Overview
Well, we got some more info. ADT finally released the full quarters for 2016, as well as some additional color on 2017 quarters (such as FCF). ADT also released the Pulse take rate going back to 2016, quarterly. Problem? The Pulse historicals don’t line up. AND, the official take rate of 71% for new residential customers in 1Q18, for example, is the same rate as disclosed for the December-Q 2014 (special disclosure for % of new residential). Showing us a gradual climb means the numbers were re-cut or something else was put into the mix. We have some work to sort it all out.
Revenue & FCF
ADT revenue was fine but mostly driven by non-recurring items + M&A. It is fine to consider M&A part of the mix, but valuation has to be based on the lower recurring revenue growth rate, which has decelerated over the last 4 quarters from 2.8% to 1.6% y/y. FCF was also fine but this quarter featured some freeze in working capital, so the YTD efforts off the balance sheet have been helpful but also reverse at some point.
Billings
ADT’s billings growth rate also remained somewhat in the anemic territory of 1.2%, or 1.8% for recurring revenue, and with churn flat sequentially, the SAC ratio (SAC to gross new revenue) was basically in-line with our estimate and historical averages.
Cash improvement?
Management has been disclosing a finer level of working capital detail that includes cash from Deferred subscriber acquisition revenue and costs. As long as the former is above the latter, it is a net cash positive effect for ADT. The terms basically mean ADT is discounting the equipment installation process less than they used to, and on a cash basis managing to harvest more cash from upfront installation. There is not a ton of disclosure on this area yet but suffice to say the last time ADT was publicly traded, this gap narrowed from 2013 to 2015 as subscriber acquisition became more costly/difficult. Bulls will say: Ami, they are charging for upfront installation plus they are raising prices. Does it sound like a broken model? My answer is: ARLO (a no-name as recently as 12 months ago?) took 1mn incremental customers on ~$50m of customer acquisition spending in 2017 when ADT spent $2.5b on SAC in order to keep net customers flat (we reviewed this in detail on our pre-recorded ADT Black Book on 8/2 HERE). Are you ready for this? It isn’t getting easier for ADT, while I still tip my hat to management for pulling out a decent quarter in 2Q-3Q18.
Bottom line
Ideally ADT would acquire its way into a new business model. But they are levered…and 86% of the equity has to get digested in the market in the next 24 months. So, dear bulls, here is your bull case: 100 year old company getting displaced on business model, pricing, technology, and cost, throwing tons of cash at the market to keep customer levels flattish, levered ~4x net debt to adjusted EBITDA, trading 17-18x trailing unlevered FCF, and…86% of the stock needing to be sold by summer 2020.
Please call or e-mail with any questions.
Ami Joseph
Managing Director
