halfway through the year. So we feel confident, but you don't have a crystal ball, so we are optimistic that we'll be able to hit each of those numbers. And then we held the free cash flow guidance also just because at this point in the year, there's still a number of things that are not fully certain. But we feel good -- really good overall about where we are through the first 6 months.

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Operator [11]

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The next question comes from Gary Bisbee with Bank of America.

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Gary Elizabeth Bisbee, BofA Merrill Lynch, Research Division - Analyst [12]

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I guess, on the 3G radio upgrade, so it sounds like you're going to be adding that back to your adjusted earnings, $25 million to $35 million this year. How does the cadence of that play out over the next couple of years? Any color? And I guess you said you're maintaining free cash flow guidance but now you've got this cost. So is that included within that? Or is that something you'd add back to your, whatever you call it, adjusted free cash flow or free cash flow ex onetime items or whatever?

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James D. DeVries, ADT Inc. - CEO, President & Director [13]

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Yes. Gary, I'll give a little bit of context, and if Jeff has anything to clarify, I'll ask him to step in.

So you're right, we expect to incur, I think, $25 million to $35 million in special item costs during '19. There was a very small amount, a nominal amount of that, that we incurred in Q2. Most of our upgrades that we've done so far are what we call while-you-are-there upgrades. And we expect that to be a very significant portion of the upgrades that we achieve going forward. Essentially, that is taking advantage of the 6,000, 7,000 service calls a day to upgrade the radio while we're there.

And then I would say we're going to use the remainder of the year to continue to test methods to help us execute. We've mentioned before revenue offsets. We're still doing some vendor negotiation. We're working with the telcos on a couple of different technology alternatives. And so we are working hard to drive that expense down. And then as I mentioned in the prepared remarks, the estimated range of the net expense is $200 million to $325 million, a little bit of a broad range but a best estimate at this stage. And then, Jeff, if you had any.

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Jeffrey Likosar, ADT Inc. - Executive VP, CFO & Treasurer [14]

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Yes, I would just add to the last part of your question. I think I mentioned this in my prepared remarks, but the guidance range we shared was exclusive of the expenditures on the radio upgrades, which we do intend to treat as a special item. We incurred a bit of expense, but it was nominal in the second quarter.

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Gary Elizabeth Bisbee, BofA Merrill Lynch, Research Division - Analyst [15]

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Okay. And so -- I mean, beyond this year is sort of taking that net expense that you talked about over the next 2 years after that? Would that be a reasonable -- I know you're going to try to bring it down, and I understand all these things you're trying to do, but would that be reasonable way to think about building it in? Or is the timeline different than that?

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James D. DeVries, ADT Inc. - CEO, President & Director [16]

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Yes. I think that's a reasonable approximation, Gary, but it's roughly split between the 2 years.

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Gary Elizabeth Bisbee, BofA Merrill Lynch, Research Division - Analyst [17]

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Okay. And then just to follow-up quickly. Within that $40 million of incremental investment this year, one of the items was some advertising. I guess could you give us a sense what you're doing there? And is this going to be focused now on getting people to upgrade to the new technology? Or how are you going about the advertising portion of that investment?

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

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It's -- the advertising portion is principally orbiting around brand transformation. It's less direct response and more about helping to reposition the brand to be more tech forward and relevant and contemporary. The majority of that spend hits in the second half of the year and is largely, as I said, about -- is about brand build more than a specific initiative or around upgrades or 3G or the like.

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Operator [19]

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The next question comes from Kevin McVeigh with Crédit Suisse.

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Kevin Damien McVeigh, Crédit Suisse AG, Research Division - MD [20]

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I just wanted to focus up on the attrition a little bit. You're able to maintain the free cash flow despite kind of increasing the attrition. Do the historical sensitivities kind of remain? And just along those same lines, is there any way to (inaudible) because, obviously, the commercial is a much bigger percentage of the business today, yet it seems like the attrition is comping up, and historically, that's been lower. Just any thoughts around those questions?

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James D. DeVries, ADT Inc. - CEO, President & Director [21]

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It's a, I'd say, a couple of things, Kevin. One is that a little bit of a repeat of what I had shared with -- in response to Toni's questions. We're managing a number of KPIs to drive cash flow. We love the cash flow story. We think we can continue to expand cash flow. And the last thing I want to do is not put attrition front and center. It's a critical metric, but it's not the only metric. And so while we see some pressure on attrition, largely attributable to this dealer issue that I talked about, we're able to still deliver on our EBITDA number and we're still able to deliver on the cash flow number, and that's because we're balancing a dozen metrics to try to do so.

More specifically on your question with regard to commercial mix, we're dealing with base -- a number of small movements here can have an impact on attrition. We lost via bankruptcy a couple of commercial accounts in the second quarter, and that contributed to a little higher number on the commercial front than what we would normally expect.

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Kevin Damien McVeigh, Crédit Suisse AG, Research Division - MD [22]

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Got it. And then just obviously, really, really nice growth in the commercial. It would imply you're taking market share. Any thoughts in terms of where that's come, maybe not competitor-specific, but what parts of the market that are allowing you to kind of outpace industry growth?

