Greetings, welcome to ADT Incorporated Second 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. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Derek Fiebig, Vice President of Investor Relations. Derek, you may begin.

Thank you, operator and thank you everyone for joining us on today’s call. This afternoon we issued a press release and a slide presentation on our financial results. In addition, on Monday we issued a press release and posted a slide presentation related to our Google partnership. 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 that could cause actual results to differ materially from those expressed or implied by such forward-looking statements, among others, matters that we’ve described in our press release issued this afternoon and in our filings with the SEC. Please note that we disclaim any obligation to update our forward-looking statements, which speak only as of the time they are made. During today’s call we’ll also make reference to non-GAAP financial measures. Our historic and forward-looking non-GAAP financial measures include special items which are difficult to predict and/or may be 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 and our slide presentation issued this afternoon, both of which are also available on our website. With me on today’s call are ADT’s President and CEO, Jim DeVries; our CFO, Jeff Likosar and also joining us and available for Q&A are Don Young, our CIO and EVP of Field Operations; as well as Rich Rot, SVP of Business Operations; and Jason Smith, SVP of Finance. With that, I’ll turn the call over to Jim.

Thank you, Derek, and it’s a pleasure to welcome everyone to today’s call. As you know on Monday, we announced our long-term partnership with Google which we believe positions us for a major leap forward in our development and long-term growth potential. Our existing initiatives combined with our Google partnership enable us to continue to lead the industry well into the future. I hope many of you were able to join our call on Monday where we discuss this exciting alliance in more detail. I’ll share a brief recap of our agreement in a moment, but first I’d like to spend some time discussing ADT’s very strong second quarter performance. In early May we shared with you the transformational effort by our team to navigate the COVID-19 environment, highlighted especially by an extraordinary shift of our nearly 5,000 call center employees to a work-from-home environment. As we progressed through the second quarter, we accomplished many similar objectives towards adjusting our business operations, including extraordinary customer service provided by our entire field organization. I’m both pleased and proud that the ADT team quickly moved from navigating during a challenging time from simply thriving. From a customer care standpoint, the pandemic has allowed us to rethink the out of the possible and we are encouraged by the high level of service and effectiveness we achieved. These efforts resulted in a healthy year-over-year improvement in our NPS score to an all-time high. During the quarter, we also introduced our first artificial intelligence chatbot to handle customer service issues. Additionally, we delivered our highest ever first-call resolution rate and saw an increase in our customers’ use of our self-service interactive voice response. In our field operations, ADT technicians continued to safely and efficiently service both new and existing customers. The second quarter also represented…

Thank you, Jim, and thank you everyone for joining today’s call. As Jim mentioned, we are very pleased with our overall second quarter results and our accomplishments during the first half of 2020. Our performance demonstrates the resilience of our business and the fortitude of our teams who have delivered strong near term results while concurrently strengthening our long-term position despite the challenging macro environment so far in 2020. Our total reported revenues in the quarter grew by approximately 4% year-over-year despite our 2019 Canada disposition and 2020 effects of COVID-19. The main contributor to revenue was installation and other revenue driven mainly by higher reported residential outright sales revenue, which more than offset the softness in sales to commercial customers. Monitoring and services revenue declined by 4% on a total Company basis with the divestiture of Canada. However, US recurring monthly revenue grew by approximately 1% in the quarter even with the COVID-19 related slow down which has especially affected sales to commercial customers. We are pleased that our adjusted EBITDA of $563 million grew sequentially by approximately 4% compared to the first quarter. As in the first quarter it has expected, our adjusted EBITDA was down year-over-year, driven primarily by expenses recognized in our P&L as a result of the Defenders acquisition, the disposition of Canada and a lower volume of commercial transactions. Cash generation, which benefit from the Defenders acquisition, was again a highlight in the quarter and we generated $232 million of adjusted free cash flow during the second quarter and $405 million on a year-to-date basis. This compares to $292 million for the first half of last year. As I will describe in a bit more detail later, our adjusted free cash flow for the first time includes net inflows from our new consumer financing…

[Operator Instructions] Our first question is from George Tong with Goldman Sachs.

