ADT CORP (THE) ADT S
June 10, 2013 - 9:50am EST by
Den1200
2013 2014
Price: 40.10 EPS $0.00 $0.00
Shares Out. (in M): 299 P/E 0.0x 0.0x
Market Cap (in $M): 9,182 P/FCF 0.0x 0.0x
Net Debt (in $M): 3,236 EBIT 0 0
TEV ($): 12,419 TEV/EBIT 0.0x 0.0x
Borrow Cost: NA

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  • Competition short
  • Home security
  • Competitive Threats
 

Description

For those that want the document with formated tables, I posted the write up here too. (Often my tables do not see to format well on the VIC.)

 

cablebeach did a great write up on ADT last November. Still I believe he did not address what I think is the most relevant part of the short thesis. He is right about the high valuation, but did not address the serious risk of the cable providers ramping up in order to compete in the property security space. ADT will see pressure on its margins and its market share, which will worsen its ROIC and drive multiple contraction.

 

Most of us know what ADT does. It is the main provider of residential security systems in theUSwith about 25% market share in a very scattered field of competitors, overwhelmingly small players. The next largest competitor has less than 5% of the market. 90% of revenues are classified as recurring and 10% comes from installation. 55% of sales are in house while the other 45% is generated through a network of dealers. Once in a while ADT also purchases a number of alarm customers from other outside sources too.

The industry grows unit volume at about 1% to 2% a year. Penetration is about 20% of all housing units in theUS. Although, before stating that the runway is the other 80%, the addressable market is a lot smaller. For one, about 25% of all household units are rental units that do not have alarm service and will likely never install the service. Also in the condo market alarms have less penetration. In addition alarms are not very prevalent in poorer areas. In general thieves go where the money is.

 

The long thesis is that ADT is a great business as represented by its high EBITDA margins in a slowly growing market on a unit basis. There is nothing that should stop ADT from garnering more market share in its fragmented market. The feeling is also that ADT has significant pricing power in excess of inflation with a long runway. ADT is also looked at favorably because it seems to pay little in taxes. Lastly long investors believe a secular change is taking place in the industry towards more complex monitoring services that will drive up ARPU and profits.

On first sight this is an attractive story but it is my belief that it is way too optimistic. This is a story where investors are looking in the rear view mirror rather than through the windshield. New, large and well capitalized competitors that have a strategic advantage are aggressively entering the market at prices significantly below those of ADT. This will drive lower margins for ADT and impact its pricing power significantly. Actually, ADT is at a cost disadvantage compared to these competitors. In short, my thesis is that ADT is trading at multiples that are at the higher end of the range at exactly the time it is about to face a significant new and powerful competition.

 

So what about the competition …

 

Well the current new competition I am talking about is mainly Comcast, Time Warner Cable and AT&T. These are the front runners, but I believe more players will enter the market, as they did in the past.

 

The large cable players have been ramping up operationally in the security business in a big way. From their perspective it makes sense to enter this market:

  1. The cable companies are already in the home. ADT has a 25% market share with 20% penetration. In short, ADT is in 5% of all the household units. Contrary to that the cable industry (including the Direct TV's and Dish's of this world) are already in 90% plus of all household units. Cable is in about 60% while the other 30% is satellite and the rest does not pay for service. The cable companies also have a more active relationship with their consumers in general than ADT does. They already have the phone numbers and personal information of all these consumers. It will cost the cable companies a lot less to reach the consumer than it costs ADT.
  2. The cable sales cycle also has a higher dollar value and is already in place as the cable company is setting up more services at the same time. How much will it cost Comcast when Mr. Johnson calls to setup his new service cable service? “Mr. Johnson would you need a security service added to your triple play? We are running a great special.” In Q2 2013 ADT paid $583 per unit in marketing and sales expenses and $292 in commission expenses per new unit in direct channel subscriber acquisition costs. That is a total of $875 per unit installed just in sales and commission expenses. Somehow I find it hard to believe it is going to cost the cable companies $875 per unit to ask a new subscriber if he’d like a security service added to his order. Nor does it cost as much for the cable companies to reach out to current consumers in order to offer them alarm service. Also regarding the general advertising budget, the cable providers won’t even need to spend much additional money on advertising for the new security service as they have already enough other advertising driving the consumer to call the cable companies. Or they can just change the current advertising for the triple play into advertising for a quadruple play.
  3. In addition, the cable companies also have installation cost advantages over ADT. After all the installer will already be in the house in order to install the cable package. It won’t cost much more to install the alarm system at the same time.
  4. The cable companies also have different EBITDA margins. Where ADT runs around 50%, the cable companies currently in the mid 30%. Just that allows the cable companies to offer significantly lower pricing.
  5. Bundling of services has been a great strategy for the cable companies as not only an offensive play, offering increased value, but also as a defensive play in order to drive down attrition as much as possible. After all, it is a lot cheaper to keep a customer than to have to replace one. The cable companies over the last few years have struggled to maintain TV subscribers and bundling TV with broadband and VOIP has been a very effective strategy. Actually nowadays the value creator is broadband. Bundling services has been the driver of growth in the last few years and adding security systems is a logical extension. Just as with VOIP, the cable companies had lower sales, marketing and installation expenses and were able to drive that business at the expense of the independent operators.

Actually, it seems bundling services is going to be even more important in the future than it is now. For example John Malone believes that the TV landscape and bundling of TV content is going to struggle long-term. He believes the TV content bundle will break apart and that different sales/media channels/business models will emerge. I would recommend that you check out the following interviews with John Malone at http://www.cnbc.com/id/100637283.

In addition, from talking to someone at Dish, they are seeing disturbing trends in viewership especially among young viewers. Their surveys see young viewers still watching as much content as the rest of us, but they watch it through different channels. The share of TV time amongst that group is in fast decline. And it gets worse the younger they get. Currently 30 year olds watch more TV than 25 year olds and 25 year olds more than 20 year olds, etc. The younger they are the less they rely on TV. Also 30 year olds currently still watch as much TV as they did 10 years ago and so on. So you get the fear they have in TV land. It also points out that TV is losing in value in the cable companies offering, but increases the value of broadband especially and the rest of the service bundle in general.

 

Now lets compare the different service offerings.

 

ADT

According to the ADT sales rep, soon ADT will change its offerings. Today, June 8, 2013, if you go on the site you will see three offerings, QuickConnectPlus, Pulse Choice and Pulse Premier Lite. Soon there will be five plans.

  • Traditional which is the basic plan for $35.99 a month, which basically includes burglar alarm and smoke monitoring. If you do not have a landline you pay an additional $4 monthly for the cell phone connection. If you want temperature control, water detection and carbon monoxide the price goes up ex cell phone to $39.99. The installation fee is $299, but if you add cell phone it is another $100. If you want to add temperature, water and carbon monoxide it is another $100 per item for installation. Currently there is a $200 rebate with installation. This is the plan that is currently called ADT Quick Connect Plus and used to cost $42.99 without cell phone, carbon monoxide, water and temperature. So ADT is lowering the price from $42.99 to $35.99.
  • Pulse Remote which is the entry Pulse system. It basically has the same functionality as Traditional, but it allows you to remotely arm your alarm and gives you text notifications in case of an incident. In addition it is already cell phone based. The installation fee is similar to that of Pulse Control at $349 with a $200 rebate and the monthly monitoring cost is $47.99. There is no extra monthly fee for carbon monoxide, water and temperature, but there is an extra $100 charge per item for installation of carbon monoxide, water and temperature. Pulse comes with a cell phone connection, so there is no additional monthly charge.
  • Pulse Control, which is similar to the old Pulse Choice, is $49.99 a month and is similar to Pulse Remote, but it adds remote lock control and lighting and thermostat control. The installation fee is $349 with a current $200 rebate for a total cost of $149. Again additional charges for carbon monoxide, temperature and water installation.
  • Pulse Video Lite is Pulse Control with video added to it, which is now going to be $55.99 a month rather than the $57.99 a month it is today. The installation cost is $499 with a $250 rebate. The video offering is in essence live video with a 30 second rewind function.
  • Pulse Video which is going to cost $57.99 a month with pretty much the same video service as Pulse Video Lite, but with more equipment installed, like a touch screen which the other packages do not have and 1 more camera. The installation fee for that is going to be $999. And I assume the current $250 rebate will be valid here too.

I have no idea when the installation rebates are going to disappear, but they might not for some time. They have been available for some time now and it seems to be a strategy by ADT to bring their installation pricing down to the level of the cable providers, which offer in general equal or more generous installation packages at lower prices. Installation is the typical switch and bait game and a great way to confuse things for the consumer.

 

So here are the basic packages for ADT

 

ADT Traditional – Installation $299 ($200 rebate) for net of $99

ADT Pulse Remote and Control – $349 ($200 rebate) for net of $149

ADT Video Lite – $499 ($250 rebate) for net of $249.

ADT Video – $999 ($250 rebate for net of $749)

1 security system

2 sensors

1 motion detector

1 key fob

1 siren

1 security system

2 sensors

1 motion detector

1 security system

2 sensors

1 motion detector

1 lamp module

1 indoor video camera

1 security system

2 sensors

1 motion detector

1 lamp module

2 indoor video cameras

1 touch screen.

 

Time Warner Cable – Intelligent Home

Time Warner Cable only services its own customers with Intelligent Home. Where the competitors offer different service levels Time Warner has one level of service. In short, if you install the equipment, you can have it all for one monthly price. Time Warner Cable offers $39.95 per month all included if you are signed up with Time Warner Cable for broadband. Then if you sign up for a second service you get the monthly service for $33.95. If you have a triple play, meaning TV, Broadband and VOIP, the price of the security service goes down to $28.95 per month.

Compare that with the monthly fees of ADT, going from $35.99 a month for basic all the way to $57.99.

 

Here is an overview of the monthly costs for ADT versus TWC.

 

 

ADT Traditional

ADT Traditional Cell phone

ADT Pulse Remote

ADT Pulse Control

ADT Pulse Video Lite

ADT Pulse Video

Monthly Cost ADT

$35.99

$39.99

$47.99

$49.99

$55.99

$57.99

Similar TWC One Service

$39.95

$39.95

$39.95

$39.95

$39.95

$39.95

Similar TWC Plan 2 Services

$33.95

$33.95

$33.95

$33.95

$33.95

$33.95

Similar TWC Plan 3 Services

$28.95

$28.95

$28.95

$28.95

$28.95

$28.95

 

Below are the current Time Warner Installation packages.

The Ultra installation package at $699 is significantly cheaper than the ADT Video installation package which even after rebate is $749, with a pre rebate price of $999. And still TWC’s package contains significantly more value.

The Premier package is better than ADT’s Video Lite, with a current post rebate cost for ADT of $249 and a pre rebate price of  $499 with the TWC full price being $399. Btw, when mentioning the ADT rebate, the TWC person said he would gladly match the offer.

The Select package is cheaper than ADT’s for similar items. ADT’s has a pre rebate cost listed of $349 for its Pulse Control package with a post rebate cost of $149, where TWC offer $99 for this installation package.

 

TWC Ultra $699 Installation

TWC Premier $399 Installation

TWC Select $99 Installation

1 Indoor Camera

1 Outdoor/Night Camera

4 Window/Door Sensors

1 Motion Detector

1 Key fob

1 Touch Screen

1 Thermostat

1 Light Module

1 Indoor Camera

4 Window/Door Sensors

1 Motion Detector

1 Key fob

1 Touch Screen

2 Sensors

1 Touch Screen

1 Motion Detector

 

ADT Traditional – Installation $299 ($200 rebate) for net of $99

ADT Pulse Remote and Control – $349 ($200 rebate) for net of $149

ADT Video Lite – $499 ($250 rebate) for net of $249.

ADT Video – $999 ($250 rebate for net of $749)

1 security keypad

2 sensors

1 motion detector

1 key fob

1 siren

1 security keypad

2 sensors

1 motion detector

1 security keypad

2 sensors

1 motion detector

1 lamp module

1 indoor video camera

1 security keypad

2 sensors

1 motion detector

1 lamp module

2 indoor video cameras

1 touch screen.

 

Also TWC requires only a 18 month contract where ADT wants 36 months.

In short, TWC has in general cheaper installation costs than ADT, but also has lower monthly service charges and a lower contract period.

 

Comcast – Xfinity Home

Comcast offers three levels of service. All require a three year commitment. One is required to have at least Xfinity Broadband service.

