ADT Inc. (ADT) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Q4 2014 ADT Corporation earnings conference call. [Operator Instructions]. As a reminder, this call is being recorded for replay purposes. I would now like to hand the call over to Mr. Tim Perrott, Vice President of Investor Relations. Please proceed, sir.

Thank you, Michelle and good morning to everyone and thank you for joining us for our call to discuss ADT's fourth-quarter results for fiscal year 2014. With me on the call today are Naren Gursahaney, ADT's CEO and Mike Geltzeiler, ADT's CFO. Let me remind you and remind everyone that the discussion today contains certain forward-looking statements about the Company's future performance, which are subject to the risks and uncertainties and speak only as of today. Factors that could cause actual results to differ from these forward-looking statements are set forth within today's earnings release, which was furnished to the SEC in an 8-K report and in our Form 10-K for the year ended September 26, 2014, which we expect to file with the SEC later today. In our fourth-quarter 2014 earnings release and slides, which are now posted on our website at adt.com and on our investor relations app, we have provided a reconciliation of the Company's non-GAAP financial measures to GAAP. 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 this 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. Now I would like to turn the call over to Naren. Naren?

Thanks, Tim and good morning, everyone. Thank you all for joining our call today. We hope you had a chance to review our earnings press release we issued earlier this morning that highlights our results for the fourth quarter and our fiscal full year 2014. This morning, I will discuss our key performance highlights and accomplishments for the quarter and the year. Then our CFO, Mike Geltzeiler, will provide additional details on our financial and operational performance, as well as our outlook for 2015. We delivered a strong finish to the year driving another quarter of improved results, in line with our most recent guidance in creating good momentum to drive profitable growth in the year ahead. We have improved our execution, achieved many of our major goals for the year and crossed some important milestones. We have also strengthened our competitive position and the results of our action are evidenced in the quarter by an increase in gross adds, a reduction in attrition, improvement in cost efficiencies and strong margin performance. Before I go into detail, I'd like to reflect back on our progress and the path we've been pursuing to improve our performance. Over the past 2 years since becoming a public company, we've been working to complete our post-separation activities and taking several steps to further strengthen the foundation for ADT. Since the spin, we've built a new leadership team, enhanced our customer focus and invested in the business, all in order to improve execution and take ADT to the next level. I'm proud of the senior team that we've assembled and of all of our employees for what we've accomplished over the past year. We have the right team in place with the right strategy and operational focus to drive the business forward. At the beginning of this year, we faced some challenges and hit what I described as a speed bump in our performance. We recognize that most of the solutions to these challenges were well within our control to address and when I look back, with the team we've put in place and the changes we made, we were working on the right things to improve our performance. We took actions to strengthen our industry-leading position, generate quality growth and streamline our cost structure. We embarked on efforts to improve the customer experience, drive self-generated sales activities and reduced attrition. Strategically, we formed important relationships with key technology partners, strengthened our position in Canada by executing a strategic acquisition, invested in our technology platform and streamlined back-office operations. And although it's taken some time to see the impact of all these changes, our actions are beginning to shine through in our results and we are confident that we are on the right path. As summarized on slides 3 and 4 of our presentation, we've improved our performance throughout the year and reached most of our major goals. We drove revenue growth during the year, although not quite at the level we initially targeted due primarily to sluggish gross adds in the first half of this year. Customer adds accelerated as we progressed through the year with excellent momentum entering 2015. We also focused a portion of our sales efforts on Pulse upgrades, which rose almost 90% for the year. Operationally, one of our major goals was to bring attrition back down to the level it was at the end of last year and after an anticipated increase in the first half of the year, we drove attrition consistently lower and exceeded our stated goal by year-end with momentum and plans to drive further improvement in the future. Throughout the year, we also improved cost efficiencies and exceeded our EBITDA margin expansion objectives while also driving down the cost of adding new subscribers resulting in a year-end creation multiple near last year's level despite a strong increase in Pulse take rates. And speaking of Pulse, we recently reached a major milestone as we now have over 1 million Pulse customers. To put this into context, if Pulse were an independent company, it would be the fourth largest security company in North America on its own and we achieved all of this in about 4 years. Strategically, we enhanced our foundation for future growth through acquisitions and partnerships. We acquired the number 2 security company in Canada, Reliance Protectron, that when combined with ADT Canada will create a strong platform for future growth in this region. We formed important relationships with technology companies providing opportunities to expand our services and improve the customer experience. For example, we formed a partnership with and took a minority equity stake in Life360, a premier family networking company, creating a strong lead channel and providing an avenue for future development. This past quarter, we began to execute an initiative with Best Buy to have ADT's products and services on display and sold through their retail stores in the US. We view this partnership as a significant step in broadening our retail distribution presence. We are also happy to report that we've completed our post-separation transition activities with Tyco, removing what I would consider a distraction