Greetings and welcome to the ADT Second Quarter 2018 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is my pleasure to introduce Jason Smith, Senior Vice President of Finance and Investor Relations. Please go ahead, sir.

Good evening and thank you for joining us on ADT's second quarter 2018 earnings conference call. This afternoon, we issued a press release and slide presentation on our quarterly 2018 results, both are available on our website at investor.adt.com. Our remarks today will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we've described in our press release issued this afternoon and our filings with the SEC. Please note that all forward-looking statements speak only as of the date of this call and we disclaim any obligation to update these forward-looking statements. During today's call, we'll make reference to non-GAAP financial measures. Our forward-looking non-GAAP financial measures exclude special items, which are difficult to predict and are mainly dependent upon future uncertainties. For a complete reconciliation of historical non-GAAP to GAAP financial measures, please refer to our press release issued this afternoon and our slide presentation, both of which are available on our website at investor.adt.com. Joining me on today's call are our CEO, Tim Whall; and our CFO, Jeff Likosar. I'll now turn the call over to Tim.

Thank you, Jason, and thank you everyone for joining us today. I'll walk through our strong results and provide some perspective on our growth initiatives and key operating metrics. And then, Jeff will add more detail on our financial results and guidance before we take your questions. During the second quarter, we generated growth across our key financial measures including revenue, adjusted EBITDA, and free cash flow. We also made progress on our operational initiatives and I'm very excited about the opportunities ahead. Starting with our quarterly performance, our 6% revenue growth was driven by our efforts to balance top-line expansion with optimizing profitability and free cash flow. We produced higher revenues in commercial and multi-site accounts, grew residential post penetration and had stronger retention of existing customers versus a year ago. Our adjusted EBITDA grew 5% on this higher revenue and was $610 million for the second quarter. Perhaps most importantly, we produced $123 million in free cash flow for four special items, bringing our year-to-date free cash flow generation to $310 million compared to $191 million in the first half of 2017. We generated these financial results by having our organization aligned and focused on initiatives that includes maximizing customer retention and acquiring our new customers more efficiently, as reflected by our improved net subscriber acquisition cost or SAC. I'll now walk you through some of our largest growth initiatives that have us so excited about the future. The interactive home is an important theme for us and many of you are familiar with ADT Pulse, our primary interactive platform. This service puts us at the center of the interactive home, allowing our customers to connect and remotely control their security, lighting, thermostats, cameras and more, all through the intelligent ADT Pulse app. We've partnered with Amazon, Z-Wave,…

Thanks, Tim, and thanks everyone for joining the call today. I'll spend the next few minutes sharing some highlights of our second quarter results and some updated guidance for the rest of the year. We are pleased with our overall second quarter results and our accomplishments through the first half of 2018, which reflect our ongoing balanced approach to improving revenue, EBITDA, and cash flow, while continuing to deliver superior customer service. As Tim mentioned, our overall second quarter revenue grew by 6% versus the same quarter of last year. The drivers of our monitoring and service revenue growth, which increased by 2%, include higher average pricing, continued gross attrition improvements, and recurring revenue additions. Growth and installation and other revenue, which grew by 78%, was primarily the result of increased commercial and multi-site sales, including revenue from the commercial acquisitions we have added to our portfolio during the past year. Our adjusted EBITDA at $610 million grew by 5% mainly due to the flow through of margin on higher recurring revenue along with reductions in expensed net subscriber acquisition costs. Our adjusted net income expanded to $113 million, up from $37 million in the prior-year period. This improvement was driven mainly by growth in adjusted EBITDA and lower cash interest outflows. A key focus for us is generating efficient cash flow and our free cash flow before special items came in strong at $123 million for the quarter and $310 million for the first half of the year. This compares to $191 million for the first half of last year. An important driver of our free cash flow is our efficiency in spending on net subscriber acquisition costs, and Tim mentioned earlier, our improvement in revenue payback to 2.4 years on a trailing 12-month basis. We achieved this by…

Thank you. Now, we'll be conducting a question-and-answer session. Our first question today is coming from George Tong from Goldman Sachs. Your line is now live. George Tong - Goldman Sachs & Co. LLC: Hi, thanks. Good afternoon. You indicated you saw improved subscriber acquisition cost efficiencies this quarter. Can you discuss how this translated into gross subscriber and gross RMR performance in 2Q versus earlier quarters?

