Greetings. Welcome to ADT Inc’s First Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Derek Fiebig, Vice President, Investor Relations. Sir, you may begin.

Thank you, operator and thank you everyone for joining ADT’s first quarter 2020 earnings conference call. This afternoon we issued a press release and slide presentation of our financial results. These materials 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 in our filings with the SEC. Please note that all forward-looking statements speak only as of the time they are made 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 historic and forward-looking non-GAAP financial measures include special items, which are difficult to predict and/or may be mainly dependent upon future uncertainties. For a complete reconciliation of historical non-GAAP to the most comparable GAAP financial measures, please refer to our press release issued this afternoon and our slide presentation, both of which are available on our website. With me today on today’s call are ADT’s President and CEO, Jim DeVries; our CFO, Jeff Likosar. Also joining us and available for Q&A is Don Young, our CIO and EVP of Field Operations; and Jason Smith, Senior Vice President of Finance. With that, I’ll turn the call over to Jim.

Thank you, Derek and welcome everyone to today’s call. I’d like to begin by expressing that our thoughts and well wishes are with all those impacted by the COVID-19 global pandemic. Throughout the crisis our highest priority has been the health and wellbeing of our employees, our customers and the communities that we serve. I’m pleased to underscore the ADT business model is strong and resilient and throughout the crisis, we have continued providing an uninterrupted essential service for millions of our customers across the country. In a few minutes, I’ll share some comments regarding our first quarter. But I’d like to begin by outlining our immediate and comprehensive response to the COVID-19 pandemic, which was executed with an eye toward ensuring ADT emerges even stronger on the other side of these unprecedented events. In today’s slide presentation, we’ve listed many of the specific actions we’ve taken to protect the welfare of our workforce and customers and optimize our approach during the crisis. We significantly enhanced communication for both employees and customers. We deployed protective equipment throughout our field organization. We instituted a health checklist for ADT employees who interact directly with customers. We implemented a number of flexible scheduling options and temporarily discontinued door-to-door sales. The strength of our business model and our cash flows enabled us to provide steady employment for the majority of our employees. Voluntary turnover, as would be expected has significantly improved. Realizing that some associates would be better served by taking voluntary furloughs, we made these temporary unpaid leaves available to our employees as well. This well received practice had the benefit of helping to manage short-term supply and demand while also managing our costs. Notably, we implemented a work-from-home policy that was embraced by ADT employees, including the vast majority of our call…

Thank you, Jim and thank you everyone for joining us today. I will take a few minutes to summarize our first quarter results, share some perspective on 2020 and then will open the call to questions. We are very pleased with our overall first quarter financial and operational performance, especially during this challenging environment. We remain highly focused on generating positive cash flows. And the highlight for the quarter is free cash flow before special items of $173 million which was stronger than the first quarter of 2019 despite more than $65 million in higher cash interest due to the timing of our debt coupons. An important component of our free cash flow growth was efficiency in net subscriber acquisition costs, which were down year-over-year. We concurrently enjoy customer and RMR additions, as Jim mentioned including an opportunistic high IRR group of bulk accounts that we acquired in late March along with the benefits from having acquired Defenders. This results in improvement in our revenue payback, which on a trailing 12-month basis, declined from 2.4 times to 2.3 times in the first quarter of 2019 [ph]. Contributing factors here include the realization of some early benefits of our new consumer financing and revenue model, our acquisition of Defenders continued commercial revenue growth and our ongoing efforts to drive cost efficiencies. We are always focused on delivering strong net SAC efficiency and free cash flow before special items and this is especially true during 2020, given some of the recent changes in our business in the current environment in which we are operating. Before describing some of the other first quarter measures, I want to highlight a few dynamics that are relevant to our reported revenue and adjusted EBITDA and related year-over-year comparisons. First, as a reminder that we sold our…

Cathy, if you could please remind participants how to queue up for the question-and-answer period, please.

Certainly. [Operator Instructions] And we’ll go first to Manav Patnaik of Barclays.