for our team. With the separation complete and the non-compete agreement now expired, we launched ADT Business, positioning ADT to move into the midsize commercial market. So overall for the year, our team delivered improvements in performance in each quarter, consistent with our commitment and we took important steps to enhance our competitive position and build the foundation for future growth. As summarized on slide 5, we've built some nice momentum in Q4 that we expect to carry into the new fiscal year. From a financial perspective, we drove solid increases in revenues, EBITDA and bottom-line results. Operationally, we drove down attrition for the second quarter in a row, resulting in revenue attrition of 13.5%. Our strong brand recognition and sales efforts drove improved new subscriber growth in both our direct and dealer channels, highlighting that we continue to win in the marketplace and that our products and services remain in demand. Gross adds were up sequentially and our dealer channel performance stood out, delivering year-over-year growth for the first time this year. Overall, marketing leads were up and our self-generated sales in our direct channel were 10% higher than last year. The success of Pulse continues to be an important driver behind our results as Pulse take rates continued to increase for new system sales and Pulse upgrade activities also grew nicely. As you can see on slide number 6, 51% of our total gross adds during the quarter were Pulse units, up from 49% last quarter and 33% a year ago. In our residential direct channel, the take rate for new and resale units was over 55%, up 16 percentage points from the same quarter last year and 70% of all new residential customers we added via our direct sales channel were Pulse customers. In our small business channel, the Pulse take rate was 46%, up 11 percentage points over the fourth quarter of last year. In our dealer channel, the Pulse take rates ramped up in the fourth quarter to almost 47% from about 43% last quarter and 23% last year. In addition to new system sales of Pulse, we upgraded about 26,000 existing customers this quarter. This is more than double the number that we did in the same period last year. Our Pulse upgrade efforts allow us to provide additional functionality to our existing customers and yield higher ARPU. In addition, these upgrades allow us to enter into new contracts with these customers and enhance the customer experience. As I stated earlier, we now have over 1 million Pulse customers representing about 16% of ADT's total customer base. Turning now to slide number 7, we successfully completed the Protectron acquisition and consolidated the results in the fourth quarter. Protectron is a growing security services firm in Canada with a total customer base of approximately 400,000 residential and commercial subscribers, including about 30,000 contract monitoring accounts and generates about $11 million in recurring monthly revenue. Protectron contributed to our results in the quarter adding 17,000 gross adds, contributing about $28 million in recurring revenue and delivering attrition levels for both revenue and units below 10%. Over the next few years, we will be working towards integrating our 2 companies, combining Protectron's high-quality subscriber base, industry-leading attrition and strong dealer network with our business, creating a significant growth platform for ADT in Canada. Slide number 8 discusses the launch of ADT Business, which we initiated shortly after the expiration of the non-compete with Tyco in late September. Through ADT Business, we are now expanding our product and service offerings to the mid-size commercial market, tripling the addressable market for us in this channel to over $7 billion. We are in the early stages of our expansion efforts and 2015 will be an investment year for ADT Business as we build the necessary people resources and make further enhancements to our product portfolio in order to capture growth opportunities in this expanded segment. Our second-half performance demonstrates the power of our competitive advantages as we accelerated customer additions, improved customer retention, grew our ARPU and generated higher margins. ADT continues to lead in a market that's creating new opportunities for future growth. That growing opportunity is being fueled by innovation, new services and the need for monitored security as an integral part of connected homes and businesses. Today, only about 20% of homes in North America have a professionally monitored security system and home automation services are only in their infancy, leaving 80% of the market without monitored security or automation. This represents a significant future growth opportunity for ADT. As I stated on our last call, I view the activity in our industry in 2 distinct areas – integrated professionally monitored security life safety and automation solutions serving the 20% of households where we have traditionally focused and standalone home automation solutions where most of the recent technology company entrants have focused efforts on developing do-it-yourself or self-monitored solutions targeting the remaining 80% of the market. Recognizing that a smart home is not necessarily a safe home, our primary focus continues to be on the integrated monitored security arena where our position remains strong. One in 4 of these homes has chosen ADT as their monitored security provider and the opportunity to both grow the size of this market and capture more marketshare is before us. Innovation is spawning new products and services and there are many opportunities to bring more value to customers and expand this market segment. Despite a more competitive market, overall market dynamics remain healthy as reflected by the over 280,000 new customers we added in the fourth quarter. We also recognize the incredible opportunity developing for ADT in the unmonitored or self-monitored product segment that is largely unpenetrated and hasn't been reached by traditional security solutions. Technology developments are positioning us to bring exciting new products and capabilities to potential customers and opportunities exist to partner with others to enhance our offerings, leveraging our brand, sales and installation capabilities and monitoring infrastructure to expand beyond our traditional market. This is an exciting time for our industry and we believe that ADT is in the right place at the right time with the right capabilities to capitalize on these new opportunities. I'll follow up with some more comments, but now I'd like to turn it over to Mike for a more detailed review of our results.

