Greetings, and welcome to today's call [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Elizabeth Lippitt Landers, Senior Director of Investor Relations. Thank you. You may begin.

Thanks, operator, and good morning, everyone. We appreciate you joining today's call to discuss ADT's Second Quarter 2023 earnings and the transaction we announced this morning to sell our Commercial business. Speaking on today's call will be ADT's President and CEO, Jim DeVries; and our EVP and CFO, Ken Porpora. Following the prepared remarks, we'll take analyst questions. Also joining us for Q&A are Don Young, EVP and Chief Operating Officer; and Wayne Thorson, EVP and Chief Business Officer. Earlier this morning, we issued our earnings press release and a separate press release on the sale of our Commercial business as well as an accompanying slide presentation. These materials are available on our Web site at investor.adt.com. Before we start, I do need to mention that today's remarks include forward-looking statements that represent our beliefs or expectations about future events. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of the factors that may cause differences are described in our SEC filings. We'll also discuss non-GAAP financial measures on the call. The most directly comparable GAAP measures along with a reconciliation to those measures can be found on our earnings slide presentation on the ADT Investor Relations Web site. And with that, I'm excited to turn the call over to Jim.

Thanks, Elizabeth. Good morning, and thank you to everyone for joining us today. I'll begin the call talking about the announcement we made premarket to divest ADT's Commercial business. I'll then share some perspective about the exciting road ahead. And finally, I'll share some comments about our second quarter results. I'll then turn the call over to Ken Porpora for details on our second quarter financial results, a bit more on the divestiture and our 2023 outlook. This morning, ADT announced it entered into a definitive agreement to divest our Commercial security, fire and life safety business unit to GTCR, a leading private equity firm for a purchase price of just over $1.6 billion. The transaction was approved by our Board of Directors and is expected to close in the fourth quarter of this year, subject to customary closing conditions, including regulatory approvals. There are five key benefits of this transaction that will significantly unlock shareholder value. First, the divestment enables more focus for ADT to facilitate the pursuit of significant residential and small business growth opportunities in the smart home and solar markets. Second, the sale price represents an attractive enterprise value and at just over $1.6 billion is equivalent to a multiple of 11.2 times the Commercial trailing 12 month adjusted EBITDA, including an estimated allocation of corporate costs. Third, ADT will have a meaningfully lower leverage profile following the close of the transaction. The entirety of the net proceeds will be used to pay down debt, reducing our net leverage ratio from the current level of 3.7, down to 3.3 times, accelerating the achievement of our debt reduction goal by two years. Fourth, the transaction strengthens ADT's financial profile. We expect higher adjusted EBITDA margins and cash interest savings from debt pay down to offset the impact…

Thank you, Jim, and thanks to everyone for joining our call today. To begin, I want to echo Jim's sentiment on our agreement to divest the Commercial division. We are excited about the strategic and financial benefits this transaction unlocks. I'll first focus on the second quarter financials, then shift to add color on the Commercial divestment and end on our outlook for the year. We're off to a solid first half of the year with improved earnings, strong free cash flow and a continued decline in our net leverage ratio, illustrating the continued resiliency of our business. Total company revenue was $1.6 billion for the quarter and recurring monthly revenue or RMR from our subscriber base was up 4% year-over-year to $382 million, a company record and an outcome of our strong customer retention and higher average pricing. Within the growing RMR balance, gross attrition remained at a record low at 12.5%. Gross RMR additions were about flat year-on-year, excluding our residential account bulk buy we did last year and pricing escalations continue to slightly outpace inflation. Adjusted EBITDA was $651 million, up 9% versus prior year with outstanding margins in both CSB and Commercial, offsetting some of the near term loss in solar. Adjusted net income for the quarter was $148 million or $0.16 per share, our fifth consecutive quarter of positive adjusted net income. Our net leverage ratio improved sequentially and is now 3.7 times, down from 3.9 times at year end 2022. We are pleased to receive a corporate credit rating upgrade by S&P in recognition of our durable business model and continued progress towards our debt reduction goals. Shifting to segment highlights for the quarter. Our Consumer and Small Business, or CSB, segment delivered total revenue of $1.2 billion in the second quarter, up 7%…

Thanks, Ken. In closing, ADT is poised for future growth and I'm extremely excited for the opportunities that lie ahead. Our investment thesis is compelling when coupled with the medium term target framework that Ken just shared. ADT is serving a large and expanding addressable market with total expected market growth of approximately 10% through 2027. ADT is a growing business with industry leading scale positioned to benefit from secular tailwinds, the ADT brand is a powerful one. And with 98% brand awareness, we are synonymous with safety and peace of mind. We're the most trusted brand, the most considered brand and 2 times the most preferred brand relative to the closest competitor. ADT has a large and unique opportunity with two world class strategic partnerships and solar in early stages. ADT has compelling unit economics that support increased investment for growth. ADT has a resilient cash flow profile with a stable and predictable recurring revenue base, with over 6 million customers and a growing RMR base with improving operating margins. And with the Commercial divestiture, ADT will have an attractive debt profile with a disciplined capital allocation framework. I'll now turn the call over to our operator for Q&A.

