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The ADT Corporation’s (ADT - Analyst Report) second quarter fiscal 2014 GAAP net income declined to $63 million or 34 cents per share from $107 million or 47 cents per share in the year-ago quarter. The year-over-year decrease in earnings is primarily due to high operating costs and interest expense during the reported quarter associated with being a standalone public company.  

Excluding non-recurring items, adjusted net income stood at $89 million or 49 cents per share in the reported quarter, versus $95 million or 41 cents per share in the year-ago quarter. Although adjusted net income declined year over year, it increased on a per share basis due to lower number of outstanding shares during the reported quarter. The quarterly adjusted earnings exceeded the Zacks Consensus Estimate by 5 cents.

Quarter Details

Revenues for the quarter increased 1.9% year over year to $837 million. However, it failed to meet the Zacks Consensus Estimate of $845 million. Recurring revenues of $773 million, which accounted for 92% of total revenue in the reported quarter, was up 2.2% compared with the year-earlier period. Recurring revenue growth was largely driven by an increase in average revenue per customer, which was up 3.2% year over year to $41.05. ADT closed the quarter with 6.4 million customer accounts.

Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) were marginally up to $420 million in the reported quarter from $419 million in the prior-year period. However, EBITDA before special items improved 5.4% to $431 million. Adjusted EBITDA margins improved 170 basis points to 51.5% due to productivity improvements and cost reductions.

In its earnings release, ADT provided key insights in some of the initiatives it has taken to accelerate growth, improve cost efficiencies, and optimize capital structure. In order to capture a greater pie in the market, the company invested heavily in its ADT Pulse platform and launched several new products. ADT Pulse take rates climbed to 44% of customer additions, up from 23% in the year-earlier quarter.

During the quarter, ADT aimed to reduce customer attrition by initiating tighter credit screening policies, implementing resale efforts and customer loyalty programs. Revenue attrition was flat at 14.2% on a sequential basis, while unit attrition in residential and small business channels was up 10 basis points sequentially to 13.7% due to rise in attrition in the small business channel. The company also expanded its dealer network and forged partnership with companies like McAfee to extend its footprint in security of physical and digital assets.

In order to reduce subscriber acquisition costs, ADT implemented new technology and installation procedures and optimized lead management, sales conversion and marketing activities across all channels.

The company also announced the acquisition of Reliance Protectron Security Services for approximately $500 million, funded from cash on hand and additional borrowings from revolving credit facility. The acquisition is expected to strengthen ADT’s Canadian operations and create a combined security industry leader in the country. The acquired firm will also enable ADT to reach more consumers and provide them with better service and choice across a variety of traditional security and automation technologies.
    
Balance Sheet and Cash Flow

Cash and cash equivalents at quarter end were $332 million, while long-term debt aggregated $4,712 million. During the quarter, ADT issued $500 million worth of senior unsecured term notes. Cash from operating activities totaled $757 million for the six months of fiscal 2014 compared with $812 million in the prior-year period. Free cash flow before special items increased 33% to $121 million in the quarter.
    
The company increased its quarterly dividend by 60% to 20 cents per share. ADT repurchased 6.7 million of its shares for $200 million during the reported quarter under its $3 billion share repurchase program. Since the beginning of fiscal 2014, the company has repurchased 35 million shares for $1.4 billion.

Other Stocks to Consider

ADT currently has a Zacks Rank #3 (Hold). Stocks that look promising and are worth a look now in the industry include Nielsen Holdings N.V. (NLSN - Snapshot Report), IHS Inc. (IHS - Snapshot Report) and Corporate Executive Board Co. (CEB - Snapshot Report), each carrying a Zacks Rank #2 (Buy).

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