Thanks, Naren. After a slow start to the year, the Company has now delivered 3 consecutive quarters of above expectation performance. Our financial results and underlying operating metrics progressively improved throughout the year punctuated by a strong fourth quarter providing us favorable momentum as we head into 2015. We accomplished this while continuing to invest in growth, closing the Protectron acquisition and preparing for our launch into the mid-size commercial market. And while we are pleased with the fourth-quarter results, we have larger aspirations in the year ahead. Over the next few slides, I will review our Q4 performance and provide some guidance for 2015. Slide 9 provides an overview of our GAAP and non-GAAP results. Recurring revenue was up 5.4% to $819 million and accounted for nearly 93% of our total revenue. Adjusting for the decline in the Canadian dollar, recurring revenue was up nearly 6%. Total revenue rose 4.4% or 4.7% at constant exchange rates. The gap between recurring revenue growth and total revenue growth reflects lower levels of non-recurring revenue, particularly in our business channel as the unit is shifting away from low margin one-time sales of DVRs towards a more profitable recurring revenue model of selling hosted video services. This trend will continue into 2015. The consolidation of Protectron's results for the first time in the fourth quarter contributed about two-thirds of the revenue growth in the period. However, since Protectron currently operates at a lower margin than our ADT business, the consolidation had a dilutive impact to EBITDA margins in the period and also increased our D&A. EBITDA for the quarter was $458 million, up 6% or $27 million over prior year. This translated to an EBITDA margin of 51.9%, an increase of 100 basis points year-over-year. Good execution of our cost efficiency initiatives drove the increase in our margins as evidenced by only a 1.8% increase in gross SAC P&L expenses and a 3.5% increase in cost to serve despite a higher mix of Pulse subscribers and the addition of Protectron. Excluding Protectron, EBITDA margin for the quarter was 52.6% or a 170 basis point increase over last year. GAAP EPS was $0.47 a share. This included special items and a low tax rate in the quarter of 24.8% versus our non-GAAP rate of 31.7%. Non-GAAP diluted EPS before special items was $0.55, up 20% from prior year. Using our Q4 cash tax rate of 2.8%, our earnings per share before special items was $0.79 for the quarter, up 5% over last year. The chart also details our special items for the quarter. In Q4, we successfully completed our post-separation transition activities from Tyco by splitting several key IT applications and completing our real estate separation plants. We also continued to convert 2G radio customers, upgrading or converting 83,000 customers in the quarter for a total of 221,000 in 2014. We estimate that we are about a quarter of the way through this process, which will continue through 2016. Turning to the operating levers, slide 10 shows gross adds and average revenue per unit for Q4. Total Company gross adds increased 13% sequentially driven by improved performance in both the direct and dealer channels. Protectron contributed 17,000 units to Q4 gross adds. Gross adds in our direct channel were up 8% sequentially, led by stronger lead generation, continued self-generated sales and the addition of Protectron. We grew gross adds despite the impact of our enhanced credit screening process, which has now been fully implemented nationwide. This change is expected to improve future attrition by filtering credit-challenged customers into different payment plans and allowing us to focus on profitable growth. Gross adds in our dealer channel rose 20% sequentially as we continued to strengthen the quality of our dealers and added the production from Protectron. Throughout the year, our team has remained committed to returning this channel to growth and add 111,000 adds for Q4, excluding bulks, we achieved a 13% increase over Q4 2013. Even without Protectron, dealer adds grew about 5% representing the first quarter of year-over-year growth in over 2 years. Pricing remains healthy in our business driven by the continued success of ADT Pulse, incremental service offerings like small business bundles and hosted video and lower credits through higher customer satisfaction. Excluding the impact of Protectron, new and resale ARPU was $47.61, an increase of 7% over the prior year, while ARPU for our overall customer base was $42.32, an increase of 4% year-over-year. Protectron generates lower ARPU than our traditional base in the US. Therefore, including Protectron this quarter, our average ARPU was $41.54. As I indicated, the Company is committed to pursuing profitable growth and has launched a number of initiatives designed to improve the customer experience and increase customer retention. As shown on slide 11, we improved attrition for the second consecutive quarter with Q4 attrition now materially favorable to both our guidance and prior year. 12-month trailing net revenue attrition was 13.5%, an improvement of 40 basis points from last quarter and also versus prior year. Unit attrition, which measures customer attrition for just our residential and business customers, was 13.2% for the quarter, a 30 basis point improvement versus Q3 and 10 basis points lower than last year. Non-pay initiatives, enhanced resale efforts and tighter credit screening, along with more stable existing home sales and our enhanced customer care initiatives all contributed to the lower attrition. Our plans are to drive this number even lower in 2015. Slide 12 details our recurring revenue margins on our existing customer base was 67.5% for the quarter, up 60 basis points versus prior year, but down 80 basis points sequentially. The sequential reduction in margin is due to the dilutive impact from the consolidation of Protectron's results in the quarter, which reduced margins by 70 basis points. The year-over-year increase in margin was driven by operating leverage created from higher recurring revenue, the effects of our cost efficiency programs and a decrease