  • Basic service is $29.95 per month. This is a similar product as the Traditional product offered by ADT for $35.99, although ADT’s works through a landline while Comcast’s service uses broadband and has a cell phone backup. Adding the cell phone brings the ADT price up to $39.99.
  • Preferred is $39.95 per month. Preferred can be compared to ADT’s Pulse Video service which retails for $57.99 a month.
  • Premier which is $49.95 per month and includes enhanced video service. It is somewhat of an upgraded version of ADT’s Pulse Video, but not by much. It just offers better quality video and you can save some video clips. You also get a better installation package, but the additional price does not seem to warrant it. I do not fully understand why paying the extra $10 a month makes sense. I guess its another marketing gimmick, which certainly is not a first for Comcast. Comcast could easily get rid of this package when competing with ADT.

Anyway when comparing plans, Preferred can best be compared to ADT’s Pulse Video and the cheaper ADT plans.

So Comcast is about 20% cheaper when it comes to the basic plan and about $16 to $18 per month cheaper than ADT’s similar plans. If one compares the Preferred service to ADT’s Remote and Control plans Preferred is still $8 to $10 a month cheaper.

Still as part of the plays, Comcast also discounts the home security service monthly fee further in case one purchases more than just Comcast Broadband. If one adds one more service it offers a monthly discount of $10 monthly for the first 6 months. In case one purchases TV, VOIP, Broadband, and Xfinity home security service, the monthly $10 discount is valid for $24 months. So in case of two services the average monthly price paid over 36 months then becomes $38.28. In case one purchase broadband, TV and VOIP, the average monthly cost becomes $33.28.

 

Here is an overview of the monthly costs for ADT versus Comcast.

 

 

ADT Traditional

ADT Traditional Cell phone

ADT Pulse Remote

ADT Pulse Control

ADT Pulse Video Lite

ADT Pulse Video

Monthly Cost ADT

$35.99

$39.99

$47.99

$49.99

$55.99

$57.99

Similar Comcast Plan

$29.95

$29.95

$39.95

$39.95

$39.95

$39.95

Similar Comcast Plan Post Rebate 2 Services

$29.95

$29.95

$38.28

$38.28

$38.28

$38.28

Similar Comcast Plan Post Rebate 3 Services

$29.95

$29.95

$33.28

$33.28

$33.28

$33.28

 

Comcast Preferred Installation Package

Cost installed is $99

Comcast Premier Installation Package

Cost installed is $399

1 Touch Screen Controller

3 Window/Door Sensors

1 Motion Detector

1 Wireless Keypad

1 Touch Screen Controller

3 Window/Door Sensors

1 Motion Detector

1 Wireless Keypad

2 Indoor/Outdoor Cameras

1 Thermostat

2 Lighting/Appliance Controllers

 

ADT Traditional – Installation $299 ($200 rebate) for net of $99

ADT Pulse Remote and Control – $349 ($200 rebate) for net of $149

ADT Video Lite – $499 ($250 rebate) for net of $249.

ADT Video – $999 ($250 rebate for net of $749)

1 security keypad

2 sensors

1 motion detector

1 key fob

1 siren

1 security keypad

2 sensors

1 motion detector

1 security keypad

2 sensors

1 motion detector

1 lamp module

1 indoor video camera

1 security keypad

2 sensors

1 motion detector

1 lamp module

2 indoor video cameras

1 touch screen.

 

Comcast’s installation packages are significantly more competitive than those of ADT. Let’s start with the Comcast Premier installation which is $399 and comparable in value offered to that of ADT Pulse Video at a post rebate price of $749. Comcast’s Preferred installation is $99 and comparable to that of Pulse Remote and Control at a post rebate cost of $149.

So across the board Comcast is a better value. On the installation package cost it does very well and on the monthly fee it is significantly cheaper than ADT.

 

AT&T.

 

AT&T does not offer a discount for signing up with Uverse, but offered $100 off the installation cost and the first month free.

Their basic package which they call Simple Security is $29.99 and can be compared to the other basic packages, like ADT’s Traditional Package. It is about $6 cheaper on a monthly basis than ADT in case one has a landline and in case of no landline, the cost of the basic package with AT&T is about $10 cheaper monthly.

Then there is the Smart Security package. So AT&T's Smart package is $39.99 to start. Then in case one wants water detection it is an additional $4.99 a month, in case one wants the energy solution that’s another $4.99 a month, the door solution is another $4.99 a month and video adds another $9.99 a month.

Here is the cost for similar services from AT&T

 

 

ADT Traditional

ADT Traditional Cell phone

ADT Pulse Remote

ADT Pulse Control

ADT Pulse Video Lite

ADT Pulse Video

Monthly Cost ADT

$35.99

$39.99

$47.99

$49.99

$55.99

$57.99

AT&T

$29.99

$29.99

$29.99

$54.96

$64.95

$64.95

 

As you can see, AT&T is really competitive up to the point we get to ADT’s Pulse Control package at which point its price escalates above that of ADT. Now as you will see later, AT&T makes up for that with the Smart Installation package which is a lot more competitive than ADT’s.

 

Regarding equipment, AT&T the Simple Security installation package post the $100 rebate is more competitive than ADT’s after the $200 rebate. On the Smart Security Package then AT&T is certainly more competitive than ADT. The Smart package can be compared to the ADT Video package when one adds 2 cameras. If one adds 2 video cameras to the Smart package at $200 total, then the total cost is still only $349 while ADT Video is $749. All for a package that has way more value than ADT’s.

 

AT&T Simple Security ($149 - $49 after $100 current rebate)

AT&T Smart Security ($249 - $149 after $100 current rebate)

1 keypad

4 window/door sensors

1 key fob

1 siren

1 keypad

4 window/door sensors

1 key fob

1 siren

And an addition 3 items to be chosen from

  • Carbon Monoxide monitor
  • A pack of 4 window/door sensors
  • Glass break sensors
  • Indoor siren
  • Key fob
  • Motion detector
  • Smoke Alarm

 

ADT Traditional – Installation $299 ($200 rebate) for net of $99

ADT Pulse Remote and Control – $349 ($200 rebate) for net of $149

ADT Video Lite – $499 ($250 rebate) for net of $249.

ADT Video – $999 ($250 rebate for net of $749)

1 security keypad

2 sensors

1 motion detector

1 key fob

1 siren

1 security keypad

2 sensors

1 motion detector

1 security keypad

2 sensors

1 motion detector

1 lamp module

1 indoor video camera

1 security keypad

2 sensors

1 motion detector

1 lamp module

2 indoor video cameras

1 touch screen.

 

So overall, I would say that AT&T’s monthly fees on the low end as well as installation fees are a better deal than ADT. On the higher end the monthly fees are not as competitive, but the installation packages are way cheaper than ADT’s. At least $400 difference in value, which represents about $11 a month on a 36 month contract.

 

Apples to Apples comparison

 

So I decided to compare similar packages from all four providers. The installation package I requested was the following:

  • 1 keypad
  • 2 doors
  • 3 motion detectors
  • 6 windows
  • 2 inside cameras

The system had to be able to provide me with video and basic protection.

 

Here is a comparison of the total cost:

 

 

ADT

TWC (1 service)

TWC (2 services)

TWC (3 services)

Comcast (1 Service)

Comcast (2 Services)

Comcast (3 Services)

AT&T

Installation Package

$1,219.00*

$899.90

$899.90

$899.90

$868.90

$868.90

$868.90

$349.98**

Relevant Package Price

$55.99

$39.95

$33.95

$28.95

$39.95

$38.28

$33.28

$49.98

Total cost after 36 months

$3234.64

$2,338.10

$2,122.10

$1,942.10

$2,307.10

$2,246.98

$2,066.98

$2,149.26

Average Total Cost Per Month (36)

$89.85

$64.95

$58.95

$53.95

$64.09

$62.42

$57.42

$59.70

Total cost after 72 months

$5,250.28

$3,776.30

$3,344.30

$2,984.30

$3,745.30

$3,625.06

$3,265.06

$3,948.54

Average Total Cost Per Month (72)

$72.92

$52.45

$46.45

$51.45

$52.02

$50.35

$45.35

$54.84

*The base price for ADT was $1,419, but ADT offered me a $200 rebate offer.

** After $100 rebate from AT&T.

 

Lets now take a look at a basic package, similar to Traditional by ADT. I took the prior package, but removed the video cameras.

 

 

ADT

TWC (1 service)

TWC (2 services)

TWC (3 services)

Comcast (1 Service)

Comcast (2 Services)

Comcast (3 Services)

AT&T

Installation Package

$919.00*

$699.02

$699.02

$699.02

$669.00

$669.00

$669.00

$149.99**

Relevant Package Price

$39.99

$39.95

$33.95

$28.95

$29.95

$29.95

$29.95

$29.99

Total cost after 36 months

$2,358.64

$2,137.22

$1.921.22

$1,741.22

$1,747.20

$1,747.20

$1,747.20

$1,229.63

Average Total Cost Per Month

$65.52

$59.37

$53.37

$48.37

$48.53

$48.53

$48.53

$34.16

Total cost after 72 months

$3,798.28

$3,575.42

$3,143.42

$2,783.42

$2,825.40

$2,825.40

$2,825.40

$2,309.27

Average Total Cost Per Month (72)

$52.75

$49.66

$43.66

$38.66

$39.24

$39.24

$39.24

$32.07

*The base price for ADT was $1,419, but they have a $200 rebate offer.

** After $100 rebate from AT&T.

 

Looking at the “Average Cost Per Month” rows one sees how out of touch ADT’s pricing is. Does anyone think that ADT will be able to maintain that pricing against an onslaught of the likes of TWC, Comcast and AT&T and still maintain or gain market share?

 

Coverage Cable Companies

Now one of the arguments made is that TWC and Comcast do not cover the whole country while ADT does. Well TWC and Comcast cover about 2/3rd of the country. AT&T seems to be interested in covering the whole country independent of Uverse.

There are about 114 million households in theUS. Of that 60% or 68.4 million pay for cable. 30% or 34.2 pay for satellite. The other 10% does not pay. At the end of 2012 TWC had 14.7 million residential consumer relationships and about 0.6 million business relationships. At the end of 2012 Comcast passed 53.2 million homes in 40 states plus theDistrict of Columbiawith more than 22 million consumers. Together TWC and Comcast have 53% of the market in the cable market. In short all three have plenty of coverage to have a huge impact on ADT. And that assumes that the other cable or satellite companies won’t jump in too.

 

Cable companies want size.

ADT has about a $25% market share with $3 billion in recurring revenues. That would make for a market of $12 billion a year. Now for sure the security market size is smaller as ADT is in general at the high end for ARPU. TWC and Comcast, nor AT&T do not enter markets for small $. Just the VOIP revenue for Q1 2013 for TWC was $519 million or about $2 billion annualized. TWC is interested in this market as they believe they can gain market share and make this a business of size. If it was just to add another $100 million to the top line they wouldn’t have bothered. If they want to make the security business of the same sizes as VOIP it would have to capture 18.35% of the market.

 

More Competition

I believe that other providers will enter the market, although my thesis does not rely on it. In addition there is a push for self monitored systems. The idea is that you as the owner get warned yourself, not through a 24/7 monitoring station. When an incident happens, a number of people are contacted at the same time. So you might have your phone turned off, but your wife/friends/family are still getting the texts stating there is something going on. I haven’t figured out if this is a trend of the future. It has some weaknesses for sure. My main worry is one of liability? So a friend ignores an incident signal, a burglar kills the resident and his relatives sue the friend afterwards? I struggle with this whole concept of self monitoring, but who knows. It doesn’t matter though if I am wrong, because in case self-monitoring happens it is just as bad for the future of ADT as they are for Comcast or TWC. Verizon has a plan for about $9 a month and Lowe’s too is selling a similar product. Comcast offered me a self-monitored plan for $14 a month.

 

Competitive Advantage

In his December write-up sandman898 makes an argument that ADT has some kind of competitive advantage. I must respectfully disagree there. To me the moat seems to be about an inch wide. Especially against these new competitors they are at a disadvantage when it comes to scale, sales and marketing, and installation costs. ADT has about 6.4 million customers, Comcast has 22 million, TWC has 15 million. And Comcast and TWC both deliver multiple services from cable and broadband to VOIP. All services that are more technically difficult to operate than a security alarm service. Lastly Comcast, TWC, nor AT&T have a problem properly underwriting its customers, something that was mentioned to often be a problem for small operators.

In its basic form an alarm is a service that sends a signal to a remote center which then calls the police and the owner. If it was more complicated the field would not be full of small mom and pop operators.

