ADT Reports First Quarter Fiscal 2016 Results
Continued execution drives increases in revenue and EBITDA before special items, and improvements in key operating metrics Announces launch of ADT Canopy and All-In-One Smart Security product; initiated eight developmental partnerships “Our quality growth plan is improving our financial performance and will position us for lower attrition and higher levels of free cash flow" said Naren Gursahaney, ADT's CEO. "We're also investing in our traditional business and expanding into adjacencies, creating more growth opportunities in the future." FIRST QUARTER 2016 FINANCIAL HIGHLIGHTS(2)
FIRST QUARTER 2016 BUSINESS HIGHLIGHTS
BOCA RATON, Fla., Feb. 02, 2016 (GLOBE NEWSWIRE) -- The ADT Corporation (NYSE:ADT) today reported its financial results for the first quarter of fiscal 2016. The Company reported total revenue of $900 million, an increase of 1.5%, or 2.7% in constant currency(1), compared to the first quarter of fiscal 2015. Recurring revenue, which made up approximately 93% of total revenue in the quarter, was $833 million, up 1.0% compared to the same period last year and up 2.2% in constant currency(1). Recurring revenue growth in the quarter was driven by a 2.6% increase in new and resale revenue per user, as a result of strong Pulse take rates and upgrades, growth in ADT Business, and price escalations. Unit attrition for residential and business for the quarter was 12.2%, a year-over-year improvement of 70 basis points. ADT closed the quarter with 6.6 million customer accounts. Pre-SAC EBITDA before special items increased by $8 million to $566 million(1)(2), and pre-SAC EBITDA margin before special items was 66.7%(1). EBITDA before special items increased by $4 million to $457 million(1)(2), which includes the negative impact of approximately $7 million pre-tax related to the previously disclosed change in the way the Company accounts for dealer payments for leads generated through its marketing efficiency program, the negative impact of approximately $5 million due to the weaker Canadian dollar, as well as the net $10 million impact from the additional six days of expenses from the calendar month-end change in the first quarter. EBITDA margin before special items was 50.8%(1) for the quarter despite the negative impact from the marketing efficiency program and the additional six days of expenses from the calendar month-end change. The Company reported diluted earnings per share of $0.39 versus $0.41 in the prior year. Excluding special items, diluted earnings per share was $0.49(1) versus $0.51(1) in the prior year. The diluted earnings per share before special items of $0.49(1) also includes the quarterly impact of approximately $0.07 per share related to the previously mentioned marketing efficiency program, the calendar change, and weaker Canadian dollar. Using the Company's cash tax rate, diluted earnings per share before special items was $0.71(1). The Company reported free cash flow after special items of $26 million(1), up from $14 million(1) in the same period last year, driven by a $6 million increase in operating cash flow and a $7 million reduction in capital expenditures with nearly the same level of gross additions and higher Pulse take rates than the same period last year. Free cash flow before special items was $45 million(1) in the quarter, down $1 million when compared to the same period last year, despite higher annual employee incentive compensation payments in the quarter relative to last year. Steady-state free cash flow before special items, calculated on a pre-tax and unlevered basis, increased to $938 million(1), up $45 million from last year. Below is the revenue and EBITDA before special items, also referred to as Adjusted EBITDA, broken down by the United States and Canada segments for the three months ended December 31, 2015 and December 26, 2014, respectively. The Canadian dollar weakened by nearly 15% versus prior year. On a constant currency basis, Canada revenues were flat(1) and Adjusted EBITDA was up $2 million(1) or 6.5% over last year.