in bad debt expense. On a per-unit basis, cost to serve was flat versus prior year and was up just over 1% sequentially. We continue to make progress in driving down customer acquisition costs and lowering our overall net creation multiple despite higher Pulse take rates, which require a larger upfront investment. Excluding the impact of Pulse upgrades, our combined net creation multiple improved 0.4 times to 30.6 times in Q4 versus Q3 while the net creation multiple in our direct channel before Protectron fell to 29.9 times. The fourth-quarter direct creation multiple was more than 10% below Q1 2014 levels. The momentum is strong entering 2015 to drive creation costs even lower through our cost efficiency programs and a solid pipeline of productivity initiatives such as the launch of electronic contracts, rollout of our new Pulse panel and other planned hardware efficiencies. Turning to slide 13, we detail our free cash flow and steady-state free cash flow for the quarter. Cash flow from operations was $354 million, down 10% from Q4 last year. This is primarily due to a large tax outlay related to a Tyco Sensormatic settlement, interest paid on incremental debt and the cost of 2G conversions in the quarter. Capital expenditures for the quarter were $362 million, of which 92% of that investment was for new subscriber adds. This compares to $316 million of total CapEx in the fourth quarter of last year. Direct channel subscriber CapEx increased by 3% reflecting higher Pulse penetration and greater volume of Pulse upgrades. Our dealer channel, which experienced strong growth this quarter, saw CapEx increase by 29% attributed to a strong increase in gross adds, the inclusion of Protectron and increased Pulse take rates. Factoring all of this, free cash flow before special items for the quarter was $54 million. Our steady-state free cash flow for the quarter was a fiscal 2014 high of $966 million. This compares to $939 million in last year's fourth quarter and $934 million last year. This metric is heavily skewed by current quarter EBITDA, creation multiple and last 12-month attrition, all of which improved in Q4 versus Q3. Slide 14 highlights our capital allocation and debt levels for the quarter. On a pro forma basis, reflecting a full year for Protectron, leverage was 2.8 times at quarter-end. For the year, we added $1.7 billion of debt enabling us to finance the acquisition of Protectron and reduce diluted ending shares outstanding by 17%. In Q4, we paid a quarterly dividend of $0.20 per share, a 60% increase over last year. We ended the quarter with 175 million shares outstanding after dilution, which is a reduction of 26% in the share count over the past 2 years. In fiscal 2014, we repurchased $1.4 billion in shares at an average price of $38.49. We have $381 million remaining on the share buyback authorization and we remain opportunistic when evaluating additional buybacks. When we reflect back to the Investor Day we held last December, we guided investors towards a second-half turnaround in our financials and key operating metrics and this is what we delivered. Slide 15 details the quarterly trends for key financial and operating metrics since ADT became public in 2012. As we look over the 8 quarters, it is clear that our hard work is starting to pay off and the improved second half of 2014 has generated favorable momentum leading into 2015. EBITDA and EBITDA margins before special items have risen steadily throughout the year. This, coupled with lower SAC and customer attrition, helped drive higher steady-state cash flows. Gross adds were off our plan for the year, but have grown sequentially throughout the year in both channels ending 2014 with our highest level of gross adds in the last 2 years when excluding bulk purchases. Our attrition initiatives are taking hold after peaking at 14.2% in Q1. We ended the year at 13.5% in revenue attrition, only 10 basis points from our lowest level since we went public and surpassing our goal for the year. We expect to continue this trend. We are also adding customers more efficiently with our creation multiple improving each quarter this year despite increases in automation take rates and again, we feel confident we can make further improvements in 2015 given our pipeline of initiatives. So let's move to slide 16 and address our 2015 full-year guidance. Given our strong finish, we have a positive outlook for the upcoming year and believe 2015 will be a year of financial growth and improved operating metrics while we increase investments to position the Company for success in the dynamic environments where we operate. In 2015, we expect subscriber growth and increased Pulse traction to drive recurring revenue growth between 5% and 6% over last year on a constant currency basis. We are planning to invest in this growth, as well as in other initiatives, including building our capabilities to expand into the mid-size commercial business and accelerating growth in our health business. Both these growth areas require investments creating minor headwinds on 2015 EBITDA. All-in, we expect 2015 EBITDA to increase between $70 million and $100 million. Customer satisfaction and retention remain a priority and we expect to drive unit attrition below 13% as a result of improving the customer experience and continuing to deliver upon our attrition initiatives. As we've stated previously, steady-state free cash flow is a better long-term than short-term metric given its volatility to certain metrics. For the year, we expect steady-state free cash flow to exceed $1 billion in 2015. The EBITDA and steady-state free cash flow guidance excludes special items. These include one-time costs related to the integration associated with acquisitions, the cost to realize efficiencies and costs associated with upgrading some of our existing customers' communication radios. Underlying this outlook, we expect continued improvement in the 5 value drivers that impact the business, including growing gross adds in all channels or both channels, direct and dealer, driving increases in ARPU, lowering churn and driving cost efficiencies. Now I would like to turn the call back over to Naren.

