Good morning. I'd like to welcome you all to the ADT Fourth Quarter 2023 Conference Call. My name is Brika and I will be your moderator for today. [Operator Instructions]. And I would now like to pass the conference over to your host, Elizabeth Landers, Senior Director of Investor Relations of ADT to begin. So Elizabeth, please go ahead.

Thanks, operator and good morning, everyone. We appreciate you joining today's call to discuss ADT's year-end results for 2023. Speaking on today's call will be ADT's Chairman, President and CEO, Jim DeVries; and our Interim Chief Financial Officer, Jeff Likosar. Following the prepared remarks, we'll take analyst questions. 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. Before we begin, I'd like to remind everyone that beginning in the third quarter of 2023, the commercial business was reported as discontinued operations. Financials and metrics for current and historical periods discussed on this call will be for continuing operations, except for cash flow, which includes amounts related to the commercial business through the date of sale. Today's remarks also include forward-looking statements to 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 will 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 in our earnings presentation on the ADT Investor Relations website. And with that, I'm excited to turn the call over to Jim.

Good morning and thank you for joining us today to discuss the release of ADT's fourth quarter and full year results. 2023 was a pivotal year for ADT and we delivered solid performance, invested for the future, reshaped our portfolio and meaningfully improved our capital structure. With the divestiture of our commercial business and the decision to exit residential solar, we have simplified our business model and focused on our consumer-oriented core security and smart home business. Our remaining business serves a large and growing market and we are the proven industry leader with durable customer relationships that generate substantial and predictable cash flows. After having reduced our debt by $2.1 billion during 2023, we entered 2024 with additional strength and flexibility with our debt-to-adjusted EBITDA leverage ratio, now at 3.2x. Our team is now entirely dedicated to growing our core consumer businesses, deploying capital to invest in the future, further reducing debt and providing strong returns to shareholders. I'll share several financial highlights, which continued to demonstrate very solid performance in our core business. For the full year, we grew revenues and earnings consistent with our expectations. Total revenue was approximately $5 billion, driven mainly by our Consumer and Small Business or CSB segment at $4.7 billion, up 6% versus the prior year. We generated adjusted net income from continuing operations of $439 million or $0.51 per diluted share. We also posted adjusted EBITDA of $2.4 billion with adjusted free cash flow including interest rate swaps of $525 million. ADT ended the year with a record recurring monthly revenue balance of $353 million, up 4% which benefited from strong attrition of 12.9%. We also continue to improve our revenue payback, now at 2.1 years. I'll note that our fourth quarter results included a strategic customer portfolio acquisition for just…

Thanks, Jim and thank you, everyone, for joining our call today. I'll take the next few minutes to share some additional comments on our 2023 financial performance and our 2024 plans. Total company revenue was $1.2 billion for the fourth quarter and as Jim mentioned, $5 billion for the full year 2023. Total company adjusted EBITDA was $599 million for the quarter and $2.365 billion for the year. Strong CSB revenue and margins offset solar losses, generating slight total company adjusted EBITDA growth for the quarter and the year. Adjusted fourth quarter net income was $226 million or $0.25 per share and $439 million or $0.51 per share for the year, as Jim also mentioned. Our CSB segment delivered total revenue of approximately $1.2 billion in the fourth quarter and $4.7 billion for the full year, up 6%. Full year monitoring and services revenue grew 3%, driven by the record RMR balance Jim described. Full year installation revenue increased by 44%, driven by higher deferred revenue amortization and higher outright sales. Installation revenue per unit was up approximately 14%. The trend towards larger system sizes also contributes to our improved revenue payback at 2.1 years and strong 12.9% attrition rate. CSB adjusted EBITDA was $627 million in the quarter and $2.481 billion for the year, an 8% increase. In addition to the higher revenue, we also demonstrated progress on our cost efficiency efforts. The resulting benefits enable stronger profitability and the investments in the ecosystem and infrastructure priorities Jim described. Overall, we delivered solid results while also investing for the future and are very pleased with our CSB 2023 performance. As a reminder, early last October, we closed the disposition of our commercial unit, which is presented as discontinued operations. We used the net sales proceeds to repay $1.5 billion…

[Operator Instructions]. And we have the first question from George Tong of Goldman Sachs.

You talked about the decision to exit your solar business. Can you elaborate on logistical next steps with the exit and the time line for when you might be able to fully wind down the business?

