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Executives

Lawrence DeMarco - Director, Investor Relations

Naren K. Gursahaney - Chief Executive Officer, President and Director

Alan D. Ferber - President of Residential Business Unit

Luis J. Orbegoso - President of Small Business Unit

Donald A. Boerema - Chief Corporate Development Officer and Senior Vice President

Michael S. Geltzeiler - Chief Financial Officer and Senior Vice President

Analysts

Jeffrey T. Kessler - Imperial Capital, LLC

Jeffrey T. Sprague - Vertical Research Partners, LLC

Jason B. Bazinet - Citigroup Inc, Research Division

Melissa Link

Brian Jacoby - Goldman Sachs Group Inc., Research Division

ADT Corp. (ADT) Investor Day Conference December 6, 2013 9:00 AM ET

Lawrence DeMarco

Let's get started. Good morning. Thank you always for joining us, both all of you in the room and those joining us via the webcast. A very nice turnout. Thank you, again. I am Larry DeMarco, the Director of Investor Relations for ADT, and we are very excited to be here and tell you our story.

One quick housekeeping item. As you've heard the voice from God tell you, please make sure your electronic devices are on mute. That will be very, very helpful.

Let me open up this morning session with the most boring slide in the world. I won't go through it, but we ask that you please read through the forward-looking statement and the cautionary information that's included here.

It is now my pleasure to introduce Naren Gursahaney, our Chief Executive Officer.

Naren K. Gursahaney

All right. Well, thank you, Larry, and again, welcome, everybody. We're very excited to have the opportunity to give you an update on ADT. This is our second Investor Day that we've had. Today, I've got several key members of our leadership team joining me for the presentation. Mike Geltzeiler is our new Chief Financial Officer. Mike, as you're probably aware, came from the New York Stock Exchange and joined us. This has been about 3, 3.5 weeks now. I'm very excited to have Mike on our team as a key partner here. And we're so excited to have him that we decided to host this in Mike's house, I guess, this is referred to. Mike's going to also be leading our cost-reduction initiatives, so I'm counting on him to go back to the New York Stock Exchange and get us a little bit better deal now that he knows the people that we'll be working with.

In addition to Mike, we've got several of our business leaders. About 1.5 months ago, we reorganized the business to focus on the individual lines of business, Residential, Small Business and our Health Business unit. And this was really to give us a much stronger focus on each of these markets, so that we can grow these businesses and improve our overall returns. So Alan Ferber, who is our Chief Customer Officer, who joined us earlier this year, is now leading our Residential Business. Alan was a great add to the team, came to us from U.S. Cellular. He's got a very diverse background, and you'll get to know him through his presentation today.

In addition, Luis Orbegoso is running our Small Business operation. Luis joined us from United Technologies, also, about 6 or 7 months ago. At UTC, Luis has held several senior leadership positions within their fire and security business, knows this space very well. And actually prior to that, Luis and I were colleagues at GE for several years.

And then Don Boerema, you met Don last year during our Investor Day. Don is our corporate -- Chief Corporate Development Officer, so he's got responsibility for our strategy, M&A. And Don is also now leading our Health Business. So Don is going to talk to you about both our Health Business and what's going on from an M&A perspective in the business. So again, you get to see a few more people on the executive leadership team for ADT.

We've got a very busy agenda for you today. I'm going to start out with giving you an overall business and market overview, talk a little bit then about the progress we've made in 2013, our first year as a standalone company and how that positions us for the future and talk about the priorities for 2014.

Specifically, on the area of growth, we're going to have the 3 business leaders talk about the growth strategies and the opportunities they see in their respective markets. So Alan will talk about the Residential Business. Luis will talk about Small Business. Don will talk about the Health Business unit. And then Don is also going to talk about the M&A environment and give some exciting opportunities we see there. Mike is then going to come up and give the financial overview of the business, but also talk about some of the cost efficiency opportunities we see in the business that will help enhance our margins and returns as we move forward. I'll come provide some concluding remarks, and then we'll open it up to Q&A.

As we prepared for this meeting today, there were 5 things that really resonated with me that I'm very excited to share with you today. One is just reinforcing the story we talked about last year at our Investor Day, great business, great market. ADT has a tremendous leadership position, high market share, 6.5 million customers and very attractive incremental returns in all of our business lines.

Two is as we've gone through our first year and had what I think is a very successful year, we also see some opportunities that we can improve our performance. Two of the specific areas are around attrition, and Alan Ferber is going to talk to you about some of the programs that we've put in place already to drive improvements in attrition and the impact we think that can have when we go forward. Two is our dealer channel, and Alan is going to talk about that as well. I think we've got some opportunities to really optimize our dealer channel going forward.

And the third area, and I'll talk about this a little bit, Mike is going to talk about it, is just simplifying the ADT story. I think the reality is in our efforts to be more transparent, we actually made the story a little bit more complicated than we had to, and we're going to try and work based on feedback that you've given us to try and simplify that story.

As I mentioned, we also see opportunities to further improve our cost position. We think we've got industry-leading cost position today because of our scale. But in our cost to serve and subscriber acquisition costs, specifically in our G&A areas, we think we've got some opportunities to invest to become more efficient, and Mike is going to walk you through some of the programs that we're putting in place to capitalize on that.

As we've discussed, we went through a pretty deep and extensive strategic planning process this summer. And I think, as a result of that, we all see some tremendous opportunities to grow our business both organically, as well as through acquisitions, and we'll talk about that today.

And then finally, the leadership team. We have great leadership team. We started with a great foundation, people who really understand the industry and have deep knowledge and expertise. And we've added some tremendous talent to our leadership team over the last year. Some of the folks you'll get to meet today, and I'll talk a little bit about some of the other people we've added to our team.

So let's go ahead and get on with it. When I think about the ADT story, and we reinforced this last year as well, it really is a great business in a great market. We're the leading player in Residential and Small Business security and automation systems. We've got a large customer base and very attractive returns. The market itself is poised for future growth. It's grown nicely in the past, and we think there are opportunities for the market to grow even faster going forward. And ADT has some very significant competitive advantages around our brand, around our scale, our product and services that we offer in the marketplace and then this multichannel sales and account generation model.

As a result of all that, ADT has been able to deliver mid single-digit recurring revenue growth, industry-leading profit margins and customer returns and great cash flow and redeployment of capital back to shareholders. So it's a great story, and we're looking at how we can make that story even better.

So let's start out with just a reminder of the markets that we compete in. On the Residential side, about $11 billion market, U.S. and Canada, market growth we expect to be somewhere in the 4% to 5% range. ADT is the clear market leader with 25% market share, but it continues to be a very fragmented market. So we think we've got tremendous share gain opportunities as we look forward.

It's also what I would argue is a significantly under-penetrated market, with today only about 1 in 5 homes having a monitored security and automation system, and Alan is going to talk a little bit more about the opportunities we see there.

Small Business is a little bit smaller market, just about $2.5 billion in total. Again, ADT is the market leader, but only with about 13% market share. So again, we've got tremendous opportunity to gain share. Penetration rates are a little bit better on the Small Business side, about 15%. That may have some upside opportunity as well. But clearly, we have the opportunity to gain share because of the strength that ADT has in that market with our brand, and all the things that we've been able to leverage in Residential apply in the Small Business market as well.

In aggregate, the security market has grown nicely over the past several years. If you look, since 2006, this market in aggregate has grown at a compound annual growth rate of about 5% per year. We talked about the $11 billion plus $2 billion, so $13 billion, $13.5 billion market that we compete in today. And when we -- when the noncompete that we have with Tyco expires in end of September of next year, it actually opens up an even bigger market. The total market opportunity for us will be somewhere between $19 billion and $21 billion. So we see tremendous opportunity. And as I mentioned, each of the segments are growing nicely over the next couple of years.

The share story really hasn't changed much. Despite some M&A activity and some new entrants, ADT is the clear market share leader in this space with 6x the scale of our next largest competitor. And as you get to see, once you get past the top 5 or 6 players, this market gets fragmented very quickly with 60% of the market being held by literally thousands of small and local and regional players. A lot of discussion about the cable and telco players over the past year. In aggregate, the cable market -- cable players only have less than 1% of the market today. So it's not a huge impact on the business. And again, ADT has some tremendous advantages, and I'm going to talk in a little bit more detail about all 4 of these areas, our brand, our scale, our products, our services, as well as the diverse distribution channels.

From a brand prospective, I don't think anybody can challenge the fact that when people think about security, they think about ADT, almost 90% aided brand awareness. We have a huge differential when it looks at those -- when people are choosing a security provider, who would they consider? I mean, you look at it. We're over 40%. The next closest player is about 6%. And then a really interesting fact, when you look at ADT customers, those who chose to buy ADT, 50% of them never even considered another provider. So again, it just reinforces the power of that brand, the trust that customers have in that brand and the huge competitive advantage that gives us in the marketplace.

Our scale, 6.5 million customers, 200 branch offices across the U.S. and Canada, 6 monitoring centers, fully redundant, gives us some tremendous advantages. When you look at it from a national scale perspective, we're able to leverage our marketing across a very broad base or cost per sale or cost per opportunity are very low industry-leading. When you look at it on a local basis, we've got good account density in virtually every market that we compete in that allows us to be more efficient from a cost-to-serve perspective, as well as from a monitoring cost perspective.

And that scale also provides us some additional advantages. When people are looking to partner with a company in the security space, ADT is the partner of choice. We are everywhere. We're all across the U.S., all across the Canada, so we truly are the partner of choice.

When people are looking to sell their business, they want ADT in the mix from an acquisition perspective because, again, we can bring more synergies to the table than anyone because of that scale and the additional density and synergies that we can be generated there. So again, just a tremendous advantage for us since we'd look to compete and grow this market moving forward.

I'm very excited about the product portfolio we have. When you look at ADT Pulse, it really has helped transform ADT from a traditional security company 3 years ago to a true leader in security and automation. And I don't want anybody to think for a second that we're abandoning that security and life safety piece. That is the foundation of what we do. And that's the platform that we build off of, and we've been able to build off of that and expand into home and Small Business automation, allowing you to manage your home or business remotely through your cellphone, through your PDA, through your laptop.

We have also expanded into the energy space, allowing you to manage your lighting and thermostats, and they're to drive real savings from your security and automation system.

And then we're expanding into entertainment to just expand and continue to grow the utility of the service. This has really had a profound impact on how customers interact with their ADT system. If you go back 3 or 4 years ago, the typical customer, our best customers, may be interactive with their system a couple of times a day. You arm your system when you go to work. You disarm it when you come home. You arm it when you go to bed. You disarm it when you wake-up. Now we have customers who are interacting with their ADT system on a regular basis throughout the day, looking in at video cameras to see what's going on in their home, getting productivity out of their home or business by being able to unlock the doors and open or disarm the system and let people in, while seeing what's happening with the cameras. Our new customers, our Pulse customers, engage with their systems much more frequently than the traditional security customers. And as result, it's a much stickier service. And Alan and Luis are going to show you what the first couple of years of Pulse retention rates look like compared to traditional customers, and it's a big difference in both Residential and in Small Business.

And as excited I am about our products, one of the real differentiators of ADT is our people. The average tenure in our business is about 6 years. Many of our competitors haven't even been in the security industry for 6 years, and that's the average tenure. When you look at our service technicians and our installers, that frontline who's interacting with the customer, we've got 11 years for service technicians on average and 7 years for install techs. Our sales reps have over 3 years and monitoring reps over 4 years. These guys are truly security experts, and they becomes security and automation experts.

About 3 years ago, when we made the acquisition of Broadview, we adopted one of their best practices, the LifeSaver Award. This was an opportunity to introduce our monitoring center reps, who help save a customer's life, with the customer who's life or business or home they help save. I participated in several of these over the years, and they're just incredible reunions and reminders for all of us of the business we're really in and the impact we have. Our employees help save lives every single day. And we've expanded the LifeSaver program not just to recognize the monitoring center employees, but also the sales rep who sold the system, the installer who installed the system, the service tech who serviced the system. We've expanded beyond the ADT family to recognize the first responders, the police department, the fire department, the ENT who responded to those alarm signals. And rather than me continuing to talk about this, I thought I'd show you a video that really characterize the people that we have in our company.

[Presentation]

Naren K. Gursahaney

I can tell you that opportunity we have to help save lives is why our 17,000 employees come to work everyday. Again, one of the other distinct advantages that we have is this multichannel approach to account acquisition. We talk a lot about our direct channel, almost 4,000 sales reps with dedicated sales teams focused on Residential, Small Business and Health, and a national sales center that cuts across all 3 of those and does both inbound and outbound calling for sales. That's complemented by our indirect channel, about 350 authorized ADT dealers who are exclusive to ADT in the security space. And also some great lead generation partners, organizations like USAA and AARP, and we continue to expand that network with the rebound in the housing market. We've built great partnerships with Lennar and Pulte, and we want to make sure that we're partnering with everybody. And we truly are the partner of choice.

And a difference from what we've talked about in the past is I really now look at M&A as that third leg of the stool from an account generation and account growth perspective. We did the Devcon acquisition this year -- this past year. We're very excited about that and the capabilities it brings. Don is going to talk a little bit more about that.

We've also done some account purchases from companies that were just looking to either exit the business and monetize their accounts. And I think we've got the opportunity to do more of that in this industry as we move forward.

Well, there's been a lot of discussion. With this attractive market, there've been new players coming in to the market. As result, there's been a lot of discussions, and I've got questions from all of you about what's the impact of the cable and the telco players. And it's been a little tough to tell that story at times because the reality is most of these new entrants don't report their numbers. You see their ads, but we don't know how many new accounts they've got and everything. Fortunately, Morgan Stanley did some market research over the past few months and published this report that reinforced what we've seen in our own data. And when you look at it on the left-hand side there, over the past 3 years, new subscriber additions, ADT has more than held its own in there. Now that's not saying these new players aren't making any traction. But at least based on these data and confirming data we have internally, it looks like it's at the expense of the smaller players in the industry, not at the expense of ADT.

