Good day, ladies and gentlemen, and welcome to the Q4 2013 ADT Corp. Earnings Conference Call. My name is Grant, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Larry DeMarco, Director, Investor Relations. Please proceed.

Thanks, Grant. Good morning, and thank you for joining us for our conference call to discuss ADT's fourth quarter and full year results for fiscal year 2013. With me today are ADT's Chief Executive Officer, Naren Gursahaney; and ADT's Chief Financial Officer, Michael Geltzeiler. Let me begin by reminding everyone that today's discussion contains certain forward-looking statements about the company's future financial performance and business prospects, which are subject to risks and uncertainties and speak only as of today. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings press release, which was furnished to the SEC in an 8-K report, and in our Form 10-K for the year ended September 27, 2013, which we expect to file with the SEC later today. The fourth quarter 2013 earnings release and accompanying slides, which are now posted on our website at adt.com and on our Investor Relations app, we have provided information that compares and reconciles the company's non-GAAP financial measures with the GAAP financial information, and we explain why these presentations are useful to management and investors. We urge you to review that information in conjunction with today's discussion. For those of you following on the webcast, we will be using the slide deck to supplement our commentary this morning. Please note that unless otherwise mentioned, references to our operating results exclude special items, and these metrics are non-GAAP measures. Additionally, our results reflect the impact of the Devcon acquisition, which closed on August 2, 2013. Now let me turn the call over to Naren.

Thanks, Larry, and good morning, everyone. Thank you, all, for joining us. As Larry mentioned, Mike Geltzeiler has joined us for today's call. I'm very excited to have Mike join our leadership team as our new Chief Financial Officer. Mike brings more than 30 years of public company financial leadership experience to ADT. His deep understanding of subscriber-based revenue models like ours, combined with his extensive capital market experience, will help us deliver on both our strategic and financial goals. Mike will be available during the Q&A period today and will also be a key participant in our upcoming Investor Day. Now let's move on to our results for our fourth fiscal quarter. Recurring revenue grew by 4.7% to $777 million and accounted for 92% of our total revenue. Total revenue was $846 million, up 4.2% over the fourth quarter of last year. EBITDA was $431 million, which was up 7.5% versus prior year, and EBITDA margin was 50.9%, an increase of 150 basis points year-over-year. EPS before special items was $0.46, while GAAP diluted EPS was $0.45, up approximately 7% and 12.5%, respectively, over the prior year. Earnings per share before special items using our cash tax rate came in at $0.75 for the quarter, representing a 34% growth over the prior year period. Cash flow from operations increased $31 million or 8.6% to $393 million, driven primarily by $30 million in EBITDA growth year-over-year. Capital expenditures for the quarter were $316 million, with all but $24 million of that investment going towards new subscriber additions. This compares to $281 million of total CapEx in the fourth quarter of last year. Direct channel subscriber CapEx increased $55 million, reflecting growth in direct channel gross adds, higher Pulse penetration and greater volume of Pulse upgrades. Dealer channel CapEx was lower…

[Operator Instructions] Your first question comes from the line of Ian Zaffino. Ian A. Zaffino - Oppenheimer & Co. Inc., Research Division: Just a couple quick questions. I wanted to talk about the dealer channel a little bit. The additions are down year-over-year, and I know you had mentioned that there is a dealer that kind of got ahead of its SKUs. Is that sort of the entire delta? Or is this just really what we're seeing is the factor that you mentioned previously persisting, in that we're going to eventually lap those comps and start to see growth resume? Or what else is going on there?

Yes. As we've talked in the past, there's really 2 issues. One is one of our larger dealers, which, I believe, was a top 5 or top 6 dealer, got in that financial trouble, and honestly, they've had trouble getting back on track. So we're continuing to work with them, but they've not made the progress we want. But secondly is, over the past several years, some of our dealers became more dependent on third-party lead generators to generate sales and opportunities for them. As part of our cleanup last year, we found one of the lead generators that they were using was not compliant with the telemarketing rules and other rules, and we've made them discontinue using that third party. That's why we've been working closely with our dealers, and our marketing team has worked closely with them, helping them to develop their own capabilities. In addition, we are working with them to try and find a new third-party lead generator to replace the one that was discontinued. I would say that, that is the bulk, if not all, of the year-over-year challenge with the dealer channel. Ian A. Zaffino - Oppenheimer & Co. Inc., Research Division: Okay. And then the other question would be on SAC. What are you seeing -- and I know you had indicated that you're not really seeing any kind of competitive churn or any type of other metrics related to churn, but what are you seeing as far as it relates to your SAC and competition? I mean, are you having to do anything or you're just really not seeing anything and these guys are just really not a threat really at all? I mean...

