On Wednesday November 20th, ADT Corp. (ADT) posted results for its third quarter 2013 with a slight beat on both top and bottom lines compared to analyst expectations. Early in the session, shares spiked to around $46 slowly retreating to a more modest 2.4% increase over Tuesday's close. While results were generally rather "in line", the high short interest (12.2% of float) suggests many expected a less than stellar performance.
Recurring revenues came in 4.7% and 4.8% higher in Q4 and FY 2013 respectively, comfortably within the upper range of company's guided model of 4-5% topline growth. Total revenues improved less, posting just 2.5% for full 2013 - expectedly offset by 17.5% decline in Other Revenues as company shifts away from non-ADT specific products in its portfolio. Margins improved 150bp and ARPU grew 3.7% YOY, driven by improved take rates on Pulse units which hold higher-margin.
On the negative - attrition ticked up 40 bp YOY, with impact fully attributable to "higher relocation disconnects". Subscriber acquisition costs (SAC) also ticked up as expected on better Pulse penetration.
As mentioned on the conference call in regards to competition, management "continues to see minimal impact on our business performance, specifically attrition, ARPU and Pulse take rates". Lastly, the company boosted its dividend by 60% and announced an accelerated buyback program - a certain positive for the company's "investor relations".
2013 was the first year in ADT's performance post separation from Tyco (TYC). A lot of concern over company's future was on the minds, but ADT has managed to deliver on its commitments and has been successful growing and expanding its Pulse product line. Much of it has certainly been helped by housing recovery and increased "homeowner churn".
The other interesting aspects is identification of Small Business potential and active pursuit of product expansion in that direction. This area certainly poses a significant upside potential, should the company successfully penetrate the segment with the right product. Further yet company completed two acquisitions during the year and potential benefits and synergies are yet to be garnered.
On the downside - the increase in long-term debt (33.6% YOY) and decline in equity introduced some liquidity risk, with debt-to-capital at 56.4% from 44.3% a year earlier.
I'm certainly bullish on ADT prospects into 2014. Guidance for 2014 of 4-5% topline growth, with continued margin improvements from cost reduction initiatives and continued share buyback certainly suggesting an even higher bottom line growth rate.
The risks though are still in the picture. ADT business is housing related and a down tick in that industry can cause to significant guidance shortfalls. Taking into account taper-fear and potential interest rate rise this scenario is not all that unlikely.
In the end, I plan to extend my long position on a market downtick, should shares descend into $41-42 price range. And considering the toppy markets we are witnessing today that is also a likely scenario. I think current levels may turn out to be risky for trading on the long side, but for a long-term investor starting small on the long side may turn out to be quite rewarding. I would also add if shares witness a pullback as long as the general economic picture for U.S. remains intact.