I wanted to dive deeper into the potential financial implications of the new Google long-term partnership. You’ve laid out three time horizons for the partnership to ramp. Could you perhaps put a framework around what the timing is around each of the horizons, what that corresponds to your perspective and then which horizon would you expect to see a material financial impact from the partnership?

It’s Jim. Clarity on the horizon, first, the horizons aren’t necessarily sequential. We’ve been working with Google for almost a year now on their technology and how that can advance the ADT plus Google vision for smart home, and how we can transform the industry, and really create a special customer experience. And so it’s not necessarily sequential, but let me speak to your question. Horizon one is essentially the introduction of products available today to our current and to our legacy customers. That will occur over the next 12 months. Then, horizon two is a fully integrated solution that utilizes net products in Pro Install. There are some additional features like enhanced alarm verification and the total launch of horizon two is no later than June of 2022. And then probably what we’re most excited about, what we call the re-imagination horizon, that’s all about the art of the possible, and rethinking the smart home experience using AI, machine intelligence and building a platform that ties all of that together. We’re not prepared to give quantitative impacts at this point for each of those horizons, but that’s a timeframe and a little descriptive for you on what the horizons look like.

Hi, George, and just I’d add - one thing I’d add to that too is the way we’re thinking about this, is it fundamentally changes our long-term growth trajectory. And if that’s kind of in the horizon two, horizon three, but it exposes us to more quickly growing markets, some smart home markets in addition to our core security market. It makes us appeal to consumers who might be a little bit more smart home first instead of security first. It gives us a more compelling broader set of offerings even for those security first customers and it gives us more differentiation which Jim mentioned with differentiated monitoring, video analytics, possibly prioritized alarm response and to the heart of the possible point, video over the last 24 to 36 hours. We’ve got a lot of inbound ideas of other places that this could go over time, and we’re excited to have this being now signed in and in motion and more to share later, but I’d just emphasize this.

And just a follow-up on the partnership. How does the Google partnership differ fundamentally from your Amazon partnership, how does it augment the market and the addressable opportunity differently than the Amazon partnership did?

So the Amazon partnership really orbited around Alexa and using Alexa Guard as an audio detection device in the home and outside of home swim lanes that was the extent of the Amazon relationship. The Google relationship, it’s just fundamentally different partnership. It involves deep integration. You know about the investment and the incremental $150 million in growth funds. We viewed and still view the Amazon relationship is helpful to the organization, but the Google relationship is really a great accelerator for us and exceptionally deep integration product roadmap, joint marketing, co-branding, all part of what’s involved with Google.

Our next question is from Toni Kaplan with Morgan Stanley. Please proceed.

The attrition rate in the quarter was exceptionally strong. I was hoping you could help break down the drivers. I know you mentioned fewer relocations and that makes sense since COVID I think would lead to fewer people moving during the period, but just talk us through the factors and how sustainable the number looks from here. I expect that potentially it could tick up a little bit if it is driven by the fewer moves. Thanks.

Thanks, Toni. So first just a little bit of context on attrition, our number one objective is, as you know, is capital efficient growth and that involves balancing a number of metrics like cost to acquire customers, customer retention, cost to serve, a number of other factors. Attrition is obviously extremely important and it receives sometimes more attention than warranted because it’s a balancing act for us to drive capital efficient growth. That said, we’re unbelievably proud of the improvement in attrition. We’ve shared a number of times, the improvement will be linear, but we like what we saw in Q2. MPDS, for us it was a record level, customer satisfaction with our service agents was at record levels, first-call resolution was at near record level and then we did have fewer relocations and that’s certainly was a driver, but we improved in retention in every single category we tracked, non-pay voluntary locked competition, and not unimportantly we improved in every region of the country and in customers generated from direct and dealer. So we think Q2 retention is an excellent proof point to highlight recession resistance and the value that customers place on our service. So we feel great long-term. We know that attrition won’t be linear - attrition improvement won’t be linear, but we feel great about the performance in the quarter.

That’s great. And on the Google partnership, we’ve received a number of questions on what it could mean for your resi pricing and also if there would be any cannibalization of the Pro Install business. I was hoping you could share your perspective on that. And also if you could clarify if there is a revenue- or profit-sharing component to the sale of each unit, that’s something people have asked us about as well. Thank you.

