Good day, ladies and gentlemen, and then welcome to the Q3 2013 ADT Corp. Earnings Conference Call. My name is Freida, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Mr. Craig Streem, Vice President, Investor Relations. Please proceed.

Thank you, Freida. Good morning, everyone. Thank you for joining us today for our call to discuss ADT's third quarter results for fiscal 2013. With me this morning is our Chief Executive Officer, Naren Gursahaney. Let me begin, as I always do, by reminding everyone that today's discussion contains certain forward-looking statements about the company's future financial performance and business prospects, which are subject to risks and uncertainties and speak only as of today. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings press release, which was furnished to the SEC in an 8-K report, and in our Form 10-Q for the quarter ended June 28, 2013, which we expect to file with the SEC later today. In the third quarter 2013 earnings release and accompanying slides, which are now posted on our website at adt.com, we've provided information that compares and reconciles the company's non-GAAP financial measures with the GAAP financial information, and we explain why these presentations are useful to management and investors. We certainly urge you to review that information in conjunction with today's discussion. For those of you following on the webcast, we will be using the slide deck that we provided to supplement our commentary this morning. Please note that unless otherwise mentioned, references to our operating results exclude special items, and these metrics are non-GAAP measures. And now let me turn the call over to Naren for his comments.

Thanks, Craig. And good morning, everyone. Thank you, all, for joining us. Before I discuss our third fiscal quarter results, I wanted to provide a few important updates. First, we continue to make good progress in our search for a new CFO and we believe we are nearing the conclusion of this process. While I cannot share additional details at this time, I look forward to introducing you to our new CFO in the near future. Second, we've recently completed our first annual strategic planning process as a public company, and we feel very confident in our prospects and strategic plan going forward. I'll provide you with more details towards the end of the call. And we plan on sharing the full details of our strategy and associated capital plan at an ADT Investor Day in the fall that will roughly coincide with our 1-year anniversary as a public company. Third, we announced this morning our acquisition of Devcon Security from Golden Gate Capital for $148.5 million, which will be funded with cash. The acquisition includes over 117,000 quality-monitored accounts including residential, homeowners association and small-business customers, representing total recurring monthly revenue of $3.6 million. Devcon is a high-quality asset with an attractive customer base and strong financial and operating metrics. Now let's move on to our results for the third fiscal quarter. Overall, this was another solid quarter for us with a number of positive trends in our business. First, we're continuing to drive great results with ADT Pulse, with take rates increasing in all channels. We've also continued our efforts to market Pulse upgrades to existing customers, with ongoing positive results. The increase in Pulse take rates, greater upgrade activity and price escalations for base customers is fueling strong improvements in our average revenue per user. During the…

[Operator Instructions] Okay, your first question comes from Ian Zaffino from Oppenheimer Ian A. Zaffino - Oppenheimer & Co. Inc., Research Division: Question would be, if you look at the business between the direct channel and the dealer channel, the direct channel actually seems to be doing quite well, the dealer channel seems to be the opposite. What kind of initiatives do you have in place? Or how do you plan to improve sort of the production from that channel? I guess, at first, it's sort of an air pocket, but it seems to be continuing. What are you doing to address it?

First of all, Ian, I would say that we are seeing good, steady sequential progress in quarter to quarter. So quarter sequentially, we were up 4.6% in the dealer channel on an apples-to-apples basis. So we are seeing improvements in that channel. Again, I still think we're dealing with the challenge that we faced in Q1 with one of our dealers facing some financing troubles. They have continued to make progress, but that's going to be slow, steady progress because, in essence, they almost reduced their business down to 0 as a result of those financial challenges. The other major challenges that our dealer are facings is on the lead generation front. Because of the tightening requirements around marketing and the regulations around marketing, we had to abandon some of our former lead generation partners. And we've been working very closely with them to develop new ones. And in fact, our marketing team is now working on a much more collaborative basis with our lead generation partners to make sure that we're supporting both the direct and our indirect channels. And we're going to continue to drive improvements there. So I'm encouraged by the progress, yet as you pointed out, we are still down year-over-year. Ian A. Zaffino - Oppenheimer & Co. Inc., Research Division: Okay. So it's just going to be sort of a bunch of blocking and tackling and just sort of sitting and waiting for it to improve.

Very much so, although again, I still expect to see continued steady improvement on a quarter sequential basis, with us getting back to last year's leverage towards the latter part of this year. Ian A. Zaffino - Oppenheimer & Co. Inc., Research Division: Okay. And then in the context of the higher leverage ratio and this acquisition you just did, are we going to see acquisitions around this size, maybe 20,000-customer-account type of acquisitions? Or is there anything large in the offing?

