The ADT Corporation reported its financial results for the fourth quarter and full year 2014. The Company reported diluted earnings per share of $0.47. Excluding special items for the separation from Tyco, merger and restructuring costs, 2G radio conversion costs, and discrete tax items, diluted earnings per share was $0.55, a 19.6% increase as compared to diluted earnings per share excluding special items of $0.46 in the fourth quarter of 2013. Using the Company's cash tax rate, diluted earnings per share before special items was $0.79
FOURTH QUARTER 2014 FINANCIAL HIGHLIGHTS
* GAAP results: revenue of $883 million, net income of $82 million, diluted EPS of $0.47
* Diluted EPS before special items of $0.55(1); up 19.6% over prior year period
* Recurring revenue of $819 million, up 5.4% or 5.8% in constant currency(1)(2)
* EBITDA before special items of $458 million(1), up $27 million or 6.3%
* BITDA margin before special items of 51.9%(1), up 100 basis points from prior year
* Operating cash flow of $354 million and steady-state free cash flow of $966 million(1), up 3% from prior year
FOURTH QUARTER 2014 BUSINESS HIGHLIGHTS
* ADT Pulse customers grow to over 1 million
* Lowered revenue attrition to 13.5%, a sequential and year-over-year improvement of 40 basis points
* Lowered unit attrition to 13.2%, a sequential improvement of 30 basis points
* Reduced Direct Channel net SAC creation multiple to 30.1x, a sequential improvement of 1.0x
* Customer base reaches 6.7 million, not including wholesale contract monitoring accounts of approximately 95,000
* Completed post-separation transition activities from Tyco
* Completed 83,000 2G conversions in fourth quarter 2014; 221,000 in FY 2014
The ADT Corporation reported its financial results for the fourth quarter and full year 2014. The Company reported diluted earnings per share of $0.47. Excluding special items for the separation from Tyco, merger and restructuring costs, 2G radio conversion costs, and discrete tax items, diluted earnings per share was $0.55, a 19.6% increase as compared to diluted earnings per share excluding special items of $0.46 in the fourth quarter of 2013. Using the Company's cash tax rate, diluted earnings per share before special items was $0.79
The Company reported total revenue of $883 million, an increase of 4.4%, or 4.7% in constant currency, compared to the fourth quarter of 2013. Recurring revenue, which made up 93% of total revenue in the quarter, was $819 million, up 5.4% compared to the same period last year and up 5.8% in constant currency. Recurring revenue growth in the quarter was primarily driven by an increase in ADT's organic average revenue per customer, which rose 3.7% over last year to $42.32, and the consolidation of Reliance Protectron for eleven weeks in the quarter. Revenue attrition for the quarter improved 40 basis points sequentially and year-over-year to 13.5%, while unit attrition for residential and small business improved 30 basis points sequentially, and 10 basis points from last year, to 13.2%. ADT closed the quarter with 6.7 million customer accounts, including Reliance Protectron accounts, a 3.6% increase over last year. The customer accounts exclude approximately 95 thousand wholesale contract monitoring accounts. EBITDA before special items increased by $27 million to $458 million, 6.3% higher than the prior year and EBITDA margin before special items was 51.9%, a 100 basis point improvement over the comparable period last year. The year-over-year increase in margins was primarily attributable to recurring revenue growth, productivity improvements and cost efficiencies slightly offset by the consolidation of Protectron in the quarter. Excluding Protectron, EBITDA margin before special items was 52.6%, 170 basis points above fourth quarter of 2013.
Free cash flow before special items was $54 million(1) in the quarter, down from $91 million(1) in the same period last year due to an increase in customer acquisitions and other growth investments, as well as higher interest paid on incremental debt in the quarter. The Company also reported steady-state free cash flow before special items, calculated on a pre-tax and unlevered basis, of $966 million(1), up 3% from last year.
