Greetings. And welcome to ADT's Third Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Jill Greer. Thank you. You may begin.

Thanks, operator. And good morning, everyone. We appreciate you joining ADT's third quarter earnings call, which we'll also use to discuss our pending acquisition of Sunpro. Speaking on today's call will be ADT's President and CEO, Jim DeVries; and our CFO and President of Corporate Development, Jeff Likosar. Jim will provide an overview of our recent performance and discuss our growth strategy and the pending Sunpro acquisition. Jim - Jeff will then cover our financial performance. Joining us for Q&A are our Chief Operating Officer, Don Young; and Ken Porpora, EVP of Finance. Earlier this morning, we issued a press release and slide presentation of our financial results and also a separate release with the details of the Sunpro transaction. These materials are available on our website at investor.adt.com. Before we start, I do need to tell you that today's remarks include forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those forward-looking statements. Some of the factors that may cause differences are described in our SEC filings. We'll also include non-GAAP financial measures on the call. For a complete reconciliation of our non-GAAP financial measures, please refer to our earnings press release. And with that, I'll turn the call over to Jim.

Thanks, Jill, and welcome, everyone, to our call. This is an exciting day for ADT as we announced just this morning that we have reached an agreement to acquire one of the largest residential solar companies in the country, Sunpro, in an all-stock deal. ADT will be expanding our residential footprint into the fast-growing residential solar space. Jeff will be covering our third quarter financial results in more detail shortly, but I'd like to share a few highlights of the quarter from my perspective. First, the impact from our growth initiatives is reflected in our revenues, with RMR additions up 7% for the quarter and 19% to date. Second, the rebound in our commercial business continues, with revenues up nearly 18% over last year. Third, we're making good progress on the innovation front with the Google relationship continuing to move forward, and just recently, an exciting new partnership with DoorDash, which leverages our in-house developed mobile platform. Fourth, 3G replacements. Our outstanding field operation leaders and technicians have executed well on our 3G objectives. We have successfully completed 85% and remain on track for full completion for AT&T customers by the February 2022 sunset date. Finally, overall, we remain on track to deliver on our 2021 commitments, while simultaneously building a solid platform for future growth. Regarding our growth platform, I want to spend some time talking about the transformation we're executing at ADT and how our move into the residential solar segment complements our strategy. ADT is an iconic extraordinary brand, one that is underpinned by the trust our customers place in us. Historically, our brand has been centered around in-home security. ADT is evolving to more of a lifestyle and consumer technology brand, a brand that will deliver safe, smart and sustainable solutions for our ADT customers by…

Thank you, Jim, and thank you, everyone, for joining our call today. With more than three quarters of the year complete, we continue to demonstrate solid performance from our growth initiatives and our broader operational execution. Our increased investment in customer acquisition continued to deliver very strong results, with gross additions to recurring monthly revenue, or RMR, up 7% year-over-year for the third quarter and up 19% year-to-date. The resulting RMR base grew to $356 million, which is an increase of $15 million versus last year and represents almost $4.3 billion of durable annual revenue. We remain on pace to achieve our mid-teens full year growth objectives for new additions to growth RMR. Total company third quarter revenue was just over $1.3 billion, with adjusted EBITDA at $554 million. Our year-to-date performance on these measures is tracking ahead of our original plans. And we have improved our full year outlook with newly updated ranges towards the upper end of our previous ranges. RMR growth, improved commercial performance and general cost controls all contributed positively to our results through the first three quarters. Offsetting headwinds versus 2020 included a non-cash effect of our ownership model changes, technology investments and higher service cost trends, which we have improved in recent months. As the only large scale national player in our space, we acquire customers through several diverse channels and sales tactics. Our dealer channel has been particularly strong throughout 2021 and has contributed a larger percentage of new RMR additions than we planned. Dealer-generated accounts deliver solid returns and include attrition protection for the first 13 months. Due to our strong customer retention overall, our average customer tenure is more than 7 years. This is significantly beyond our 2.3 year trailing 12-month revenue payback and illustrates the long tail benefit of our…

Thank you. [Operator Instructions] Our first question comes from Gary Bisbee with Bank of America Securities. Please proceed with your question.

Hey, guys. Good morning. Some exciting news there. I guess let me start with a question on Sunpro. The - obviously, it grown dramatically. But can you give us a sense how profitable is it right now? And when you think about growth over the next few years, how are you thinking about that? Is it - is that 100% CAGR sort of sustainable? Or do you think that the business is likely to slow as it matures in the next couple of years? Thanks.

