ADT Inc. Q3 FY2025 Earnings Call

Hello, and thank you for standing by. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to the ADT Third Quarter 2025 Earnings Conference Call. Now I would like to turn the call over to Elizabeth Landers, Vice President, Investor Relations. Please go ahead.

Good morning, and thank you for joining us to discuss ADT's third quarter 2025 results. Today's speakers are Jim DeVries, ADT's Chairman, President, and CEO; and Jeff Likosar, our CFO. After their prepared remarks, we'll open the call for analyst questions. This morning, we issued a press release and presentation summarizing our financial results. Those are available at investor.adt.com. We'll reference our non-GAAP financial measures today. Reconciliations to the most comparable GAAP measures are included in the earnings presentation on our website. Unless noted otherwise, all financials and metrics discussed reflect continuing operations. Non-GAAP cash flow measures include amounts related to our former solar business through 2Q 2024. Forward-looking statements included in today's remarks are subject to risks and uncertainties. Actual results may differ materially. Please refer to our SEC filings for more details. And now I'm happy to turn it over to Jim.

Thank you, Elizabeth, and good morning, everyone. I'm very pleased to report that ADT delivered another quarter of solid revenue growth, robust cash flow and very strong earnings per share, collectively reflecting the resilience of our business model and our team's continued execution of our 2025 strategy. Let me start with a few key financial highlights. Total revenue grew 4% to $1.3 billion. Adjusted EBITDA grew 3% to $676 million with adjusted earnings per diluted share of $0.23, up a strong 15% year-over-year. Cash flow continues to be a highlight with adjusted free cash flow, including interest rate swaps, reaching $709 million year-to-date. Additionally, year-to-date, we have returned $746 million to ADT shareholders through share repurchases and dividends. We ended the third quarter with a recurring monthly revenue balance of $362 million, up 1% year-over-year. Turning to attrition. Earlier this year, ADT achieved record levels, and this quarter, we ticked up to 13%. While above our budget, our teams are focused on plans to continue improving customer retention and those actions are underway. As we've executed in prior quarters, during Q3, we completed a small bulk account purchase of 15,000 accounts for $24 million. Overall, consumer sentiment remains cautious and relocations continue at low levels. We have remained disciplined in our SAC spending, which resulted in lower new subscriber and RMR adds. Jeff will provide more specific details about our results and full-year outlook later in our call. I'd like to spend the next few minutes updating you on ADT's 2025 progress and strategic focus areas, which continue to build on the priorities we've shared throughout this year. ADT's commitment remains unchanged, delivering safety and peace of mind to our residential and small business customers. Our strategy is anchored in 3 core pillars: unrivaled safety, innovative offerings, and a premium best-in-class customer experience. Unrivaled safety is at the heart of everything we do at ADT. As it has been throughout our entire 150-year history, we are constantly strengthening the ways we protect ADT customers and provide them with confidence in their security, delivering peace of mind. As we execute on our near-term financial goals, we're also investing in our product and experience ecosystem, expanding and enhancing our differentiated offerings. These efforts give customers even more reasons to choose ADT and to remain loyal to our brand. Our ADT+ platform continues to gain traction, enhancing the safety, convenience, and experience we deliver to our customers. Our product and engineering teams are firing on all cylinders, in coordination with our strategic partners to drive a continued pipeline of innovative releases. Our product road map is robust, and we expect to continue expanding our suite of unrivaled offerings every quarter to continue to gain share within the smart home. An increasing percentage of our new customers are now enjoying ADT+, and many of these customers are opting for larger, more comprehensive ADT systems, leading to increased installation revenue, and we anticipate contributing to even stronger retention over time. During 2025, approximately 25% of our new customer additions have been installed with the ADT+ platform, and we are continuing to expand to more categories of customers and channels. This quarter, we launched the ADT+ Alarm Range Extender further enhancing the capabilities, performance, and dependability of the ADT+ platform. This device expands coverage between the ADT+ base and other connected devices in larger or more complex homes with a 24-hour battery backup and tamper alerts. We also introduced new automation and AI-driven testing capabilities to streamline app development, reduce the need for manual testing and deliver faster, high-quality releases. These innovations help ensure a smoother, more reliable experience for our ADT+ customers. We are actively evaluating new features, use cases, and economic models and we'll continue to share additional information as these come to market. I also have a few updates regarding our efforts to optimize our hardware portfolio. While we don't expect hardware savings to be material in 2025, we view this as a meaningful source of savings going into 2026. Beginning October 15, ADT refreshed our smart home security portfolio, and we now offer 5 new Google Nest camera models, reflecting the continued expansion of our partnership with Google. And we are working closely with our suppliers to mitigate our tariff exposure, which we do not expect to be material during 2025. On the customer service front, we remain pleased with our progress with ADT's remote assistance program, which has eliminated approximately half of our in-home service calls, reducing truck rolls and field service costs. Our current AI efforts remain focused on our customer care operations with an emphasis on improving the customer service experience for both our customers and our employee agents while also improving overall efficiency. These AI initiatives continued to deliver positive results with an increasing number of customer service chats processed by AI agents, with nearly half of those successfully resolved without live agent intervention. We're also continuing to expand the rollout of AI agents for voice calls and early results are promising for both customer satisfaction and cost efficiency. AI-driven cost savings are beginning to materialize, particularly in our call center operations, and we expect to provide more quantitative detail as these benefits scale. Turning for a moment to State Farm. As mentioned during our last call, we have pivoted away from the past selling program, and we're exploring new opportunities for a digital relocation-focused approach to jointly pursue new customers. Despite some ongoing macroeconomic uncertainty, including tariff pressures and elevated interest rates, ADT's business model remains resilient and very well positioned for the future. In closing, we remain focused on execution, operational excellence, and positioning ADT for long-term value creation. I remain confident in ADT's outlook and our ability to deliver on our commitments for 2025. I want to thank our employees, partners, and customers for their dedication and trust in ADT. I'm proud of our team's performance and excited for the opportunities ahead. With that, I'll turn the call over to Jeff.