“We continue to drive improved financial results and key operating metrics as we begin executing the next phase of our quality growth plan," said Naren Gursahaney, ADT's chief executive officer. "The first phase of this approach began last year with tighter credit screening, which contributed to our 100 basis point attrition improvement last year. This year, with new tools and analytics, we're enhancing our focus on higher quality customers, optimizing offers, increasing customer up-front payment requirements, and improving customer on-boarding and service. We are already seeing early signs of the benefits of this approach through higher new customer revenue, lower acquisition costs, and better recurring revenue margins. However, the bigger payoff will be in significant future improvements in retention -- which remains our top priority. We are also encouraged by the progress we are making in the Business and Health markets, as we continue to drive subscriber growth by launching new products and expanding channels to market. The commercial opportunity alone represents a $24 billion market opportunity for ADT. We also further extended our leadership position, announcing ADT Canopy, our new Security-as-a-Service offering, integrating ADT's professional monitoring services into popular life safety products, wearables, and connected home devices. Our first product utilizing ADT Canopy will be through our partnership with LG Electronics, which will be launched this spring and is targeted at the previously unpenetrated residential market segments. We expect all of these efforts to drive improvements in our operational and financial performance, creating long term value for our shareholders," he added. OPERATIONAL HIGHLIGHTS: DELIVERING ON GROWTH INITIATIVES IMPROVING CUSTOMER RETENTION THROUGH EXECUTION OF QUALITY GROWTH STRATEGY
DRIVING GROSS ADD GROWTH AND EXPANDING INTO ADJACENCIES
"The first quarter represented an acceleration of our quality growth strategy in the US Residential Direct channel. Our newly implemented productivity tools and business analytics enabled improvements to the characteristics of our new customers", said Michael Geltzeiler, ADT's chief financial officer. "We have seen encouraging results as our new customers this quarter had higher credit scores, invested more in their system installations, and more elected our EZ Pay service, all of which should lead to better retention. Total company new and resale RPU increased by nearly 3% and creation multiples in our Direct channel were lower by 1.4x or 4.4% compared to last year, despite increased Pulse Automation take rates. Total company SAC per unit was also down despite a similar level of gross adds. In addition to the continued improvement in our operating metrics, we grew EBITDA before special items by $4 million(1), despite $22 million of headwinds relating to our marketing efficiency program, the calendar change impact, and the weaker Canadian dollar. Our existing customer base continued to perform strongly as recurring revenue margins increased by 20 basis points(1) on a year-over-year basis and pre-SAC EBITDA before special items grew by $8 million(1) as margins reached 66.7%(1), a 30 basis point improvement from last year. We also continue to make improvements in free cash flow, as steady-state free cash flow(1) increased significantly and free cash flow before special items was relatively flat at $45 million(1), despite a double digit million dollar increase in annual incentive payouts versus the prior year." COST EFFICIENCIES HIGHLIGHTS
FIRST QUARTER 2016 RESULTS HIGHLIGHTS
(1) Reconciliations from GAAP to non-GAAP financial measures can be found in the attached tables. CONFERENCE CALL AND WEBCAST Management will discuss the Company's first quarter 2016 results during a conference call and webcast on February 2, 2016 beginning at 8:30 a.m. (ET). During the conference call and webcast management will refer to a slide presentation hosted on and accessible at http://investors.adt.com. The conference call for investors can be accessed in the following ways:
ABOUT ADT The ADT Corporation (NYSE:ADT) is a leading provider of security and automation solutions for homes and businesses in the United States and Canada. ADT's broad and pioneering set of products and services, including ADT Pulse® interactive home and business solutions, and health services, meet a range of customer needs for today's active and increasingly mobile lifestyles. Headquartered in Boca Raton, Florida, ADT helps provide peace of mind to nearly seven million customers, and it employs approximately 17,100 people at 200 locations. More information is available at www.adt.com or by downloading the ADT IR app for iPhone, iPad and Android Devices. From time to time, ADT may use its website as a channel of distribution of material Company information. Financial and other material information regarding the Company is routinely posted on and accessible at http://investors.adt.com. In addition, you may automatically receive email alerts and other information about ADT by enrolling your email by visiting the "Investor Relations" section at http://investors.adt.com. NON-GAAP MEASURES Revenue in constant currency, recurring revenue in constant currency, leverage ratio, earnings before interest, taxes, depreciation and amortization (EBITDA), EBITDA margin, pre-SAC EBITDA, pre-SAC EBITDA margin, free cash flow (FCF), steady-state free cash flow (SSFCF), diluted earnings per share (EPS) and diluted EPS at cash tax rates, in each case "before special items," are non-GAAP measures that may be used from time to time and should not be considered replacements for GAAP results. Revenue and recurring revenue, each in constant currency, are useful measures because they provide transparency to the underlying performance in markets outside the United States by excluding the effect that foreign currency exchange rate fluctuations have on comparability. Revenue and recurring revenue in constant currency as presented herein may not be comparable to similarly titled measures reported by other companies. The difference between revenue (the most comparable GAAP measure), revenue in constant currency (non-GAAP measure) and recurring revenue in constant currency (the non-GAAP measure) is the exclusion of the impact of foreign currency exchange fluctuations. This is also the primary limitation of this measure, which is best addressed by using revenue and recurring revenue in constant currency in combination with GAAP revenue. The leverage ratio may be presented as the ratio of EBITDA or Pre-SAC EBITDA before special items to total debt. The leverage ratio is a useful measure of the Company's credit position and progress towards