Yahoo Finance

Jeffrey Likosar

Thanks, Jim, and thanks, everyone, for joining our call today. I'll take the next few minutes to share some additional detail on our first quarter results, along with an update on our outlook for the full year. Like Jim, I'm very pleased with our first quarter performance and very strong start to 2025, particularly our continued cash flow and earnings growth.
First quarter adjusted free cash flow, including interest rate swaps more than doubled year-over-year to $226 million and adjusted earnings per share grew by 11% to $0.21.
Key drivers of this strong performance include steady RMR growth and efficient service and subscriber acquisition costs. Additionally, some timing items benefited cash flows in the quarter and lower share count benefited our adjusted earnings per share.
Our top line was also very strong with total revenue up 7% to $1.3 billion. Monitoring and services revenue was up 2%, driven by our record RMR balance of $360 million, also up 2%. Installation revenue was $184 million, up $57 million or 45%.
This was driven by outright sales, which more than doubled compared to the prior year due mainly to our transition to the ADT+ platform. As we have described, ADT+ subscribers acquire ownership of the relevant equipment resulting in upfront recognition of installation revenue and costs.
This differs from our historic model in which we retained equipment ownership and therefore, capitalized and amortized the installation revenue and costs. Jim mentioned the optimization of our ADT+ offerings and subscriber economics.
A relevant highlight in the quarter was improved installation revenue per unit at approximately $1,500. This was driven by continued customer interest and more comprehensive systems, along with our efforts to sell on value and to rely less on promotions and discounts.
Adjusted EBITDA in the first quarter was $661 million, an increase of 4%. Building on Jim's comments about our ongoing discipline, we are highly focused on strong subscriber economics and returns on the capital we deploy. We accordingly have continued to balance our SAC spending with other uses of cash, especially in the current macro environment.
During the first quarter, we generated 172,000 gross new customer additions, adding $10.6 million of new RMR. Consistent with recent trends, our net spending on the acquisition of new subscribers remains efficient.
In addition to the improved revenues I mentioned, we continue to progress initiatives focused on sales and marketing efficiencies and on installation costs. We also renewed our receivable securitization facility late last month with enhanced terms.
Our reported cash SAC, which reflects net receivable and securitization flows rather than contractual revenue was approximately flat year-over-year and revenue payback was consequently slightly higher than the fourth quarter.
We expect this to tick back down in the second quarter as we settle securitization cash flows under our refreshed facility. Our net debt of $7.6 billion remained at 2 times adjusted EBITDA with a very efficient weighted average interest rate of approximately 4.5%.
This includes the new $600 million 7-year Term Loan B we closed last month and the partial redemption of our April 2026 notes. We intend to refinance all or part of the remaining $850 million of these notes later this year. We continue to return significant capital to shareholders in the first quarter, enabled by our progress reducing debt and leverage and strong cash generation.
In addition to our January dividend payment of $49 million, we repurchased and retired 53 million shares for an aggregate price of $397 million. This included 20 million shares repurchased concurrent with Apollo's secondary sale of 80.5 million shares in March.
In April, we repurchased an additional 6 million shares and we now have $148 million remaining under our current repurchase authorization. We were able to do this with only modest usage of our revolving credit facility, which as of today is undrawn. As we look to the rest of 2025, our plans remain anchored on our resilient and growing recurring monthly revenue and our focus on efficiency.
Despite current macroeconomic uncertainty, especially including the effect of tariffs, we are reaffirming the full year guidance ranges we shared in February. At the midpoint of the respective ranges, adjusted free cash flow, including interest rate swaps would be up 14%, adjusted earnings per share would be up 8% and total revenue and adjusted EBITDA would be up 5%.
As a reminder, we expect monitoring and services revenue to be up approximately 2% and our transition to outright sales and the treatment of some other expenditures, while cash neutral pressures our adjusted EBITDA margins.
I will add a caveat around tariffs with the landscape still highly uncertain. If fully enacted, the tariff structure as most recently publicized, will lead to higher equipment costs. We are developing several mitigating actions to offset our gross exposure, which includes supplier negotiations, inventory management, potential source changes and potential customer price increases or surcharges.
While any new tariffs pressure the midpoints of our 2025 guidance, we currently believe we can manage our net exposure within the ranges we've shared. Additionally, there are some seasonal dynamics in our business and other timing items that affect the quarterly phasing of our full year results.
In consideration of these factors, we expect second quarter revenue to be slightly higher than the first quarter due to more installation revenue. We expect adjusted free cash flow to be similar to the first quarter with higher cash taxes offsetting lower interest. And we expect adjusted EBITDA and EPS to be similar to or slightly lower than the prior quarter due to some timing items and the potential initial effect of tariffs.
Before turning to questions, I want to reiterate my enthusiasm about our strong start to 2025 and highlight again the resilience of our business model. I also want to echo the gratitude Jim expressed to our employees and partners. I want to welcome Fawad and Omar to our team, and I want to wish Don well in his new endeavors.
Thank you, everyone, for joining our call today and for your support of our company. Operator, please open the line to questions.