Thanks, Jim, and good morning, everyone. I will take the next few minutes to share some additional details on our third quarter and year-to-date results and our outlook for the rest of the year. As Jim mentioned, cash flow remains a significant highlight. In the third quarter, we generated $208 million of adjusted free cash flow, including swaps, up 32%, and we have generated $709 million year-to-date, up 36%. Adjusted net income for the quarter was also very strong at $187 million or $0.23 per share. Year-to-date, we have generated adjusted earnings per share of $0.67, up 20%. Adjusted EBITDA for the quarter was $676 million, up 3% in the quarter and up 4% on a year-to-date basis. This strong performance is driven by revenue growth, the associated margins, and our overall efficiency, enabling continued investments for the future while delivering these results. Adjusted earnings per share also benefited from our repurchases enabled by our strong cash generation and our efficient capital structure. On the top line, we delivered total revenue of $1.3 billion in the quarter, up 4%. Monitoring and services revenue was up 2% with an ending RMR balance of $362 million. Installation revenue was $200 million, up 21% and reflecting our continued mix shift to outright sales at higher average prices as more customers choose our ADT+ offerings. Gross subscriber additions were 210,000 in the quarter, adding $12.5 million in RMR. Our adds were down year-over-year, driven mainly by fewer bulk account purchases, approximately 49,000 accounts last year versus approximately 15,000 this year. I will note that our third quarter results still include the multifamily business, which we divested on October 1. This business is comprised of customers who own or operate residential rental housing facilities such as apartment complexes. Its characteristics are akin to the commercial business we divested in late 2023, generating meaningfully lower EBITDA and cash flow margins than our core residential subscriber base. We are consequently pleased with the $56 million sale price for this relatively small portfolio of approximately 200,000 subscribers and $2.6 million in RMR. We have also continued to return significant capital to shareholders while strengthening our balance sheet. As Jim mentioned, we have returned $746 million so far this year from the repurchase of 78 million shares and our quarterly dividend distribution. We remain very comfortable with our leverage at 2.8x adjusted EBITDA with net debt of $7.5 billion at the end of the third quarter. In October, we closed on a new 8-year $1 billion bond and a $300 million add-on to our 2032 Term Loan B. We used the proceeds to fully repay our $1.3 billion 2025 Second Lien Notes, which was our most expensive debt. We also closed on a new $325 million term loan A last week with those proceeds designated to repay some of our 2030 Term Loan B and our April 2026 notes. In all cases, we were able to price the new facilities below the rates of the debt they replaced. Together with transactions from earlier in the year, we have extended almost $2.5 billion of upcoming maturities and lowered our borrowing cost to 4.3%. We also enjoy a continued strong liquidity position with an undrawn $800 million revolving facility and $63 million of cash on hand at the end of the quarter. I'll close with a couple of comments on our outlook. With 2 months to go, we remain on track to deliver results consistent with the guidance we shared early this year. Reflecting this confidence, we have tightened and adjusted our guidance ranges, largely maintaining prior midpoints. We now expect total revenue of between $5.075 billion and $5.175 billion, with the midpoint consistent with our original guidance. Our refreshed ranges include slightly higher adjusted EPS midpoint with an offset to the adjusted EBITDA midpoint. This is in consideration of the mix between expense and capitalized SAC and other factors, including a delayed planned legal recovery. We now expect adjusted EPS in the range of $0.85 to $0.89, and we expect adjusted EBITDA to be in the range of $2.665 billion to $2.715 billion. Finally, we are maintaining our $800 million to $900 million range for adjusted free cash flow, including swaps, as we evaluate a handful of fourth quarter opportunities, including bulk account purchases. In summary, we are very pleased with our progress during the first 3 quarters of 2025. As we look towards the remainder of the year, we are confident in our ability to deliver on our commitments. We remain focused on driving operational efficiency, investing in innovation and generating long-term value for our stakeholders. Thank you for your continued support. Operator, please open the line for questions.

