ADT Inc. — Q1 2019 Form 10-Q
Business context and period. ADT provides monitored security and home and business automation in the U.S. and Canada. This unaudited report covers the three months ended March 31, 2019, compared with Q1 2018. The company reported one operating segment and over 7 million recurring customers.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $1,243.1 million | $1,116.4 million | +$126.6 million, 11.3% |
| Operating income | $90.4 million | $71.4 million | +$19.1 million |
| Operating margin | 7.3% | 6.4% | +0.9 percentage points |
| Net loss | $66.5 million | $157.4 million | Loss narrowed $91.0 million |
| Net loss per share | $0.09 | $0.22 | Loss per share narrowed |
| Operating cash flow | $509.3 million | $504.6 million | +$4.7 million |
| Free cash flow (non-GAAP) | $163.3 million | $173.8 million | -$10.4 million |
| Adjusted EBITDA (non-GAAP) | $621.3 million | $619.8 million | +$1.6 million |
Monitoring and related services revenue was $1,070.4 million, up $53.1 million; installation and other revenue was $172.6 million, up $73.5 million. The filing attributes revenue growth primarily to acquisitions, higher recurring fees from new customers and pricing, and greater sales of equipment outright. Growth in equipment sales also raised cost of revenue.
At March 31, cash and cash equivalents were $95.7 million, down from $363.2 million at year-end. Total debt, including capital lease obligations, was $9.714 billion; $366.5 million was classified as current. ADT reported $400 million of available revolving-credit capacity and said it expected liquidity sources to meet operating and business needs. Current assets were $606.5 million and current liabilities were $1.382 billion.
Material changes and management commentary
- Recurring monthly revenue (RMR) rose 4% to $349.3 million; approximately 2 percentage points of growth came from the Red Hawk acquisition. Trailing 12-month gross customer revenue attrition improved to 13.3% from 13.6% (excluding DIY customers under the current presentation).
- Operating income improved, while Adjusted EBITDA was nearly flat. Net loss narrowed partly because interest expense declined and the debt-extinguishment loss was smaller: $21.6 million versus $61.6 million in Q1 2018. Q1 2019 still included a $21.6 million loss related to redeeming Prime Notes.
- Operating cash flow was broadly stable, but Free Cash Flow fell, reflecting higher investment outlays. Investing activities used $400.1 million, including $163.3 million for dealer-generated and bulk customer accounts, $144.9 million for subscriber system assets, and $53.9 million for acquisitions. Financing activities used $380.2 million, primarily for debt repayment, dividends, and share repurchases.
- In April 2019, after quarter-end, ADT issued $1.5 billion of first-priority secured notes due 2024 and 2026 and used the proceeds, cash, and revolver borrowings to repurchase $1.0 billion of Prime Notes, repay $500 million of term loans, and pay related costs. The filing describes amendments that increase debt-incurrence flexibility and revolving capacity; these subsequent transactions are not reflected in March 31 balances.
- ADT adopted the new lease standard in Q1, recognizing operating lease assets and liabilities; management said adoption did not materially affect operations or cash flows. The company declared a $0.035-per-share dividend and repurchased approximately 3.27 million shares for $21.9 million during the quarter.
Outlook, risks and contingencies
- No specific revenue, earnings, or cash-flow guidance was provided. Management identified operating cash generation and revolving-credit facilities as liquidity sources and emphasized that ADT is highly leveraged with significant debt-service requirements.
- Wireless providers plan to retire 3G and CDMA networks by the first quarter of 2022. Approximately 4 million customer sites use affected equipment. ADT had not finalized its transition plan; estimated hardware cost was less than $90 per site, with possible cost-sharing and opportunities to sell upgraded products and services.
- An amended wireless-provider agreement creates a fixed purchase obligation of approximately $80 million through 2022. The company also disclosed ongoing legal matters, including IPO-related shareholder suits, California contractor and alarm-permit class actions, and electronic-waste investigations. Accruals for ongoing legal proceedings were described as not material; outcomes or potential losses were often not estimable. The California authorities proposed a settlement conference for late May 2019.
- Interest-rate exposure remains relevant: ADT had $4.225 billion of interest-rate swaps outstanding, intended to hedge the majority of variable-rate debt. The company said it was in compliance with debt covenants at March 31, 2019.
Important facts for investors to verify
- Whether recurring-revenue growth and lower attrition persist, particularly excluding acquisition contributions and under the revised DIY presentation.
- The effect of the April refinancing on interest expense, maturity profile, leverage, available revolver capacity, and covenant flexibility.
- The ultimate cost, timing, and customer impact of replacing 3G/CDMA equipment across the affected installed base.
- Whether free cash flow can support debt reduction, customer-acquisition investment, dividends, and repurchases given the company’s high debt burden.
- Developments in the disclosed litigation and investigations, including any changes to estimated exposure or accruals.