Good morning, ladies and gentlemen, and welcome to the Quarter Two 2015 ADT Corp. Earnings Conference Call. My name is Caroline, and I will be your operator for today. At this time, all participants are on listen-only mode. We will conduct a question-and-answer session towards the end of the conference. [Operator Instructions] As a reminder, the call is being recorded for replay purposes. And, now, I'd like to turn the call over to Tim Perrott. Please go ahead, sir.

Thank you, Caroline, and good morning to everyone and thank you for joining us for our call to discuss ADT's second quarter results for fiscal year 2015. With me on the call today are Naren Gursahaney, ADT's CEO, and Mike Geltzeiler, ADT's CFO. Let me begin by reminding 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 we filed to the SEC in an 8-K report, and in our Form 10-Q for the quarter ended March 27, 2015, which we expect to file with the SEC later today. In our second quarter 2015 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, let me turn the call over to Naren. Naren?

Thanks Tim, and good morning, everyone. Thank you for joining our call today. I hope you had a chance to review our earnings press release we issued earlier this morning that highlights our results for the second quarter of 2015. This morning I'll discuss our key performance highlights and accomplishments for the quarter. Then Mike Geltzeiler will provide additional details on our financial and operational performance. As you can see from our results, we continue to build on the trends that we have seen over the past year, delivering another quarter of improved year-over-year performance. Strong execution of our initiatives along with our focus on quality growth yielded solid operational and financial results. We continue to drive gross add growth year-over-year in both our direct and dealer channels, while our key customer metrics continued to move in the right direction, highlighted by a significant improvement in customer retention. We continued to make smart investments in our business, positioning us for future profitable revenue growth and free cash flow generation. Overall, our performance this quarter shows that we're widening the gap and extending our leadership position in the industry, an industry we believe is creating even more opportunities for future growth. As I have in the past, I will discuss our results in the context of our approach for achieving our vision for ADT. Our approach is focused on three areas. One, driving quality subscriber growth and improving the customer experience; two, executing on operational initiatives to deliver strong financial returns; and three, investing in our business to achieve profitable growth and strong free cash flow generation in the future. The results of these actions that we've take are continuing to shine through in our results, reinforcing that we are on the right path. And despite a market landscape that is…

Thanks, Naren. As Naren mentioned, we delivered another quarter of improved financial and operational results. This is our formula for success. Execute on the five operating levers in our core businesses to drive higher recurring revenue and pre-SAC EBITDA, while at the same time we invest a portion of our cash flows and profits and improving customer experience launching new businesses like commercial and new services and health, increasing Pulse penetration and adding new products and services. All of which will generate future cash flows and incremental profitability benefiting both our customers and shareholders. We also remain committed to delivering against our 2015 guidance. I'm pleased to report that we are updating our guidance favorably versus earlier guidance, which I will address later in my remarks. As we look towards the second half of the year, we will continue to invest in creating new partnerships, as we open our platform to expand our services to target the large market opportunity that currently doesn't purchase home security and automation services, expand our health and commercial businesses as well as integrate our Canadian businesses. Over the next few slides, I'll review our Q2 performance and highlight our accomplishments during the quarter. Slide seven provides an overview of our GAAP and non-GAAP results. Recurring revenue, which accounts for 93% of our total revenue, grew 7.2% to $829 million, while total revenue increased by 6.3%. When adjusting for the Canadian dollar, which declined by 11% versus last year, recurring revenue was up 7.8%, and total revenue increased by 6.8%. We report the FX impact only on ADT Canada, since Protectron was not in the portfolio this time last year. However, including Protectron, Canada represents almost 10% of our total company revenues, and the currency impact versus the start of this year when we gave…

Thanks, Mike. As you just heard, we've delivered a strong first half of the year and remain encouraged about the investments we're making in the business that will position ADT for future growth and free cash flow generation. We're growing the business, moving closer to our goal of driving net subscriber adds, and focused on enhancing the customer experience to drive more value for customers and shareholders. We're looking forward to the second half of 2015 and will provide more insight on our priorities and growth objectives during our upcoming analyst and investor Day on May 14. With that, I'd like to open up for questions. Caroline, can you provide instructions for asking questions?

Okay. Thank you. [Operator Instructions] It's coming from the line of Charles Clarke from Credit Suisse. Please go ahead.

