Greetings. Welcome to the ADT First Quarter 2022 Earnings Coninference 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 your host, Elizabeth Landers, Senior Director of Investor Relations. You may begin.

Good morning, everyone. We appreciate you joining ADT's First Quarter 2022 Earnings Call. Speaking on today's call will be ADT's President and CEO, Jim DeVries; and our CFO and President of Corporate Development, Jeff Likosar. Jim will provide an overview of our recent performance and how that links to the mission and long-term strategies we laid out in our Investor Day in March. Jeff will then cover our financial performance. Joining us for Q&A are Don Young, Chief Operating Officer; Ken Porpora, EVP of Finance; and Jill Greer, SVP of Finance, Investor Relations and Communications. 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. And before we start, I do need to tell you that today's remarks include forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to materially differ from those forward-looking statements. Some of the factors that may cause differences are described in our SEC filings. We'll also include non-GAAP financial measures on the call. For a complete reconciliation of our non-GAAP financial measures, please refer to our earnings press release. And with that, I'll turn the call over to Jim.

Thanks and welcome everyone to our call. ADT released our earnings results this morning, beginning the year with solid first quarter momentum, delivering strong year-over-year improvements in total revenue and adjusted EBITDA, and a $52 million net profit. We continue to see solid demand for ADT products and services helping drive our subscriber growth and producing the highest RMR balance in our history. We are also seeing good traction with SAC efficiency and our consumer and small business segment, with record high installation revenue per unit that was up more than 30% versus prior year, aided by higher attachment rate for our Google Doorbell sales and increased pull-through of additional products. The extraordinary service provided by our employees is reflected in improved customer satisfaction rates and enhanced brand loyalty. Gross customer attrition over the last 12 months was 12.9%, a record low down 20 basis points versus prior year, and sequentially from the fourth quarter. This trend is consistent with expected retention characteristics of our interactive customers with more advanced and larger systems. I want to express my gratitude to our employees and dealer partners for a tremendous start to the year. Our people are ADT's greatest asset, and our results are evidence of what can be achieved when 25,000 of the best professionals in the industry focus on taking great care of our customers. At our Investor Day in March, we presented our mission and laid out our long-term strategy. ADT is a trusted brand, and synonymous with safety and peace of mind. We are positioned to drive growth across all our business segments by leveraging our unique strategic advantages, our innovative offerings, unrivaled safety, and premium customer experience. The strategy we outlined at Investor Day focused strongly on our customers, growing our subscriber base, expanding the share-of-wallet from…

Thank you, Jim, and thank you everyone for joining our call today. As Jim described, we've started the year with solid momentum across the business and are pleased with our first quarter results. Total company revenue in the first quarter was $1.55 billion, up 18%, which includes the benefit of our Solar acquisition. Excluding Solar, our revenue grew approximately 4%. Importantly, our recurring monthly revenue or RMR base grew to $365 million, the record level Jim mentioned, and was $60 million higher than last year. This is the result of the cumulative effect of our recent growth in customer retention progress. Our gross new additions to RMR were down slightly in the first quarter as planned due to last year's initial Ackerman account acquisitions. Our revenue growth combined with efficiency improvements, especially within our CSB segments, generated an 11% increase in adjusted EBITDA at $601 million. On a segment basis, Consumer and Small Business or CSB delivered total revenue of $1.063 billion, an increase of 2% or $24 million versus last year. This performance was largely driven by the increase in monitoring and service revenue from the higher RMR balance I mentioned earlier. We continue to see an increasing number of customers choose interactive, integrated, and more comprehensive systems. In addition to the retention benefits Jim described, the resulting mix shift has also helped improve our average revenue per subscriber. We expect this base of interactive customers to grow as we add more Google products to our portfolio. CSB adjusted EBITDA increased by more than $40 million, representing the largest contribution to our overall improvement. This was driven by the higher revenue combined with strong cost performance. A key driver of this cost performance was the virtual service initiative Jim mentioned, which allowed us to service our growing and increasingly…

And at this time, we'll be conducting a question-and-answer session. [Operator Instruction]. One moment, please, while we pull for questions. And our first question comes from the line of George Tong with Goldman Sachs. Please proceed with your question

Hi. Thanks. Good morning. Can you discuss how you're seeing inflation impact the business and then steps that you are taking to mitigate the impact? I know you're rolling out virtual services, which account drive some savings, and then pricing as well. If you can elaborate on those factors, that'd be great.

