ADT culls ‘weaker players' from its dealer program

Imperial Capital’s Kessler predicts ADT dealer-based Pulse take rates should increase
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Tuesday, November 26, 2013

NEW YORK—ADT’s dealer program has been one of the company’s “soft spots” for years but now is turning around after the company “culled” more than 100 lower-performing dealers over the past year or so, according to an industry analyst.

Jeff Kessler, managing director of institutional research at Imperial Capital, told Security Systems News that he has been concerned for about five years that some smaller ADT dealers lacked sufficient “IT IQ” to handle the technology, installation and service of new wireless, interactive technologies such as ADT Pulse.

But now, Kessler said, “it’s finally beginning to look better. … For the first time I’m kind of beginning to reverse myself and say it looks as if there is light at the end of the tunnel for their dealer business, both in terms of quality and in terms their ability to start upselling some of the Pulse products.”

He said that’s because the company has eliminated some of the “weaker underbelly” of its dealer base and pared its authorized dealers in the United States and Canada from about 450 down to about 350. “Now, with a stronger … group of younger and more wireless-savvy players, I believe it’s fair to say their dealer business is turning the corner,” Kessler told SSN.

He also predicted ADT would cut more dealers over the next year, but not as many as the 100 or so recently dropped. “They’re not going to drop that much anymore,” he said. “I think they’ve gotten most of the weaker players out of the system both financially and technologically, not all of them, but we’ll see.”

ADT officials were not available for comment before SSN’s deadline.

Kessler made his comments in a phone interview with SSN and in an Imperial Capital report.

ADT on Nov. 20 reported its 4Q and fiscal 2013 results, saying it had increased customers and RMR but that attrition had increased to 13.9 percent. 

Imperial Capital is maintaining its outperform rating on ADT and predicted its stock would rise about 21 percent above recent share prices over the next year. “We continue to view ADT as an industry-leading home services company with very high unaided brand recognition,” the report said.

Total Pulse take rates were more than 32 percent for customers, compared with 12.9 percent last year, according to the report. But while internal “residential direct” sales rates were 38.2 percent and small business take rates were more than 34 percent, up from 15.4 percent a year ago, the dealer-based take rate lagged behind at 23.1 percent.

However, that dealer-based take rate is a big improvement from 1.5 percent a year ago. “I think we’re getting to a point, we’re not quite there yet, but we’re getting to a point where the problems with the dealer base are diminishing for ADT and I haven’t said that in five years,” Kessler said.

ADT, which split from Tyco International and became an independent publicly traded company a little more than a year ago, inherited a dealer program that had been added to more for growth than quality, Kessler told SSN. “I’ve been involved with quite a number of franchisees as well as dealer businesses over the last 20 years, and it was clear that ADT initially did not put its dealer business together very thoughtfully,” he said.

He said that too many of the ADT dealers were small, low-RMR, “lifestyle type guys” not prepared to handle new interactive services like Pulse. “It turned out that [about] one-third of the dealer base probably would never get beyond the $25-to-$32 a month old [POTS] line alarm system that they’d been so used to,” Kessler said.

But he said in the past year or so, ADT has “continued to try to weed out what I call the bottom third of its dealer base, and not necessarily by size but by quality.” He said metrics included the FICO scores dealers brought in, the type of systems they were installing, ARPU and RMR.

The dealer program has also faced other problems, Imperial Capital’s report contends. It said one of the company’s larger dealers has been in “financial trouble” and while ADT is working with that company, it “has not made the progress ADT wants.” Kessler declined to say which dealer the report refers to.

Some dealers were using a third-party lead generator who wasn't compliant with telemarketing regulations, according to the report. ADT required them to stop using that lead generator and now is working with the dealers to help them generate their own leads while looking for a new third-party lead generator, the report said.

If ADT were a private company it could quickly reduce the number of dealers but it must move slowly because it is publicly traded, Kessler said. “As a public company you can’t just hack them all off at one point and take this giant hit,” he said. “You’d have a big hit on attrition, you’d have a big write-off you’d have to do.”

However, the slow motion reduction is generating some dealer discontent, Kessler said. “As they do it slowly, the bottom line is that some dealers get angry, some dealers get disappointed because they’re not getting all the product they want, [and] some dealers get nervous because they’re on the bubble and they may or may not be good enough to make it in the world of interactive sales,” he said.