ADT Inc. Q3 FY2025 earnings call

• Financial highlights: Solid revenue growth, robust cash flow, and strong earnings per share. Total revenue up 4% to $1.3B, adjusted EBITDA up 3% to $676M, adjusted EPS $0.23 up 15% YOY, adjusted free cash flow $709M YTD, and $746M returned to shareholders.
• Strategic focus: Anchored in unrivaled safety, innovative offerings, and premium customer experience. ADT+ platform advanced with launch of Alarm Range Extender and AI-driven testing capabilities. Hardware portfolio optimized with refreshed smart home security portfolio and work on tariff mitigation.
• Customer service: Remote assistance program reduced in-home service calls by half, and AI initiatives in customer care improved NPS, customer satisfaction, and digital self-service.
• State Farm: Pivoted to a digital relocation-focused approach.

Total revenue grew 4% to $1.3 billion. Adjusted EBITDA grew 3% to $676 million with adjusted earnings per diluted share of $0.23, up 15% year-over-year. Cash flow was strong with adjusted free cash flow (including interest rate swaps) reaching $709 million year-to-date. Recurring monthly revenue balance was $362 million, up 1% year-over-year. Monitoring and services revenue increased 2% with an ending RMR balance of $362 million. Installation revenue was $200 million, up 21%. Gross subscriber additions were 210,000, adding $12.5 million in RMR. The multifamily business divested on October 1 was sold for $56 million, consisting of ~200,000 subscribers and $2.6 million in RMR.

Total revenue is expected between $5.075 billion and $5.175 billion. Adjusted EBITDA is projected in the range of $2.665 billion to $2.715 billion. Adjusted earnings per share are expected to be between $0.85 and $0.89. Adjusted free cash flow is maintained in the range of $800 million to $900 million, with evaluation of fourth quarter bulk account purchases.

• Macro economic uncertainty including tariff pressures and elevated interest rates.
• Nonpayment cancels higher than last year, voluntary losses worse than last year, and relocation losses modestly lower than last year.

Q: Great to see free cash flow growth really materialize this year, pretty impressive. Jeff, really 1 question for me, Jeff. I was just wondering, we obviously know next year, a full cash taxpayer, but on the other hand, you've been able to lower the borrowing cost for the company. So I mean, those are pretty important key inputs as we think about 2026 free cash flow. Are there any other areas that we should think about when -- in our modeling, as we look to 2026, any components to free cash flow growth that stand out in your view?

A: Yes, you hit on the ones that have some dynamics that could cause them to change. So we've had some success managing our cash taxes will end up a little bit better on cash taxes, a couple of benefits from the recent legislation. We've done a really good job with a series of debt transactions, reducing our borrowing cost which makes that less of a challenge next year compared to what we once thought it would be. So we feel really good about our progress. In 2025, we're on track to achieve our original guidance because of our improvements, we have a lot more flexibility in capital deployment. So while we're not sharing any specific guidance beyond '25 today. This is, of course, the time of the year where we're working on strategic planning and budgeting for next year, ongoing conversation. With our Board evaluating several really interesting initiatives and opportunities for long-term growth. We continue to believe our stock is undervalued. So we've deployed capital there this year. And we plan to share more in the first part of next year in terms of a broader strategy and longer-range outlook along with our 2026 guidance. But I feel really, really good about where we are in 2025.

Q: So you mentioned efforts underway to improve retention, I believe, ADT+ and some of the AI initiatives are part of it. But I was just wondering if you could elaborate further on how should we think about some of these initiatives helping retentions going forward?

A: Sure. Thanks for the question. It's Jim. I'll give a little bit of color on attrition overall and then talk about a couple of the improvement areas that we're focused on. As I said on the call, we ended the quarter rounding to 13%, up about 13 basis points from last quarter. As a reminder, we achieved record levels earlier this year and expect to drive attrition lower over time. Largely due to tailwinds on customer service and new offerings like ADT+, which should drive -- continue to drive more customer engagement and more usage. On the quarter itself, the pressure on the quarter came from a couple of areas nonpayment cancels were higher than last year. Voluntary losses were worse than last year and relocation losses were modestly lower than last year. A couple of areas to -- more specifically to your question, where I think there's cause for optimism. The team stability continues to improve, and more tenured employees perform at higher productivity rates, our customer experience metrics virtually across the board. NPS, customer sat, digital self-service, are all improving and going in the right direction. There's been some excellent improvement on life cycle management, which the team is advancing. And then from a hardware perspective, ADT+ things like Trusted Neighbor, increased penetration with video, all drive improved usage of our services. And to the extent that usage increases, we know historically that retention improves, the more a customer uses the system, the higher they value it, and the higher retention. So the quarter ended at 13%, we ticked up, but there's a number of initiatives underway that I think long term, bode well for us.

