ADT Inc. Q4 FY2020 Earnings Call

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the ADT Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. I will now turn the conference over to your host, Derek Fiebig, Vice President, Investor Relations for ADT. Thank you. You may begin.

Thank you, Operator, and thank you, everyone, for joining ADT's Fourth Quarter 2020 Earnings Conference Call. This afternoon we issued a press release and slide presentation of our financial results. These materials 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 and uncertainties that could cause actual results to differ materially from those expressed or implied by such forward-looking statement. These risks include, among others, matters that we've described in our press release issued this afternoon and in our filings with the SEC. Please note that all forward-looking statements speak only as of the time they are made 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/or mainly dependent upon future uncertainties. For a complete reconciliation of historical non-GAAP to the most comparable GAAP financial measures, please refer to our press release issued this afternoon and our slide presentation, both of which are available on our website. With me on today's call are: ADT's President and CEO, Jim DeVries; and our CFO, Jeff Likosar. Also joining us in the room and available for Q&A is Don Young, our CIO and EVP of Field Operations; and Jason Smith, Senior Vice President of Finance. With that, I'll turn the call over to Jim.

Thanks, Derek, and thank you to everyone for joining us today. I'd like to begin our first call of 2021 with some comments reflecting on our 2020 overall performance, and then share some thoughts regarding our new partnerships and current growth momentum. Finally, I'll offer some perspective on ADT's priorities as we advance into 2021. I'll then ask Jeff to cover our financial results, as well as our 2021 outlook. With the world thrust into an unexpected pandemic, 2020 was an extraordinarily challenging year for so many and impacted everyone's lives in different ways. There was also a year which brought us at ADT the gift of perspective. We were reminded more than ever of the importance of protecting one's home and family. For all of us at ADT, 2020 brought a newfound appreciation for the essential role we play partnering with first responders and serving our customers and communities continuously and reliably. After witnessing the tremendous collaborative efforts of our team during the past year, I'm humbled to lead such a great organization and couldn't possibly be more proud of the collective performance of our more than 20,000 ADT associates and our dealer partners. During our first call last year on March 5, prior to the impact of the pandemic even being understood, ADT provided our full-year 2020 financial outlook. Our guide was $5 billion to $5.3 billion in revenue, $2.175 billion to $2.25 billion for adjusted EBITDA, and $630 million to $670 million for adjusted free cash flow. Because of the resiliency of ADT's business model and the outstanding performance of our team, and despite the challenges and volatility of the economy, we exceeded the upper range of our revenue, delivered in-range on adjusted EBITDA, and performed just above range on adjusted free cash flow. We also set the table for accelerating our growth and continuing momentum going into 2021. Further, in 2020, we grew our net subscribers for the full year. Our new U.S. RMR additions started off solid in Q1 at plus 7%, but then in Q2 were down 11% as most of the country began shutting down. However, we continue to drive sustainable internal improvements to our subscriber acquisition engine. This efficiency contributed to not only favorable results but also the positive momentum for our business, especially when combined with secular trends and external demand catalysts such as new household formation, deorganization, the desire for increased home security, the acceleration of smart home adoption, and growing consumer spending on home improvement more generally. U.S. RMR additions increased year-over-year 10% in the third quarter and 15% in the fourth quarter. Further, our interactive take rate increased to 86%, and we reached the milestone of 3 million residential interactive customers. Just this month, ADT added our one-millionth customer on the Command platform. As we've mentioned in the past, our DIY business continues to grow nicely as well and we're excited about this complementary part of our business. We remain anchored to capital-efficient growth and the cost of acquiring subscribers also improved, resulting in a record-best revenue payback of 2.2 years. This efficiency was driven by our successful consumer pricing and financing initiative, as well as benefits from the Defenders acquisition. Exceeding our expectations, our gross attrition metric improved by 30 basis points to 13.1% as relocations across the country were less common than normal in the second and third quarters, and importantly, our customer satisfaction was strong. We also delivered on our commitment to drive strategic partnerships and alliances to expand our reach and offerings, and ultimately to better serve our customers. On the residential front, we entered into a