Sure, George. It's Jim. Thanks for the question. I have a couple of comments to just sort of set the pins on solar and then I'll ask Jeff to add some comments as well. As you know, we announced the restructuring and strategic review in Q3. And then in late January, announced the decision to exit the solar business, all wind-down activities are underway. So head count reductions were now less than 500 employees in solar, will be less than 250 by the end of the quarter. We're focused on finishing existing jobs, installing the pipeline. We've shut off marketing investments, shut off new sales. We're engaged in wind-down activities like selling the inventory and the trucks, subleasing the real estate. And we've got a governance structure around the solar wind down to help navigate costs and time line. And Jeff, if you want to comment some on the costs and the time?

Yes. I just would add that we are seeking for sure to optimize economics, the disposition the assets and the remaining activities, including especially the existing pipeline of jobs but we're also focused on speed and risk mitigation. So we'd expect to have the vast majority of the business wound down in the next couple of months with some ongoing service obligations. And then, of course, we're committed to take care of our customers. So we shared some more information in the press release and we'll also, with our 10-K and an 8-K later this afternoon. As to the ranges, we're going to work to make this as efficient as it can be. And then there's also a couple of things where we still have to work through precisely what the accounting effect is going to be. But we are expecting, as I said, to have this largely in the rearview mirror in the next couple of months.

Got it. Very helpful. And then as it relates to State Farm, you mentioned that you closed out 2023 with 13 states early this year. You're going to enter 4 more. Can you provide an update on monetization efforts with State Farm, including recent wins, the scale of your revenue base with State Farm and then projections for how big the opportunity can be?

Yes, George, it's Jim. I'll take a shot at that. The -- so as you know, we launched the partnership in earnest in March of '23. We had about 6,000 sales during the year. We're now in 13 states. That represents about 40% of State Farm policies in force. So we've got very good overlap. One of the things that I've shared before is each subsequent month is better than the one prior and that continues to be the case. I think we were about 1,600 new sales in January of '24. About 2/3 of the systems include an upsell, so we feel great about that. Customer satisfaction is very high at about 97%, 98% and we're working well with State Farm. We're going to pilot a couple of alternatives in 4 different states. Two of those states will be a DIY offering, George. And in 2 of those states, it will be a water-led offer that's effectively marketed to State Farm customers who have had a water claim in the past. So we're excited to test a couple of new ideas and continue to penetrate in the 13 states where we exist already.

Our next question comes from Toni Kaplan of Morgan Stanley.

Jim, you made a number of comments about technology, modernizing the CRM system, virtually closing 50% of the service tickets through virtual and some additional. Should we see some of these efficiencies flow through to margins in the future? Or is the plan to reinvest the efficiencies that you received from this and any way to size some of the efficiencies from technology?

Yes. Great question, Toni. I would say there are a handful of opportunities that we're super excited about. AI, the work that we're doing in digital, the comment that you made about virtual, we're expanding virtual support beyond service even to installation add-ons for existing customers. We've had pretty substantial investment in our technology and I would say the -- that those investments will see really a high watermark in 2024. Much of the improvement on the IT spend, we'll start to see in '25 and beyond. And we'll also see less IT expense in '25 and beyond. The margin improvement related to virtual is baked into the 2024 guide. Anything else, Jeff?

Yes. And I would add -- you asked specifically about efficiency and that definitely is part of the objective here. Some of the benefits, though, also will show up in growth in features and capabilities that are attractive to different segments of customers, enhanced service and, therefore, enhanced attrition. So some of it is efficiency and some of it is continuing to grow and service our base of customers and RMR.

That's great. And then I wanted to ask about DIY. I know you mentioned in the last answer about piloting 2 DIY pilots with State Farm. And then I know you have the DIY business that you launched a number of years ago. Maybe you could just give us an update on how big it is, how fast it's growing and your strategy around DIY going forward?

Yes. It's still smallish for us, Toni but I think DIY for us will be an opportunity for growth going forward. The -- there's a lot of growth here. It's not where the profit pools are compared to DIFM but when you look at DIY through the lens of customer lifetime value, I think it becomes particularly interesting to us. So we have a small business, we're going to lean -- small DIY business, we're going to lean into this business more assertively in 2024 and that's inclusive of the pilots that you just mentioned related to State Farm.