Regarding the social proof of saving $10 by not using ADT, I can’t agree with that argument. If that argument was that powerful ADT would already have a lot more marketshare. Also since ADT has only a 25% marketshare in a market that has 20% penetration I find it hard to assume there are many streets and neighborhoods exclusively using ADT.

 

More than 50% of ADT customers are off contract

More than 50% of ADT customers are off contract. I assume that is the case for the whole industry at this time. All households the cable operators can reach out too cheaply.

 

The installation cost and its impact on ADT’s cash flow

The shift to lower installation pricing, what ADT calls retaining ownership, ends up in increase Subscriber System Assets, has a significant impact on the financial statements.

First regarding the term retaining ownership. Yes on paper ADT is the owner of the equipment, but the consumer maintains functional ownership of the equipment. What is ADT going to do? Call the consumer to see if they can setup an appointment where they can go and rip out depreciated equipment that has no value to ADT? I spoke to two ADT reps to clarify this issue and they both had never seen an instance where ADT retrieved equipment. As one rep said, “disassembling an alarm system is not like unplugging and sending back a cable box and we can’t force our way into the property”.

Now the impact is that there is a larger cash layout upfront, which leads to more depreciation and higher EBITDA. So be careful with using EBITDA as the valuation method over the next few years as the quality of the EBITDA is going to deteriorate.

Also lowering installation costs while increasing the monthly subscriber fee does help the first 36 months when you are under contract, but after the 36 months are over you have to lower your pricing in order to match the competition or you will drive your attrition numbers up. Any alarm company will give you a great deal if it does not have to subsidize installation. Btw. I do not believe ADT is going to be able to increase its monthly pricing as an offset for higher installation subsidies.

Also, the same argument can be made around the ARPU increase because of the change from landlines to cell phone connections. Switching from landline to cell phone added $4 a month to the ARPU, but that’s just a pass through from expenses with no additional margin.

Increased installation costs also increases the risk of the business. If I use $1,360 in SAC per new unit, that gets me $36.11 per month and the cost to serve per unit is about $13.28 per unit monthly. That gets me to a cost of $49.39 a month per unit. Some plans have a lower revenue per month, some higher, so it takes ADT about 36 months to get its money back. If in month 37 the consumer leaves, ADT’s ROIC will be close to 0%. Basically the more upfront subsidies you offer, the worse the risk profile becomes. And the business clearly is moving towards increased installation subsidies.

 

The evolution of the Subscriber Acquisition Costs is not good.

 

 

TTM Q4 2011 Dealer

TTM Q1 2012 Dealer

TTM Q2 2012 Dealer

TTM Q4 2012 Dealer

TTM Q1 2013 Dealer

TTM Q2 2013 Dealer

SAC Per Unit

 $       1,212

 $       1,233

 $       1,245

 $       1,255

 $       1,267

 $       1,254

 

 

 

 

 

 

 

 

TTM Q4 2011 Direct

TTM Q1 2012 Direct

TTM Q2 2012 Direct

TTM Q4 2012 Direct

TTM Q1 2013 Direct

TTM Q2 2013 Direct

SAC Per Unit

 $       1,115

 $       1,113

 $       1,120

 $       1,157

 $       1,201

 $       1,250

 

 

 

 

 

 

 

SAC Per Unit

FY 2012 Direct Channel

Q1 2013 Direct Channel

Q2 2013 Direct Channel

 

 

 

Sales and Marketing

 $          517

 $          535

 $          534

 

 

 

Commissions

 $          274

 $          299

 $          292

 

 

 

Installation Cost

 $          821

 $          860

 $          981

 

 

 

Gross SAC

 $       1,612

 $       1,694

 $       1,807

 

 

 

Installation Revenue

 $       (455)

 $       (431)

 $       (447)

 

 

 

Net SAC

 $       1,157

 $       1,263

 $       1,360

 

 

 

 

Especially the Direct SAC per unit is increasing consistently and seems to be accelerating over the last few quarters. Installation revenue is slightly decreasing while installation cost is increasing. Based on my apples to apples comparison, if ADT wants to bring its net installation cost to the consumer in line with that of TWC and Comcast it would have to take down per unit installation revenue by $200 to $300. The difference with AT&T’s $769 and $869.

 

ADT experience

So as part of my scuttle butt I did call ADT as well as the other providers a lot about pricing and making it sound as if I was installing a system. So Friday morning the ADT rep calls me and asks if I am ready to move forward. Upon which I make up an excuse saying that I went with another provider because of price. This was the instant reply of the rep, “Comcast … right?” At which point I say yes and give him a soft apology, saying “you did great work, but Comcast was just a lot cheaper.” Again rep “I know, I know. You aren’t the first one I lost to Comcast.”

Maybe I was the second one or the third, but given the rep’s frustrated reaction it seems he has lost a fair amount of business to Comcast. Why otherwise would his first reaction be “Comcast … right?”.

 

Attrition and Depreciation

Attrition is important and has been going up. For every customer that disconnects you have to find a new one, either a resale or new customer. Every 1% attrition represents about $30 million in recurring revenue that needs to be replaced. This also has an impact on depreciation. ADT depreciates 58% of the subscriber system assets in the first 5 years, 25% in the next 5 years and 17% over the last 5 years and the intangible assets, which basically is the business purchased from the dealers, are depreciated 67% in the first 5 years, 22% in the second five years and 11% in the last five years. For an easy calculation I assume that approximately 50% of ADT's business is direct and 50% is dealer. This gives me a weighted average depreciation period of 7.58 year which points to an attrition rate of 13.1%. Actual unit attrition currently runs at 17% indicating a 5.9 year average effective life. ADT points to recurring revenue attrition which is 13.9% in Q2 2013. They say that the customers cancelling are lower ARPU customers so one needs to us recurring revenue attrition. I disagree and believe that one should use the unit attrition numbers when thinking about depreciation. After all, the life of the equipment is not related to the ARPU a consumer pays. Independent of the ARPU, ADT has to depreciate the equipment. So based on the current unit attrition rate of 17% ADT seems to be under depreciating its subscriber assets and intangibles by about 28%.

So either the unit attrition rate comes down again to the 13% rate long term or at some point ADT will have to adjust its depreciation and accelerate its depreciation schedule. Naturally this does not have much of an impact on the FCF, but it does mean that the current income statement net income might be too high.

My believe is that this attrition rate will stay high or increase. Even if ADT takes its pricing down, it still is going to be fighting an uphill battle, Vonage style, against the cable companies. And high attrition means lower average effective life per unit, resulting in lower ROIC.

 

Market Cap and EV

 

Market Cap and EV

 

Number of shares

229,000,000

ADT

$40.00

Marketcap

$9,160,000,000

Cash

($209,500,000)

Deferred Income Tax Asset

($102,000,000)

Debt

$3,227,000,000

Deferred Tax Liabilities

$321,000,000

EV

$12,396,500,000

 

Comments:

  1. Cash: I took 50% of the Q2 2013 cash. After all, companies need cash to operate.
  2. Deferred Taxes: I included deferred taxes. In case ADT’s growth goes flat these deferred taxes will have to be paid soon. And you need cash to pay taxes to the IRS.

 

Using the income statement for the valuation.

 

Income Statement Levered

 Q2 2013

Minus 5% ARPU

Minus 10% ARPU

Minus 15% ARPU

Recurring Revenue T6M

 $1,500

$1,425

$1,350

$1,275

Installation Revenue T6M

$130

$130

$130

$130

Total Revenue T6M

$1,630

$1,555

$1,480

$1,405

Cost of Revenue T6M

$677

$677

$677

$677

SG&A T6M

$582

$582

$582

$582

Operating Income T6M

$371

$296

$221

$146

Interest Expense T6M

$60

$60

$60

$60

Income Before Tax T6M

$311

$236

$161

$86

Tax (35%) T6M

$109

$83

$56

$30

Net Income T6M

$202

$153

$105

$56

Annualized NI

$404

$307

$209

$112

Market Cap

$9,180

$9,180

$9,180

$9,180

Valuation Multiple

                               22.7

                   29.9

                   43.9

                   82.1

 

 

 

 

 

Income Statement Unlevered

 Q2 2013

Minus 5% ARPU

Minus 10% ARPU

Minus 15% ARPU

Recurring Revenue T6M

$1,500

$1,425

$1,350

$1,275

Installation Revenue T6M

$130

$130

$130

$130

Total Revenue T6M

$1,630

$1,555

$1,480

$1,405

Cost of Revenue T6M

$677

$677

$677

$677

SG&A T6M

$582

$582

$582

$582

Operating Income T6M

$371

$296

$221

$146

Interest Expense T6M

-  

-  

-  

-  

Income Before Tax T6M

$371

$296

$221

$146

Tax (35%) T6M

$130

$104

$77

$51

Net Income T6M

$241

$192

$144

$95

Annualized NI

$482

$385

$287

$190

EV

$12,417

$12,417

$12,417

$12,417

Valuation Multiple

                               25.7

                   32.3

                   43.2

                   65.4

 

In the above table I valued the company just using the income statement. Some comments:

  1. T6M: In order to give ADT the benefit of the doubt I decided to use ADT’s 6 month trailing as it had higher recurring revenues.
  2. Revenue: I left Installation Revenue flat as we are still installing as many units. Installation revenue per unit will likely go down over time as the trend is to have higher installation subsidies for consumer.
  3. Cost of revenue and SG&A: The ARPU is pretty much independent from Cost of Revenue and SG&A. While I kept units flat in this exercise I do not see why expenses would come down.
  4. Interest expense: In the levered version I took the interest rate for Q2 2013 as it reflects the increase in debt taken on in Q2, 2013.
  5. Taxes: Yes, I am aware that at this time ADT does not pay a lot of cash taxes at this time. But once growth slows down, the cash taxes will normalize. Lets say you spend $300 upfront and you depreciate it 1/6th over the next 6 years or you depreciate $0 in years 1 to 3 and then 1/3rd in years 4 to 6, the difference in NPV is pretty small. You can defer the taxes, but not avoid them.
  6. Lastly, you' see that I excluded the separation costs and the other income in order to focus on the operating side of the business.

 

So I stuck to ARPU decline instead of taking a mix of ARPU declines and unit declines. Trying to get to a scenario that predicts unit and price declines and run that through a pro-forma income statement would have just been more confusing and had little benefit. Now if you assume that ARPU goes down by 3% and ADT losses a net 2% of subscribers, that number is pretty close to my minus 5% ARPU decline number. Or you can assume flat ARPU and 5% net loss in subscribers.

It all comes down to how well ADT will hold up to the new competition. I think we all agree that when Comcast, TWC and AT&T entered this business it had to be worth their while. In order for this business to make a dent all three need to capture real market share, which I am sure they are all planning on doing. And they have shown us they can do so with broadband and VOIP. For example TWC’s VOIP business has revenues of about $2 billion a year currently. In order for TWC to match that with Intelligent Home it has to end up with a market share of 18.35% or 4.7 million units. So does anyone believe that in a market in which units expand by 1% to 2% a year at best, with the new competitors aggressively courting market share, that ADT will be shielded to the point ADT might lose almost no customers nor see a decline in ARPU? Especially since its total average monthly cost is significantly higher than that of the competition?

 

Steady State Free Cash Flow

ADT makes a Steady State Free Cash Flow argument, meaning how much free cash flow would be generated in case ADT wanted to keep its recurring revenue flat. They assume they replace the attrition by replacing 100% of the direct sales and then buy as much from dealers as is needed to maintain recurring revenue. The numbers they show are huge, close to $950 million using ADT’s Q2 2013 number. Btw. ADT calculations can be found in their Q2 2013 slide presentation on page 8 and page 11 of the Q2 2013 earnings release.

 

Now the way I calculate the adjusted SSFCF I get to a much smaller number. I started with the 6 month trailing numbers, then annualize and deduct the necessary capex. My adjusted SSFCF number is $587 million. I have three scenarios below. One is based on the inputs ADT used. The next one is the same calculation but assuming that no increase in prices would have taken place over the last 12 months and the 3rd one assumes what would have happened in case the recurring revenue declined by 5% over the last 12 months. The numbers do not look pretty. In case we had had a 5% decrease in recurring revenue the adjusted SSFCF would have been negative $266 million. In case of no price increase the adjusted SSFCF would have been $244 million. ADT throws a number of $953 million at us.

 

A large difference is made by the fact that I use a post tax number. In my world, taxes need to be paid. That’s why in ADT’s situation they end up as deferred. Anyway, in a steady state scenario, the gap between the GAAP Income Statement tax rate and the cash tax rate would disappear. After all, it is the combination of upfront cash outlays and growth that drives that gap. When we go steady state, that growth goes away. In short, one can’t go steady state and assume that ADT’s cash tax rate will stay low.