Hi. This is actually Greg calling in. I was just hoping to get a little flavor on potential exposures in commercial and small business part of the operation. Maybe some of the exposures relates to retail or restaurants or anything that we should think about where it’s potentially more at risk? Thanks.

This is Jim. Thanks for the first question. I’ll give you some context on COVID-19. And then hopefully, get to your question. To start with, ADT is really in the life safety business. We have commitments to our customers, our employees, no matter what circumstances we’re in. We’re considered as an essential business because we are an essential business. We’ve never closed and provided uninterrupted service to our customers. While we were doing this, we were focused on the safety of our employees, safety of our customers. We did what a lot of organizations did around communicating and educating the work for flexible scheduling. And then to ensure uninterrupted customer service, we moved to work from home for a large portion of our workforce. Work from home had the silver lining, in that we’re actually going to change our model going forward. We had great employee retention, productivity has been stellar. We see an opportunity for lower real estate costs. And then in terms of how we’re thinking about and managing through the crisis, we’ve made the conscious decision to take care of our employees, focus on the longer term and our business model gives us that opportunity. So I’d say probably the most important takeaway in the answer is we’re a resilient business. We’re operating in a unique environment right now, obviously. We’ve been focused on playing defense across all our businesses, managing costs closely, navigating the expected challenges, especially in our commercial business. But we’re also focused on playing offense. We’re implementing changes like the work from home model, I just mentioned, focused on recruiting best-in-class talent. We’re looking at commercial M&A via tuck-in acquisitions and then even considering high bulk opportunities that are made available to us in the environment at terrific returns. So it gives you some context for how we’re managing the business across both high volume and commercial.

Okay. And then maybe just some color on how important historically door-to-door sales has been to the acquisition model? I imagine a lot of that is tilted towards the warmer [ph] regular month to begin with. So just any color there on how to think through the moving pieces?

Yes. The door-to-door sales, we suspended relatively early in the process. We have started to unwind the suspension of door-to-door in markets where shelter-in-place has been easing. It is most important in our dealer organization. They use door-to-door in a more prevalent way than indirect and it’s somewhat important in the SMB market for direct as well. So it’s been suspended, it’s starting to unwind. The unwinding started about a week or so ago and we’re taking it market-by-market and open it up again.

Thank you.

And next, we’ll go to Toni Kaplan of Morgan Stanley.

Could you talk about April trends in both the residential and commercial side? Just trying to understand if you’ve seen just an acceleration of further challenges or if you’ve seen a stabilization in both of those businesses?

Hi, Toni, it’s Jim. Thanks for the question. Of course, it’s a very fluid situation still. We anticipate Q2 to be the worst of it. There were weeks in April where we were at 80% or so of our normal run rate for gross adds. I’d mentioned it on the prior answer that as states begin to relax shelter-in-place, we’re seeing very early optimistic signs. From a business standpoint, commercial will probably be the most impacted. And the duration of that impact really depends on the duration of the crisis. Not unimportantly, and I think relevant to your question, the commercial business has less than 10% of new business from construction. So we continue to be bullish about commercial over time, but that will most definitely be the most impacting. And then on the residential side, we anticipate will remain strong. We think that our business model performs well in this kind of environment. And overall, we feel we’re in a very good position during an obviously challenging time.

That’s great. And then I was hoping you could also give an update on the 3G conversion. I’m assuming that home visits are required to switch out the radios. And so I was wondering if there is any sort of pushing back on the costs associated with that program just because of not being able to go into people’s houses, tell me if I’m wrong? And just any update on expectations there?