And Toni, it's Jeff, one thing I would like to add to is, as we roll out the new ecosystem of products and the app, that Jim described, the same hardware will be available for either self-setup or for professional install. So in some respects, the distinction will blur a little bit and much of what we're focused on here is having offerings to serve and that are attractive to a broader set of customers, many of whom will choose to install it themselves. We'd love for even those customers to choose to avail themselves of our professional install services as well.

Your next question comes from Ashish Sabadra from RBC.

Wanted to focus more on the Google partnership. You talked about how it's helped double the IRPU in the 3 years. Can you talk about the uplift that you're seeing on the RMR side as well? And just in terms of penetration where like particularly for the new customers, how much penetration is there but also the opportunity among your existing customer base as they upgrade?

Yes. We're -- it's going well with Google, Ashish. Both organizations continue to work together on everything from quality testing to supply chain to customer experience. The products have strong customer appeal. We're enjoying the benefits of increased installation revenue at the time of the install. And I think I may have mentioned this last quarter, in the year prior to the Google partnership, 23% of our new customers had 10-plus devices. And in 2023, that figure is 57%. So that's been a very important influence on improving our SAC efficiency and because customers who invest more at the time of installation also retain better. Our 4-year retention rates for customers with 10-plus devices is about 50% better than those with fewer than 10 devices. So it's going well. Google products, customers who have Google products have a higher NPS, higher product satisfaction, more positive comments on functionality, dependability, even aesthetics. So we're continuing to feel good about the Google partnership. It's going really well.

[Operator Instructions]. And we now have the next question from Manav Patnaik from Barclays.

This is Ronan Kennedy on for Manav. If I may, please, just looking to follow up on the questions on State Farm with regards to further penetration opportunities. Can you talk about how we should expect to see continued impact in the KPIs, whether it's the higher IRPU or the SAC efficiencies on a granular level? And then broadly, could you remind us of how we should think about framing the timing of when you would expect to see material revenue impact from the State Farm partnership?

Sure. Thanks for the question. I'll tag team with Jeff on it. In terms of economics, the -- as we get more traction with State Farm, it's a different model than our traditional DIFM model and while the IRRs are approximately the same, maybe even a little bit higher, the RMR will come in lighter. Our average RMR for a State Farm customer is in the zone of $30. And the cost to acquire that customer because there's very little marketing expense and very little sales expense also comes in much lower. So it will have the effect of improving SAC efficiency on a per unit basis but RMRs will be lighter. Anything to add, Jeff?

I would even broaden that slightly to say that that's true of our overall model as we move forward and some of the characteristics I was leading to -- alluding to earlier or further to Jim's remarks, is having more bundles or more disaggregation combinations available for our customers and our model, as we've talked about previously, seeks to optimize it overall. Economics, which is a combination of the cost to acquire the customer, how long does the customer stay with us and how much do we earn serving that customer over its time. So State Farm, not inconsistent with some of the other segments we're targeting, generates a high IRR, as Jim was describing but has different composition of those variables.

Okay. And then for my second question, please. Following the strategic bulk acquisition, I think you had said you will continue to periodically consider portfolio acquisition opportunities. You've significantly enhanced shareholder returns with the buybacks, a significant increase of the dividends delevering, et cetera. Can you just help us frame the approach and priorities for capital allocation?

Yes, you bet Ronan. I'd say -- I'd describe our capital allocation policy as returns-based and opportunistic. And there are 4 categories, you just essentially outlined. The first is organic growth, SAC, IRRs in the 20s. Secondly, bulk account purchases or M&A in our core. Thirdly, return of capital to shareholders, dividends, stock buyback and then lastly, paying down debt is still a priority for us. We're holding to our commitment to be at 3x leverage or lower by year-end. So the critical point is, we're going to do -- we'll do the math, we'll do the analysis. And with a returns-based mindset and eye towards maximizing shareholder return, we'll apply the capital against those 4 priorities.

I would now like to turn the call back over to Jim DeVries for any final remarks.

Thank you, operator and thanks, everyone, for taking the time to join us today. As you heard, ADT delivered solid results in our core, invested for the future, reshaped our portfolio and meaningfully improved our capital structure. We've got good momentum in the business, great catalysts for growth and we're looking forward to a strong 2024. I'd like to extend my appreciation to our ADT employees and dealer partners for an outstanding quarter and year. Our results are a direct reflection of your efforts. So thanks again, everybody and have a great day.

Thank you all for joining. I can confirm that does conclude the ADT Fourth Quarter 2023 Earnings Conference Call. You may now disconnect your lines and please enjoy the rest of your day.