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Executives

Naren Gursahaney - President, Tyco Security Solutions

Analysts

Scott David - Barclays Capital

Tyco International Ltd. (TYC) Barclays Industrial Select Conference Call February 23, 2012 2:05 PM ET

Scott David - Barclays Capital

We are thrilled to have Tyco with us here and obviously Tyco is going through a bit of a transition period and breaking up into three separate companies, you’re going to have ADT North American and Naren’s going to talk about this in a second. The flow business and then the commercial business, a break up that was announced, was it this summer?

Unidentified Company Representative

September, September. It was announced in September.

Scott David - Barclays Capital

September, okay. That's right, I was thinking it was August but yeah, September that sounds right. I was on gardening leave and most of that time I came back, it was announced. But anyway, obviously this breakup makes a lot of sense into parsing into three very focused companies. One of the more interesting pieces obviously from our perspective it is indeed ADT. I have always felt on a personal and analytical level that it is a misunderstood and maybe in some way, shape or form, really it’s a new word I am looking for.

Unidentified Company Representative

I am not even going there. Exciting there…

Scott David - Barclays Capital

It’s less love than it ought to be. Let's just put it that way. It’s highly cash generative. I think the growth can be very reasonable. I think there's a tendency for people to try to comp these guys, the cable providers and I think cable would love to have these guys problems, right I mean, cable doesn't really grow and you guys do, you certainly can.

There's always a lot of chatter about increased competition and such that's never been a concern of ours, but obviously something that will have Naren address as well. Antonella Franzen is here also and she is miked up if you have any general Tyco questions I am she should be happy to field them within reason, but Naren why don’t we, I know there is some background that you wanted to at least make some opening comments and than we can move into Q&A and obviously we want to get the audience involved as well as fast as we can as well. So, with that perfect.

Naren Gursahaney

Well, first of all I think I will speak on behalf of our entire management team. We’re very excited about the prospect of ADT being a standalone public company. I think we’re in a great industry, large, resilient and still growing security industry and I think ADT has just got a great position within that industry. It’s about a $12 billion market with what I think is good growth prospects right now and a steady environment with even the potential for some upside if in fact the new home construction market ever picks up again. So I think there’s some good market dynamics in the industry right now.

Penetration of residential securities is still only at 20% and when you look at that against other home based services, we think over time as long as we can strengthen the value proposition to customers, we can grow that penetration rate and like I said ADT has just got a great position within that market. We are the clear market leader with a great brand, a very strong field force of sales, install and service technicians, a robust monitoring infrastructure that supports those customers and a very strong customer base of over 6 million customers right now.

From a business model perspective, I think Scott hit the nail on the head. It probably is a misunderstood business because it is very different from the other business models even within Tyco. It’s a subscriber-based business model where we are making investment up front in our subscriber acquisition cost and we get that return overtime through the monthly recurring, monitoring and service revenues that we generate.

I think as a leadership team, our team has demonstrated our ability to improve those key business drivers over the past several years. And when you look at our strategy going forward, it’s just building on the successes that we have demonstrated over the past several years as well as some interesting potential growth opportunities that will be beyond kind of the base case if in fact we can take the penetration rates up to other comparable home based services, small business where our share is probably lower than where it is on the residential side. And then kind of looking at some adjacencies, things like home health where the demographics kind of support the need to do some monitoring in there.

Clearly we’d have to build out our capabilities and build out a partner network to be successful in that space. But I think when you look at the opportunities, we see out there to just continue to improve our business model and ultimately grow it overtime, I think we are very excited about what we see out there.

Scott David - Barclays Capital

That’s interesting, I mean, I think, I am going to start with something more specific and may be we can work our way back to more general questions. But [Pulse] is a product that demoed first at the Trade Show I think four, five years ago. And it was the first security product that ever demoed where I said this one has got it. And I wouldn’t say that if I didn’t mean it. I really I thought it was a fantastic product and took a couple of years after that to come out and now it’s fully out and still, what’s in the customer feedback, I mean two kind of questions. I mean one customer feedback of people using it, do they like that? I mean, I am in this technology stuff. So I use mine but and then what’s been the competitor response. I mean, I haven’t seen anybody else who has had anything overly interesting, but you would know better than us. So let’s address the feedback first.