Hey, George. This is Jeff. So like all companies, we're working our way through the macro environment and navigating inflation, especially part -- parts labor. Fuel, managing it quite well in our residential business, where we have a smaller number of SKUs and very strong relationships with a more concentrated number of suppliers. It's more, more complicated and challenging in our commercial business where we have much longer tail of lower volume parts with a much greater number of suppliers, so more challenging there. And then our solar business, of course, is new and subject to the same pressures. We're navigating it with a host of actions, including qualifying ultimate suppliers in a number of cases, including having strategically built some inventory and then including some actions that we've taken into attempt to pass along some of those challenges via pricing and other actions. So it's a challenge for sure spending a lot more time on it than we were a year and certainly compared to two years ago, but we think we're navigating it well.

It's Jim here. My comments mirror Jeff's, but I'll just share a couple of other things quickly. We have already taken price actions in Solar and taken price actions in Commercial to just point the markets are absorbing those increases and we've not had any impact from a growth or retention perspective.

Very helpful context. And then secondly, with respect to the Google partnership, we talked about rolling out the Doorbell earlier in January. You have the Mesh Wi-Fi launched several weeks ago, and then indoor outdoor cameras to come in 3Q. Can you discuss what you have planned beyond 3Q? What are the Next major milestones for the Google partnership, and how would you expect that to impact your operating and financial performance?

I will share some perspective on Google overall, and then get specifically to your question, George. We feel great about the relationship with Google, we had earlier expanded our home automation product set with the Hub and Hub Max and [Indiscernible] assistant. The Google video Doorbell was launched in January. We have an attachment rate that is approaching 50%, we just launched the Mesh Wi-Fi product. Specific to your question, indoor and outdoor cameras will be next, we'll launch those in Q3. And then, I'll mention as a reminder, we're going to be going to market co-branded with Google. Our marketing teams are already working together on some creative; and then on the engineering front, both organizations are working toward full integration with the next generation app and technology platform that we'll have in 2023. But the next milestone for us will be some work we're looking forward to on co-branding, and the cameras in Q3.

Got it. Very helpful. Thank you.

Thank you.

Our next question comes from the line of Pete Christiansen with Citi. Please proceed with your question.

Good morning. Thanks for the question. Really nice trends here, guys. Jim, I was just wondering if on the attrition number coming down, any recent attribution deeper in the numbers there, that gives you confidence that the value proposition transformation is really occurring, that would be helpful. And then as a follow-up, the virtual service tickets number look really, really good. And certainly great traction towards your goal of targeting a 40% increase in virtual service tickets overall. How do you think about that features in the labor intensity of the business going forward or maybe longer-term? Thank you.

Thank you, Pete. I'll take on the first question on attrition, and then Don Young who's leading the efforts around virtual service will take your question on the service front. On attrition, yeah, we feel great about it. Ended the quarter at 12.9, a decrease of 20 bps. That's an all-time record for ADT, we see continued momentum. We know that the more customers use a system, the higher the retention; we know the more customers invest in the system, the higher the retention. We know that our interactive customers retained at a higher rate, and all of those trends bode well for us. we're getting more sophisticated in our safe efforts reactively and proactively. And then there's some lead indicators that are positive. The mix of credit scores, our service backlog is at historical low. So retention is going to move around from quarter to quarter, but we're long term bullish about the metric and we think that there is just a whole host of positive trends that should serve as tailwinds for us.

