Thank you for standing by. This is the Conference Operator. Welcome to ADT Incorporated Third Quarter 2020 Earnings Conference Call. As a reminder, participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Derek Fiebig, Vice President, Investor Relations. Please go ahead.

Thank you, operator and thank you everyone for joining ADT’s Third Quarter 2020 Earning Conference Call. This afternoon we issued a press release and a slide presentation on 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 and uncertainties that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These risks included 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 also 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 also available on our website. With me on today’s call are ADT’s President and CEO, Jim DeVries; our CFO, Jeff Likosar also joining us in the room and available for Q&A is Don Young, our CIO and EVP of Field Operations; and Jason Smith, SVP of Finance. With that, I’ll turn the call over to Jim.

Thanks, Eric and good afternoon, everyone. We appreciate your interest in ADT. And we're glad you've joined our call today. I'll begin by highlighting our results for the quarter. I'll touch on some growth opportunity areas for us and of course, I'll share an update on our partnership with Google. Jeff will then cover our financial results. ADT had an outstanding third quarter, a testament to the strength of our business model and made possible by the efforts of our 20,000 associates who have served our customers exceptionally well throughout the year. I'm pleased with both our continued operating performance and our financial results. We are increasing our full year 2020 outlook for revenue, adjusted EBITDA, and adjusted free cash flow. We see continued consumer demand in the products and services ADP provides. We're seeing the benefits of near and long term external demand catalyst, the urbanization, household formation, growth and smart home adoption and escalating consumer demand for security. We're also leveraging our strong operational execution and driving internal initiatives leading to our growth. Our progress has led to year-to-date net positive subscriber goals and were positive for the third quarter on a completely organic basis. How gross RMR additions were one of a number of highlights for the quarter of 10% in the U.S. on a year-over-year basis. We benefited from the trends I mentioned a moment ago as well as improve marketing efficiency, sales conversion rate and self-generated field sales volume. Our dealer performance was exceptional. And we're just beginning to see the growth benefits of our DR Horton relationship. With the introduction of our new DIY products, this part of our business also continues to grow. And we're very optimistic about DIY going forward. Capital efficient growth remains our North Star. Revenue payback a key measure…

Thank you, Jim and thank you everyone for joining today’s call. As Jim mentioned, we have performed very well during the challenging 2020 macroeconomic environment and we are very pleased with our overall third quarter results and our improved outlook for the full year. We are even more excited about the actions we have taken and progress we have made during 2020 to position ADT for long-term growth and success. Our strong performance this year continues to demonstrate the resilience of our business and the fortitude of our teams who have risen to the challenge and remain passionately focussed on delivering for our customers in both the near and longer term. I will summarize some of our key financial and operational measures along with a brief update on our outlook and will then open the call for questions. Our total reported revenue in the quarter was essentially flat year-over-year, despite the 2019 distribution of our Canada operations, which previously represented approximately 4% of our revenue. Installation and other revenue increased by $46 million, driven mainly by higher reported residential outright sales revenue resulting from the Defenders acquisition. This increase was partially offset by lower installation revenue to commercial customers, resulting from the COVID-19 driven economic challenges we have encountered in that part of our business during 2020. Monitoring services revenue declined by 4% on a total company basis, and was up slightly year-over-year excluding the effects of the Canada Disposition. Our ending recurring monthly revenue or RMR balance, a primary driver monitoring and services revenue grew by approximately 2% in the U.S., compared to the prior year, including an increase in commercial RMR. Our highlight in the quarter, which Jim already mentioned, was improvement in our gross revenue attrition, which declined by approximately 60 basis points versus the prior year…

Thank you.[Operator Instructions] And our first question comes from the line of George Tong with Goldman Sachs. Please proceed with your question.

Hi, thanks. Good afternoon. You're accelerating the launch of the professionally stalled co-branded offerings with Google into doing line [technical difficulty] partnership with alarm pulse?

Pardon George. We didn’t – there was some interference on our end, could you repeat that question?