In addition, in a steady state, many of the other operating cash flow changes, like working capital would become neutral over time.

 

As you look at the multiple below, you can see that ADT isn’t cheap on a steady state basis. I for one would not be interested in paying 20 times plus for a steady state business. And you can see what happens to the multiple if prices start going down.

 

Steady State Free Cash Flow Unlevered

With Price Increase

No Price Increase

5% Price Decline

Net Income Unlevered T6M

$241

$209

$162

Depreciation and Amortization T6M

$459

$459

$459

Amortization Deferred SAC T6M

$60

$60

$60

Amortization Deferred SAR T6M

$(65)

$(65)

$(65)

Adjusted Net Operating Cash Flow T6M

$695

$663

$616

Annualized Adjusted Net Operating Cash Flow

$1,390

$1,325

$1,232

Capex Subscriber Assets (TTM)

$471

$471

$471

Capital Expenditures (TTM)

$76

$76

$76

Dealer Accounts Required To Maintain Recurring Revenue (TTM)

$256

$534

$951

Total Capex TTM

$803

$1,081

$1,498

Adjusted Steady State FCF

$587

$244

$(266)

EV

$12,397

$12,397

$12,397

Multiple

21.1

                    50.7

                  (46.6)

 

Comments:

  1. T6M: Just giving ADT the benefit of the doubt I decided to use ADT’s 6 month trailing as it had higher recurring revenues.

 

Recurring Monthly Revenue valuation

I use an RMR of $250 million and an EV of $12.4 billion to get a current RMR valuation of 50.

 

What do I think ADT is worth?

I believe it’s worth a lot less than $40 per share. It all depends on what multiple we think its worth given the new scenario and that’s naturally a personal decision. Using my own expectations, being a mix of higher installation subsidies, lower ARPU and at best equal, but probably declining units, I assume a fair value at this time of $24 to $26 a share. Assuming my 5% decline in ARPU scenario, which I believe to be pretty benign, and putting a 15 multiple on that NI, I get to $20.

 

One last point

Even if you think I am wrong, you can’t be guaranteed to be right yourself … so should ADT be selling for its current multiple given the increased risk profile?

After all, ADT was just drafted into the major leagues and it is going to find out that the majors are a lot harder to compete in. Now I am not saying ADT does not belong in the majors, just that its old competition was from the minor leagues, while Comcast, TWC and AT&T are used to playing in the majors and no one is sure how well ADT will hold up.

 

Risk

The cable companies mess up the roll out and do not get traction. Since each run more than 15 million customers they should be able to get the operations right.

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

The continued national build out of the networks by the TWC, Comcast, AT&T and whomever joins them. Remember they are still in the first inning. It will not take much for the newcomers to start taking share from ADT and the rest of the market. I expect that ADT’s net additions will start turning consistently negative one of these quarters. When it does it will come as a surprise to many investors. In order for ADT to prevent that from happening it will have to lower its prices and not just on installations. Its either ADT’s average total monthly cost that comes down or units installed come down.
    sort by    

    Description

    For those that want the document with formated tables, I posted the write up here too. (Often my tables do not see to format well on the VIC.)

     

    cablebeach did a great write up on ADT last November. Still I believe he did not address what I think is the most relevant part of the short thesis. He is right about the high valuation, but did not address the serious risk of the cable providers ramping up in order to compete in the property security space. ADT will see pressure on its margins and its market share, which will worsen its ROIC and drive multiple contraction.

     

    Most of us know what ADT does. It is the main provider of residential security systems in theUSwith about 25% market share in a very scattered field of competitors, overwhelmingly small players. The next largest competitor has less than 5% of the market. 90% of revenues are classified as recurring and 10% comes from installation. 55% of sales are in house while the other 45% is generated through a network of dealers. Once in a while ADT also purchases a number of alarm customers from other outside sources too.

    The industry grows unit volume at about 1% to 2% a year. Penetration is about 20% of all housing units in theUS. Although, before stating that the runway is the other 80%, the addressable market is a lot smaller. For one, about 25% of all household units are rental units that do not have alarm service and will likely never install the service. Also in the condo market alarms have less penetration. In addition alarms are not very prevalent in poorer areas. In general thieves go where the money is.

     

    The long thesis is that ADT is a great business as represented by its high EBITDA margins in a slowly growing market on a unit basis. There is nothing that should stop ADT from garnering more market share in its fragmented market. The feeling is also that ADT has significant pricing power in excess of inflation with a long runway. ADT is also looked at favorably because it seems to pay little in taxes. Lastly long investors believe a secular change is taking place in the industry towards more complex monitoring services that will drive up ARPU and profits.

    On first sight this is an attractive story but it is my belief that it is way too optimistic. This is a story where investors are looking in the rear view mirror rather than through the windshield. New, large and well capitalized competitors that have a strategic advantage are aggressively entering the market at prices significantly below those of ADT. This will drive lower margins for ADT and impact its pricing power significantly. Actually, ADT is at a cost disadvantage compared to these competitors. In short, my thesis is that ADT is trading at multiples that are at the higher end of the range at exactly the time it is about to face a significant new and powerful competition.

     

    So what about the competition …

     

    Well the current new competition I am talking about is mainly Comcast, Time Warner Cable and AT&T. These are the front runners, but I believe more players will enter the market, as they did in the past.

     

    The large cable players have been ramping up operationally in the security business in a big way. From their perspective it makes sense to enter this market:

    1. The cable companies are already in the home. ADT has a 25% market share with 20% penetration. In short, ADT is in 5% of all the household units. Contrary to that the cable industry (including the Direct TV's and Dish's of this world) are already in 90% plus of all household units. Cable is in about 60% while the other 30% is satellite and the rest does not pay for service. The cable companies also have a more active relationship with their consumers in general than ADT does. They already have the phone numbers and personal information of all these consumers. It will cost the cable companies a lot less to reach the consumer than it costs ADT.
    2. The cable sales cycle also has a higher dollar value and is already in place as the cable company is setting up more services at the same time. How much will it cost Comcast when Mr. Johnson calls to setup his new service cable service? “Mr. Johnson would you need a security service added to your triple play? We are running a great special.” In Q2 2013 ADT paid $583 per unit in marketing and sales expenses and $292 in commission expenses per new unit in direct channel subscriber acquisition costs. That is a total of $875 per unit installed just in sales and commission expenses. Somehow I find it hard to believe it is going to cost the cable companies $875 per unit to ask a new subscriber if he’d like a security service added to his order. Nor does it cost as much for the cable companies to reach out to current consumers in order to offer them alarm service. Also regarding the general advertising budget, the cable providers won’t even need to spend much additional money on advertising for the new security service as they have already enough other advertising driving the consumer to call the cable companies. Or they can just change the current advertising for the triple play into advertising for a quadruple play.
    3. In addition, the cable companies also have installation cost advantages over ADT. After all the installer will already be in the house in order to install the cable package. It won’t cost much more to install the alarm system at the same time.
    4. The cable companies also have different EBITDA margins. Where ADT runs around 50%, the cable companies currently in the mid 30%. Just that allows the cable companies to offer significantly lower pricing.
    5. Bundling of services has been a great strategy for the cable companies as not only an offensive play, offering increased value, but also as a defensive play in order to drive down attrition as much as possible. After all, it is a lot cheaper to keep a customer than to have to replace one. The cable companies over the last few years have struggled to maintain TV subscribers and bundling TV with broadband and VOIP has been a very effective strategy. Actually nowadays the value creator is broadband. Bundling services has been the driver of growth in the last few years and adding security systems is a logical extension. Just as with VOIP, the cable companies had lower sales, marketing and installation expenses and were able to drive that business at the expense of the independent operators.

    Actually, it seems bundling services is going to be even more important in the future than it is now. For example John Malone believes that the TV landscape and bundling of TV content is going to struggle long-term. He believes the TV content bundle will break apart and that different sales/media channels/business models will emerge. I would recommend that you check out the following interviews with John Malone at http://www.cnbc.com/id/100637283.

    In addition, from talking to someone at Dish, they are seeing disturbing trends in viewership especially among young viewers. Their surveys see young viewers still watching as much content as the rest of us, but they watch it through different channels. The share of TV time amongst that group is in fast decline. And it gets worse the younger they get. Currently 30 year olds watch more TV than 25 year olds and 25 year olds more than 20 year olds, etc. The younger they are the less they rely on TV. Also 30 year olds currently still watch as much TV as they did 10 years ago and so on. So you get the fear they have in TV land. It also points out that TV is losing in value in the cable companies offering, but increases the value of broadband especially and the rest of the service bundle in general.

     

    Now lets compare the different service offerings.

     

    ADT

    According to the ADT sales rep, soon ADT will change its offerings. Today, June 8, 2013, if you go on the site you will see three offerings, QuickConnectPlus, Pulse Choice and Pulse Premier Lite. Soon there will be five plans.

    I have no idea when the installation rebates are going to disappear, but they might not for some time. They have been available for some time now and it seems to be a strategy by ADT to bring their installation pricing down to the level of the cable providers, which offer in general equal or more generous installation packages at lower prices. Installation is the typical switch and bait game and a great way to confuse things for the consumer.

     

    So here are the basic packages for ADT

     

    ADT Traditional – Installation $299 ($200 rebate) for net of $99

    ADT Pulse Remote and Control – $349 ($200 rebate) for net of $149

    ADT Video Lite – $499 ($250 rebate) for net of $249.

    ADT Video – $999 ($250 rebate for net of $749)

    1 security system

    2 sensors

    1 motion detector

    1 key fob

    1 siren

    1 security system

    2 sensors

    1 motion detector

    1 security system

    2 sensors

    1 motion detector

    1 lamp module

    1 indoor video camera

    1 security system

    2 sensors

    1 motion detector

    1 lamp module

    2 indoor video cameras

    1 touch screen.

     

    Time Warner Cable – Intelligent Home

    Time Warner Cable only services its own customers with Intelligent Home. Where the competitors offer different service levels Time Warner has one level of service. In short, if you install the equipment, you can have it all for one monthly price. Time Warner Cable offers $39.95 per month all included if you are signed up with Time Warner Cable for broadband. Then if you sign up for a second service you get the monthly service for $33.95. If you have a triple play, meaning TV, Broadband and VOIP, the price of the security service goes down to $28.95 per month.

    Compare that with the monthly fees of ADT, going from $35.99 a month for basic all the way to $57.99.

     

    Here is an overview of the monthly costs for ADT versus TWC.

     

     

    ADT Traditional

    ADT Traditional Cell phone

    ADT Pulse Remote

    ADT Pulse Control

    ADT Pulse Video Lite

    ADT Pulse Video

    Monthly Cost ADT

    $35.99

    $39.99

    $47.99

    $49.99

    $55.99

    $57.99

    Similar TWC One Service

    $39.95

    $39.95

    $39.95

    $39.95

    $39.95

    $39.95

    Similar TWC Plan 2 Services

    $33.95

    $33.95

    $33.95

    $33.95

    $33.95

    $33.95

    Similar TWC Plan 3 Services

    $28.95

    $28.95

    $28.95

    $28.95

    $28.95

    $28.95

     

    Below are the current Time Warner Installation packages.

    The Ultra installation package at $699 is significantly cheaper than the ADT Video installation package which even after rebate is $749, with a pre rebate price of $999. And still TWC’s package contains significantly more value.

    The Premier package is better than ADT’s Video Lite, with a current post rebate cost for ADT of $249 and a pre rebate price of  $499 with the TWC full price being $399. Btw, when mentioning the ADT rebate, the TWC person said he would gladly match the offer.

    The Select package is cheaper than ADT’s for similar items. ADT’s has a pre rebate cost listed of $349 for its Pulse Control package with a post rebate cost of $149, where TWC offer $99 for this installation package.

     

    TWC Ultra $699 Installation

    TWC Premier $399 Installation

    TWC Select $99 Installation

    1 Indoor Camera

    1 Outdoor/Night Camera

    4 Window/Door Sensors

    1 Motion Detector

    1 Key fob

    1 Touch Screen

    1 Thermostat

    1 Light Module

    1 Indoor Camera

    4 Window/Door Sensors

    1 Motion Detector

    1 Key fob

    1 Touch Screen

    2 Sensors

    1 Touch Screen

    1 Motion Detector

     

    ADT Traditional – Installation $299 ($200 rebate) for net of $99

    ADT Pulse Remote and Control – $349 ($200 rebate) for net of $149

    ADT Video Lite – $499 ($250 rebate) for net of $249.