You know what, again, we're going to have to see what becomes available. And we'll share more details on our thoughts when we do our investor day. But I do continue to believe that there are going to be some attractive acquisitions available in this market space of varying sizes. So I think our focus is on quality assets like Devcon that bring attractive customer bases; that bring good, strong capabilities in areas that complement what we do today.

Your next question comes from the line of Jeff Kessler from Imperial Capital.

Firstly, congratulations on the Devcon acquisition. I'll be circumspect in actually asking you what I'm going to ask here: Does the Devcon acquisition -- firstly, does it come with the New York businesses? Or is it mainly the Floridas?

I -- it -- we're going to buy all of Devcon's assets, so it's the total business.

Okay, great. And also with regard to Devcon, in your planning for it, when is the estimated closing? And I'm assuming that the current numbers that you have for guidance do not include Devcon, or at least include only a sliver of it.

We expect to close the transaction in the -- within the month of August. So there is a little bit of impact but not a significant impact in our results for this year.

Okay, great. In terms of company-owned systems and the dealer base, as the dealer base -- as you try to improve your dealer base, what has been the effect of company -- of your switch to company-owned systems with regard to that channel itself? Has that been affecting the numbers at all that we've seen? Again, sequentially, it looks okay, but we'd like to see a little bit more particularly on the disconnect side.

Yes, I mean, there was no impact. The change that we made on the business model only impacted our direct sales channel, so no impact at all on the dealer channel.

All right, great, so there was no bleeding-over from that. In terms of the lead generation that you are doing that you're getting out of the direct side, which you're clearly putting a lot of work into, what types of best practices or what types of things are you doing from the internal side to help get to replace some of the items that you cannot do anymore on the dealer side?

Well, we -- one of the things we've done, Jeff, is we've actually engaged one of our advertising partners to work directly with our dealers using the content that we've developed, whether it be print or TV materials. They can leverage our materials. We kind of make them, on the print side, cut-and-paste so they can create their own ads using common artwork and everything that ADT uses. And on the TV side, we're providing them some of the video that we've prepared for our own TV ads. So some of our larger dealers are actually starting to run TV ads now in order to generate more leads and generate more interest.

All right. Just 2 more quick questions, first with regard to higher costs, and the -- they're in the Pulse area, and their effect on near-term steady-state net operating free cash flow. Do you have some type of -- can you draw in your mind some type of timeline with regard to the initial cost and obviously the pass-throughs that you have to deal with iControl, because they're charging you x per month? At what point does the -- let's just say, does the EBITDA margin and, more importantly, the steady-state free cash flow margin in the Pulse product begin to trend up again for each -- on a per offer or subscriber in terms of time?

Jeff, let me kind of clarify this a little bit because I think it'll be worthwhile: The iControl license fees and everything, that really doesn't have any significant impact on us. The issue is that we will spend the subscriber acquisition cost, the cost of installing those new systems or doing the upgrades, in the current period. So when you look on a trailing 12-month basis, which is what our steady-state free cash flow is, you have all of those subscriber acquisition costs going in but you have very little of the revenue benefit from the increased ARPU, that would be more of a forward-looking benefit. So we're going to try and refine the metric a little bit more for you and we'll talk in greater detail when we do our investor day and provide some additional thoughts. But again, this is really just the issue of the timing of you invest that cost now, which impacts the current period, and the benefit comes over time. And steady-state free cash flow, the way we calculate it, just doesn't capture that effectively.

Yes, it would be really helpful to get some type of, I will say, quasi-IRR, something like that, on these Pulse systems to show what the investment can bring you over time. And I guess...

As we've talked in the past, Jeff, when I look at the IRR for our Pulse offering, it is towards the higher end of our range of returns that we get from the different products and the different channels, and it continues to be very attractive.

Okay. And finally, with regard to -- I realize that I'm probably in the 10% of people who focus on steady-state and operating cash flow, and -- but given -- I'll give you a 90% focus on the free cash flow, which seems to be what's kind of the more happening in the market. Does it appear to you that, for 2014, the same type of trend, the accelerating trend, in free cash flow is going to continue, if the -- in -- if the continue -- if the operating trends you are under now continue?

Yes, again, and I'll speak to only 2013 and the guidance we've given. Our change in our free cash flow expectations for the year were really based on the lower gross add production in our dealer channel. So our spend to acquire accounts from dealers is lower than what we expected, so that's why we increased our outlook for the year.

All right. I'm assuming that there are dealers, particularly at the low end of your dealer base, who have higher attrition -- whose accounts have higher attrition rates, and then there are dealers who are -- you would consider more, let's call it, Pulse ready or more higher end who are producing lower attrition rates.

Again, I think it's a good mix. We have some of our smaller dealers who have embraced Pulse and are really adopting it. And So I don’t know that I'd characterize it necessarily just based on the size of the dealer. And again, our credit scores and our requirements of our dealers are consistent regardless of the size, so...