Yeah. Hey, George. It's Jeff. So, this is our third consecutive quarter of having grown our RMR additions, while at the same time, decreasing our subscriber acquisition spend, net of the revenues, which is the main driver of the improvement in our revenue payback. So, we were focused on balanced efficient growth and we're very pleased to have three quarters in a row of having grown our RMR additions. George Tong - Goldman Sachs & Co. LLC: Got it. And then, what about your actual gross subscriber count additions? How would you comment on the – qualitatively on trends there?

We're at about 7.2 million. We were at 7.2 million at the end of last quarter, you'll see in our 10-Q, we'll reference the same 7.2 million subscribers. So, no material change. George Tong - Goldman Sachs & Co. LLC: On a net basis.

Right. George Tong - Goldman Sachs & Co. LLC: Got it. Amazon and Google, you probably saw, recently launched new competitive offerings in the lower end monitoring and DIY space. Can you discuss any changes to customer behaviors that you may be seeing following these recent new offerings and what you might be doing in response?

Yeah. Again, great offers for – we feel for the renters for sure. Those folks that – are looking to add one or two devices, traditionally not an area we've played in, George. Our typical customer is buying a larger system – systems that we've installed this year, slightly larger and more devices than last year. I think we see the home getting more complicated, our traditional buyer enjoys that full service of our tech. So, again, we're not seeing a difference in our buyers. We do see it as a chance to increase the market share and bring some new buyers into this space that hadn't previously been there. And of course, we're working to put a DIY offering out there. I think we've announced that before with our partnership with Samsung and try and take advantage of their – if we get to see growth in that market. But, two different buyers from what we're seeing and very pleased to see it – the opportunity to expand the market. George Tong - Goldman Sachs & Co. LLC: Got it. That's helpful. And then, lastly, can you discuss your progress in winning commercial clients? How growth in commercial this quarter compare to 1Q and what expectations for commercial are included in your updated guidance?

Yeah. The commercial story is an exciting one for us. Unfortunately, it doesn't move the needle yet when you take a look at the size of our consumer base. It's just the way it is, we'd love it if it was a more meaningful part of what we're doing. It's an exciting part of the business, it's something we've had great success in, in past ventures and I think you guys understand the gist of the commercial business. You pay less to get the account, the SAC or the subscriber acquisition cost can be materially lower. Oftentimes, you get a little better attrition with those customers. The guys have had another great quarter in the commercial business and our national accounts as well as our multi-locations, so they did a terrific job moving forward, and we look forward to just continuing to grow that channel, it's a nice part of growth for the company for us. George Tong - Goldman Sachs & Co. LLC: Very helpful. Thank you.

Thanks, George.

Thank you. Our next question is coming from Toni Kaplan from Morgan Stanley. Your line is now live. Toni M. Kaplan - Morgan Stanley & Co. LLC: Hi, good afternoon.

Hey, Toni. Toni M. Kaplan - Morgan Stanley & Co. LLC: I wanted to ask about attrition. It didn't improve sequentially and the reduction over prior quarters had been slowing. So, I guess what's been driving that slowdown and what gives you the confidence that you'll be able to get to 13% to 13.3% by the end of the year?

Yeah. A couple of things. I mean, progress in this – it's not always linear on a sequential quarter basis. We did improve by 50 basis points year-over-year and affirm the guidance, as you said, comfortable with the tactics we've used. And again, I think we would – we've discussed on these calls various performance management, certain branches get out a little earlier, get a little better numbers going, certain ones play to the middle, then you've got certain ones that are more at the bottom end of the spectrum. There's a touch of seasonality into the business with this, I think you guys know in the summer months. So, we're where we thought we'd be at this point. And we can confirm or affirm the guidance for the year, but we'll stick to the tools we've been using. I think we announced before we've introduced some voice analytics in our call centers, it's kind of exciting for us, but kind of taking a look at that variance performance management, learning from the branches that are a little ahead of the others, taking those learnings back to the other branches and moving them as a group. Toni M. Kaplan - Morgan Stanley & Co. LLC: Okay. Strong free cash flow performance in the quarter and you did raise the midpoint of the range and at least increased the bottom of the range by the $25 million. I guess, was there anything one time to call out in this quarter driving that strong free cash flow growth? And just anything to think about in the back half of the year that would impact free cash flow maybe being more volatile. Thanks.