long-term relationship with DR Horton, the nation's largest homebuilder and in mobile, we introduced ADT to a broader set of potential customers through the national rollout of our partnerships with Lyft and Instacart. Certainly, our most transformative partnership in 2020 was with Google. ADT's long-term strategic relationship with Google significantly enhances our growth opportunities. The foundation for our partnership is a shared vision for the future of the smart and helpful home and a steadfast commitment to our customers. As a reminder, Google invested $450 million of equity in ADT and is committed $150 million in matching dollars to fund marketing, product development, and employee training. Our partnership facilitates the development of new offerings, both services and products, as well as new technologies, which will power ADT's leadership in the rapidly growing smart home market. I'm pleased to share that our partnership with Google is off to a tremendous start. We'll be rolling out product integration beginning in the second quarter and we're on track to introduce a first-generation ADT plus Google solution in the second half of this year. Finally, ADT and Google have agreed on an exciting new joint go-to-market branding strategy, which we'll share later in the year. Summarizing a unique and unexpected 2020, we purposely and strategically played the long game and will continue to do so. ADT navigated amid the pandemic with resilience and as a whole avoided any material adverse business impacts while building a strong foundation for growth in the years ahead. We committed to persevere through the COVID-19 crisis with a goal to ultimately become a stronger company, and we've done so. Our momentum going into 2021 is real and I'm excited to share a few comments about the year to come. We've invested a significant amount of time over the last few years improving our operating KPIs, driving improvements in customer service, better operating metrics, improved efficiencies, and field performance. Having made substantial progress in many areas, we begin to focus our improved internal growth capabilities and the pursuit of strategic alliances and partnerships. As mentioned, we developed a relationship with DR Horton, and more recently with Google. As a catalyst, we've added new partners such as Ackerman Security and DISH. Ackerman, a successful company over many years with customers in the southeastern part of the country, particularly Atlanta, will join forces with ADT as a new residential dealer. Ackerman also provides ADT with some commercial assets. The strategic partnership with DISH expands our total addressable market to additional ex-urban and more rural geographies of the country. Many of the DISH technicians have experience with the installation of Google products and will be a great asset for ADT as we grow. Our operating improvements, the partnerships we've developed and will continue to pursue, as well as the many macro tailwinds and demand catalysts, are all converging as we focus more intently on allocating capital to the best array of growth opportunities we are now presented with. 2021 represents an exciting pivot point for ADT. We'll leverage our strengths, including our trusted brand, our operating excellence, our outstanding customer service, our talented field force, our national scale, and our capital efficiency to lean further into high-return growth opportunities before us. With these in mind, I'd like to provide three markers to evaluate our progress in 2021. First, will be the continued growth in RMR additions. After a strong 2020, we're targeting a 2021 growth rate in RMR additions in the mid-teens. As such, you will see a higher aggregate dollar level of SAC investment which we're allocating towards this high-return growth. We'll continue to be disciplined in our approach with high credit standards and will remain focused on efficient SAC investments with high IRRs in the high-teens and above. Keeping these high ROI standards, we plan to deploy between $150 million and $250 million of incremental residential SAC in 2021 versus 2020. Second, we will drive innovation, highlighted with the launch of the first-generation ADT plus Google Smart Home solution during the second half of the year. We will also invest significantly in our next-generation end-to-end ADT owned technology platform and continue to pursue meaningful partnerships in mobile safety. Third, while COVID-19 and its continuing impact provide some uncertainty, we expect to return to low double-digit revenue growth and substantial year-over-year improvement in profitability levels for commercial customers during the year. Our early optimism is heightened because the backlog of commercial customers was actually higher at the end of 2020 than the prior year, and the pipeline for new business is healthy. We have an outstanding leadership team in commercial, and we're very excited about this part of our business. In summary, our current momentum is strong and we are encouraged about our future. 2021 is positioned to be an exciting year for ADT, one where our growth is more significant than in the past and where investments executed well will result in attractive sustainable growth for years to come. I'll now hand the call over to Jeff.