    ADT Video – $999 ($250 rebate for net of $749)

    1 security keypad

    2 sensors

    1 motion detector

    1 key fob

    1 siren

    1 security keypad

    2 sensors

    1 motion detector

    1 security keypad

    2 sensors

    1 motion detector

    1 lamp module

    1 indoor video camera

    1 security keypad

    2 sensors

    1 motion detector

    1 lamp module

    2 indoor video cameras

    1 touch screen.

     

    Also TWC requires only a 18 month contract where ADT wants 36 months.

    In short, TWC has in general cheaper installation costs than ADT, but also has lower monthly service charges and a lower contract period.

     

    Comcast – Xfinity Home

    Comcast offers three levels of service. All require a three year commitment. One is required to have at least Xfinity Broadband service.

    Anyway when comparing plans, Preferred can best be compared to ADT’s Pulse Video and the cheaper ADT plans.

    So Comcast is about 20% cheaper when it comes to the basic plan and about $16 to $18 per month cheaper than ADT’s similar plans. If one compares the Preferred service to ADT’s Remote and Control plans Preferred is still $8 to $10 a month cheaper.

    Still as part of the plays, Comcast also discounts the home security service monthly fee further in case one purchases more than just Comcast Broadband. If one adds one more service it offers a monthly discount of $10 monthly for the first 6 months. In case one purchases TV, VOIP, Broadband, and Xfinity home security service, the monthly $10 discount is valid for $24 months. So in case of two services the average monthly price paid over 36 months then becomes $38.28. In case one purchase broadband, TV and VOIP, the average monthly cost becomes $33.28.

     

    Here is an overview of the monthly costs for ADT versus Comcast.

     

     

    ADT Traditional

    ADT Traditional Cell phone

    ADT Pulse Remote

    ADT Pulse Control

    ADT Pulse Video Lite

    ADT Pulse Video

    Monthly Cost ADT

    $35.99

    $39.99

    $47.99

    $49.99

    $55.99

    $57.99

    Similar Comcast Plan

    $29.95

    $29.95

    $39.95

    $39.95

    $39.95

    $39.95

    Similar Comcast Plan Post Rebate 2 Services

    $29.95

    $29.95

    $38.28

    $38.28

    $38.28

    $38.28

    Similar Comcast Plan Post Rebate 3 Services

    $29.95

    $29.95

    $33.28

    $33.28

    $33.28

    $33.28

     

    Comcast Preferred Installation Package

    Cost installed is $99

    Comcast Premier Installation Package

    Cost installed is $399

    1 Touch Screen Controller

    3 Window/Door Sensors

    1 Motion Detector

    1 Wireless Keypad

    1 Touch Screen Controller

    3 Window/Door Sensors

    1 Motion Detector

    1 Wireless Keypad

    2 Indoor/Outdoor Cameras

    1 Thermostat

    2 Lighting/Appliance Controllers

     

    ADT Traditional – Installation $299 ($200 rebate) for net of $99

    ADT Pulse Remote and Control – $349 ($200 rebate) for net of $149

    ADT Video Lite – $499 ($250 rebate) for net of $249.

    ADT Video – $999 ($250 rebate for net of $749)

    1 security keypad

    2 sensors

    1 motion detector

    1 key fob

    1 siren

    1 security keypad

    2 sensors

    1 motion detector

    1 security keypad

    2 sensors

    1 motion detector

    1 lamp module

    1 indoor video camera

    1 security keypad

    2 sensors

    1 motion detector

    1 lamp module

    2 indoor video cameras

    1 touch screen.

     

    Comcast’s installation packages are significantly more competitive than those of ADT. Let’s start with the Comcast Premier installation which is $399 and comparable in value offered to that of ADT Pulse Video at a post rebate price of $749. Comcast’s Preferred installation is $99 and comparable to that of Pulse Remote and Control at a post rebate cost of $149.

    So across the board Comcast is a better value. On the installation package cost it does very well and on the monthly fee it is significantly cheaper than ADT.

     

    AT&T.

     

    AT&T does not offer a discount for signing up with Uverse, but offered $100 off the installation cost and the first month free.

    Their basic package which they call Simple Security is $29.99 and can be compared to the other basic packages, like ADT’s Traditional Package. It is about $6 cheaper on a monthly basis than ADT in case one has a landline and in case of no landline, the cost of the basic package with AT&T is about $10 cheaper monthly.

    Then there is the Smart Security package. So AT&T's Smart package is $39.99 to start. Then in case one wants water detection it is an additional $4.99 a month, in case one wants the energy solution that’s another $4.99 a month, the door solution is another $4.99 a month and video adds another $9.99 a month.

    Here is the cost for similar services from AT&T

     

     

    ADT Traditional

    ADT Traditional Cell phone

    ADT Pulse Remote

    ADT Pulse Control

    ADT Pulse Video Lite

    ADT Pulse Video

    Monthly Cost ADT

    $35.99

    $39.99

    $47.99

    $49.99

    $55.99

    $57.99

    AT&T

    $29.99

    $29.99

    $29.99

    $54.96

    $64.95

    $64.95

     

    As you can see, AT&T is really competitive up to the point we get to ADT’s Pulse Control package at which point its price escalates above that of ADT. Now as you will see later, AT&T makes up for that with the Smart Installation package which is a lot more competitive than ADT’s.

     

    Regarding equipment, AT&T the Simple Security installation package post the $100 rebate is more competitive than ADT’s after the $200 rebate. On the Smart Security Package then AT&T is certainly more competitive than ADT. The Smart package can be compared to the ADT Video package when one adds 2 cameras. If one adds 2 video cameras to the Smart package at $200 total, then the total cost is still only $349 while ADT Video is $749. All for a package that has way more value than ADT’s.

     

    AT&T Simple Security ($149 - $49 after $100 current rebate)

    AT&T Smart Security ($249 - $149 after $100 current rebate)

    1 keypad

    4 window/door sensors

    1 key fob

    1 siren

    1 keypad

    4 window/door sensors

    1 key fob

    1 siren

    And an addition 3 items to be chosen from

    • Carbon Monoxide monitor
    • A pack of 4 window/door sensors
    • Glass break sensors
    • Indoor siren
    • Key fob
    • Motion detector
    • Smoke Alarm

     

    ADT Traditional – Installation $299 ($200 rebate) for net of $99

    ADT Pulse Remote and Control – $349 ($200 rebate) for net of $149

    ADT Video Lite – $499 ($250 rebate) for net of $249.

    ADT Video – $999 ($250 rebate for net of $749)

    1 security keypad

    2 sensors

    1 motion detector

    1 key fob

    1 siren

    1 security keypad

    2 sensors

    1 motion detector

    1 security keypad

    2 sensors

    1 motion detector

    1 lamp module

    1 indoor video camera

    1 security keypad

    2 sensors

    1 motion detector

    1 lamp module

    2 indoor video cameras

    1 touch screen.

     

    So overall, I would say that AT&T’s monthly fees on the low end as well as installation fees are a better deal than ADT. On the higher end the monthly fees are not as competitive, but the installation packages are way cheaper than ADT’s. At least $400 difference in value, which represents about $11 a month on a 36 month contract.

     

    Apples to Apples comparison

     

    So I decided to compare similar packages from all four providers. The installation package I requested was the following:

    The system had to be able to provide me with video and basic protection.

     

    Here is a comparison of the total cost:

     

     

    ADT

    TWC (1 service)

    TWC (2 services)

    TWC (3 services)

    Comcast (1 Service)

    Comcast (2 Services)

    Comcast (3 Services)

    AT&T

    Installation Package

    $1,219.00*

    $899.90

    $899.90

    $899.90

    $868.90

    $868.90

    $868.90

    $349.98**

    Relevant Package Price

    $55.99

    $39.95

    $33.95

    $28.95

    $39.95

    $38.28

    $33.28

    $49.98

    Total cost after 36 months

    $3234.64

    $2,338.10

    $2,122.10

    $1,942.10

    $2,307.10

    $2,246.98

    $2,066.98

    $2,149.26

    Average Total Cost Per Month (36)

    $89.85

    $64.95

    $58.95

    $53.95

    $64.09

    $62.42

    $57.42

    $59.70

    Total cost after 72 months

    $5,250.28

    $3,776.30

    $3,344.30

    $2,984.30

    $3,745.30

    $3,625.06

    $3,265.06

    $3,948.54

    Average Total Cost Per Month (72)

    $72.92

    $52.45

    $46.45

    $51.45

    $52.02

    $50.35

    $45.35

    $54.84

    *The base price for ADT was $1,419, but ADT offered me a $200 rebate offer.

    ** After $100 rebate from AT&T.

     

    Lets now take a look at a basic package, similar to Traditional by ADT. I took the prior package, but removed the video cameras.

     

     

    ADT

    TWC (1 service)

    TWC (2 services)

    TWC (3 services)

    Comcast (1 Service)

    Comcast (2 Services)

    Comcast (3 Services)

    AT&T

    Installation Package

    $919.00*

    $699.02

    $699.02

    $699.02

    $669.00

    $669.00

    $669.00

    $149.99**

    Relevant Package Price

    $39.99

    $39.95

    $33.95

    $28.95

    $29.95

    $29.95

    $29.95

    $29.99

    Total cost after 36 months

    $2,358.64

    $2,137.22

    $1.921.22

    $1,741.22

    $1,747.20

    $1,747.20

    $1,747.20

    $1,229.63

    Average Total Cost Per Month

    $65.52

    $59.37

    $53.37

    $48.37

    $48.53

    $48.53

    $48.53

    $34.16

    Total cost after 72 months

    $3,798.28

    $3,575.42

    $3,143.42

    $2,783.42

    $2,825.40

    $2,825.40

    $2,825.40

    $2,309.27

    Average Total Cost Per Month (72)

    $52.75

    $49.66

    $43.66

    $38.66

    $39.24

    $39.24

    $39.24

    $32.07

    *The base price for ADT was $1,419, but they have a $200 rebate offer.

    ** After $100 rebate from AT&T.

     

    Looking at the “Average Cost Per Month” rows one sees how out of touch ADT’s pricing is. Does anyone think that ADT will be able to maintain that pricing against an onslaught of the likes of TWC, Comcast and AT&T and still maintain or gain market share?

     

    Coverage Cable Companies

    Now one of the arguments made is that TWC and Comcast do not cover the whole country while ADT does. Well TWC and Comcast cover about 2/3rd of the country. AT&T seems to be interested in covering the whole country independent of Uverse.

    There are about 114 million households in theUS. Of that 60% or 68.4 million pay for cable. 30% or 34.2 pay for satellite. The other 10% does not pay. At the end of 2012 TWC had 14.7 million residential consumer relationships and about 0.6 million business relationships. At the end of 2012 Comcast passed 53.2 million homes in 40 states plus theDistrict of Columbiawith more than 22 million consumers. Together TWC and Comcast have 53% of the market in the cable market. In short all three have plenty of coverage to have a huge impact on ADT. And that assumes that the other cable or satellite companies won’t jump in too.

     

    Cable companies want size.

    ADT has about a $25% market share with $3 billion in recurring revenues. That would make for a market of $12 billion a year. Now for sure the security market size is smaller as ADT is in general at the high end for ARPU. TWC and Comcast, nor AT&T do not enter markets for small $. Just the VOIP revenue for Q1 2013 for TWC was $519 million or about $2 billion annualized. TWC is interested in this market as they believe they can gain market share and make this a business of size. If it was just to add another $100 million to the top line they wouldn’t have bothered. If they want to make the security business of the same sizes as VOIP it would have to capture 18.35% of the market.

     

    More Competition

    I believe that other providers will enter the market, although my thesis does not rely on it. In addition there is a push for self monitored systems. The idea is that you as the owner get warned yourself, not through a 24/7 monitoring station. When an incident happens, a number of people are contacted at the same time. So you might have your phone turned off, but your wife/friends/family are still getting the texts stating there is something going on. I haven’t figured out if this is a trend of the future. It has some weaknesses for sure. My main worry is one of liability? So a friend ignores an incident signal, a burglar kills the resident and his relatives sue the friend afterwards? I struggle with this whole concept of self monitoring, but who knows. It doesn’t matter though if I am wrong, because in case self-monitoring happens it is just as bad for the future of ADT as they are for Comcast or TWC. Verizon has a plan for about $9 a month and Lowe’s too is selling a similar product. Comcast offered me a self-monitored plan for $14 a month.