Question and Answer Session

Operator

(Operator instructions)
Manav Patnaik, Barclays.

Ronan Kennedy

Hi, good morning. Thank you for taking my question. This is Ronan Kennedy on for Manav. You referenced uncertainty in the macro environment. Could I just ask for kind of a holistic assessment of that demand environment and what you're seeing from customers? And then also kind of what you've spoken to before the two sides of the coin, with regards to the housing market, attrition, gross adds, et cetera, please?

James DeVries

Sure, Ronan, it's Jim. Thanks for your question. So from a macro perspective, I think the headline for us is we have an exceptionally resilient business and feel very good about that. As you know, Ronan, demand for personal safety increases during uncertain times, factors that pressure new subscriber adds for us, such as fewer relocations, actually contribute to customer retention. We're not particularly reliant on new home builds, perhaps 5% or so of our gross adds.
So net, we've done well in past recessions and generally expect our model to be resilient this time around.

Ronan Kennedy

Thank you and can you. And can you talk about some of the metrics that would be indicative of the strength of the consumer, whether it's voluntary or nonpays and delinquencies, things of that nature?

Jeffrey Likosar

Yeah. We -- this is Jeff. We've seen a little bit of uptick in slower payments, not enough to rise to a level of materiality, but I'd also point to some positive trends. We're seeing even in this environment, such as higher average pricing on install, higher average monthly pricing, and we delivered record attrition in the environment and then just one other point further to what Jim mentioned, if you go back and look at our performance during the last downturn, downturn around the time of COVID, you'll see that we weathered that very well, and we would expect to do the same here. Thank you.

Ronan Kennedy

If I may just sneak in a follow-up. So that -- you talked about the high potential higher costs from tariffs and the leverage you can pull with regards to supplier negotiations and inventory management. Can you further contextualize or quantify potential impacts and then your actions? And obviously, the situation with tariffs is fluid, dynamic volatile. What about -- if you can also speak to kind of a general downturn playbook and leverage that could be pulled within the cost structure, et cetera, please?

James DeVries

Sure. Ronan, Jim, I'll provide maybe a couple of contextual comments for you on tariff pressure, and then Jeff will jump in and share some perspective on the quantitative side. Jeff covered this topic in his prepared remarks, but maybe a few brief items to add some color. As you said, it's obviously difficult to predict given the frequency of changes.
But we've got a team focused on mitigation plans. Those mitigation plans in the immediate term include existing negotiating with existing partners. We're even considering in some cases, selecting new partners. We're doing a lot of work around inventory management, buffer stock, considering buy forwards, and we're considering potential price increases, a tariff charge for new customers.
So net monitoring very closely, a team of talented leaders. We're benefited from the fact that our two biggest sources, countries of origin for our product are Vietnam and Mexico. Much of the product we buy in Mexico is covered under USMCA. And so we're managing it and feel pretty good about where we are for now, anything else here, Jeff?

Jeffrey Likosar

Yeah. I would add as we quantify it internally, it's of course, challenging because of the frequency of changes in some cases, lack of clarity as to the exclusions and [in carve-outs] and then the timing of course, matters. So in our prepared remarks, I noted that it could put pressure on the midpoint, but we believe we could cover our net exposure for the year within the guidance range, so you can deduce from that kind of the range of expected outcomes that we could envision in our 2025 results is within those ranges.
And then even on the mitigating actions, we expect to take those timely or very soon upon starting to actually incur some expense. And I also noted that maybe there's a little bit of pressure in the second quarter, but we see this as more of a second half challenge to work through in the second quarter.

Ronan Kennedy

Thank you very much. I appreciate it.

James DeVries

Thanks Ronan.

Operator

George Tong, Goldman Sachs.

George Tong

Hi, thanks. Good morning. Gross RMR additions fell 7% year-over-year in the quarter. Can you talk about some of the -- contextualize some of the dynamics driving that? And then also whether you expect any bulk purchases to potentially reverse that?