Thanks, Jim, and thank you, everyone, for joining our call this evening. As Jim described, we performed very well in a highly unusual 2020 environment. Like most companies, we encountered many unexpected dynamics and we are very pleased that we were able to execute on opportunities to offset several of the unplanned challenges we faced. More importantly, we maintained our long-term focus and continued our strategic progress and are especially encouraged by the trends we saw in the second half of the year into 2021. As a reminder, during 2018 and 2019, our priority centered on enhancing our service culture, improving our operations, and expanding our cash generation capabilities. More recently, we are focused on strengthening our foundation and executing initiatives to drive efficient sustainable growth in addition to recurring monthly revenue or RMR. We are pleased with the progress we saw during the second half of 2020 with U.S. RMR additions up 12% following a 3% first half decline driven by challenges arising from the COVID-19 pandemic. On a full-year basis, U.S. RMR ads grew by 5%. We concurrently grew our full-year adjusted free cash flow by 14% to $675 million. By comparison, and as evidence of our cumulative progress in recent years, adjusted free cash flow in 2017, the year prior to our IPO, was over $400 million. As Jim mentioned, other full-year 2020 highlights include gross revenue attrition at 13.1%, down from 13.4% in 2019 and significantly below the 16-plus percent attrition for legacy ADT prior to the Apollo acquisition. Revenue payback at a record 2.2 years in 2020 compares to 2.3 years in 2019 and 2.7 years on a pro forma basis in 2015. As a reminder, some of our core financial measures were affected by the disposition of our Canadian operations in 2019 and the acquisition of Defenders in early 2020. Despite the favorable economics, these transactions reduced our adjusted EBITDA, which was $533 million in the 4th quarter of 2020 and just under $2.2 billion for the full year. Our total year 2020 revenue was $5.315 billion, up 4% driven by growth in installation revenue, primarily due to a higher volume of outright sales transactions to residential customers, which includes volume from the Defenders acquisition. This increase was partially offset by lower sales to commercial customers, which, although down for the year due to COVID-19, improved sequentially in the third and fourth quarters. For the fourth quarter, total revenue was $1.315 billion, up 1% versus 2019 despite the effect of the Canadian disposition and lower sales to commercial customers. The strong 2020 adjusted free cash flow I already mentioned, up 14%, was a result of several factors including some offsetting dynamics related to COVID-19. A key contributor was efficiency in net subscriber acquisition cost, or SAC, which was down year-over-year despite our growth in RMR ads. Other noteworthy items affecting cash flow included our participation in the CARES Act, Payroll Tax Deferral program, and the offsetting acceleration of a portion of 2020 annual incentive plan payments. In addition to strong cash generation, we built on our 2019 refinancing transactions to further improve our capital structure during 2020. In January of 2020, we refinanced our second lien notes. In August, we replaced our 2021 first-lien notes with new 2027 notes. In December, we repaid $300 million of our term loan, which we then repriced in January 2021. Our resulting lower borrowing costs and extended maturities provide us with greater flexibility to deploy capital to high-return growth opportunities. In 2021, we are eager to build on our substantial progress from the past several years. We've strengthened our business fundamentals, enhanced our service culture, improved our cash generation capability, improved our capital structure, and developed new and more efficient routes to market. We are enthusiastic and optimistic about our future and you can see on Page 8 in our deck a summarized framework of our strategic priorities. The next chapter for our company is focused on driving more RMR growth, creating new innovative offerings, further enhancing our overall customer experience, and continuing our commitment to generating shareholder returns. We plan to share more detail on our long-term strategic plans and objectives, including our ADT Google branding and products during Investor Day later in the year. Our teams across the business are energized by our strategy and our growth prospects for 2021 and into the future. As Jim mentioned, we anticipate 2021 RMR additions in the mid-teens, which reflects a significant increase from our growth rates during the past few years. We are also investing to support our strategy with our new interactive platform, the development of new offerings in collaboration with Google, upgrades to our infrastructure, and the launch of the ADT-Google marketing program. We can see our results in 2021 financial outlook in our Investor Day that includes total revenue in the range of $5.05 billion to $5.25 billion, adjusted EBITDA in the range of $2.1 billion to $2.2 billion, and adjusted free cash flow in the range of $450 million to $550 million. While many factors affect our cash flow, included in our guidance is $150 million to $250 million higher cash SAC spending in support of the strong RMR growth I just mentioned. As a reminder, our reported revenue and adjusted EBITDA are affected by the Defender's acquisition and the different accounting policies applicable to accounts generated via different channels and under different ownership models. These different accounting policies do not affect cash flows, and we describe more detail in our Investor deck in 10-K. As you can tell from our 2020 progress and our 2021 outlook, we are well-positioned to capitalize on our improved capabilities in several favorable secular trends. Our focus is decidedly long-term, the long game Jim mentioned, and our teams have never been more excited about our future. Before concluding my comments, I want to express my appreciation for our more than 20,000 employees, our dealers in growing with the partners, and our investors for the continued support of our company. Thank you everyone for joining our call today. Operator, please, now open the line for questions.

