ADT reported second-quarter results that reflected impressive traction with its interactive offering Pulse, but a continued slowing of key growth metrics and hints of competitive pressure.
On the bright side, higher-priced Pulse continues to gain traction across all channels. The percentage of new customers in its direct channel (53% of new customer additions) and dealer channel (remaining 47%) rose to 33% and 11%, up 3 and 6 percentage points, respectively, from the December quarter. ADT has only begun to upsell to existing customers, and converted 13,000 existing customers to Pulse or 0.2% of all non-Pulse customers. The mix shift to Pulse, which comes at a 25% monthly premium to monitoring-only bills, to be the primary driver for ADT’s revenue over the next few years, especially since only 5% of existing customers have Pulse.
Headline financials in the quarter looked OK, and management maintained full-year revenue, margin, and cash flow guidance, but analysts were concerned about elements of the results. Recurring subscription revenue (92% of revenue) grew 5% in the quarter, supported by a 4.4% increase in average revenue per user. However, excluding 34,000 accounts purchased from third parties outside its authorized dealer network (“bulk purchases”), total customer additions fell 8% year over year, a third consecutive quarter of annual declines. Further, churn increased 10 basis points sequentially and 70 basis points year over year, most likely as a result of increased customer relocations from a stronger housing market.
On April 26, AT&T launched their muchanticipated Digital Life offering in 15 U.S. markets that seeks to go toe-to-toe with ADT. By the end of this year, AT&T expects to reach 50 markets. Pricing for AT&T, a $30 monthly charge for basic home monitoring and a $40 monthly charge for home monitoring plus a choice of three Pulse-like features, comes at a $6-$10 monthly discount to ADT, and comes with only a two-year commitment (versus three years for ADT), though appears to carry a slightly higher upfront equipment and installation fee.
AT&T could use its superior marketing might and hundreds of retail stores to carve out a meaningful market presence, something that the other large cable and telecom companies have been unable to accomplish to date. Indeed, ADT acknowledged that it has had to increase its promotional activity in the quarter, which was partly responsible for the 12% increase in direct channel subscriber acquisition costs (mostly due to greater mix to Pulse, however) in the second quarter.
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