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Why Omega Advisors initiates new position in ADT

Smita Nair

Overview: Omega Advisors discloses new positions in 1Q14 (Part 3 of 6)

(Continued from Part 2)

Omega Advisors and ADT

Leon G. Cooperman’s Omega Advisors added new positions in Dollar General (DG), ADT Corp. (ADT), and Time Warner Cable (TWC). Top positions sold were T-Mobile U.S. (TMUS) and General Motors (GM).

Omega’s 13F filing revealed that it initiated a 1.07% position in ADT Corp. (ADT) in 1Q14.

ADT provides electronic security, interactive home and business automation, and related monitoring services. The company comprises the North American security business of Tyco International (TYC) that was spun-off in 2012. Its key business drivers include customer additions, costs to add a new customer, average revenue per customer, costs incurred to provide services to customers, and customer tenure. Key brands are ADT, ADT Pulse, and Companion Service.

ADT announces acquisitions and partnerships

In April, home security giant ADT announced the acquisition of Reliance Protectron for total cash consideration of $500 million. The acquisition of Protectron is expected to boost ADT’s Canadian operations and create a combined security industry leader in Canada. The acquisition brings ADT 400,000 residential and commercial customers including 31,000 contract monitoring accounts, and CAD $12 million (approximately USD $11 million) in associated recurring monthly revenue, the release said.

In January, ADT announced partnerships with McAfee, Ford, and Ideal Life. It recently announced a partnership with Life360—a provider of location-based services and family networking technology. The partnership will provide a lead generation source for ADT and enable the development of innovative, co-branded mobile security applications. As part of the agreement, ADT said it is taking a minority ownership stake in the company through a $25 million investment, leading a $50 million Series C financing for Life360.

ADT expects Pulse to be a future growth driver

For 2Q14, the security and home automation provider reported diluted earnings per share of $0.34, which includes a non-cash tax charge of $13 million related to Tyco’s pending settlement with the Internal Revenue Service (or IRS) of a pre-separation tax liability. Total revenue of $837 million increased 1.9% compared to 2Q13, but missed estimates. Revenue increased due to growth in recurring customer revenue. Average revenue per customer grew due to price escalations on existing customer base and, to a lesser extent, the addition of new customers at higher rates partially driven by increased take rates on ADT Pulse. The management said, “Our Pulse home automation product continued to gain strong traction with take rates climbing to 44% combined and Pulse customer upgrades rising by 38% year-over-year.”

In the previous 1Q14 quarterly results announced in January, revenue and earnings missed estimates and shares plunged. The company’s customer base grew just by 0.7%.

ADT working on reducing customer attrition

Revenue attrition was flat at 14.2% for the quarter sequentially and unit attrition for residential and small business was 13.7%—up ten basis points sequentially primarily due to higher attrition in small business. ADT closed the quarter with 6.4 million customer accounts. ADT added that, “Our sluggish start on gross adds and currency headwinds have resulted in slower than expected revenue growth in the first half of the year. Reducing attrition drives significant value in our business model and we remain committed to improving attrition in the second half of the year through our relocation and non-pay initiatives.”

The majority of customer attrition is driven by relocations associated with the housing recovery and non-pay customers. During the quarter, ADT said it continued to take action to improve its ability to reduce future customer attrition, including expanding the rollout of tighter credit screening policies and other non-pay initiatives, strengthening resale efforts and customer loyalty programs, and driving increased penetration of ADT Pulse automation which exhibits better retention characteristics.

ADT faces high competition in home automation space

The company has a market share of over 25% in the U.S. and Canada, and dominates the $13 billion home security market. Its principal competitors within the residential and small business security systems market are Protection One Inc., Monitronics International Inc., and Vivint Inc. Recent news reports indicated that ADT is seeing competition from AT&T (T), Comcast (CMCSA), Time Warner Cable (TWC), and even Apple (AAPL) and Google (GOOG) in the home security and automation space. The $9 billion global home automation market is forecast to reach $14 billion by 2018, according to ABI Research.

Continue to Part 4

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