Thank you. At this time we will be conducting a question-and-answer session. Our first question is from Peter Christiansen with Citi.

Good evening, gentlemen. Thanks for the question and nice execution in a tough year. Jim, it's really good to see you guys in a position to up the offense in 2021. That makes a ton of sense, but I want to dig a little bit into the cadence on how you're thinking about the incremental SAC throughout the year and introducing new products, particularly the next phase of Google. Is that something that you kind of save your resources for a little bit and then act a little bit more aggressively once that comes out? And as a quick follow-up, it sounds to me that this joint product could have a much higher value proposition for the customer. So, is there any preliminary thoughts on pricing relative to the current interactive offering that you guys provided in the residential side? Thanks again.

Yes. Thanks, Pete. So, I'll give a little bit of context to the pivot to growth and then ask Jeff to address your question in a more detailed way. Much of the last several years, Pete, we've been focused on operational excellence. Our retention improved 300 basis points, customer satisfaction improvement as you're aware, better operating KPIs across the board, revenue paybacks come down from 2.7 to 2.2 years, and at the same time, as we're getting our operational house in order, we've had macro trends and demand catalysts that we've been talking about, and these are essentially tailwinds for our products; we see our products and services are in demand. And then, in addition to getting our operational house in order and the macro tailwinds, we have worked really hard on building strategic relationships. It's a long list, including DR Horton, DISH, Ackerman, and some relationships in the insurance space. When you combine all those factors, operational excellence, macro trends, new partnerships, and now Google, we're able to allocate capital to high-return growth and pivot more assertively to capital-efficient growth. Jeff, do you want to add some?

Yes. I'll just add that it's energizing for the whole organization to be in a growth mode, so there's a lot of enthusiasm across the company and a lot of fun. Your specific question about the cadence – the comparisons will be odd, because last year was odd. The second quarter, of course, was the most depressed quarter, so the comparisons are easy. The Ackerman alliance with an initial account purchases from that agreement will be helpful in the first quarter. A way I would think about it is our pace of ads and SAC spending, setting aside the Ackerman purchase in the first quarter, we would expect to be relatively normal with historic patterns, excluding last year. So, a bit higher in the summer season when it tends to be more activity. But aside from that, we're modeling it to return to a more normal cadence; of course, the year-on-year will be affected by if we have a normal cadence in 2020.

Great. So not really like a first half/second half story, pretty normal cadence throughout the year?

Yes, we're expecting to layer things in as we go through the year, but we exit 2020 with really strong momentum having grown U.S. RMR by 15% in the second half of the year. So we're entering the year with momentum. We have additional benefits coming from even the recent partnerships we've announced just over the past several days, which will yield the easiest comparables in the second quarter of 2021, because of the soft 2020 and then the tougher compares in the second half of the year.

Our next question is from George Tong with Goldman Sachs.

Hi, thanks. Good afternoon. I wanted to dive deeper into your plans to deploy $150 million to $250 million of residential SAC in 2021. Can you elaborate on which customer segments you plan to go after with this incremental spend and what returns we expect from the investment?

Yes, George, it's Jim. So, there are a handful of different opportunities in front of us. Most of the incremental SAC will be spent in the residential business. We've got the demand catalysts that we've talked about since the third quarter, bringing some significant tailwinds for us and some unique opportunities to really allocate capital to that business and grow. The returns are high-teens and above, and we will also allocate some of that capital to opportunities in the commercial space. But most of the incremental capital will be in residential.

One other thing I would add is that if you look at our historical financials, we included a slide in our deck that shows back to 2017, the year prior to the IPO. We're planning to generate these RMR adds still with more free cash flow generation, adjusted free cash flow as compared to 2017, which is just a testament to some of the points Jim made earlier about all the progress we've made in recent years, becoming more efficient, better attrition, improved SAC efficiency, and improved capital structure. So we're very excited to be in a position to have the capital structure and cash generation capability to be able to grow at a higher rate.