Naren Gursahaney

I think the customer feedback has been very positive, both in their words and probably equally important in their actions. I mean it’s become a relatively significant piece of our new unit sales. You know, when we launched the Pulse backup, about 15, 16 months ago, you know, our aspiration was to get into a 25% to 30% take rate and at the end of our fiscal first quarter and the December, we closed at about a 28% take rate for the quarter, but if you look at the month of December, it was right around that 30% range.

So, we’ve seen good success. Again, that’s only to our direct new unit sales right now. We’re in the process of rolling it out to our dealer channel and we’re running some pilots with the dealer, just to make sure we got both the right product configuration that meets their business model as well as got the supply chain in place to support them.

So, I think the feedback has been very good. And I think the usage continues to be good. Interesting, you know, a lot more usage on the lifestyles aspect of it, which is kind of what we wanted but people are still using it, the life safety, and it’s really that integration of the two, taking advantage of all those sensors in the home to trigger activities, whether it be video or some of the activities around lighting and everything.

So, I think we continue to be very excited about that and we’re looking to see where it will take us from a financial perspective. The returns of that are very attractive, you know, slightly above our traditional security aspects and that’s not even factoring in what we hope will be better retention rates on that and time will tell and once we feel comfortable that we have the right data there, we’ll factor that in to our economic models as well.

Scott David - Barclays Capital

And competitor response.

Naren Gursahaney

I mean, there clearly are some competitors out there. I know the question that continues to come up is the cable and telco interest in this market space and their attraction, I think, to the market space is built around the home automation, you know, integration with security. So we’re seeing some competitors out there and I think we stacked up pretty well to competitive product as well as the services and capabilities that we put around our product.

Scott David - Barclays Capital

Now one of the barriers to entry that I always talk about is that security is not like cable. You can’t just hire anybody and kind of teach him basic teaching in cable and then send him out on the road. I mean security, you know the people have to be licensed, they are bonded. I mean you have regulations, you have, the technology is difficult.

I tell people when I installed my security system that, the installer was literally there for two weeks working on it. It can be complicated. It is hard, this is big of a barrier to entry as I think it is and or is it when you get down to kind of more basic services that is not that a big deal.

Naren Gursahaney

I think there is a significant investment to build up the capabilities. You need to be both a regional player as well as a national player. Just highlighting some of the differences, 90% of our sales today are done over the kitchen table and our sales people on the direct side as well as on the dealer side really are security consultants. They come in and try to understand how you operate within your household and as a result they will design the security system to meet your needs, in addition to do a walk around within the home, yeah they will walk around outside the home and provide some useful tips that may have nothing to do with the security systems.

So I think clearly that strong field force, field sales force is very important. To your comment, Scott, the installation in the home is different. You are running a lot of sensors through the home which is different than a maybe a telephone system or a cable box going into the home and then from the service standpoint as well as from the install standpoint, there are specific licensing requirements that actually apply on the sales side. And it tends to be a jurisdiction-by-jurisdiction, local-by-local municipality licensing, so not a national licensing. So there are some challenges, challenges that clearly can be overcome but takes some investment and a real commitment to the business.

Scott Davis - Barclays Capital

I think part of the question I am trying to ask is that, as the products get more sophisticated, that barrier to entry arguably goes out, right. Like, if you are installing a Pulse product, I am guessing it’s more difficult than installing a traditional alarm panel.

Naren Gursahaney

It is and our cycle times to install a greater proportion than they are for our traditional security system, you know, some of that is just the newness of it but some of it is that you were really now installing a network in the home and all those devices tying into the network. So it’s a different skill set for our team as well.

Scott Davis - Barclays Capital

Right. You have and I am going to spend now the whole time on Pulse. I apologize in advance as that’s the best you have. A good, better, best strategy with Pulse, can you talk about where that's falling out and I mean let's just start with where that's falling out and where you see that going?

