Greetings, and welcome to the ADT Fourth Quarter and Full Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Elizabeth Landers, Senior Director of Investor Relations. Thank you. You may begin.

Thanks, operator, and good morning, everyone. We appreciate you joining ADT's Fourth Quarter and Full Year 2022 Earnings Call. Speaking on today's call will be ADT's President and CEO, James DeVries; and our EVP and CFO, Ken Porpora. After the prepared remarks, we'll take analyst questions. Also joining us for Q&A are Don Young, EVP and Chief Operating Officer; and Jill Greer, SVP of Finance and Investor Relations. Earlier this morning, we issued a press release and slide presentation of our financial results. These materials are available on our website at investor.adt.com. Before we start, I do need to mention that, today's remarks include forward-looking statements that represent our beliefs or expectations about future events. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of the factors that may cause differences are described in our SEC filings. We'll also discuss non-GAAP financial measures on the call. The most directly comparable GAAP measures, along with a reconciliation of those measures are available on our website at investor.adt.com. And with that, I'll turn the call over to Jim.

Thank you, Elizabeth. Good morning. Thank you, operator, and thank you to everyone for joining us on our earnings call today. ADT released our fourth quarter and full year results this morning, 2022 was a very strong year as we delivered our financial commitments, strengthened our foundation and advance the transformation of our business from a traditional security company, towards an innovative business poised to accelerate growth in new markets. I'd like to begin by sharing some of our growth highlights. For the full year, we grew revenues, earnings and cash flows. Our total revenue was up 21% to $6.4 billion, generating adjusted net income of $218 million, or $0.24 per diluted share. We also posted improved adjusted EBITDA up 11% year-over-year, and over $550 million of adjusted free cash flow, up 20% year-over-year. Importantly, we met our commitments to our shareholders, delivering total revenue and adjusted EBITDA at or above the top end of our full year guidance, and met our adjusted free cash flow guidance. As part of growing the business, we've also focused on diversifying our revenue streams. To this end, during the last several years, we've expanded our commercial business as well as acquired residential solar business. These actions resulted in meaningful TAM expansion in both of these fast-growing markets. Our commercial revenues grew 10% for the full year, and our solar business ended just under $800 million in revenues for 2022. For yet another consecutive quarter, our recurring monthly revenue balance or RMR was at a record level, and we maintained our record revenue payback of 2.1 years. Customer retention also continued to improve, with gross attrition at an all-time low of 12.5%. In addition, underscored by a record revenue payback level, capital efficiency is improving our free cash generation allowing us to invest in…

Thank you Jim, and thank you everyone for joining our call today. As Jim mentioned, we have delivered on our financial objectives for 2022, and have clear momentum across each of our business segments. I'm excited with these results, delivered by our team. Total company revenue was $1.6 billion for the quarter and $6.4 billion for the full year, up 21% versus prior year including the benefit of our solar acquisition. Excluding solar, our revenue grew approximately 7% in 2022. Our recurring monthly revenue or RMR from our subscriber base grew to $374 million or up 4% year-over-year, a record for the company and a strong reflection of the benefits of our higher average pricing, growth initiatives and improved customer retention. This stronger revenue translated into higher adjusted EBITDA, which for the full year was $2.45 billion, up 11% versus prior year. Adjusted net income was $92 million or $0.10 per share in the fourth quarter, an improvement from a loss of $25 million last year. For the full year, we delivered adjusted net income of $218 million or $0.24 per share, representing our first full year positive adjusted net income since IPO. Moving to our segment highlights. Our Consumer and Small Business or CSB segment delivered total revenue of $1.1 billion in the fourth quarter. And for the full year, this segment delivered $4.4 billion in revenue, an increase of 6% or $233 million versus last year. This performance was driven primarily by a 5% increase in monitoring and related services revenue, resulting from higher average pricing, subscriber growth and improved customer retention that I referenced earlier. CSB Adjusted EBITDA increased by $204 million or 10% for the full year, and was driven by the increased revenue combined with cost efficiencies. EBITDA margin in 2022, expanded year-over-year by 200…

[Operator Instructions] Our first question comes from the line of George Tong with Goldman Sachs. Please go ahead.

Hi. Thanks. Good morning. You have plans to launch offers to state foreign policyholders in select markets in 2Q of this year. Can you discuss the timeline for when you expect to more broadly launch State Farm? And what ballpark the impact you expect this will have on revenue and free cash flow performance?

