ADT Inc. — Q3 2020 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2020. ADT provides security, automation, and smart-home services, primarily in the U.S.; it reported approximately 6.5 million recurring customers.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1,298.9 million | $1,300.6 million | $4,000.1 million | $3,827.4 million |
| Operating income (loss) | $62.9 million | $(51.2) million | $24.0 million | $132.3 million |
| Net loss | $(113.1) million | $(181.6) million | $(520.1) million | $(352.2) million |
| Operating margin | 4.8% | (3.9)% | 0.6% | 3.5% |
| Adjusted EBITDA (non-GAAP) | $563.8 million | $624.5 million | $1,666.4 million | $1,876.1 million |
- Revenue mix: Q3 monitoring and related services revenue was $1,045.7 million, down 4.4%; installation and other revenue was $253.2 million, up 22.3%. For the nine months, those categories were $3,133.0 million, down 3.6%, and $867.1 million, up 50.0%, respectively.
- Cash flow: Nine-month operating cash flow was $993.3 million, versus $1,459.2 million. Investing cash use was $800.3 million, versus $1,156.9 million. Free cash flow, a company-defined non-GAAP measure, was $343.3 million, down from $394.0 million.
- Debt and liquidity: Total debt carrying value was approximately $9.7 billion. Cash and cash equivalents were $489.4 million; ADT also reported $400 million available under its revolving facility and $159 million of uncommitted capacity under its receivables facility. Management stated liquidity was adequate for operating and business needs over the next 12 months. The company was in compliance with its debt covenants.
- Other balance-sheet measures: Current assets were $1.18 billion and current liabilities were $1.25 billion. Stockholders’ equity was $3.14 billion.
Material changes versus the prior comparable period
- Nine-month revenue rose 4.5%, but net loss widened by $168.0 million and Adjusted EBITDA fell by $209.6 million. Operating cash flow declined by $466.0 million.
- Monitoring revenue and recurring monthly revenue were affected by the 2019 sale of ADT Canada. September 30 recurring monthly revenue was $341.4 million, down from $351.4 million a year earlier; management attributed the decrease mainly to the Canadian sale, partly offset by U.S. pricing improvements. Gross customer revenue attrition improved to 12.9% from 13.5%.
- Installation revenue increased substantially following the Defenders acquisition and a temporary shift toward customer-owned equipment sales. ADT said it does not expect the same level of revenue growth after transitioning residential transactions back toward a company-owned model.
- Nine-month results included an $81 million charge to settle a pre-existing relationship with Defenders, $115 million of debt-extinguishment losses, and higher credit-loss provisions. In 2019, results included a $45.5 million goodwill impairment and a $55.5 million loss on sale of business, affecting comparisons.
- ADT refinanced debt: it issued $1.3 billion of 6.25% second-lien notes to refinance higher-coupon notes and issued $1.0 billion of 3.375% first-lien notes to redeem $1.0 billion of notes due 2021. The refinancings generated substantial extinguishment costs.
Outlook, commentary, and risks
- Outlook: The filing gives no specific full-year revenue or earnings guidance. Management expected adequate liquidity and continued capacity to service debt and pay regular quarterly dividends, while cautioning that COVID-19 effects remained uncertain.
- COVID-19: Management said the commercial channel was more affected than residential, citing lower commercial equipment sales and broader economic uncertainty. It noted additional safety and work-from-home costs, temporary cost controls, and increased credit-loss provisions. Future effects could materially affect estimates and results.
- Business-model transition: The new residential sales and financing model, and the planned return toward company-owned systems, may change revenue, margins, operating cash flow, and investing cash flow. Management said the initiative was in its early stages and outcomes were uncertain.
- Google partnership: Google invested $450 million for 54.7 million Class B shares, approximately 6.6% ownership on an as-converted basis. The parties’ commercial agreement includes product and service supply, certain sales exclusivity, and $150 million marketing commitments from each party, subject to milestones. Integration and commercialization timing, exclusivity terms, and termination provisions are material considerations.
- Other notable risks: ADT estimated net costs of $200–$325 million through 2022 for replacing 3G/CDMA equipment; $49 million had been incurred through September, with $50–$75 million expected for 2020. The company is highly leveraged and had a $305 million net liability for interest-rate swaps; hedge de-designation contributed to higher interest expense. The filing also describes litigation, including claims related to unauthorized access by a former technician to 220 customers’ systems.
- Unusual subsequent item: In October 2020, ADT entered a related-party Rackspace agreement with a $50 million minimum purchase commitment over seven years.
Important facts for investors to verify
- Whether the shift back toward company-owned residential systems affects future revenue growth, Adjusted EBITDA, and the timing of operating versus investing cash flows.
- Whether COVID-19-related customer attrition, credit losses, and commercial demand improve or worsen.
- Debt maturities, refinancing costs, covenant compliance, interest-rate exposure, and the availability of the uncommitted receivables facility.
- Progress and economics of the Google integration, including milestones, exclusivity, marketing contributions, and termination risks.
- Actual radio-conversion costs and timing, and developments in the disclosed litigation and customer-access matter.