ADT Inc. (ADT) Q4 2013 Earnings Report, Transcript and Summary

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 than prior year by $27 million due to the lower level of gross additions. Additionally, our maintenance CapEx was higher than prior year by $7 million due primarily to increased onetime investments in IT infrastructure and facilities resulting from our separation from Tyco. Our resulting free cash flow before special items was $91 million versus $86 million last year, up $5 million. Turning to Slide 4. I'd like to walk through a bit more detail on our financial performance for the quarter. You can see that we had a strong quarter with respect to growth in recurring revenue, profits and EBITDA margins. As I mentioned earlier, recurring revenue grew 4.7%, driven by increase in average revenue per customer of 3.7% and 1.5% increase in our overall customer base. Nonrecurring revenue was virtually flat year-over-year as the model change to more ADT-owned systems has now been in place for a full year. Total revenue was $846 million for the quarter, up 4.2%. Going forward, we expect total revenue to grow at a rate that is similar to recurring revenue. Turning to costs. Total operating expenses before special items were $656 million, up 3.5% year-over-year, driven by an increase in depreciation and amortization expense of $23 million due to increased penetration rates for higher-cost Pulse Systems, as well as the mix shift to more ADT-owned systems. Cost-to-serve expenses and the elements of subscriber acquisition costs that run through the P&L were virtually flat versus prior year. Details of our cost-to-serve expenses and subscriber acquisition costs can be found in the slide presentation appendix on slides 13 and 14, respectively. EBITDA was $431 million this quarter, up 7.5%, and EBITDA margin was 50.9%, up 150 basis points versus the prior year. On a pre-SAC basis, EBITDA grew 6.5% to $527 million, with pre-SAC EBITDA margin at 66.5% for the quarter, also 150 basis points higher than prior year. Moving to Slide 5. We continue to see very encouraging improvements in our Pulse take rates for new system sales. In total, across all channels, over 32% of our gross adds during the quarter were Pulse units, up from 28% last quarter and 13% in last year's fourth quarter. In our direct residential sales channel, our take rate was just over 38%, which was virtually flat with the prior quarter and up 15 percentage points over the same quarter last year. The sequential slowdown in growth in this channel is a result, in part, of the Devcon team not yet selling Pulse. As we began training the Devcon team on selling and installing Pulse earlier this month, we expect to see continued improvements in our direct channel take rates going forward. In our Small Business sales channel, the Pulse take rate was over 34%, up more than 4 percentage points sequentially and almost 19 percentage points higher than the fourth quarter of last year. In our dealer channel, the Pulse take rate ramped significantly in the fourth quarter to just over 23% from 15% last quarter and virtually 0 last year. This quarter, we completed the rollout of Pulse for ADT-authorized dealers in Canada, who can now sell and install all levels of Pulse, including video and home control. In addition to new system sales of Pulse, we upgraded 12,000 existing customers to Pulse this quarter. This is 2x the number that we did in the same quarter last year. Our Pulse upgrade efforts allow us to provide additional functionality to our existing customers and yield a higher ARPU. In addition, these upgrades allow us to enter into new contracts with these customers. These investments generate attractive returns and enhance the customer experience. We recently passed the 500,000 mark with Pulse customers. Just to put that into perspective for you, if Pulse was a stand-alone business, it would be the sixth largest security provider in North America. While this a major milestone for us, it still only represents about 8% of our total customer base, so we still have a tremendous opportunity to further grow our Pulse customer base. We're continuing to add new features and capabilities to our Pulse platform to make a great product even better and to ensure Pulse continues to be the best home security and automation solution in the industry. During the fourth quarter, we added a new battery-powered thermostat to our solution. This significantly simplifies the installation process for thermostats and in many cases reduces the cost to customers. We also launched ADT Pulse alert services, which allows Pulse customers to be notified of emergency situations, like weather alerts, wherever they are, via their smartphones, tablets or PDAs. We're excited about Pulse and what it means for our customers and the future of ADT. During the fourth quarter, we made solid progress across several of our key value drivers. The continued success of Pulse have fueled ARPU growth for new and existing customers. In the quarter, new and resale ARPU was $44.24, an increase of about 3% over the prior year, while the ARPU of our overall customer base, as of the end of the quarter, was $40.31, an increase of 3.7% year-over-year. Roughly 40% of the gain in average revenue per customer was due to the richer mix from new customer additions, including the new Pulse sales. The remainder was from price escalations to existing customers. These gains were partially offset by the addition of the Devcon customers, many of whom pay a lower rate as part of a homeowners' association. However, these homeowner association accounts have significantly