Naren Gursahaney

Sure. I mean the good, better, best, we start out with the select package which allows you to remotely arm and disarm your security system as well as get alert signals from them when either an event happens or doesn't happen. So it’s really tied to the base security system and allowing you to interact with the security system. That does not require a broadband connection, so that can work off of your normal connection.

As you move up to the Advantage package that's when you can introduce lighting as well as the thermostats. Now you require a broadband and you are able to manage those aspects of lifestyle remotely through any web enabled device through you got an iPhone app, as well as an Android app there.

And the Premier now brings video into that where you can again do live look-ins on your home or event based triggers you can do a recording that we will send it to you. You know we started out with probably about 85% of our new Pulse installed being in that Select and 15% being in the Advantage and Premier and its kind real get to about a 75 25 now. So its still a large preponderance is taking the entry level system. But I think overtime again the life style aspect become more attractive, I think we will see that plus move up a little.

Scott Davis - Barclays Capital

How much of that is the sale force, I mean again I am not going to be maybe a normal customer to select the technology but when a security guy comes at my house and says you can have this really cool thing. You can work up your iPhone and to me it’s like 8 to 10 bucks done. How much is the sales guy selling the product?

Naren Gursahaney

I think that clearly is a piece of it. One is, our sales people, any sales person they sell with what they are most comfortable selling. For years they sold basic security, just the remote arm and disarm, is an easy add on to the traditional security. So that’s clearly where they have been most comfortable and I think as they get more comfortable with the critical conditions and life style aspects of it, we’ll continue to see that move up absolutely.

Scott Davis - Barclays Capital

Our guys are laughing at me out here, I like the Pulse stuff.

Naren Gursahaney

Anyway I think that’s something to be proud of. We like the fact that you like the Pulse stuff.

Scott Davis - Barclays Capital

I just think I had demoed lots of stuff. I think its really very cool product but anyway I am just surprised the take rate is even higher.

Naren Gursahaney

I think that’s an awareness issue still. When I talk to people at cocktail parties and I am showing off my system, there is still a lot of people who don’t know, they don’t have an awareness that this is available and part of that is to roll out that we did, which was a measurable lot. I think as it moves forward you’ll see more advertising. We’ve refreshed our advertising to focus more on Pulse than hopefully we are seeing that out there now.

Unidentified Company Representative

And Scott one thing to add that is, in your comment that you mentioned about the sale force. And as you could see when we first have rolled out Pulse about five quarters ago we started at 14.5%, so our take rate and we’ve gotten it at 28%. Sales people are getting more and more comfortable with the package than they did at the start.

Scott Davis - Barclays Capital

Sure, sure. That makes sense. Let’s pack up a little bit. I know it is premature to kind of ask you of your 90 day plan. Because you are not 100% there yet but when you think about the as a standalone publicly traded entity, what you can do better and what you can do faster and what you can do to create shareholder value. I mean, give us an initial view into may be your vision?

Naren Gursahaney

Well, I think actually a lot of it is building on what we have been doing in the past several years. I mean, we as a team really have a good grasp of how that business model works and more importantly how that business model creates value for our shareholder. We understand the levers around growth, around adding new units and I think we have got some good plans in place.

We continue to grow our direct sales force. We continue to grow on the indirect side as well and we will continue to drive productivity in our sales force. We are in the process of rolling out iPads to all of our salespeople to make it an easier sale for them, especially when you talk about Pulse. It is hard to sell Pulse showing PowerPoint pages or showing walking through a book. Now they can take them through live demos, how the system works and give them the look and feel of the system, not just kind of looking at screenshots.

That will also help us drive productivity in the sales force because we are using salesforce.com to push the leads out to them. So we will become more efficient there. So we are going to continue to accelerate the growth on the new unit side. We are working hard on that subscriber acquisition cost, both on the lead generation side to make sure we are optimizing the different channels of leads coming in, partners, as well as direct. I think we have got some opportunities in social media and just with the craze around social media, we can use that as a better lead generation tool for us as well as working on the product in the install side to make sure that we’re streamlining our product offering, getting the economies of scale there. And that we’re leveraging the lean and 6-Sigma tools to optimize the install time and cost around that.