leverage targets. Refer to the discussion on EBITDA and Pre-SAC EBITDA before special items for a description of the differences between the most comparable GAAP measure. The calculation is limited in that the Company may not always be able to use cash to repay debt on a dollar-for-dollar basis. EBITDA is a useful measure of the Company's success in acquiring, retaining and servicing our customer base and ability to generate and grow recurring revenue while providing a high level of customer service in a cost-effective manner. The difference between Net Income (the most comparable GAAP measure) and EBITDA (the non-GAAP measure) is the exclusion of interest expense, the provision for income taxes, depreciation and amortization expense. Excluding these items eliminates the impact of expenses associated with our capitalization and tax structure as well as the impact of non-cash charges related to capital investments. Pre-SAC EBITDA is useful because it measures the Company's operational profits from its existing customer base by excluding certain revenue and expenses related to acquiring new customers. The difference between Net Income (the most comparable GAAP measure) and pre-SAC EBITDA (the non-GAAP measure) is the exclusion of interest expense, the provision for income taxes, depreciation expense, amortization expense, gross subscriber acquisition cost expenses and revenue associated with the sale of equipment. Excluding these items eliminates the impact of expenses associated with our capitalization and tax structure, the impact of non-cash charges related to capital investments and the impact of growing our subscriber base. In addition, from time to time, the Company may present EBITDA and pre-SAC EBITDA before special items, which are the respective measures, adjusted to exclude the impact of the special items highlighted below. These numbers provide information to investors regarding the impact of certain items management believes are useful to identify, as described below. EBITDA and pre-SAC EBITDA may also be presented at constant currency. Constant currency presentation is useful because it provides transparency to the underlying performance in markets outside the U.S. by excluding the effect that foreign currency exchange rate fluctuations have on comparability. There are material limitations to using EBITDA and pre-SAC EBITDA. EBITDA and pre-SAC EBITDA may not be comparable to similarly titled measures reported by other companies. Furthermore, EBITDA and pre-SAC EBITDA do not take into account certain significant items, including depreciation and amortization, interest expense and tax expense, which directly affect our net income. Additionally, pre-SAC EBITDA does not take into account expenses related to acquiring new customers. When presented at constant currency, these measures exclude of the impact of foreign currency exchange fluctuations. These limitations are best addressed by considering the economic effects of the excluded items independently, and by considering EBITDA and pre-SAC EBITDA in conjunction with net income as calculated in accordance with GAAP. The EBITDA and pre-SAC EBITDA discussion above is also applicable to the respective margin measures. FCF is a useful measure of the Company's ability to repay debt, make other investments and return capital to shareholders through dividends and share repurchases. The difference between Cash Flows from Operating Activities (the most comparable GAAP measure) and FCF (the non-GAAP measure) consists of the impact of capital expenditures, subscriber system assets, dealer generated customer accounts and bulk account purchases. Dealer generated accounts are accounts that are generated through the network of authorized dealers. Bulk account purchases represent accounts acquired from third parties outside of the authorized dealer network, such as other security service providers, on a selective basis. These items are subtracted from cash flows from operating activities because they represent long-term investments that are required for normal business activities. SSFCF is a useful measure of pre-levered cash that is generated by the Company after the cost of replacing recurring revenue lost to attrition, but before the cost of new subscribers that drive recurring revenue growth. The difference between Net Income (the most comparable GAAP measure) and SSFCF (the non-GAAP measure) consists of the factors discussed above regarding pre-SAC EBITDA, on a quarter-to-date basis. Pre-SAC EBITDA is then annualized and adjusted for additional factors, described in the reconciliation below, required to maintain the steady-state. Certain components of these inputs are determined using trailing twelve month information or information from the most recent quarter. In addition, from time to time the Company may present FCF and SSFCF before special items, which is FCF or SSFCF, adjusted to exclude the impact of the special items highlighted below. These numbers provide information to investors regarding the impact of certain items management believes are useful to identify, as described below. The limitation associated with using FCF and SSFCF is that they adjust for certain items that are ultimately within management's and the Board of Directors' discretion to direct, and therefore, may imply that there is less or more cash that is available than the most comparable GAAP measure. FCF is not intended to represent residual cash flow for discretionary expenditures since debt repayment requirements and other non-discretionary expenditures are not reduced. This limitation is best addressed by using FCF and SSFCF in combination with other GAAP financial measures. FCF and SSFCF as presented herein may not be comparable to similarly titled measures reported by other companies. These measures should be used in conjunction with other GAAP financial measures. Investors are urged to read the Company's financial statements as filed with the Securities and Exchange Commission, as well as the accompanying tables to this press release that show all the elements of the GAAP measure. Diluted EPS at cash tax rates is a useful measure of the Company's diluted earnings per share after considering the difference between the effective tax rate and cash tax rate. The difference between diluted EPS (the most comparable GAAP measure) and diluted EPS at cash tax rates (the non-GAAP measure) is the exclusion of the impact of income tax expense and the inclusion of the impact of income taxes paid, net of refunds. Adjusting for these items provides information on the impact of our net operating loss carryforwards on our diluted EPS. The Company has presented its diluted EPS, diluted EPS at cash tax rates, EBITDA, EBITDA