Hey, Toni, it’s Jeff. One thing I’ll add to Jim’s comment to on April trends we’re seeing in March. Jim had mentioned a voluntary furlough program and some other accommodations. We have been able to reasonably well balance our labor with the demand to maintain more efficiency than we otherwise would. Your question is a good question, in that lower activity has led to fewer radio conversions. You’ll note in our 10-Q that we have not changed our range over the life of the program because we don’t see any change over the life of the program. But we have lowered the amount that we expect to spend during the course of 2020 and that’s because we’re doing fewer [indiscernible] homes for other reasons. And in light of an environment, we are not launching proactive the way that we otherwise might have. We’ve always said it continues to be the case that there’s a whole host of things that we’re pursuing and considering to manage this program over time, including some accommodations from vendors, including technology solutions and including trying to do as many as we can. And we’re there for other purposes. So no change to the range overall, but we do expect to spend less during 2020.

Thanks a lot.

Now we’ll go to George Tong of Goldman Sachs.

You mentioned you’re seeing 80% of the normal run rate for gross adds moving through April. Can you talk about how attrition rates and pricing in residential and commercial performed in the month of April as well?

George, this is Jim. Thanks for the question. I noticed some weeks in April where we were as low as an 80% run rate the business overall, I think I mentioned this on the earlier answer, the business overall, we see probably April as the toughest month from a gross add perspective. Attrition was better than our budget. We have some tailwinds because of relocation. Relocation, as you know, is the cause for about one-third of our disconnects. And with the current situation, we have meaningfully fewer relocations. So we’ve got some tailwind on that front. So soft month on gross adds, pretty strong month on attrition. And as I mentioned earlier, commercial is the business of the area that we expect to struggle most with.

And George, one thing I’d add Jeff is that while Jim’s comments are reflective of the company in total and in aggregate, we have observed some market differences at different times in different parts of the country. As you can imagine, as the rate of infection changed or as governmental actions changed, we saw ebbs and flows in one part of the country that’s been here what we saw in another part of the country and more variation than we have had in normal circumstances.

And then any comments on the pricing?

Yes. Generally, pricing has – is more affected by the changes that we’ve recently made. We’re very pleased with the progress that we’ve made in our overall revenue and pricing model during the first part of 2020, that included the introduction of some financing options. We rolled this out nationally in earnest during the course of February. So we were off to a really good start. We’re very, very pleased with what we saw out of the gate, mainly leading to more installed revenue per unit, also leading to enhanced ability to sell more comprehensive systems. So there we had good progress increasing our installed revenue per unit. And while there was some pressure in leads as Jim described, we haven’t changed anything or seeing any material changes in our efforts to roll out and launch that initiative.

Got it. That’s helpful.

And George, you asked about April, but I want to give just a little bit of color on the quarter on both sides the high volume side and the commercial side. On the high volume side, it was a great quarter for us. We picked up some extra accounts via the Defenders acquisition. But even excluding those accounts, we were net positive in adds. And I think that’s the first time in five years and it’s without a change on our focus. We’re still focused on capital efficient growth, still focused on disciplined growth. And so we feel really good about the quarter from a gross adds perspective on high volume. And then in commercial, we had been targeting a 10% growth rate, had a strong start to the year January, February, both at 10%. March started to be impacted by the crisis. And so we came in single-digit on organic growth for the quarter. But we felt great about the start in the pre-COVID experience on commercial and then we felt great about gross adds across the board for the quarter in high volume.

Got it. That’s helpful. And just a quick follow-up on cost actions. Your subscriber acquisition costs are highly variable in nature. Can you talk about some of the more fixed costs that you might be addressing in order to maintain your free cash flow midpoint?

Yes. So George, we have a good amount of flexibility in our subscriber acquisition costs with certain portions of our subscriber acquisition costs are highly variable. So dealer additions, for example, are almost 100% variable. On the direct side, the equipment cost is of course variable. Incremental labor is variable. And then you get into things like overhead that is a bit less variable and there are components of advertising can be less variable. So we’re managing this closely. The door-to-door piece we talked about earlier that’s a 100% variable. So if those aren’t happening in the dealer channel, I mean we’re incurring no cost. And as we managed through the rest of the year, we’re looking to balance the maintenance of our capabilities, the maintenance of certain advertising, the continuity of our workforce against appropriately reducing our cost structure where we need to, to the extent that we see lower demand.