Thanks, Mike. I'm proud of our team and what we accomplished in 2014, but also recognize that we have much more to accomplish in the year ahead. We will continue to focus on execution and making smart investments to grow and strengthen our foundation for the future. On slide number 17, I've highlighted 5 priorities that we're focused on in 2015 in support of our goals. We will continue to invest in our business in order to generate growth, as well as to defend our leading position in the monitored security industry. We remain focused on improving the customer experience and retention, a significant value driver for our business and continue to drive cost efficiencies through a number of initiatives. We will also pursue and invest in new growth opportunities, expanding into the mid-size commercial market for one example and work to integrate Protectron and create a growth platform in Canada. With that, we will open up for questions. Michelle, can you provide the instructions for asking a question?

[Operator Instructions] Please stand by for your first question.

Yes and I'd like to remind those that will ask questions today to keep it to one question and then a follow-up, if we could do that so everybody gets a chance to get their questions asked.

The first question we have comes from the line of Charles Clarke from Credit Suisse. Please go ahead your line is now open. Charles Clarke – Credit Suisse: Hey, guys, congrats on another solid quarter. I was just hoping, first, if you could highlight where you were in terms of various initiatives to improve the SAC creation multiples. I know in the past you guys have spoken about wireless equipment helping reduce the install times, more efficient advertising spending, more self-generated leads to drive more direct adds. If you could expand on those initiatives, as well as the timing of when those may start to help the numbers and maybe any other initiatives that I may have missed. I think that would be helpful for me, especially in the context of guidance to kind of bring down creation multiples again next year.

Sure, Charlie. I will start and maybe Mike can chime in on a couple. Clearly, one of the big keys is the wireless Pulse platform that we have talked about in the past and Mike mentioned in his comments. We've begun the rollout of that across our residential business footprint. At this stage, we've rolled out about half of our footprint, really starting aggressively towards the end of the fourth quarter and as we moved into the first quarter of FY ‘15. We expect to be rolled out across our entire platform I'd say by mid-second quarter, second fiscal quarter and again, that will be a continuous ramp-up. The initial focus is for the higher-end Pulse solutions, those that include automation and then over time, we will look across the entire Pulse platform. As I mentioned in my comments, self-generated sales per rep are up about 10% year-over-year. We've done a lot of work in collecting the best practices across our footprint and sharing those with all of our sales managers and our sales reps. And it's a story of teaching a person to fish, so I think we're starting to see some real nice traction there, but we've got plenty of room ahead of us on that in order to get the balance that we think will be appropriate for the business. And then we continue to drive other productivity initiatives. Mike mentioned the new electronic contracting. That's a big customer satisfaction, but it also eliminates a couple steps in our installation and activation process and the scheduling process as well. So we are very excited about what that project can do for us. We are again early in the rollout, starting with our small business or our business channel first and then we will be rolling that out across residential towards the latter part of the year. Charles Clarke – Credit Suisse: Great, thanks. And then second on attrition, congrats on now having over a million Pulse customers under contract. With this many Pulse customers under contract, are you guys still confident that the Pulse customers will exhibit better attrition characteristics when compared to the traditional customers?

Again, with only 4 years under our belt, we clearly don't have as much of lifing data as we have on our traditional customers, but based on the data we have, we are seeing better retention characteristics, especially for the automation customers. So that drives much higher engagements, so we're still confident that we can continue to drive improvements as Pulse becomes a bigger part of our overall customer base. Charles Clarke – Credit Suisse: And with the non-pays, I know that that's hurt additions over the past couple quarters, is that going to be a tailwind for attrition next year? Will that start to impact it next year?

Non-pays really are just again an overall progress we're making just in terms of improving the customer experience, changes we've made with the collection team to get focused more on resolution of issues. So I think we continue to see that category of attrition decline. And we have, as I indicated, a number of initiatives like the largest being the credit screening. We really didn't fully launch the credit screening for the direct salesforce, the 10-year screening, until the fourth quarter. We were testing it as we went through the year, so you don't really see the benefit of that. One of the largest categories of non-pay is the first 6 months, so it really is sort of 6 months after you bring a customer in that you would see the benefit in attrition on that. So I think that's something that will benefit us in 2015 as we have now fully rolled out that credit screening. Charles Clarke – Credit Suisse: Great. Thanks a lot, guys.

Thanks, Charlie.

The next question we have comes from the line of Jeff Kessler from Imperial Capital. Please go ahead. Jeff Kessler – Imperial Capital: Thank you. First, could you talk about – your Q4 last year was strong relative to the rest of the – earlier on in the year and then obviously you had some weakness in the beginning of this year. Granted, you've gone through what you've done somewhat on the infrastructure to put in place a more sustainable model so that this doesn't happen again. What is going to keep – can you tell us to convince us that the types of numbers that we are seeing and the types of growth we're seeing, metrics we're seeing in the fourth quarter, which was a good quarter, are going to be sustainable into 2015 the way you've just given us your outlook? The outlook sounds great, but what are the infrastructure differences that you can stand on now to make those assumptions?