And your first question comes from Peter Christiansen with Citigroup.

It's great to see the strong growth in free cash flow this year, which is quite impressive. Jeff, I just have one question for you. As we know, next year we will be a full cash taxpayer, but you have successfully reduced the company's borrowing costs. These factors are significant as we consider the free cash flow for 2026. Are there any other aspects we should consider in our modeling for 2026, or any specific elements of free cash flow growth that you believe are particularly noteworthy?

Yes, you hit on the ones that have some dynamics that could cause them to change. So we've had some success managing our cash taxes that will end up a little bit better on cash taxes, a couple of benefits from the recent legislation. We've done a really good job with a series of debt transactions, reducing our borrowing cost, which makes that less of a challenge next year compared to what we once thought it would be. So we feel really good about our progress. In 2025, we're on track to achieve our original guidance because of our improvements, we have a lot more flexibility in capital deployment. So while we're not sharing any specific guidance beyond '25 today. This is, of course, the time of the year where we're working on strategic planning and budgeting for next year, ongoing conversations with our Board evaluating several really interesting initiatives and opportunities for long-term growth. We continue to believe our stock is undervalued. So we've deployed capital there this year. And we plan to share more in the first part of next year in terms of a broader strategy and longer-range outlook along with our 2026 guidance. But I feel really, really good about where we are in 2025.

And your next question comes from the line of Ashish Sabadra with RBC.

So you mentioned efforts underway to improve retention, I believe, ADT+ and some of the AI initiatives are part of it. But I was just wondering if you could elaborate further on how should we think about some of these initiatives helping retention going forward?