Yep, and I'll let Jeff answer the back half of this question. On the front side, our strategy is clear, we've got to grow the revenue, grow the earnings. We're very disciplined in terms of our sales growth as we mentioned earlier. When the cost to acquire accounts goes down, when the attrition is lower and you are able to grow the RMR base, those things combine to a very powerful cash flow number. That's how we've always looked at the business. Terrific performance for the quarter; other than things that you don't foresee. I've been doing this for a long time. There's always a couple things that pop up that you didn't think of going forward, but very comfortable with the guidance we have put up for the remainder of the year. Any other comments there, Jeff?

Yeah. Certainly, there's no one thing I would call out. I would as a general comment though note that the timing of certain inflows and outflows can vary a bit from quarter to quarter and year to year just because of even things like when did the quarter happened and relative to when a pay cycle occurs and do we have an extra week or one week's less payroll in one period than the next. So, we feel good about our guidance. There is some seasonality, nothing in particular I would call out. Third quarter tends to be a higher SAC spending quarter than some of the other quarters historically. Toni M. Kaplan - Morgan Stanley & Co. LLC: Thanks a lot.

Thank you. Our next question today is coming from Manav Patnaik from Barclays. Your line is now live.

Thank you. Good afternoon. The first question is just around I guess the new CMO hiring and the switch you made there. I guess I've noticed a few more TV ads and so forth. Is there a change of strategy? Can you just help us understand what prompted that switch?

Yeah. Again, we're a little more of a digital present, digital sales, had an opportunity to bring Jochen to join the team, terrific background, got us very excited. Jamie Haenggi who has kind of carried double duty for us since she started also owns our customer service experience. So, in effect, we're kind of doubling down. She's taken a yeah more full time active role on that where she's been kind of carrying two jobs; whereas Jochen bring us some new experiences on the digital side that we think will play very well for us in terms of our ability to attract new customers.

Okay. And maybe just on the commercial side, like a lot of these acquisitions, especially the ones that have I guess cyber capabilities. Are these all complementary capabilities or meeting the different cyber acquisitions or are they more sort of geographic plays that give you presence somewhere else?

Yeah. So, again, our premise from the get go was, take security outside of just the premises. We announced ADT Go for the security to the person when they're outside the home and then of course to protect their networks as well. The first acquisition was much more of the commercial enterprise level type customers and kind of gave us some high end capability. The recent acquisition of SDI is much more in the small business arena. So and again, cyber is a big business. There is a trusted brand with ADT. We've done a fair amount of market research where we play well, we think being able to protect networks, whether it's in the consumer side or in the small business or the enterprise makes sense for us, but we're particularly targeted in where we think we can play well in that space. SDI, with Larry and his team, strong acquisition for us to really open up that small business area as we move forward.

All right. Thanks, guys.

Thank you. Our next question is coming from Peter Christiansen from Citigroup. Your line is now live.

Thank you. Good afternoon. A quick question as it – thanks for the Pulse data, that's very helpful. Just generally, can you characterize what the attrition trends are in Pulse versus traditional, and if there's any dramatic difference you think that's going to play a role in driving overall gross attrition lower?

We haven't shared specific numbers in that area, Pete, but obviously, the more devices, the more the people use the system, the more they get connected. There's an attach rate issue that plays well, but also their larger systems as I mentioned before and the larger systems, one of the key indicators of how long the customer stays, of course, is the money they pay upfront when they get it. And that's played very well for us. Again, as these larger systems get installed, upfront money has gone up nicely for us as we pushed and we expect to get favorable attrition characteristics as we go forward.

Thanks. And then, I know you've talked about 3Q being pretty important in terms of possibly introducing Internet buying with better information in terms of the breakdown of cost that would make you or at least illustrate to customers that you're more competitive than many may think on the surface. Do we still think that's on track and also with new equipment coming on in the second half, do you see that as an upside opportunity to margins?