Got it. That's helpful. And just as a follow-up, do you view the increase in SAC as a permanent/structural step up, or do you expect it to reverse? And perhaps related to that question, what kind of payback period do you expect? Is that a two-year payback? So in other words, you get back this $150 million, $250 million, two years down the line. How are you thinking about that?

I would think about it, and we plan to share more in an investor day in the second half of the year, but I would see it as raising the water level with respect to the quantity of new subscribers and/or new RMR that we had each year. So we would expect to continue to grow. Of course, we will seek to become more SAC-efficient and improve revenue payback over time, and in terms of your question on payback, I would describe that in the context of IRRs. We target IRRs in the teens and higher and as we've talked about many times in the past, the IRR is the combination of the upfront cost to acquire, the profitability of the customer on an ongoing basis, and then how long the customer stays with us. So we're always looking at each of those variables among others with an eye on optimizing the return on the capital that we deploy.

Two quick points of elaboration, George. The first is that as a philosophy, we'll continue to pursue our growth in a very disciplined way. We won't retreat from our standards on credit, we'll continue to be disciplined and ensure that this growth is good growth. And then specifically on your question on payback, I think we'll have a revenue payback that's in the zone of where we are now. It might move a bit up, it might move a bit down, but will be in a range that will facilitate the returns that Jeff just mentioned on IRRs and in a revenue payback range consistent with those higher IRRs.

Got it. Thank you. Very helpful.

Our next question is from Toni Kaplan with Morgan Stanley.

Thanks so much. I just wanted to understand the revenue impact versus RMR growth. So, I understand the equipment financing shift, but excluding that, I guess revenue would maybe be up about 4%, and your RMR estimates look like more of a high-teens growth. So, is that largely due to a decline in installation revenue? Why doesn't the RMR addition flow more through to the top line?

Yes, it's definitely that. It's a somewhat complex topic, but because we are in the process of converting legacy Defenders to our historic ADT ownership model and because last year, we for a portion of the year had legacy ADT in an outright sales model, we have significantly more installation revenue last year. We included some description of this in our earnings materials. We estimate this about $350 million to $400 million of lower revenue. It will predominantly be lower install revenue, which is worth about seven points. If not for that pressure, then we'd have additional revenue. The drivers of that additional revenue is a recovery in the commercial part of our business, which we expect to get back to something that looks more like the trajectory pre-COVID-19 and then the flow through of our M&S revenue growth that comes from the top RMR ads that we had last year and expect to continue until this year.

That makes sense. And I wanted to ask about attrition. Given the fewer customer relocations during COVID, that was a real benefit to the attrition this year, and of course, it's a trailing 12-month metric. So, just help us out with how you’re expecting attrition to trend this year? I just want to make sure that we have a good sense of expectations for what you're thinking there.

Sure, Toni. The retention for us in 2020 was a real strength, ending the year at 13.1%, down 30 basis points from last year. Some companies report net attrition. If we use that metric, we're actually closer to a 10% attrition level, and so we feel good about the progress that we've made. We saw improvement in most categories and had a record low in Q3. In the fourth quarter, we continued to improve in the categories of lost competition and non-pay. What real estate activity is, as everybody knows, picked up late in the year, and we saw pressure on relocations in particular. So long-term, we're optimistic about customer retention, especially as we enter the smart home space more aggressively. We know the more our customers use our systems when devices are more plentiful, the more integrated the devices and the system are into the daily activities of our customers, and we know that retention improves. So we think that we'll be in a range here for attrition with some relocation headwinds and some smart home and interactive rate tailwinds that will carry through 2021. One additional thing to mention, when we acquired Defenders, we continue to receive a chargeback benefit for accounts prior to the acquisition, and that benefit expired over 12 months. With a slight metric headwind in 2020, the impact of the chargeback change in 2021 is about 40 basis points.

Very helpful, thank you.