Sure. So again, you talked about accelerating the launch of your professionally installed co-branded offering with Google into 2021. Can you elaborate on the product roadmap for the Google partnership and how it may pertain to your partnership with alarm/pulse?

Sure. So I'll give a little bit of detail on the platform decision and the roadmap and then ask Don to add anything that I may have missed. So a few points to make; first, the discussions with alarm.com that we had, in accelerating the roadmap results in a great outcome for both parties, and included the launch of a first generation ADT Plus Google offering developed to the commitment by alarm.com, that will result in several things. First, it leverages the foundation, and extends command and control until the end of 2022. And then beyond that allows that platform to support our end customers for a very long time. And we believe these customers which command and control customers with integrated nest product and services will perform well on an attrition basis. The second thing Integrated Google Nest devices, and Google Video services will be available and accelerate our go-to-market with a co-branded offering in the second half of 2021 instead of mid-2022. So in short, the agreement that we put in place and negotiate with alarm.com allows us to pull forward, many of the benefits that are that are resident in the ADT Plus Google partnership. Two quick additional points. First, the platform decision and the roadmap really allows us George to control our destiny, our partnership alarm. com has been extraordinary but we now think, in coordination with Google that we're better positioned to own and develop our own platform. Two reasons for that, we think at a high level, we'll capture efficiencies, efficiency benefits as a result. And then secondly, the point I made earlier about controlling our destiny, we can better navigate our own unique product roadmap to create differentiation for us in our in our products and services in a better way.

Hey George, this is Don. Jim covered it very well. Our Pulse and our command, as we've already talked, or Jim already talked about, you have fully integrated in that second half that invites all the Google products leads into kind of our infosystem. But regarding our new platform, just to add a little bit to what Jim said, we're looking not just to go to make our smart platform smarter, we're looking to make it more helpful. And that's leveraging Google's progress in ML and AI to fuel what Google calls and in computing. And you can imagine for a moment in today's world, we have to educate our customers, make them smarter, smarter your delivery system in different ways with rules and automation, that kind of thing. One of our customer is not smarter, necessarily, but more comfortable sharing information, regarding the tool that can be a competing opportunity, and actually print the rules automatically, without the customer having the intelligence to do it by themselves. And we are going to see that as a way -- the customers grow value in their system without the necessary investment of additional devices or even educating them on how to even move themselves.

Got it. That's helpful. You generated positive net subscriber growth organically in the quarter. Can you discuss the sustainability of this -- of this growth in net subscribers in the top factors/initiatives to fuel this growth going forward?

Thanks, George, it’s Jeff. We feel really good about our performance in the quarter. We talk often about balancing various objectives in pursuit of strong ROI over the long term. And in this quarter, we delivered on all of those objectives, we reduced our SAC spending, we improved our customer acquisition efficiency, we exceeded our objectives. And as I said in my prepared remarks, we were really excited that we did that while generating such strong cash flow. So there's a whole variety of factors that goes into that, and the many are to do with their own performance has also benefited from some of the macroeconomic and macro environmental factors. And we think many of those will stay with us and that we will have some wind at our back for a period of time and continuing to drive improvements in the business as we head into 2021. And that's what we're focused on doing.

Got it. Thank you.

And our next question comes from the line of Seth Weber with RBC. Please proceed with your question.

Hey, you guys, good evening. I guess just first on the Google announcement. Can you just, I'm just trying to make sure I'm understanding, is the pull forward, is that a more simplified version of what you were planning on rolling out in sort of mid 2021? Or is it basically the same, the same offering, it just got accelerated? And then I guess, you just talked to how that the acceleration, ways on the $150 million marketing spend and how we should think about timing of that from both you and Google?