Thanks George. It's Jim. I appreciate the first question here. At a high level, just to set the question up the vision for the State Farm relationship is to really transform homeowners insurance from purely restoration to include prediction and ultimately prevention to avoid losses. And the first offering that we're going to market with is called Circle of Protection, and the objective there will be to provide State Farm customers an offering that is centered on preventing fire intrusion and water claims. We will go to market in Indiana in late-March. We have Pennsylvania and Illinois as fast follows where we're testing and learning this Circle Protection offering, working with the agents to get it in distribution. I think we have six -- about a half dozen states after those first three that are on the docket for rollout throughout the rest of 2023. And then, the intent is to go more broadly across the country into 2024. Teams are working together every day. We're excited to get in market in Indiana. And as I said that will be late-March, possibly early-April for that launch.

Got it. That's helpful. You discussed the impact that the Google partnership has had on net doorbell attach rates, net camera growth and overall residential installation revenue per unit. Can you elaborate on how much additional lift you would expect from Google in the years ahead? And what inning the Google partnership is currently in with respect to its ramp cadence.

Yes. I mean we continue to feel great about the partnership with Google. Our marketing teams, as you know, George are working together for a co-branded campaign. We'll be going to market as ADT+ Google. The teams have developed some excellent content recently. The Google Success funds were going to be tapping into for the first time this quarter and those success funds that first $50 million tranche we anticipate receiving in 2023. The large majority of those funds will be invested in upper-funnel advertising. And then George on the product front we feel great to be offering Google Nest products. Our installation revenue per new install was just a tick above $1,300 in the fourth quarter that is largely due to having Google in our lineup. So, we feel good about the marketing. We feel good about the relationship overall and access to those Google Success funds. And then from a product perspective we're pleased with the product. Our customers are pleased with the products and we're seeing record levels of installation revenue per.

Great. Thanks for the color.

Your next question is from the line of Peter Christiansen with Citi. Please go ahead.

Thank you. Good morning guys. Nice trends all around. Jim I was wondering if you can talk a little bit more about the setup in the housing market that we're all seeing right now. I guess you are seeing some trade down in some of the home improvement retailers. And I know you're seeing higher attach rates. It's contributing to lower attrition things of that nature. I just wanted to point out have you seen any issues as it relates to pricing, trade down, any of those impacts given where we are in the housing cycle?

Yes. Thanks for the question Pete. So, far so good. We for sure have some pressure on gross adds because homes that are built can't have a system installed. But overall consumers are spending on home improvement as I just mentioned to George our installation revenue has been on a tear just about linear improvement over the last five or six quarters. I think if we look back just a couple of years that IRPU was at about $700. And as I mentioned finished Q4 at $1,300. Importantly, from an attrition perspective, about 40% of our attrition is due to movers and with a softer housing market and fewer relocations, the net is a benefit to us. We look at some pressure as I said on new adds but far and away the benefit from improved retention advantage of ADT.

That's helpful. And then I wanted to dig a little bit into the commercial backlog which really grew at a nice clip this quarter I think up 20%, RMR up 35%. Just if you could talk about some of the areas where you are seeing some positive momentum there maybe by particular real estate verticals so on and so forth. But also, can you just chat about the supply issues? Are those largely alleviated right now?

Yes, the momentum in this business is fantastic. The capabilities that we're building in new verticals energy education government have been strong for us, really hitting on most all cylinders. We're doing some really interesting work in innovation around interior robots and drones have some customer pilots in place. So at a high level, Pete, we feel great about business specific to the supply chain, we're not out of the woods. I'd say, I think the team would describe the environment is a bit better now than in the summer months of 2022. We've had some parts come in, so we're able to chip away at that backlog a little bit. But I'd say -- I'd probably characterize it as improving, but not back to normal quite yet. I think we anticipate as 2023 goes on for the parts situation to get better and better for us.

Thanks, James, really nice trends. Thank you.

Thank you.

Your next question is from the line of Brian Ruttenbur with Imperial Capital. Please go ahead.

Yes. Thank you very much. First of all, on attrition, you talked a little bit about what's going on? What is in your guidance in terms of attrition in 2023? Do you expect it to be at these levels? Do you expect some improvement in attrition? There's a lot of moving parts. I want to understand what your projections are.

