ADT Inc. — Q1 2022 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2022, compared with Q1 2021. ADT provides security, monitoring and smart-home services; following its December 2021 acquisition of ADT Solar, it also sells residential solar and energy-storage solutions. The company reported approximately 6.7 million subscribers.
Key financial results
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $1,544.7 million | $1,304.7 million |
| Operating income (loss) | $76.0 million | $(16.4) million |
| Net income (loss) | $51.6 million | $(47.9) million |
| Diluted EPS | $0.06 | $(0.06) |
| Adjusted EBITDA (non-GAAP) | $601.0 million | $542.1 million |
| Operating cash flow | $308.1 million | $359.3 million |
| Investing cash flow | $(405.1) million | $(399.1) million |
Revenue increased $240.0 million, or approximately 18%, year over year. Monitoring and related-services revenue rose $58.5 million to $1,121.3 million; installation, product and other revenue rose $181.5 million to $423.5 million, including $192.0 million from Solar, which had no comparable Q1 2021 revenue. Adjusted EBITDA increased $58.9 million. Its margin was approximately 38.9% of revenue, compared with 41.6% in Q1 2021; this is a calculated, non-GAAP ratio.
Cash and cash equivalents were $17.4 million at March 31, 2022 ($28.1 million including restricted cash). Current assets were $1,067.4 million and current liabilities $1,579.0 million. Total debt carrying value was $9,861.7 million, up from $9,692.7 million at year-end; debt principal excluding finance leases was $10,000.1 million. The revolving credit facility had $170 million drawn and $405 million available; the receivables facility had $225 million drawn and approximately $175 million of uncommitted capacity. ADT reported compliance with debt covenants and believes its liquidity sources are adequate for its needs.
Material changes and management commentary
- CSB revenue increased to $1,062.6 million from $1,038.6 million; Commercial revenue increased to $290.2 million from $266.1 million. Solar contributed $192.0 million. CSB Adjusted EBITDA increased to $560.5 million; Commercial Adjusted EBITDA was $23.6 million and Solar was $16.8 million.
- Recurring monthly revenue (RMR) grew to approximately $364.9 million from $349.1 million. Gross customer revenue attrition improved to 12.9% from 13.1%, which management attributed primarily to retention initiatives and lower voluntary and non-payment disconnects.
- Reported net income improvement reflected, in part, lower net interest expense, which included unrealized gains on interest-rate swaps of $145.3 million versus $106.5 million a year earlier. These non-cash gains affect period comparisons. Adjusted EBITDA excludes specified items and is not a GAAP substitute.
- Operating cash flow declined $51.3 million, mainly due to higher annual incentive compensation payments and timing of vendor payments, partly offset by lower radio-conversion spending and cash interest. Investing outflows included $185.1 million for dealer-generated and bulk account purchases and $182.1 million for subscriber-system assets.
- ADT says it converted substantially all remaining 3G customers as the network sunset process began in February 2022. It cannot yet estimate the effect on attrition for customers not transitioned; it does not expect remaining conversion costs and related revenue to be material.
Outlook, risks and unusual items
- No specific full-year revenue, earnings or cash-flow guidance is provided. Management expects cash from operations and available borrowing capacity to support operating needs, debt service, investment and potential dividends. It generally reaches revenue break-even on new subscriber installations in less than two and a half years, according to management.
- Management cites inflation, labor and parts costs, supply-chain disruption, competition, customer attrition, technology changes, and the ability to integrate acquisitions and launch new offerings as risks. COVID-19 and related regulatory uncertainty may also affect employees, costs and results.
- The Google commercial agreement includes exclusivity provisions. If an integrated solution is not launched by June 30, 2022, Google may require ADT, subject to exceptions, to offer certain devices and services without integration. ADT said it was working toward integration and described planned product rollouts.
- ADT and Ford formed Canopy in April 2022, after quarter-end. The companies expect to invest approximately $100 million collectively over three years; ADT’s share is 40%, with an initial contribution of approximately $11 million.
- Changes to federal tax rules effective in 2022 may increase taxable income and affect tax expense. Management noted potential future changes to deferred-tax valuation allowances could materially affect results; proposed tax legislation was uncertain.
- Legal matters include claims related to a former technician’s unauthorized access to customer accounts. Certain claims and class allegations were dismissed or withdrawn, but individual proceedings remained ongoing; trials were scheduled for September 2022 in two matters. Accrued insured claims and lawsuits totaled $89 million. The filing says the outcome of legal proceedings cannot be assured.
- The quarter included approximately $36.3 million of acquisition-related Adjusted EBITDA reconciliation adjustments, primarily amortization of the acquired Solar customer-backlog intangible, fully amortized by March 2022. Solar customer loan financing fees reduced revenue by approximately $38 million; $15 million of fees related to Sunlight, an Apollo-controlled related party.
Important facts for investors to verify
- How much of reported earnings and interest improvement depends on non-cash interest-rate-swap gains, and how results compare using recurring operating measures.
- Solar’s revenue, margins, customer acquisition economics and cash needs, including the impact of purchase-accounting adjustments and financing fees.
- Debt, variable-rate exposure, refinancing needs and liquidity availability, particularly given low unrestricted cash and substantial leverage.
- Progress on Google integration and the commercial agreement’s exclusivity requirements, as well as Canopy’s investment and commercialization outlook.
- Customer retention and any attrition or collection effects from the 3G/CDMA network sunset, alongside exposure to supply-chain, labor and inflation pressures.
- Developments in the technician-access litigation, tax legislation and potential deferred-tax valuation allowances.