     

    Competitive Advantage

    In his December write-up sandman898 makes an argument that ADT has some kind of competitive advantage. I must respectfully disagree there. To me the moat seems to be about an inch wide. Especially against these new competitors they are at a disadvantage when it comes to scale, sales and marketing, and installation costs. ADT has about 6.4 million customers, Comcast has 22 million, TWC has 15 million. And Comcast and TWC both deliver multiple services from cable and broadband to VOIP. All services that are more technically difficult to operate than a security alarm service. Lastly Comcast, TWC, nor AT&T have a problem properly underwriting its customers, something that was mentioned to often be a problem for small operators.

    In its basic form an alarm is a service that sends a signal to a remote center which then calls the police and the owner. If it was more complicated the field would not be full of small mom and pop operators.

    Regarding the social proof of saving $10 by not using ADT, I can’t agree with that argument. If that argument was that powerful ADT would already have a lot more marketshare. Also since ADT has only a 25% marketshare in a market that has 20% penetration I find it hard to assume there are many streets and neighborhoods exclusively using ADT.

     

    More than 50% of ADT customers are off contract

    More than 50% of ADT customers are off contract. I assume that is the case for the whole industry at this time. All households the cable operators can reach out too cheaply.

     

    The installation cost and its impact on ADT’s cash flow

    The shift to lower installation pricing, what ADT calls retaining ownership, ends up in increase Subscriber System Assets, has a significant impact on the financial statements.

    First regarding the term retaining ownership. Yes on paper ADT is the owner of the equipment, but the consumer maintains functional ownership of the equipment. What is ADT going to do? Call the consumer to see if they can setup an appointment where they can go and rip out depreciated equipment that has no value to ADT? I spoke to two ADT reps to clarify this issue and they both had never seen an instance where ADT retrieved equipment. As one rep said, “disassembling an alarm system is not like unplugging and sending back a cable box and we can’t force our way into the property”.

    Now the impact is that there is a larger cash layout upfront, which leads to more depreciation and higher EBITDA. So be careful with using EBITDA as the valuation method over the next few years as the quality of the EBITDA is going to deteriorate.

    Also lowering installation costs while increasing the monthly subscriber fee does help the first 36 months when you are under contract, but after the 36 months are over you have to lower your pricing in order to match the competition or you will drive your attrition numbers up. Any alarm company will give you a great deal if it does not have to subsidize installation. Btw. I do not believe ADT is going to be able to increase its monthly pricing as an offset for higher installation subsidies.

    Also, the same argument can be made around the ARPU increase because of the change from landlines to cell phone connections. Switching from landline to cell phone added $4 a month to the ARPU, but that’s just a pass through from expenses with no additional margin.

    Increased installation costs also increases the risk of the business. If I use $1,360 in SAC per new unit, that gets me $36.11 per month and the cost to serve per unit is about $13.28 per unit monthly. That gets me to a cost of $49.39 a month per unit. Some plans have a lower revenue per month, some higher, so it takes ADT about 36 months to get its money back. If in month 37 the consumer leaves, ADT’s ROIC will be close to 0%. Basically the more upfront subsidies you offer, the worse the risk profile becomes. And the business clearly is moving towards increased installation subsidies.

     

    The evolution of the Subscriber Acquisition Costs is not good.

     

     

    TTM Q4 2011 Dealer

    TTM Q1 2012 Dealer

    TTM Q2 2012 Dealer

    TTM Q4 2012 Dealer

    TTM Q1 2013 Dealer

    TTM Q2 2013 Dealer

    SAC Per Unit

     $       1,212

     $       1,233

     $       1,245

     $       1,255

     $       1,267

     $       1,254

     

     

     

     

     

     

     

     

    TTM Q4 2011 Direct

    TTM Q1 2012 Direct

    TTM Q2 2012 Direct

    TTM Q4 2012 Direct

    TTM Q1 2013 Direct

    TTM Q2 2013 Direct

    SAC Per Unit

     $       1,115

     $       1,113

     $       1,120

     $       1,157

     $       1,201

     $       1,250

     

     

     

     

     

     

     

    SAC Per Unit

    FY 2012 Direct Channel

    Q1 2013 Direct Channel

    Q2 2013 Direct Channel

     

     

     

    Sales and Marketing

     $          517

     $          535

     $          534

     

     

     

    Commissions

     $          274

     $          299

     $          292

     

     

     

    Installation Cost

     $          821

     $          860

     $          981

     

     

     

    Gross SAC

     $       1,612

     $       1,694

     $       1,807

     

     

     

    Installation Revenue

     $       (455)

     $       (431)

     $       (447)

     

     

     

    Net SAC

     $       1,157

     $       1,263

     $       1,360

     

     

     

     

    Especially the Direct SAC per unit is increasing consistently and seems to be accelerating over the last few quarters. Installation revenue is slightly decreasing while installation cost is increasing. Based on my apples to apples comparison, if ADT wants to bring its net installation cost to the consumer in line with that of TWC and Comcast it would have to take down per unit installation revenue by $200 to $300. The difference with AT&T’s $769 and $869.

     

    ADT experience

    So as part of my scuttle butt I did call ADT as well as the other providers a lot about pricing and making it sound as if I was installing a system. So Friday morning the ADT rep calls me and asks if I am ready to move forward. Upon which I make up an excuse saying that I went with another provider because of price. This was the instant reply of the rep, “Comcast … right?” At which point I say yes and give him a soft apology, saying “you did great work, but Comcast was just a lot cheaper.” Again rep “I know, I know. You aren’t the first one I lost to Comcast.”

    Maybe I was the second one or the third, but given the rep’s frustrated reaction it seems he has lost a fair amount of business to Comcast. Why otherwise would his first reaction be “Comcast … right?”.

     

    Attrition and Depreciation

    Attrition is important and has been going up. For every customer that disconnects you have to find a new one, either a resale or new customer. Every 1% attrition represents about $30 million in recurring revenue that needs to be replaced. This also has an impact on depreciation. ADT depreciates 58% of the subscriber system assets in the first 5 years, 25% in the next 5 years and 17% over the last 5 years and the intangible assets, which basically is the business purchased from the dealers, are depreciated 67% in the first 5 years, 22% in the second five years and 11% in the last five years. For an easy calculation I assume that approximately 50% of ADT's business is direct and 50% is dealer. This gives me a weighted average depreciation period of 7.58 year which points to an attrition rate of 13.1%. Actual unit attrition currently runs at 17% indicating a 5.9 year average effective life. ADT points to recurring revenue attrition which is 13.9% in Q2 2013. They say that the customers cancelling are lower ARPU customers so one needs to us recurring revenue attrition. I disagree and believe that one should use the unit attrition numbers when thinking about depreciation. After all, the life of the equipment is not related to the ARPU a consumer pays. Independent of the ARPU, ADT has to depreciate the equipment. So based on the current unit attrition rate of 17% ADT seems to be under depreciating its subscriber assets and intangibles by about 28%.

    So either the unit attrition rate comes down again to the 13% rate long term or at some point ADT will have to adjust its depreciation and accelerate its depreciation schedule. Naturally this does not have much of an impact on the FCF, but it does mean that the current income statement net income might be too high.

    My believe is that this attrition rate will stay high or increase. Even if ADT takes its pricing down, it still is going to be fighting an uphill battle, Vonage style, against the cable companies. And high attrition means lower average effective life per unit, resulting in lower ROIC.

     

    Market Cap and EV

     

    Market Cap and EV

     

    Number of shares

    229,000,000

    ADT

    $40.00

    Marketcap

    $9,160,000,000

    Cash

    ($209,500,000)

    Deferred Income Tax Asset

    ($102,000,000)

    Debt

    $3,227,000,000

    Deferred Tax Liabilities

    $321,000,000

    EV

    $12,396,500,000

     

    Comments:

    1. Cash: I took 50% of the Q2 2013 cash. After all, companies need cash to operate.
    2. Deferred Taxes: I included deferred taxes. In case ADT’s growth goes flat these deferred taxes will have to be paid soon. And you need cash to pay taxes to the IRS.

     

    Using the income statement for the valuation.

     

    Income Statement Levered

     Q2 2013

    Minus 5% ARPU

    Minus 10% ARPU

    Minus 15% ARPU

    Recurring Revenue T6M

     $1,500

    $1,425

    $1,350

    $1,275

    Installation Revenue T6M

    $130

    $130

    $130

    $130

    Total Revenue T6M

    $1,630

    $1,555

    $1,480

    $1,405

    Cost of Revenue T6M

    $677

    $677

    $677

    $677

    SG&A T6M

    $582

    $582

    $582

    $582

    Operating Income T6M

    $371

    $296

    $221

    $146

    Interest Expense T6M

    $60

    $60

    $60

    $60

    Income Before Tax T6M

    $311

    $236

    $161

    $86

    Tax (35%) T6M

    $109

    $83

    $56

    $30

    Net Income T6M

    $202

    $153

    $105

    $56

    Annualized NI

    $404

    $307

    $209

    $112

    Market Cap

    $9,180

    $9,180

    $9,180

    $9,180

    Valuation Multiple

                                   22.7

                       29.9

                       43.9

                       82.1

     

     

     

     

     

    Income Statement Unlevered

     Q2 2013

    Minus 5% ARPU

    Minus 10% ARPU

    Minus 15% ARPU

    Recurring Revenue T6M

    $1,500

    $1,425

    $1,350

    $1,275

    Installation Revenue T6M

    $130

    $130

    $130

    $130

    Total Revenue T6M

    $1,630

    $1,555

    $1,480

    $1,405

    Cost of Revenue T6M

    $677

    $677

    $677

    $677

    SG&A T6M

    $582

    $582

    $582

    $582

    Operating Income T6M

    $371

    $296

    $221

    $146

    Interest Expense T6M

    -  

    -  

    -  

    -  

    Income Before Tax T6M

    $371

    $296

    $221

    $146

    Tax (35%) T6M

    $130

    $104

    $77

    $51

    Net Income T6M

    $241

    $192

    $144

    $95

    Annualized NI

    $482

    $385

    $287

    $190

    EV

    $12,417

    $12,417

    $12,417

    $12,417

    Valuation Multiple

                                   25.7

                       32.3

                       43.2

                       65.4

     

    In the above table I valued the company just using the income statement. Some comments:

    1. T6M: In order to give ADT the benefit of the doubt I decided to use ADT’s 6 month trailing as it had higher recurring revenues.
    2. Revenue: I left Installation Revenue flat as we are still installing as many units. Installation revenue per unit will likely go down over time as the trend is to have higher installation subsidies for consumer.
    3. Cost of revenue and SG&A: The ARPU is pretty much independent from Cost of Revenue and SG&A. While I kept units flat in this exercise I do not see why expenses would come down.
    4. Interest expense: In the levered version I took the interest rate for Q2 2013 as it reflects the increase in debt taken on in Q2, 2013.
    5. Taxes: Yes, I am aware that at this time ADT does not pay a lot of cash taxes at this time. But once growth slows down, the cash taxes will normalize. Lets say you spend $300 upfront and you depreciate it 1/6th over the next 6 years or you depreciate $0 in years 1 to 3 and then 1/3rd in years 4 to 6, the difference in NPV is pretty small. You can defer the taxes, but not avoid them.
    6. Lastly, you' see that I excluded the separation costs and the other income in order to focus on the operating side of the business.

     

    So I stuck to ARPU decline instead of taking a mix of ARPU declines and unit declines. Trying to get to a scenario that predicts unit and price declines and run that through a pro-forma income statement would have just been more confusing and had little benefit. Now if you assume that ARPU goes down by 3% and ADT losses a net 2% of subscribers, that number is pretty close to my minus 5% ARPU decline number. Or you can assume flat ARPU and 5% net loss in subscribers.

    It all comes down to how well ADT will hold up to the new competition. I think we all agree that when Comcast, TWC and AT&T entered this business it had to be worth their while. In order for this business to make a dent all three need to capture real market share, which I am sure they are all planning on doing. And they have shown us they can do so with broadband and VOIP. For example TWC’s VOIP business has revenues of about $2 billion a year currently. In order for TWC to match that with Intelligent Home it has to end up with a market share of 18.35% or 4.7 million units. So does anyone believe that in a market in which units expand by 1% to 2% a year at best, with the new competitors aggressively courting market share, that ADT will be shielded to the point ADT might lose almost no customers nor see a decline in ARPU? Especially since its total average monthly cost is significantly higher than that of the competition?

     

    Steady State Free Cash Flow

    ADT makes a Steady State Free Cash Flow argument, meaning how much free cash flow would be generated in case ADT wanted to keep its recurring revenue flat. They assume they replace the attrition by replacing 100% of the direct sales and then buy as much from dealers as is needed to maintain recurring revenue. The numbers they show are huge, close to $950 million using ADT’s Q2 2013 number. Btw. ADT calculations can be found in their Q2 2013 slide presentation on page 8 and page 11 of the Q2 2013 earnings release.