FULL YEAR 2014 RESULTS
For the year ended September 26, 2014, the Company reported net income of $304 million and diluted earnings per share of $1.66. Total revenue was $3.4 billion, a year-over-year increase of 3.0%, or 3.4% in constant currency(1). Recurring revenue was $3.2 billion, up 3.7% compared to the same period last year and up 4.0% in constant currency(1). EBITDA before special items increased by $77 million to $1.8 billion(1), ending 4.6% higher than the prior year and EBITDA margins before special items was 51.8%(1), a 70 basis point improvement year-over-year. EBITDA margins before special items excluding Protectron was 52.0%(1), 90 basis points above 2013, in line with our guidance for margin improvement of at least 50 basis points. Excluding special items, diluted earnings per share for the year was $2.02(1) compared to diluted earnings per share excluding special items of $1.84(1) in 2013. Using the Company's cash tax rate, diluted earnings per share before special items was $2.92(1).
"We ended the year with a solid quarter, consistent with our most recent guidance, positioning us to drive profitable growth in the year ahead," said Naren Gursahaney, ADT's chief executive officer. "I am proud of how our team has responded to the competitive landscape, while continuing to leverage ADT's competitive advantages to deliver a great customer experience and create long term value for our shareholders. We continued to build on the momentum we have seen over the past two quarters, as we drove increases in gross adds, exceeding last year's strong fourth quarter performance, and reduced attrition below prior year and our guidance for the year. Our strong operational results and our continued commitment to cost efficiency fueled improvements in EBITDA before special items(1) and bottom line results(1). Pulse continues to perform well, as we recently added our one millionth Pulse customer, and our overall fourth quarter take rate was 51%. We completed our post-separation transition activities from Tyco, freeing up resources to sharpen the focus on our operations, to improve the customer experience, and to strengthen our competitive position. While we are pleased with our progress this quarter, we recognize we have more to accomplish and I am excited about what our team can accomplish in the year ahead."
PROGRESS ON 2014 PRIORITIES: DELIVERING ON GROWTH INITIATIVES
* Growth investments in ADT Pulse propels Pulse customer base to over 1 million subscribers - The Company continued to extend its position as a leading provider of monitored interactive home automation solutions, achieving strong growth in its ADT Pulse platform. In our residential direct channel, approximately 70% of new customers purchased a Pulse security system, and upgrade units more than doubled from a year ago. Total ADT Pulse surpassed the one millionth customer milestone and now make up 16% of ADT's total customer base.
* Attrition reduction initiatives leading to improved customer retention - The majority of customer attrition is driven by relocations associated with the housing recovery as well as non-pay customers. The Company continued to take action to reduce customer attrition by completing its roll out of tighter credit screening policies and implementing other non-pay initiatives, strengthening resale efforts, customer loyalty programs, and driving increased penetration of ADT Pulse automation services, which currently exhibits better retention characteristics. These actions, along with a more stable housing market, drove improvements resulting in revenue attrition in the quarter of 13.5% -- a 40 basis point improvement sequentially and year-over-year, and unit attrition in our residential and small business channels of 13.2% -- a 30 basis point improvement sequentially and 10 basis points below 2013.
* Increases in dealer channel production surpasses prior year level - Aligned with a key priority to improve productivity in the dealer channel, the Company took steps to strengthen the quality and output of this channel.
* *Customer adds from the dealer channel grew by 20% sequentially and 17% from the fourth quarter last year. ADT dealer production, excluding Protectron, rose 7% sequentially and 5% from the fourth quarter last year. Dealer production has risen every quarter this year and this is the first quarter in 2014 we reported year-over-year growth.
* *The Company expanded its dealer network and drove a 47% take rate in ADT Pulse units in the quarter, up from 23% in the comparable period last year.
* Expanding presence in business interactive security and automation - The Company is executing on growth initiatives in the small business and mid-size commercial space.
* *Following the expiration of the non-compete provisions with Tyco, the Company re-branded its Small Business channel as ADT Business, with an expanded focus into the mid-size commercial space.
* *ADT Pulse take rate in the small business channel continued to improve as 46% of new small business customers added during the quarter adopted Pulse.
* *The Company expanded its video surveillance and analytics offering to include both cloud-based and on-site secure storage solutions, providing small business owners with enhanced visibility into the security of their business premises.
* *The Company continued to execute upon its strategic plan to deliver customized security and automation solutions to address the most common needs and concerns of business owners within a particular industry by announcing the Food and Beverage Solutions Bundle in addition to the previously announced ADT Retail Solutions Bundle.
* Forging new partnerships to achieve future vision - The Company continued to build out its strategic partnerships as it looks to expand beyond its strength in managing and protecting physical assets to protecting digital assets and protecting its customers outside of the home.