Well, again, the biggest driver of our SAC is the increase in Pulse take rates. Pulse definitely has a higher SAC but also a significantly higher ARPU and now, we believe, better retention characteristics, so the returns are very attractive. And then also the Pulse upgrades, and remember, we report SAC on a per-customer bases. When we go do an upgrade, we get all of that cost in the numerator, but we don't get an incremental unit in the denominator. So that does distort a little bit the SAC per customer, and that's about 350 basis points of the year-over-year increase. So Pulse is really the primary driver of the SAC increase, and we feel good about making that incremental investment based on the returns we expect to get from those customers.

Our next question is coming from the line of Charles Clarke. Charles Clarke - Crédit Suisse AG, Research Division: Thanks for the incremental matter just on the creation multiples. Just a question. I think maybe, sometimes, even I get lost in the weeds with kind of small numbers. But dealer creation multiples were steady quarter-over-quarter, 2.70x the annualized RMR. Excluding -- without taking out the upgrades, your direct SAC creation multiples were 2.57x on my math, up a little bit from maybe 2.48x last quarter. Where -- obviously, you said today that you think early indications are that the Pulse returns will be better. Just curious, where is the level where you guys can continue to target that 15% to 20% IRRs? I mean, even if we do see creation multiples, like I said, rising from 2.48x to 2.57x, I mean, is that, that big of a difference? I mean, do you guys feel like your creation multiples are fairly steady here and still very consistent with the IRRs that you're targeting?

Well, first, let me kind of separate the dealer from the direct side. Dealer, we expect to be higher, one, because our Pulse take rates are higher in the direct channel versus the dealer side; and two is all of the upgrades we do is through the direct channel. So there is no impact of that on the dealer side. Dealer is also somewhat deflated right now because we look at SAC on a trailing 12-month basis, and in that number is a pretty sizable bulk purchase that we did back in, I believe, the January, February time frame that was done at very attractive rates. So that's probably masking a little bit of the increase that the dealers are seeing as a result of the higher Pulse takes that they're starting to ramp up. Again, as I look at Pulse customers, the economic model is the same, but the variables are different. It is a higher SAC, it is a significantly higher ARPU, and early data suggests that we'll have longer retention of those customers. So we expect, and we'll talk more about this in our Investor Day, that Pulse customers will continue to be towards the higher end of our IRR range.

Our next question comes from the line of Jeffrey Kessler.

Naren, one of the things I wanted to ask was, now that you have some of the cohorts in place for new -- the upgrades into Pulse and you see what the cost is at the beginning and what you can be getting from higher ARPU and the recurring revenue, when do you start -- when can we start seeing, on an aggregated basis, the RMR generated by Pulse begin to take over from the new adds put in by Pulse to, let's just say, begin to even out the margin that you are -- or some of the margin degradation that you've seen from the greater percentage of installs of Pulse relative to the ongoing RMR permit?

Not sure I understand all the details of your question.

I'm trying to get to the point at which we see -- begin to see a crossover toward more positive numbers in your margin, particularly your RMR margin and steady-state from having a higher percentage of recurring revenue installed Pulse customers relative to the new Pulse customers that you're adding on.

Yes. Okay, got it. So I mean, when I look at the recurring revenue margins of Pulse customers, the margin rates are comparable. We get a higher ARPU. We do have some incremental costs associated to that, some license fees, as well as some support costs, but the margin dollars are greater because we're talking about, again, an average of $50 of ARPU versus close to $40 of ARPU. So we look at this margin dollars continue to grow. And then, again, the efficiency programs that Mike is going to play a key role in helping lead across the business, that will help us continue to improve margins as well. Again, I look at it year-over-year, we had a nice improvement in our EBITDA margins and our recurring revenue margins year-over-year, and we believe that we're going to get at least 150 basis points of incremental margin enhancement over the next 3 years, with over 50 basis points built into our plan for FY '14. So we're going to continue to drive improvements in margin, whether it comes through Pulse or whether it comes the old-fashioned way, just continue to drive productivity in the business.

Okay. It appears that even though you didn't -- you don't list that you actually are more -- you actually do list what's going on in terms of your customer creation multiple on the dealer side. On the internal side, which you really don't list, could you give us some directionality on what the customer creation multiple is on your internal? Was it -- it looks like, to me, about the same or slightly down.

Yes. Bear with me. Our creation multiple year-over-year is up slightly, again, driven -- 2 things, you have Pulse and then we have all of that SAC for the upgrades. So again, I think -- I'm confident that it's a good investment that's going to pay off for us, but we definitely do see a slight increase there on the direct side. And I expect we'll see a slight increase on the dealer side as well as we move forward. But again, the overall returns on IRRs will continue to be very attractive.