Sure. Seth, it’s Jeff. The one thing we’ll roll out with alarm.com and Google, with video is a part of that, is part of that offering, where we will allow a go-to-market with ADT plus Google, in the second half of 2021 is very nearly what we had anticipated, rolling out in mid-22. It's not precisely what we have been trying to do along in not 22. But it has almost all of the benefits and features that we had, that we had envisioned, and we'll be pulling forward. In terms of $150 million from Google that comes in three tranches. The second and third tranche are dependent on volume commitments that we're exceptionally confident we’ll achieve. The first $50 million will go towards product development, marketing, training, in some way, in some proportion that we've not yet finalized. A healthy portion of it will be, will be product development, but exactly how much is yet to be determined.

Okay, and then maybe just switch to the commercial side for a second. I mean your commentary was pretty positive about the backlog and sort of sequentially improving trends there. Can you talk to, that was a part of your business that was growing, double digits pretty nicely, pre-COVID? Do you envision that getting back to sort of a double digit revenue growth once the environment kind of settles back down?

Absolutely. We're very optimistic about the commercial business. Total revenues up sequentially and in Q3, we believe we'll return to growth in 2021. The business includes a large recurring revenue base 30%, 35% of the revenue in that business is recurring. So it's boring and, durable, highly diversified stuff. I think we're just shy of 250,000 customers. In the commercial business, we have upside in new and growing verticals, healthcare, education, government, critical infrastructure. And as we talked about a number of times before we have the best service in the space, and that's the most critical source of differentiation. So we're, we're optimistic about the commercial space and expect to grow again next year.

Perfect. Appreciate guys. Thank you very much.

And our next question comes from the line of a named Pat Knight [ph] with Barclays. Please proceed with your question.

Hi, this actually Greg calling on. Maybe this thick on the commercial side, I just wonder what you're seeing from small business customers. As we go further along here and kind of the stimulus wears off. Are those guys hanging in and what's the outlook factor there?

Yes, we feel good about small business. Your question with regard to how they're doing it, the stimulus wears off. We, we so far, feel good about attrition level delinquency in that area. Our business has held strong. And generally speaking, we feel great about, about the SMB business, and it continued to perform in a healthy way for us.

Yes, the way I might describe it is that our small business customers in general have performed more analogous to our residential customers into our larger commercial customers.

Okay. That makes sense. And then maybe, again, on the Google partnership. I think you said that, very nearly what you anticipated for 2022. Any color on, what will be the things that need to be added from there, what's missing versus initial expectations? And how do you continue to grow once you get the product out in 2021?

Yes, this is Don. So we have mentioned before, we're going to have the Google privacy fully integrated with our command and control and pulse platforms. On the newer platform, we're looking to go beyond this device integration, we're looking for leverage. Now, then, I mentioned beforehand in computing, in addition to something I didn't mention, which is alarm verification, and great opportunity to go in and collect data and analyze it, and help verify even score alarm activity in the future. We think that's an added value to our customers as a result of some of the things that police departments have across the country, first responders. And we're excited about that. There's also a bit of an imagination phase that begins in 2022, to kind of, opportunity in the possible and I'm looking forward to that.

Okay, thank you.

Our next question comes from the line of Gary Bisbee with Bank of America. Please proceed with your question.

Hey, this is Jay [ph]. And I’m on for Gary today. My first question just you’ve marked 300 million of the 450 from the Google investment for debt reduction, is it safe to assume the remaining 150 will be used also, for these two initiatives you guys have come in with Google?

Yes, so we said, a minimum of $300 million. We feel really good about our capital structure and the progress we've made over the last couple years. We've done, I think it's four refinancing transactions between 2019, 2020 collectively reduced our cost of debt by almost a full point. And the Google proceeds because of our strong cash generation, as we said, are available for a combination of debt repayment and growth. And the reason for now we're saying $300 million or minimum there are because we are continuing to evaluate the some of the questions that have already come up and the exact amounts and timing here in addition to some other things related to Google, that are on our radar screen for the fourth quarter headed into next year.

Okay. So that that could potentially be a reference to that account acquisition that were mentioned in the slide?