So, I think we’re going to continue to drive that. Clearly, ARPU will continue to be a focus for us and Pulse is a big enabler for us to drive that ARPU up as well as even in our core package, making sure that people were taking, you know, the additional sensors, the additional capabilities and then finally around retention, 10-year attrition. I think we’ve done some great, risk modeling. We have a good understanding of what types of characteristics might lead customers to have a higher propensity to leave us and we’re putting dedicated marketing programs in there to help them decide to stay with us.

So, I think we’re going to continue to drive our improvements across all of those drivers as well as looking at the new growth opportunities that I mentioned. Again if we can strengthen the value proposition around energy management and some of the other capabilities in the home, hopefully, we can get well beyond that 20% penetration rate and that means working with partners who can help us, leverage their experience and knowledge in the home and their expertise to build those business cases. Again, small business, I think is an opportunity, future growth opportunity and then some of those adjacencies like home health.

Scott Davis - Barclays Capital

Okay. Let’s open it up to the audience. Couple of questions. Starting in the front, we will work our way back or start in the back and work – either way. Let’s start in the back, get some microphones there

Unidentified Analyst

If I remember correctly from the disclosure, something like a little north of $1000 for an acquired account. When you rolled out Pulse to the dealer network, what you expect the acquisition cost to be and what does that mean for payback for current profitability of your payback or return? And if you would assume sort of equal customer life, is Pulse currently accretive to returns?

Naren Gursahaney

From an economics perspective both on the direct end and dealer side, we do expect subscriber acquisition cost to be a little higher. The cost of the equipment, the cost of install is higher. We are getting more from that customer upfront because they are clearly more willing to pay. But net-net it is slightly higher but the ARPU is significantly higher. So it is more than offset with that. I would expect the same dynamics from the dealer perspective because their ARPU is higher, we will pay more upfront.

From an IRR perspective right now Pulse is running a little bit better than our traditional security product and that’s with the same assumptions on attrition. We do believe that the attrition rate will be better for Pulse because of the additional features, the greater usage, the greater stickiness. But in all of our modeling right now we have been conservative using the historical traditional security rates and as we get more data on how that Pulse customer is behaving and how long they are staying, we will probably change our assumptions. But right now the overall returns are a little bit better than what we are seeing on our traditional security.

Unidentified Analyst

You said about 20% of households have some sort of security offering. I am trying to get a sense of how much of the remaining 80% is truly addressable. Is there a typical customer that has a security offering that is elderly or is it family is it single people and is it urban setting versus suburban settings, is it may be by geography, people in California tend to have a lot of security and may be Washington they don’t. Is there any consistency or patterns that you can walk us through?

Naren Gursahaney

I guess when I look at kind of the 119 million to 120 million households and maybe we started that and kind of worked the waterfall down. Clearly, you have a group of low income that whether they want or need that they just probably can't afford the offering, so I would kind of strip; that would be the first piece out of the waterfall.

Second would be renters. And even when they have a need, I think the issue is the industry including us, just don't have an economic solution for them. They tend to be highly transient, so as a result, you've got to be able to get a payback within 18 months. Our traditional cash payback for an incremental account is somewhat just less than three years, so we have to have a different solution for that customer set.

I think the potential is out there with what's going on with hardware costs, what's going on with mobility to have kind of instead of a panel have more of a box type of solution where the devices could either be self installed or installed at a low cost and then that box, the hub, the panel, could be either taken with you when you move or ship back to us. So we've got to develop a solution, but right now the industry just does not have a competitive economically viable solution. So I take out the low income and the renters as ones they can’t.

So when you look at it there, there's probably still a 50 million households, 70 million households that are the target market for this stuff. And I think when you look at it from a demographics perspective and the geographic perspective there's nothing that jumps out right now that says that this group has a higher propensity to have security.