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

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It's all -- it is most principally market share. Very little of the new business that we get is coming from new construction. And this, Kevin, is about what we've said a handful of times. You're winning this space based on service. That's in our sweet spot. And based on that service reputation and just simply outstanding core of talent in the commercial space, we've got a lot of momentum. I would say it's across all industries. I'd say it's across all aspects of our commercial business. National account is killing it. Core commercial, the tuck-in acquisitions are going well, and Red Hawk. So all boats are rising with the rising tide, and it is principally as a result of taking share.

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Operator [24]

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The next question comes from George Tong with Goldman Sachs.

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Keen Fai Tong, Goldman Sachs Group Inc., Research Division - Research Analyst [25]

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Going back to attrition. You mentioned that dealer-acquired accounts are causing pressure in the quarter and for the remainder of the year. Can you discuss whether this should be isolated to 2019? Or if it's a structural shift in your underlying strategy for dealer accounts that could impact longer-term attrition rates?

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James D. DeVries, ADT Inc. - CEO, President & Director [26]

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Yes. I don't -- good question, Kevin. I don't think it's something that is a long-term issue for us. Interestingly enough, some of the accounts that we brought on because the price for acquisition is adjusted based on the credit quality of the customer, we bring on high-return business that results in putting pressure on attrition but it helps us achieve our goals on EBITDA and cash flow and great payback.

So like I said earlier, it's a bit of a balancing act. I think that the pressure that we see as a result of some of the lower credit quality customers coming through will be optimized to have less of an impact going forward after '19.

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Keen Fai Tong, Goldman Sachs Group Inc., Research Division - Research Analyst [27]

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Got it. That's helpful. You launched the Amazon partnership in 2Q and touched on sales and marketing efficiencies, early efficiencies from the channel. Can you help frame up the potential revenue opportunity of the partnership longer term? And what the milestones are that you hope to hit?

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

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Yes, you bet. We haven't shared a great deal of specifics on volume expectations. We're working with Amazon on co-marketing and on distribution. I can share that we continue to work with them, our engineering teams and marketing teams. I think we mentioned that we launched Guard in the second quarter. We've got 15,000 customers locked in. We're exploring other use cases with Amazon. But at this stage, I would not build in incremental revenue as a result of the relationship. It's not yet material.

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Operator [29]

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The next question comes from Seth Weber with RBC Capital Markets.

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Seth Robert Weber, RBC Capital Markets, LLC, Research Division - Analyst [30]

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Thanks for the details on the consumer finance program. I was wondering if you could just provide any more color around implications for that business? I know you're bumping up the ramp here, but just how can you get to a national level? Is that a, do you think, a 2020 event? Or is that just going to be kind of phased in over the next couple of years?

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James D. DeVries, ADT Inc. - CEO, President & Director [31]

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Sure thing, Seth. I think it's a 2020 event. The pilot has gone well. We -- I think we're in 5 markets. We've now expanded that pilot. We're always reviewing the volume implication in terms of units and the trade-offs we potentially make with higher install revenue. We're looking at customer experience and ensuring that, that's first rate. But I would say we're pleased with the early economics. The -- as I said, the pilot expanded, and we'll be anticipating a national launch in 2020.

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Jeffrey Likosar, ADT Inc. - Executive VP, CFO & Treasurer [32]

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And Seth, one thing I would add too is that we're encouraged by the interplay between consumer financing and our Command & Control rollout. One of the things that financing allows is customers to build more comprehensive systems, and we have seen that both in the pilot markets with this financing and we've seen it more broadly across the country. So in addition to that being a way to reduce the upfront cost of taking on customers via the margin on the extra peripherals and equipment they buy, we also expect, although can't yet prove it, but expect that, that will be very positive for attrition over time because those customers tend to use their systems more.

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Seth Robert Weber, RBC Capital Markets, LLC, Research Division - Analyst [33]

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Right. That's helpful. And then just maybe a follow-up on the share repurchase program. You burned through it pretty quickly. Should we expect to see some sort of re-upping on a new program? Or how are you thinking about capital allocation here for the rest of the year?

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Jeffrey Likosar, ADT Inc. - Executive VP, CFO & Treasurer [34]

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Yes. Thanks for the question. Yes, we mentioned on our last call that we see the stock at its recent levels to be an attractive use of the company's capital. It's both a good investment for the company to retire some shares, also a way to return some capital to shareholders. So we utilized the $150 million initial authorization. We continue to expect that a significant portion of our cash flows over time will be focused on delevering, but we also remain focused on making sure we're making the right investments in M&A organically and also looking for opportunities to return capital to shareholders to drive shareholder value. And that could include additional repurchase reauthorization that could include changes to our dividend, but nothing to talk about today beyond what the normal quarterly dividend that we announced in our press release.

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Seth Robert Weber, RBC Capital Markets, LLC, Research Division - Analyst [35]

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Does the 3 (inaudible) spending (inaudible) effect (inaudible) delevering.

(technical Difficulties]

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Jeffrey Likosar, ADT Inc. - Executive VP, CFO & Treasurer [36]

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Seth, you broke up slightly. I think you're asking 3G conversion play into that?