* *The Company announced that it will begin marketing its products and services at Best Buy, creating a strong reatil presence for ADT in the US.
* *The Company announced a new relationship with IFTTT, a service that enables consumers to create powerful connections with one simple statement - if this then that. The partnership will enhance the ADT Pulse home automation experience as ADT and IFTTT are planning to test a beta version of an ADT Pulse Channel on IFTTT, connecting a customer's ADT Pulse-enabled home with more than 100 existing Channel partners. Whether it's adjusting the thermostat in reaction to local weather conditions, or arming the security system based on users' GPS data, an ADT Pulse Channell on IFTTT could enable users to put many aspects of their home on auto-pilot.
* Completed Reliance Protectron acquisition positioning Canadian operations for growth - The Company completed its acquisition of Reliance Protectron, expanding and strengthening its position in Canada. The Company has begun integrating Protectron's operations and customer base, which includes approximately 370,000 high quality residential and commercial customers (excluding approximately 30,000 wholesale contract monitoring accounts). Included in the Company's consolidated results are Protectron's operations for 11 weeks of the fourth quarter 2014.
"We delivered another quarter of solid execution and improved operating metrics, while accelerating our investment in growth," said Michael Geltzeiler, ADT's chief financial officer. "In the fourth quarter, we closed the Protectron acquisition, prepared for the launch of expanded commercial capabilities and advanced several new partnerships designed to strengthen our business for the future. We achieved our cost objectives for the year, grew steady-state free cash flow(1), improved EBITDA margin before special items by 90 basis points(1) before Protectron and drove direct subscriber acquisition creation multiples back below 30x for the quarter. For the year, we reported a 10% increase in diluted EPS before special items(1) enhanced by optimizing our capital structure with the repurchase of 35 million shares and increasing leverage. We also increased our quarterly dividend by 60%. With the post-separation transition activities behind us, we have a healthy list of productivity improvements still to be executed in both cost to serve and SAC, providing a runway for increased profitability and investment funding to fuel growth."
PROGRESS ON 2014 PRIORITIES: DRIVING COST EFFICIENCIES
* The Company made progress on its cost efficiency initiatives, improving its EBITDA margin before special items(1) and direct creation multiple excluding the impact of upgrades over the course of the year. Total operating expenses before special items(3) were up only 5.5% over last year despite the acquisitions of Reliance Protectron and Devcon as well as higher depreciation and amortization ("D&A") expenses of 10.5%, as we transition our customer base to Pulse and home automation. Excluding D&A, total operating expenses before special items(3 rose 1.8%.
* Cost to serve / G&A - Cost to serve before special items(3) was up 3.5% compared to last year and increased 6.8% sequentially due to higher product related costs associated with the increase in ADT Pulse accounts and the addition of Reliance Protectron.
* Subscriber acquisition cost (SAC) / Creation multiple - Total net SAC creation multiple, excluding the impact of Pulse upgrades, was 30.6x, a sequential improvement of 0.4x. Direct net SAC creation multiple, excluding the impact of upgrades and Protectron was 29.9x. Sequential improvements in the net creation multiple were driven by SAC improvements, partially due to the higher level of gross additions, rationalization in the installation area and higher ARPU from our new customers. We expect to benefit more from these and other initiatives, including the launch of electronic contracts and planned hardware efficiencies in 2015.
PROGRESS ON 2014 PRIORITIES: CAPITAL STRUCTURE OPTIMIZATION
* Share repurchase - In 2014, the Company has repurchased 35 million shares for $1.4 billion, at an average price of $38.49.
* Debt/Capital Structure - Long-term debt totaled $5.1 billion at the end of the quarter, bringing the Company's leverage ratio, based off of a trailing twelve month EBITDA before special items, to 2.8(1) on a pro-forma basis.
* Quarterly dividend - The Company paid a quarterly dividend of $0.20 per share on August 20th, an increase of 60% versus last year.
FULL YEAR FISCAL 2015 GUIDANCE
The Company is providing the following guidance for full year fiscal 2015:
* Recurring revenue growth in the range of 5% - 6%
* EBITDA before special items growth in the range of $70M - $100M
* Year-over-year increase in gross additions for direct and dealer channels
* Unit attrition below 13%
* Steady-state free cash flow before special items greater than $1 billion