Q: That's great color. And maybe just on the RMR front, we saw some softness there from a growth perspective. How should we think about the puts and takes going forward?

A: Sure. So at the intersection of attrition being 13 basis points higher and gross adds not being quite where we'd like them to be. RMR ended the quarter less than what we had anticipated. Our direct organic residential adds were actually up 1% year-over-year, dealer adds were down modestly. DIY, it's a small number, but DIY for us was up 13% year-over-year. The most significant impact on ending RMR for us this quarter from a comparison perspective is that we did a bulk of 15,000 this quarter comparing to 49,000 last year. So RMR -- ending RMR ended a little lower than anticipated. We have some bulk in the pipeline. We'll be disciplined about pursuing that bulk but that should continue to be a source of growth for us going forward. Thanks for the question.

Q: Can you talk about the portfolio hardware optimization efforts? I believe you indicated not material savings in '25, but a potentially meaningful source of savings into '26. If you could please provide some color of that on that and also the benefits of the remote assistance program and your early AI initiatives, please?

A: Sure. Ronan, there's a lot packed into that question. I'll go tree tops on each of the 3, and we can go deeper in the after call, if you like. On the product side, we're working with our ODMs, essentially leveraging our scale and their expertise to drive lower cost manufacturing. And we've had some good progress with ADT+. That now represents something in the neighborhood of 25% of our new sales, we'll continue to expand that to new order types, new channels, but all of the work that our engineering teams are doing with the ODMs are focused on driving down prices. We'll have a little bit of tailwind. We've had a little bit of tailwind on that front this year. It's not material. But as we continue to expand ADT+ to more and more of our new installations, we'll see more progress on the savings front. AI continue to focus on customer service. We're now expanding into some sales applications, employee productivity. There, too, we've had savings in 2025 and expect that to begin to accelerate in '26 as well. Chat volumes now 100% AI containments right around 50%. Voice is we're probably in the neighborhood of half of our calls have virtual agent of our voice calls containments flat at just below 20%, but I feel good about what we're doing on the AI front as well. And then on remote servicing, that's maintained about -- at a level of about 50% of our service calls. And we've plateaued right about there for the last handful of quarters. I think there might be a little bit more improvement there, Ronan, but it's not -- shouldn't be meaningful. We're happy with where we are. The NPS and customer sat scores are very good with remote service. And I would expect that it will maintain right around half of our service costs.

Q: Another, if I may, kind of multifaceted question, but more so on the macro and the strength of the consumer as you see it. I think you said our voluntary disconnects were up. I don't think you commented on nonpay. You also alluded to potential impacts of tariffs and a still higher interest rate environment. So could we just have your characterization of the macro and the strength of the consumer? And if and how those could potentially impact you achieving your guidance for 4Q are going into '26, please?

A: Yes. We -- so absolutely. We -- so we reiterated on the guide. So I'd say overall, macro factors included -- we are confident with a couple of months to go that will be in the guide and therefore, reiterated. . I'll make -- I'll share a couple of comments on attrition and macro overall and then ask Jeff to touch on your question with regard to tariffs. I think generally, Ronan, we're seeing a cautious consumer delinquency is up a bit. Our nonpay cancels, as I mentioned, were higher than last year. it's not meaningfully higher, but it's a number we're paying a lot of attention to. I think that some of the process changes and collections that our team is making while early bode well for us, and we're definitely not seeing a continued erosion, those elevated nonpay cancels and delinquencies have stayed steady -- elevated but steady. Another thing worth mentioning, you're pretty familiar with our business when we have relocations down -- the downside is we get fewer bites at the apple from a gross adds perspective, but it is a tailwind for us on attrition. And relocation losses were a bit less Q3 this year than Q3 last year. So overall, taking macro all the macro variables into consideration, I continue to feel good. Jeff continues to feel good about Q4.

Q: I first wanted to ask about the lower SAC spend. Was that a deliberate strategy? It makes sense that you wanted to be more disciplined, but I guess, is there anything that sort of drove you to spend less this quarter? Or it just was that the customers that you saw weren't as high quality? Or was it sort of a deliberate you wanted to spend less?

A: Yes. I would say it's the combination of those things. Navigation of the point I was alluding to earlier, a variety of factors and offsetting directions and our commitment to deliver the guidance we put forth at the beginning of the year. And the point I mentioned about disciplined and returns oriented in our approach and then maybe worth also mentioning that we do still have a range around our adjusted free cash flow outlook for the full year, even with a couple of months left and part of that is a continued evaluation of SAC and the largest chunks of SAC tend to be bulk account purchases that we will evaluate in the last handful of weeks here.