Hey, guys, thanks.

Hi, Charlie.

I'm just wondering if you guys were willing to share any statistics on the attrition rates at Pulse versus the traditional burglar alarm systems, and if not when we could maybe expect to get some of that data?

Yeah. I guess, directionally, Charlie it's consistent with what we've talked about in the past. Pulse as a total product line is performing better than our traditional security from a retention perspective, but clearly the automation what we refer to as our Tier 2 and Tier 3 products have a more meaningful differentiation. And it's really driven by the customer engagement, the level of activity and engagement between the customers and their system is much greater when you get to the automation side. We will definitely talk a little bit more about that during our Investor Day on May 14th.

Great. Thanks. And then, just a quick question on gross adds. I saw that they were obviously up year-over-year which is an improvement but down sequentially. Historically, I didn't think that there was usually much of a difference on an absolute basis from Q1 to Q2, so just wondering if there – if credit screening was a big impact. I saw that was 5,000 accounts, but was whether an impact as well, I assume it's difficult to install a system when there's two feet of snow on the ground. So maybe just any color on why the gross adds were just down a little bit sequentially.

Yeah. Again, I'm very happy with our gross adds progress in the quarter. I think year-over-year very strong, we're seeing good growth in all channels, all business – all businesses, excuse. From a seasonality perspective we tend to see more in the second half versus the first half as you get into moving season. Between Q1 and Q2 you can have worked a difference, as you can have weather but again, I'd say that's more in the noise I'd focus more on the year-over-year growth that we're saying.

Okay. And just one quick last one. I'd love to see the attrition down and 12.5% but I think a tough question people will ask will be attrition is 12.5%, it sounds like you guys are expecting it to stay around there and this quarter just still 3000 is a great number for loses but. How – if attrition stays at 12.5%, how do you get back to customer growth, is it the ads, is that where we should expect to pick up in the back half?

I mean, one thing – this is Mike. I mean, I think what we're basically saying is we gave guidance below 13. We started to make very nice improvements last year. We're heading into the summer months where some of attrition is out of our control house, customer relocations et cetera. So we're guiding in the mid-12 but you should not read into it that's our long-term objective and every day we're coming to work trying to get that number lower. But to sit there and make short-term protection – projections amidst, a period of time where some of it is out of our control which is the summer months. So I think that answers the question. We think we can get subscriber growth on an annualized basis because we are growing adds and we think in the 12% attrition level we can get to subscriber growth. We're not predicting per se that's going to happen in the next quarter, the quarter after but going forward if we continue to grow ads, we can keep attrition even at these levels, we think we can get the subscriber growth. If we can go lower, then it'll be even more growth.

Thanks a lot, guys.

Thanks, Charlie.

Thank you for that question. The next one we have comes from the line of Ian Zaffino from Oppenheimer. Please go ahead.

Hi. Great. Thank you very much. I just want to piggyback on that last question on the churn. What is sort of the inherent churn that you're looking to get to? Because it seems like you could probably even bring it below 12.5%, but I imagine you sort of may be pushing pricing at that point and kind of tweak churn from there. So barring maybe potential price increases or barring anything else that you re-jig, what sort of the inherent churn do you think this business can do – on an annual basis, so ignoring the spikes in the summers?

Ian, it's hard to say what kind of the potential is. I think, as we look at it, we're aggressively trying to manage the controllable areas of attrition that we can. I think we've got great initiatives that have really bear a lot of fruit for this year around the non-pay side. We've seen tremendous progress there. I think we're starting to see more of the impact on our voluntary attrition – some of the things that we're doing their as Pulse upgrades, the investments we're making to enhance customer service. As you can see by our ARPU growth, both new ARPU and our average ARPU, once you take out the impact of FX and Protectron, we're continuing to be aggressive on the pricing side. So I still think we've got opportunities. We just have to watch the piece that's uncontrollable with the rebound in the housing market. So, again, I'm not ready to give any long-term guidance about where we go. Every year, we'll talk about what our goals are for the year. And we're going to continue, as Mike said, every single day looking for new opportunities to improve each of the areas we can control. And one more thing to add, I think – we continue every day to convert our legacy base to Pulse. So I think we measure churn on a net basis and we feel it's a lot easier to resell a home particular on a relocation if that home has invested in Pulse. So I think some of the legacy challenges are getting better every day and I think as we get people on Pulse, you not only have the opportunity to keep the customer, you also have opportunity to resell the home once it's since installed. So I think that bodes well for our future as well.