As we've talked in the past, we look -- we watch our attrition numbers very closely to understand if there's an impact there. And as we've discussed with you, about 10% of our disconnects -- or attrition or disconnects are related to lost to competition. So 13.9% attrition, about 1.4% of that attrition is related to lost to competition. Of that, about 10% to 15% is cable and telco players. So when you run the math there, it's a very, very small portion, 1.5% roughly of our disconnects or 0.2% of our customer base. So again, I feel confident saying the impact on our business and business results has not been significant, and we're going to continue to improve our performance to make sure that, that continues to be the case.

So when you look at all of these together, what has ADT been able to do over the past many years? As you can see, from 2007 through 2013, our recurring revenue has grown at over 9% on a compound annual growth basis. That includes the acquisition of Broadview, or former Brink's Home Security. But even if you exclude that, we're north of 5% compound annual growth rate. You can see margins improved throughout that time period. And on the right-hand side, you can see all of our lines of business, all of our channels are generating incremental returns that are well above our cost of capital. The responsibility that Mike and I have is making sure that we have the capital need that we need to continue to invest in these businesses to continue to generate those returns and create values for our shareholders.

Now let me take a step back and talk about 2013, some of our accomplishments in the areas of opportunity we see moving forward and how the market dynamics and our performance in 2013 really shaped our priorities and focus areas for 2014 and beyond.

You know there's a lot of things that I'm proud of, of our accomplishments in 2013, starting with the management team. We've attracted some very talented people to our business. I talked about Mike, Alan and Luis. We also recruited a new Chief Information Officer about 6 months ago, Kathleen McLean. Kathleen is just a dynamite information technology leader, but she's also a dynamite business leader. She's got real operating experience, came out of the telecom industry, knows how this business model works and is really helping us rethink our whole IT architecture, our whole IT landscape and bring in tremendous value to the organization.

We also recruited about a year ago a new Chief Innovation Officer, Arthur Orduña. Arthur came out of the cable industry. He was with Canoe Ventures, and Arthur just has tremendous experience in emerging technology and product development. And he's really helping make ADT not just a product company, but also a software company because a lot of our differentiation as we move forward is in the area of software and that customer experience and how the customer interacts with their ADT system. Pulse has been a great story throughout the year as you heard on our fourth quarter earnings a call couple of weeks ago. In the fourth quarter, 32% of our new customers bought Pulse, and that rate continues to grow sequentially every quarter, every year. And we still see plenty of headroom there.

A year ago, we talked about Small Business as being a growth opportunity, and we still think it's a tremendous growth opportunity. But in 2013, we actually doubled -- more than doubled our growth rate. So we've got some nice momentum as we move into 2014.

M&A, when we were here a year ago, we talked about the opportunity that we saw because it's a very fragmented market, because there are some interesting market dynamics. Now the pipeline is starting to fill up, and we're starting to see some real activity there. And we think that, that will be even more of an opportunity for us, and Don is going to talk about that.

And then the return of capital. In 2013, we returned $1.4 billion back to our shareholders, a little over $100 million through our dividends and $1.3 billion in share repurchase. And subsequent to the close of the fiscal year, we committed to another $1.2 billion of share repurchases and increased our dividend substantially. So we are committed to investing to grow our business, but we're also committed to returning capital back to our shareholders.

In simplifying our story, this chart will hopefully help. Mike is going to talk a lot more detail going forward. As an operating business, we talk a lot about the left-hand side, the 5 key operating drivers that we use and focus on every single day to run this business; customer additions; attrition; average revenue per user, or ARPU; cost to serve; and SAC, or subscriber acquisition cost. That's what we're focused on everyday is improving all of those. Those operating drivers come together to create -- or to influence a series of financial metrics. So customer additions, attrition and ARPU come together to generate growth in recurring revenue. Net out the cost to serve, and you've got our pre-SAC EBITDA margins. There's a portion of our subscriber acquisition cost that runs through the P&L. And once you net that out, you've got our overall EBITDA margins. All of this comes together and drives steady-state free cash flow, which we think is an important valuation metric for this business, and Mike is going to talk about that in a lot more detail.

Because of the long-term low cash tax rate we have in this business, we also think it's very important to look at our EPS using our cash tax rate. And we now believe that, that tax rate will continue to be low well past 2020, and Mike is going to talk in a little bit more detail about that.

So let me talk about the operational drivers, the 5 things that we as a leadership team focus on every single day. When you look at what's happened from a customer addition perspective, that multichannel model we have has allowed us to add over 1 million new customers every year for the past 4 years. In 2013, despite some challenges on our third-party dealer channel that Alan will talk about, we still generated 1.2 million new customers that we brought into the ADT family. When you look at the direct channel, we saw great momentum as we moved through the year. The first quarter was challenged by Hurricane Sandy, and we had some headwinds there. But as we moved through the year, we really built some nice momentum and exited the year with over 8% unit growth in our direct channel.

Well, there's been a lot of noise around attrition and retention. And part of it, the issue or the challenge is that people measure retention or attrition differently across our industry. So what we've tried to do is normalize it and put things on an apples-to-apples basis for you. ADT measures attrition on a recurring revenue basis. What percentage of our recurring revenue base did we lose in a given year, 12-month period? As we reported in -- when we reported our results a couple of weeks ago, 2013, we had 13.9% attrition. Many of our industry peers report unit attrition. So if you take that revenue attrition and translate it to unit attrition, it's about 13.5%.

In addition, many of our competitors don't count customers that move to a new location where we recapture them. We don't agree with that because when you recapture them, you have to make another investment of that subscriber acquisition cost in order to generate that ARPU. But to give you an apples-to-apples comparison, if you take that and give ADT credit for those that we recapture, that attrition rate goes down to about 12.2%. This is an industry-leading attrition rate when you compare us against our peers in the market and significantly better than other industries that we're being compared to. Again, at 12.2% or 13.9%, the way we look at it, we're not happy with that, and Alan is going to talk to you about some of the programs that we put in place to continue to improve our attrition rates.

We've seen tremendous growth in our average revenue per user, and a lot of that has been driven by Pulse. And with the take rates we have just north of 30% in the fourth quarter and the continued growth, we still see some nice tailwinds as we move forward. Our new customers had about a 4.6% growth in fiscal year 2013, and our average customer base grew by 3.7%. Some of that includes Pulse becoming a bigger part of our base, but Pulse is still only 8% of our customers right now. And we are able to continue to get modest, but meaningful price increases. And you can see through the year, we've got price increases on average of between 2.5% and 3% year-over-year.

The success of Pulse has also driven an increase in our subscriber acquisition cost. There's more equipment. It's a little bit longer install time, so there is higher cost. But keep in mind, the ARPU associated with those Pulse customers is up to 25% higher than our traditional security customers.

You have seen over the past year an increase in the creation multiple. That's your SAC divided by the ARPU, and that's an important metric that we'll be talking about a lot as we move forward. And while that did increase year-over-year, you've got to keep in mind, those Pulse customers have better retention characteristics, so we expect them to stay with us for a longer period of time, so the overall returns are better. And again, Alan and Luis will show you what those retention curves look like.

And our scale allows us to be advantaged from a cost-to-serve perspective, so our cost to serve per subscriber, around $13. And you can see how that stacks up to our industry peers. In addition, we think we've got some opportunities to further improve our performance and further improve our margins.

So how do all these tie together? How do we look at 2014? Again, we feel good about customer addition opportunities we have. We think there's growth in each of our channels, and we're pursuing that. And our business leaders will walk you through those. Attrition will probably continue to have a headwind from relocation-based attrition as the housing market still improves year-over-year, and we look to mitigate that and offset some of that through the areas that we can control. Alan will talk about the programs we have in place. As result of Pulse, we expect continued growth in ARPU, and that will be -- or a headwind from a SAC perspective, but we think we've got some cost reduction opportunities that Mike will talk about. And those cost reduction opportunities also apply on the cost-to-serve side, and Mike will talk about those as well.

But the one thing that you need to keep in mind is we can't just focus on 1 of these 5 drivers. Management has to have the flexibility to trade these off. Alan is going to talk to you about some programs that we're putting in place or we've already put in place to impact attrition that will slow down our customer adds. That's a good thing for the business because we're eliminating those adds for customers that don't create value, customers that are likely to disconnect within a relatively short period of time. And we have to maintain that flexibility to make those trade-offs, so that we can optimize the value creation of this model.

As we look at what's going on in the marketplace and what we've learned as our -- in our first year as a standalone company, it's really helped shape our priorities for 2014. And I look at it in kind of in 3 buckets. One is we want to continue to invest to grow this business. We've got very attractive returns. We've got very attractive opportunities in each of our 3 business lines. In addition, we see some exciting M&A opportunities to complement our organic growth.

Two is we think there's an opportunity to further optimize our cost structure on the cost-to-serve side and on the subscriber acquisition side, and that is a big priority for us in 2014 and beyond. And that will drive margin improvement for us.

And three is we want to continue to be balanced in our capital allocation, making sure we have the cash we need to invest to grow our business and through -- organically, as well as through M&A and then redeploying excess capital back to our shareholders in the form of dividends and share repurchases.

With that, I'm going to turn things over to Alan Ferber, and Alan is going to talk to you about what's going on in our Residential Business and some of the exciting opportunities we see ahead of us.

Alan D. Ferber

Thank you, Naren, and good morning, everybody. I'm very excited to be part of this great team. And there are 2 things I'd like you to know about me and why I joined ADT. First, I've spent the last 20 years driving best-in-class customer loyalty and advocacy, and that's really been the inspiration and the driving force throughout my career and what brought me here to ADT. And I think there's tremendous opportunity to build on an extremely strong foundation.

The second thing I want you to know about me is I bring passion and a sense of urgency to the way we operate our business. Frankly, it would be easy for us to rest on our laurels with the kind of market position that Naren just shared. We are the undisputed market leader with our many peers. But at the same time, I am creating a challenger mentality in my team to aggressively go after the market opportunities that exist. Simply stated, I'm trying to instill the heart and mind of a challenger brand and the body of a market leader. So with that, let me go through our plan to grow the Residential Business.

As Naren shared, we are the clear market leader in a large, growing, fragmented market that's relatively under-penetrated. Our 25% market share is over double the size of the next 3 largest players combined. But more importantly, we have a clear path for further growth in revenue and customer adds.

Our growth plan is really focused around 3 core areas: first, to capture our fair share of the overall market growth, and that's being driven by the improved housing market, demand for home automation and technology innovation; second, to grow automation by investing in innovation and Pulse to drive both ARPU and net adds; and third, to further drive net adds by optimizing and investing in our dealer channel, expanding our partner network and stabilizing churn. I'll now go deeper into each of these areas, spending the next couple of pages on the overall market growth.

As you could see on this chart, penetration of security and home automation is quite low relative to other home services. And while penetration has been around that level for some time, we believe that between innovation, the increased marketing spend from new entrants and other macro trends, they're all converging to really generate upside to both security and automation penetration. I liken this to other technology-based products like smartphones or tablets that rode broad macro trends and move from niche products to more mass appeal products after applying innovation and some real marketing muscle. And while we don't expect home security and automation to reach the same penetration levels as wireless, we are optimistic that the market is poised for some meaningful expansion.

As we look deeper into those key macro trends that I've just referenced, clearly, the recovery of the housing market is the biggest driver. By far, buying a new home is the most common trigger of purchasing home security. About 75% of people who have recently purchased home security mentioned buying a new home as their reason. And the industry is expected to grow about 6% over the next 5 years and at an even higher growth rate if you focus just on new home sales. And new home sales is particularly encouraging because it grows the overall size of the housing market and the market size for home security and automation.

In addition to housing, the growth in broadband and overall smartphone adoption across all age groups and the boom of connected devices is also driving growth. At the same time, the retirement and relocation of baby boomers and their desire to still remain independent, but connected, are all positives for our industry.

Crime is another purchase trigger. And although crime rates are generally going down, consumers' perception of crime is actually that crime is increasing, and they feel less safe and less secure. So at this point, we view crime as neutral to overall industry growth.

And then lastly, we believe the regulatory environment is slightly negative as police and others seek to reduce the number of false alarms and misleading sales practices in this industry. Now ADT has taken a leadership role in ensuring best practices in this industry, and we work very closely with all authorities to ensure consumers feel safe and secure.

As we look at industry growth, clearly, automation is leading the way, reflecting the convergence of the macro trends I just talked about. And I'll spend the next couple of pages talking about automation growth. Now automation ranges from using your smartphone or your tablets to just arm or disarm your system all the way to video cameras and alerts and managing your thermostat and your lights and your door locks.

In a recent survey of existing security users, 20% of them said that they intend to buy automation in the next year. At the same time, almost half of consumers who don't have security but intend to purchase it, almost half of them also want automation. So as you bring those 2 together, about 80% of industry growth is expected to be driven by automation over the next 5 years. And we believe that we are well positioned to capture that growth.

First, currently 8% of our existing customers have Pulse versus the 20% that I just mentioned of existing security users who stated they intend to purchase automation over the next year. So we believe we have untapped potential within our existing customer base.

Second, Pulse adoption in our dealer channel is relatively more recent and is accelerating rapidly. And we also just launched Pulse in Canada last year and are excited about the upside there as well.

And third, we have the scale, the platform and the years of experience in automation to be the partner of choice and drive innovation and integration across the entire automation ecosystem, moving the industry away from a series of automation point solutions that exist today.