I will highlight a couple things. One is, remember, there is some seasonality in this business, so Q4 to Q1 gross adds I don't necessarily expect a growth because we're getting out of the summer season where we have a lot more activity. That said, looking more on a year-over-year basis, I would say a couple changes. One, from a marketing perspective, I think we've just got a better portfolio of offers and if there are some competitive changes in the marketplace, some aggressive competitive offers, I think we've got a good portfolio of things that have been tested and we have the confidence that we can roll those out quickly across the organization. Secondly, as we've discussed, we have seen nice steady improvements in the self-generation with our sales reps and we expect to see continued momentum there, so they are not as dependent on the leads that we've got. We've strengthened our dealer channel and I think we are seeing good performance out of our dealer channel and not just total point of units generated, but also the stronger focus on Pulse with our dealers. So I think we've got good momentum in that channel as well. And then, finally, I would say some of the other partnerships that we've developed, which again at a minimum provide us new lead generation opportunities and in some cases really new distribution channels like the relationship that we talked about with Best Buy that's just very early in that pilot, but we're excited about that opportunity. So I think we just have a lot more arrows in the quiver than we had a year ago at this time. Jeff Kessler – Imperial Capital: Okay. The second question is, and you did mention that your non-recurring revenue, low-margin sales of DVRs were kind of going away moving toward hosted video services. This is quite interesting. Can you describe a little bit – I'm assuming a lot of this has to do with a small business opportunity, that maybe it has – ties in a little bit into (technical difficulty).

Sure, I'll kick it off. It's primarily in small biz or businesses as we call it today. Really the essence of it is we had a decent amount of sales historically selling DVRs to our customers at cost or sometimes a little less than cost. And I think that's both an additional outlay that our business customers have to incur and I think that the market is moving and we are moving the Company more towards us hosting those videos in the cloud and we've launched a number of products like that, as well as ancillary services we sell, which sort of move like the rest of the Company, move it from a 1-time sale to a recurring revenue model where people are leasing the activity. So it's more profitable for us; it's less of a cash investment for our customers. I think it will build the recurring revenue base, but it will also reduce – now the good news is it's also reducing the cost, so in a 1-time sale, you are breaking even, it certainly will – it's not hurting your EBITDA, but you will see some of it in the non-recurring revenue decline year-over-year.

I think the other thing I'd add to that, Jeff, is it allows us to bundle it with other value-added services like analytics, which should make those services sticky. When they were just buying the camera and DVR, many of them were discontinuing the service aspect of that. With analytics and other things that we can deliver through that cloud-based solution, hopefully we'll see better stickiness as well.

The next question we have comes from the line of Ian Zaffino from Oppenheimer. Please go ahead. Your line is now open. Ian Zaffino – Oppenheimer & Co.: Hi, great, thank you very much. I wanted to touch on the 2015 guidance. As you look at your recurring revenue growth, how much of that is new customer adds, how much of that is pricing? Also, how much is commercial and what would we expect maybe from like the non-recurring revenues on the commercial side? Thanks.

We are not providing that level of granularity, but commercial is an investment; you need to understand that. We really are starting from the beginning of this year. Commercial is a little different model. We will definitely – the installation and the sale of the unit will probably be at a profit more than a financing. And yes, we will be building a recurring revenue, but it builds over time as you bring the customers in. So it's not going to materially impact. It will benefit, but it will not materially impact the recurring revenue for the period. In terms of the pricing and new customers, I think we continue to trend in the way we are guiding that with attrition coming down and adds growing, at some point, you start to go from where we were this year, which was a net customer loss to closer to customer growth again. So I think, in the meantime, we feel good about pricing as I mentioned, and about ARPU trends as we increase the amount of customers on Pulse, add additional services, the hosted video we discussed, etc. So again, I think we will continue to report those metrics. Ian Zaffino – Oppenheimer & Co.: Okay. And then on – just staying on the commercial side for just one more question. As you look at the recurring revenues that you are going to generate on the commercial side, is it primarily that you're just on the smaller side of the commercial business, so therefore the mix of recurring/non-recurring would be very similar or are you going to move to a model that is going to be more let's just say hardware-focused?

I think it will be a mix, Ian. As we move into above small business to that mid-size segment, I think you'll see probably a little bit more non-recurring revenue there, but we're still focusing on those customers that will deliver good solid recurring revenue, but it would be a little different mix than what we have with our small business customers.

And customers, as the installations are a little more sophisticated, customers tend to want to own their systems rather than having ADT own it. So if the customers own it, we recognize it as a sale whereas ADT owns it, it's amortized over time. Ian Zaffino – Oppenheimer & Co.: Okay, thank you very much.

The next question we have comes from the line of Shlomo Rosenbaum from Stifel. Please go ahead. Your line is now open. Shlomo Rosenbaum – Stifel Nicolaus: Good morning. Thank you for taking my questions this morning. Mike, I just wanted to ask you a little bit about attrition rates because we're layering in Protectron. It has materially lower attrition rates and can you just give us an indication as to the unit attrition rate sequentially, where they went, in order to get down to the level we talked about? Because it looks to me like, if I just do the math, it's possible that the unit attrition rates would've gone down maybe a tick, 10 basis points or something like that and still come out with the same number. Does that sound right to you?