Okay. And then, just another question would be on the move to the pre-SAC EBITDA. Are you maybe anticipating a pickup in the dealer channel, as they migrate more to Pulse in that, the direct channel already has a significant amount of Pulse where the dealer channel is going to see more Pulse come on maybe at a higher price. And therefore, you're trying to make the adjustment and trying to make us look at it from that perspective, or is there anything else that you're seeing that really drove the motivation of this move?

No, I think I'll give you my perspective and I'll ask Mike to comment as well. In the past we were simply trying to forecast mix between dealer and direct, because of the accounting differences that Mike talked about between those channels. With this new kind of category of lead sharing dealers with a kind of a mixed accounting model in there, it really puts us in a position where we have to predict mix across three channels and I'm just not sure that that's a productive use of our time or your time to provide that level of granularity. Again, the economics on all of our channels are very good. We want to grow wherever we see the opportunities, and I don't want to have to be put in a position where we're trying to manage the growth of the different channels when all of them give us very attractive returns. Just kind of directly responsive the way you said is it's actually the opposite. Dealer, dealer sales don't impact the EBITDA. It would actually create a higher EBITDA. Direct sales would create a lower EBITDA and feelers and the efficiency program in the middle.

So I think it's exactly what Naren said, there's a different mix of each and we're not anticipating anything here but it's what really counts is whether it's dealer or direct it's about $1500 SAC to bring a customer in. The customer is paying $48 in both channels on average. So the cash-on-cash returns are the same, the ROI is the same and those are the economics we ought to be focusing on and that's pre-SAC EBITDA is really the cleanest and is used by a lot of people in our industry. Because it really takes out all of the SAC. We were taking out much of the SAC but not the marketing cost of the SAC by using EBITDA. Now we are taking it all. Moreover, we were going to continue to report EBITDA, so we're not reporting EBITDA but I think pre-SAC EBITDA is a better figure to guide on.

All right. Great. Thank you very much.

Thanks, Ian.

Thank you. The next question we have comes from the line of Jeff Kessler from Imperial Capital. Please go ahead.

Thank you. I'd like to maybe to range some of the thoughts that you originally came in with on some of the customer experience improvements that you're making at the ISC show amongst the alarm companies that were there. The big talk is all about creating a better customer experience than extending the life of the customer probably in another two years or so which is the goal to get a higher IRR with the new interactive wireless systems that are out there. What specifically – you talked about it in different spots, but can you organize that so that what are you doing to enhance both the customer experience and enhance the service you're providing to customers, so you can get them to stay on two years longer.

Well, I think, you hit the head – the nail on the head with both of those. From a product perspective, we're continuing to invest in the product to make sure we've got new features, make new capabilities, not just hardware, Jeff, but also the software – how you interact with the system, making it more intuitive, making it easier with the Pulse app as well as the Pulse platform itself. And on the service side, we want to make sure that if you've got a service need, we can – one, do as much of the fixed remotely. And while that helps us from a productivity perspective, it also helps the customer, so they're not waiting for a service tech. So a lot more self-service there or, for example, batteries – we'll ship them to you, and you can install them yourself. And then when you do need to roll a truck, we want to make sure we can get a truck there in a timely manner. So some of the investments that we made this quarter were to get our meantime to repair down to what we felt was an appropriate level. We think it got a little bit higher than where we wanted to be, and we've made a one-time investment to get them back in line. So like with attrition, Jeff, there is no single silver bullet that drives the customer experience. It's a culture, it's a series of processes, and it's also the product itself – hardware and software.

Okay. One of the things – one of the interesting things that's going on now is, for the first time in probably 10 years, we're seeing verification become somewhat of an issue. And that pertains specifically or like Sonitrol may see its first growth actually in 10 years as a verification company. What are you doing to make sure that when the signal goes out and the dispatch decision has to be made that the right decision is being – the right decision is being made and police response is quick or healthcare response is quick.