Now, we're excited about Pulse take rates and as they continue to increase as well, driving both ARPU and retention. Now in the past, we shared overall Pulse take rates. On this page, we've actually broken that down, so that you could see the underlying components in those trends. If you focus first on the dark-blue bars, those are the Pulse take rates of our new customers in our direct channel only. We've seen strong growth over the past few years and exited our fiscal 2013 with over half of new customers choosing Pulse.

You could also see in the light-blue bars, which is our dealer channel that we launched much later but we've seen rapid adoption in the past year and the gap narrowing between our dealer channel and our direct channel, as we focus on those dealers that are best able to support our full product set. So despite this strong growth, as you can see, we are still optimistic that there's additional opportunity for further expansion across all of our channels.

So turning to innovation. We're also taking a number of actions to leverage our leadership position to raise the standards and redefine what security means. This focus is driving our technology, product and partnership strategies. In addition to expanding the number of devices that connect to our platform, over time, we'll be expanding from protecting a fixed place to a mobile person and also from just protecting a customer's physical asset to their digital lives as well. By doing these, we believe we will broaden our target market and also give more reasons to purchase.

Today, we actually protect the customer's home. But we know that in many cases, when, for example, computers get stolen, it's as much for the digital information on those devices as it is for the device itself. And so, as an example, we see an opportunity to leverage our Pulse platform and our partnerships to protect that digital information by locking down those connected devices when an intrusion event actually occurs.

And lastly, we're also investing in the user experience, to make it easy, simple and compelling to use our services. As an example, I'd like to show you a video now of a new product we're going to be launching next quarter called Pulse Voice.

[Presentation]

Alan D. Ferber

All right. Exciting. So the net effect of all these types of innovation is to really drive more customer engagement, resulting in higher ARPU and increased loyalty. And it also extends our leadership position and opens up new business opportunities to leverage the data we collect to better serve customers. And I'll hit on a couple of those opportunities in a few more slides.

So moving to our area of focus of net additions. So in 2013, we began to optimize our dealer channel to focus more resources on those that are [indiscernible] to evolving with ADT's overall direction and the trend towards automation. And while we're eliminating about 100 dealers, which obviously impacted overall net adds, our focus on the right dealers has resulted in the quality of the customers that come through that channel to remain high and actually have been improving. ARPU is about 10% above our average ARPU and growing about 5% over the past year and the creation multiple has actually come down even though there's been an increase in SAC. But we do remain focused on strengthening and continue to optimize this dealer channel to drive growth over time.

As we look back at 2013, I've already covered the Pulse adoption rate and the dealer rationalization that impacted dealer channel growth. But we also did eliminate a lead generator that did not meet our compliance standards, and that lead generator was a major source of business for some of our largest dealers.

In addition, channel growth was impacted by some changes among our largest dealers. We purchased 1, 1 had some cash flow issues that impacted their ability to increase adds and 1 left ADT for a competitive program. I'm very pleased, however, to report that, that dealer has now returned to the ADT family once he experienced the negative impact on his business of not having the powerful ADT brand behind him. So it's reconfirmed our dealer value proposition with that dealer and with many other dealers as well.

But more importantly, we're taking a number of actions to stabilize this channel. We are investing in enhanced funding to help drive further Pulse adoption, particularly higher end Pulse, where that higher level of automation has a very significant retention benefit as well. And increased funding will also enable some incremental sales and marketing activities by our dealers and also the recruitment of new high-quality dealers that are positioned to further drive automation. And as you saw on the previous slides, the IRR in creation multiples gives us some room to optimize growth in the future.

We're also investing in staffing and support to ensure success. We've added resources to provide better support for planning and performance management, and we've enhanced training and other tools to get new and existing dealers more productive, particularly with our new services. And while we certainly expect some noise in the next couple of quarters, we do believe these actions are establishing a very strong foundation for growth over time.

So in addition to dealers, we have a growing set of high quality partners that are driving customer adds and innovations. Our partners throughout the many industries and create a range of benefits, including lead generation, distribution opportunities for some of our advanced devices, product integration opportunities, which enhance the overall customer value proposition, and we also have technology partners that allow us to continue to innovate on our industry-leading platform.

And to highlight just a few of those, our global partners, for example, such as Pulte, allow us to leverage the uptick in the housing market and get access to new movers before the cable companies or the telcos.

In the insurance category, we've added our overall portfolio with the announcement earlier this week of a new relationship with State Farm. And in addition to being a lead source for us, we're exploring leveraging Pulse and Pulse data with customer apps and, of course, to mitigate insurance risk and provide incremental savings to our joint customers.

Similarly, in the energy category, we partnered with companies like Southern California Edison to do joint promotions, but also to integrate their products with our Pulse platform. So as an example we're reducing energy consumption via Pulse and passing those resulting savings onto our joint customers. So we are very excited about the partnerships we have and the partnerships we are forming for our future growth.

We also recognize that one of the best ways to grow net adds is by remaining intensely focused on building upon our industry-leading retention rates to mitigate the expected impact from an improved housing market. On this chart, what we show is while increased -- while our attrition in units increased year-over-year by 40 basis points, that was exclusively driven by a 60-basis-point increase in relocation disconnects. We've actually offset that by about 20 basis points with lower voluntary churn, including lost to competition and non-pay disconnects. And I'm going to cover some of our plans over the next few slides, and I'm confident that we are aggressively addressing each of those categories of churn. However, given the year-over-year improvements we see in the housing market, we do expect our reported churn to increase over the next couple of quarters before recovering in the back half of the year.

So in terms of voluntary churn, we are investing more in a comprehensive life cycle management program that focuses on improving the customer experience at key moments of truth to extend the customer life. Now, I used the term "moments of truth" to refer to various key interactions during that customer's life that helps determine whether they are going to be a loyal customer advocate for life or a source of potential churn in the future. These practices are pretty ingrained in the loyalty industry that I come from, but relatively immature in the security industry still.

For example, we know that customers who have more services and more engagement with the systems stay longer, because we have more opportunities to reinforce our value proposition and why they purchased our service in the first place. We also know that gaining a customer, utilizing the full range of the service early on in their life is critical for setting that customer up for success. So as a result, we're rolling out a series of programs focused exclusively on the first 100 days of a customer's life, and these activities include things like ensuring the customer's properly trained, setting up alerts and automations on Pulse, so they get to see the value right away, registering customers on auto pay and on my ADT, where they can get access to self-help and other valuable tools, and welcome calls or emails that allow us to interact with our customers and address any lingering issues that may remain from installation.

Similarly, later on in the customer's life, we are identifying other triggers that are predictors of future churn, so that we could intervene early to address those customers' needs. And these could be a wide range of items from arming or disarming activity to calls into our care centers.

And of course, we continue to invest in our loyalty desk to ensure we are saving those customers who are considering switching to other industry players. And while some of these will take time to develop, our major push in the near term is really upgrading customers to Pulse.

So on many occasions, including this morning, we referenced the retention benefits of Pulse. We now have enough history to show how truly meaningful this difference is. So look at the chart. If you look at the first 24 months of a customer's life, cumulative attrition for Pulse customers is 30% lower than non-Pulse customers. And this data is even larger for those Pulse customers that have our higher end automation services. As a result, we are investing more in promotions and targeted base marketing efforts to drive deeper Pulse penetration and protect our base.

We also have a large multi-year program underway to convert our 2G radios to 3G. And we'll be taking advantage of those trucks that we're rolling and being in the customer's home to drive more Pulse conversions as well.

We're also extending our efforts to what we call non-converters, those that reach out with us with an interest in Pulse, but didn't ultimately purchased. We know from our data that those customers have a high likelihood of leaving us. And so we have implemented, as part of our life cycle management program, various reach-out activities and offers to drive conversion of those folks that have raised their hands and said they are interested in Pulse.

And we're also focused on improving our performance in recapturing relocation disconnects. This is clearly a growing opportunity and within those, actually a potential for 2 sales for every relocation disconnect. Selling our current customer on their new home and selling the existing ADT system to the new homeowner of the old home. Today, we only recapture about 0.5 of every one of our relocation disconnects and we have set an aggressive goal to drive that to 1.5 sales for every relocation disconnects over the next few years. [indiscernible] in this area, our focus on faster detection of potential movers through our partnerships that I mentioned earlier, improved data sources like home listings and more marketing activities that raise awareness among our existing customers of our relocation offers.

We are also increasing selling capacity by expanding our dedicated resale group, but also providing our out-of-service location information across all of our channels. And we continue to enhance our centralized relocation desk to leverage a single point of contact to help make the moving experience much easier for our customers and to gain early access to the new homeowner of the premise where we have an existing ADT system.

Turning to non-pay disconnects, we have begun rolling out an enhanced credit screening process in our direct channel to support our focus on adding high-quality customers. Our customers that failed the screening have an opportunity to prepay their first year's monitoring services. Now we do expect this new screen to reduce direct sales by 6%, but we also expect to eliminate half the non-pay churn that happens in a customer's first 8 months, and that's a large percentage of overall non-pay churn. This customer's churn at 7x the rate of our customers that pass the screen, all of them are unprofitable and this reflects a conscious decision that we're making to trade off short-term growth for long-term value creation. And we should begin to seeing the benefits of these actions in our reported churn metrics by the end of 2014, but the direct sales impact will begin in the first quarter.

So to wrap up, I'd like to recap the key points of our growth plan. First, we are strongly positioned in a large and growing market. Second, I am confident we have the right plan to improve our net additions over time. Third, we will continue to invest in Pulse, as it's a meaningful driver of ARPU, net adds and improved churn. And lastly, we are the clear market leader. But as I said at the outset of my presentation, we are bringing a challenger mindset to the many growth opportunities we have.

So thank you for your time. We're going to take a 15-minute break. We're going to keep going. Okay. We're not going to take a break, everybody sit down. In that case, I would like to introduce Luis Orbegoso, who is the President of our Small Business Unit.

Luis J. Orbegoso

Thank you, Alan, and good morning. As Naren mentioned earlier, my name is Luis Orbegoso, and I lead the Small Business Unit for ADT. I joined ADT earlier this year and prior to that, I was with United Technologies for over 5 years, where most recently I led the commercial fire product businesses, which include Edwards Systems Technology, a global leader in commercial fire detection notification alarm.

Prior to that role, I led the commercial security businesses for UTC, which included Lenel Systems International, which is a global leader in commercial and enterprise security software and products. I originally joined UTC as a VP and General Manager of Product Management for UTC Fire & Security.

Prior to UTC, I spent all my career at GE, where I spent over 12 years in several commercial and P&L leadership roles, but I'm very excited to be here. I mean, as a former supplier, I always admired the capabilities, the reputation and the scale that ADT has. The influence that ADT wields in the security industry is unmatched, which gives us an unparalleled advantage in terms of us creating key partnerships and relationships.

So we believe that Small Business presents an incredible opportunity for growth. And we currently define Small Businesses as brick-and-mortar locations that are 7,500 square feet or less. This market represents about $2.4 billion in revenues and is growing at about 3% to 4% per year.

As you can see from the right hand of the slide, we estimate that there are about 7 million individual small businesses in the U.S., of which only about 50% have a monitored security, 30% have some type of security that is not monitored, which could range anywhere from a door chime to a dog and 70% have no security whatsoever. Now ADT is by far the largest player in this market with a share of 13%, but it's an extremely fragmented environment.

Now, this is particularly impressive and has an incredible amount of potential here for us to grow, given that backdrop, our approach has typically been typically been focused on the homeowner as opposed to a businessman, but I'll talk a little bit about that here in a minute.

Now ADT has had very good success in gaining share in these Small Business markets. The compounded annual growth rate for this market over the past 4 years has been about 2% compared to ADT's 6%. But there is much more upside for us when you consider, as I mentioned earlier, that historically, ADT's approach to this market has basically been an extension of how we sell to our residential customers. Until recently, our products, our messaging, our advertising has been centered around a homeowner as opposed to a business owner. And I am sure you will all agree that homeowners and small business owners have significant different needs. As a matter of fact, there are significant differences within the types of business customers that we have as well. A food service operator, like a Subway, will have different needs than a retail store and we need to align our products, our messaging and our processes to account for these differences.

Now in spite of this less-than-optimal approach, we have been able to outpace the market significantly over the last several years, as you can see on this slide. So, over the past year, we have faced a significant amount of focus on our business customers. The first thing that we did was to deploy key tools, optimize our sales processes and drive accountability down to the sales rep level. We have deployed a robust CRM system with Salesforce.com that allows our sales reps to effectively manage leads and prospects. We've redesigned our training courses and materials to reflect the specific needs of small business owners and all 1,200 of our small business sales reps are equipped with iPads and the necessary tools that they have in order to articulate our value propositions. Now these tools have allowed us to gain a high level of visibility as to the performance and the activities of each sales rep, which now allows us to drive a much higher level of accountability and therefore, performance.

We have also established a dedicated business marketing organization, which is developing business-specific marketing and messaging. And we are very encouraged by each of these initiatives. And the results speak for themselves. I mean, if you take a look at the right-hand side of the chart, our subscriber base grew by 8% and the recurring revenue base grew by 7% in the last year alone.

Now, similar to what Alan mentioned on the residential side, there is no doubt that business customers with Pulse are a lot stickier and much more valuable to ADT. As you can see on the left-hand side of this chart, after 24 months, Small Business cumulative Pulse attrition is 40% lower compared to non-Pulse attrition. Furthermore, customers at Pulse are willing to pay approximately 27% more than non-Pulse customers. Now, this bodes very, very well for us since our Pulse take rates are accelerating significantly. In our last quarter, more than 34% of all new Small Business sales have Pulse. This is up by a factor of 3 in only 3 years. And obviously, a key part of our strategy is to have Pulse as the foundational component in our business offerings.