Yes. Right. I’d say is the normal course of business things you might pursue M&A that we may pursue, and just trying to remain flexible and nimble as we work our way through budgeting and planning for 2020 loans. And we look out into the horizon, not just for the full quarter that into next year. And, again, we set a minimum $300 million, but depending on how that plays out, the exact timing, the exact mechanics and even the exact amount, a little bit still to be determined.

Okay, and then just with regard to Defenders, could you give an update on how it's helping driver drive customer acquisition and some efficiencies?

That's going on, it's going very well. The integration phase resulted in us capturing both the cost synergies and the revenue synergies that we anticipated. One of the great strengths of Defenders was their direct marketing capability. And together with our own marketing organization, we're seeing terrific benefits in terms of SAC efficiency. And, and I'd say feel great so far about the about the integration of Defenders.

And one thing I would I would add, and I love when people ask that question, we even talked about it internally. We have so many things that are working in the positive direction that it becomes difficult to disaggregate each of those things to figure out what's the precise contributions of each one. But when you look at it at all, improvement in our subscriber acquisition efficiency, you have the Defenders integration on some improvements that we've made in marketing more generally have the benefits of our new pricing model that we rolled out just in the first quarter of this year. And then and then also exposure to some of these trends that you see on the slide, slide five, on our deck around the organization, household formation and each of those dynamics. So we feel really good about all of them. But to be honest, we struggle to precisely parse out our performance into the exact contribution from any one of those factors.

Right, thank you.

[Operator Instructions] Our next question comes from the line of Jeff Kessler with Imperial Capital. Please proceed with your question.

Thank you. Could I could I follow on with regard to some of your metrics, your cost to create and then again, and your cost and your close to serve and attrition? So to some extent, they are they are interrelated. Getting good customers, obviously, potentially make some longer live. But what I'm asking about is beyond Defenders, and the getting into your third party or your third party financing. How are you using that? And, and how are you finding the ability to effectively make it efficient that they take the right, they finance the right customers for you, and you either take on or finding those other customers that don't, that don't meet, don't meet the standards so that you don't have, so you don't have upticks in nutrition so that everybody knows who's on, who's playing them on what board here?

Jeff, this is Jim. I'll take the attrition question, answer it a little more broadly, and then come back to a point on Defenders. And then you touched on consumer financing and how that's going off. Just a little comment on [Technical difficulty] consumer financing, sort of [Indiscernible] in a high level on attrition. We feel great about retention in the third quarter. As we announced it was a record low 12.9% for us the improvement was super widespread across geographies, all categories across all.[Technical difficulty] S&B [ph] was flat, but residential core commercial improved. But, but a couple of reminders on attrition and one of them precisely addresses your question. The first is, while attrition is an important metric and all attrition, bad attrition. It's only a part of the value equation along with other measures cost to acquire probably the most important. And then secondly, and to your question when we acquired Defenders, we continue to receive chargeback benefits for accounts sold to the acquisition. And that benefit expires over a 12 month period and will be a slight metric headwind in the subsequent 12-month period for us. So we feel great about customer retention. We're optimistic about it from a long term perspective, especially as we enter the Smart Home space more assertively. We know more customers use their systems. The more devices are plentiful in the home, the more the systems are integrated into their daily activities, that retention improves but because they are charged back some Defenders will go away. In January, it will be a slight metric headwind in the in the subsequent 12 months.

And Jeff, start of your question, where you even talked about cost to create cost to serve? And yes, it's kind of similar, similar to George's question. I mean, those things along the growth, along with cash generation are what we seek to balance every period. We talk about how we're not trying to optimize anyone, but in the third quarter, like we achieved or exceeded our objectives on every single one of those, so we feel really good about our performance in that regard. And then the you know, there's some noise in year-over-year because of the candidates position to Defenders acquisition, roll out of the via financing and ownership model that goes with it. But really good about overall performance, is the way we feel. And then when you ask more specifically about financing in customer selection, I would emphasize that the growth that we've generated in our RMR additions is coming at higher average install revenue per unit. And a significant driver for that, notwithstanding my earlier point about the difficulty parsing every factor, but one of the drivers is for sure our new pricing and our financing model. So we're using as a selling tool. Buying large is a selling tool for all customers. But all customers don't end up taking the financing options and in many cases we use it as a selling tool, but we end up collecting up front in cash, and then your question about how we select it's based on a combination of the customer, and the order size and the credit scoring. And it's the same kinds of things that we've used, historically. And then just a reminder, in terms of how it works, the customers relationship is with ADT, we offer the financing ADT team and then we monetize it in partnerships with Mizuho bank with an advance rate that is based on some of the same characteristics I just described. But we're only two full quarters then off to a really, really good start. And we'll continue to fine tune exactly how we present the offer to maximize the effectiveness and utilization over time.