     

    Now the way I calculate the adjusted SSFCF I get to a much smaller number. I started with the 6 month trailing numbers, then annualize and deduct the necessary capex. My adjusted SSFCF number is $587 million. I have three scenarios below. One is based on the inputs ADT used. The next one is the same calculation but assuming that no increase in prices would have taken place over the last 12 months and the 3rd one assumes what would have happened in case the recurring revenue declined by 5% over the last 12 months. The numbers do not look pretty. In case we had had a 5% decrease in recurring revenue the adjusted SSFCF would have been negative $266 million. In case of no price increase the adjusted SSFCF would have been $244 million. ADT throws a number of $953 million at us.

     

    A large difference is made by the fact that I use a post tax number. In my world, taxes need to be paid. That’s why in ADT’s situation they end up as deferred. Anyway, in a steady state scenario, the gap between the GAAP Income Statement tax rate and the cash tax rate would disappear. After all, it is the combination of upfront cash outlays and growth that drives that gap. When we go steady state, that growth goes away. In short, one can’t go steady state and assume that ADT’s cash tax rate will stay low.

    In addition, in a steady state, many of the other operating cash flow changes, like working capital would become neutral over time.

     

    As you look at the multiple below, you can see that ADT isn’t cheap on a steady state basis. I for one would not be interested in paying 20 times plus for a steady state business. And you can see what happens to the multiple if prices start going down.

     

    Steady State Free Cash Flow Unlevered

    With Price Increase

    No Price Increase

    5% Price Decline

    Net Income Unlevered T6M

    $241

    $209

    $162

    Depreciation and Amortization T6M

    $459

    $459

    $459

    Amortization Deferred SAC T6M

    $60

    $60

    $60

    Amortization Deferred SAR T6M

    $(65)

    $(65)

    $(65)

    Adjusted Net Operating Cash Flow T6M

    $695

    $663

    $616

    Annualized Adjusted Net Operating Cash Flow

    $1,390

    $1,325

    $1,232

    Capex Subscriber Assets (TTM)

    $471

    $471

    $471

    Capital Expenditures (TTM)

    $76

    $76

    $76

    Dealer Accounts Required To Maintain Recurring Revenue (TTM)

    $256

    $534

    $951

    Total Capex TTM

    $803

    $1,081

    $1,498

    Adjusted Steady State FCF

    $587

    $244

    $(266)

    EV

    $12,397

    $12,397

    $12,397

    Multiple

    21.1

                        50.7

                      (46.6)

     

    Comments:

    1. T6M: Just giving ADT the benefit of the doubt I decided to use ADT’s 6 month trailing as it had higher recurring revenues.

     

    Recurring Monthly Revenue valuation

    I use an RMR of $250 million and an EV of $12.4 billion to get a current RMR valuation of 50.

     

    What do I think ADT is worth?

    I believe it’s worth a lot less than $40 per share. It all depends on what multiple we think its worth given the new scenario and that’s naturally a personal decision. Using my own expectations, being a mix of higher installation subsidies, lower ARPU and at best equal, but probably declining units, I assume a fair value at this time of $24 to $26 a share. Assuming my 5% decline in ARPU scenario, which I believe to be pretty benign, and putting a 15 multiple on that NI, I get to $20.

     

    One last point

    Even if you think I am wrong, you can’t be guaranteed to be right yourself … so should ADT be selling for its current multiple given the increased risk profile?

    After all, ADT was just drafted into the major leagues and it is going to find out that the majors are a lot harder to compete in. Now I am not saying ADT does not belong in the majors, just that its old competition was from the minor leagues, while Comcast, TWC and AT&T are used to playing in the majors and no one is sure how well ADT will hold up.

     

    Risk

    The cable companies mess up the roll out and do not get traction. Since each run more than 15 million customers they should be able to get the operations right.

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    The continued national build out of the networks by the TWC, Comcast, AT&T and whomever joins them. Remember they are still in the first inning. It will not take much for the newcomers to start taking share from ADT and the rest of the market. I expect that ADT’s net additions will start turning consistently negative one of these quarters. When it does it will come as a surprise to many investors. In order for ADT to prevent that from happening it will have to lower its prices and not just on installations. Its either ADT’s average total monthly cost that comes down or units installed come down.

    Messages


    SubjectAlarm Business
    Entry06/10/2013 11:49 AM
    Membermitc567
    Hi,
     
    Nice detailed write up on your thesis.  I have no horse in this race, but here are some of my views on this business.  
     
    I used to own an alarm business years ago.
     
    The cable operators have the same basic cost to install alarm since they are already penetrated in the market. Their only installation cost advantage comes when someone moves and looks at their new home's cable, phone, internet and alarm needs.
     
    Existing customers, in my experience, don't look to switch to new alarm providers due to the high up front costs that you detailed.  ADT and industry churn tends to run in the low doubles digits, which is due partly to no pay turnoffs and the rest to moving needs.  
     
    There are start up costs for the cable operators since they will need to open new call centers to just handle the alarm business, but that shouldn't be too big of a hurdle.  
     
    If anything I think that this will not affect ARPU in any meaningful way over the next few years since small guys have been underpricing ADT for years.  It will more likely affect growth rates for the current industry players and will probably just squeeze out small players whose price advantage will disappear.  
     
    Those are my thoughts for what they are worth. 
     
    Good luck

    SubjectRE: Alarm Business
    Entry06/10/2013 01:32 PM
    Membersurf1680
    I am short ADT so I am biased.  
     
    I interviewed an acquaintance in the alarm business.   He said that at under $20/month customers will be yours forever, at $50+ you're going to have churn.  That's all part of the game for ADT as they are a "marketing machine" and manage the turnover.
     
    He said that the 20% penetration is a wall because that is all the local police can handle because of the burden of false alarms.  Even then, ADT waits longer than most companies after the alarm goes off before they contact the police - which is supposed to mitigate the false alarm problem.  
     
    A couple of other reasons you may want to be bearish on ADT:  end of spinoff momo, and potentially disruptive technology from all the app-enabled wifi devices (that you can buy at apple store, online, etc. and install yourself)... all of which are better than Pulse.
     
    Great writeup!  Thanks!

    SubjectIs competition actually making headway?
    Entry06/10/2013 08:04 PM
    Memberoldyeller

    Den, thanks for the writeup.  We looked at this after Off Wall Street came out with a short with the new competition thesis.   We spoke with them and it didn't seem like they actually had specific evidence cable was taking market share (at least yet).   We've also done some calls ourselves and it's been hard to pinpoint.

     

    Have you done any field work to see if cable has actually been taking share?   If so, do you have any specifics you can share?  Call me paranoid, but when something has been posted by OWS (and now twice on VIC) and short interest has doubled since April, we try and really get the catalyst/timing nailed down.    Thanks very much.  

     


    SubjectRE: Alarm Business
    Entry06/15/2013 02:17 PM
    MemberDen1200
    I agree with you that there is little installation advantage when people are not moving and already have a system installed. Still that does not stop TWC or Comcast or AT&T offering cheaper monthly service and since they often would not have to install equipment that would be an offset to the installation subsidy.
    Now TWC and Comcast have much better service density for its installation and maintenance crews. There just are many more of them. Still I get your point and the installation advantage would be minimal.
    Now lets not forget that 40 million americans move. Now assuming 2 people on average to a household, which is a high number, that makes for 20 million household move out of 113 million. In short, 1 in 6 americans moves each year. The average of 1 move on average every 6 years is skewed downward by many renters who typically do no have alarm service. So lets assume that the "average alarm consumer" moves every 10 years, then that means that 10% of the customer base moves each year. That's a big number that compound in a big way after a few years and a large enough pool for TWC and Comcast and AT&T to compete in and take share away. Remember, my thesis does not require ADT to lose double digits in market share or ARPU declines. 5% ARPU or marketshare decline already has a huge impact.
     
    Regarding your argument that people often do not like to switch because of the high upfront cost? Once an alarm is off contract it seems to me there is almost no cost to switch except of one chooses to upgrade which would be just as expensive with the current provider. I called around among my friends about their alarm services. 9 moved into a house that had alarm service. They just called around and used a local company or Comcast as they were cheaper. 2 moved into a place that had ADT equipment already installed and went with another service because it was cheaper. None had ADT.
     
    Regarding the ARPU decline, ADT for sure can keep it flat or growing, but they will pay for it in increased churn and lower subsciber numbers. Yes, the smaller players have been underpricing ADT for some time now, but the difference is not that large. I checked local services and in general they were all more expensive that Comcast, TWC and AT&T. Often by a lot, especially on the upgraded packages. Both parties will lose a lot of market share to Comcast, TWC and AT&T I believe. 
     

    SubjectCompetition
    Entry07/11/2013 11:17 AM
    MemberMSG257
    Thanks for the idea.  I don't have a lot of color on this but have heard that the cable guys have previously tried to enter the space and were unsucessful.  Do you have any color here?  If this is true what is different this time vs. other attempts at entering the space?
     
    How do you think about acquisition risk given the relative size of ADT vs. someone like a Comcast?  Could you see one of the larger new entrants acting "strategically" and purchasing ADT?
     

    SubjectRE: Private Market Value
    Entry01/03/2014 10:24 AM
    Memberafgtt2008
    Den1200, I enjoyed the write-up. Great analysis.
     
    I am curious to get an update on whether you have seen any tangible evidence that the telcos/cable companies are making significant progress in the alarm industry? I understand all the qualitative reasons why they should be a serious LT threat. But have you seen any specific #'s or tangible evidence from either the large alarm companies (ADT, Monitronics, Vivent, etc.) or the telco/cable companies showing that they are winning share, driving higher churn, etc.?
     
    At the recent Gabelli conference (December 2013), the CEO of Monitronics (the #2 player in the industry) was asked about the threat and basically said he has not seen any impact.
     
    Question: The cable companies and telcos entered the alarm business 2 years ago. Can you discuss the impact?

    It has not. We watch it closely. Everyone makes a big deal of this. I came out of the cable TV industry 8 years ago when I came to Monitronics. We had looked at the alarm business while I was there. I actually worked for a company that had both a security company of a significant size and a cable company of significant size and we were never able to put it together and find synergies.

    Today, I talk to our dealers all the time. They are the ones in the marketplace making the sales. They tell me point blank no they are not really seeing an impact from telco/cable co’s other than it is making their job easier when they reach the door because the customer is already familiar with the interactive and home automation services we are trying to sell. So this is a positive on the sales side. On the negative side when you look at attrition we are not seeing an impact there either. Frankly, a medium size regional security company has more impact on our attrition than all of the telcos/cable companies put together. So while we will continue to watch them today there is just not any impact.

    Question: Just to follow up on that. It seems that they should have an advantage. They are large companies with more marketing dollars than you.  They already have multiple relationships through video, broadband, their phone. Why haven’t they been able to make inroads?

    First. They have relationships but it needs to be a good relationship to build on. I came out of cable TV so I understand the relationship that cable and telco’s have with their customers and it’s not always the best. So do people really trust them with security?

    I think the more basic reason is that they are advertising a lot but they are not selling. The difference is that security is a business you need to sell. If you go knock on someone’s door and say do you want video service of some type, the answer is pretty much 100% of the time – yes. If you go knock on their door and say do you want security service – and if you haven’t even made a sales pitch – the answer is probably for the most part – get out of here. Don’t want to talk to you. You have to sell security. And I don’t think they quite have that model down yet.

    We have frankly over the years recruited 10 to 20 Dish or DirectTV sales partners to try to represent us as a security company and not a single one has been successful at this point. Some went in with very high hopes and very high expectations and just couldn’t make it work. I think it goes back to the fact that it is such a different product to sell then a video product.