I think when you get into the urban areas, especially multifamily units and everything, generally security alone isn't compelling enough because you probably have security at the door or you have a -- if you are in New York City and the high rises there, its not as compelling. So now it’s a matter of can we build the value proposition with all of the different elements of security, life safety and then the life style issues.

Scott Davis - Barclays Capital

Okay, just go ahead, and then the gentleman next.

Unidentified Analyst

Can you discuss the Pulse roll out strategy for the existing subscriber base you know both economics and then the timing and execution of that?

Naren Gursahaney

Yeah, our initial focus was on new customers and it was purely an economic decision. There was the opportunity to go from zero dollars of APRU up to about $50 of ARPU with the investments they were required so just the IRR is significantly better.

Clearly, we want to and we are working on the packages for the existing installed base; we’ve got 6 million plus loyal customers who have been with us for many years and we want to make sure that we can offer to them. We’re in the process right now of refining that package. It will be a discount off of the existing initial costs. And then the APRU will still be in that same range of what a new customer would pay.

So I think it will still have an attractive IRR, you know something positive there clearly not as attractive as a new customer because we’re going from zero to $50 on those. And we are starting to rollout those offerings right now and test those with our existing customer base. So I think the rollout has started and we’ll continue to roll that out as we ramp it up to our direct sales force.

Scott Davis - Barclays Capital

Okay. Right here please.

Unidentified Analyst

Can you just discuss what the free cash flow relative to net income will look like for ADT for your business on a standalone basis; I think we see Tyco as a whole, but what does the free cash flow relative to net income on a pro-forma basis looking that percent prospectively as well?

Naren Gursahaney

Yeah, all the details on both, the income statement, the balance sheet and free cash will be available when we file our Form 10 which will be in the March timeframe as we’ve announced before. I think again, just kind of do the high level math; it is a strong cash generating business. We’ve got over 6 million customers generating about $27 a month, so when you look at that, it is somewhere around $2.7 billion worth of recurring revenue that we generate.

We’ve got about $1 billion $3.4 billion kind of on a cost to serve. When you look at the EBITDA margins of the business, we are right around 50% and then from that you would deduct what we reinvest for either new subscribers or to replace the attrition. So that growth adds and then you can walk down from there. We will have interest payments. We will have tax payments. So I still think it’s going to be a good strong cash generating business. We expect it will be above net income on a free cash flow basis.

Unidentified Analyst

And Scott mentioned he loves the devices, so he is carrying this device in his hands so he can access his house; but it says interactive capabilities from any internet connected device anywhere in the world. Now one of the great problems we have is cyber crime. We can break into anything.

Naren Gursahaney

Yeah.

Unidentified Analyst

We can get into his device in about two seconds if we really go after.

Naren Gursahaney

Okay.

Unidentified Analyst

What do you guards against this, because are you opening up your security to being less secure because you are on the internet?

Naren Gursahaney

That clearly is a risk. I think that we’ve got -- our teams have been all over this from a security perspective. We’re using encrypted videos, when you are translating video and the intrusion capabilities we test that robustly, it’s the same kind of encryption. Then you get doing banking when you use banking transaction. So it’s a very high level of encryption and I think we feel very good, but our teams are always testing this to make sure that it is a very robust design. It’s a great question though. It clearly is a concern and is one that we stay on top of everyday.

Scott Davis - Barclays Capital

Next question.

Unidentified Analyst

Can you just give us some idea, what do you about growing your business going forward, obviously, there is a lot of potential growth and how do you think about possibly, you make very good margins, lowering margins possibly subsidizing more longer sort cable handset. So I want to, they would be more subsidizing upfront, you can arguably get faster growth if you’re doing that and build a very stable cash generative base? How do you sort of decide on growth rates and think about that with margins and how much of that discount installation?

Naren Gursahaney

I guess I don’t look necessarily kind of GAAP operating income type of margins. We look at it purely on a cash basis and the return, the IRR of an individual account that we get or the return on invested capital that we make in the business. So what we’re looking for is do the returns make sense and do we have the confidence in those returns?