James DeVries

Sure, George. Thanks for your question. So the headline on gross adds that I want to underscore is that we're going to be disciplined. We clearly prefer for gross adds to be up versus down. But let me share a little bit more color on the -- and I think that quantifies to 15,000 units versus lower than Q1 '24.
And so here's a bit of detail. DIY where we tightened our credit standards, and we're very returns focused, accounted for 9,000 of the year-over-year decline and our health business, which can be fairly lumpy accounted for another 8,000 adds less this year than last.
And we also tightened our credit standards there. Dealer channel got off to a little slower start than what we would like, but it's starting to come back in Q2. Small business, George, was about flat to last year. But most importantly, in our core business, [pro install direct adds] versus last year were actually up 4%.
Again, we'd like to see gross as higher. But in the core, we feel pretty good about it. Your second question with regard to bulk, we did no bulk deals in the first quarter. We don't have anything, I would say, on the immediate horizon, there's opportunities available to us. We're not going to chase those transactions. We're exploring alternatives with a couple of different parties now.
And like with gross adds, we'll stay disciplined and returns focused, but we are kicking tires on bulk.

George Tong

Got it. Very helpful. And then revenue payback increased year-over-year. Can you talk about what that means with respect to subscriber acquisition costs are you seeing or any other moving parts that may be causing that?

Jeffrey Likosar

Yeah, George, it's Jeff. I'll take that one. The short answer is, as I noted in the prepared remarks, we expect it to reverse in the second quarter. There's some timing dynamics associated with our securitization facility for our customer receivables. We have historically reported cash SAC inclusive of the cash flows back and forth between us and our financing partner.
If we look at our revenue payback as we do internally on the basis of our contractual arrangements with customers, in other words, how much revenue did the customer agreed to pay irrespective of timing, we see revenue payback approximately flat.
And I'll also note that we renegotiated our securitization facility with our partner with some more favorable terms. So again, we expect that particular trend to reverse. And then I'd highlight again that we delivered RMR overall consistent with our expectations while doubling our adjusted free cash flow. So we feel really good about our overall cash performance in the quarter.

George Tong

Got it. Thanks for clarifying.

Operator

Ashish Sabadra, RBC Capital Markets.

David Paige

Hi, good morning. This is David Paige on for Ashish. I was wondering if you could give an update on two fronts. One, the State Farm partnership. I believe you have some pilot programs in several states going on. And then how is the AI initiative going in terms of virtual calls, call center efficiencies? I know you progressed really nicely last quarter and have some targets for '25. So just an update on those two fronts. Thank you.

James DeVries

Sure, David. It's Jim. Thanks for the question. On State Farm, I'm pretty certain I shared this last time, but we're feeling good about the trajectory, 5,500 units in '23; 18,000 units in '24; gross adds for us in Q1 of '25 were 4,000. That compares to Q1 of 2024 last year of 3,200.
The pilots are underway. We're early-ish in the process. DIY is having more success than the pilot with regard to leak detection. DIY represented about 10% of our gross adds in the first quarter and the relationship and working teams continue to do well.
I should mention customer satisfaction is holding very high. Your second question with regard to AI. The initial focus for us has been in the area of customer care operations. So this is call deflection, agent efficiency, improved customer experience. At the end of Q1, 90% of our customer service chats were processed by AI agents.
We had a nice percentage of containment with those chats, meaning the customer request is addressed without the need for any human interaction. And we started to roll out AI agents for voice calls in -- late in the quarter and expect to have 20% of our voice calls completely contained by AI agents by the end of the year. Savings in 2025 are not material. We expect those to begin to ramp up nicely for us in 2026.

David Paige

Great. Thank you so much, appreciate it.

Operator

Peter Christiansen, Citigroup.

Peter Christiansen

Good morning. Thanks for the question. Question, Jim. You gave some good macro content on the residential side. Just wondering if you could juxtapose that versus what you're seeing on your small business channel in terms of price realization, system purchases versus leasing versus purchases, that kind of stuff. Thank you.

James DeVries

Thanks, Pete. On the small business side, I'd say, we're holding our own. Things are generally going well. We see this as an opportunity to drive a bit of growth. One of the things that we pay very close attention to in SMB is attrition.
I think that's a bit of a leading indicator of where things are, and we're generally flat in SMB attrition. It's an area that we're going to be focusing a bit more on going forward than we have in the past. There's some pretty exciting product work that the team is developing. But generally speaking, I think that the market for us has been holding its own.