As we indicated on the call, Protectron does have a lower attrition percent. Now keep in mind it's small and we're only talking about 370,000 customers. For the fourth quarter, it was barely an impact, a 10th of a percent on 1 metric and no movement on the other metric because we only have 1 quarter. As we roll it out for the year, there will be a little bit of – certainly a little bit of tailwind from Protectron consolidating their numbers into our numbers, but it's not materially changing the improvements and the messaging of the improvement. But as you know, we've indicated in our guidance – we didn't say we were going to be at 13%. We are guiding we are going to be below 13% and it's fair to say that Protectron will have a small improvement for the full year next year. Shlomo Rosenbaum – Stifel Nicolaus: Okay, thank you. And then just to kind of parse the numbers on the core business, it looks like the dealer, even if I exclude Protectron, certainly had an improvement and I know it's a high focus area for the Company. On the direct side, if I take out the Protectron gross adds, you are flat sequentially. And I was wondering how we should think about that? Is that the enhanced credit screening process, is there something else going on over there I should think about or seasonally is that the way we should normally expect? I would've kind of thought a little bit of a tick-up on the organic direct gross adds.

I'll start and Naren can – just remember that, first off, that excludes upgrades, so we did double the upgrades this quarter as well, but being kind of in line with last year – someone mentioned earlier on the call that we had a very strong fourth quitter last year in both direct – actually more direct than even dealer last year. So kind of being in line with – sequentially higher than third quarter, in line with the prior year, which was a very strong prior year with what was probably our best performance of the year. So I think we do agree that our guidance is for improvement next year year-over-year, but that the fourth quarter was actually stronger than it had been throughout this year, but albeit in line with last year. Shlomo Rosenbaum – Stifel Nicolaus: I'm looking at it sequentially, if you take out the Protectron gross adds sequentially, the direct number looks to be the same as last quarter.

It's definitely up quarter sequentially. That Protectron number, most of their gross adds, that 17,000 that Mike and I talked about is in the dealer channel.

There is only 4,000 gross adds from Protectron direct.

On the direct side. Shlomo Rosenbaum – Stifel Nicolaus: All right, maybe I have to go back over the math.

Take 4,000 out of our number, so there was 17,000 in total, 4,000 direct, 4,000 bulk and the rest dealer. So when I look at our direct channel, we were definitely up sequentially meaningfully in the I'd say high single digits.

We were up 8,000, 8,000 adds sequentially without Protectron.

And we're down slightly year-over-year with much of that being driven by the enhanced credit screening. Shlomo Rosenbaum – Stifel Nicolaus: Okay, great. Thank you.

The next question we have comes from the line of Jason Bazinet from Citi. Please go ahead. Your line is now open. Jason Bazinet – Citi Investment Research: Thank you. I have a question for Mr. Gursahaney. In 2012, at your Analyst Day, you laid out the recurring revenue growth historically on an organic basis, 2008 to 2012, of sort of 4% to 6% with the view that between 2013 and 2017, it could be more like 5% to 7%. As we went through this last year, I think we understand the source of the top-line weakness given what happened with gross adds and attrition, but given the improvements that you're making on both fronts and the strong Pulse adoption, why is the recurring revenue growth outlook in that 2% to 3% range if you back out Protectron? What is it that's causing that?

It's a great question, Jason. And when you look at it over a 1-year period, the gross adds in FY ‘14 is what really drives the recurring revenue growth in FY ‘15. So the fact that we had a soft first half of the year will definitely impact the growth rates and you've seen the deceleration as we move through this year, excluding Protectron. We expect to turn that corner and start seeing an acceleration again as we move forward, but it really just is the impact of the slow gross adds and the sluggishness we saw in the first half of this year. Jason Bazinet – Citi Investment Research: Okay. Is there anything going on – this may be a smart business decision, but is there anything going on on the installed base where you guys are going out and discounting to protect the customer from defecting to a rival that makes the churn numbers look better, but it sort of manifests itself in a lower recurring revenue or is that not what's going on?

When you look at our revenue attrition, it would be captured in the revenue attrition number and we still report both unit attrition and revenue attrition. Again, I think we do have a loyalty desk, so there are certain cases where we may, but that's a very, very small percentage. We're continuing to have modest escalations in our prices and I would say the big focus for us on the installed base is driving Pulse upgrades there to enhance the functionality that those customers get.

And as I mentioned, the ARPU for new and resale was up 7%, excluding Protectron, and up 4% in average. And that's where you would see it. So if anything, as we look at it, the level of credits are lower than they have been in the past, but we are definitely focused on the customer experience and retention. So with SAC being down and with the ARPU growing, those are the 2 metrics I look at and the revenue attrition, as Naren mentioned, that are telling a different story. Jason Bazinet – Citi Investment Research: Understood. Okay, thank you very much.

Thanks, Jason.

The next question we have comes from James Krapfel from Morningstar. Please go ahead. Your line is now open. James Krapfel – Morningstar: Hi, good morning. Thanks for taking my questions. So just curious to hear your thoughts on the competitive landscape and just general industry promotional activity that you're seeing.

I would say that things have been pretty stable for the past couple quarters. I haven't seen anything meaningfully new in the 20% of the market that is really focused on professionally monitored security. I think over the past couple quarters, most of the activity and announcements that I've seen have been focusing on the other 80% that tends to be either unmonitored or self-monitored. I would say stable in our core business where we've been traditionally focused. James Krapfel – Morningstar: Okay. And then previously you've given guidance on EBITDA margins expanding by 150 basis points over a 3-year period. So you've got 70 basis points this most recent year. It looks like in your guidance you are guiding to about flat margins this year. Correct me if I'm wrong there and then do you still anticipate the 150 basis points over that 3-year period?