Hey, Brian, it's Ken Porpora. And thanks for the question. We're not specifically guiding to attrition. When we think about some of the high-level figures that we've shared an extra slide in our deck, the predictor that we have going on with the new attributes that customers are joining are really excited about the new visits that we're adding and the proposed tickets, whether it's more devices per home the higher IRPU that Jim mentioned higher video take rates all that's building off for the future, the relocation market, mood market tough to predict. So I think holding serve in 2023 from an attrition perspective kind of is generally kind of what we're thinking, but we're not giving specific guidance for the metric. We think about at a high level that we're driving the indicators and factors that will drive long-term retention and the piece that we don't control is the relocation and move market. We're really excited about the trends that we've seen here and even a slight downtrend in the delinquencies that we'd like to see with our high level of credit scores in our portfolio.

Okay. So what I heard is that probably the likelihood is going to be flattish attrition is what we should be thinking along those lines though it could go a fractional point either way. Is that a correct summary?

I think that's fair, Brian. Super tough to predict. But all of the lead indicators that Ken mentioned really bode well for us. The devices, I think, I shared this on the last call the number of devices in a system correlates with retention. And our devices that are 10 or more devices in a system is about double right now than it was a couple of years ago. Ken mentioned an uptick in credit scores service backlog near record low. We're getting more sophisticated on our own save offers. And so while we're planning to hold serve come in right around where we are now, where we've got some cost for optimism given the positive lead indicators.

Great. And then as a follow-up on the Google rollout on ADT+, I believe the plan was rolling out starting in the first quarter. When do you expect it to be fully rolled out for all new customers coming on board? Is it going to be 2023, beginning of 2024, maybe you can give us kind of some rough guidelines.

You bet. So the way that we're staging it is that the self-install or DIY product with Google is now launched. And that's with the integrated app that you're familiar with Brian, later this year very late third quarter maybe fourth quarter, the intent is to roll out the product offering for our professional install product as well. So DIY is out and we'll say Q4 for DIFM.

Great. And then just one other quick question on solar. Are you seeing anything with the economy that's slowing adoption of solar, or are you on plan or seeing an improvement kind of year-over-year from 2022 levels?

Yes. A lot of moving parts here. The housing market, the overall economy, the Inflation Reduction Act provides a bit of a tailwind. And I'd say net it's probably a little softer demand than it might have been a year-ago. But yes, we're still long-term bullish on solar. I mentioned this on our last call. I'm pleased with the progress the team is making. Jamie's leadership is fantastic for us but there's a lot of work to do here. And so I'm bullish on 2023 and even more so, as we continue to set the operating foundation to scale this business to size.

Thank you.

Your next question is from the line of Manav Patnaik with Barclays. Please go ahead. Manav, please go ahead your line may be on mute. Okay. We'll move on to the next question and it's from the line of Ashish Sabadra with RBC Capital Markets. Please go ahead.

Thanks for taking my question. I just had a multipart question about the 2025 goals. I'll just ask them upfront. So the – like when we look at the midpoint of the 2023 guidance and the 2025 goals, it implies like 20% CAGR for revenue and 24%, 25% CAGR for free cash flow. So can you just talk about how should we think about that trajectory going forward? What will drive that kind of strong momentum and maybe some of the details that you provided but how important is Google and State Farm in helping deliver on those goals. Thank you.

Sure. Thanks for the question Ashish. They're coming off the back of our rate to 2022 I think our guidance for 2023, 5% revenue, 5% EBITDA and 20% of free cash flow growth. So your question really is how does that compare to our long-term growth? It's not exactly linear, but I think we think it's a great milestone to step in the right direction there. I think the revenue number you quote is probably a bit high versus what we shared at the Investor Day, but I think the way to look at it is a little bit more growth in the back-end from the solar business that base matures more in 2024 and 2025. The consumer business and the commercial business are coming out very strong in 2022s. We're excited with that growth as well. So I think while it's not linear, it's a step certainly in the trajectory for our 2025 goals. And we still are aligned with those 2025 goals things like $10 billion in revenue with $3 million in EBITDA taking our net leverage ratio to under three. Some of those factors -- were some of the key factors. We're paying out $1 billion of debt some of our commitments and our long-term goals.

That's very helpful color. And if you don't mind if I can just follow-up on that question around free cash flow as well. How do we think about the drivers for free cash flow going forward?

