Thank you for standing by. I'd now like to welcome everyone to the ADT Second Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I would now like to turn the call over to Elizabeth Landers. Please go ahead.

Thank you, operator, and good morning, everyone. We appreciate you joining today's call to discuss ADT's Second Quarter 2024 Results. Speaking on today's call will be ADT's Chairman, President and CEO, Jim DeVries; and our Chief Financial Officer, Jeff Likosar; Wayne Thorsen, Chief Business Officer, will also join us following the prepared remarks as we take analysts' questions. Earlier this morning, we issued a press release and slide presentation of our financial results. These materials are available on our website at investor.adt.com. Before we begin, I'd like to remind everyone that both the former Commercial and Solar segment are reported as discontinued operations. Financials and metrics for current and historical periods discussed on this call will be for continuing operations, except for cash flows, which include amounts related to the Commercial business through the date of sale and Solar through the second quarter of 2024. Today's remarks also include forward-looking statements that represent our beliefs or expectations about future events. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of the factors that may cause differences are described in our SEC filings. We will also discuss non-GAAP financial measures on the call. The most directly comparable GAAP measures along with a reconciliation to those measures can be found in our earnings presentation on the ADT Investor Relations website.

Good morning, and thank you to everyone for joining us today to discuss ADT's second quarter results. As we've passed the midpoint of the year, ADT is well positioned to deliver the full year financial guidance we outlined in February. I am pleased with our overall performance this quarter and our first half, particularly against the current macroeconomic backdrop, which includes higher interest rates and fewer relocations, a traditional catalyst for new subscribers. We continued to grow revenue up 3% versus the prior year while remaining focused on balancing profitability and investments for the future. And importantly, we again delivered very strong adjusted free cash flows at $251 million, up 14% from the prior year. Gross revenue attrition was 12.9% for the quarter with revenue payback at 2.2 years. This performance is a testament to the durability, resilience, and flexibility of ADT's business model. Jeff will provide more details about our financials and full year outlook in a few moments, but I first would like to share a few comments about our business and strategic progress. I'd also like to take a moment to highlight a pivotal point in ADT's history. This month, ADT will be celebrating an extraordinary milestone, our 150th year in business. We are among just a few iconic companies to have been founded in the 1800s and still thriving today. The key to ADT's enduring success has been our exceptional ability to adapt and innovate. It goes without saying that our people have driven our business, and I want to thank the dedicated teams of professionals that have built and driven this company over several generations. We now stand at a pivotal moment in our company's history, ready to write the next chapters of the ADT story fueled by thoughtful innovation and our current industry-leading team. I could not be more excited about this chapter and remain humbled by the opportunity to lead this great company. Today, as we progress into the chapters to come, we are focused on investing in the next-generation product and experience ecosystem and creating even more reasons for customers to choose ADT and stay with ADT. A key component of our future is our new and proprietary ADT+ platform, which I'm pleased to share is now available across the country for a growing portion of our professionally installed residential customers. This follows our rollout for self-setup customers last year. Our ADT+ platform includes a new app, refreshed hardware, and offers a number of advantages, including enhanced installation flexibility and configurability. Importantly, it also offers additional and stronger integrations with smart home devices such as Google's Nest ecosystem. Our ADT+ platform is the foundation on which we will innovate to build future unique experiences tailored to our customers' individual needs. The first of these experiences will be what we have branded, Trusted Neighbor, an innovative new feature offering both convenience and security to our customers by leveraging Nest's familiar faces to seamlessly grant trusted individuals secure and temporary access to their homes, either on a defined schedule or for specific events, such as package delivery or water leaks. We anticipate this offering will become available for ADT+ customers during the third quarter. Facilitating this experience, we're pleased to announce we have recently entered a partnership with Yale Lock to provide our customers this innovative and secure solution, which also builds on our existing Google relationship. We will continue to add more features to the ADT+ platform over time and look forward to the enhanced capabilities and flexibility we will enjoy with our owned and proprietary ecosystem. I also want to share that concurrent with this rollout, we're offering more flexibility to our customers and their buying choices, including more disaggregated offers, installation options, and payment and contracting terms. Additionally, we continue to make progress in our second to none commitment to safety, again, a hallmark for the past 150 years, with our alarm scoring capabilities, which are now live nationwide. This technology allows us to classify alarms based on predicted severity, which leads to a reduction in false alarms and importantly, enables us to share more precise alarm information for our customers with first responders. Additionally, as I've shared previously, we have expanded our Google relationship to include their cloud artificial intelligence technology platform and are currently exploring several opportunities across our business with early efforts focused on call center operations. We also remain focused on advancing our State Farm partnership, both installation and new customer RMR were up 7% on a unit basis in the second quarter. We're also focused on a self-setup alternative in select states. The first state where we've rolled out this offering just this month has been Georgia, with another state expected in the third quarter. We're obviously very excited about the overall progress we've made in developing new and innovative products and services for our customers and the foundation this provides for the future. Supporting this progress, we recently introduced our new brand promise, When Every Second Counts, including the launch of a new advertising campaign, Always There. We've refreshed our media across a variety of outlets, including placements during the Olympics. In closing, I want to highlight that the top priority of our team remains to deliver on our commitments for our shareholders, customers, and partners. I'm incredibly proud of our ADT team and our recent accomplishments as well as our achievements over the course of our company's 150-year history. I'm even more excited for the opportunities that lie ahead. And with that, I'll turn the call over to Jeff.

