The ADT (NYSE:ADT) logo is one of the most recognized logos in the world. Normally, a logo is used by the company to give a visual representation of a company brand, but ADT's logo has another special use in which an ADT yard sign has shown some effects on deterring intruders and burglars. The value of the brand alone should worth a lot.
Established in 1874 and until 1901, ADT had grown into a technology giant after successfully consolidated 129 companies and its innovations were ahead of its time, comparable to today's Google (NASDAQ:GOOG) (NASDAQ:GOOGL). For 140 years, ADT went through years of peaks and valleys and its history is surprisingly unique. On October 1, 2012, ADT became an independent public company for the second time on the NYSE after a series of changes of ownership and mergers. Fortunately, the name ADT has been kept the same over the years. Since 1987, it has become the #1 security services provider in the US.
Analysis of Financial Condition and its Financial Risks
ADT continues to gain momentum in its annual EDITDA: $1,609M in 2012, $1690M in 2013. From the latest Q2 2014 Results, ADT increased its total revenue to $837 million from $821 million, an increase of 1.9% compared to the same period last year. The recurring revenue in this quarter is made up of 92% of the total revenue. If we examine the recurring revenue in the same period for 3 years, we can see a clear trend of revenue increases in the range of 2% to 5%.
|Total Revenue||Recurring Revenue||EPS|
|Q2 2012||$807 million||$720 million||$0.46|
|Q2 2013||$821 million||$756 million||$0.41|
|Q2 2014||$837 million||$773 million||$0.49|
However, if we look at the diluted earnings per share in the same periods, we see that the earning actually went down during 2013 and came back up for this quarter. These all look good going forward, but if we analyze the current risks, we can see that ADT still has some financial issues needed to be addressed. One issue is that the Debt/EBITDA ratio has been increased from 1.6 in 2012 to 2.7 in Q2 2014. This ratio is used to assess the company's ability to pay off its debt, and this definitely increases the financial risks of the company. Despite the weakness, the company uses the added leverage to expand its market share by acquiring competitors. So the additional financial risk is manageable when we see how taking additional debt can benefit the present growth and the future domination of the market.
Another issue is that ADT continues to incur revenue attrition. It has a higher attrition in small business than the residential sector. The CEO of ADT said in Q2 2014 Report that the "Revenue attrition was flat at 14.2% for the quarter sequentially and unit attrition for residential and small business was 13.7%, up 10 basis points sequentially primarily due to higher attrition in small business."
There are many possible factors contribute to attrition such as company acquisition, reduction in customers retention and sales from the business sector since some companies have reduced their security budgets during the recession. With limited information, we are unable to identify which factors are causing the attrition. Nevertheless, reducing attrition is a top priority that ADT is actively pursuing.
Here are the main efforts implemented by ADT to lower revenue attrition:
- Continued focus on resales and customer loyalty programs
- Increase Pulse penetration (Pulse is the latest home security system)
- Involving sales force in the retention efforts
- Capture new opportunity as housing market becomes stabilized
Confronting the Challenges
ADT has the biggest market share with 25% in the residential security and automation market, followed by competitors, including the traditional security companies, cable/telecom companies, and local security dealers. The most aggressive player in the market is the cable and telecom companies, such as AT&T (NYSE:T), Comcast (NASDAQ:CMCSA), Verizon (NYSE:VZ), and DirecTV (DTV), since it's easy for them to sell bundle packages to existing customers and they have more marketing resources as well. Advancing in technology is another challenge for any players in the market. It is becoming a main focus in terms of their capabilities and features since for the first time in the history, people can ensure the safety of their home remotely by controlling home security system and other home devices via their mobile devices. Since ADT has released its latest security product, Pulse, it has shown to increase new residential customers and by upgrading to Pulse, existing customers are retained with another 3-year new contract. Besides technology competition, pricing and terms are heating up as bigger companies like the AT&T have the abilities to reduce its price and shorter contract terms.
ADT continues to face challenges from various sides of business. From the latest business development, ADT has shown solid performance on acquiring new customers, and executing specific strategies to resolve issues and improve dealer support and customer royalty. Besides strengthening its core business that drives values, ADT aims to expand its territory and accelerate its growth. On May 7, 2014, ADT has acquired Reliance Protection Inc. in Canada with $500 million, and it is estimated that it will create $11 million recurring-monthly revenue. In addition, partnering with other businesses creates greater opportunity to expand its presence outside of the traditional market. ADT has teamed up with Ford to include the ADT Pulse app in the FordSync ecosystem and with McAfee to offer digital security for computers and other networked devices. The future outlook seems to be bright for ADT since there are so many opportunities out there for ADT to capture. The management in ADT clearly understands their strengths and weaknesses. Unlike other product-based technology company, ADT must also make a great effort to develop a higher standard in the service part of the business since security is a serious business. If ADT continues to work with the same passion as it was found, the night that a burglar broke into the ADT founder's house and where it was all began, there is no doubt for ADT to thrive another 140 years! Watch out, the sleeping giant now awakes.
Disclosure: I am long ADT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.