lower attrition rates and as a result, very attractive financial returns. ARPU growth was 4.2% excluding the impact of the Devcon acquisition. The ARPU for new Pulse customers continues to be about $50 per month, providing a long-term tailwind for the company as our customers continue to adopt Pulse. Recurring revenue margin for the quarter was 66.9%, up 150 basis points versus prior year. Much of this increase was the result of lower expenses related to legal matters this year. We also saw continued progress on cost reduction productivity programs, which helped offset the additional costs we incurred as part of becoming a stand-alone public company. Net attrition increased by 10 basis points sequentially and 40 basis points year-over-year to 13.9%, with more than 100% of the increase attributable to higher relocation disconnects as a result of the continued recovering in the housing markets. We've launched several new programs to address the more actionable aspects of attrition, including non-pays and voluntary disconnects. These projects yielded about a 20-basis-point improvement in our attrition performance year-over-year, partially offsetting the impact of relocation disconnects. We are continuing to launch new programs to address attrition, and we look forward to discussing these in more detail at our upcoming Investor Day. Total gross additions, including the accounts added through the Devcon acquisition, increased by 36.6% on a year-over-year basis. As we previously discussed, we view bulk account purchases and tuck-in acquisitions like Devcon to be a key part of our customer account growth strategy, an important vehicle for investing our cash to generate attractive returns for our shareholders. Gross adds in our direct channel grew by 8% as we saw continued improvements in sales activity as a result of the improved housing market. The improvements we have made in our relocation programs and processes, along with new partnerships with key homebuilders, helped fuel this performance. As we've noted previously, new household formation and new home construction increase our addressable market, and we are working to capitalize on that opportunity through multiple avenues. Gross adds in our dealer channel declined by 21% compared to last year. We are continuing our efforts to work with our authorized dealers to strengthen their marketing and lead-generation capabilities, including giving them access to sales collaterals and marketing materials developed by and for ADT. In addition, we're continuing to roll out Pulse to all of our authorized dealers so they have access to the products they need to successfully and profitably grow this channel. Our recent focus has been with some of our smaller dealers, who, in some cases, have adapted to evolving technology and home automation more slowly. Per subscriber acquisition cost in our direct sales channel were up 15.9% on a trailing 12-month basis versus last year, reflecting the increased Pulse take rates for new residential and Small Business customers, as well as costs related to Pulse upgrades for existing customers, which accounted for roughly 350 basis points of the increase. Overall, Pulse accounted for the majority of the increase in direct channel SAC. We expect SAC to continue to grow as Pulse take rates improve further and as we continue to convert existing customers to Pulse. Keep in mind that Pulse customers come with a significantly higher ARPU, and early indications are that they have better retention characteristics than our traditional security customers. As a result, we expect to realize greater economic returns from our Pulse customers. On a trailing 12-month basis, dealer SAC per customer was relatively flat versus last year, reflecting favorable bulk account pricing during the year, which offset the increase in SAC related to higher Pulse take rates in this channel. Before I discuss our total year results, I'd like to comment on the competitive landscape. We continue to see minimal impact on our business performance, specifically attrition, ARPU and Pulse take rates, resulting from any new competitors attempting to enter our market. We will continue to closely monitor the competitive landscape, and we believe the heightened awareness on the industry will continue to benefit ADT and the industry as a whole. Turning to Slide 7. Our overall results for fiscal year 2013 were consistent with our expectations and the guidance we provided for the full year. I'd like to highlight a few key financial measures for the full year 2013. Recurring revenue was up 4.8% versus last year. We generated $1.7 billion of EBITDA, around 5% above the prior year, and we grew EBITDA margins by 130 basis points despite taking on additional costs as a result of our separation from Tyco. EPS before special items was $1.84 for the full year, up approximately 6% over the prior year, while GAAP diluted EPS was $1.88. Earnings per share before special items using our cash tax rate came in at $2.88 for the full year, representing 9% growth over the prior year. For the total year, free cash flow before special items was $507 million, which is $75 million higher than prior year. Turning to Slide #8. Our unlevered steady-state free cash flow was $895 million, which was down $57 million from the prior year. While increased attrition contribute to a portion of this decline, it also was adversely impacted by the increased costs associated with our separation from Tyco and the continued success with Pulse sales and upgrades. As we discussed last quarter, our current definition of steady-state free cash flow penalizes us for