Now, I would like to demonstrate a specific example of how we have focused our advertising and messaging to resonate with business customers by leveraging Pulse.

[Presentation]

Luis J. Orbegoso

Now, that's pretty exciting but we have just scratched the surface. I mean, as I mentioned at the beginning of my presentation, our products and solution set for Small Business are basically an extension of our residential approach, and it was a one-size-fits-all type of approach. Now, we believe that there's a significant opportunity for us to accelerate our growth even more aggressively by adopting a vertical-specific approach for our offerings. We have done an incredible amount of analysis over this past year of our existing customers, as well as the overall market, and we have defined verticals based on groups of customers with similar buying behavior. These groups are clinical, storefront, food beverage, mechanical and office, and I'll describe each of these briefly.

Now, all of these segments have one common need, which is basic security. And Naren mentioned that that's our foundation and it will continue to be our foundation going forward. However, there are also specific needs by vertical, where we can leverage our technologies in order to provide a much, much better value proposition. For example a store-front is typically concerned not only about employee theft and shoplifting, but also about ensuring that employees open and close the store on time. So a solution set for that vertical would include a heavy video component, point-of-sale integration into the cash register to prevent against employee theft and cheat, hoarding, as well as consolidated time and attendance reports to make sure that the schedules are operating as they should.

The food and beverage segment is concerned about food safety. So monitoring and integrating into commercial refrigeration system, so as to avoid temperature spikes, may be really important. The last thing that you want to do is to poison your customers.

The clinical group includes doctor's offices, labs, dentists. And this is all about securing the prescription drugs, right? Not only are they very valuable, but they're also regulated. So some of these customers get audited. So again, monitoring and making sure that you have visibility as to who have access to these drugs, as well as creating automated reports for auditing purposes is something that I am sure would resonate with them.

The office segment is very interested -- is very interesting because this is the intersection between physical security and digital security. And for them, losing important documents or confidential information is -- could present a significant risk. So not only helping customers encrypt and secure their data, but making sure that we have the digital tollgates to ensure that only the people that should access certain information digitally have the right and the access to do so.

The mechanical segment, which includes gas stations and oil-changing stations, is more focused on protecting customers and employees from themselves. I mean, the last thing that you want as [indiscernible] operator is to have your customer fall into that oil pit, right? The last thing that you want is someone maybe lighting up a cigarette near the gas pump as well.

So understanding these customers and these segments are very, very important, and we think that we've made significant progress in this regard.

Now, our vertical approach, one that I've just described, is very well matched for multilocation accounts and franchises. Because when you think about the needs, the multiple account -- multiple location accounts and franchises are interested in having standardized offerings that they can deploy throughout. They also want to make sure that they have common configurations and they have -- and that the solutions can be deployed in a consistent and reliable manner. They also need a single point of contact at the corporate level, like for consolidated billings and things of that nature, but they also need localized support for each individual account. Now, we believe that our scale, our infrastructure and our capabilities are a significant differentiator compared to the other industry participants. No one even comes close to our national footprint of 4,300 technicians, 200 branches and 1,200 dedicated small business sales reps that can help augment our national account organization at the local level.

Now, we have defined our growth strategy in 3 phases. And the first phase will consist of us leveraging the insights we have gained from our vertical analysis so that we can package and market the optimal solution to most effectively secure each vertical we have defined. We will also provide our sales force with vertical-specific tools, training and case studies that we are able to effectively communicate a clear value proposition. We will also have vertical-specific advertising and marketing as well.

Now the second phase of our strategy is to focus on helping our customers optimize their businesses through operational efficiencies, such as point-of-sale integration to prevent employee theft, RFID tagging to help with inventory management, hosted solutions to minimize the capital expenditures associated with the purchases of DVRs, encoders and other hardware that small business owners typically have to purchase when investing in a new security system.

The third phase of our strategy, which is the most exciting one, will be centered around how we can help our customers grow their business by providing key insights and data that they can easily monetize. Now, we are confident that each of these phases will drive increased value to our customers, which will in turn translate into a higher RPU and increase stickiness for us.

So this slide illustrates a specific example of how we would go about executing on this strategy. So let's take the storefront vertical as an example. In order for a small business to grow, there are certain things that concerns a small business owner on a daily basis. They want to make sure that they attract more customers, they want to make sound investment decisions with limited resources, they need to increase their differentiation and they need to scale effectively with growth.

So let me give you a snapshot of how ADT will be an effective partner for these types of customers. Now let's say that a retail store owner decides to run a promotion and uses local newspaper to help advertise it. Our Pulse for business platform will be able to measure activity within the store, identify customer demographics and develop results that could outline the following: one, how effective the promotion was by measuring the amount of additional people that came into the store during the promotion through people-counting software and tools. We can also help identify what parts of the store customers are spending their time in, as well as the basic demographics of these customers walking in, such as age range and gender by leveraging video analytics.

Now, we can also leverage some of the technologies that we deployed in our previous phases, such as understanding what customers bought and how much they paid by leveraging point-of-sale integration. So let's think about how powerful this data is. Now the store owner can evaluate how efficient each advertising vehicle is, how to best organize their aisles based on where customers are spending their time, what product to stock up on, when to run promotions and so on and so forth. Think about the value to the customer. I mean, if the vast majority of profitable sales come from women aged 25 to 35, why in the world would you advertise in men's health, right? So the amount of research is incredible. Now we believe that customers would be willing to pay more for these types of insights.

And more importantly, it shifts the paradigm from ADT being that only a security provider, but a partner that helps them manage and grow their businesses more effectively. Now, all the capabilities and the technologies that I've just described as it relates to the video analytics, heat maps, gender recognition, this is not science fiction. I mean, these technologies are currently available today. However, only huge retailers like Walmart and Target can afford them. Our strategy is to replicate these same types of capabilities and bring them to small businesses by creating simpler, customized versions of these solutions by vertical. Our scale and industry relationships put us at a very, very clear advantage compared to other industry participants in order to be able to execute on this strategy.

Now the ADT brand has supported not only small businesses but also medium and enterprise businesses for almost 140 years. And our current definition of a small business as a location that is 7,500 square feet or less is somewhat arbitrary and not necessarily a true reflection of the market. It was actually the result of our noncompete zone improvement with Tyco, which expires in 10 months. Now once this noncompete expires, we will have the ability to take a look at possible adjacencies, such as commercial fire solutions and larger commercial and enterprise security offerings that we can integrate and leverage with our existing infrastructure and customers. These adjacencies could potentially quadruple our addressable markets. And again, today we are extremely encouraged by the momentum that we have in this space and our ability to execute.

So if you [indiscernible], I'm very, very excited about the opportunity and I think that we are in an enviable position in order to really change things around and shift the paradigm as to how we have a relationship with our customers. We've got some good momentum [indiscernible] into this year. We have a good understanding of what our customers' needs are and we have the right relationships in the marketplace in order to have secure on the things that I've just mentioned.

So with that, I would like to turn it back over to Naren. Thank you.

Naren K. Gursahaney

Thanks, Luis. Before we turn things over to Don to talk about the health BU. I think we'll take a little bit of break for everybody in the room's health. As you may have noticed, there was a booth set up on your way in with Pulse. That was not there just to demonstrate Pulse. We're actually going to run a sale today. In celebration of our 1 year anniversary, we launched a friends and family sale promotion to all of our ADT employees, as well as some of our key partners. We decided to extend that promotion to this group, so here's your opportunity to get a Pulse system for your home, so you can see firsthand how exciting this product is and how changing -- how much of a change it can drive to our business. So Tim McKinney, who heads up our Custom Home Sales Team, and several of his sales reps are out there right now. So during the break, I encourage you to stop by and take advantage of this special promotion. We'll try and get back, people back in here say in 15 minutes, so 10:35 we'll start up with Don Boerema. Thank you.

[Break]

Naren K. Gursahaney

All right, we're going to go ahead and try to get started. If you guys, take your seats please.

I saw some big long lines down at the Pulse booth. I understand we had to turn some people away this year because of the seating, so for those who bought Pulse, you'll be the first people invited to next year's Investor Day.

Now I'm going to turn things over to Don Boerema, as I mentioned in the introduction, Don is our head of corporate development, who is responsible for strategy, M&A and also our health business, so he's going to talk about the health business first, and then go into some of the M&A opportunities and capabilities we've built. So Don?

Donald A. Boerema

Great. Well, thanks, Naren, and welcome, everybody. As Naren said, I'm Don Boerema, I'm the Chief Corporate Development Officer, so I have responsibility for all the M&A, as well as all our partnerships and business development we have, so that's important piece. I also have responsibly for corporate strategy and also for our new health, which is pretty exciting.

I've been with the company for about 6 years, and I actually started my career as a Chief Marketing Officer. So I was pretty excited, and I had the opportunity to do some of the fun things in a marketing role. And really, prior to ADT, I've had about 20 years of experience in the subscriber base businesses, working for companies like AT&T Wireless, and also I ran a small telecom company before that. And I've had experience in strategy and business development, marketing, sales, operations in those companies, as well as some large consumer good companies, like PepsiCo and Procter & Gamble and McCaw Cellular before that. So it was a fun career that I actually had.

The thing that I'm really passionate, and I really love though is growing businesses, especially when you have disruptive technologies. And I've been pretty fortunate over my career to have some rare opportunities to do those things. I was employee #1 in the wireless data business at AT&T Wireless, and I have the great opportunity to really build that business with a great team and everything else. And I still remember the day when folks came to me and said, "Why would anybody ever text message when I can actually pick up the phone and call people?" So we went out there and launched the American Idol deal and next thing you know, we're off to the races.

I also was fortunate when I was in the CMO role here at ADT to be one of the leaders in really driving our Pulse efforts we have, and that's been a great success and been very fun and exciting for us from a business standpoint.

And in both cases, really to be successful, you had to build an ecosystem of partners, and also we had to do some really strategic M&A to really allow ourselves to differentiate ourself. And now with our new health [ph] and some of the really positive things we have in front of us, when you look at some of the M&A activity, it's a pretty exciting time for us.

Let me walk you through some of that. So starting with the health EU [ph]. Today, we had a personal emergency response solution, called PERS in the industry. And what that is, it's a single [ph] solution that you can wear on a wristband or a necklace, or have a base station in your home, and in our case, though -- once you push that button, you have immediate communication to a highly-trained monitoring customer reps that we actually have out there. And they can react immediately to whatever you're needs are from the customer's standpoint.

The exciting thing is if you look at that industry and that category, there's tremendous growth in front of us. If you look at the projections from that category, it's expected to grow in double-digit growth over the next 3 or 4 years. And I expect they'll continue past that.

And for ADT, we're just scratching the surface in this area. We don't have a leadership role like we have in the residential business and in our small business areas. And it's something that we think, at least for today, we don't have that leadership role, but in the future, we have a great opportunity really to capture leadership role, and really be a big growth engine for ADT going forward. In fact, we expect this, by 2016, to be greater than $100 million business for us.

Now there's a lot of drivers that are tailwinds behind the health business in the market today. For example, you just look at the demographics; there are 77 million Americans today that are 65 years old, growing at 10,000 new Americans per day, great opportunity overall.

The other thing is the cost of health care, as we all know, is going up dramatically. And not only do you have that, but people are living longer. So the cost over the life is higher.

The other thing is the Affordable Care Act, your ObamaCare, is driving the industry do things very differently, and some of the solutions and some of the capability that we're bringing to the market direct exactly some of the needs they have. Well, we can reduce readmissions in to the hospital. We can reduce your health care costs. We can provide things that are much more proactive in the health care space right in the comfort of your home.

Insurance companies are starting to recognize that. Today, Medicare and Medicaid will reimburse for our PERS solutions. So remove that barrier of actually going out and having to buy our services. And we're actually talking to a lot of private payers now that are also getting in the same space, so they recognize the savings you can have from a cost standpoint, and we fully expect that they'll jump on the bandwagon and start reimbursing for some of these services also, which really allow adoption rates and penetration rates really to grow.

And new technologies are driving this. Wireless remote health care, right in the comfort of your home, are driving new ways that health care will be delivered in the future.

So if we look at ADT, for example, on the bottom slide here, today, we have our Pulse solution hopefully all -- you have the opportunity in the back to actually experience it a little bit. But today, we put a gateway or a hub into the home, and that connects the devices like door locks and thermostats and lighting modules, et cetera. We could do the same thing for health care. Use that same hub in the home, but now you're connecting to medical devices, a glucose monitor, a blood [indiscernible], a scale or even a pill box. And now we can connect totally, you get all that information in a HIPAA-compliant, FDA-cleared environment, so now I have the information as a user or as a caregiver.

What's a little different for Pulse, though, from Pulse, is now we can view that to the ecosystem. So with the customer's permission, now what we can do is feed that to your medical professional, to the hospital, to the insurance company and provide that data so it can be realtime proactive care we can provide to them in the comfort of their homes. So now people can age in place in their homes. They don't have to move into assisted living, or as quickly into assisted living or into the hospitals. Will be a able to allow them to really live in a rich life as you go forward.

Now we have a very robust roadmap in some investments we're making in this space overall. As I mentioned a little bit earlier, today, we have a telephone-based or a POTS-based PERS solution. And really, that's focused on the elderly overall. And what we do is we provide that single button immediate communication directly to the customer. To be honest, though, we're walking away from business everyday with that solution. Because people are eliminating their home phones, they're eliminating those POTS lines. So we're excited that this month we'll be introducing our wireless option, so you get that same great experience, but you deliver it over wireless. And you can have that same great experience directly into your home, that alone should drive us some tremendous growth for us.