Thanks, Jim, and thank you, everyone, for joining our call. As Jim mentioned, we continued our progress during the second quarter, delivering a very strong first half, consistent with our full year objectives, and we are reaffirming our full year guidance today. Before summarizing our results, I want to reiterate that, as Elizabeth mentioned, we have substantially wound down our Solar operations. Results were: Solar, along with the Commercial segment we divested last year are reflected in discontinued operations. My comments will therefore focus mainly on our core CSB business. I will start with our cash flow performance, which remains a highlight through the first half. As Jim mentioned, we delivered very strong adjusted free cash flow, including interest rate swaps of $251 million, which was up 14% compared to last year. On a year-to-date basis, we have generated $362 million, which is more than 50% higher than last year. This growth is driven by our overall profitability and lower cash interest due to our debt reduction. Working capital management, including some timing items, also contributed. Adjusted net income for the quarter was $156 million or $0.17 per share. On a year-to-date basis, we have generated earnings per share of $0.36, up 38% compared to the first half of last year. Total revenue was $1.2 billion for the quarter, up 3%. Monitoring and services revenue was up 2%, driven by our recurring monthly revenue, or RMR, from our subscriber base. Ending RMR was at a record $355 million, also up 2%, driven by strong customer retention and higher average pricing. We generated 212,000 gross new customer additions, adding $12.5 million of new RMR. This was down somewhat from the prior year as we remain disciplined with SAC expenditures in the current environment. While fewer relocations generally lead to less consumer demand for new systems, they also provide some tailwind for customer retention. Our overall attrition was 12.9%, approximately flat, reflecting this benefit and our continued commitment to delivering superior service and some offsetting challenges driven by somewhat higher payment delinquencies and related cancellations. Installation revenue increased by 9% in the quarter, driven by higher deferred revenue amortization. As we've described previously, we expect installation revenue to grow as we evolve our model to transfer equipment ownership to our customers. Adjusted EBITDA for the quarter was $629 million, down 2%. Our results included an unfavorable legal settlement in the current year, while the prior year quarter included a favorable legal settlement. The net effect of these unrelated items is approximately $40 million or 6% year-over-year. I will note that we are seeking indemnification for this year's settlement. Otherwise, a key driver of our EBITDA performance is the higher revenue I mentioned earlier. Additionally, we remain focused on operating profitability and benefited from strong field and call center cost performance. Offsetting dynamics include credit loss allowances consistent with the payment delinquencies I mentioned, and we also continue with our planned product and technology investments supporting the initiatives Jim described in his remarks. During the quarter, we returned $50 million to shareholders via dividends. And year-to-date, we have returned $175 million, including our March share repurchases. We repaid the final $100 million to retire our April 2024 notes and the $50 million drawn on our revolving facility. We also completed the repricing of our Term Loan B, reducing associated borrowing costs by 25 basis points and we upsized our Term Loan B to retire our Term Loan A. Our overall net debt of $7.4 billion is down approximately $2 billion from this time last year. We now have no significant debt maturities until 2026, with a weighted average cost of debt of approximately 4.5%. I'm especially pleased that our net debt-to-adjusted EBITDA ratio is at three times, achieving the milestone we set for this year. We have approximately $257 million in remaining share repurchases authorization, and we continue to think our stock is very attractive at recent prices. We remain very confident in our overall capital structure, liquidity, cash generation capability, and the resulting flexibility in capital allocation. As we look to the rest of 2024, we are reiterating the guidance we shared at the beginning of the year. We'll note that we have updated our adjusted EPS guidance to reflect the Solar business presented as a discontinued operation. Due mainly to the legal settlement I described, we expect third quarter adjusted EBITDA to look more like the first quarter than the second, and we expect third quarter adjusted free cash flow to be in line with, if not a little lower than the first quarter. This is mainly because our cash interest payments are much lower in the second and fourth quarters than the first and third. Additionally, we anticipate some higher SAC spending in the third quarter due to a potential bulk account purchase. We have considered these factors in our full year ranges and we remain focused on disciplined execution to achieve this year's objectives and to position for 2025 and beyond. Overall, we are very pleased with our strong first half and excited to be building on our 150-year legacy, writing the new chapters Jim described. I want to thank our teams, including our partners for all their contributions to our success. And thank you again, everyone, for joining the call today. Operator, please open the line to questions.