Peter Christiansen

Well, that's good to hear. And then, Jeff, I guess, in terms of the outlook, if you could -- if possible, can you give us a sense of mix between monitoring and installation. Installation was certainly a bit higher in the quarter as a percentage of the total mix. How should we think about that as we look at the full year outlook? Thank you.

Jeffrey Likosar

Yeah. Generally, when we shared our initial guidance with revenue at the midpoint of the range being up around 5%, we noted at the time, and I would still say this is the case that we would expect monitoring and services revenue in a range of 2%, which of course, implies meaningfully higher. From install revenue, the reason for that, as we've described, is our transition to a larger percentage of our transactions with customers, particularly with the ADT+ platform being outright sales, which causes us to record the revenue and effectively the SAC expense upfront.
So it's lower margin revenue and maybe a little bit more subject to some seasonality the monitoring services because we tend to have more adds in the middle part of the year than around the holidays. So all that was factored in and you see 7%. In the first quarter on total revenue, no change to our guidance of it being in the mid-single digits for the full year.

Peter Christiansen

Okay. So we should see, I guess, normalizing for the trend last year, we should see roughly a similar sequential uptick in 2Q, 3Q versus last year just on the higher base?

Jeffrey Likosar

Yeah, I think you could think of an uptick from a Q1 to Q2 looking kind of like the uptick from Q1 -- or I'm sorry, from the fourth quarter last year to the first quarter of this year. And that's just because we are continuing to roll out, continuing to increase the percentage of our new customers with ADT that are outright sales.

Peter Christiansen

Okay, that's helpful. Thank you so much.

Operator

Toni Kaplan, Morgan Stanley.

Yehuda Silverman

Hi, good morning. This is Yehuda Silverman on the line for Toni. I've just had a question about attrition. So record attrition in the quarter, improving 50 basis points. I was just wondering how much more room do we see for improvement? And what is an ideal range or target for attrition?

James DeVries

Thanks for the question. I'll share a little bit of color on the quarter and try and give you a sense for where we're headed with attrition. For the quarter, [12.6%] that's, I think, let's see, about 50 basis points, I believe, better than last year. Nonpayment cancels are flat to last year, a good sign for us. Relocation losses were a little bit better than last year, and voluntary losses were solidly better than last year.
Our NPS scores have steadily improved. We're now at a record best in the last three years. Call center metrics are continuing to improve. And there's some new initiatives underway that give us some optimism. We're being more proactive with risk customers.
There's a new program for new customers around white glove treatment. There's some new retention offers that are getting some traction. Longer term, I'd like to see this start with an 11 versus 12. But next up for us is [12.5% and 12.4%] after that, and we'll keep plugging away.
I've often said that the improvement isn't necessarily linear in this space, but it's generally been linear the last few years. I think we were [13.5% and 21%, 12.9%, 23% and now down to 12.6%]. So feeling good about it at a high level when you parse out some of the details there's cause for optimism, and I like what I'm seeing on some of the new programs.

Jeffrey Likosar

And then one point too. I'd just emphasize, if comparing to other firms, we report the number on a gross basis. So if a relocating customer signs back up for ADT service or if a home that we've previously secured signs back up, we don't net that against our attrition. If we did so, we'd be closer to the ranges that Jim's already describing.

Yehuda Silverman

Got it. And just one follow-up about pricing. So the question about revenue and inflation. So I was -- is the guide implying or with the understanding that inflation is more moderating or steadying. I was just wondering if there's any update to the inflation outlook for the remainder of the year.

Jeffrey Likosar

Not anything that I would add beyond, of course, the tariffs as an avenue with which we've incurred inflation in our material cost. But by and large and including our overall outlook for revenue, we do have price escalations and in some cases, even richer mix of pricing because richer configurations is certainly considered. But the macroeconomic comments that Jim made earlier in the comments about tariffs. I think, I wouldn't add anything beyond that with respect specifically to inflation.

Yehuda Silverman

Great, thank you.

Operator

This concludes the question-and-answer session. I will turn the call to Jim DeVries for closing remarks.

James DeVries

Thank you, Sarah, and thanks, everyone, for taking the time to join us today. We had a strong first quarter. We feel very good about the momentum in the business. We're confident in our plans for 2025. The priority of our team is to execute on our commitments.
Again, I'd like to extend my appreciation to our ADT employees and dealer partners. Congrats on a great quarter and an excellent beginning to our 151st year. Thanks again, everyone, and have a great day.

Operator

This concludes today's conference call. Thank you for joining. You may now disconnect.