One other point that I don't believe I mentioned, when I talk about the change in revenue recognition because of the ownership model for residential customers, that is a non-cash change. So we're still collecting the same amount of revenue from customers; in fact, we're requesting even more revenue due to the success of our pricing in our financing initiative. But we capitalized that revenue netted against the equipment cost, and we recognize that revenue over time. So this is a different accounting treatment because of the different ownership model. We have nothing to do with taking cash, and in fact, more install revenue is one of the contributors to the improved acquisition cost efficiency or revenue payback improvement that you see.

And Tony, this is Derek. If you look at Page 25 in the deck, we provided some of the cadence on this. This could be helpful to model.

Great, thank you.

Our next question is from Kevin McVeigh with Credit Suisse.

Can you just give us a little more context on what the $50 million investment next-gen technology platform; and would you expect having to impact the business longer term?

You're breaking up a little bit there, Kevin. But, I think you were asking about the $50 million investment in the platform, correct?

About the platform in which we're investing the $50 million.

Yes, that's right.

Yes, just for context and then I'll ask Don to describe a bit more. But the two areas of investment that we called out are a higher SAC spending that goes with more ads in the teens. And in the second, we noted in our materials is approximately $50 million associated with the development of our next-generation platform, which we described on our last call. There are, of course, lots of other puts and takes to go into our cash flow guidance. There are a couple that I'll describe a bit more about the platform itself.

Yes. So, Kevin, we have actually inherited some nice IT and project engineers from three acquisitions: Red Hawk, ICO and Defenders. In addition, the Google announcement doubled the number of engineers that are specifically working on this platform, and we're targeting another third on top of that. And that's equal to the number of engineers we’re working with Google, but it's meant to basically move us to a more advanced platform than we have right now with demand and control. That platform is also meant to serve both the DIFM and DIY customers in the future.

Thank you.

Our next question is from Gary Bisbee with Bank of America.

Hey, guys, good afternoon. Jeff, I wonder if you could just be clear with us because it's been difficult to know. What was revenue growth excluding the different accounting treatment for install revenue? If we pull that out of 2020, what was the revenue growth for the year, and what does 2021 guidance imply for revenue growth?

So forward, there is about seven points of revenue pressure that comes from the change associated with the ownership model, and backward, it's a bit more complex because of the interplay with Defenders, with the Canadian disposition, and with the ownership model change. But I would point you to our install revenue, and the predominant driver of our install revenue growth was more install revenue associated with the ownership model change.

So if we just take the actual revenue, the midpoint of the guidance range, calculate the growth rate that implies, add seven points and that's what the growth rate would imply, is that correct?

Yes.

Fair enough. And then two small ones. On the Google investment, the $150 million do you have any more insight on timing of when you'd spend it and what's CapEx versus OpEx? And the other small one, you've had a couple of press releases out about this technology that could eliminate or reduce the impact of the 3G conversion because people could just plug and play. What's the update on that, and what's implied in your guidance in cash flow for spending related to the conversion?

I'll take both of those, Gary, and then ask Don to elaborate on the technology associated with the radio conversion. On Google Play, as a reminder, both parties agreed to invest an incremental $150 million in the partnership, so there is a total of $300 million. The Google funds can be used for marketing, product, and employee training and are generally earmarked for those three categories. We haven't yet agreed with Google on the specific expenditures; we will likely make a meaningful investment in the launch campaign, the ADT plus Google launch campaign later this year, and expect to invest an incremental $50 million and that's built into our guidance. On radio conversion, we started the year with 1.6 million conversions, shared an initial range of $200 million to $325 million net of revenue. Our replacement plans are essentially on pace, despite the pandemic. We'll finish Q1 with about 1.3 million radios remaining to convert, we've updated the range from $225 million to $300 million; the majority of that will be spent this year. So, the short answer on the radio conversion is that we're on track, and I'll ask Don to comment on your question related to the technology, a company we acquired called CellBounce.

Sure. And quick correction, I think Jim said 3.6 million in the start off, which is actually 1.6 million to start off the year with. But, so first we're calling it Cell Bridge internally for our ADT recipients of the device, CellBounce externally because we do have an agreement with AT&T to provide this device for those elsewhere in the industry. We have successfully tested this device both in the lab and at a handful of homes. We are looking to scale this up nationally this quarter and we're exceptionally excited as you can see how well it's working with some of the panels that all their alarm systems are particularly more difficult than others to be able to go ahead and swap up the radio wave. So we're very bullish on how it's going and looking for the first quarter rollout.