[Operator Instructions] We'll take our first question from George Tong with Goldman Sachs.

It sounds like the full year guide was updated primarily to reflect softness on the Solar side of the business. Can you describe initiatives internally that you're adopting to help improve execution within Solar and when you would expect to see improved performance?

So with regard to Solar, we're clearly not pleased with the financial results. As you're aware, we intentionally slowed down growth to address some deep rooted customer and operational issues. Those have improved. However, turning growth back on is proving to be slower than we anticipated with the principal headwind being higher interest rates. I would say I'm encouraged by the progress on the operations side of the house, the backlog issues are being addressed. Cycle times improved and we're now focused -- turning our focus to sales. And so to more directly answer your question, the priority now is turning the sales engine back on. We've partnered with two of our key smart home dealers to sell Solar. We've had very good success hiring sales reps. We're getting them up to speed and productive quickly. Last week, we signed a partnership PPA deal -- a lease deal with SunPower. The market has shifted from loan to lease pretty quickly and getting this alternative in the market is important for us and should be done in September. And then just this last week, we started cross-selling ADT smart home customers and we're obviously monitoring that progress closely.

On the residential side, it looks like trends there are relatively strong. Can you discuss where perhaps you saw upside in the quarter that -- relative to your initial expectations, and how the State Farm ramp is currently reflected in the full year guide in terms of the number of states you expect to launch products in?

I'll offer a couple of comments on State Farm and then Ken will share some perspective on growth in the quarter. State Farm, the partnership -- the companies are aligned on the transformation vision. We've had a great deal of regulatory and compliance work that's been accomplished. We're being very methodical with the start and launch of the program, incredibly customer focused. And we're rolling out to seven states in Q3, I think, 13 states by the end of the year. There's been a lot of work in product development. We feel very good on that front and turning on marketing just in July. So we remain long term bullish. The start of the launch, as I said, super customer focused and methodical doing a lot of work on the regulatory side. But as I started with customer -- the State Farm organization, have been terrific partners and the company is aligned with them on the vision.

And George, to add on just on the overall momentum we had in the CSB business, specifically residential, like the RMR growth we mentioned, up 4%. You saw the margins are up 200 bps year-over-year and the EBITDA margins, attrition, the record low, SAC efficiency at 1.9 times overall, another record [loss]. You really start to see the momentum build there’s in the existing business. And then Jim just talked about the State Farm catalyst and the additional catalyst that we see as we launch more product innovation, whether it's Google related or our own ADT platforms as well. So we're really setting the foundation but putting up some pretty impressive results in the near term as well.

Next, we'll go to Manav Patnaik with Barclays.

This is Ronan Kennedy on for Manav. So you you articulated the five benefits of the divestiture of Commercial, including the financial with the proceeds, the EV to pay down debt. But can you just help us better understand the -- because it was regarded to be a strong business in terms of it being lower capital efficiency and therefore better returns. So just more of the overall considerations from a financial standpoint, also how it played into the flywheel, what the impacts will be without and the flywheel and also the impact to some of the KPIs, such as the payback as I think it was also lower than CSB? So just more of your assessment on full consideration of the financials.

I'll offer some perspective and then like the last question hand it over to Ken to share some more details. I'd start with the operating benefit. We think that there is an advantage to the transaction in that it enables us to focus. We've got a lot going on. And to have our time and talent focused on the residential and small business opportunities available to us, we think is helpful. We continue to be incredibly excited about the core business, the returns, cash generation, some product enhancements that are upcoming and of course, our partnerships. Turning directly to your question about the Commercial segment. It represents about 5% of our total EBITDA. After the business, to your point, was growing nicely in '21 and '22, both the bottom and top line. But as you know, we believe our stock valuation at approximately 6 times EBITDA doesn't reflect the intrinsic value of the company. And we had an opportunity with a purchase price of $1.6 billion using the stand-alone costs, the EBITDA multiple was 11.2%. So there's an arbitrage value unlock for ADT versus where the stock is trading today. And then lastly, I'd say it facilitates getting to our leverage ratio objective much more quickly. Essentially, we received, Ronan, a very good price for the asset and able to reduce our debt and we think that's important, especially in this market.