Yeah. As ADT, a lot of our competitors sell something of what ADT sells. ADT has got the largest breadth of products out there and we think that going to e-commerce will give us a better chance to kind of showcase this with buyers. Also following the trend that people are using the digital buying is a way to actually secure purchases, something we haven't done before. So, again, if we sell one, it's one more than we used to sell. But, I also think it's a chance for us to kind of highlight the different areas of the business, so consumers can see for themselves. It's not ADT doesn't sell this one product. I think you guys know we're a technology aggregator. We're partnering with many people's different products that are out there. Our Pulse app is a terrific app. We're helping to simplify the whole by putting a lot of different devices into our one app as they go forward. So, on track to introduce our first set of products e-commerce in the third quarter. And again, I am excited about, from a growth, how do you bring new services to this large customer base that we have. We're very encouraged by how our ADT Go service has rolled out to our customer. I think we've put in the deck over 150,000 downloads at the end of June as we go forward, and a couple of new services like that to our existing base have us excited about the future growth.

Thank you. I'll jump back into queue.

Thank you. Our next question is coming from David Ridley-Lane from Bank of America Merrill Lynch. Your line is now live.

Sure. Wanted to ask about the installation revenue, it's rising fairly dramatically. Excluding the effect of recognizing the amortization of deferred subscriber acquisition, the core installation revenue up really strongly. So, I'm wondering, is that an increase in upfront revenue per installation or is it increasing the number of gross units that you're installing? Is it a mix of both? Just trying to better understand the drivers and kind of that core installation revenue growth?

Yeah. Hey, David, it's Jeff. So, a couple things I'll point out on, one, our install revenue is comprised of what I'll describe as three separate categories. One is organic outright sales. So, our organic outright sales grew and that's driven by what you just said, it's more. Outright sales overall, it's pushing for more revenue collection. It's some of what Tim described, more full featured system, but it's only outright sales. If it's not an outright sale, it wouldn't be in the number. That drives about $17 million of the growth. Another component of the growth is M&A, as I mentioned in my prepared remarks. So, about $20 million, slightly more than $20 million of the growth is M&A, and those M&A targets and acquisitions, as Tim has described, a little bit on this call, but more detail on prior calls. Generally they are commercial, generally they are integrators and/or installers more so than they are sources of recurring revenue. We seek to bring them in and then drive recurring revenue over time. But, the acquisitions generally are install revenue and then the third component is as you pointed out, it's amortization of deferred revenue that we collected in prior periods. So, nice improvement in all three of those areas, but I thought I'd share that little color to break it down for you.

[Technical Difficulty] (27:44) additional disclosure around Pulse customers. Is there a rule of thumb you could help us with on in terms of the revenue benefit from every 1% shift to Pulse as a percentage of your client base mix?

Nothing specific that we'd share. What I would tell you is that, when we lose a customer, typically the customer we take on to replace that customer is at a price that's several dollars higher than the customer we lose. That's largely driven by the fact that new customers are taking a much higher percentage of interactive systems and some of the other features that Jim described.

Thank you, very much.

Thank you. Our question is coming from Jeff Kessler from Imperial Capital. Your line is now live.

Thank you. There are a lot of companies working on technology, particularly analytics technology, a couple of whom you've probably – you've bought, a couple of whom you work with in the form of like alarm.com. What I'm interested in is what are you doing particularly when it comes to analytics and video to reduce the amount of false alarms or reduce the amount of dispatches that you can make, so that the customer experience gets better. And so, you don't have to spend as much and so, your attrition goes down as well.

Yeah. Great area for us. Don Young has kind of spearheaded this initiative over the last 10 years in prior deals. I'm happy to have him here with us. I think you should know Jeff, I mean, Vice President of the PPVAR, very closely tied with our police chiefs across the country, et cetera. But our center in Dallas I think is kind of cutting edge in terms of what we do with video response, verified video response, as well as even ring down services that we provide on the commercial side. On the consumer side, obviously verified response has been important for us. We have, as I think the industry has seen, increased numbers of cameras being put in out there that are helpful to us, in terms of determining exactly what's going on at the premise before we send the dispatch.

Okay. Second question, the follow-up question is, we've seen one or two companies in the industry who have gotten approval to do it been able to and you know who they are to finance customers. It's generally been – they've generally been able to reduce the amount of spend they have upfront and also help – hopefully be able to spend more on their customer later on if they spend less. What type of, I wouldn't call schemes, but what type of options are you modeling at this point with regard to the way you can market, the way your customers stand upfront on your systems?