The next step is you eliminate the 4 walls of your home. You move into a mobile environment, so now I can have that same communication, that same experience they have, wherever I am. I can be in the grocery store parking lot, the Wal-Mart parking lot. And I can then still have that communication directly with our highly-trained monitoring centers as we go forward. And we'll add fall-detection capabilities. So if you fall and you don't respond, we know exactly where you are because we have location-based capabilities. We'll be able to send the authorities there. We'll be able to notify your caregiver or the other folks. You can respond quickly and provide the care you need wherever you are as you go forward.

And there are some great things you can do with that. Now we start repurposing that for other applications. So when you just exited the hospital because you had a hip replacement or a knee replacement, or other surgeries, we can provide the service for you, and we can actually use that as another target audience for us. Or if there's a mom that's struggling with some of the pregnancy things she has. This is another tool that she can -- we can always be there whenever they need. So now we're expanding into new customer segments. And the exciting thing about that is in some of the deployments we've done with some of the partners, those customers are no younger in age. So we're allowing us to extend that customer life much longer than we have on our PERS platform today. And the other thing is, as we add things like fall detection, our ARPU increases. So it's a double win for us, and we're also delivering great value to our customers.

The next step is you get into that remote health care that I just talked about, where you put those devices in the comfort of your home, and we can provide the vitals and everything else directly to the care, to all the ecosystem you have out there. And the exciting thing about that is now you don't have to wait until the next visit to the hospital. I know immediately as many times as you take your vitals, how to respond to you immediately in the comfort of that home. And I could be more proactive. So if you have congestive heart failure, you step on the scale, you do your blood pressure, and when there's a need, immediately you can respond and provide those care, and you could do it again in the comfort of your home.

So it's pretty exciting, and then we bundle all these things together with Pulse. We bundle all these together with all these different platforms, and there are some exciting things we can do as we go forward.

Now the way we're going to deliver care in this remote home environment is going to be different in the future. If you think about PERS, for example. You can have this on you 24x7. I could sleep with it, I can shower with it, it's waterproof. And to be honest, showering is very important because that's where many falls occur. Or I can be with it when I eat my meals during the day or enjoy at the comfort of my home.

If you're with that Pulse, we know everything that's going on in the premise. We went in doors open, windows open, motion, everything is going on. So if you have an Alzheimer's patient, we know if they left the premise. If you have the home nurse that's visiting, we know who's at the front door, so I can sit in the comfort of the couch or my chair. I can view who's at the front door or if it's the home nurse, I can turn off the security system, I can unlock the door and never have to get off the comfort of my couch or get into my wheelchair to let somebody in, so tremendous benefit.

And once we get into this remote health care solution, when you put this ecosystem in all of these devices, we'll be able to provide all those vitals to really that ecosystem, the nurses, the doctors, the insurance companies, again, with permission base, but a great opportunity for us as we go forward.

One of the things that we're introducing on our solution is a pillbox. 40% of the issues in health care today is because of noncompliance in medication. I'm not taking my medication when I'm supposed to, or at all in some cases. Well, what our pillbox does is when you're supposed to take your pillbox, with just 28 slots, the slot lights up, it's time to take your medication. At a short period of time, if I still haven't taken that medication, it starts to beep. Please take your medication, there's a reminder, I can hear, that's an audible sound. And if you still don't take it, what it does it is can notify your caregiver, so I can call mom, please take your medication, you forgot again.

There's some wonderful things we can do overall from the business standpoint with this new solution that can really help and really affect health care going forward.

So we're really excited about the opportunity from the health care standpoint. There's tremendous amount of growth, there's tremendous amount of change, and some of the solutions that we're prepared to put in place and investments, we think help deliver great double-digit growth for us and really give us a great growth engine as we move forward, and it's a very healthy business proposition. We have some things that will grow our ARPU, as well as extend customer life. And what we're excited about is we focus on building customers for life with ADT, and this allows them to extend their relationship with us as a company.

So shifting gears. Another way we want to grow our business is through M&A, and this is a very exciting time from an M&A standpoint. Not only do we have growth opportunities, but there's also lots of operational opportunities as we go forward.

Now when we look at M&A, we break it into really 3 buckets: So first of all, we look at strengthen our core, and what we do there is we really buy customer basis. If you look at our exclusive dealers that Alan talked about today, everyday, we buy customer basis from them. If I sell them, we fold them into the ADT family, I mean, we have a machine that does this. This is -- we have this down to a science. We also do that with other industry companies, other security companies. What they do is they sell us their customer base, and we did this with Pinnacle this year, we did it with Absolute, and we always look for these opportunities. We roll them in, and this is very accretive to our business, and something that's very positive to our business as we go forward.

Secondly, we extend our leadership position by buying security companies. Now in these situations, we have to look at a number different dimensions. We not only have to look at the quality of those customer bases, we look at the synergies that those companies have between us with ADT. We also look at the growth engine they could bring to us, and many of them are bringing great new opportunities for us to accelerate our growth, so would bring these companies in, and we actually deploy those across our entire footprint. And the other opportunity is they bring us new capabilities, they bring us new skills, they bring us new products, and we can also roll those in.

Obviously, this year, we acquired Devcon, and I'll about that one a little bit later. So it was a real positive acquisition for us, and obviously Brink's/Broadview was another great one.

Both of those are more what we call financial investments from an M&A standpoint. When you get into the third area, these are more strategic. Now we have the opportunity to invest in adjacencies; things that really can increase our extensions on Pulse as we go forward, and really accelerate our penetration in the marketplace and build on it.

Things like in the business area as we go forward. What we could do is bring in new capabilities. One of the things that Luis talked about was fire capabilities. Instead of doing that organically, we can acquire and hit the ground running, or video analytics and things like that. And we talked just about a lot of the health opportunities as we go forward.

We invest in a company called iControl, which is a software platform that is really the underlying platform for Pulse. And recently, we invested in a company called Ideal Life, which is a remote health care platform where we actually are going to use that to really take advantage of the opportunity in the marketplace.

Now the market is really changing, and there's some big drivers -- the market is really ripe or M&A right now. And there's really a number reasons for that. First of all, new competition. When you look at some of these major players, they have major resources that they put against the marketplace, with huge marketing budgets, and these small- and medium-sized companies really are struggling in many cases to compete against those big players that are coming in the marketplace.

Secondly, interactive services like Pulse. That's a very different business model. We sell it different, we install it differently, we service differently, we even monitor it differently. We're now putting in light switches and door locks in, bringing in different electricians and partners to actually install the service. And that's very foreign to many of the security companies out there from a model standpoint. And they're struggling in making that shift to get new model, and really, that's a table stakes in the future to be successful.

Thirdly, a big driver is anybody who has a wireless system needs to move from 2G to 3G. So they need to do a truck roll, they need to install a new radio, they need to upgrade the system overall, and many of them, since they don't have interactive services or Pulse, all they're doing is trying to keep that customer and they just have a cost associated with that. We're fortunate because we're taking advantage of that opportunity to upgrade all of those customers to Pulse. And you saw the loyalty of those customers and the upside from on ARPU standpoint, that's a positive experience for us. For them, they don't have that same opportunity.

And we look at all of those drivers combined, that's driving them to think differently and say, "Maybe it's time for me to go out of this business." And they're calling us, and they're calling us because not only are they looking at these factors, but the other thing is they love our vision. We will be proactive with them in explaining our vision and everything else, and they want to be part of the ADT family, and we bring them in and many of the employees are really happy with participating in our company and where we're actually moving in the future.

The fourth driver is there's a lot of private equity and security today. And looking at all these factors that we just talked about, and saying, "You know what, I'm going to prolong my exit and I'm not going to get any benefit from that." They're calling us now. We're the obvious choice, the obvious acquirer, and we're doing everything possible to build those relationships and take advantage of those opportunities. So it's really a right time for M&A.

Naren talked a little about this, and so did Alan. The market is still very fragmented. We're, obviously the leader at about 25%. Almost 60% of the market are these small, little security companies out there; they're highly fragmented, they're struggling as they move forward. We've identified already and are in conversations and being proactive, with billions of dollars of revenue for us that we could acquire over time.

And all of these fit and align strategically with us. Leverages our scale and density, and many of them will also have increased penetration in certain geographies. They bring us new capabilities, we bring them a lot of capabilities like Pulse. They want to sell Pulse. And nobody could deliver the synergies that ADT can, nobody can do that. Well, we have experienced that in Devcon and in Broadview and continue to do that through other acquisitions.

And the other exciting thing is they bring us new growth engines. And we love that. We are -- we want to be a growth company. And we are leveraging those, and the great thing is, we can take what they bring to us and just roll it across the entire footprint from an ADT standpoint.

The other thing we look at M&A is really building new capabilities, and we talked about that as we move forward, self-generated lead capabilities. We actually have folks that go doorknocking overall. One of the things that Luis talked about was fire. We don't have those capabilities today. There are opportunities for us to acquire a company, jump start that, get in the bandwagon, and immediately take advantage of those opportunities as we go forward.

Data analytics is going to be key. As we look at marketing, we need to become more efficient on how we do our marketing and things are changing because now it's becoming digital media. So we need to look at social media and different things as we go forward. Other in-home services; today, we outsource some of those capabilities. We hire electricians to put high-voltage solutions in. That's something that we could potentially acquire and bring that in-house, and get the benefit of that increased margin.

And the other thing is as we become more and more software-centric, the intellectual property is critical for us. So we're looking at intellectual property in IP, and bringing that in the portfolio, which allows us to differentiate ourself in the marketplace.

Devcon has turned out to be a great acquisition for us. We spent just under $150 million in July to acquire the company. They brought us $2.9 million of RMR, and we got it at a very attractive multiple, 41x of RMR.

And the exciting thing, as mentioned earlier about synergies, we're going to be able to deliver $14 million of the synergies, and we're on track to do that. And that represents about 34% of their operating costs, about 1/3 of their operating costs. And because of the process we put in place and the discipline we put in place, we're going to do that and deliver those synergies below what we expected and planned for, from a onetime-cost standpoint.

And Devcon brought us great, great assets; 117,000 highly valued customers, quality customers with low attrition rates. They brought us a great capability from a self-generating sales standpoint, and we're rolling it out because we've learned from them into other areas. And the other thing is they brought us this really a gem that we didn't realize until we got into it, which is a homeowners association or a community association capability, that is something that is very new and we see that -- it's very promising for us in the future.

So it's been very positive. And the exciting thing about Devcon, they're excited to be part of our family. We got some great employees out of this, and they're operating and delivering their results, in fact, they're exceeding the results from a planned standpoint, which in many times, when you have all those acquisitions, you struggle on continuing the momentum of their business.

Because of our separation agreement with Tyco, we also had to divest the commercial business that they had up and New York. And the exciting thing is we've got a great multiple for that also, and we did it very quickly because of the process we have.

And there's other strategic opportunities we have also. We talked about Ideal Life, that's a company we invested in, which is a remote health care business. We bought 20% of the company, we got a board seat overall. We have full access to the solution worldwide, and it's something can jumpstart us in this area very quickly; HIPAA-compliant solution, FDA cleared, have devices already, have customers already, have relationships in the industry, they have an ecosystem. It's really a great opportunity for us to really capitalize on that.

And we have predetermined rights to expand our ownership position, at our discretion, if we choose. And we're looking in all kinds of other opportunities. For example, the Vehicle. The Vehicle will be a way for you to manage Pulse in the future. You saw a little bit on the voice activation earlier, but now I can voice activate that, or I can have geo-fence and that wireless geo-fence, when I break through it, all those automations can occur. So the garage door can open, the lights can go on, the thermostat can change, or whatever you need, by just going through that.

There's a new video analytic abilities we're looking at. New industrial design because it's very important now for customers how our products look in the marketplace. And monitoring capabilities that build on our expertise there in energy and health care, and even in the vehicle, are all opportunities for us that are new extensions that we can actually get into from an M&A standpoint.

Now we establish some very disciplined process, and that's why we are so successful with Devcon, when we actually look at M&A. First of all, we know we need to be fast and nimble. So we've got the process in place so we can quickly identify the opportunities, assess the opportunities, and meet with management, review those opportunities, and the board if we need to, and take advantage of those in a very, very quick manner.

And we work very collaboratively. Not only internally -- through all our functional areas, but also with a partner. We're in conversations with them. We know their businesses, they know us. We share some of our vision and things like that. And that's allowing us really to fill up that funnel as we go forward.

We have a very disciplined economic process we have, and Mike is helping us in that area, and we have some really tight goals that we look at. Our target IRR is 12% or greater that we look at, and we assess all those opportunities against that. And not only do we assess it, we measure on an ongoing basis to make sure we're delivering on it and we learn from that.

And we really think that we can become the acquirer and the partner of choice in this area. Through that collaboration, through that communication, through that proactive nature and showing those visions and we everything else, and we're already seeing that as our funnel fills up.

Integration teams that we have get involved early on in the process. And that allows us to expedite the process and take advantage of those synergies in growth engines, and all of those things associated with doing those deals.

And our plan is we want to be proactive. We're targeting those companies, meeting with them and they want to join us. And that allows us to avoid auctions and things like that.

So we build some capabilities from an M&A standpoint. If you think about it, when we separated from Tyco we didn't have any M&A capabilities. We have built it on from scratch. So we had to put a disciplined process in place, we hired new skill sets and new capabilities to make sure that we capitalize in this opportunity.

For example, we start off, if you look at our deal team; we've hired investment bankers, they come in that know how to do these deals, know how to operate quickly, know how to assess the opportunities, prioritize the opportunities, determine valuations and move forward very quickly. And working hand-in-hand with them is a due diligence team. We took cross-functional people out of their jobs and created this due diligence team, so immediately they can identify and assess the opportunities from a synergy standpoint, can look at the quality of those customers, and can make sure that we capitalize on the growth engines overall.