So Pete, this is Don. On the virtual side, hard not to get excited about this, it was really born out of necessity last year when our costs were feeding our plan. We leaned into it slightly with basically a thousand virtual appointments per day, we're up to 4,000 virtual appointments per day now. The reality is that the customers have a large appetite to go in and get immediate satisfaction, which is obvious, but also education on how they can go and enhance the value of the solutions that we give them, whether it's figure or convenience. Reality is that most of the problems that customers call us for are either door and window sensors or broadband issues. Well, both of those can be solved easily given the trend in wireless equipment that we've been delivering to our customers over the years and all we need is access to the customer's eyes and hands to resolve their problem remotely. They don't particularly want us in their home to resolve the problem if it could be done satisfactorily a lot quickly without them -- us entering the home. And literally, this is just the launching pad at 4,000 to a lot of other areas of the business that we could see ourselves doing virtually, and then really, just kickstarting our whole plan all along to digitize the experience.

And Pete, [Indiscernible] is beautiful equation there. As you see that there's CSB segments up about almost 300 mix year-over-year in margin, virtual services is a start that show we hit that a little bit on Investor Day. So we're really happy with the immediate tangible results we're seeing.

That's great. Thank you guys. Nice execution.

Our next question comes from the line of Ashish Sabadra with RBC Capital Markets. Please proceed with your question.

Hi, this is John Aczone filling in for Ashish. Maybe quickly on solar, other installers have indicated strong demand for residential solar across the U.S. largely driven by increasing utility rates and homeowners desire for energy independence. Could you talk about the demand environment and any trends you're seeing there? Thanks.

Yeah, this is Jim. So we're feeling really good about solar, the team is fantastic, we're out of the gate nicely. We think that the demand is going to continue to be a catalyst for growth in this space, there's only 3.5% penetration and we think that we can get more than our fair share of the growth. We mentioned earlier that our first quarter was up 80% year-over-year versus legacy Sunpro, and we're really just getting started. We're beginning to re-brand to ADT Solar. We're at a point where about 20% of the sales volume is coming from ADT sources, and we're going to be disciplined about our growth, keep our eye on the customers. But we think that this is going to be a very meaningful business for us and the growth catalyst is real.

Great. Thank you. And maybe quickly on labor, is there any other comments you could share on the higher-end environments and perhaps what you're doing these days, it seems like the virtual servicing will help, but on the technician side and other hiring fronts, it would be great to get an update there, thanks

So we're seeing some inflationary pressure from labor. I'd say it's not material at this time. Labor in staffing overall are absolutely a focus area for us. We're seeing in the marketplace record turnover, job vacancies across the country. It's obviously a tight labor market. Like many employers, we're working through talent acquisition strategies across a broad range of our positions. We're focused also on training, because that's part of the equation. It's not just a lack of candidates, but it's a lack of candidates with the skill set that we need. We're helped by the fact that our employee turnover is actually down, this year versus last year, about 400 basis points down. And we are beginning to look at some offshoring, for some of our more transactional roles. That will provide us some savings, but the real driver for that decision is access to talent. So net -- talent labor shortages are on our radar screen, talent acquisition, ensuring we have an attractive employee value proposition has never been more important. And the inflationary pressure is real, but we've been able to offset it at this point, and it's not material this time.

Great. Thanks for the color. Congratulations again on strong results.

Thank you.

Our next question comes from the line of Philip Shen with ROTH Capital Partners. Please proceed with your question.

Hey, guys. Thanks for taking my questions. As a follow-up in terms of solar, there's this anti-circumvention case out there with a threat of potential retroactive tariff. And with that, as well as LG pulling out of the module markets, was wondering if you could talk through how your module supply looks for the rest of the year.