margin, pre-SAC EBITDA, pre-SAC EBITDA margin, FCF, SSFCF and other measures before special items. Special items include charges and gains related to acquisitions, integrations, restructurings, impairments, and other income or charges that may mask the underlying operating results and/or business trends of the Company. The Company utilizes these measures to assess overall operating performance, as well as to provide insight to management in evaluating overall operating plan execution and underlying market conditions. The Company may also present its effective tax rate as adjusted for special items for consistency. One or more of these measures may be used as components in the Company's incentive compensation plans. These measures are useful for investors because they may permit more meaningful comparisons of the Company's underlying operating results and business trends between periods. The difference between net income and diluted EPS before special items and net income and diluted EPS (the most comparable GAAP measures) consists of the impact of the special items noted above on the applicable GAAP measure. EBITDA, EBITDA margin, pre-SAC EBITDA and pre-SAC EBITDA margin before special items do not reflect any additional adjustments, other than taxes, that are not reflected in net income before special items. The limitation of these measures is that they exclude the impact (which may be material) of items that increase or decrease the Company's reported operating income, operating margin, net income and EPS. This limitation is best addressed by using the non-GAAP measures in combination with the most comparable GAAP measures in order to better understand the amounts, character and impact of any increase or decrease on reported results. The Company is not providing a quantitative reconciliation of our non-GAAP outlook to the corresponding GAAP information because the GAAP measures that we exclude from our non-GAAP outlook, other than those described above, are difficult to predict and are primarily dependent on future uncertainties. The GAAP measures excluded from our non-GAAP outlook for which we do not prepare a reconcilable GAAP forecast include the factors described above for recurring revenue, EBITDA before special items, FCF before special items, and in each case at constant currency. FORWARD-LOOKING STATEMENTS Our reports, filings, and other public announcements may include "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements relate to anticipated financial performance, management's plans and objectives for future operations, business prospects, outcome of regulatory proceedings, market conditions and other matters. We make these forward-looking statements in reliance on the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, included in this press release or report that address activities, events or developments that we expect, believe or anticipate will exist or may occur in the future, are forward-looking statements. Forward-looking statements can be identified by various words such as "expects," "intends," "will," "anticipates," "believes," "confident," "continue," "propose," "seeks," "could," "may," "should," "estimates," "forecasts," "might," "goals," "objectives," "targets," "planned," "projects," and similar expressions. These forward-looking statements are based on management's current beliefs and assumptions and on information currently available to management that are subject to risks and uncertainties, many of which are outside of our control, and could cause future events or results to be materially different from those stated or implied in this press release or report. Specific factors that could cause actual results to differ from results contemplated by forward-looking statements include, among others, the following:
Given the risk factors and uncertainties that could cause our actual results to differ materially from those contained in any forward-looking statement, we caution investors not to unduly rely on our forward-looking statements. These risk factors should not be construed as exhaustive. We disclaim any obligations to and do not intend to update the above list or to announce publicly the result of any revisions to any of the forward-looking statements to reflect future events or developments. If one or more of these risks or uncertainties materialize or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Consequently, actual events and results may vary significantly from those included in or contemplated or implied by our forward-looking statements. More detailed information about these and other factors is set forth in ADT's most recent annual report on Form 10-K, our quarterly reports on Form 10-Q and in other subsequent filings with the U.S. Securities and Exchange Commission.
(1) Items have been presented net of tax of $10M for the three months ended December 31, 2015, $3M for the three months ended September 25, 2015, and $9M for the three months ended December 26, 2014.
(1) Items have been presented net of tax where applicable.
(1) Items presented at cash tax run rates where applicable.
(1) Relates to the 2012 Tax Sharing Agreement among Tyco, ADT and Pentair.
(1) SAC required to maintain recurring revenue is calculated as follows:
(2) Average trailing twelve month recurring revenue disconnected net of price escalations. Disconnects account for dealer chargebacks. (3) Gross creation cost includes amount held back from dealers for chargebacks. Operating Cash Flow and FCF Before Special Items
(2) Leverage ratio is defined as the ratio of debt to trailing twelve month EBITDA before special items, or trailing twelve month Pre-SAC EBITDA before special items.
(1) Constant currency results above are calculated by translating current period amounts in local currency using the prior comparable period's currency conversion rate.
(1) The customer unit attrition rate is a 52-week trailing ratio, the numerator of which is the customer sites canceled during the period due to attrition, excluding health services and contracts monitored but not owned and net of charge-backs and re-sales, and the denominator of which is the average of the customer base at the beginning of each month during the period. (2) Average revenue per customer measures the average amount of recurring revenue per customer per month, excluding contracts monitored but not owned, and is calculated based on the recurring revenue under contract at the end of the period, divided by the total number of customers under contract at the end of the period. Media Relations Jason Shockley tel: +1 561.322.7235 jshockley@adt.com Investor Relations Tim Perrott tel: +1 561.226.2983 tperrott@adt.com |
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