Good morning, Gary. It's Jim. I'll give a couple of just contextual responses, more at a strategic level. Ask Jeff to comment as well. Obviously, we're super, super excited by the acquisition, all the opportunities. We're especially excited given the growth that they've had, positive EBITDA and cash flow. We've been attracted to the solar space for some time. For us, this is an opportunity to increase TAM in an adjacent market and really accelerate our growth. We were attracted to the industry for all the reasons you would expect. There's a massive shift underway driving the residential solar adoption, overall transition on renewable energy. We were specifically attracted to Sunpro for a handful of reasons. The management team is first rate, fantastic customer service. And we think we can bring some assets to the party that are from ADT that can further accelerate the growth, leveraging our brand, cross-selling to our base, cross-selling to our new subscribers and bringing scale advantages that ADT has and that Sunpro will be able to leverage. So - and I'll ask Jeff to address some of your specific questions.

Yeah. So same here. We're very, very excited about the space, the expanded footprint, the larger size of the market available to us. One of the attractions is that they have been very fast growing company, but have been profitable, generated positive cash during that growth. And implicit in our comments where we talked about the approximate multiple, you can infer from that, that we're anticipating forward EBITDA in the $80 million range. We shared in our materials, their trailing 12 month revenue is a little bit less than $700 million, they've grown during the year. So the run rate from a revenue perspective is approaching $1 billion. Strong cash conversion, and we're expecting continued growth. We're very excited by the contribution and what it means for our future. And then we'll, of course, share more detail once we get the transaction closed, concurrent with the rest of our 2022 guidance.

Okay. Great. And just maybe another follow-up on that. So I understand how you could likely have a meaningful impact on their ability to acquire to customers. Beyond that, how do you think about synergies, Jim I think you did say help [indiscernible] in both directions, I don’t know if there is an obvious play as to how we can help core ADT. And beyond that are there other synergies we should think about that you think support the transaction? Thank you.

Sure. Thanks, Gary. I think principally a revenue synergy play for us. There's most definitely some cost take out opportunities, much of it in negotiating with supply chain, helping with things like talent acquisition, just bringing the scale that ADT has to bear on a meaningfully smaller company. So we think we can get some margin expansion by deploying those cost synergies. But principally, the big opportunity for us is on revenue synergies. The - what I mentioned earlier, that the opportunity to cross-sell into our base, the opportunity to cross-sell to new subscribers. We're looking at some really interesting things around bundling smart home and solar together. We've done a good bit of research with our base with solar in tenders, with non-solar in tenders. We know that our brand plays incredibly well. And we're bullish both on the revenue synergy side, and then there's some cost synergies to pick up as well.

Great. Thank you.

Our next question comes from George Tong with Goldman Sachs. Please proceed with your question.

Hi, thanks. Good morning. On the Sunpro acquisition, just to touch on the last point, on revenue synergies, you talked about the opportunity to cross-sell into the base and to bundle. Can you potentially give us a quantification of how much this acquisition can lift underlying growth, both at ADT and at Sunpro?

I'd say, George, we're not - beyond what Jeff shared, we're not ready to give guidance on 2022. The - we think we purchased this at a really attractive price, about 10 times forward EBITDA. So that implies an EBITDA next year of about $80 million. But beyond that, we're not ready to share specific numbers. One of the things that I will share though is we have a number of our dealers who are currently selling solar. Obviously, it's not ADT Solar. They've got relationships with other companies. But the cross-sell experience has been really successful. And really, in suppliers' confidence in us, that we're going to both in direct and dealer be able to cross-sell to the base and new subs. We'll not really give specific numbers today. That will be embedded in the '22 guide. We'll share much more at Investor Day in Q1. But beyond that, not more than $80 million in EBITDA next year.

And one thing I'd add, George, I'll add to that, that we evaluated the company, a variety of different financial models, as you can imagine. We effectively underwrote it without necessarily counting on synergies. Jim says, we think we bought it for a good price, that's true. I mean, it's especially true if we model in synergies. I also want to emphasize that the seller's consideration is via ADT stock. So it became clear in the conversations and part of buying it for a good price. So the sellers were highly attracted to ADT stocks. So that also doesn't quantify the synergies, but it just gives you a sense that both parties are highly attractive to what the two firms can do together.

Got it. That's helpful. And then looking at revenue payback, it looks like revenue payback went to 2.3 times in the quarter. That compares with 2.2 last quarter and 2.2 last year. And you also narrowed the free cash flow guidance range to reflect more of a focus on growth. So given those moving parts, can you talk about your overall efficiency in acquiring customers? Are you seeing improving efficiency? Or any changes in how efficiently you're able to deploy your SAC?