Sure. Thanks for the question. It's Jim. I'll provide some insights on overall attrition and discuss a few key areas of improvement we're focusing on. As mentioned earlier, we ended the quarter at about 13%, which is an increase of roughly 13 basis points from the previous quarter. We previously reached record levels this year and anticipate that attrition will decrease over time, mainly due to enhancements in customer service and new offerings like ADT+, which should enhance customer engagement and usage. Looking specifically at the quarter, we faced some pressure from a few factors: nonpayment cancellations were higher than last year, voluntary losses exceeded those from last year, while relocation losses were slightly lower than last year. Regarding the areas where I see reasons for optimism, team stability is on the rise, and more experienced employees tend to achieve higher productivity levels. Our customer experience metrics, such as NPS, customer satisfaction, and digital self-service, are all improving and trending positively. We've also seen significant progress in life cycle management, which the team is working on. Additionally, from a hardware standpoint, offerings like Trusted Neighbor within ADT+ and increased engagement with video are all contributing to a higher usage of our services. Historically, we've found that as usage increases, retention improves; the more customers utilize the system, the more they value it, leading to higher retention rates. Although the quarter ended at 13%, there are several initiatives in progress that I believe will have a positive long-term impact for us.

That's great color. And maybe just on the RMR front, we saw some softness there from a growth perspective. How should we think about the puts and takes going forward?

Sure. So at the intersection of attrition being 13 basis points higher and gross adds not being quite where we'd like them to be, RMR ended the quarter less than what we had anticipated. Our direct organic residential adds were actually up 1% year-over-year, dealer adds were down modestly. DIY, it's a small number, but DIY for us was up 13% year-over-year. The most significant impact on ending RMR for us this quarter from a comparison perspective is that we did a bulk of 15,000 this quarter compared to 49,000 last year. So ending RMR ended a little lower than anticipated. We have some bulk in the pipeline. We'll be disciplined about pursuing that bulk, but that should continue to be a source of growth for us going forward. Thanks for the question.

And one thing I'd add to or just to emphasize is our continued focus on returns and discipline in capital deployment, SAC deployment especially. It's, of course, a very important measure, but we're also focused on profitability, SAC efficiency, and cash generation. So really pleased to be still affirming our guidance that would have our adjusted free cash flow up 14% or 15% at the midpoint after 40%, I think it was a little bit above 40% last year. So as we're balancing all of these objectives, I want to emphasize the progress we made on cash generation.

And your next question comes from the line of Manav Patnaik with Barclays.

This is Ronan Kennedy on for Manav. Can you talk about the portfolio hardware optimization efforts? I believe you indicated not material savings in '25, but a potentially meaningful source of savings into '26. If you could please provide some color on that and also the benefits of the remote assistance program and your early AI initiatives, please?

Sure, Ronan, there's a lot to unpack in that question. I'll touch on each of the three points briefly, and we can discuss them further after the call if you'd like. Regarding our products, we're collaborating with our ODMs to leverage our scale and their expertise to reduce manufacturing costs. We've made good progress with ADT+, which now accounts for about 25% of our new sales. We plan to expand that into new order types and channels, and our engineering teams are focused on lowering prices, which has given us some gradual benefits this year. While these benefits aren't substantial yet, we expect to see more savings as we roll out ADT+ to a larger portion of our new installations. On the AI front, we're concentrating on enhancing customer service and are now branching into sales applications and employee productivity. We've begun seeing savings in 2025, which we anticipate will accelerate in 2026. Currently, our AI can handle around 50% of chat volumes, and about half of our voice calls are managed by virtual agents, maintaining a containment rate just below 20%. I'm optimistic about our AI initiatives as well. Regarding remote servicing, it has stabilized at around 50% of our service calls over the past several quarters. There might be some room for improvement, but it likely won't be significant. We're satisfied with our current position, as our Net Promoter Score and customer satisfaction ratings for remote service are very strong, and I expect this level to remain consistent.

Another, if I may, kind of multifaceted question, but more so on the macro and the strength of the consumer as you see it. I think you said our voluntary disconnects were up. I don't think you commented on nonpay. You also alluded to potential impacts of tariffs and a still higher interest rate environment. So could we just have your characterization of the macro and the strength of the consumer? And if and how those could potentially impact you achieving your guidance for 4Q as going into '26, please?