And clearly, in the traditional security space, we’ve got a long history and a lot of experience and we understand what a good quality account looks like and how long that account will stay with us and we can model that very well.

As we go into some of the adjacencies where they might deviate from our existing models, I think we’re going to be conservative in how we model those, but still making sure that we get a good return on our invested capital. But so, I would look at everything on an IRR or you know as a public company, an ROE basis, making sure that we are getting a return that is well in excess of our weighted average cost of capital.

Scott Davis - Barclays Capital

Next question (inaudible)?

Unidentified Analyst

How do you calibrate your dealer spend, if you want it to, I mean with good return on that capital you spend, you wanted to double that next year; are there enough dealers out there or is there enough accounts in the pipeline, if you could?

Naren Gursahaney

I look at it and first and foremost it’s going to be a question of is the market demand there? The word about 25% market share from an installed base perspective, I think we are probably doing better than that on the new units that we gain out there. So clearly, is the market opportunity there I think both on the direct side and the dealer side where we have capacity to continue to grow, we have ramped up our direct sales force, so in the past couple of years we are probably up close to 10% year-over-year with our direct sales ads and everything.

I manage making sure that we’ve got a balance of everything else; again on our direct sales force, we provide them leads, so just having sales people isn’t enough, we got to have the lead generation and it’s got to be cost effective lead generation there. So I think we got to make sure that the whole system can ultimately scale and as we see those opportunities, we’re going to continue to invest.

And I think that will be one of the advantages of being a standalone public company because unlike some of the other business models that are out there and the business models that I participated in the past, this is the business where margin rates can actually get diluted as you grow.

For example, our direct channel, which is the most efficient channel for us from an IRR perspective, when I acquire a new account or obtain a new account through my direct channel, of that subscriber acquisition cost about half of it is expensed in the period. So the marketing expense, any of my big sales expense, I take that as a period expense. And then the equipment cost plus any commissions, your salary, commissions for the sales force as well as the install cut that gets capitalized over the life of the account, but taking almost half of that subscriber acquisition and the period costs means in year one I run negative margins, but again it’s still a great IRR business and I think having the investor base understand that and look at the operating metrics about how we are driving the business will be a more accurate view of the company and I think we will have greater flexibility as we move forward.

Unidentified Analyst

Naren, when you talk about having 25% share and the big acquisition that you made over the last few years obviously was [Brinks] and my understanding that’s been reasonably successful as you picked up a really nice install base. Is there more to do there or if you reach kind of the point where it just makes more sense to grow organically rather than go out and do deals?

Naren Gursahaney

Scott, I think it really comes down to price expectations. You know Brinks was a unique situation and that if you just look at that in the context of what we paid per account, it would have been a tough deal to do because they were in the process of rebranding from Brinks to Broadview and early in that stage we had some unique synergies there because of their scale and footprint and the overlap with ours, we had some significant operating synergies as well as some tax synergies we were able to bring to the table.

So I think that was a unique one because of that particular environment. I think when I look at other acquisitions, one is that price expectations are reasonable. We clearly know how to do that, we've got a good set of capabilities around not just bringing on new accounts, but now with Brinks Broadview, bringing on new people and integrating them into our culture, I think we've got a lot of capabilities there, but the price would have to be good and there would have to be some synergies that we can leverage also. Otherwise we would look to be, we had to do more, just bulk account purchases where we could value that account base, leveraging the experience and knowledge we have and then bring those accounts on.

Unidentified Analyst

Sure. Let’s just talk about attrition rates. I mean I think you are somewhere around 12.4% right now and I know Brinks have calculated there as differently but it was a little bit lower and some mixed accounts and stuff, but is there a theoretical rate that you think about that you could get to that you know that you really can’t get below, but you could strive to get to or is this just too much of a moving target given that you don’t know what Pulse is going to have and

Naren Gursahaney

I think it is a moving target in that, that’s only one of the levers, if we could bring our stack way down I might even take some accounts that tend to have higher attrition and if I get that payback period real short. So all of these things do interplay with each other, but the steady state business of kind where we are right now I mean we’ve demonstrated the ability to kind get a 20 to 30 basis point improvement for a year and that’s we’ve model out. Whether it’s a theoretical or a practical limit, hey I still look at where Brinks was on an apple-to-apples basis and they were a couple of 100 basis points better than where we are now. Now part of that was just the average life of the customer.