And then, if I could sneak one more in, Jim, since you've become CEO, you've obviously pivoted hard towards investment, a flurry of partnerships; you've invested a lot in commercial, the DIY, the ADT mobile stuff, and obviously Google. There's been a lot of activity. What I hear from many of your investors is while each one of these on their own makes sense and is logical, we don't all understand exactly what the vision is, especially because you haven't really given any color on what's the end game, what are you aiming for here? What is the return for ADT and its shareholders from this flurry of activity? I guess one of the challenges is you haven't given any long-term targets so that we can assess your performance. So I want to put that to you as a comment. Certainly, I hear the optimism, but what does this all mean for revenue growth 2 to 3 years, 4 years down the road? What does it mean for profitability? What does it mean for cash flow? I just think there is a lot of excitement and we understand it, but profits have been stagnant for years and we haven't seen revenue accelerate. So there is some frustration that it all sounds good, but we don't have a great sense of what the return for the company and shareholders is from all of this activity in the last few years. I don't mean that to sound critical if it does, I'm just trying to get some color on where this is heading and maybe what some targets might be to help us understand the vision you're aiming for? Thank you.

Yes. I'll talk a little bit about the vision from a high-level perspective; we're going to have a chance to elaborate a good bit on this in the Investor Day later this year. I'll ask Jeff to weigh in here as well. But, Gary, what might appear as a flurry of activity externally is all really engineering to get our organization positioned for capital-efficient growth. I mentioned this earlier too when I was answering Pete's question. The work that we've done over the course of the last 24 to 30 months has been to get the operational house in order: get attrition where it needs to be, get our revenue payback where it needs to be, set the pins from a marketing perspective to more efficiently acquire customers, develop partnerships, Google being central to that to facilitate growth, and then really to take advantage of these macro headwinds that are out there. The evidence for 2021 that those pins are set and we're ready to knock them down is mid-teen RMR ads. Over the last four years, our figure on RMR ads was something like 3%, and we're talking in 2021 about the mid-teens, and that's before Google kicks in in a major way in the second half and into 2022. Jeff, additional comments?

Yes, it's something we've spent significant time on internally after spending the first 3 or 4 years focused on operational execution. Our next chapter is going to be more about growth, being more innovative, taking the customer experience to an even better place, leveraging our brand especially in partnership with Google, with further differentiating our frontline search capability, which nobody else has. Then building as part of the innovation point more of the technologies that further extend the realm of the various offerings that we provide for smart home and security together. And we think nobody is positioned to do this better than ADT. As Jim alluded to, we plan to hold an Investor Day later in the year and go through that in more detail, including some perspective as to exactly your question about what that means in terms of economics over time with some longer-term targets and objectives that go with it.

Our next question is from Manav Patnaik with Barclays.

Yes, thank you. So just kind of a follow-up to Gary's question. I mean the partnership with Google. So I think you kind of answered it in that last statement, but on the high level, you're just trying to get a foot into the door in the smart home and therefore hopefully expand the stand, is that how we should think about the real benefits of this partnership?

Much more broadly than that, Manav. We think we can leverage Google to not just get our foot in the smart home space but to grow significantly and be a major player in the smart home space. I've mentioned this before, we're super excited about the hardware that Google brings, the ADT plus Google branding is something that our marketing research reveals is very exciting. But I'm most excited about what the partnership does from an AI perspective, video analytics, and data analytics perspective. We think that we can not only compete in the smart home space but really be a technology leader and provide customers services that don't exist today. That's all part of a second-generation offering, some of which will be available in the second half of this year, but will be launched when we have our own interactive platform built in-house combined with Google hardware and video analytics to launch the next-generation offering.

Got it. And another broad question; the residential space obviously has been toughened, and I think all the efforts you're doing makes sense to grow better in that market. But commercial has always been the preferred area, and I'm just curious, at some point down the road, you used the word pivot earlier, like, is there a pivot to become just more exposed to commercial or is residential just such a big element for you that that's probably not something in the near future?