strong new Pulse sales and upgrade results as the associated upfront SAC impacts current performance while the increased ARPU and retention will benefit future periods. Clearly, we believe our success with Pulse is a positive trend and will create significant long-term value for our shareholders. As a result, we're planning to make some adjustments to our steady-state free cash flow definition to better reflect all of the dynamics of our business while simplifying the definition and associated calculation. Our goal is to provide an accurate view of the strong cash generation performance of our core business, excluding growth investments. We look forward to sharing these changes with you at our upcoming Investor Day. As we close the discussion on fiscal 2013, I wanted to share my assessment of our first year as a stand-alone company. Overall, I'm very pleased with our progress on several important fronts as we were able to grow our business, enhance our margins, continue to invest in our business to support future growth and return a significant amount of capital to our shareholders. I'm confident the momentum we have built, coupled with the improvement programs we have implemented to address our challenges, will position us for continued revenue growth and operational improvements in 2014. Our interactive service and automation platform, ADT Pulse, continues to generate excitement and customer acceptance as we've seen steady improvements in our take rates for new system sales. We've also accelerated our efforts to market Pulse upgrades to our existing customers, with ongoing positive results. The increase in Pulse take rates and greater upgrade activity contributed to our strong average revenue per user growth during the year. In addition, early indications are that our Pulse customers, in aggregate, show better retention characteristics than traditional security customers. As a result, we expect to generate better financial returns over the service life of these customers. We look forward to discussing this topic in more detail at our Investor Day. At the outset of the year, we identified the Small Business channel as a potential growth opportunity for ADT as our market share there was well below what we've achieved in our Residential business. While we are still in the early stages of implementing our Small Business growth strategies, we ended the year with about 7% recurring revenue growth, which is more than 2x the approximately 3% growth rate we saw in fiscal year 2012. In 2013, we also completed 2 acquisitions to strengthen our capabilities and grow our customer base. Devcon Security added 117,000 customers with very attractive retention characteristics and gave us a new platform to grow our presence with homeowners' associations. Both Devcon and Absolute Security also enhanced our self-generated sales capabilities. During fiscal 2013, we also returned a significant amount of capital to our shareholders. For the year, we paid out $112 million in dividends and made substantial progress against the 3-year $2 billion share buyback program we announced last November. During the year, we repurchased approximately 28 million shares for just under $1.3 billion. This reflects a 12% reduction in our share count before dilution. We closed the year with 209 million shares outstanding. We will continue to pursue a flexible, balanced capital allocation plan, including investing in organic growth, making acquisitions and returning capital to shareholders in the form of dividends and share buybacks. Finally, we completed the build-out of new capabilities we needed to be a stand-alone public company. These include recruiting new business leaders for our residential and Small Business operations in important areas like finance, M&A, information technology and innovation. I look forward to introducing some of our new leaders to you at our upcoming investor meeting in a couple of weeks. We also had some challenges during the year, and we are laser-focused on improving our performance in these areas. Customer attrition, one of our most important value drivers, grew during fiscal year 2013. While all of the increase in attrition is attributable to relocation disconnects, we are committed to mitigating the impact in other areas where we have greater control. As I said earlier, we've implemented several new programs to focus on the areas we can impact, including non-pays and voluntary disconnect, and these initiatives are already yielding positive results. In addition, we've revamped our relocation process on an end-to-end basis to help retain our existing customers as they move into their new homes and capture the new homeowner who is moving into the house with an existing ADT system. We also saw a significant decline in our dealer production year-over-year. However, this was primarily due to one of our larger dealers encountering financial difficulties and several dealers facing lead-generation challenges as a result of a discontinuance of a third-party lead generator. We are continuing to work closely with our dealers to help them strengthen their capabilities and better leverage ADT's marketing assets to grow their businesses. We remain committed to our 2-channel approach, which provides us significant competitive advantage and allows us -- and has allowed us to add more than 1 million new customers every year for the past 4 years. Again, we'll share more details on the specific attrition and dealer-focused initiatives we've implemented at our Investor Day next month. Before I discuss guidance, I wanted to share our priorities for 2014. Our strategy, which we'll