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Seth Robert Weber, RBC Capital Markets, LLC, Research Division - Analyst [37]

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Sorry. Is the (inaudible) now that the (inaudible) does that (inaudible)

(technical Difficulties]

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Jeffrey Likosar, ADT Inc. - Executive VP, CFO & Treasurer [38]

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Sorry. We're only getting about every third word, but if you were asking about the 3G conversion program play into our long-term capital allocation strategy, the answer is yes, it does.

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Operator [39]

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The next question comes from Jeff Kessler with Imperial Capital.

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Jeffrey Ted Kessler, Imperial Capital, LLC, Research Division - MD [40]

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First question is can you talk about what you're doing in the monitoring center, granted you have different monitoring centers for residential and for commercial and national accounts within commercial, et cetera, et cetera. The growth that we've seen coming out of commercial as well as the -- as well as, let's say, the continued improvement in EBITDA in commercial. What is -- what are you doing in those monitoring centers to essentially capture not just better service, but to figure out what those customers would want down the line as they begin to tell you what they need and what their problems are?

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Donald M. Young, ADT Inc. - Executive VP of Field Operations & Chief Information Officer [41]

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Yes. Jeff, this is Don. Yes, great question. Certainly, we're trying to identify, call it, the low versus the high priority events that customers want humans to be a part of versus automation to be a part of.

Jim mentioned earlier, we're really starting to mature. Our capabilities on analytics, both voice and data. Soon -- we haven't had the opportunity at ADT yet to go and deploy things like chat bots and other kinds of technologies like that, AI, ML, but we're just starting to go ahead and kind of hit our stride with figuring out where those make the most sense and not damage the customer experience.

The last part, Jeff, I would offer is that the interaction we have with 911 and the cops, that has escalated to all new kinds of encouraging levels with exchanging data, whether it's ASAP to PSAP or other technologies that really provide a more effective and arguably fast response by law enforcement without the added requirement of human intervention or additional labor expense to work harmony. So that's something that we're especially encouraged about, and we'll be able to talk more about that in future calls.

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Jeffrey Ted Kessler, Imperial Capital, LLC, Research Division - MD [42]

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Okay. Follow-up question on the financing side. You've said that, particularly in the dealer program, there's been some pressure on attrition as you've gone toward making sure that credit scores were at the level that you want them to be, things like that. How does financing program play into the dealer business to try to help the attrition rates there?

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James D. DeVries, ADT Inc. - CEO, President & Director [43]

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Jeff, I'm not -- I don't think that the program, the financing program will impact the attrition rates in dealer. And in fact, the financing program is specifically directed to, and will be a tool for, the direct business. In a sense, ADT, through our funding mechanisms, we are the financing mechanism for dealers, and so we -- I don't see a relationship between financing and dealer accounts or dealer quality.

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Operator [44]

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The next question comes from Peter Christiansen from Citi.

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Andrew Garth Schmidt, Citigroup Inc, Research Division - Senior Associate [45]

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This is Andrew on for Pete. I just wanted to follow on the 3G costs. I just wanted to better understand the delta on that upgrade there, like what drive it towards the high end and the low end?

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James D. DeVries, ADT Inc. - CEO, President & Director [46]

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Andrew, I'd say we're -- the 3 levers that are probably the most important variables are 3 that I think I may have mentioned. The first is this extent to which we're successful in revenue offset. The second is we're still negotiating with our partners, both on the hardware side and with the telcos. And the third is there are potentially a couple of different technology alternatives that could influence how frequently we would need to roll a truck. And together, those 3 variables will influence whether we're able to drive an outcome to the lower end or the higher end of that range.

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Andrew Garth Schmidt, Citigroup Inc, Research Division - Senior Associate [47]

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Okay. Understood. And then in terms of commercial as a percent of revenues. So growing at a nice clip. You said 19% organic in this quarter. I guess, over the next year or 2, is there kind of a percent of revs that you're aiming for to get the commercial side, too?

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

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We haven't targeted a specific percentage, Andrew. I will offer this. Commercial is a significant part of our future. We think the ADT brand plays well. We've said a couple of times on the call and we live it every day, we win on service, and that's our strength. We think it provides diversification for our business. You're familiar with the financial profile, less capital intensity, better retention. And so while I don't have a target, a specific target, I can underscore that it will be an important and increasingly important part of our business.

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Operator [49]

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This concludes time allocated for the question-and-answer session. I would like to turn the conference back over to Jim DeVries for closing remarks.

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

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Thank you, Shaney, and thanks, everyone, for joining us today. Our ongoing progress wouldn't be possible without the dedication and tireless efforts of our many ADT colleagues and dealer partners. I want to thank them for our continued successful efforts and serving our millions of ADT customers.

As you can tell from our last quarterly results, 2019 is shaping up to be a very solid year. We're increasingly excited about a number of our growth initiatives, and we're looking forward to providing our next update to you in a couple of months. Thanks again for joining our call today. Have a good evening, and we'll speak to you soon.

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Operator [51]

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This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.