ADT Inc. — Q1 2018 Form 10-Q Summary
Business context and reporting period
Quarter ended March 31, 2018; comparisons are with Q1 2017 unless stated otherwise. ADT provides monitored security, automation, installation and related services in the U.S. and Canada, reporting as one segment. The company served approximately 7.2 million customers at quarter-end, excluding contracts monitored but not owned. This was ADT’s first quarter as a public company following its January IPO.
Financial and operating performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $1,116.4 million | $1,059.2 million | +5.4% |
| Operating income | $71.4 million | $5.5 million | Improved |
| Operating margin | 6.4% | 0.5% | Improved |
| Net loss | $157.4 million | $140.9 million | Loss widened |
| Basic and diluted loss per share | $0.22 | $0.22 | Unchanged |
| Operating cash flow | $504.6 million | $412.0 million | +22.5% |
| Free cash flow (non-GAAP) | $173.8 million | $82.3 million | More than doubled |
| Adjusted EBITDA (non-GAAP) | $619.8 million | $577.0 million | +7.4% |
Monitoring and related services revenue was $1,017.3 million, up 2.0%; installation and other revenue was $99.2 million, up 61.0%, including increased outright equipment sales and acquisition-related revenue. Management attributed recurring-revenue growth to higher average pricing and price increases, partly offset by lower customer volume. Recurring monthly revenue (RMR) was $336.5 million versus $329.7 million. Gross customer revenue attrition improved to 13.6% from 14.5%.
Cost of revenue increased to $248.4 million from $218.7 million, while selling, general and administrative expense decreased to $305.0 million from $353.3 million. Depreciation and intangible amortization rose to $483.7 million. Interest expense was $174.3 million. A $61.6 million debt-extinguishment loss, primarily from redeeming notes using IPO proceeds, contributed to the larger net loss despite higher operating income.
Balance sheet, debt and liquidity
At March 31, 2018, cash and cash equivalents were $258.2 million; an additional $750.0 million was restricted for the planned preferred-securities redemption. Current assets were $621.6 million and current liabilities $979.2 million. Long-term debt was $9.53 billion, with total debt carrying value reported in MD&A at $9.58 billion, excluding preferred securities. ADT reported $350 million available under its revolving credit facility and said it was in compliance with debt covenants. Management described the company as highly leveraged but expected available cash, operating cash flow and revolver capacity to meet its liquidity needs.
Cash used in investing was $366.8 million, including $159.6 million for dealer-generated and bulk customer accounts, $138.0 million for subscriber systems, $33.2 million in capital expenditures and $36.2 million for acquisitions. Financing provided $747.9 million, principally reflecting IPO proceeds and debt repayments.
Material changes, outlook and notable items
- The IPO raised approximately $1.415 billion net of underwriting discounts. ADT used approximately $649 million to redeem $594 million principal of 9.25% notes, and placed $750 million in a restricted account for preferred-securities redemption.
- Subsequent to quarter-end, ADT agreed to redeem all Koch Preferred Securities on July 2, 2018. Management estimated approximately $200 million of additional funding would be needed beyond the segregated funds, with the final amount subject to change. The preferred securities had a carrying value of $708.1 million at quarter-end and accumulated approximately $25 million of dividends during Q1.
- ADT declared a $0.035-per-share common dividend in March, paid April 5, and declared another $0.035-per-share dividend in May, payable July 10. No formal earnings guidance or numerical full-year outlook is provided in the filing.
- Revenue recognition was adopted January 1, 2018 using the modified retrospective method. Adoption increased opening stockholders’ equity by $34.4 million, net of tax; Q1 net loss was $5.1 million lower than it would have been without adoption. Prior-year results were not recast.
- Share-based compensation rose to $49.3 million from $2.4 million, mainly following IPO-related equity awards and Class B unit conversions. Litigation settlements provided benefits to SG&A, including $10 million cash and $7.5 million non-cash compensation; additional licensing fees of $24 million were not considered probable of collection at quarter-end.
- Risks include substantial leverage and debt service, customer attrition and competitive pressures, the planned preferred redemption, five shareholder class actions alleging IPO disclosure violations, other legal matters, and tax disputes. An IRS challenge to trademark amortization deductions could materially reduce tax-loss carryforwards, although ADT expects minimal cash tax impact if it loses that dispute. Hurricane-related Q1 impacts were not material.
Important facts for investors to verify
- Confirm the final cash cost and funding source for the July 2018 Koch Preferred Securities redemption, including redemption premium, accumulated dividends and tax reimbursements.
- Track debt balances, interest costs, refinancing terms and covenant headroom given approximately $9.6 billion of debt carrying value.
- Assess recurring-revenue growth and whether improved attrition and pricing persist despite lower customer volume.
- Separate GAAP results from Adjusted EBITDA and Free Cash Flow, and evaluate the effect of recurring subscriber-acquisition investment and non-GAAP adjustments.
- Monitor outcomes of the IPO shareholder lawsuits, the wireless-encryption settlement process, and the IRS trademark-amortization dispute.