Okay. And finally, with regard to the increase in your buyback program, as well as the increase in your dividend, I know that you've said you're going to employ a balanced approach to increasing shareholder value. What I'm looking forward to is -- do you see any -- is this imposing some limitation on your ability to look at other Devcon types? Because there are others out there, as you know, in the field, and they may not be 120 -- $115,000, but there's definitely a lot of $50,00 and $75,000 subscriber potential acquisitions out there that could move the meter for you if you buy enough of them.

Yes. Jeff, I don't see any constraints at all. I think between the cash that we generate, the incremental debt capacity we have within our targeted debt-to-EBITDA ratio of 3.0, I think we've got plenty of capacity to invest in organic growth, to do accretive acquisitions and return adequate capital back to our shareholders. So I don't see any constraints at all based on the capital structure we're putting in place.

Okay. One -- and again, one final question and I'll let you go. You have the amount of -- the percentage of your total revenue relative to your recurring -- your recurring revenue as a percentage of total revenue has actually ticked up slightly over the last several years, obviously, as you grow that amount of ARPU. And I'm wondering, is there a level at which you can get this up to drive -- basically, in the end, it drives higher steady-state. But at what level does -- do you have to get it to with the initial higher costs that you have in Pulse? Meaning, do you have to drive this up to 92.5%, 93%?

No. Jeff, the big change over the past year was the ownership model change, which moved some stuff that would have been in nonrecurring into the recurring bucket. So the 92%, where we are, I think is kind of the normal run rate as I expect going forward. Again, when you look at what's in that nonrecurring bucket, there are still some units that are customer-owned. It's a very small percentage of what we sell. But then you have T&M. You have maintenance type of things. There are some contract termination charges. There's really just not a lot of stuff in there that's going to move dramatically. So again, we try to encourage most of our customers to take service contracts rather than T&M, and that will move a little bit there. But I just -- I don't see any big movements coming in there at this stage. I think about that 92% is where we'll stay going forward.

Our next question comes from the line of Steven Shui. Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division: Actually, this is Shlomo Rosenbaum here from Stifel. I wanted to ask you a little bit about the guidance for RMR growth, 4% to 5%. Is that -- we started out last year looking for RMR growth of 5% in fiscal year '13, and my understanding was that it's supposed to be more of a long-term expectation for the company. Is the 4% to 5% a reflection of the issues in the dealer channel persisting for longer than you expected or is this a change to what you guys are thinking about long term?

I would say that it's really driven by 2 things. One is that [ph] does not include any acquisitions other than those we've already completed. And acquisitions will clearly be an important part of our strategy going forward, so that would be incremental to that. And then I think it's a little bit just of a reset of the new baseline for the dealer side. We expect to see year-over-year growth on the dealer, but again, that takes time to really impact our recurring revenue, so we've got a little bit lower jumping-off point versus where we expected to be. And then I think the second piece of that is attrition. Attrition has ticked up versus where we were last year. We understand where that -- what's driving that, what's the biggest driver, and again, more than 100% of our year-over-year increase is being driven by relocations. But everything we see suggest that the housing market will continue to be stronger. We're working to mitigate that in the areas we can, but I still think we could see some headwinds in the short term from relocation-based attrition. And again, we'll talk a lot more detail on that in our Investor Day in a couple of weeks. Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division: So just to hone in a little bit more. If -- once you guys actually feel like you've worked the dealer channel and the dealer that's capital-constrained has gotten themselves straightened out and you've worked through as far as you can go with the third-party referrals, do you expect that, apples to apples, you would be at a 5% RMR growth expectation? Or if we reset because of the housing, so actually it would be a little bit lower than that?

Again, I can't speculate what's going to happen on the housing market and the impact that will have on attrition. What I would say is I expect our dealer growth rates, account growth rates and ultimately, RMR growth rates to be consistent with what we see on the direct side. It's a complementary channel that is -- should be seeing the same type of dynamics. Even though our lead generation is different, they should seeing the same kind of dynamics in the marketplace that we're seeing through our direct channel. Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division: Do you have an idea of how long you think it will take until that gets kind of straightened out on the dealer side? I mean...

Again, I expect, in 2014, we will see growth over what we saw in 2013. I think it again will ramp up as we go through the year, so you'll see more towards the back half of the year. Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division: Got you. And then, it looks like, on a sequential basis, you guys saw a decline in direct channel subscriber acquisition costs. Can you just comment on that a little bit more? I was surprised to see sales and marketing expenses down a little bit, commissions down a little bit. Is there anything going on behind the scenes that we should think about?

No, that's normal seasonality we see on a quarter sequential basis, so nothing unusual in there. Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then, lastly, the guidance for growth in steady-state free cash flow of 5% to 10%. We're still expecting an increase in the subscriber acquisition costs because the Pulse rates continue to move up. How are you going to great growth in that metric as your capital costs go up because of that?