Yes, sure. You'll see our guide this year is $600 million to $700 million with including the benefits of the interest rate swaps. So a midpoint of $650 million, which represents about 20% year-over-year growth versus 2022. Our overall treatment for 2025 implied by $1 billion of potential cash flow. So we think we're on that pace and we like that year-over-year growth consistent with the 20% that we grew in 2022. I think we've proven in 2022 the ability to deliver the cash flow, the movements in our SAC year-over-year and the revenue payback have us showing a clear line of sight to some of those goals, but especially the SAC, which is our biggest expense because cash output. We really like the revenue payback numbers are playing up. And some of the installation revenue is a big driver of that, especially, in the residential business. So when you add all those factors together it makes us feel good about the guidance on our way to the long-term goal.

That’s very helpful color. Thanks again.

This concludes the Q&A session of today's call. I will now turn the call back over to the company's CEO Jim DeVries for closing remarks.

And so -- to as we have one more question from Manav, if you could squeeze him back in.

Manav, your line is open. Please go ahead. Manav, your line is open.

Hi. Good morning. This is Ronan Kennedy [ph] on for Manav. Thanks for taking questions. There's been a lot of questions on specific drivers by business. But can I just read how do you recap the underlying assumptions and what the guidance contemplate from a macro standpoint, assuming a lower volume of housing relocations and higher interest rates, but what the broad macroeconomic assumptions are? And then also any help on how to think about sequential growth in margins given consideration to seasonality et cetera for 2023?

Manav, can you repeat the last part of that about the seasonality I kind of caught the rest of it though. The last part of your question -- can you repeat the last part of your question about seasonality

Yes. Yes. Just with regards to sequential growth in margin and how to think about that for in consideration of your guidance for full year 2023 with any impacts of seasonality.

Got it. Okay. So overall how do we think about 2023 in the form of what's going on with the macro fees? I mean as Jim mentioned there's a bunch of different variables. As I think about the consumer business, while the home market rebound may be starting up, let's assume it just flattened and the existing again that tends to be a net positive for us given the greater stickiness and the greater attachment to recurring revenue. Overall to some of the pricing that we're seeing in the market, we've had some good trends especially on the IR fee or our revenue per unit in the home. So if you think about the consumer business, we see a bucking most of the trends with the macro given the customer portfolio that we target. The commercial business again given a robust backlog of over $420 million, we feel really strong about the new verticals that we're in as well as the ability to knock down that backlog. And on the solar business, while there are a couple of headwinds related to inflation costs and interest rates the Inflation Reduction Act as well as higher utility expenses tend to bolster that business as well. So lots of pros and cons, when I step back when we think about our guide in the form of macro, I call it generally neutral, given the markets that we play in. On a sequential basis and kind of how 2023 looks, the only thing to kind of keep in mind is, I think Solar is a little more back-end loaded generally based on, how we're improving that business. I think the timing of our free cash flow as I mentioned in the prepared remarks, Q1 tends to be a little low for us and it kind of accretes throughout the year. So I think 2022 is a good example of how our primary free cash flow generally comes in through the year. So I think about the free cash flow along all those lines of our 2022 patterns.

That's very helpful. Thank you. Appreciate it. And then, may I just confirm, you had referred to streamlining the cost structure and CSB and reference initiatives in Commercial and Solar last year. Could you just recap what those were for Commercial and Solar in the prior year and what you expect them to be for CSB and the potential impact?

Sure. Last year, kind of put it in two categories. One was its some labor force rightsizing. And the second piece was, pricing. And we were pretty aggressive in both areas. So we've had the opportunity in our consumer business that the trends have been pretty solid as you can see from the metrics we put out last year and have guided to in 2023. So I would think of this more as pruning around the edges, by sharpening our cost buckets for the consumer business, getting a little bit sharper in our pricing but also rightsizing some of the pieces of the workforce. So I think a bit more as pruning versus the more aggressive actions we took in the Commercial and Solar business.

Got it. Thank you. Appreciate it.

And at this time, there are no further questions. I will now turn the call over to the company's CEO, Jim DeVries, for any closing remarks.

Great. Thank you, operator and thanks everyone for taking the time to join us today. As you heard ADT is effectively growing our business. We're driving innovation building brand loyalty and improving our capital efficiency. We've got great momentum in the business with catalysts for growth in State Farm and our Google partnerships. We're looking forward to a strong 2023. I'd like to extend my appreciation to our ADT employees and dealer partners for an outstanding quarter and outstanding year. Our results are a direct reflection of your collective efforts. Thanks again everyone, for joining the call. And have a great day.

This does conclude today's conference call. We thank you for your participation. You may now disconnect.