Yes, we absolutely reiterated our guidance. Overall, considering macro factors with a couple of months left, we are confident we will meet our expectations. I'll share some comments on attrition and the macro environment before asking Jeff to address your tariff question. Generally, we are observing a cautious consumer with a slight increase in delinquency rates. Our nonpay cancels have been higher than last year. While this increase isn't significant, it is something we are closely monitoring. The changes our team is making in the collections process, though early, look promising, and we are not experiencing any further decline; the elevated nonpay cancels and delinquencies have remained consistently high, but steady. It's also important to note that with fewer relocations, we have fewer opportunities for gross adds, but this does help with attrition. Additionally, relocation losses in Q3 were lower this year compared to last year. Overall, after considering all the macro variables, I remain optimistic and so does Jeff about Q4.

Yes. I would like to add that while the environment regarding tariffs has become clearer, it is still not fully resolved, so we are actively collaborating with our vendors to manage costs. This involves negotiations and considering shifts in the country of origin, both in the short and long term, which may lead us to adjust pricing for our customers. I want to emphasize, even if it sounds repetitive, that we are confident in our ability to meet the guidance we provided at the start of the year. I remember discussing in our first quarter call that we anticipated tariffs would pressure the midpoint of some of our guidance ranges, yet we expected to meet those ranges. Now, in November, the tariffs have indeed impacted EBITDA somewhat. There are a few factors affecting EBITDA relative to the profit and loss statement and the balance sheet, but we've managed to offset those impacts in our earnings per share. Our earnings per share have increased by a few cents. Additionally, I want to express our strong confidence in our cash generation capabilities. Despite certain uncertainties, our teams have done an excellent job navigating the various challenges this year.

And your next question comes from the line of Toni Kaplan with Morgan Stanley.

I first wanted to ask about the lower SAC spend. Was that a deliberate strategy? It makes sense that you wanted to be more disciplined, but I guess, is there anything that sort of drove you to spend less this quarter? Or it just was that the customers that you saw weren't as high quality? Or was it sort of a deliberate you wanted to spend less?

Yes. I would say it's the combination of those things. Navigation of the point I was alluding to earlier, a variety of factors and offsetting directions and our commitment to deliver the guidance we put forth at the beginning of the year. And the point I mentioned about being disciplined and returns-oriented in our approach and then maybe worth also mentioning that we do still have a range around our adjusted free cash flow outlook for the full year, even with a couple of months left and part of that is a continued evaluation of SAC and the largest chunks of SAC tend to be bulk account purchases that we will evaluate in the last handful of weeks here.

Great. And then on State Farm, I know you had talked about sort of changing course on the program that was originally rolled out because of this low pace. This one seems more targeted but also sort of more limited. So I guess, like maybe just talk about how did you sort of pick this new target customer base? Were they seeing higher adoption of like a higher take rate of the ADT product during the initial phase? Or was there something else? And I guess in terms of like your cost of this program, I imagine it's probably not that big, but I guess like how do you think about like what you're hoping to get for returns or things like that? And when do you sort of reevaluate on the new pilot?

Thanks for the question, Toni. It's Jim. I'll provide some context on State Farm and then address your question regarding the digital program we are considering. Our initial agreement with State Farm lasted three years and just concluded this past October. As I have mentioned in previous calls, the volume has not met our expectations from this partnership. We haven't incorporated significant additions into our 2025 budget so far, and we currently have around 32,000 to 33,000 subscribers. Therefore, we have shifted our focus to developing a digital solution aimed at relocating consumers. We are in the early stages of this design. It's not necessarily a final attempt at traditional distribution with State Farm, but rather a new approach, and we are going to fully commit to it and see if we can gain some traction. An advantage of this solution is that it's integrated into the potential buying process, which reduces reliance on agent interactions unlike the traditional method. This digital process is focused on relocating customers. Additionally, we are maintaining our data sharing program with State Farm, where, with customer consent, we share home alarm activity with them. We continue to explore that avenue to see if it provides value. Referring back to your original question about the advantages of the digital program, I would emphasize that it is part of the buying process, which we believe will lead to better results.