As soon as the deal is consummated, that same due diligence team moves in the execution mode. They move over, and they get into the integration team, they determine the process, they simulate in the ADT, and we're actually capitalizing the opportunity very quickly. What that does is it maintains the people, it maintains the progress and the momentum in those businesses as we bring them in, and allows us really to capitalize on that.

And we those step there. We continue to assess the opportunities as we go forward, to make share we continue to improve that process as we go forward to continue, to be quicker and faster and take advantage of those opportunities and even deliver better results from a business standpoint.

M&A is an exciting opportunity for us going forward. The funnel is very full, and we're going to be very aggressive in this space going forward. I'm looking forward to next year when we get together to talk about all of the exciting opportunities because we think this can be very complimentary to our organic growth strategy that we actually have in the marketplace.

So with that, I want to thank you for your time. I'd like to turn the mic over to Mike who's going to walk you through some of our financial overview. Thank you.

Michael S. Geltzeiler

Good job, Don.

Donald A. Boerema

Thank you.

Michael S. Geltzeiler

Thanks, Don, and good morning. Before I provide an overview of our financial strategy and business outlook, I thought I offer a brief introduction.

After a long engagement, I finally joined ADT on November 14 as the organization's CFO. For the past 5 years, I was the CFO of this great institution, the NYSE Euronext, until our merger with ICE. Although I had committed to join ADT several months before, I was officially not able to start until after the NYSE deal closed.

Also, in my career, I was the CFO of Reader's Digest and had senior financial roles at Nielsen and Dun & Bradstreet beforehand.

What excited me about ADT is the opportunity to work for our firm with a great brand, clear market leader and an industry with developments in home automation and adjacencies such as home health that have considerable opportunity for innovation and growth.

Additionally, as a recent spinoff in Tyco, I was excited about the possibility to transform this 138-year-old divisional business into a standalone, high-performing public company. It reminded me favorably of my experience at Nielsen when we spun off with Dun & Bradstreet.

Lastly, with the strong balance sheet and cost efficiency opportunities, I believe there are plenty of levers to add incremental shareholder value. One CFO with an envy of business, with a great core franchise, in a growing industry with plenty of capital to invest.

Naren shared a form of this slide with you earlier. This chart highlights the favorable economics we enjoy in the security industry. Recurring revenues have risen steadily for the past 6 years, even during the economic downturn, growing over 9% per annum. When you adjust for the 2010 acquisition of Broadview, recurring revenues grew 5.1% on a CAGR basis over this period.

The business has also grown its EBITDA margins from nearly 44% in 2007 to over 51% this year, and generates steady-state free cash flow of nearly $1 billion this past year. With all of these cash proceeds, the company has successfully been able to deliver excess capital into initiatives with attractive return metrics, all exceeding our cost of capital, which is slightly less than 9%.

Before I get into our outlook, cost efficiency program and capital allocation plans, I thought it would be beneficial to try and convey our financial strategy for realizing value for ADT shareholders. Even in the weeks that I've been here, the company has announced a flurry of actions designed to optimize total shareholder return and company evaluation on a per-share basis. So what's our plan?

Naren discussed the 5 key value drivers: Performance on these drivers will drive higher enterprise valuation. Further, as we execute our plan to increase operating leverage towards our financial policy of 3x, we plan to deploy a portion of these proceeds towards organic growth and M&A opportunities that will also generate returns above our cost of capital, which would drive also increased enterprise valuation.

We do plan to return capital to shareholders in the form of dividends and share repurchases but near term, we will be prioritizing acquisition opportunities ahead of capital.

With our high recurring revenue growth and growing steady-state free cash flow, management is comfortable with the dividend payout ratio of between 40% and 50% of non-GAAP EPS. To this end, last month, we announced a 60% increase in our quarterly dividend to $0.20 per share. At today's stock price, that translates to a 2% yield.

This, coupled with our share buyback program, drives our ultimate goal, which is total shareholder return and valuation on a per-share basis, while at the same time, staying within our long-term financial policy of 3x debt to EBITDA. This become clearer on the next slide.

This chart shows our performance in 2013 for the 5 value drivers and how these contribute to growing the enterprise valuation metrics for ADT. In 2013, we added 1.1 million customers and increased average revenue per customer by nearly 4%. This was somewhat mitigated by an increase to our customer attrition, cost to serve and SAC creation multiples. These results drove higher recurring revenue, improvements in both pre-SAC and EBITDA margins and steady-state free cash flow of nearly $1 billion.

Additionally, the NOLs we inherited from Tyco resulted in cash taxes of only 5% to 7%, which are considerably favorable to our book tax rate of about 36%. With our recent debt offering, we're now able to guide that cash taxes will approximate this 5% to 7% for the next 9 years. So we single out adjusted EPS using our cash tax rate is the more appropriate EPS metric for valuation purposes. Cash EPS in 2013 was $2.88, and we are 14x today's stock price.

We also use capital to make a few strategic acquisitions and repurchased $2.4 billion of our stock.

When you look at the right-hand side of this chart, this shows the multiples we trade at using 2013 results. For each metric, our multiple trails valuation for our industry, recent transactions in our space and other friends and related industries. This why we are a buyer of our stock.

My next 3 slides focus on our cost position and the efficiency program we're launching at the firm. With EBITDA margins north of 50%, the company has a favorable economic model. That said, our focus over the past year has been on undertaking a separation of ADT from Tyco and establishing a necessary governing functions to operate as a standalone public company.

The Tyco separation continues into this year, and is expected to be essentially complete by year-end 2014. This will provide some headwinds on near-term cost and margins, probably through the first half of the year, and then we expect to see the benefits of the cost initiatives in the second half.

To this end, we have internally launched an efficiency program across our cost to serve and subscriber acquisition cost that categories. For cost to serve, we have a series of initiatives underway to reduce G&A spending through streamlining, process redesign, automation and through rationalizing our real estate portfolio. We also have initiatives underway in our field operations to simplify and harmonize how we maintain and service our clients.

In the SAC area, we're implementing actions that optimize sales and marketing channels, reduce installation costs and we're in the process of implementing a new common order platform.

Marketing spending in our space is on the rise, and we're prepared to do what it takes to retain our leadership position in the security and home automation market.

So what does this mean for our cost base? In 2013, we spent nearly $1 billion to serve our customers with nearly half of this in G&A activities. This translates to a cost to serve per subscriber of $12.88, which as Naren discussed earlier, is by far the most efficient in our industry. As we look forward, we're targeting a 10% reduction at cost to serve per subscriber by 2016. This includes a reduction of G&A cost by 10% or $50 million.

On the SAC cost basis, we spend on capital and P&L $1.4 billion last year to market, sell and install ADT systems. This translates to $1,277 per new subscriber. This figure has been rising as the installation cost for our interactive Pulse offering is the more expensive. That said, Pulse is driving higher revenues per unit. And we feel the more appropriate way to view productivity in the SAC area is to focus on net creation multiple. Net creation multiple, as Naren said earlier, is the SAC per subscriber over the average revenue per new subscriber. For 2013, the creation multiple was 29.1x, and our productivity goal for SAC is to reduce the net creation multiple by onetime by 2016. This would bring us below 2012 levels.

One of my first orders of business as ADT's new CFO was to really hone in on the key value metrics of the business. And one of these keys metrics to ADT is steady-state free cash flow. This metric encapsulates the 5 key operating drivers that we discussed today on a cash basis and is a great depiction of the cash potential of our existing subscriber base.

After speaking with several of you, I quickly realized that my second order of business was to simplify my first order of business. This will create greater transparency, better comparability to peers and a metric that's just plain and simple to understand. While the old metric was a useful indicator for us, it was unnecessarily complex and was impacted by some positive activities such as Pulse upgrades.

The new metric ties back directly to the key value and financial drivers. As you can see at first glance, our new definition is much simpler to calculate than the prior definition. The major changes to the methodology include that we're starting with EBITDA and not free cash flow. We have adopted last quarter annualized versus last 12 months. We're assuming a steady-state maintenance CapEx of $10 million per year. And as we've mentioned earlier, upgrading customers to Pulse is part of our strategy, so the SAC cost to Pulse upgrade will be excluded from the calculation.

Using the new methodology, steady-state free cash flow before special items was $939 million last year. We're continuing to guide this metric to increase 5% to 10% in 2014. In the Appendix, we restated each quarter for 2013 for the new calculation.

When Tyco spun off from ADT in 2012, the company had 1.6x debt-to-EBITDA ratio. Our management is determined that an appropriate long-term capital structure for the company is 3.0x leverage, and we're committed to maintaining this financial policy. With over 90% of revenues being recurring in nature in our diverse sales channels, we feel that investment-grade ratings are not necessary for this business.

We believe that a 3x leverage freeze up sizable amounts of capital for growth at attractive returns, while at the same time, balances risk and access to global debt markets, and has afforded a double-B rated company.

Speaking of capital, the company increases leverage from 1.6 to 2x in 2013, but it's still considerably below its target level of 3x. This capital is used for customer for acquisitions, to acquire Devcon and to repurchase $1.3 billion of our shares.

As we look at the next few years, we estimate that we'll have approximately $3.4 billion of incremental capital to deploy for M&A, buybacks and dividends in the 2014 and 2015 periods and a further $1 billion annually beginning in 2016 and beyond. $1.7 billion of this increase comes from adding incremental leverage, whereas the balance is driven by EBITDA growth and free cash flow generated from the franchise. And all of these figures are above what we spend, which is about $1.2 billion typically in pursuing organic growth through both purchases and adding new customers.

My focus on 2014 to 2015, we plan to use approximately $300 million of that $3.4 billion for our dividends, targeting a dividend payout of 40% to 50% of non-GAAP EPS. The remaining $3.1 billion will be allocated to M&A and share buybacks, with the ultimate mix dictated by market dynamics and return metrics.

Already for 2014, we've announced repurchases of $1.2 billion. Approximately $600 million remains on the previously communicated $3 billion share authorization. As Don covered very clearly in his presentation, we believe there are a number of interesting M&A targets on both the strategic and account roll-up fronts, which we are currently evaluating. And the box on this chart, we've highlighted the criteria, we put each opportunity for -- through in determining where to invest.

As I've mentioned earlier, we've been active in the first quarter on capital front. It felt it would be helpful to provide a chart for our debt leverage and ending share count is after the $1 billion bond issuance we did in October and our $1.2 billion of share repurchases so far this year.

Debt levels have increased to $4.5 billion with about $200 million of which is the borrowing against our short-term revolver of $750 million. Our pro forma leverage incorporating all these expenditures is about 2.6x, and we anticipate having 187 million shares outstanding on a diluted basis after we complete the ASR.

Turning to guidance. We are reiterating our 2014 financial guidance of 4% to 5% growth in recurring revenue, EBITDA margins to expand at least 50 basis points and steady-state free cash flow to grow 5% to 10%.

As this chart also summarizes, we've given guidance earlier in this meeting on 5 operating levers with customer additions, ARPU and cost to serve all to improve and attrition rates and SAC costs to stabilize.

And finally, on our earnings call, we provided some guidance on our special items that we plan to spend $50 million to $66 million in special items for M&A integration, implementing our cost efficiency program, completing the separation from Tyco and on 2G to 3G conversions, about half of this will be spent on 2G to 3G.

Lastly, for me, I thought it will be helpful if we summarize our longer-term guidance 3 years from 2014 to 2016 based on the presentations and the action plans you heard earlier. We feel our revenue story is compelling. Over the next 3 years, we see mid-single digit growth in our residential business and higher levels of growth in both small business and health care. This is all organic.

If you couple top line growth from M&A, we're to see total company revenues growing at a mid- to high-single digits. We expect our cost efficiency programs to expand EBITDA margins by 150 basis points over the next 3 years, and we're guiding steady-state free cash flow on a CAGR basis to grow high-single digits as attrition rates moderate.

If we are successful on this quest, we believe this will drive sizable growth in those enterprise valuation metrics I discussed earlier: recurring revenue, EBITDA, steady-state free cash flow and cash EPS. And with our efforts to shrink the equity base, each shareholder piece of this pie will also increase.

I'll now turn the meeting back to Naren for some concluding remarks and then we'll take your questions.

Naren K. Gursahaney

All right. Thanks, Mike. What I like to again, just kind of recap what I started with, and what excited us all about coming today and telling you ADT's story. One is, the ADT value proposition remains intact. Great industry, ADT has got a strong leadership position, large market share position but a growing market and tremendous opportunities to continue to accelerate growth.

Based on our 2013 performance, we see some areas that are actionable, that actions have already put in place to improve our performance further, specifically around attrition and optimizing our indirect or third-party dealer program and simplifying the ADT story.

We also see opportunities to continue to improve our margins and reduce our subscriber acquisition costs to improve our overall returns. I think we've got an exciting growth strategy for this business and I think we've got the right leadership team in place to execute that strategy and continue to drive shareholder value.

With that, we're going to open things up for Q&A. I think we're got to bring some chairs up here and we'll bring the entire leadership teem up here. I'm going to ask Larry DeMarco, our Director of Investor Relations, to kind of play the moderator here and field the questions and pass them on to us.

Question-and-Answer Session

Lawrence DeMarco

Thanks, Naren. So my colleagues here have shared a tremendous amount of information with you guys. I can't imagine why you would have any questions. Anyway, we'll give you some time to do that, get these chairs. Hands are raising already. Lovely. So I'll call on you guys. Let's get some microphones down the aisles here. If you don't mind, please wait until the microphone gets to you so our friends on the webcast can hear. And also, so let us know your name and what firm you registered. First question, Jeff?