Thank you very much. Your first question comes from the line of George Tong from Goldman Sachs. Your line is open.

Hi. Thanks. Good morning. You mentioned that you are taking a careful approach to managing subscriber acquisition costs, which helps maintain cash flow in the current environment. While that's positive, it does have an impact on gross additions. How do you find the right balance between investing in subscriber acquisition costs and your growth priorities? What external indicators would prompt you to be bolder with your investments in subscriber acquisition costs?

Thank you for the question, George. It's Jim. I'll provide some insight. We are experiencing some pressure in our organic business due to fewer housing relocations. Additionally, we have tightened credit standards in DIY, and marketing costs for affiliates and direct mail have increased. As a result, we are being very disciplined about our growth and won’t pursue growth that doesn’t meet our return requirements. As Jeff mentioned, we are preserving some resources for a potential bulk opportunity in Q3. There are significant opportunities for us to acquire bulk deals, which we have pursued in several of the past years. We see this as part of our capital allocation strategy—balancing bulk purchases, dealership opportunities, and organic growth. We expect to utilize some of our available resources for a bulk acquisition in Q3, particularly from the same seller from whom we bought bulk last December. This opportunity has favorable characteristics and expected returns similar to what we achieve with our dealer business.

George, I would like to remind you that as we assess these factors, we consistently focus on the internal rate of return, which is determined by the cost of acquiring the customer, the expected profitability of that customer, and the anticipated duration of the customer's relationship with us. The balance between these elements may fluctuate, but our goal remains the same. Additionally, I want to emphasize that in our guidance at the start of the year, we indicated that we expected our sales and marketing costs to be roughly flat for the full year. The fourth quarter was our peak for sales and marketing expenses. Last year, our year-to-date figures were aligned with that expectation. As we move through the second half of the year, we are consistent with Jim's comments, which reflects our current outlook.

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

Sure. So I'll give you some operating perspective on the State Farm partnership. The vision remains intact. We together want to essentially transform the homeowners business from purely restoration to include prediction and prevention to avoid losses. We made good progress in the first half. Some areas have been a little slower than we had hoped. We have a great deal of regulatory and compliance work that's accomplished. I think I mentioned during the last call, George, we're in 13 states. We had 6,000 sales in 2023. We're at 9,000 sales year-to-date. On a unit basis, both RMR and install revenue per unit are up 7% sequentially. So it's improving in terms of the economics, and about two-thirds of the installs that we have include an upsell. Customer satisfaction is very high as well. So we're tracking, moving along, making progress. I'll mention one last thing for you. We're testing DIY currently in Georgia. We anticipate rolling out a DIY alternative in Washington in Q3, and then in addition to that, we're looking at a water-specific test that we hope to launch later this year as well.

Very helpful. Thank you.

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

Hi. Thanks for taking my question. Congratulations on the ADT+ launch. I wanted to follow up and see what initial feedback you have received on ADT+, especially regarding the self-install aspect. Additionally, for the professional installation, do you have any insights from the installers or customers about their experiences and any efficiencies in the installation process? Thank you.

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

Thank you, Ashish, for the question. We just wrapped up the national rollout in June, making it available in all regions, and we’re really excited about this. We're pleased with the initial results; for instance, one key quality metric we track is how often installers need to return for additional work. Since late spring, as we introduced this rollout, the quality has exceeded our other products. We’re also seeing month-over-month improvements in efficiency, as this method is designed for both professional installation and DIY setups. We are very happy with these developments.

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

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

Yes. I don't have anything specific to highlight. There are always ups and downs, but we are pleased to be in a position after the first half of the year, including the legal settlement and other known factors, to reaffirm the guidance we provided earlier. We're confident that we will manage the second half of the year to meet those objectives.

Thank you. Thanks gentlemen.

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

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

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

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

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

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

Thank you.