discuss in much greater detail in a couple of weeks, involves 6 major focus areas, many of which are already in motion. The first area of focus is to stabilize customer attrition despite the robust housing market. The second is materially improving efficiency across the business to improve our financial returns and allow us to better serve our customers. The third pillar of our strategy is to continue to grow our core businesses: home security and automation, Small Business and home health. We'll accomplish these via investments to support organic growth, as well as complementary acquisitions. Our fourth focus area revolves around strengthening our business platforms to support our efficiency and growth aspirations. This includes investing to enhance our IT, business simplification, innovation and M&A foundation and capabilities. Our fifth focus area is to continuing to move towards our optimal leverage target of 3x debt-to-EBITDA in accordance with our strategic plan. I'll describe some of the specific capital allocation actions we are taking when I discuss guidance for 2014. Finally, we need to execute on a couple of important onetime programs. During 2014, we will complete our separation from Tyco as we conclude the transition service agreements that exist between ADT and Tyco. In addition, we'll begin upgrading customers with 2G radios, as a result of announcements made by AT&T and other cellular carriers regarding the phased approach to sunsetting their 2G infrastructure over the next several years. This is a program that will impact all traditional security players. Overall, we're very excited about the prospects of the business as we enter 2014. ADT is the leading player in the industry, and we are steadily growing ARPU and increasing penetration by adding new customers through innovative automation and security offerings. I look forward to sharing a lot more details on our business strategy in a couple weeks. Now I'd like to focus on our guidance for fiscal 2014. We believe recurring revenue, EBITDA and cash flow metrics, including steady-state free cash flow, are the key valuation metrics for our business and are providing financial guidance supporting these items. We expect recurring revenue to continue to grow at a rate that is comparable to what we saw in fiscal year 2013, between 4% and 5%. Total revenue growth should also be in this range. Volume leverage and cost-reduction programs will help us to continue to improve our EBITDA margins. We've established a 3-year goal of improving EBITDA margins by at least 150 basis points, and we expect to improve margins in fiscal year 2014 by at least 50 basis points, with the improvement phase towards the second half of the year associated with the new efficiency initiatives. In terms of steady-state free cash flow, we expect it to grow between 5% and 10% in 2014. The EBITDA margin and steady-state free cash flow guidance excludes special items. These include onetime costs related to our separation from Tyco, integration costs associated with the Devcon acquisition, the costs to realize efficiencies and the costs associated with upgrading some of our existing customers' communication radios I described earlier. In total, we expect these special items to be between $50 million and $65 million in 2014, with about half of this associated with the 2G conversion program. Next, I wanted to discuss some of the capital actions that we are planning for 2014, several of which are currently underway. Subsequent to the close of the fiscal year, we have continued to buy back shares, utilizing some of the proceeds from our recent $1 billion debt offering. Since the end of October, we have repurchased an additional 7.3 million shares for $300 million. On a program-to-date basis, we have repurchased 35.5 million of our shares for just under $1.6 billion. A fiscal year 2013 pro forma view of our capital structure incorporating our actions to date can be found in the slide presentation appendix on Slide #12. In addition, this morning we announced a $400 million accelerated share repurchase program that will also be funded by the proceeds from our recent debt offering. This will bring us close to completing the current share repurchase authorization of $2 billion. As we plan to continue to pursue a flexible, balanced capital allocation plan, including investing in organic growth, making acquisitions and returning capital to shareholders in the form of dividends and share buyback, our board has approved an increase in our current authorization by $1 billion to $3 billion. Lastly, we intend to increase our quarterly dividend by 60%, from $0.125 per share up to $0.20 per share, roughly equivalent to a 43% payout ratio on year-end 2013 EPS before special items. Over the past year, we've had the opportunity to demonstrate the strength of ADT's recurring revenue model. The steady, predictable cash flows generated from our 6.5 million customers, combined with a modest increase in our leverage from 1.4x to 2.1x net-debt-to-EBITDA has allowed us to invest $1.4 billion to generate over 1.2 million new customers through multiple channels. At the same time, we've repurchased approximately 15% of our shares, excluding the ASR we announced this morning. Moving to our target leverage of 3x debt-to-EBITDA affords us the opportunity to continue to grow our investments, and we look forward to discussing this in greater detail at our upcoming Investor Day. With that, we can move to the Q&A period. So I'd like to ask Grant to provide you the instructions for asking a question.

[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.