So the Google relationship will involve both our DIY segment and our Do-It-For-Me segment. There isn’t a revenue-sharing aspect to the agreement per se. We’re excited about what we can do with Google in both segments, but I would say most of our attention and frankly most of the attention and the reason why Google was attracted to us was because of our Do-It-For-Me segment. Our 5,000 or so technicians are deep experienced and expertise in distribution, the brand, our trusted reputation and the ability for us to be the curator of Google product in the smart home is where we focused a great deal of attention, and at the end of the day it was really what tipped Google to be - to choose ADT as their strategic partner.

And Toni, to your pricing question too, I want to add that not related to Google of course in the quarter, but we continue to make really good progress on our new pricing model that as you may recall we rolled out in the first quarter and launched nationally towards the end of the first quarter and second quarter was our first quarter where we had our new structure in place and our focus there was to have a simple pricing structure. It was to enable to sales teams to sell more comprehensive solution to customers and rely less on discounting, all enabled by the availability of financing solution. So after our first quarter having us played, we’re very pleased with the progress that has led to us realizing more installed revenue for the average residential installation, which is a meaningful contributor to the SAC improvement that you see in the revenue payback that you see year-over-year. And Google is just going to help that more because it gives us both products and services that we think give us additional differentiation relative to other solutions that might be out there.

Our next question is from Seth Weber with RBC Capital Markets. Please proceed.

I wanted to ask a little bit on the commercial business. The commercial side of the business, down 15% in the quarter. Can you just give us any color as to trend rate through the quarter and then I guess just - it looks like the customer account was pretty flat. So are you expecting things to get a little bit worse before they get better here going forward? Thanks.

Thanks, Seth. It’s Jim. So the commercial business grew by 10% in Q1. Obviously, the impact by COVID-19 changed the trajectory pretty significantly in the second quarter. Again, maybe three or four takeaways on the commercial business for you. First, we expect softness in EBITDA and revenue essentially through the remainder of the year, that’s baked into our guidance. Secondly, we think the softness is temporary. As the country navigates through the pandemic, we are long term bullish about this part of our business. And third, we’re using this time to position ADT Commercial to be even stronger over the long term. We are focused on the integration of Red Hawk. We had a big systems milestone just completed this past weekend. We continue to look at tuck-in M&A, that remains part of our ongoing strategy here and we are opportunistically reviewing those options. And then we’re actually still in the market from a commercial talent acquisition standpoint, especially on the technician front and we’ll continue to focus on net important work. So, ultimately share gaining here is on customer service and that’s our sweet spot and as I mentioned we’re bullish about this business. When we think about the opportunity here, we think it’s deferred, not diminishing.

And that definitely grew - we started doing acquisitions to grow our commercial, essential part of that was to diversify the portfolio and while that’s part of our business, it is performing quite as well in the COVID-19 world. We’re very fortunate to have the diversification and the resilience in the residential side that some of the trends that Jim described earlier about the suburbanization, more demand for peace of mind, fewer relocations has led our sales to residential customers and retention risk customers to remain strong which goes into us being in a position, even despite the COVID-19 dynamics affecting commercial to have raise our guidance in the period.

Right. I appreciate that. I was just trying to get a finer point as to whether the trends in June were different from April, May, whether you saw any improvement through the quarter on a year-over-year basis, just if you’re willing to address that or if you don’t want to get that granular, that’s fine, but that’s really the spirit of the question.

Yes, I would say, well we have - there’s macroeconomic uncertainty we have wider range in our guidance than we normally would. It was clear on the residential side and as we mentioned in the prepared remarks that the trends improved over the course of the quarter. That’s the clarity, I’d say at this point as to how commercial is likely to play out between now and the rest of the year.

And can you talk to whether you’re seeing challenges on the collections side on the credit - I’m sorry, on the commercial side of the business just credit quality, anything that you would call out there that we should be aware of. Thank you.