I think there's 2 things in there that have been a little bit of headwinds. One is the consolidation of Protectron. Protectron runs at lower margins and hence that is dilutive to our EBITDA margins and 2 are some of the investments that Mike talked about as we now look to grow our presence in that mid-tier mid-size business market, as well as in the health business. So I would say, as we look at our core business and strip out those things, we are continuing to drive improvements in the rates. But those headwinds will – the reported numbers may not – .

If I could just add to what Naren said, we're totally committed to that on a core basis. I think to get the numbers straight, so without Protectron, we were 52% this year, 52.0%, so we are up 90 basis points of that 150. We will continue to drive that 150 on an underlying basis. Unfortunately, commercial, the growth in health, the Protectron and some other strategic things we're doing that are a different model and a different margin model in our opinion make margins – we're absolutely driving that on the core business – but make that as an external metric not the right metric. And then our goal is to grow – to pursue profitable growth and to grow EBITDA with the right ROI characteristics. So that's why we didn't throw that out there, but we will obviously be continuing to be reporting EBITDA margins as we always have. James Krapfel – Morningstar: Got you. That's helpful. Thank you.

Great. Michelle, I think we are going to have time – I think we have some of those who got back into the queue maybe for 1 question each, so we will just take 1 or 2 more questions and then we will have to cut the call off.

Okay. The next question we have comes from the line of Jeff Kessler from Imperial Capital. Please go ahead. Jeff Kessler – Imperial Capital: Okay. We've talked a lot about Protectron and what it does to the cost of getting an EBIT – putting it together, EBITDA margins being affected, adds being affected. What are you going to do to get your return on capital employed? Meaning what are you going to do to get Protectron integrated into ADT so it runs at ADT level margins and ADT level adds?

We're still very early in the integration planning and the integration work there. We've got some expectations of the teams this year, what they're going to deliver, but that is going to be a two-year integration process. Clearly, when we valued the deal, we valued some level of synergies and operational improvements, as well as some things that they could help us with, particularly on the attrition side. So again, that's not going to be a long term; I think that's going to be what we deal with over the next 18 to 24 months.

Yes, it's a scale issue. We're using the ADT margin as overall. We're not saying that ADT Canada has that same margin as the Company either. When you are a business up in Canada with all their infrastructure that's necessary, you will have lower – Protectron has excellent margins and as Naren mentioned, they will be helping ADT Canada. ADT Canada will be helping Protectron and I think the parent company will be helping [indiscernible]. I think with the synergy opportunities, we're very comfortable that we – a margin enhancer will be bringing this business into the portfolio over time.

Okay. Thank you.

Last question and just one more question. I think there's a follow-up.

Yes. The last question comes from the line of Shlomo Rosenbaum from Stifel. Please go ahead. Your line is now open. Shlomo Rosenbaum – Stifel Nicolaus: Hi, thank you for letting me back in. My question was more on attacking that 80% of the market that has not historically been the core. Can you just elaborate a little bit more about the do-it-yourself pilot that is going on with DEFENDER Direct? And then also what the strategy is in Best Buy because I understand that the overwhelming majority of your contracts are closed over the kitchen table. Is Best Buy doing a do-it-yourself type offering or how are you guys attacking that retail channel? It's really a different mode of sale than what you guys have normally done. Thank you.

Sure, I'll cover that. The DEFENDER Direct pilot that they are doing for a DIY solution is really still focused on that 20%. There are a few DIY companies in the marketplace today with a product offering that is very similar to what we install, but maybe a little bit easier than allowing the customer to self-install. They have got a solution out there that is professionally monitored by ADT that they are testing. I would argue that that really still focuses on the 20% versus the 80%. What we're doing with Best Buy today is very much of a lead generation, kind of try and understand Pulse and what Pulse capabilities are. But ultimately that still leads to an appointment with a sales rep and then that sale over the kitchen table. I think over time you will see us – we're looking at that DIY market and seeing if there is an opportunity. I think we're excited by what we do see. We've still got some more work to do to understand the value of a professionally monitored solution in there to make a smart home truly a smart and safe home and that's the opportunity we see and we will be talking more about that as we move forward.

And we could leverage the Best Buy relationship for that offering.

Okay, Michelle, I think that's all the time we have for questions today. Naren, any just final thoughts before we turn the call?

Again, I just want to reiterate our focus for 2015. Number 1 is going to be continuing to drive profitable growth in the business across all channels and all geographies. 2 is we are going to continue to invest in the business, to strengthen our leadership position and develop new capabilities. 3 is we have got a relentless focus on customer and customer retention and delivering a great customer experience. And I'd say 4 will be the integration of Protectron and building that growth platform for the future in Canada. I think all of our leadership team feels good about the way we ended 2014 and the momentum that we carry into 2015 and we continue to be very excited about the future of this business. So thank you all for your time and interest.

Great, thank you. Michelle, that's all the time we have for the call today and thanks, everyone, for joining.