Yeah. We'd like to leave it, so the customer chooses if you could imagine kind of two bar graphs in front of you. If they want on the left was the installation dollars or the amount you want to pay upfront and the one on the right was the recurring services you want to pay. We envision where the customers kind of self-selects into, I pay upfront and lower monthly, or I'd pay, I'll take the lower upfront, but I'll take the higher monthly. So, they're selecting kind of what feels best for them to buy, where we can maximize market share going forward. I think kind of staying with our disciplined approach and the credit check policy and those kind of things as we move forward.

You don't need a third-party to do this.

Again, the internal rate of return is what we'd look at.

Okay.

There's a financing option that provides a better return. We'd look at it. But currently we don't need to do that unless it's a better IRR than what we're getting today.

Okay. Got it.

Thank you. Our next question is a follow-up from Peter Christiansen from Citigroup. Your line is now live.

Thanks again for having me back on. Two questions. I think last quarter, you provided an attribution of the top-line outlook between net RMR ads, pricing and upgrades, commercial and multi-site. I was just wondering if there's any commentary on one of those legs of the stool, if one is kind of outperforming or underperforming, puts and takes there as we passed 2Q.

I don't – there's nothing in particular I would call out, Pete. I don't recall exactly what you're referring to. But if you look at our full year revenue guidance, it's tracking towards the higher end of the range. I described there's some M&A included in there and then or otherwise our mix between monitoring and service revenue and installed revenue is largely as we had originally anticipated it. The fact of the rev rec standard change which we called out in the last quarter, we didn't address it specifically here, but that's just a little bit more into install and out of monitoring and service and then some of our initiatives around the technician upsell leads to in some cases selling more into outright sales, it otherwise would have been monitoring and service revenue, but nothing that terribly different from how we originally model it.

Okay. That's fair. And then, my last question, a bit theoretical and following up on my Internet buying question from before. We've seen this happen in other industries and perhaps with DIY and Amazon coming into the business, fully transparent pricing is sometimes can be disruptive to any industry. Is this something that ADT is considered or is this somehow would it be any way prohibitive for you considering you rely heavily on a dealer network. Just any color on that would be helpful. Moving from more of a quote based kind of pricing mechanism to more fully transparent kind of pricing menu?

Yeah. We actually see it as a positive. Pete, as you know, our traditional sale is subsidized upfront dollars for a higher RMR and that can skew what a customer thinks we're charging for something versus a lower priced options. So, we actually see this as a benefit that, hey, if you want to pay for the devices upfront, we'd be able to offer competitive monthly fees and we think that's a real positive for ADT. It's also a chance for us to kind of show some of the new services as opposed to just protecting the premises, like I say that personal – the Go had been received very well in the marketplace. And as Jay Darflar from the team introduced new services to our existing customer base, it's another chance for us to educate them on the website. So, we actually think it's a great opportunity for ADT moving forward versus traditionally we've been hey, you call in, talk to one of our reps or have someone come out to your house and that was the way you actually were able to get a price, where there's a lot to these buyers, they'll shop on their own and I feel like we're losing out a little bit of share by not being able to let them see exactly what we could give to them. So, I see it as positive, Pete.

Have you considered with an upfront equipment purchase perhaps introducing some type of financing product as well?

Yeah. We've looked at it for sure. Again, you can imagine someone who's maybe credit score constrained to get into deal like one on the lower monthly perhaps having a raise we're able to finance that purchase of the equipment, where we want them to pay a little bit more for us?

Great. Thanks again.

Hi, Pete. It's Jeff and two other points I'll make, two from your original question, just as I'm thinking back to the last call. We have talked in the past about price escalation being less than 1% growth. That's tracking generally as we originally planned. And then, second point I'd make is that there is more flexibility in installed revenue so to be at the higher end of a range or exceed a range, when we start get into the second half of the year, installed revenue is more likely to drive us to the high end of the range just because monitoring and service revenue if take on a new customer today, we only have four or five months of year left whereas in installed, we get the full revenue whenever we complete the job.

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to Tim for any further closing comments.

Thank you, operator and I want to thank the many people of ADT and our dealer partners for their hard work and dedication that are driving the results. We certainly appreciate everyone joining the call today. We hope you share our enthusiasm over our favorable position in the security industry and our plans to extend our well-known brand and operating ability to new and exciting growth opportunities. Have a good evening and we look forward to updating you again next quarter.

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.