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

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

We believe we are in a strong position. I've been with the company for nearly eight years, and while I didn't experience it personally, I've observed that during tough economic times, people often prioritize security and the reassurance it provides. Furthermore, when customers reevaluate their expenditures during challenging periods, they typically do not consider security as an area to cut back on. Additionally, tough times usually result in fewer relocations, as we've noted previously. Therefore, we feel confident about our position. In past downturns during my tenure, this has been validated. Lastly, we have new initiatives on the way that we believe will enhance our position even further.

Thank you. Regarding investments, are you experiencing the expected benefits in terms of efficiency, customer experience, and improved insights to meet customer needs from the recently implemented cloud-based CRM platform? Also, how should we view the current level of spending for these innovative solutions and experiences?

Thanks for the question, Ronan, it's Jim. So we're in the relatively early days on the investment in ADT+. We're just now rolling it out in our DIFM, to our DIFM customers. So early results are very positive. We're doing some testing with the Trusted Neighbor app and customer experience that we feel really good about. But it's early. And so it's hard to answer with precision what kind of return we expect. I will mention, in terms of investments, that 2024 will be a high watermark for us on the technology front. We've been investing pretty significantly over the course of the last handful of years. And in 2025, we expect that those investments will be pulled back a bit. And so we'll have a little bit of a tailwind from that standpoint. But on ADT+, a little early in the game, early results are positive, both from an efficiency perspective and a customer response perspective, but difficult at this point to quantify.

Got it. Thank you.

Our next question comes from Peter Christiansen from Citi. Your line is open.

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

It is. The ADT+ app, as I was mentioning to Ronan, Pete, it's early in the game but it is increasingly part of our calculus as is the path to upgrade. In terms of just generally speaking, how we look at the adds, it's way more of a capital allocation exercise today than ever before. And we're looking at organic. We're looking at dealer and we're looking at bulk. I'd mentioned that some of our marketing costs are up a bit. And so on a relative basis, it makes bulk more attractive, and we also have had a very positive experience with the same seller, selling us a bulk in December. And so when we look at how we allocate our SAC, we're looking at each of those buckets and allocating the dollars for the best return. I think that the organic opportunities for us will be more and more attractive over time. Some of these experiences like trusted neighbor are truly differentiated, and we think that there's going to be solid demand for it, and we'll make that organic allocation a greater percent of our total overall SAC.

And Pete, I would like to emphasize the capital allocation point and highlight the progress we've made. Our debt has decreased by a couple of billion dollars compared to last year, and it is down by nearly $3 billion from not long ago. We have reached our target leverage of 3 times that we aimed for this year. This flexibility allows us to shift our focus; while debt reduction remains our top priority, we are also seeking to optimize capital allocation between regular organic growth and acquisitions. Additionally, we are significantly increasing returns to shareholders through the dividend increase and share repurchases earlier this year. Having this flexibility provides us with greater opportunities to generate returns for both the company and our shareholders.

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

Yes.

Go ahead, Wayne.

Thank you for the question. One of the things we are evaluating is the advantage of having our own platform, which allows us to integrate both hardware and software with equipment we may find in homes. This approach increases our capital efficiency as we explore options for upgrading older equipment from us or other sources. As we develop some of the products we are launching, like Trusted Neighbor, we start to see potential benefits even without specific forecasts. By incorporating more equipment, such as cameras and locks, we notice improved retention metrics immediately. This results in higher average revenue per user and a greater willingness among customers to choose premium packages, especially when cameras are part of the offering, which are often absent in older homes. Additionally, with the rollout of the Trusted Neighbor product, those Trusted Neighbors will be able to download the ADT Plus app. As they assist our subscribers, there's a chance for us to gain new subscribers from these Trusted Neighbors, who are not currently our customers, presenting a unique opportunity for growth.

And I'd add, too early to have firm conclusions, of course, but everything Wayne just said, it just gives us more levers to optimize the returns we generate from our customers, an outcome almost for sure will be a broader mix, just different combinations of attributes. A lot of this is designed to pursue a broader TAM for different kinds of customers who have different needs, maybe different degrees of price sensitivity, and we are and we'll test our way into how to adjust those levers or knobs and dials to seek the optimal overall portfolio economic outcome. And I would emphasize or link back to what I was saying earlier is the mix may be different. It might be a different mix of upfront cost compared to attrition characteristics compared to ongoing profitability, but the foundation with which we make all of those decisions is the return and the lifetime value of all these customers. And again, we're excited to be more attractive to a broader TAM.

That's great. Yes. I can imagine the combination of organic growth through user acquisition with a strong brand name would be exciting to watch. Thank you all. That was helpful.

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

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