Jeffrey T. Kessler - Imperial Capital, LLC

Yes, Jeff Kessler with Imperial Capital. Your customer acquisition multiple has been rising slowly because of the increased cost for putting in Pulse systems, regarding its cellular or whatever extra costs on both the customer side and on the monitoring side that you have to include there. We've calculated that your cash-on-cash return on these new Pulse systems, on the base Pulse System, at a certain level, which is higher than the old POTS line systems that you've been selling. So that's one of the reasons for that. We've also calculated, though, that if you were to be able to sell some of these higher end Pulse systems that you have out there immediately, you could actually get a cash-on-cash return that would be lower than the POTS system. Now without getting into any specifics as to what you have to sell or what you're going to sell, could you tell us what do you need to do to get that the amount of time that you get that cash-on-cash return back to the POTS system? What specific items can you add into that Pulse select system so that you basically even out the years that it takes and that way you can, at least for the short period of time, maintain the customer acquisition multiple that you have and don't have to worry about all these new costs if you can just get some more upfront apps in there? What are the most likely upfront apps that you could add to the base system to get you to the same return as you had on the POTS system?

Naren K. Gursahaney

Jeff, I think there's a couple of things. First, of all, Pulse, in aggregate, has better returns than our traditional systems. And especially when you factor in the better retention characteristics that Alan and Luis talked about for our respective businesses. We were hesitant to factor that into our modeling upfront because we wanted to make sure we had enough experience to feel confident before we went aggressively and change all of our models to reflect that. As Alan and Luis showed you, we now got 2 years of data and I think the results are pretty compelling that the retention rates are significantly better. That said, we are working to continue to improve that subscriber acquisition cost on a business-by-business basis. And some of the examples, we're going through a complete redesign of our product platform for Pulse right now. The current platform is a standalone security panel, plus an iHub, and we've got a redesign going on to integrate those 2. And that does 2 things: One, is it takes cost out of the system; but two, it makes the upgrade an over-the-air upgrade. So somebody buys what we used to call, Select, the entry-level Pulse System, which just allow you to remotely arm and disarm. If they want to upgrade to more of the higher end Automation Solutions, we won't have to roll a truck to bring out the iHub and introduce it. We can provide that upgrade as a software upgrade over the air. We may be able to ship the product to them for a self install, we're working through those. So just a redesign of the product and that new product platform will be available about midyear is when we'll start to roll that out across both our direct and our dealer channel. That also will simplify the installation. It's more of a wireless product, so the labor costs associated with installation will come down as well. And then once you have that platform and we could continue to provide new services from a software perspective, and use that to drive ARPU upgrades moving forward.

Lawrence DeMarco

If you'll allow me, I've had a few calls over the past few weeks. So I'd like to ask a question to Naren on behalf of you guys. Naren, can you provide us with a little color and rationale into the Corvex buyback? And why at that price?

Naren K. Gursahaney

First, let me provide a little bit of context because I think it will help you understand our decision-making process as this opportunity was presented to us. Keith Meister was a member of our board and as such, he was subject to restrictions on his ability to trade ADT shares and buy extension, so was Corvex. We have limited trading windows for all statutory insiders. Generally, that trading window opens a couple of days after we report earnings. So we reported our fourth quarter earnings. Two days later, when the window opened, we received a call from Keith expressing his interest in selling a chunk of his shares at the market price at the day of close, which was roughly $44. Myself and our Treasurer sat back and reviewed our situation. One, is we had in our plans for 2014, as Mike mentioned, $1.2 billion roughly of share buybacks. So we had the capacity to do so within our plan. Two as we were sitting in a very strong cash position with cash we had on the balance sheet, plus liquidity that we have to our revolver to do it; and three, when I look at it, the price, the $44, one it was a market price, and two, it was consistent with the share buybacks we've done over the past 12 months. We decided to make that -- to execute on that transaction. It allowed us to remove a significant block of shares from the market in one transaction with no -- virtually, no transaction cost. And I think it was a good business decision for us being a buyer in the market.

When you look at it from a price perspective and review some of the data that Mike shared, I think at $44, ADT is still a very attractive buy, and we continue to buy with that price. Jeff?

Jeffrey T. Sprague - Vertical Research Partners, LLC

Jeff Sprague from Vertical Research. A couple of related questions really on maybe starting on kind of the relo leakage you've had historically. My sense is really a lot of that is a technology problem. And I wonder if you could actually address that? Is it you're not linked properly with these customers? How can you do that better? And I want to kind of tie that into kind of the M&A. It looks like you've executed very well on Devcon. But as you stir more accounts into kind of the legacy base, what is actually your IT and internal operational capability to really be on top of these clients? And ultimately try to upsell them into Pulse?

Naren K. Gursahaney

Yes. Great question, Jeff. I mean, the reality is you're absolutely right. There was an information gap. Our ability to track customers when they move from one location to the next location was just not very good. It was not a unique identifier. And when we looked across other industries, wireless is pretty simple because generally, you have portability, people will take their number with them, you could continue to track them. So we didn't have good information and that made it difficult to track them. I think we still had a good relationship or reputation, but it was somewhat at the mercy of who got to that customer first in their new location. Clearly, ADT had 2 options to get there, through our channel, as well as through our dealer channel. And our dealers view those as new sale opportunities as well. What we've done, and Alan talked a little bit about this, over the past, I'd say, 6 months, we've really revamped our relocation process on an end-to-end basis. And so that is when a customer calls in to disconnect because of relocation, we route them to a centralized group within our national sales center. And that centralized group had several responsibilities, as well as empowered with several offers.

One is they collect that customer information as to where they are moving, get -- make sure we've got an e-mail address for them and a cellphone address so that we can track them as they move to that location, and that goes into our database. Two is they make -- we make sure that they're aware of the offers that they are eligible for as a existing relocation customer. Now if they are within the initial contract period, that 2- to 3-year period, we will generally waive the termination charges if they sign up at their new home and they get a good attractive offer. If they're outside that contract period, we put in place our best offer that we offer to any of our customers, I'd say, even better than what we offered to you guys in the back room today. So they would be entitled to the best offer that we have available for traditional system, but more importantly, for a Pulse system because we want to use that as an opportunity to upgrade our customers.

And then with that information, we continue to market to them as they move to their location using the cell phone because they have an opt in there, as well as their e-mail address. The third piece of the puzzle was also making sure we engage that customer to help us resell the existing home and we provide them a referral fee if they pass along the information on who's moving into their home and if that customer becomes a new customer for us, we actually provide a referral fee to that customer.

We've also worked with some third parties to take the data that we do have and reconcile that. So we're leveraging third-party data aggregators and taking that disconnect data, comparing it to our existing customer base so we can get a better view of what that recapture rate is. As Alan showed you, we're not pleased with that recapture rate is. Today, out of a 2x opportunity selling the customer again, selling the home again, we're only capturing about half right now. And we set an aggressive internal target of trying to get from half to 1.5 and I've left it up to Alan to decide whether it's 100% and 50%, 75%, 75% however, he wants to get there. Alan, if want to add anything more?

Alan D. Ferber

No, I think that encapsulated it well. I mean, clearly, it's an opportunity for us. And that's not the kind of performance that we expect. I think Naren described the improvements that we actually put in and we've actually seen some nice improvement since we've implemented that centralized relocation desk. There is still more opportunity, though, and we're aggressively working those plans. And I think you hit on it very, very well. It was the information links and historically, we view the customers as the premise rather than the person.

Jeffrey T. Sprague - Vertical Research Partners, LLC

[indiscernible]

Naren K. Gursahaney

As far as the technology goes, we do integration? Yes, I mean, part of the reason we went out and recruited a top class Chief Information Officer in Kathleen, in order for us to be the acquirer of choice and more importantly, the integrator of choice, we have to have better, more robust platforms and Kathleen helped put together the roadmap that we'll be executing on and you will see our IT investment go up over the next several years. We had an increase over the past couple of years tied to the Broadview integration, as well as the separation. We expect that we'll maintain that level so that we can put some of these new platforms in place. Charlie? [indiscernible], I'm sorry about that, I'll get to you guys.

Unknown Analyst

Thanks. Charlie [indiscernible]. You guys have talked a lot today about ways that you're going to help the subscriber acquisition cost on a creation multiple basis come down. A lot of those efforts are obvious to benefit your direct channel but how are you guys going to help out the dealers? Because, obviously, the dealers are competing in the same market, not against you, but they have their own costs to go instead of the account and they sell it to you and that's their margins. So if their costs are going up or they need to be more competitive in their -- own a contract with you guys, how do you help them win, too? Is it -- are they buying the wall units for the same price that you guys are or maybe if you can explain some ways that you'll help the dealer channel be as productive as you guys.

Naren K. Gursahaney

I'll hit on 2 of them, Charlie, and then I'll ask Alan to supplement that. One is our dealer creation multiple actually came down this year and I think part of it is we may have squeezed the dealers little bit too hard. As we go forward, we're actually looking to increase that multiple to give them some incremental capacity there but they, too, will benefit from the product redesign I talked about. They will benefit from that. We're looking at -- as we build out our supply chain capabilities, we will potentially source on their behalf and distribute the product on that behalf as well.

Alan D. Ferber

Yes, I think that's absolutely right. And the information that I shared earlier, I referenced actually enhanced funding to the dealer channel. So we actually expect the creation multiple to increase a little bit because of that enhanced funding. And the reason -- one of the reasons why we're doing that, exactly the reason you just hit on is as they're going deeper into Pulse, particularly the higher end Pulse, the economics get challenging for them. And given the customer economics to us, we believe there's some incremental room there. So we'll put in that enhanced funding in place to allow them to participate more aggressively in the automation trend in the higher end Pulse.

Naren K. Gursahaney

And again, the one multiple improvement was really in net. So there might be an increase on the dealer side offset by what we do on the direct side and blended should be better.

Jason B. Bazinet - Citigroup Inc, Research Division

Jason Bazinet, Citi. This is maybe a CFO question but I'm going to ask Mr. Gursahaney since there's greater continuity there. A year ago, before you were public, I think you outlined 5% to 7% recurring revenue growth without M&A. When you went public and you actually gave guidance for the year, it was 5%, sort of the low-end [ph] to that. I mean, you upped that range during the course of the year. This year, on your long-range guidance, the numbers are bit more fuzzy maybe in terms of your interpretation, maybe a little bit lower. And so my question is when I look at the landscape, Pulse adoption seems to be quite good, you argue that competitive intensity from the telcos and cable is not really material. So what is it that sort of surprised you or changed in terms of your outlook in terms of the potential for top line growth in this business X M&A?

Naren K. Gursahaney

Yes, I think the 2 things that we're -- surprised us/disappointments in 2013, one was the increase in attrition. The rebound in the housing market really drove that disconnect, and that clearly put pressure on our net adds and ultimately our recurring revenues. So the attrition -- and then two is the softness that we saw in the dealer channel that Alan talked about. I think as we look forward to 2014, no changes in the marketplace. We've initiated some programs. As we talked about, we reduced the number of dealers to get a more manageable number of dealers and also those who are truly focused on Pulse an interactive services, so the right dealers to build forward. So we've got a headwind just by the reduction in number of dealers and the unit production there that we're going to deal with for the first half of the year. And secondly, as the program that Alan talked about, about some of the enhanced credit screening that we're doing on the direct side, which we said could have a 6% unit impact. Again, that's us making those trade-offs between those 5 value drivers. That will put pressure on our gross adds. Over time, we expect that, that will benefit our attrition numbers because those non-pays take anywhere between 6 to 8 months to manifest themselves. We don't think we get the benefit to the end of the year. So there is a little bit of room. And I would say the third thing, Jason, is we got some great feedback from our investors and from the analysts about we probably guided to too tight a range last year and didn't give ourselves as much flexibility to make those kinds of tradeoffs. I think we guided from 49 to 52 and we said we'd be a little bit more -- a little broader with our guidance this year to give us the flexibility we need to make those tradeoffs that truly do create long-term shareholder value.

Unknown Analyst

I have 2 quick questions. The 7.8% growth in small business subscribers, how many small business subscribers do you have with -- just absolute numbers?

Naren K. Gursahaney

Well, we have about 450,000 or so.

Unknown Analyst

So you have 450,000 today and it's up 7.8% from last year, okay. And then my other one was just on your 24-month retention chart for the small business and residential, where you show the improvement between non-Pulse and Pulse. There's actually just no Y-axis on either of those charts. So I was wondering what the actual just numbers were.

Naren K. Gursahaney

We generally don't disclose kind of the detailed lightning charts on there. We wanted to make sure we saw the -- what the directional value is. We can't give too much information to our industry peers.

Lawrence DeMarco

Right here.

Unknown Analyst

[indiscernible], JPMorgan. The first question is can you remind us in terms of your thought process in allocating dollars for M&A versus share, share buybacks? And secondly, the 3x leverage target, why 3 and what could change the targets in terms of the competitive environment or the opportunities you may see?

Naren K. Gursahaney

Yes, I would -- maybe I'll answer the second question first and I'll turn it over to Mike for the first question. The 3x was really put together in the context of our business strategy. If we went through our strategic planning process for the year and looked at both the threats and the opportunities we saw in the marketplace with a much, I would say, more watchful eye towards the M&A opportunities as our pipeline was starting to build. As Don said, we felt that we were going to need incremental capital in order to be able to support that strategy. We ran through a variety of scenarios, both upside scenarios and downside scenarios. And honestly, in our business, upside and downside scenarios can stress cash and we modeled different leverage ratios. And we felt, based on the weighted average cost of capital and the risk of -- to the business we had, 3 is the optimal structure. I mean, clearly, as the economic environment changes, we'll continue to look at that. But right now, I feel very comfortable that 3 is the optimal model for our business and that's what we're moving towards. Mike, I don't know if you want to...