Your next question comes from the line of Steven Shui from Stifel. Steven Shui - Stifel, Nicolaus & Co., Inc., Research Division: What is driving the pickup in volume you guys are seeing at smaller dealers? And is that sustainable?

Well, again, we've got a pretty large population of dealers, and I think just the timing of the mix will always vary a little bit quarter to quarter. We are continuing to recruit new dealers into our fold, just in the same way that we're pairing out some dealers who weren't performing well. And I do hope that some of the new dealers, while they're starting off small, will continue to grow and become some of our larger dealers over time. So I'm not sure that I'd draw any conclusions on the trends specifically there, Steven. Steven Shui - Stifel, Nicolaus & Co., Inc., Research Division: Okay. Just a follow-up on that: You guys had lower dealer SAC costs, as you mentioned, partially from the volume in smaller dealers, but you guys also had pretty good Pulse uptake in the dealer channel. As you increase your Pulse uptake there, should we -- how should we think about an increase in SAC cost?

It should be a commensurate increase. They get to -- our dealers get funded on a multiple of ARPU. So as long as the ARPU is going up, which clearly it will be as Pulse grows, that creation multiple will hold about the same, so we'll see an increase in our SAC costs accordingly. Steven Shui - Stifel, Nicolaus & Co., Inc., Research Division: And for the Devcon acquisition, can you comment on how fast that business was growing and what the average credit scores in that portfolio is?

I don't have their growth numbers in front of me right now, but it -- they have been growing nicely. And they've got a very attractive customer base both on traditional residential where their attrition rates were modestly better than the ADT rates, and then they've got a significant number of customers that are homeowners associations that have very attractive attrition performance, lower ARPU but attractive, very attractive, attrition rates. So overall, the attrition rate of that portfolio is better than we'll -- the average of ADT is today. Steven Shui - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And finally, one last question. Some of your competitors have been bundling home automation for alarm monitoring. Can you comment on this strategy and what it means for potential increases to gross adds for ADT in the...

Again, I won't comment on their strategies. I'll only comment on ours. We are a security company. We've built our foundation and our expertise in security. We believe the integration of security and home automation provides a very attractive market opportunity for us, and that's why we invested to develop our Pulse solution. And I think we're going to continue on the path. The success we've seen with Pulse in the 2.5, almost 3, years now since we've launched the product reinforces that the strategy is working. And we're going to continue to invest to build what we've got.

Your next question comes from the line of Jim Krapfel from Morningstar.

So the increased attrition that you saw this quarter, is that a continuation from last quarter? Was it really driven by housing, or is competition a factor in that as well?

Well, again, when I look at kind of the 4 buckets of attrition that we talk about, the largest and the most significant growth is still coming from relocations. And we expected to see a little bit of a pickup because summertime is when a lot of the relocations happen. So not a big surprise, from that perspective. I would say, loss to competition, there hasn't been a significant change there. The only change in that would be kind of who is showing up at the top of the list. And again, that wasn't a surprise some of the competitors that have aggressive summer deal -- summer sales programs, doorknocking programs, specifically picked up more during this time period. But again, that's something we see on a seasonal basis every year.

Okay. And then could you just speak to the rationale for the higher debt target? Previously, you've raised it to 2x, and now 3x. What really brought you to increase it further?

Well, again, we'll share a lot more when we do our investor day, but I would say it's all being done in the context of our strategy, the opportunities that we see to invest in our business organically as well as to do acquisitions. And we felt that a 3x debt-to-EBITDA structure best supported our strategy and really was optimal for us as we go forward. Again, we'll share a lot more details when we get together in the fall for that investor day.

The next question comes from the line of Jason Bazinet from Citigroup.

Actually, this is Chris Lo, on behalf of Jason. Just, I guess, one question. You guys talked about how the sort of higher Pulse adoption is sort of temporarily impacting steady-state free cash. Are there maybe some benefits we're not quite seeing yet, maybe perhaps with a scale, as the sort of Pulse sub base grows? Or are you guys seeing lower churn from Pulse subs even though it's sort of early days?

Well, again, what -- many of our Pulse customers are still in that initial contract period, so it's hard to draw definitive conclusions. What I will say is that, as we look at Pulse versus traditional, every one of our Pulse offerings is performing better than traditional. And where we see the biggest differential is where we have the integrated security and home automation. So we do feel, over time, that we'll be able to demonstrate better attrition performance for Pulse customers. We just have not modeled that yet because we just don't have enough data at this point in time.

Your next question comes from the line of Jeff Sprague from Vertical Research.