All right. Thank you.

And now we’ll go to Seth Weber of RBC Capital Markets.

I wanted to ask about the comment about the allowance for credit losses. Is there any color if you see that more tilted towards residential or maybe the small business side? And then just as a follow-up, can you give us any color on the profile of the customers that are kind of signing up for the new consumer lending program? Thank you.

Yes. So first, on the credit losses, there was some accounting guidance asking all firms to go revisit their credit loss policy. So we of course did that. The place where we first focused and the most focused was in the commercial and SMB space and we have exposure to a wide variety of industry verticals in our large commercial, some of which are relatively unaffected, healthcare as an example. And others that are more highly affected, mall based retail as an example. So we assessed our provisions. We made some adjustments that led to an increase. And then on the higher volume side, the consumer and SMB side, we would expect - as the economy deteriorates or has deteriorated and there’s job loss, we would expect over time to incur more bad debt than we normally would in SMBs and in residential. We’ve considered that of course, in our full year outlook ranges and it’s too early to draw firm conclusions on how that’s actually going to play out. And then the second part of your question?

Just if there’s any kind of profile, demographic or anything you could share about the customers that are signing up for the new consumer lending program?

Yes, not so much a demographic of the customer, we offer it to all of our customers. There’s nothing noteworthy that I would highlight as to what kind of customer takes it versus doesn’t take it. What I would tell you is that customers who avail themselves of the financing option, you tend to take more comprehensive systems. It’s also noteworthy that luminous is a sales tool for all customers enables us or has enabled us to generate better economics even in the cases where the customer chooses to pay us upfront. So it’s a tool in the arsenal of our sales force that we found effective even in cases where the customer doesn’t end up taking. And another comment I’ll make that is relevant to what Jim was saying earlier. In terms of the first quarter being very strong, it was very strong despite the fact that we made – what were pretty substantial changes to the way we go to market. The sales motion that every individual sales rep has to go through, the script they use, the closing process, they use changed and we had internally expected that might cause us to suffer for some lower volume during start-up. And in fact, we held our volumes very well while we were able to generate more pricing. So we’re very pleased with the progress out of the gate.

Super. I appreciate guys. Thank you very much.

Now we’ll take a question from Gary Bisbee of Bank of America Securities.

Let me just follow-up on that one. What do you attribute the better Q1 adds in the residential monitoring business too? I mean, there’s a bunch of things going on. The consumer finance, although that was part way through the quarter. You talked about several other factors that could impact. What got better from last quarter? Is it tenders in there? You talked about their marketing capabilities? Or what are the handful of things driving that?

Gary, it’s Jim here. Thanks for the question. It’s not any one thing, we had success across the board in the quarter. We’re leveraging the talent that we talked about leveraging at Defenders. The marketing organizations have come together and are working very well. We’re doing a lot more work around data and the use of data and more precisely marketing. We had a terrific quarter from a self-generated perspective, sales being self-generated. It was really a collective of hitting on all pistons in virtually all geographies that came together for us. And I’d say the special highlight would be the marketing prowess and combination of the marketing organizations between ADT and Defenders coming together to be stronger.

Okay. And is there any reason to believe that other than obviously, the impact of the COVID situation is having on consumer behavior that, that would prove to be more of a one-off? Or would you – other than the short-term issue, is there a case to make that this momentum builds for a while?

Yes. We think so. Absolutely. The integration with Defenders is proceeding smoothly. The teams are performing well together. We’ve talked about our new product and we like our new product. DIY is operating from a fairly small base, but we see strength in that area. We’re getting good traction, differentiated product and experience so we are bullish about it, Gary.

And then on the new consumer finance offering, does the fact that we’re going into a recession. Obviously, consumers are going to be in worse shape overall. Does that give you any pause to how this is set up and effectively taking more risk in the way this program works? I know why operationally, it’s better than the pilot you’d had with the third-party taking that risk or you comfortable you can manage that?