And your next question comes from the line of George Tong with Goldman Sachs.

You outlined various drivers to improve your attrition rates. Can you talk about how long you think it might take for those improvements to materialize and drive year-over-year improvements in attrition?

Thanks for the question, George. I think it will probably be Q1 or Q2 of next year. It takes some time for the NPS improvements to take effect. The digital self-service continues to gain great traction, and we're better than ever at engaging with customers in their preferred ways. Therefore, we're expanding our digital platforms. We are doing some interesting work leveraging AI to enhance satisfaction, but I believe it will take a quarter or two before we begin to see improvements. I expect voluntary losses to be the first to show improvement. I also mentioned earlier our nonpayment cancellations; we've implemented process improvements in collections by increasing our contact rates with delinquent customers and experiencing some success there. I anticipate some improvement in nonpayments as well. However, that is significantly influenced by the macro environment, making it a bit harder to predict. Nonetheless, I believe our internal processes and the improvements we're making bode well for us in Q1 and Q2.

And one other thing I'd add too is we made some adjustments and fine-tuning to our underwriting processes to whom we extend how much credit earlier in the year that we expect will have some benefit, but it also takes a few months to work its way through the system.

Got it. That's helpful. And you mentioned earlier, continuing to opportunistically pursue bulk account purchases. Can you remind us what's embedded in the guide in the full year with respect to future bulk account purchases? And what current economics look like with purchases?

Let's work together on this one, Jeff. I'll provide some details, and Jeff will add his insights as well, George. We currently have several bulk opportunities in the pipeline. As you know, we will remain disciplined and won’t pursue bulk orders just for the sake of it. If we can't meet our targeted economics, we won't go after them. However, there are two or three significant bulk opportunities we are considering. We might proceed with one in the fourth quarter. As Jeff mentioned earlier, this is primarily why we kept our free cash flow guidance broad. We tightened our projections for revenue, EBITDA, and EPS, but maintained our adjusted free cash flow guidance between $800 million and $900 million to allow for flexibility to pursue one of these bulk opportunities in Q4 if the economics are favorable.

Yes, I don't have a whole lot to add. Similar to Toni's question and even in the third quarter, as Jim had noted, one of the drivers that I noted also in the prepared remarks, that one of the drivers year-on-year was less bulk in the third quarter. So of course, that led to less SAC spending on those bulks. We're evaluating these in the fourth quarter. I'll just be echoing Jim's point about that. That's why the range is a bit wider than some of the other ranges.

And your next question comes from the line of Ashish Sabadra.

Just 1 quick question on capital allocation. You've been very opportunistic with the share repurchases. Can you just remind us how much more authorization do you have in place? And also from a liquidity perspective, can you talk about your opportunity to continue to do more opportunistic share repurchases going forward?

Yes, we have fully utilized the $500 million authorization from the beginning of this year. In addition to that, we repurchased over $100 million in January under the previous year's authorization. We have access to our revolving facility and are pleased with the debt transactions we've executed, including the refinancing of our highest interest debt recently. We also issued a term loan A, using $200 million from that to pay off our older, higher-interest term loan B due in 2030. We still have some cash available, designated for debt repayment, but currently, we have liquidity on hand. Looking ahead, our next maturity is $300 million on our April 2026 notes, and we feel confident in managing that while having capital available for share repurchases or other priorities like M&A or SAC.

There's no further questions at this time. I will now turn the call back over to Jim DeVries for closing remarks. Jim?

Thank you, Mark, and thanks, everyone, for taking the time to join us today. We look forward to finishing the year strong. We remain confident in achieving our financial commitments for 2025. I'd like to extend my appreciation to our employees and our dealer partners. Thanks again, everyone, and have a great day.

This concludes today's call. You may now disconnect.