Yes, it’s something we’re watching closely. We increased our credit loss provision in the first quarter. We did materially change it in the second quarter and we’ve had some exposure to some of the kinds of businesses that you read about, everyone is through some difficult time. I would add though that our commercial exposures are reasonably diversed and some of those exposures are to the segments of the economy that are less affected. So we’re watching this closely, managing it closely, trying to balance the risk with our growth objectives. But so - so far. I’d say it’s played out a little bit better than we maybe would have expected going in.

Seth, Jeff was talking about the commercial side. It’s probably worth mentioning the SMB of our business as well where I know there has been some concern expressed. Year-to-date retention in our small business segment is, through June 30, similar to last year, and there is a slight mix shift what cancels predominantly as you might expect the higher in the current economic environment. But overall, year-to-date retention, even SMB is the same as last year through June 30. So we’re monitoring that pay on SMB closely. On past dues, it’s a bit higher than expected, but whether it’s flat to last year and we feel good about that.

Our next question is from Jeffrey Kessler with Imperial Capital. Please proceed.

Can you elaborate a little bit on one of the - in terms of commercial, you did get a boost to keep it from being down further from what I would call the winning the Dollar group, the installation - the beginning of the installation there. Can you describe what you have done - what you showed because the competition who had have pretty good technology. What have you been doing with your national accounts and what are you doing - and then on a broader basis, what are you doing in terms of implementing of technology to get assuming that COVID begins to relax in 2021 and you are positioning yourselves to take advantage of the marketplace, what are you doing to take advantage and get greater share through both technology and the types of service you’re telling the potential clients you can give them that their incumbent can’t give them?

Yeah. So, I’ll give a little bit of color and then - at a high level, Jeff, and then hand it over to Don. Ultimately, like I mentioned earlier, we see share gain here as of our customer service and no one in this space provides the level of service that ADT does, that Red Hawk and ADT together do, and we think that that has been and will continue to be the single most important source of growth for us. Specifically, to your question on Dollar Tree and Family Dollar, we announced that in May that was our largest national partnership ever announced. The work has already started. We have a material impact on the quarter. Ultimately, that could be as large as 15,000 locations and we think that there continues to be pretty significant opportunity in the national accounts space, again driven principally by world-class service.

So, Jeff, this is Don. Let me offer - from a technology standpoint, Family Dollar had a one-stop shopping solution offered to them like combined phone service, broadband, security, et cetera. And they shifted their focus. They came up with other alternatives for the broadband and the phone service [inaudible] the primary reason for seeking a new alternative and then we just basically was able to close the deal just based on our prowess and our service levels.

So my follow-up question is, Don, you know that I’m going to be at - what I am asking you, but this past quarter an appeals court upheld the Sandy Springs suit or if you want to call it, there are onerous fine and actually their police response types of rules for providers that - and customers who have to make false alarms. That brings up the question of differentiation in the marketplace and where are you in the process of putting together a verification capability that will satisfy police from not - so they’ll put you at the top of their scoring system and so that you don’t get hit - your clients don’t get hit by fines for false alarms. Where is that progress at this point?

Yes, so we have talked about this before, Jeff, fire arms have their own different category of response and intrusion alarms. Typically it’s been difficult to try to prioritize. The technology we’ve been working on literally for years, but more importantly, the last six months or so with Google’s help, their analytic progress really accelerates us to a place where we’re very comfortable deploying a prioritized version of an intrusion alarm. So basically categorizing that prioritization within the comp lines add up to this point. Combined that with a foreign standards and we think we’re really well positioned to go into a market with not only the technology to support it, but also a standard in the industry to go out and match it up.

And is there a general time frame on this, is this something you hope to roll out in 2021?

Probably difficult for me to roll it - paint a picture from a time horizon standpoint. I would expect in 2021 a scoring standard or at least the first version of that to be available, and the technology to at least prioritize some portion of intrusion alarms, mainly in the video portion. The question that remains is how far and how fast we can go on the other sources of data. I would say video leads the way, followed quickly by location information.

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

This is Jay Hannon [ph] on for Gary today. Just going back to that Google partnerships conversation, how should we expect some of the more immediate cost just from that initial integration process, like on your slide, we’ll take the first step is just the combined DIY offerings. Is there going to be some cost there we should expect in the next two quarters and is that reflected in the guidance you just updated?