Q: And then on State Farm, I know you had talked about sort of changing course on the program that was originally rolled out because of this low pace. This one seems more targeted but also sort of more limited. So I guess, like maybe just talk about how did you sort of pick this new target customer base? Were they seeing higher adoption of like higher take rate of the ADT product during the initial phase? Or was there something else? And I guess in terms of like your cost of this program, I imagine it's probably not that big, but I guess like how do you think about like what you're hoping to get for returns or things like that? And when do you sort of reevaluate on the new pilot.

A: Thanks for the question, Toni. It's Jim. I'll give a little bit of context on State Farm and then speak to -- speak more directly to your question about the digital program that we're contemplating. . Our original agreement with State Farm was for a 3-year term. That concluded just this past October. As you know, and as I've mentioned on a few calls, volume has been below what we expected from the partnership. We didn't build meaningful adds into our 2025 budget program to date. We're at around 33,000 subscribers -- 32,000, 33,000 subscribers. And so we have pivoted to explore a digital solution. This is effectively directed at relocating consumers. We're in the very early days of design. It's not necessarily the last effort trying the traditional distribution with State Farm, but it's a fresh tactic, and we're going to lean in here and see if we can get some traction. An advantage is that it's in the potential buy flow. And so there's not a reliance on agent execution as there is in the traditional path. This is a digital process directed at relocating customers. I should also mention we're continuing our data sharing program with State Farm, where with customer consent, we share alarm activity at the customer's home with State Farm. And so we continue to kick tires on that front to see if there's a source of value. But back again on your original question about the advantage of the digital program, I would say, is that it's included in the buy flow, a more natural process and one we hope we get better traction with.

Q: You outlined various drivers to improve your attrition rates. Can you talk about how long you think it might take for those improvements to materialize and drive year-over-year improvements in attrition?

A: Thanks for the question, George. I think that it's probably Q1, Q2 of next year. The -- It takes a little bit of time to bake on the NPS improvements. The digital self-service continues to get really good traction. We're better than ever at meeting customers where they choose to interact with us. So we're expanding the digital platforms. There are some really interesting work that we're doing, leveraging AI to drive satisfaction. But我think it's a quarter or 2 before we start to see some improvement. I think the voluntary losses -- I anticipate voluntary losses will be the first to improve. And I'd mentioned earlier on our nonpayment cancels, there's been some process improvement on collections, where we essentially are dialing up our contact rates with delinquent customers and having some success there. And I'd expect some nonpay improvement as well. That, of course, is pretty significantly influenced by the macro environment, so a little more difficult to predict. But I think our internal processes and the improvement we're making bode well for us, say, Q1, Q2.

Q: And you mentioned earlier, continuing to opportunistically pursue bulk account purchases. Can you remind us what's embedded in the guide in the full year with respect to future bulk account purchases? And what current economics look like with purchases?

A: Let's tag team on this one, Jeff. So I'll give你a little bit of color and Jeff will as well, George. So we've got some bulk in the pipeline now. We -- as you know, we'll stay disciplined. We won't chase these bulks. We don't want ads just for the sake of ads. So if we can't get to the economics that we target. We won't pursue them. But there's 2 or 3 sizable bulk opportunities available to us. We're evaluating those. We may end up executing one in the fourth quarter. And that, I think Jeff mentioned earlier, is largely the reason why we left the free cash flow guide wide. We tightened revenue, EBITDA and EPS, but left adjusted free cash flow at the $800 million to $900 million to in to -- principally to have the flexibility to pursue 1 of these bulks in Q4 if the economics work out.

Q: Just 1 quick question on capital allocation. You've been very opportunistic with the share repurchases. Can you just remind us how much more authorization do you have in place? And also from a liquidity perspective, can you talk about your opportunity to continue to do more opportunistic share repurchases going forward?

A: Yes, sure. So the authorization from the beginning of this year, we have fully consumed. So that was $500 million authorization. We also had another a little bit more than $100 million of repurchases in January under the prior year's authorization. In terms of capacity, we have access to our revolving facility. As I noted, we feel really good about the debt transactions we've been able to undertake, including refinancing our most expensive debt just in the last couple of weeks.我们also recently issued a term loan A. We used $200 million of those proceeds to repay our older, more expensive term loan B -- the 2030 Term Loan B. But we do have some of that cash still available. It's earmarked for debt repayment. But from a liquidity perspective, as we sit here today, we have liquidity available. And as I already alluded to, significant flexibility. Our next upcoming maturity is $300 million on our April 2026 notes and we feel very confident we can manage that maturity and have some capital available for share repurchases, if there's a good opportunity or M&A or SAC or any of the other capital allocation priorities we've talked about.