Well, again, a lot of that will be through efficiency programs we'll be driving in the business. And again, I think, in our Investor Day, we're going to talk about a new metric or new definition, really, with some adjustments that, hopefully, will give you greater transparency on exactly what's happening, as well as be simpler for people to be able to calculate on their own. Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division: So is that 5% to 10% on the existing metric that we understand, or is that on that metric that you're going to...

No. The 5% to 10% is on the existing metric. So in the existing metric, it will be efficiency offsetting what we see on the SAC side, and that will be primarily on the cost to serve.

When we launch the new metric, we'll give you new history as well on the new metric, as well as revise the outlook, the guidance.

Our next question comes from the line of Jim Krapfel.

I wanted to see if I'm in the ballpark in my math here. Your direct subscriber acquisition cost in the dealer channel x upgrades to existing customers seems to imply that Pulse SAC are 50% higher than non-Pulse SAC. If that's correct then with Pulse about 20% higher priced than non-Pulse, would that imply then that you breakeven on a Pulse customer 30% later than non-Pulse and that the attrition rate on Pulse would need to be about 30% lower than non-Pulse to make the economics work out the same?

Yes. The 50% is high, it's clear [ph] in the 20% to 30% is our calculation. We can kind of walk you through, based on information that we've already disclosed, offline. We can set up some time with Larry to walk you through that.

Okay. And then how much do you think you ultimately have to spend to upgrade customers with 2G radios?

We don't know what the total program cost is at this point in time. Right now, in FY '14, we've quantified what we think the impact is going to be. Again, the overall special time items is $50 million to $65 million, roughly half of that is attributable to the 2G upgrades, so between $25 million and $35 million in 2014. I think we'll use 2014 as a learning. Again, this is a technology upgrade for our customers. It will provide some benefits. It will require a touch of those customers, and we're going to use that opportunity to sell Pulse upgrades to those customers, so there clearly could be some benefits that come out of this program as well.

Our next question comes from the line of Nigel Coe.

This is Jiayan for Nigel. We just have a quick question on pricing actions. So based on the slide, it looks like you had 2.8% price escalation, I think, both fiscal '13 and '12. Are you planning some kind of similar level of price increase for next year?

Yes. We will continue to escalate prices for existing customers consistent with incremental value that we're delivering. So I would say FY '13 -- or actually, I mean, FY '14 will be comparable to what we saw this year.

Cool. And also just one thing on attrition. You talked about you have many programs trying to drive down attrition rates over time. So do you have like a long-term target in terms of attrition rate, where you want to get to?

I mean, we'll talk a lot more about that during our Investor Day. At this point in time, we do not give guidance as to where attrition is primarily because there are some pieces that we think are significantly controllable and some that are less controllable. And that less controllable bucket has driven a lot of the increase over the past, let's say, 18 months. But again, we'll talk in a lot more detail about attrition at our upcoming Investor Day, and we can provide some context to what we're doing.

Our next question comes from the line of Jeffrey Kessler.

A quick question on -- you mentioned briefly health care, and I know that you'll probably be talking about this at some length at Investor Day, but realizing that the model that you can use with -- currently is very different from the old "I fall and I can't get up" dependence. Can you talk a little bit -- just a little bit about the economics, what type of ARPU can you -- and what type of costs within -- particularly what type of ARPU growth can you generate from health care, which seems to be a fairly big addition on the RMR side, to whatever other services you can -- you have in Pulse right now?

Yes. Jeff, as you indicated, we'll be talking a lot more about this at our Investor Day, and Don is going to share some of the thoughts about where this market is going. I think in the short term, it is the first platform that exists for us that has not been a major focus area, so we now have a dedicated leader for that business. We've got a dedicated marketing leader supporting that business, so I think we have the opportunity, in the short term, to just grow what we're already doing. As you've indicated and as we've talked in the past, over time, we think there's great opportunity to integrate more of those capabilities into Pulse and not just have the "I've fallen and I can't get up" type of solution, but be able to leverage all of the sensors and equipment that's in the home and then, longer term, even look at patient monitoring type of integration into Pulse. So Don is going to kind of lay out that whole story, the multiyear story for you. But I think for 2014, the primary focus is just going to be growing that PERS business that we have today.

Yes. I was think just in the longer-term because your former parent, obviously, has developed a very interesting solution in health care, which is mainly institutional, but obviously, it's not the type of the thing that you could take a look at.

Agreed.

We have no further questions.

All right. Well, thanks, everybody, for joining the call, and we look forward to seeing you in a few weeks in New York for our Investor Day. Thank you very much.