Hi Jay, it’s Jeff and I agree I may have mentioned in my prepared remarks, but our guidance outlook for the year include consideration of the initial expense associated with the recently announced partnership because we’re so new to being formerly aligned. We are in the process as you can imagine. We are working through the details and specifics and if anything is meaningfully different, we’ll of course talk about it on our next call. In the near term, we wouldn’t expect to see a material difference on outside bigger changes I just shared as we thought really what we’re most excited by is if you are doing, those near term investments could drive a materially meaningfully different set of opportunities for us over the longer-term.

Okay, great. And then just quickly on the consumer financing offering, it sounded like it was nicely additive in Q2. Is there any concern on the credit side going forward. It strikes to me that the typical customer that might perceive that offer might have some more obligations crop up elsewhere in the next couple of quarters.

Yes, it’s something we watch closely and we don’t offer, as you can imagine, we don’t offer the financing program to every single customer we evaluate and stick to credit standards because it’s new, we’re watching it super close. To the earlier question about commercial credit losses, we are very attuned to payment rates and your credit card accept rates and ACH accept rates and all of those things have continued to perform in a range that so far is going okay. But as stimulus runs out and the depending on how the economy performs in the coming weeks and months, we will continue to watch that closely and potentially make some adjustments.

We have time for one more question. And that would be Bryan Lim with Credit Suisse. Please proceed.

[Technical Difficulty]

Kevin, we couldn’t make out most of what you said. Could you repeat that please?

Just trying to determine what the business mix looks like post the Google partnership whether or not it allows you to accelerate the shift to commercial or how are you thinking about percentage of business residential versus [Technical Difficulty] partnership you just announced?

Okay. Kevin, I got about one out of every four words. So I’m going to answer the question I think you asked. The Google partnership is focused right now on the residential and small business parts of ADT. We think that there is some optionality on the commercial side in the future, but right now we are focused principally [Technical Difficulty] high volume residential and SMB.

And then I guess within the context of the retention, with the [Technical Difficulty], do you look at the retention to get better than some of this that you already put out there or how should we think about retention?

Absolutely, the retention will improve. We know that the more that a customer uses their system, the more they interact with their system, the higher the retention and a smart home customer that has more devices in their home that recur rate will be a stickier customer. And not only as the retention advantageous there, Kevin, but another advantage is from a SAC cost perspective, we have higher installation revenue and we were able to acquire smart home customers more efficiently. So to answer your question, our retention is yes. We expect improved retention characteristics and also because our installed revenue, it would be a tailwind for us in SAC.

And is there any way to think about the retention of what an average smart home retention is versus [Technical Difficulty]?

Yes, I would say, Kevin, the - to go back to what Jim was saying earlier that we’re confident that all things equal, this is going to lead to customers using their systems more and is going to lead to better retention over time. We’re also balancing that, managing that with the cost to acquire customers that you can envision different models that have different contractual terms into the future. And then, we felt that always also against the possibility of serving the customers. So back to what Jim said at beginning about our number one job being to optimize the customer lifetime value and NPV of customers we take on, the way I would look at that is we are highly confident that this partnership is going to both enable us to do that and also lead to meaningfully different long-term growth trajectory as the partnership fully comes together.

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

Thank you, operator. So it was obviously very strong quarter for us, especially in the context of the environment of COVID-19. We’re feeling very good about the anticipated benefits of our recent announcements as well. We had strong Q2 financials, outstanding cash generation. As I mentioned earlier, customer service is at record levels. Our customer retention was strong. Technician productivity, revenue payback are both pointed in the right direction. A number of operating KPIs were also terrific. We successfully partnered with one of the largest retailers in America, Dollar Tree/Family Dollar. And then, as most of you know, just last week DR Horton, the largest builder in the country selected us as their extensive partner. And then of course we announced our long-term partnership with Google this week, and couldn’t be more excited about what that relationship will do to accelerate growth. Finally, I want to thank all the ADT employees and our dealer partners for their relentless commitment as we continue to navigate the pandemic and serve our customers. So, thanks for taking the time this evening. We appreciate your interest in ADT. Good night, everyone.

Thank you. This does conclude today’s conference. You may disconnect your lines at this time and have a good evening.