Yes. We like this structure better for a whole host of reasons, much more seamless to the customer, much easier for our sales team and we retain good control of the customer relationship. It also gives us more flexibility in downstream in the months to come with the customer for upgrades and add-ons and other things so there’s a lot of considerations, but this is a better structure for us for whole host of reasons.

Okay. And if I could just sneak one more. In a quarter ago, you sort of defend, I should say, pushed off or didn’t provide a lot of commentary on the financial impact of Defenders just other than the, obviously shift from capitalized to expense cost on the marketing front. Now that you own it, is there any more color you can give us like how many accounts came with that? Sort of what the profit was they’ve been earning that now accrues to your benefit? Anything else change because of that? Just looking for a little more color to justify the price paid for that asset?

Yes. So the acquisition of Defenders, of course caused us to transition from buying accounts from Defenders so now we have all the Defenders’ infrastructure and the cost that shows up on the various line items in our P&L. So it caused there to be a pretty significant shift as we expected of expenses into our P&L. If you look in our slide deck at Slide 13, here you can see our net subscriber acquisition spend is down. One of the drivers is that there is no more Defenders’ margin in there. But what you also see is a big shift in that the non-capitalized portion of SAC has increased and the capitalized portion has decreased. But having Defenders is among the contributors to our lower net subscriber acquisition cost. Another thing I would point to is we previously with Defenders and with all of our dealers, we had a revenue sharing arrangement where we paid to the dealer a portion of the revenue on an ongoing basis over the life of the customer. That of course had gone away. And then that the biggest benefit over time is going to be the integration of all the various capabilities, particularly the marketing capabilities for purposes of generating new accounts and we’re off, we believe to a good start there. And then there’s some cost to reduce over time as well.

Thank you.

And next, we have Jeff Kessler of Imperial Capital.

Firstly, you mentioned that one of the things that you’re looking at to grow the business, it is bulk acquisitions. Bulk acquisitions can be good, and they can be not so good, particularly if you’re looking at a [indiscernible]. Well, I’m thinking of is, what are the criteria? What are you holding up? What are those shift points that you’re going to make sure that number one, what is the type of group that you’re trying to buy in the bulk acquisition that may be different for every state? But what are the minimum criteria that you will set to essentially protect yourself against bad things happening from when people change – when people find out that they’re being bought by ADT, and they’re now going to have an ADT router [ph] in front of their house and you try to keep them just get them to stay? That hasn’t always happened, that hasn’t always worked for other companies.

Jeff, it’s Jim. I’ll start by saying this. The North Star for us is capital efficient growth. And so we look at everything through that lens, including bulk deals. In this environment, we have an opportunity to be incredibly selective with bulk. So we’re starting with high quality. We’re looking for high internal rate of return on the deals. We have attrition protection built into the deal. We’re looking for geographic density that helps from the perspective of servicing the accounts. We’re looking for high quality customer base and looking at credit scores to ensure that, that’s the case. But all of the criteria come together and need to align around the objective, which is capital efficient growth. So as I said, the environment is allowing us to be incredibly selective, perhaps replace some of the accounts and that we are currently losing in the dealer channel and efficiently deploy SAC. So is that helpful?

Yes. I would have 15 questions here. Obviously, I’m limited to two. I’m wondering if you can talk a little bit about the - let’s say, bounce [ph] of project. The project of getting their verification technology to a point at which you have partners in this project, there’s obviously in this type of environment, there’s going to be a lot of residential accounts and cities under financial pressure who are going to want find ways of getting money out of any place they can. And there may be more pressure on those places that have more false alarms. What are you doing in that area to work with these other companies to either accelerate or move along the project to essentially verify these alarms and essentially separate yourself from the rest of the industry? A – Don Young: Yes. So Jeff, this is Don. Good question. We just recently launched or piloted something we call Signal Chat, that allows the customers to engage us directly if you text and chat messaging, if you will, to tell us whether or not their alarms are real or false, that’s a major contributor to us to try to verify the alarm. We’re excited about that and it’s going extremely well. We’ve reduced our number of false alarms just on our sample set by up to 30% or 40%. So we’re seeing some really good success there. That’s all part of the journey that we’ve talked about before, Jeff to go ahead and create that ADR, the additional data repository using machine learning and AI to try to go in and leverage other data sources. Data sources that are coming from partners that we’ll be announcing in the future to combine with our own data sources, to basically qualify the alarms as something that either deserves a response or deserves maybe even a higher priority response. That journey continues. We think there will be more incremental deliverables in the months ahead.

