ADT releases Q1 results—and stock price drops

But Imperial Capital maintains ‘outperform’ rating on ADT, saying it expects ‘positive catalysts’ from the company in 2014
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Thursday, January 30, 2014

BOCA RATON, Fla.—The ADT Corp. reported Jan. 30 that ADT Pulse take rates and recurring revenue were up in its latest quarter. But customer growth was below expectations in Q1 and net income decreased 27 percent in that period—and ADT’s share price tumbled.

Still, company CEO Naren Gursahaney said ADT is taking steps to ensure future growth—such as making improvements to its dealer program and lead generation process; the introduction of a new mobile security app, ADT Canopy; and a new marketing campaign focused on “everyday security”—and some analysts are still bullish on ADT.

Among them is Imperial Capital. According to reports issued Jan. 30 and Feb. 4, Jeff Kessler, managing director of institutional research at the full-service investment bank based in New York City, said the company is “maintaining our outperform rating and our one-year price target of $50.”

Kessler, who declined to comment beyond what is in his public reports at this point, wrote that the company continues to view ADT as “an industry-leading home services company with a very high unaided brand recognition. We believe the stock should gradually rise over time.” He predicts increased penetration and growing ARPU will lead to higher RMR and cash flows.

Kessler also noted that Q1 is “normally the smallest and the most volatile and most unreliable for ADT” and added that “we expect positive catalysts” from the company later in 2014.

Imperial Capital’s one-year price target is considerably above ADT’s recent share price, which at the close of trading Feb. 5 was $29.75. On the day before ADT released its Q1 results, ADT shares closed at $37.81 but the price has trended downwards since the company gave the latest details on its finances.

ADT reported Jan. 30 that it had about 6.5 million customers at the end of Q1, up 0.7 percent from a year earlier. Recurring revenue grew by 4.2 percent to $775 million. But ADT added fewer customers and attrition rose to 14.2 percent from 13.4 percent.

According to a transcription of an earnings call from Seeking Alpha, ADT CEO Gursahaney admitted that “gross customer adds were below our expectations for the quarter.”

While ADT added 255,000 customers in Q1 of 2013, it added just 231,000 in Q1 2014.

Gursahaney said that while ADT Pulse take rates climbed in the residential and small business sales channels, they declined in ADT’s direct channel “due to lead-generation challenges and the rollout of our enhanced customer credit screening.”

The challenges to lead generation include new advertisements from the big competitors entering the home security and home automation market, Gursahaney said, so ADT is expanding its lead generation activities, which included the rollout of some new ads.

The company announced Jan. 31 a new television, radio, direct, digital and social media marketing campaign focused on “everyday security,” a transition from its traditional focus on monitored security. The company said the idea behind the campaign, called “In My Mind’s Eye,” is that ADT Pulse is not only for emergency situations but also for “everyday moments, such as when we ask ourselves whether we remembered to lock the back door.” The ads highlight how being able to do such things as lock the door remotely with Pulse enables customers to feel more in control of their lives.

Gursahaney said in the earnings call that gross adds declined in ADT’s dealer channel by 16 percent. He said that was “primarily driven by the lower number of dealers as we discontinued activities with about 100 dealers who were not able to effectively make the shift to our higher-end automation solutions towards the end of 2013 and the same lead generation challenges we faced in our direct channel.”

But Kessler noted that ADT had added 11 new dealers in the first quarter and re-enlisted a top dealer who had left the company for a competitor. Such steps, he said, are “a clear indication that the company is very focused on optimizing the dealer channel and turning around this critical part of the business.”

The increase in attrition was mostly due to more customers moving as the housing market recovers, but Gursahaney said the company is “aggressively implementing” customer retention strategies to reduce attrition. Kessler noted that ADT since 2013 has been putting in place costly programs to better monitor when people are moving and to market to them before they move into their new homes.

The company said the ADT Pulse take rate was 36.5 percent in the first quarter, up from 19 percent last year. Gursahaney said the company is adding an ADT Canopy app to Pulse, which can keep track of the whereabouts of family and friends. A subscription-fee based ADT Chaperone feature of Canopy provides a direct connection to an ADT monitoring center that customers can use when alone in a dark parking garage or crossing a campus at night, Gursahaney said.

In Q1, ADT’s net income was $77 million, or 39 cents per share, down from $105 million, or 44 cents per share, a year ago. ADT spun off from Tyco in 2012, so excluding those expenses and other one-time costs, earnings were 43 cents per share. Revenue grew to $839 million from $809 million, a 4 percent increase.

Zacks Equity Research also views ADT positively. In a Feb. 3 report, Zacks’ Analyst Blog said, “We suggest investors stay invested” in ADT, saying the company has a “strong footprint” in the market.

But Herb Greenberg of TheStreet on Feb. 1 wrote a piece titled “Why ADT is appalling,” in which he criticized ADT for spending “billions buying back shares at prices well above where the stock now trades” instead of investing cash in its business. Greenberg particularly questioned ADT’s 2013 buyback of the shares of its third-largest shareholder, Corvex Management.