Yeah. Well, I think, healthcare is a different – any of the life safety areas, healthcare, fire, smoke, carbon, are just handled differently from a process perspective. We're going through the call list but we're dispatching immediately on those. And that's all about speed, because we have the confidence that those are real events. I think when we're looking at the burglar alarm which is where many of the false alarms tend to be – again, there's a lot of best practices across the industry, many led by ADT, but looking for multiple technologies. People who do have Pulse can get that earlier alarm signal on their own, because there's no delay built into the panel by code. You can get early notification and they can react and make those changes in parallel with us. And we are looking at video verification. We're looking more on the commercial side right now, because I think we're still getting a lot of customer resistance about others being able to look into their cameras and things like that. So I think Jeff we're staying on top of both the technology trends as well as the policy trends. We're influencing them where it makes sense for us to do so and we want to work with the responders to reduce the level of false alarms. It's bad for them and it's bad for us as an industry.

Okay. One final question that is on Protectron. Can you map out some milepost, if you want to call it a plan, for what you like to see in Protectron as it integrates into ADT? What would you like to see them get to in terms of Pulse take up? What would you like to see them in terms of the ARPU that it's generating so that at some point in time you're not going to have – you won't have a drag essentially on the comps from Protectron?

Yes Jeff, we haven't provided guidance not do we intend to for any of the individual kind of lines of business within the portfolio. I would say directionally we've got goals the synergies that we want the business team to achieve as we bring these two businesses together. But clearly it was more than just cost synergies. We feel good about the retention characteristics that we saw on the Protectron side and we're already seeing nice improvement on the ADT side there, coming closer to where we wanted to be, so we're seeing good progress there. And I think most of the businesses, the ADT business and the Protectron business or the combined business moving forward, we want to see Pulse take rates continue to drive. We rolled out on the ADT side, a little later in Canada than we did in the U.S. so there's still playing a little bit of catch-up there. We also had some language capabilities. We need to embed into the platform as we go into Québec in places like that, but again, I expect over time to see, I'd say take rates that are comparable to what we see in the U.S. businesses fees and it should be different.

Can you give us any idea of where you are in the integration of ADT Canada with Protectron?

I'd say, we're still in the early days. We brought in a new leader for our Canadian business Andrea Martin. She joined us in January. Mike and I were actually up there last week to review the progress. I think she's building a great leadership team with the best of both as well as some real strong talent from outside and their focus not just on integration but growing the business. So I'm pleased at where we are, but we still got a long way to go.

And I would add that we're talking about Protectron now it's the first year of the deal and we're trying to be transparent with how much incremental our financials have benefited from but I think come the fourth quarter we will be using the Protectron word. She's creating a one ADT Canada, which includes Protectron, and I think we'll start to lose the distinction between ADT Canada and Protectron. But for now, we're trying to give you the transparency of this impact. But even with ADT Canada and some of their metrics, their SAC is lower, their attrition is better, but their ARPU is lower. So it's not just Protectron. We never really pointed it out. We're only pointing Protectron now because its initial results are not in last year's results. But I think as you suggested and Naren mentioned, it's definitely upside down the road, as we move into higher automation and leverage some of the best practices in the U.S. So we're very excited about that.

Great. Jeff, thanks. I think we'll need to move on to our next question.

Okay. Great. Thank you very much.

Thanks, Jeff.

Thank you. The next question comes from the line of Jason Bazinet from Citi.

Thanks. I just have a question for Mr. Geltzeiler. Do mind just sharing what the upgrade spending was in the quarter and then just sort of a rough sense of when you think those upgrade outlays peak? What year do you think that occurs?

Yeah. So we indicated the upgrades were up from 18,000 to 32,000. And the 32 was flat with last quarter. I think we were at 31 last quarter.

That's dollar.

So I think we are flattening out in the 30,000 range. And as we've indicated in the past, an upgrade is around $800 – $800 to $850. So it's about $25 million. As well, we're spending on incrementally it's about $10 million year-over-year. So when you look at our direct CapEx, you can probably take $10 million of the variance year-over-year is attributable to this – to upgrades. But I think, as I mentioned in my statement, it's really over the next couple of years. I mean, part of the upgrades are being driven by the 2G conversions as well. That's going to finish up in 2016. So, again, we want to be there. And if a customer wants to stay with ADT but wants the benefits of automation, we'd rather they do have with us instead of somebody else. Overtime, we'll have more and more of our customer base on Pulse and there clearly will be less to upgrade. So it will flatten out and eventually decline.

Great. Thank you very much.

