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The ADT Corporation’s (ADT - Analyst Report) third quarter fiscal 2014 GAAP net income declined to $82 million or 47 cents per share from $113 million or 52 cents per share in the year-ago quarter. The year-over-year decrease in earnings is primarily due to high operating costs during the reported quarter associated with being a standalone public company.  

Excluding non-recurring items, adjusted net income stood at $97 million or 55 cents per share in the reported quarter, versus $116 million or 53 cents per share in the year-ago quarter. Although absolute 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 9 cents.


 

 

Quarter Details

Revenues for the quarter increased 1.9% year over year to $849 million and perfectly matched the Zacks Consensus Estimate. Recurring revenues of $785 million, which accounted for 92.5% of total revenue in the reported quarter, was up 2.7% compared with the year-earlier period. Recurring revenue growth was largely driven by an increase in average revenue per customer, which was up 3.9% year over year to $41.85. ADT closed the quarter with 6.4 million customer accounts.

Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) decreased 9.3% to $388 million in the reported quarter from $428 million in the prior-year period. However, EBITDA before special items improved 4.4% to $452 million. Adjusted EBITDA margins improved 120 basis points to 53.2% due to productivity improvements and cost efficiencies.

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 49% of customer additions, up from 28% 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 improved 30 basis points to 13.9% on a sequential basis, while unit attrition in residential and small business channels was up 20 basis points sequentially to 13.5% due to relocations associated with the housing recovery and non-pay customers. The company also expanded its dealer network and forged a 5-year renewal contract with its largest dealer Defender Direct to drive new growth initiatives.

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 collaborated with location-based services and family networking technology provider Life360 to add a new dimension to its expanding portfolio. The partnership between the two leading players in their respective categories aims to develop innovative co-branded mobile security applications to provide greater safety and security services to families. In order to facilitate mutual bonding and trust in the business relationship, ADT has decided to take a minority interest in Life360 by investing $25 million. Both the companies are expected to work in unison to develop a new mobile application that will offer personal security solutions for on-the-go families. The upcoming mobile app will enable users to have a direct access to ADT’s round-the-clock monitoring centers that can connect them to police, fire and emergency medical responders.

Subsequent to the quarter end, ADT closed the acquisition of Reliance Protectron, Inc. – one of the largest security monitoring and installation companies in Canada. With the deal, ADT has strengthened its Canadian presence to better serve over 800,000 local customers with the best of products and solutions along with superior customer service in the security industry. In addition, the strategic buy will offer a steady revenue stream to ADT as Protectron reportedly has higher levels of customer retention than other major players in North America. Post-acquisition, the Canadian firm will continue to use the Protectron brand under ADT ownership.
    
Balance Sheet and Cash Flow

Cash and cash equivalents at quarter end were $250 million, while long-term debt aggregated $4,725 million. Subsequent to the quarter end, ADT borrowed $375 million from the revolving credit facility to fund the Protectron acquisition. Cash from operating activities totaled $1,165 million for the nine months of fiscal 2014 compared with $1,273 million in the prior-year period. Free cash flow before special items decreased 40.6% to $98 million in the quarter.
    
ADT repurchased 2.6 million of its shares for $79 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 Dun & Bradstreet Corp. (DNB - Analyst Report), McGraw Hill Financial, Inc. (MHFI - Analyst Report) and FTI Consulting, Inc. (FCN - Analyst Report), each carrying a Zacks Rank #2 (Buy).

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