     

     

     

     

    SubjectQ1 2014 update
    Entry01/30/2014 08:51 PM
    MemberDen1200

    Update and my thoughts around the latest Q1 2014 numbers (January 30 2014)

     

     

    2014

    2013

    2013

    2013

    2013

    2012

    2012

    2012

    2012

    2011

     

    Q1

    Q4

    Q3

    Q2

    Q1

    Q4

    Q3

    Q2

    Q1

    Q4

     

    Dec-13

    Sep-13

    Jun-13

    Mar-13

    Dec-12

    Sep-12

    Jun-12

    Mar-12

    Dec-11

    Sep-11

    Ending # Subscribers

            6,448

            6,521

            6,452

            6,471

            6,404

            6,422

            6,447

            6,432

            6,394

            6,351

    Growth

    -1.1%

    1.1%

    -0.3%

    1.0%

    -0.3%

    -0.4%

    0.2%

    0.6%

    0.7%

     

    Total Growth

    1.5%

     

     

     

     

     

     

     

     

     

    SAC (Net) (Direct Channel)

     $    1,599

     $    1,365

     $    1,374

     $    1,250

     $    1,201

     $    1,157

     $    1,120

     $    1,120

     $    1,113

     $    1,115

    Growth

    17.1%

    -0.7%

    9.9%

    4.1%

    3.8%

    3.3%

    0.0%

    0.6%

    -0.2%

     

    Total Growth

    43.4%

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Installation Revenue

     $       476

     $       468

     $       448

     $       447

     $       431

     $       455

     

     

     

     

    Growth

    1.71%

    4.46%

    0.22%

    3.71%

    -5.27%

     

     

     

     

     

    Gross SAC (Direct Channel)

     $    2,075

     $    1,833

     $    1,822

     $    1,697

     $    1,632

     $    1,612

     

     

     

     

    Installation Revenue/Gross SAC

    23%

    26%

    25%

    26%

    26%

    28%

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Revenue Per New Customer

     $    44.91

     $    44.24

     $    44.20

     $    43.94

     $    43.67

     $    42.99

     $    42.55

     $    41.76

     $    40.74

     $    40.55

    Growth

    1.5%

    0.1%

    0.6%

    0.6%

    1.6%

    1.0%

    1.9%

    2.5%

    0.5%

     

    Total Growth

    10.8%

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Average Revenue Per Customer

     $    40.63

     $    40.31

     $    40.08

     $    39.66

     $    39.42

     $    38.87

     $    38.36

     $    37.98

     $    37.51

     $    37.24

    Growth

    0.8%

    0.6%

    1.1%

    0.6%

    1.4%

    1.3%

    1.0%

    1.3%

    0.7%

     

    Total Growth

    9.1%

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Multiple of Net SAC/Rev New Customer

            35.60

            30.85

            31.09

            28.45

            27.50

            26.91

            26.32

            26.82

            27.32

            27.50

     

    - Before I get to the numbers, here are some comments by ADT confirming my thesis.

     

    Gursahaney: Chief Executive Officer, President and Director ADT

    “Over the past few months, we've seen a significant increase in advertising by some of our new competitors as they spend to build brand awareness in this market. This put pressure on our lead-generation activities, impacting both our direct- and dealer-channel gross customer adds. In response, we've increased our advertising levels to maintain an appropriate share of voice, strengthen our offers to enhance our self-generated lead activities and redeployed some sales and installation resources to focus on upgrades, particularly those customers looking to upgrade to Pulse. These actions, while increasing our subscriber acquisition costs in the quarter, allowed us to partially mitigate the impact of lower lead flow in our direct channel. We're confident that these are the right steps to improve our competitiveness and our ability to win today and in the future.”

     

    Gursahaney: Chief Executive Officer, President and Director ADT

    “Sure, Shlomo. Yes, as I mentioned in my prepared comments, the big difference that we saw this quarter was a significant ramp-up in advertising spend by a couple of the new competitors in the space. And I would say, while we expected a ramp-up, we didn't expect to ramp up to that magnitude. And I mean, it's clearly understandable, they are working to build or establish their brand in this space. And in many cases, these are companies that have pretty sophisticated marketing or advertising muscle, and they can spread their advertising over a pretty large customer base. So from that perspective, I think it was a little more than we expected, and that did have an impact on the top of the funnel.” 

    Zaffino: Oppenheimer & Co. Inc., Research Division

    “When you talk about the competition, that's from the larger new entrants or are you still see -- is it from the smaller ones? And I guess, if you're talking about seeing that advertising would be the larger ones, is that correct?”

    Gursahaney: Chief Executive Officer, President and Director ADT

    “Yes. The advertising share of voice challenge that we saw this quarter, it was definitely the large ones. With the smaller ones, they are more self-generating lead, so we don't see advertising pressure lead generation. We may see, I would say, our dealers would be more impacted by that than our direct channel.”

     

    Gursahaney: Chief Executive Officer, President and Director ADT

    “I would say what we've seen in the month of January is continued advertising spend by the companies who have ramped up.”

     

    Now we have Gursahaney telling us he saw significantly more competition from the “large” competitors. I knew it was taking some time for the “large” competitors to fully ramp up, but Gursahaney himself says that he is seeing significantly more competition and that is does have an impact on unit growth and acquisition costs. In short, in Gursahaney’s own words, these large competitors ramp up advertising and the same quarter his numbers go kaput. Remember, there is a lot of operating leverage in this business. Just look at the impact of a 5% price (or unit) decline on the Steady State Free Cash Flow numbers of ADT as laid out in my VIC write up. I have a gut feeling that at some time Gursahaney might do a Ron Johnson and stop reporting the SSFCF numbers when this becomes the new normal. Actually it’ll probably happen when someone replaces Gursahaney.

     

    - So I think my thesis is playing itself out and it shows in the numbers. I thought I’d elaborate a little more on those.

     

    Lets start with the SAC (btw. I only have current numbers for direct channel, but over the years the dealer channel numbers have been close to direct anyway). For this quarter people are surprised with the massive jump in the SAC from $1,365 to $1,599, a 17% jump. But given the comments above they should not be. The increased competition is forcing ADT to increase its sales and marketing spend and installation costs per customer significantly. Q1 over Q4 ADT is spending $79 more per subscriber in sales and marketing and $151 more in installation costs. Besides having to spend more on sales and marketing, I believe ADT is trying to compensate by offering enhanced installation packages. The incentive to increase the value of the installation package is that it also allows ADT to also offer a discounted monthly revenue plan. In short, you give the customer an upgraded package and charge him the cheaper package price. And since the lowest cost Pulse plan is still more expensive than ADT’s average revenue per new customer number it all looks like things are not as bad. It would be great if they would break out Pulse revenue per new customer versus other. It’d bet you that is what is going on.

    In addition it seems to be the case that while the SAC increased dramatically, ADT had no pricing power when it comes to installation revenues. While SAC increased by 17%, ADT increased its Installation Revenues Per New Customer by 1.7% over the same time period. The same argument for the last quarter can be made for New Revenue Per Customer where the increase was 1.5%.

    The result of all this is that for the last quarter the ratio of SAC/Monthly Revenue Per New Customer is now 35.60. This number used to be between 26 and 28. So instead of generating positive cash flow from a customer after 28 months now it will take ADT 36 months to start generating net cash from a new customer.

     

    - But lets focus more on the long-term trend.

     

    I know ADT presented at the Blair Williams Growth Conference and Gursahaney keeps talking about the “home automation opportunity”. But is there anything there growth wise? Until now there isn’t much to show for.

    Lets first look at the long-term numbers above. Based on those ADT should not be presenting at BW’s Growth Conference. At every metric since the Q4 2011 quarter ADT has been dismal, except for the Revenue Per Subscriber number where it has done OK and where it has been able to increase revenue per subscriber by a total of 9% - 10%, a period of 9 quarters. The SAC keeps increasing, but # of customers is close to flat. All the while, installation revenue as a % of gross SAC went from 28% in Q4 2011 to 23% in Q1 2014. Regarding the increase in revenues let us also not forget that much of that revenue increase is the result of Pulse. Little can be attributed to true pricing power. New customer revenues per subscriber have increased by 10.8% since Q4 2011 while SAC has increased by 43.4%. The numbers speak for themselves.

     

    And lets address Gursahaney’s home automation a little more. He insinuates there is this massive opportunity, and while there will be more competition, ADT is the one positioned to win. Well lets review where that new competition is coming from. We know that the large cable players are in on this. But also Google has its eye on home automation and just spent $3.2 billion on a home automation startup called Nest. MSFT has been eying the home and home automation for many years now. And many others must be thinking the same. Anyone willing to take a bet who will come out a winner? I don’t want to bet on knowing who will be the winner in this battle, but I am willing to take a bet that ADT won’t be. Actually I see this home automation opportunity as described by Gursahaney more as as treat than an opportunity to ADT. Home automation will be a tech thing and ADT is not a tech company. Overall things would have been better if there was no home automation opportunity for ADT. It would have been the big player in a boring large market. Now it is at risk of becoming a very small player in a very large technology driven high volatile market with non of the operational advantages it used to have versus the small operators.

     

    Also Gursahaney mentioned the non-compete with Tyco ending allowing it to go after large commercial accounts and international expansion. An opporunity that could double the size of his current market. Agreed. But he has no experience selling to those markets and will need significant capex in order to make inroads. Many international markets are very differently structured. For example, in theUSalarm services can be this cheap because the police actually shows up to protect your property and they shoot back when shot at. In other countries the police is often unreliable resulting in a need for private security guards which increases the cost significantly resulting in a much smaller market opportunity. And its not as if there are no other estabilished operators in those markets already.

    Regarding the commercial market over 7,500 square feet, isn’t that a different market from home security? Often those businesses are serviced by security guards and the client does not need remote automatic garage door openers or ways to turn on the coffee maker from their Iphone. This market is purely security oriented and already highely competitive.

     

    My thoughts … ADT will keep struggling and its stock price will continue to decline over time. This was the first quarter where the large players roled out big and right away ADT’s operating metrics start struggling. These large players never entered this market in order to just leave it and will continue this spend for some time until they get the market share they want. Operating metrics will continue to deteriorate and ADT’s operating leverage will go into reverse. The increased installation and commission costs will start working their way through the P&L’s depreciation soon and earning will stay under pressure.

    From a valuation prespective I will stick with my Steady State Cash Flow model as it nicely lays out the impact of the operating leverage on a cash basis if they want to keep unit growth flat. My SSFCF model assuming zero net combined unit and revenue growth shows a multiple around 35. My short-term goal is still in the low $20s for now. If we see continued deterioration in the operating metrics I would lower my valuation further. If the large players really start taking significant share resulting in further increases in SAC and in lower installation revenues and lower monthly revenues per customer, then this stock will be worth less than $20 per share. The key metrics to watch is the sales and marketing per new customer, the installation costs per new customer, the installation revenues per new customer and the monthly revenue per new customer. These are the metrics that will show us how well ADT is holding up in the market. This time the sales and marketing per new customer and installation cost per new customer struggled mightily. Lets see what happens if ADT has to compromise on the other two in order to maintain units.

    Btw. lets also not forget that in a no growth scenario the cash tax should normalize over time, except if they decide to spend outlandishly resulting in a vastly lower IRR.

     

    Risks to my thesis:

    - Large players do not get a foot hold and this quarter was a one off. I sincerely doubt that. For what its worth, Gursahaney said the following about January spending by the large players. “I would say what we've seen in the month of January is continued advertising spend by the companies who have ramped up.” So I do not see why the next quarter’s operating metrics would look much improved for ADT. Still this is only one more quarter. The real money will be made when the pressure on ADT is maintained over the next year and we see sustained pressure on results.

    - One of the two opportunities Gursahaney talks about comes through. (Given my short stance on ADT it is hard to assume I would not be biased. So I have to allow for this.)

    - One of the large players decides to buy ADT. But why do so? The replacement cost of the monitoring infrastructure is way below the cost to buy ADT. And if they run the numbers using their own pricing ADT they’ll be paying a lot for ADT. I think it’ll be hard for Comcast or Time Warner to keep ADT separate thus charging ADT customers more than their own customers. Anyway, it doesn’t seem to make sense to me.

    - The whole “the country is moving” argument is correct and soon all those that moved sign on again with ADT. I find this argument to be not convincing. Even if we assume that ending subscriber numbers would have been the same as in Q4 2013 the unit subscriber growth numbers would still have been dismal over the last few years. This argument only holds in case people have an extended lapse between when they cancelled service and when they installed new service. Given that people receive a discount on their insurance when having a security service installed and since most people get insurance at the time they purchase the house I find it hard to see how there would be an extended period of no service. Anyway this certainly was not the reason why the SAC went up by 17%.


    SubjectRe: Author Exit Recommendation
    Entry02/16/2016 07:21 AM
    MemberRSJ

    Can you provide some fundamental insights on the recommendation? Have the telcos and cable MSOs gained share at the expense of ADT and others in the home security industry? Thanks.


    SubjectRe: Re: Author Exit Recommendation
    Entry02/16/2016 08:22 AM
    Memberzzz007

    Maybe because it just got taken out.


    SubjectRe: Re: Re: Author Exit Recommendation
    Entry02/16/2016 08:31 AM
    MemberRSJ

    Yup, just saw the news.

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