It's actually Andy, on behalf of Jeff. I was wondering if you could update us on where you think the Pulse take rate can go. I mean, in the residential direct, it's kind of above that 30% target you put out earlier when you first rolled it out. I mean, how high do you think it can go and especially with the opportunity with the incremental conversions for the upgraded accounts?

Yes, I -- great question, Andy. And I'm hesitant to speculate because, when I made my original forecast, we've gone past it so far. And the success just continues to grow. I would say, with new customers, so take the resale, we've bundled new and resale together, and if you'd just look at the new customers who are getting security and security home automation for the first time, I -- clearly, we're going to be north of 40% -- somewhere between 40% and 50%. Resale is a little bit more challenging, and that's what draws down that overall number because, in most cases, they already have a system in the home. They're primary interest is in activating what they've got. So it's a little bit more of an upgrade sell, and actually, it's a sell that's more similar to the upgrades that we're doing. When we look at the base customers, I think we view -- there's about 15% which are "target" opportunities. I would expect, based on some of the market data that we worked on as part of our strategic planning process, that maybe, over time, we'll get about 20% of our existing base. But again, that's going to take some time to get there.

Okay. Do you have any statistics on how successful the resale has been so far, like an percent of what you've been going after?

Well, again, resale for us is a pretty big population. What we include in resale is any former ADT-monitored system that's out there. And we've got a dedicated resale sales team out there. We're continuing to invest to grow that team. So a lot of that will be driven by the investments that we can make, as well as the opportunities. So we've seen good, steady progress in resale. Again, a lot of that is simply activating the existing system with a refresh of the current technology. Now we're pushing a little bit more Pulse upgrades there. But it's still a very attractive opportunity for us with generally lower SAC because we get to leverage most of the assets that are already in the home.

Okay. And then just a follow-up question, on acquisition opportunities. Are there a lot of Devcons out there for you? And what was the ARPU on Devcon?

The ARPU on Devcon was in the low 30s. Again, it's a mix between traditional residential and the homeowner association. The homeowner association will be lower than that but, again, very, very attractive churn characteristics there. And again, as far as the opportunities, we continue to see attractive opportunities. The question is going to be: making economic sense there, and the strategic and cultural fit with our business.

Your next question comes from the line of Charles Clarke -- from Charles Clarke from CSG. Charles Clarke - Crédit Suisse AG, Research Division: Just had a question with respect to competition. So you said in the past that the Pulse take rates have been better in areas where you're seeing new competitors from cable and telcos, so just the geographic areas where they've started to compete with you guys. Two questions: First, is this still true? Are you still seeing better Pulse take rates in that area? And second, it seems like your customer creation multiples, your SAC creation costs, are pretty steady across the business. I'm just wondering if, even in the face of competition, your SAC multiples are steady in those areas, in the areas where you are seeing new competition.

Yes, I guess, Charlie, first, I'd say, yes, we are still seeing better Pulse take rates in those markets, but I'll also put the qualifier in there that there's fewer and fewer of the markets where we don't have competitors. I mean, as most of the cable and telcos have expanded across -- their entire footprint, and now you have some of the telcos coming in who are national players. So the distinction is going to get blurred over time. That said, and I would look more towards our ARPU. We've maintained that roughly $50 a month of ARPU really throughout the 2.5, almost 3, years that we've been selling Pulse. So I think we are able to continue to get prices. Although, we're going to continue to watch that closely. Charles Clarke - Crédit Suisse AG, Research Division: So when you guys talked about IRRs on new accounts, is this really -- the initial upfront cost is really a function of creation multiple? So when you guys talked about 30x, the ARPU was upfront costs and you're calculating your IRRs based off future cash flows, based on that kind of purchase price. You're not seeing really any pressure in that creation multiple with the emergence of new competitors, right? I...

Again, I would say SAC has gone up, but most of our SAC increase is a result of the Pulse take rates as well as the Pulse upgrades, which impacts the numerator but not -- it doesn't benefit the denominator. And again, I think there is some offset by attrition as well, as we expect better attrition performance with Pulse customers as we move forward. But again, overall, the returns, the IRRs are towards the higher end of our range. Charles Clarke - Crédit Suisse AG, Research Division: Sure. And then just really quickly on share count. So just according to the Q, last quarter ended the quarter at 219.9 million. And you're ended this quarter at 213 million. Just curious how the share count comes in at 219 million. Was it just weighted towards the back end of the quarter? Or is it something I'm missing there?

No, it's just the weighted average through to the quarter.

And then -- and Charlie, just -- when we publish the new Q, on the face of it, you will see the actual share count at the end of July or, on the date of Q, July 24. So you'll get a more specific realtime number there.

I now would like to turn the call over to Mr. Craig Streem for closing remarks.

Thank you very much. Thanks to all of you for your attention, your interest. And of course, as always, come back to us for your follow-ups, anything else you need. Thanks, have a good day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a good day.