They had a larger population of their customer base inside that 3-year initial contract period, which you would tend to have a lower attrition because there is termination costs. But still there are some operational benefits. I don’t think we’re at the end of our opportunity. I still think we’ve got further opportunity whether we can ever get to 10% I don’t know, but I think we can continue to drive improvements there and part of it will be based on the stickiness of an offering like Pulse and how we can move the needle with those type of new capabilities.

So when you think about let’s move on to price when you think about APRU and I think you’ve had really successful price for quite some time now around that 2% or 3% 2 plus percent increase per year. Obviously when you get customers to trade up something like Pulse, your price points go up, and get them to add functionality, your price points go up, is there a component of same store sale price increase that you can still, when the contracts up to three years still invoice somebody out, 6% higher or is there a just too much risk of dislocation?

Naren Gursahaney

We are always trading that off as to how much pricing power we have versus what incremental attrition it might drive and I think we drove some tests out there and we see what the room is. But I think our real focus on the pricing side is how we do bring more value to our customers and how do we add more capabilities again with things like Pulse and as we continue to build up the Pulse ecosystem, hopefully, we will be able to continue doing and increase that value proposition such that people will be willing to pay more because they will see savings in energy and things like that as well as just overall utility of the service.

Scott Davis - Barclays Capital

Okay. Why don’t we take another one or two questions right upfront please?

Unidentified Analyst

Is it possible to quantify just with the ARPU figure you have some adds that are presumably coming in above your sort of average and then you are having some disconnects that may be your average or below as your sort of a natural mix shift in ARPU upwards. Is it possible to quantify how much that has been historically?

Naren Gursahaney

I think that new customers coming on at the higher ARPU whether it’s higher ARPU for traditional security or Pulse is a big part of that ARPU growth. Clearly, what’s coming out is probably coming out at higher than the average of the $36, $37 in there and that’s primarily just because your highest attrition if you look at the [lighting] curve we’ll be at that three year point, the end of the initial contract. So you know, at that point, they probably wouldn’t be at a $36. They might be a little bit higher than that. But the greatest part of that ARPU growth is the new adds that are coming on at higher levels. It’s not a big escalation portion on the existing base.

Unidentified Analyst

Any preliminary thoughts on whether you all be paying a dividend or…?

Naren Gursahaney

I think we will be paying a dividend it’s in what’s in our current planning. I think, Ed articulated that the dividend the Tyco shareholders currently get should be cover by the three new companies. I think, we’re still working through both the capital structure and then the capital allocation models in there. But, I would expect that we will have a dividend for sure.

Scott Davis - Barclays Capital

Is there a way to hold onto some of the tax benefits of the previous Tyco structure even though most of your revenues have been in U.S.?

Naren Gursahaney

We will be a US based company. So clearly from a book perspective, from a GAAP perspective, we will have the US tax rate. That said, you know, we believe that our cash tax rate will be significantly lower than our book rate. So we will get some advantages on a cash basis there and our tax teams are looking at all the opportunities that will just be done clearly differently because we will no longer be a Swiss company.

Scott Davis - Barclays Capital

Has there been any churn in your employee base; any competitors trying to pick-up your guys ahead of and as dislocation or is it just not affecting people?

Naren Gursahaney

I haven’t heard of anything from that perspective. Again, we’re not going away. In fact, I think our employees are excited by the prospects of being a standalone company and you know, what they think the benefits will come from that so I think our people are excited about what the future brings.

Scott Davis - Barclays Capital

Makes sense. Is there anything else in the audience? Okay. Well, we are holding you all at the lunch, so why don’t we break there. And thank you Naren and Antonella for your time and good luck with everything.

Naren Gursahaney

Thank you very much Scott.

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