No, I would say that's not in our future. We expect to return to growth in 2021 in commercial. I mentioned in my prepared remarks that our backlog, both install and recurring revenue are higher at the end of 2020 than at the end of 2019. The pipeline is healthy. We've got incredible upside in some of the growing verticals, like healthcare, education, and critical infrastructure. We think the leadership team is outstanding. We provide the best service in the space. That's the most critical source of differentiation, and we expect to grow the commercial business in a capital-efficient way and get back to double-digit growth as we were prior to the pandemic.

Our next question is from Jeff Kessler with Imperial Capital.

It's ironic; I feel like Obi Wan having my two pupils go right in front of me. The first question I have is on Defenders. You've talked a bit about Defenders today, but Defenders has been a growth company for basically its entire history, regardless of what it was selling and right now, it's focused solely on security. And I'm wondering, given the fact that you've had accounting adjustments having been made, what I want to know operationally, what are you doing to get Defenders and have they been integrated into what we call not just the interactive platform, but because they're able to sell. Do they have and are they being trained on the IT level to be able to sell a new platform that you folks are going to be coming out with over the next couple of years? And how is Defenders going to come out in the wash since it doesn't come out in the accounting, but it should come out in the way the operations are handled?

Yes, that's absolutely right. The Defenders integration is progressing smoothly. We're on schedule, and some of the teams have already been integrated into the ADT branch infrastructure. We anticipate that the integration will be finalized around March or April. We are effectively utilizing the skills the Defenders organization has brought to our company and training them in the ADT processes, which they are adapting to well. Defenders began using our command panel even before the acquisition, and now they are using it exclusively, similar to core ADT. Looking ahead, both Defenders and ADT technicians and customer care professionals will be trained on the new equipment that will be integrated with Google, and this will become standardized as part of our offerings.

One thing I'd add, we talk about this internally periodically. Even if you look in our deck on Slide 10 where we show our view as to RMR and growth, we worked on that page four factors. The point I'm making is that there are a lot of factors and it's difficult to decompose them because they interplay with one another. The macro drivers, changes to our pricing model, the financing, the stuff we've done to simplify our offering, advertising effectiveness, install efficiency, and analytics. Included in those internal initiatives, is just the sharing of best practices between legacy ADT and legacy Defenders. So we would struggle to tell you precisely how much of the 15% growth in RMR ads that we're guiding on for the next year comes from that, but it's an important ingredient into that mix overall.

Great. For my second question, having reviewed the earnings results from many of the industrial companies in security that I follow, it’s clear they are experiencing a slow start to 2021, with hopes for improvement in the second half. I won’t label it as a vacation, but your commercial industrial teams, who were thriving two years ago, seem to have taken a break, as they were unable to visit sites or finalize postponed deals. During this time, what steps have you taken with your commercial industrial group to ensure they are prepared to accelerate quickly and remain competitive with your larger rivals? When the market rebounds, whether for national accounts or specific large enterprise installations, how will you be positioned to regain and drive the growth you enjoyed previously, ensuring you are not left behind by companies that focus solely on commercial and industrial sectors?

Four key areas, Jeff, that we took the opportunity when we couldn't have access to customer premises to really bolster up. The first is training. I don't think we've expanded as much energy in training in the commercial space in any year like we did in 2020. We doubled down in a significant way our employee development. Number two is recruiting. From the start, we play the long game, and if organizations weren't as healthy overall as ADT, we took the opportunity to recruit some excellent talent in 2020 both at the technician level and the leadership level. The third is integration; we've done a number of tuck-in acquisitions like Red Hawk a couple of years ago, and so we cleaned up the house from an integration perspective. Lastly, we advance the cause on IT systems and IT integration. We feel good about the positioning of that business and as I mentioned earlier, expect 2021 to be a really good year in commercial.

We have reached the end of the question-and-answer session. I would like to turn the call back to management for closing remarks.

Thank you, operator. In closing, I'd like to again extend my appreciation to our employees and our dealers. 2020 was a unique year, an extraordinary year. I'm completely proud to be associated with all of you. Thanks to everyone for joining our call this evening. As you heard, we're exceedingly optimistic about ADT's future, looking forward to the growth ahead. Have a great night everybody.

This concludes today's conference. ADT, thank you for your participation. You may disconnect your lines at this time.