Michael S. Geltzeiler

Sure. Yes, I mean, just a quick follow-up on the 3x. I think the other thing that's important, we just increased our dividend. We think being a BB-rated company, we've done some strategic evaluation, it's the right level for this company. And we start moving into greater leverage then you start to become a company that doesn't pay dividend, et cetera. So we not only reinforced our dividend, we increased it. We think a BB-rated company is the appropriate level of leverage for this company. And in terms of the allocating of capital, I mean, I think we -- the good news with this company that I'm very excited about is that there's too many places to put the money. I mean, you saw the chart, almost everything we do has returns, they add value shareholders above our cost of capital. We continue to monitor the stuff. I think M&A is [indiscernible] really traditional M&A even, with the high synergies and the consolidation opportunities. So think we'll continue growth. What we try to do is grow the stock price and it's not just about -- we clearly feel that buying our own stock at these levels make sense because we're doing a lot of it. But we can grow our revenues, grow our multiples, grow our margins and grow our capabilities. The potential multiple growth you get on top of your earnings is what something that I think M&A can really be a big catalyst for us. So we think it's the right mix of the 2. What we try to say is we're not going to tell you exactly how many dollars are going for each. We're going to be smart and we're going to evaluate the market opportunities and the nice -- the good news is we have $3.4 billion and $1 billion a year after that to invest in our company.

Lawrence DeMarco

Right here.

Melissa Link

Melissa Link, Aflac Global Investments. Just to follow up on that 3x leverage target. Within a year of the initial debt offering, you changed your leverage target 2x the detriment of bondholders. You were downgraded 3 to 4 notches by the agencies. So my question is to what degree, if at all, the bondholders play into your financial policy decision? Will they factor in going forward? And you did just mention your rationale for 3x but given this unprecedented number of changes in financial policy in such a short period of time, how do we really believe that 3x is where this ends?

Michael S. Geltzeiler

Yes, I could take that as well. [indiscernible] history, I think, first of the initial leverage the company had was inherited from Tyco. So I don't know if that was a policy, it just what was when they spun the company left. You could argue it's just a company year [ph]. The board advised everyone to sort of find the right level of leverage. I am very comfortable being the new person on the team with where we are today. We're -- I think we're pretty clear today that we think that's the right target level long-term. So a chance for the right opportunity we go 3.2x one day and then sort of scale it back. We don't want to say there's a ceiling, we want to keep the flexibility but 3x we think is the right Level. Congratulations to Robbie and Naren. We were able to successfully sell a bond, $1 billion bond earlier this year and I think the bondholders we continue to see them as an important constituent, we've had a good dialogue with them. And again, part of the messaging today is to sort of lay out now what we, the board, management feel is our appropriate financial policy.

Naren K. Gursahaney

Just building on that since Mike didn't have the history. As you said, exactly right. I mean, the Tyco Board of Directors decided to string ADT out with the $1.6 billion, I believe, was our initial leverage. And that was really not necessarily because they thought that was the optimal. It was their decision to allow the new ADT board and management team to determine what the optimal structure was for the business. We moved from that $1.6 billion to roughly $2 billion because we felt that, that was a no regrets move. We knew we had the potential to add on incremental. We didn't know whether the number was $3 billion, $4 billion or whatever it was but we knew we had room. We saw an opportunity to raise some debt and then we use much of that for share buybacks because we saw what we thought was on undervalued stock. So we took an interim step until we went to our strategic planning process but we viewed that as a no regrets move because we knew we had capacity above where we were.

Lawrence DeMarco

Over here.

Unknown Analyst

Just a question on Slide 14. Is that actually saying that 38% of new subscribers go to cable and telco? Just would love to get your thoughts on that. And secondly, if smaller independent firms are actually losing share to such a degree, why is M&A such an interesting opportunity?

Naren K. Gursahaney

Yes. I mean, again, I look at the data, that's the Morgan Stanley reports. So I'm familiar with it. Again, I think it's early in the days of their rollouts. We can look at that and clearly question some of the data. I think the reality is from an impressions perspective, they are advertising heavily. They are putting big push on the markets. Until they start reporting their numbers, it's difficult for me to comment as to whether or not those numbers are accurate. I think, unfortunately, we're slightly disadvantaged based on what they do or do not report. The only cable player I know who has reported I believe is Time Warner Cable, they announced in their last earnings call they've got, I think, about 30,000 units. That's not a significant increase over what they had several years ago. They've been in the security business in Upstate New York for a long time.

Lawrence DeMarco

Right upfront here.

Brian Jacoby - Goldman Sachs Group Inc., Research Division

Brian Jacoby, Goldman Sachs. So just a little bit more on a capital allocation policy. Not to beat a dead horse here but you have share buybacks, you have dividends, you have M&A, and it's going to be funded partially by debt. You've been buying back stock like crazy, understood. But at what point, if you're looking at M&A targets, M&A sometimes takes longer than expected. You don't want to blow your dry powder completely on share buybacks. How do you view that? Can you give us color on how you think about delaying buyback activity so you don't have to go to 3.2 or 3.5 and S&P and Moody's decide to take down again. Because sometimes they react more harshly than they should. The other thing is maybe you could just lay out -- I know you mentioned it earlier but what's left on the buyback? And how should we think about if that is completed, what's the next step for the next one? Is this going to be a story where every year, you will have a definitive buyback? And some years you may not execute all of it, in some years you will? Maybe you could just -- color on that going forward?

Michael S. Geltzeiler

Yes. So I mentioned in my comments, the $3 billion -- originally, a $2 billion authorization went to $3 billion and we brought $2.4 billion back, so there's $600 million left. And that's over '14 and '15 time period. I mean, I think, we also commented that -- Naren mentioned, we had a plan and we believe that the right answer, these stock prices because they both are attractive to us buying our own stock and also M&A and we, this year at least, allocated some capital for both. We've accelerate the buyback. So in my comments, I did indicate that the sort of prioritization for this year, again, subject to finding the right candidates and things that meet our financial metrics, as Don laid out, is more M&A from this point forward given that we brought $1.2 billion back. But that's just for this year and it doesn't mean we wouldn't buy back more but again, as the stock is appropriately priced, we will continue to buy back potentially more M&As. We continue to evaluate this. We're trying -- everyone keeps asking for a formula to lay out for 3 years to $0.01, when I'm going to buy or not. You'll probably say to me, well, doesn't it depend on what the stock price is? Or how interested are the M&A candidates in getting out of the business that -- people are really interested in exiting the business, they're spooked by home automation. We could buy them at very low arm [ph] multiples. We'll do even more than M&A. If the prices are too high and Don has walked away on a number things he's looked at, we're not going to do the M&A. Because I think the good news is we have the capital and I think as we showed in the chart, there's 7 places to put it, including organic growth, all that drive value above our cost of capitol. So -- but I think right now, I think I've answered math here.

Naren K. Gursahaney

I think our preference, and Mike said it very well, I think our preference for the rest of this year is to really focus on the acquisitions as long as there are opportunities for us at the right price with the right capabilities that they bring to the organization, we think that's a better way for us to create long term value.

Brian Jacoby - Goldman Sachs Group Inc., Research Division

But one last thing. Just the $600 million. So again, if that gets completed, we should all assume that you're going to announce another program, it's going to be a part of the ongoing capital allocation, whether you buy it back or when you buy it back, understood, you have to assess the situation but that's going to be a ritual, part of it.

Naren K. Gursahaney

It's not something we talk about with our board. I mean, we don't want to informally now announce an expansion of something. But what happened last time, as we set a 3-year $2 billion plan and spent the $2 billion in 1 year. So I think as we get closer to exhausting that authorization and we would meet with our board and management and we would evaluate whether to issue another authorization or not. But then again, as Mike pointed out, not to share buybacks. We announced a significant increase in our dividend where we're going to look [indiscernible] again a very balanced approach to capital allocation.

Lawrence DeMarco

Jeff?

Unknown Analyst

Yes, a couple of quick questions. First, with regard to partnerships, you've mentioned in some of your channels to market, you mentioned Southern California Edison that's been around for a while. I know that Protection 1 had a reasonably good partnership with BellSouth a number of years ago before BellSouth got bought up and Protection 1 got -- went private. I'm wondering if you have any plans to do some types of partnerships? Are they out there? Are you talking with various cable and telco players? To do this -- not necessarily a similar thing but something somewhat related to generating new customers that you could then do the monitoring on and get them over that service hump that they have to get over. Second question is I know that it's really early in the game and you've given us 2 years of kind of full, somewhat full data on the -- on your customers' attrition data. But I know that Pulse been out there a little bit longer and I'm wondering if you have any data yet on how -- on the cohorts that will go out to the contract end for what that post contract spike looks like with Pulse relative to your older systems?

Naren K. Gursahaney

Yes, Jeff, on the first one, we're in regular discussions for partnerships. And yes, we would be open to and we've had discussions about partnering with cable and telco players. And we'll continue to do that. I think the one thing we're not going to be willing to do is to go white label. We think that the ADP brand is very valuable in the security and automation space. And we want to make sure that we continue to build and strengthen the brands so we won't -- that's the one thing, we have not done contract to wholesale monitoring for anyone other than our own dealers for a period of time, while we validate creditworthiness of companies. So those are discussions that Don and his team continue to have and we will continue to explore. As far as the attrition, again, for a Pulse customer, remember, we launched the program about 3 years ago. So there's a very small population that's come to the end of that initial contract period. And the data looks very similar. I mean, we don't see a big spike on the direct channel. Historically, we saw a spike in the -- in our dealer channel and even that has changed over the past several years. So there's no noticeable deterioration in the out years. I think everything we've seen seems to mirror what Alan and Luis shared with you.

Lawrence DeMarco

In front here.

Unknown Analyst

Just a follow-up question on the installed base. Do you know or is there a way to measure what percent of your existing non-Pulse installed base you can economically upgrade when you think about the cost of the truck roll and the like? And I understand you're going to use the 2G to 3G and kind of make a virtue out of necessity a little bit. But how do we think about that? And maybe even what percent of that population fits the demographics of being interesting for an upgrade? I mean, is there a big chunk of 70-year-old people that like on and off once a day and that's it? Any color around those sorts of metrics?

Naren K. Gursahaney

Yes. So, Don, maybe I'll turn to you, even though it's not your sweet spot anymore. I know you've spent a lot of time investigating some of this.

Donald A. Boerema

Yes. Alan talked a little bit about that. We convert about under 10%, about 7%, 8% of our base ready over to Pulse ready. When we do research in the marketplace and we look at the security customers alone, about 20% of those customers are interested in actually upgrading. So they have an intent. They're intenders, they want to upgrade into interactive services. So I would say that's really the sweet spot for us. And as we do this from an economic standpoint, we're really making the truck roll out there when we do that 2G upgrade. So we're leveraging that roll where we already have the customers premised ready to upgrading their system and it makes it much more efficient for us to actually upgrade those customers that have the intent. The other thing is you'll see a lot of customers, even Pulse customers that can't upgrade on their own. So the way the platform operates is you can add cameras and lightings [indiscernible] your own. So we're seeing a lot of those opportunities and those customers are becoming a lot more loyal for us also as they put more equipment in their systems.

Michael S. Geltzeiler

So if I could just add on that. So there are 2 other things that we talked about. I think also, change the math there. One is the next-generation platform that we had on earlier, changes the economics of upgrading customers because it's a faster install, it's a lower overall cost. But the other thing is as we build in the retention benefits that we talked about earlier, again, the economics become much more favorable and allow us to be more aggressive in upgrading our base than we would have been, let's say, a year ago or so.

Naren K. Gursahaney

And from a small business standpoint, the increase value proposition per country will translate into a higher RPU, which will make the economics much more favorable as well.

Lawrence DeMarco

One over here.

Unknown Analyst

[indiscernible]. Wanted to follow up on an earlier question. I was wondering if you could walk us through where you see or articulate where you see the advantages for ADT and partnering, for instance, with a cable or telco company? And also, sort of where you see the advantages for the partner in that kind of a relationship either from a SAC or attrition perspective? And then also, where you might see risks to the ADT franchise over the longer-term from entering into that kind of a relationship?

Naren K. Gursahaney

I guess, I'd kind of start on an end-to-end basis. I think the ability to leverage the marketing muscle of some of the cable and telco players. I mean, they have huge marketing budgets, they're spread over very large customer bases. I think that's an opportunity for both sides to benefit. I think from a sales perspective, today, and this has been the case for a long time, security is generally sold across the kitchen table. I think many of the new entrants to the marketplace don't have that field sales infrastructure. They're traditional products, they've sold either via the Internet or through call centers. So this is a competitive advantage that ADT has. We do so sell some through our national sales center but 80% or so of our sales are still sold across the kitchen table because that's when you get a feel for what the business needs, what the homeowner needs and can design the solution that meets their needs. From a service perspective, again, we've got that 200 branch office network. I hope there's some of the -- cable and telcos do have 8-field [ph] infrastructure. In many cases, it is outsourced. They don't have the monitoring infrastructure. Some are building it, some are outsourcing to third parties. Again, with our 6 fully redundant monitoring centers, we have not just the footprint but the technology and the capacity. And then I would say, you get into the last phase, the billing piece of it, again, that's -- I think either party could do that. I think some of the benefits and this is something that's probably changed since our early discussions with the cable and the telco players, is they have pretty good empirical data that the bundle drives greater retention for all of the parties involved. So I think that bundling our services with other providers, whether they're pure play or whether they have 2 or 3 other pieces of the bundle, could be attractive for both parties as we get better retention on our respective offerings.

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