CALL INVITE | ADT IPO | Wiping Off Some Lipstick

01/11/18 09:39AM EST

As ADT Inc. plans to IPO within the next week (see most recent S-1/A HERE), we will be previewing the BULL and the BEAR cases Tuesday January 16th at 2PM EST, with our conclusion. We are leaning Bear on the model, notwithstanding a current trajectory that is supportive of 2018 growth.

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Call Date and Time: Tuesday, January 16, 2018 at 2PM EST

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Confirmation Number: 13675298

CALL INVITE | ADT IPO | Wiping Off Some Lipstick - ADT slide

The positives:

  • New management 
  • Improving churn metrics are having an impact on revenue growth and FCF
  • Price increases on a declining customer base 
  • ADT Canopy (service only option) reduces friction in customer onboarding process, serves as a potential near term growth catalyst and also potentially reduces ADT exposure to hardware installation costs and labor service costs
  • The company has added a solid commercial business via the acquisition of P1

The negatives:

  • Non-existent home security service penetration curve (from ~19% penetration of US homes in 2010 to ~20% in 2017) means that improvement in churn will drive a one-time period of revenue growth before churn improvements level off, excess growth disappears and collapses towards the long term penetration/pricing curve, with a residual cost of customer acquisition remaining in the model to offset long term natural churn rates
  • We estimate that false alarms constitute > 95% of all ADT alarms (~100k per day). For calls that result in unneeded police response, consumers pay between $50-250 per incident to their local municipality. In addition, ADT has to field a cost structure to support these 100k daily calls (per the roadshow). ADT considers this part of their barrier to entry, but modern day image recognition software tools can likely reduce false positives considerably, thus flattening the barriers to entry while also considerably lowering the cost to consumers. Generally speaking the risk of new technologies is part and parcel of the risks around changing competitive landscape
  • Other negatives include the l-t value of the ADT hardware installed base, ongoing employee turnover rates, risks of hardware “partners” coming after high gross margins services component, inconsistent churn metrics based on reporting by new ADT for historical ADT standalone (~12% reported in late 2015, and ~16.5% reported retroactively in S-1), unrealistic opportunity to sell sophisticated cyber security solutions to homes and enterprises, messy balance sheet, and that while Apollo may not be sellers on the IPO today they recently added leverage to ADT to pay out a dividend equal to greater than 5x trailing FCF

 

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