February 06, 2018 - 4:19pm EST by
2018 2019
Price: 12.15 EPS .87 1.19
Shares Out. (in M): 756 P/E 14 10.2
Market Cap (in $M): 9,180 P/FCF 16 11
Net Debt (in $M): 8,900 EBIT 0 0
TEV (in $M): 18,080 TEV/EBIT 0 0

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  • Beware PE firm with low basis



Thesis / Fundamentals

  • Compelling opportunity given price dislocation consequent to a broken IPO

    • IPO had initial range of $17-19, deal priced at $14, and stock has traded down to $12

    • Because of weakness of legacy ADT management/business, public market has fairly negative perception of the company

  • Current management is well respected throughout the industry, has created value in prior companies and is running ADT in a more reasonable and value-oriented way

    • CEO, Tim Whall, has spent his entire career in the home security business and this is his fourth private equity deal

    • Whereas legacy management lacked financial disciple and chased unprofitable subs, current management is much more focused on retaining existing accounts and attracting higher quality new accounts

      • Legacy management pursued a vicious cycle in which they brought on low quality subs, who churned quickly, forcing management to attract more low quality subs.  It was like a leaky bucket

  • Business is almost entirely (over 90%) contractual, recurring revenue business with low and declining attrition

    • Typically 3-5 year contracts with average customer tenure even longer

  • ADT is 5x the size of next largest competitor

    • ADT’s brand is powerful in the market with 54% of consumers saying it was the best brand

  • Over the last two years, attrition has fallen from 16-17% annually to 13-14%

    • The decline has been driven by:

      • Attracting better subs

        • New subs are now required to put more money down upfront, which helps defray SAC and also incentivizes them to stay longer

        • Higher credit standards

        • Under legacy management, 1st year churn was 18%; now, it is 12%

      • Better customer service

        • Management is highly focused on operating performance metrics like call waiting time and first call resolution

        •  Management uses a Daily Dashboard that gives them granular insight into branch and individual representative performance

        • These metrics have improved substantially in the last 18 months

          • 91% of calls in 2017 were answered in less than 1 minute

          • 65% of calls in 2017 were serviced the same or next day

      • As management notes “no one wakes up and says I want to cancel/change my home security service today, so let’s not give them a reason”

    • Attrition should continue to decline as customer service improves

      • Management is focused on closing the gap between worse and better performing branches

      • Best-in-class branches can achieve attrition rates of <10%These attrition rates are among the lowest we see among subscription businesses

  • MRR should increase over time

    • Pricing goes up as new customers typically come in on higher priced plans than older ones

    • Pricing per customer goes up over time as well

  • Cable and telco threat of a few years ago has stabilized

    • While CMCSA is taking gross add share, they are not winning significant customers away from incumbents

    • AT&T isn’t the factor people feared they might be

  • DIY is a threat over the long-term, but it’s also possible that ADT could partner with DIY players and provide the monitoring services

    • Given the strength of ADT’s brand and their built-in sales/service representatives, ADT could be an attractive partner for larger technology companies

  • Commercial represents a good growth opportunity for ADT

    • While ADT enjoys 30% of residential security market, it only has 8% of the commercial market

    • When ADT was spun off from Tyco, Tyco kept the commercial business and has 37% share

      • ADT is targeting those customers to win them back

    • Commercial business has higher ARPU and is harder to disrupt than residential

  • ADT should be able grow revenue LSD and EBITDA MSD

    • Expectations are for revenue growth to accelerate 100-200bps over the next few years

      • It does not seem that the market believes that

    • Management suggests they have been more focused on “right-sizing” the business over the last 18-24 months and have not been as focused on growth

      • Now that the business is more sound, they can shift attention to profitable growth

  • ADT is cash generative and poised to delever from ~4x level post-IPO

    • ADT should also be able to refinance debt

    • Interest expense should decline over the next few years

    • ADT should not be a cash tax payer through the medium term

  • Apollo's vested interest

    • Apollo is incentivized to get the stock price higher as they haven’t sold stock

    • Apollo owns 85% of ADT



  • Home security is a competitive market with new entrants

    • DIY players may offer cheaper options

      • Technology companies like Nest may offer better devices

      • DIY could partner with 3rd party monitoring service and still offer cheaper plans

    • Cable/telco can bundle their services with their own connectivity services

  • Limited growth for the whole legacy industry

    • Overall market penetration has been fairly stagnant at roughly 20%

  • History of legacy ADT demonstrates this business can be easily mismanaged with deteriorating unit economics

  • ADT disclosure isn’t particularly good

    • Company will not report net adds or precise account numbers

  • Apollo will have to sell down, which will be an overhang on the shares



  • Given price decline since IPO, ADT stock is a compelling value

    • Particularly considering the stability of the business

  • On 2019, ADT trades at ~10x EPS, 9% FCF yield and 7x EBITDA



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


We believe that if current management can demonstrate the business is healthy, and even accelerating, ADT shares can re-rate higher

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