Thanks, Jeff.

Thanks, Jeff.

Thank you. The next question we have comes from the line of Shlomo Rosenbaum. Please go ahead.

Hi. Good morning of thank you for taking my questions this morning. Naren, can you give us a little more detail on the national account customer and was it kind of a hunting license or is this something that's going to be rolled out and maybe just give us, if you can, maybe quantify just qualitatively how we should think about that impact in results in the next year?

Yeah. Again, this was our first national account. I don't know if I'm allowed to mention them by name, so I won't, just out of precaution more than anything else. It would be about I think 50 sites that we've got and we've done...

50 that they owned. There's a bunch of franchisees.

Franchisees, exactly Mike, you're right. Good point. We've done a couple of the installs during Q2. But again, I think this will be a focus area for us but it tends to be kind of more of the small to medium-sized footprint on an individual facility basis, but a national footprint and I think that's where ADT provides benefits, being able to get that cookie-cutter approach, that standard pricing, as well as the consistency of service that we can deliver. So it's clearly one of the primary focus areas for Luis and his team.

So is this going to be, you go to each franchisee and sell them at that point or is this going to be rolled out across from corporate?

It depends company by company. Some of it – yeah, some franchisees have a – offer it to their franchise owners and in other cases they can be a little bit more influential. I think, in this case, our initial focus is on the company-owned locations. And we're confident that if were successful there that they will give us their endorsement to roll it out across more of their franchisees.

Got it. And then can you talk a little bit more about the rollout of the TS panel, what are you seeing in terms of realizing cost savings and what will it take to kind of roll that out just more generally? Is this specifically a Tier 2, Tier 3 Pulse install or are you going to do that for the Tier 1s as well, any thoughts of upgrading them in the future?

Yes. Shlomo, first I'd say that our – the savings of the benefits that we expected is what we're seeing. It's generally in line with our expectations. The start has been for Tier 2 and Tier 3 Pulse. We're working with our product partners, trying to get the cost down such that the economics makes sense for us to do it with Tier1 and that would allow us to do an over the air upgrade if they wanted to move from Tier1 to Tier 2 or Tier 3 but right now it's primarily Tier 2 and Tier 3.

Okay. And then what percentage of your Pulse space is Tier 2 or Tier 3 right now?

It's probably about half – a little under half of our total base of the 1.2 million customers and it's somewhere between 30% and 40% of our new sales. And right now we're also just rolling this out to our direct channel. So there's an opportunity to offer it to dealers as well in that's being discussed.

Okay. Great. Thank you very much.

Operator, we have time for only one more question. So right after this question we will end the call.

Okay. The next question comes from the line of Nigel Coe from Morgan Stanley. Please go ahead. Jiayan (Jane) Zhou: Hey, guys, thank you. This is Jane filling in for Nigel. Just actually coming back to the Tier 2 and Tier 3 Pulse customer question, I wonder how does that 30 to 40% mix compare to a year ago?

It clearly is up in the quarter. But some of that, Jane, is dependent on what promotions we're running during the quarter. So we see a little movement, but it stays within that 30 to 40% range. Jiayan (Jane) Zhou: I see. Got it. And then a second question – it's actually related to margin. So with this lower oil prices, well, I'm wondering, if you guys are seeing any benefits from lower fuel prices given that you actually have a large service fleet?

Yeah. Again, we have a large installed fleet and a large service fleet. So from an installed perspective, that would float through in the SAC numbers. But, again, it's not a huge driver in our total SAC costs, at $1,500, that Mike talked about. We are seeing some benefits in our cost to serve. But again, when you look at our service fleet or the fleet of vehicles, more of them are allocated to install than you would see on the service side.

It is definitely helping.

It is definitely.

It's helping on a cash basis. Jiayan (Jane) Zhou: Okay. Would that be substantial enough to call out to quantify the impact?

Yeah. Again, from a P&L perspective, I don't think it's...

It's million, but it's not many million.

Yeah. Jiayan (Jane) Zhou: Okay. I see. Cool. Thank you, guys.

Thanks, Jane.

Great. Carolyn, that's all the time we have for our call today. Naren, anything to wrap up with?

Nope. Again, we're looking forward to seeing many or all of you at our investor day on May 14 where we'll share more about our plans not just for the second half of the year but for the future. So thank you guys for your time today.