And Ronan, it's Ken to add on to a bit to what Jim just said. Based on the multiple [upgrade] [Indiscernible] 11 and the fact that we view it as cash flow or free cash flow neutral, the fact that the leverage ratio is going down so significantly is the biggest unlock that we see in the near term. As far as the mix of business and Commercial, obviously, the EBITDA margins were lower in that business while improving, they were still lower than the overall portfolio. The attrition was a bit lower. So once we pull that out, it will spike up a tiny bit. And then also the revenue payback is a little bit lower. But what you'll see in our prepared slides in the accompanying deck, we did break out the CSP and kind of remaining business to give you some color on how that would look. But overall fantastic transaction for us. We think the leverage ratio moved and how it accelerates our debt payback is pretty substantial.

And then can I confirm, in addition to what you just discussed, obviously, the strategic and operational benefits, the operational focus, et cetera. Anything else -- because the business trends were strong. Anything else you were seeing that makes to answer the kind of why now question. And then off the back of that, for Solar, have the long term expectations for the business changed since the time of acquisition?

On Commercial, Ronan, in terms of process, I'd say with some consistency the last couple of years, we've received inbound inquiries about the Commercial business. After a couple of inbound inquiries earlier this year, we opened up the process a little more broadly and considered several buyers. We were able to reach the agreement with GTCR. As you may have read, they've been invested in Commercial businesses in the past, they've got a great team, they gave us a very good price, and we decided now is the right time, especially using all of our net proceeds to pay down debt. And then to underscore I think an important comment that Ken just had from a free cash flow perspective, the interest rate expense savings from delevering essentially offset the cash flow anticipated from the Commercial business.

[Operator Instructions] Next, we'll go to Toni Kaplan with Morgan Stanley.

I wanted to start off on sort of portfolio actions. So after now selling Commercial, are you considering additional portfolio actions from here?

There's nothing today that we're considering actively, Toni. The Commercial business was at a bit of an inflection point, potentially meeting incremental capital that we think was better deployed in our larger core business. And as I said earlier, the opportunity to delever and largely replace the cash flow sort of instigated the commercial rationale. But outside of that, there's nothing contemplated today.

And Toni, it's Ken, if I could just throw in there, the reason we shared some of that market growth and our penetration rates, we do -- it's really a double down play for us. We think the pure play and the CSP business has tremendous opportunity. the assets that we now have in place, we want to ride that future growth and we think we have the arsenal and the catalyst to do so. So being able to divest, delever and focus our efforts on growing that business, we see a substantial opportunity given where the market is growing and how we are participating in that market.

And then on Solar, I know you just signed a new financing partnership. Maybe you could talk about some of what you're expecting in terms of quantifying benefits from that. And any comments on maybe the macro, anything getting sort of better or worse? I know you mentioned high interest rates has been a barrier to some of the new sales. But how should we think about the market with regard to solar, just how that's changed over the last maybe a few weeks or months?

[Technical Difficulty] comments on macro and then ask Ken to talk -- elaborate on your question. Generally, I've talked to a number of people. The growth rate estimates for this year are all over the place. You have some people estimating 15% growth, some a modest decline. Our sense is that there's probably a modest decline, much of that driven by the interest rate environment, because when customers are doing bill compares with higher interest rates and many of these sales being a loan product, it just drives the cost of solar up, which is one of the reasons why it's so important for us to get this PPA product in market, something in the neighborhood of -- at the beginning of the year, something in the neighborhood of 20% of sales were leased and exiting the year, it's probably closer to 50%. So we feel good about the partnership, as I said earlier, with SunPower and getting that lease product in market. Long term, we're bullish about renewable energy and bullish about the residential solar market.

And Toni, the theme here for us on the options was diversification, we talked about that a couple of quarters ago. So now customers have the option to finance either through a loan, they could pay upfront, they now have a lease option. And within that loan option, we have banking partners and we also have in-house financing, which will tap into securitization and eventually the ABS market as well. So again, the theme of diversification, we've now executed on that and we’ll provide customers more options. The options become different from an attractiveness standpoint, depending on where you are geographically based on the utilities. So those different options, whether it's a loan or lease really depends on where you are in the US and what the going rates are.

We have no further questions at this time. I'll now turn the call back over to Jim DeVries for any additional or closing remarks.

Thank you, David. As you heard this morning, we are growing effectively, driving a lot of innovation, building brand loyalty. We feel good about the momentum in the business and feel good about the key benefits from our divestiture of Commercial. We have an exciting road ahead. I'd like to extend my appreciation as I do each quarter to our ADT employees and dealers. Thanks for your outstanding results in a good quarter. Thanks, everybody, for joining the call today, and have a great day.

This concludes today's conference call. You may now disconnect. Have a great day.