And it’s good to hear that pilots have started, that’s encouraging. And look, I’ll get you guys later. I have other questions, I don’t want to get into the weeds too much. Thank you very much. I appreciate it.

We’ll now go to our last question from Kevin McVeigh of Credit Suisse.

Great. Jim. Great to your hear voice, [indiscernible]. Any thoughts on what drove the decision to shift to Mizuho from Citizens? And are you still running the Citizens program? Or is that kind of - is that all kind of done by the wayside in favor of what you do with Mizuho?

Kevin, when we rolled out nationally, we rolled it out under an installment program that does not include the customer interacting with the third-party bank at all. So the customer interacts with us. We offer a variety of alternatives that include 24, 36-month option, 60-month option, a variety of options. We then are partnered with Mizuho, who enables us to generate very similar economic benefits. And in fact actually better economic benefits. But by collecting the cash in batches instead of every single individual loan. So much smoother for our customers because they don’t have to administer and deal with two separate parties. Easier as I said earlier for our sales force and that’s what we rolled out with nationally and a lot less friction in the process and what we had seen previously when there are multiple parties involved.

Got it. And then I guess on the installation side, I guess probably are you seeing any impact in terms of - how would you think about installations on the commercial versus a very residential side, getting some of the lots that do better place and probably to continue to install? Do you consider essential or just any thoughts around that?

Yes. A lot more effect on commercial. So as Jim was alluding to earlier, we’ve seen leads where our volume was down 20% or more. But in commercial and certain verticals, that’s been more pronounced. And again, some verticals are relatively unaffected. But in some verticals, for periods of time, we couldn’t get in at all. So it’s a more pressure on installed in commercial businesses in certain market segments within commercial than in residential overall.

Got it. And then just my last one would be on Defenders, have you seen any impact on the core ADT organization culturally from a marketing perspective? And is that kind of fully entrenched at this point? Or are you still on the integration phase from an internal perspective?

I’d say, Kevin, on a marketing perspective, we were out of the gates fast. The teams culturally have come together nicely. As I mentioned earlier, the entire integration is proceeding smoothly. We’re confident, we’re going to see the business case uptick that we had planned when we acquired Defenders, couldn’t possibly be more pleased with the high performing talent. They’re every bit as strong as we knew they would be. And I would tell you that marketing has led the way. They were the first to come together. They’re working really well together. I think there’s a lot of areas where there’s complementary skills. And the net takeaway here is it’s out of the gates fast and doing well.

Fantastic. Thank you.

And with that, I would like to turn the call back to our presenters for any additional or closing comments.

Thanks, Cathy. I want to thank everyone again for joining tonight’s call. I’d like to conclude by underscoring two points. First, while many companies are essentially focused on survival or simply managing through the next quarter or two, we’re fortunate that ADT’s business model and resilience in this environment allows us to instead focus on ways we can accelerate our revenue and free cash flow. Our objective is to emerge from the crisis even stronger. And sitting in early May, we’re confident that, that objective will be reached. And then finally, once again, I’d like to underscore my appreciation to our employees and dealers. I’m amazed that the extraordinary things that they’ve collectively achieved over the course of the crisis. I couldn’t be more proud of our employees and couldn’t be more proud of the company. So thanks again, and we’ll look forward to our next quarterly update with you.

With that ladies and gentlemen, that does conclude today’s call. We’d like to thank you again for your participation. You may now disconnect