Hey, George. It's Ken Porpora here. I'll take that one if it's right. Yes. As the guys mentioned, we are up 7% year-over-year in RMR growth. Again, last year with COVID impact, I actually look at it versus 2019 as well. Versus 2019, we're up about 17%. So good growth in the top line RMR added. What you're seeing there is some of the payback that you see at 2.21 to 2 to 2.3. A lot of that is our dealer mix, dealers having a killer year and a killer quarter, directed up as well. But dealers - that mix is a little more expensive for us. But if you think about the economic returns, these are healthy returns. So we're happy with all of that additional RMR added that we're getting that pushed the 2.2 up to 2.3. This - the average customer life extends over 8 years, so good economic pieces. If you think about the future and where we can bring some of the efficiency and kind of where you're going with it, the revenue payback over time, especially with some of the bundling of products, the Google innovation that we have going, as well as thinking forward now with Solar, it brings opportunities, it bring greater efficiencies and greater upsells from a revenue standpoint, as well as cost efficiencies. So again, we like where we're at right now. Good strong economic returns, but still have some leg room to improve as time passes.

And George, I'll add. You mentioned guidance, we're really pleased with our performance this year and executing overall as planned. We - as you know, we tightened our range towards the higher end of our initial range on revenue and adjusted EBITDA due to the RMR growth in many respects, come from the SaaS investment. So if you just look at the year on balance, and why we were able to do that, our RMR adds up in the mid-teens. The balance is up $15 million. That equates to $100 million annualized, the revenue at the higher end, EBITDA at the higher end. We're close to the finish line on 3G and LTE commercial underweight. So while we have a couple of months left, we're very pleased with our performance during the year.

Very helpful. Thank you.

Our next question comes from Toni Kaplan with Morgan Stanley. Please proceed with your question.

Hey, guys. This is actually Jeff Goldstein on for Toni. In the slides, you mentioned that M&S revenue benefited from an increase in average pricing. Is that more given the mix shift towards interactive products? Or are you also getting price on a like-for-like basis across your services? Just how should we think about the pricing environment overall, especially in the face of rising inflation in the market as a whole right now?

Jeff, largely, it's an increase in some of the interactive services, especially video take rates are high, continue to be up quarter-on-quarter, year-on-year. The average price that we're selling for our base services continues to be pretty confident at this point. But we are looking at there as some of our service revenues for like time and material build. So when we go in and service a customer in their home, we are taking a hard look at that and what we charge for some of that going. But the main increase that you're seeing there is the mix in interactive, specifically video.

Okay. Fair enough. And then I'm curious on the labor side. Are you running into issues, either around employee turnover or ability to find new tech? And if that is the case, do you think you've sacrificed any revenue because you couldn't have signed the labor? And then any expectation on your end when you would expect any labor pressures, if there are any, to dissipate going forward? Thanks.

Yeah, Jeff, it's Jim. It's - so labor is absolutely an area of focus for us. I think in the US, there's now something over 9 million open jobs. Like many employers, we're working through talent acquisition strategies across a broad range of our positions, technician sales, customer care, I would say to date, labor shortages have had an immaterial impact on sales, and a material impact on our technicians and ability to install, but it's a daily challenge for us. And part of the trial isn't just lack of candidates, but a mismatch between the skills of the candidates available and those that we need. So net-net, labor and a tight labor market are on our radar screen, as is talent acquisition, making sure that we've got an attractive employee value proposition has never been more important. To date, no material impact for us.

Got it. Thanks for the color.

Our next question is from Ashish Sabadra with RBC Capital Markets. Please proceed with your question.

Thanks for taking my question. So Jim, as you mentioned, ADT has embarked on several initiatives over the last several years, including Commercial, DIY, Google and now Sunpro. Can you just comment on the management bandwidth to manage so many different initiatives? And maybe just a follow-up to that would be also, are there areas - now as you think about your portfolio, are there areas, such as commercial security, which may not be as core with the Google DIY and Sunpro, and so are there areas where you think that could be potential ripe for -- potential medias for divestiture as well? Thanks.