Phil, thanks for the question, it's Jim. We are now working with three different module manufacturing partners. We don't anticipate disruption in the supply chain. We've seen an increase in panels of about $20 per panel, give or take 10% increase in costs; at the end of Q1 we increased our prices in solar to help absorb the cost on the labor front and on the panel front. We think that it's not had an impact from a demand perspective. April was an all-time record sales month for us in Solar. So we feel pretty good about managing the supply chain and absorbing the costs by increasing prices to maintain our margins.

Great thanks, Jim. And then you had a really nice and strong year-over-year growth in Q1. What kind of volume would you expect? Are there revenue or megawatts or customers to see in Q2, 3, and 4? What should we expect ahead? Thanks.

So we are intimated so that we would be right around $800 million in revenues for the business, that's about a 20% increase from 2021 for Sunpro. Obviously, on the heels of a fantastic first quarter, we're feeling really good about that. Our internal plans are obviously above 20%. We'll take it a quarter at a time, but couldn't be more bullish about the growth in solar.

And one thing I'd add to that, that I've mentioned in the prepared remarks, is that we had some headwind from a onetime purchase accounting where we were not able to recognize some revenue that was for the backlog at the time of the acquisition. So our run rate supports getting to the number as Jim described. And we're holding our guidance for now, but very optimistic about the trends we see in solar. And for that matter, the rest of the business.

Great. Thanks, Jeff. One more if I may, in terms of EBITDA, you had a nice improvement there year-over-year. I was wondering if you expect to see that 9%- ish maintain for solar as we get through the rest of '22.

Hey. It's Ken. Again a strong first-quarter, especially some of the [Indiscernible] in Q1, off including Commercial and Solar's. So we're not getting yet an initial quarterly guidance as you can double reaffirming the full-year and really like where we came out of the first quarter. Again, that virtual service on top of some of the other initiatives that we have are increasing the margin. And then for bolster the top-line stuff that we've represented in Q1 as well, so we like that combination.

Hey, one thing I'd add to was really, really emphasize or reiterate, is that we're navigating the year to deliver the guidance that we share, but we're always making trade-offs between optimizing near-term results and making the investments for the longer-term. So that's of course true, it's Solar navigating supply chain and some of the things we're talking about earlier, true in Commercial, true in CSB also.

Okay. Thanks, everyone. I'll pass it on.

Thanks, Phil.

Our next question comes from the line of Brian Ruttenbur with Imperial Capital. Please proceed with your question.

Great. Thank you very much. First of all, easy question. Attrition at all-time lows, I believe unless I haven't been tracking more than 20 years, is there -- have you ever had anything lower than 12.9% in terms of attrition?

Yes. That's a record for us. I'll also mention that's a gross attrition number. So our net attrition, deliberate take 250, 300 basis points better than that. So we feel really good about it.

Okay.

And Brian, I've been here 23 years in June for some reason looked at me you got my question. I felt like the old guy in the room.

Is that maintainable and improvable from those levels?

Yes, we think so. I mentioned earlier, it's not going to be linear. But the retention improvement we've really across-the-board relocation, was a contributor our voluntary loses are improved. Our lost to competition is better, it's in all regions of the country. We've got a little bit of headwind on non-pay, but long-term, we feel great about it. Brian, as you know, the more a customer invest a system, the higher the retention rate. And we're also at record levels for customer investment upfront installation revenue per unit, has never been higher. So I think there's cause for optimism and on customer retention.

And one thing I'd add to the different flavor on the point I was making earlier, about balancing long term and shorter-term. And we talk about as often, but you are IRR equation and that's really what we're focused on. It's a combination of the margin rates in that were able to generate. It's how long we keep our customers or attrition flash retention and it's out of much, it cost us to take on customers sac efficiency. So if we were seeking optimize any one of those measures, we preserve, produce up or seating optimize overall ecosystems. We've made progress, and we'll continue to make progress in each of them, but I just want to emphasize that will really focused on, is generating strong returns on invested capital new including especially subscriber acquisition costs.