Okay. My follow up is -- I thought my follow up obviously could be with Don, it would be a 10 minute discussion. So I don't want to do that at this point. The follow up question is actually on your commercial industrial business. I know it's been touched on a couple of times, but could you could you park? Could you give us a little bit more clarity on which areas maybe which verticals, or which types of accounts you have -- you have national accounts, businesses? And then you have you know, and then you have, like a large one, one campus types of businesses? Where are you able to start seeing people be being able to get on premises to start installing again? Or where are you able to negotiate agreements where to make it a little bit easier. Now, that's given the fact that this pandemic is not going to go away anytime soon. And yet companies are learning how to deal with it. What are you doing to learn how to deal with it on the commercial side so that you can, you can keep those keep those numbers going.

Now, Jeff, it's Jim. I know the -- I think as customers learn to deal with the pandemic, we realize the benefits as a result. And our ability to get on premise today is markedly better what our versus what our ability was three or four months ago. We think there's a ways to go for the overall market, as a pandemic and economy are still somewhat unknown. But we finished Q3 with strong backlogs, but the highest of the year was the equivalent September 30 of this year to September 30 of last year. And we have solid sales and install in October as well. So it's broadly diversified, much of it tied with getting access to the premises. And as I mentioned earlier, we feel really good about the commercial business and returning to growth next year.

And, Jeff, I would I would add to that. We're building a little bit on some of what I was saying earlier about all the factors that go into this year between Canada and Defenders new pricing model. It's also of course, a higher degree of uncertainty with COVID-19 And some of the challenges to the top line, especially in their commercial business, it partially offset by some benefits from lower spending in other parts of the business that perform very, very well. It's increasingly clear that we have this exposure to these favorable environmental trends. But as we go into 2021 planning, for sure it is a higher degree of uncertainty that we're managing through to build on those trends and manage that uncertain environment, including commercial recovery returned to normal behaviors more and more generally. And we're really focused on strengthening our capability to grow our subscriber in our addition for the long term, including consideration of investment in the Google partnership platform, other initiatives. And, and you will, of course talk more about the future in 2021 on our on call early in the New Year.

Great. Thank you very much.

Next question comes from the line of Tad [Indiscernible] with JPMorgan. Please proceed with your question.

Hi, I'm wondering if you're going to take any steps to better align your compensation to ESG metrics and execution. And then as a follow up to that, I'm wondering what is being done at the board level with regard to the underperformance of the stock? Thank you.

Yes, I'll answer the question. The – so in terms of management compensation we have a compensation program that is heavily weighted towards equity. The management team is exceptionally aligned to shareholders. And, and we think that the way that the annual incentive plan is designed sufficiently incense management to drive lead indicators that will ultimately be realized in the stock price. On in terms of your question on the board, we're not prepared on this on this call to talk about board interaction and planning.

And we have no further questions from the phone lines at this time.

Okay, Jim, if you want to make some closing remarks?

Yes, just a couple of things. So needless to say, we're very pleased with our operational and financial results. Our 10% growth in RMR additions, record low revenue payback of 2.2 years mix [ph] of growth, record low attrition all serve to underscore our strong operating capability and a really highly durable business model. The Google partnership is off to an outstanding start. And we're very optimistic about our trajectory going forward. So thank you everybody, for calling in tonight and have a great evening.

This does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.