Sure. So Ashish, from a management bandwidth perspective, we've been incredibly fortunate that the companies that we acquire have the management teams, the leadership teams of those organizations have joined and stayed with ADT. That's the case in the acquisition of DIY. That's the case with Red Hawk. That's the case with a number of tuck-in acquisitions that we've done in Commercial. And we feel really good about the Sunpro leadership team joining ADT going forward. In addition to that, we'll be operating ADT Solar really somehow autonomously. The integration will be pretty limited. We want to ensure that the organization is getting all of the benefits of ADT, that stays nimble and focused on growth. And I think from a combination of retaining the leadership talent at Sunpro as with our Commercial acquisitions and operating the business without a heavy lift and integration, we're going to be able to handle it from a bandwidth perspective.

That's very helpful color. And maybe if you could just also address the question on the portfolio rationalization. Are there, you believe, certain businesses within ADT which may not be as core given the focus on the residential business?

You broke up a little bit there. But I think you were asking about the prospects of divestiture of any of the businesses that are core. And for us, today, we're continually doing a portfolio review, the businesses that we're in, DIY, Commercial. Obviously, our core residential and Sunpro, no immediate plans, no serious conversation about divestiture. We're always contemplating how to unlock value for our shareholders. So while it's not on the radar screen today, perhaps someday in the future. But we think that, Ashish, there's a lot of advantages to having these businesses together. And at least today, as we look at the landscape, I can't really see a divestiture scenario.

That’s very helpful color. Thank you very much.

Thank you.

Our next question comes from Brian Ruttenbur with Imperial Capital. Please proceed with your question.

Yes. Thank you very much. Congratulations on the acquisition and the quarter. So just going back a little history, you've gone from a security company to a home automation company. You're now into solar, and I totally get that. But what's next? What pieces are you missing? Do you need to add hardware? Do you need to add additional services? Is it more video? Can you tell us what you're missing out of the portfolio and where the future is of ADT?

Yeah. We're feeling pretty good, Brian, where we stand today. We're looking at opportunities to increase TAM in adjacent markets. Auto is an area that we kick tires on a bit. We're looking at some interesting things around use cases, expanding use cases to leverage our mobile product. Health is an area that we've contemplated. But we feel pretty good about the existing portfolio. A lot of the innovative effort now is really on how do we improve our existing product. As you know, we're building our own interactive, that product called ADT+ will be unveiled and integrated with Google at the end of 2022. And we're doing a lot of work around monitoring and smart monitoring, working to improve that product and really read the industry. So I'd conclude with there's not - we don't see a hole in our line-up, but we see opportunities to continue to innovate to make what we've got better.

Great. Thank you. As a follow-up, talking about the - you kind of led in with my Google update. So you have a partnership agreement with Alarm.com, I believe, until mid-2022. Are you going to need to extend that? Or are you going to have the Google software ready to go - ADT Google partnership ready to go by kind of mid-2022? Or just give me a road map a little bit and the timing of that.

Yeah. So Brian, this is Don. The partnership with ADT will continue in the foreseeable future. We have a lot of customers that use both the Pulse and the community control platform. They will stay on those platforms until sometime in the future, it makes sense to perhaps upgrade them. But we'll continue to partner. We'll continue to develop and mature those platforms. At the same time, we're looking forward to rolling out our own interactive platform, of which we've had some recent success launching for our DIY customers on November 2. We're actually well ahead of plan in rolling out that platform, and it was a seamless deployment. So we're really, really bullish and excited about the things that we're going to roll out in 2022. We can't get into specifics of some milestones, but assume we'll be able to go discuss that Investor Day.

Just to follow up on that, Don, real quick. On the November 2, you started rolling it out to, is it more beta? Or is it actual live to the DIY customers?

No. It's live. We have a little over 100,000 DIY customers that were using an older version of the platform. But we since we placed with the newer platform, the one that we intend to use for what we call DIFM customers in the future. It's always our plan to go ahead and not experiment, but just still having case us that with a handful of live customers. And I'm happy to say that we're about 10 days into it now almost, and we have had no issues whatsoever.

Great. Thank you.

Thanks, Don. That's going to wrap up the analyst portion of our call. I'm going to turn it back to Jim for a quick closing comment.

Thanks, Jill. So in closing, I'd like to extend my appreciation to our ADT employees and dealers. We had a strong quarter, a terrific quarter. I'm proud of your collective efforts. Of course, I'd like to formally welcome Sunpro to our ADT family, couldn't be more excited for this next phase of our growth and the launch of ADT Solar. So thank you. Thanks as well for everyone joining our earnings call this morning. We're optimistic about finishing the year strong, as well as ADT's future and looking forward to the growth of head - looking forward to the growth ahead. Have a good day, everybody, and thank you.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.