Great and then just switching subjects real quick can you give us some kind of update on the new initiatives like insurance, and maybe talk about potential structures that may be too early for you to address that too much. But given that it's going down the road of the insurance route, and I believe that you're open to the idea. Maybe can give us an update on what your thoughts are on that front.

Yes. It's very early for us on the insurance front. I'd say we're open to it. It's not a priority, not today anyway. And most likely the way that we would enter would be via partnerships, versus selling as an exclusive agent or an independent agent or NGA, selling insurance on our own. If we enter be via partnership [Indiscernible] wouldn't be a solo act and for now it's not a high priority for us.

Great. Thank you very much.

Thank you.

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

Hi, good morning. This is actually Ronan Kennedy on for Manav. Thank you for taking the call and the question. On the back of that question with regards to insurance, just wondering if you could please give an update on some of the other partnerships, more specifically, Canopy with Ford, Lyft, D.R. Horton, etc.? Just an update on those partnerships and what the expected benefits are to be.

Yes. So just generally going well, our relationship with Lyft continues to deepen. The partnership with D.R. Horton is going well, that will be, give or take, about 100,000 home builds over the next 12 months. We'll convert something in the zone of 60% of those. We feel great about Canopy, that's new for us. For those of you who aren't aware, ADT and Ford partnered to invest $150 million in a joint venture called Canopy, the intention is to service support vehicle security. And that will involve both an aftermarket product and an integrated product, both of which will be available in the first half of 2023. So no material impact -- no impact at all in '22, but it will start to cut in in '23 and '24 and thereafter. It opens up a pretty significant new TAM for us, and the largest customer of Canopy out of the gate will be Ford. So, it's going to pay dividends long-term. It's an exciting new opportunity for us.

Thank you. And then if I may as a follow-up. Can you just comment on SoSecure, the roll out of that potential benefits and any other noteworthy innovation?

So I'll comment on SoSecure and offer the mic to anybody else that wants to comment on innovation. SoSecure is our product that essentially provides a virtual companion via GPS in the phone. We will be eventually integrating SoSecure into the application that customers use to control their homes, the interactive, what we're calling ADT Plus. So I can control my LifeLock's doors, I can arm and disarm a system, and I'll also have SoSecure embedded in that application. So we think it's a really useful add-on feature for us. Helps differentiate our application from everybody else.

Okay. Thank you, and sorry if I may, please just sneak in one more. Could you comment on ADT's recession resiliency and your assessment of how using ADT would perform if there were to be a recession?

Yes. We feel like we have a lot of characteristics that give us some recession resistance, one of course it's just the recurring revenue base. During times of recession there's a variety of macro factors that tend to move in our favor, people tend to move less frequently which means that they don't tend to cancel their accounts because they're moving often. In recessions people tend to be more concerned about things like safety and security, and then it's generally the case that if people take peace of mind from having a security system, that's not the first thing that they would cut in times of financial challenges. We talked about this a lot, in the whole time I've been with the company talked about this a lot, never having been through it, but I would also offer that the way in which we were able to navigate the challenges associated with COVID in 2020 and into '21 is almost a proof point that shows we're able to navigate through a challenging set of conditions favorably. So we're hoping the best for the overall macroeconomic conditions of course, but we think we're very well situated, and maybe one other point I'd make too, is that we have a lot of discretion in our capital allocation model. So even if some of what I said earlier were not to play out the way I described it, and I fully believe it will, we have a leverage at our disposal to manage our liquidity and our financing and debt obligations even if things were to take a turn in a more negative direction, but we feel really good overall.

Great. Thank you very much, appreciate it.

And we have reached the end of the question-and-answer session. I'll now turn the call back over to Jim DeVries for closing remarks.

Okay. I'd like to extend my appreciation to our ADT employees and dealers. We had a very strong quarter. I'm proud of our collective efforts. Thanks as well for everyone joining our earnings call this morning. As you heard, we're optimistic about continuing the year strong, and looking forward to the growth ahead. Have a great day, everybody.

And this concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.