Research

Venture investors argue that ADT is doomed from disruptive technology

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Amazon purchased the smart doorbell maker Ring for $1 billion to help the company jump an important hurdle in its Amazon Key delivery business. But it could also deal a painful blow to ADT, Calacanis said, if and when the combined company puts out smart alarm products. “They’re going to take the cameras and the alarms and put it together and the big loser in this will be ADT,” he told CNBC’s “Squawk Alley.” ADT charges thousands of dollars for installation and a steep monthly fee for continued service, Calacanis said. “People absolutely hate that company, and now there’s new products that are coming out where there’s nothing down, $20, $30 a month for the service to let the alarm company know, and you can install it yourself,” he said.
Research

LBO investors own 80% of ADT on its argument that it has a durable position, despite DIY technology competition, in an underpenetrated market

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ADT is currently America's #1 home security system provider. But with DIY competitors backed by behemoths like Google and Amazon getting into the space, will ADT's competitive advantage continue? ADT, backed by Apollo, IPO'd in early 2018 at $14 per share and has been a long slide downward ever since. With over $10 billion of debt and concerns over growth, analysts have cut their price targets. But can ADT continue to maintain its 7M subscriber base, continue uptake of its digital ADT pulse product and hold back the competition? What are the odds of a 2x in 2 years?  A 3x in 5 years? A complete wipe-out?
Analysis

ADT's stock price implies revenue decline and has large upside simply from reduced fear of disruption

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By Quantifying this Story in Scenarios using the BPN Platform, we can explore how much ADT Equity share price upside or downside there may be at multiple future horizons from changes in investors' expectations about the odds of different levels of differentiation amongst competitors in maintaining its subscriber base, amongst other drivers. The market has priced in a decline in ADT revenues and increase in subscriber acquisition costs based on increasing competition. If ADT investors come to see upside from partnerships with tech/DIY offerings, there is lots of upside. If differentiation proves elusive, there is considerable downside as ADT maintains a heavy debt load.
Analysis

Quantifying this Story in Scenarios enables putting odds on many combinations of drivers of cashflow from various markets

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By Quantifying the ADT Equity Story in Scenarios, we can explore the odds of combinations of its major drivers, from the odds that ADT loses significant share to new market entrants such as SimpliSafe, Vivint and DIY solutions, to the odds is continues to be a dominant player with its ADT Pulse product, to how those odds affect customer acquisition cost and lifetime value. Revenue multiple and valuation at a horizon like year-end 2021 can be influenced heavily by investors' outlook at year-end 2021 for long-term for these drivers. In the table below, explore the odds of year-end 2021 stock prices, and the combinations that influence them, by dragging the dot at the bottom to toggle some of our 100 cases.
Analysis

We can even put odds on other investors' future forecasts, highlighting good odds of big increase in multiple from reduced fear of disruption

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Is ADT Equity "cheap" at 6.5x forward EBITDA, while some comparables trade at 9x or more? Well, that depends on whether its price will trade at a higher or lower multiple in the future, say in 1 year, 2 years, or 5 years. And as it does today, its multiple then may depend on the outlook at that time for peak economics, which may drive the outlook for cash production over the long-term. In the chart below, hover over 1 of the 100 cases in any of the 4 time horizons to see the outlook at that time. Click a case to zero in on it. And select horizons at the bottom to zero in on them too. Explore what could drive revenue multiple to, for example, above our 90th percentile of 12.0x in 5 years or below our 10th percentile of 0.5x. If you are reading this on a smart phone, flipping to landscape mode will help.
Research

We can continue attaching views and supporting evidence to drivers like the odds ADT maintains its oligopoly position and retains its current subscriber base

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We keep models living and breathing by attaching research directly to key drivers inside the BPN Platform. As new evidence is attached and views change, we can update the judgments for those key drivers, such as what are the odds ADT maintains its oligopoly position and retains its current subscriber base

Research

Inc. Magazine argues that DIY tech is likely to cause attrition of ADT customers

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The global security market is slated to surpass $100 billion by 2020. Home security systems will account for an estimated $47 billion of the total security market. The main drivers are: 1) Tech upgrades are hugely expanding the functionality of electronic security systems. This includes wireless integration and other "smart home" features that provide greater flexibility and convenience for consumers. 2) DIY home security solutions--in which homeowners install and monitor the systems on their own--are in high demand. ll told, DIY systems are on track to take over 34 percent of the home security market by 2020. They're also projected to account for more than 62 percent of the market by 2035. 3) Millennials' consumer preferences are spurring growth across industries, and the home security market is no exception. DIY home security solutions are especially enticing to consumers under the age of 45. 4) The profitability of home security systems has become ever more apparent. That's resulted in intense competition within the industry as startups and big-name corporations duke it out. While the Home Security market is growing rapidly, the competition is increasing and DIY solutions are becoming more prevalent and this is likely to lead to customer attrition for ADT
Research

Consumer reports says ADT costs $2,425 over 5 years and DIY can cost $620

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Shares in Boca Raton-based ADT, the security provider that went public in January, took a fall after Amazon in February announced its $1 billion acquisition of Ring, a maker of systems that connect doorbells with security cameras. Amazon’s move opens the possibility of the Seattle giant disrupting the new market for do-it-yourself home security, a fast-growing category that threatens to squeeze ADT and its long-established model of installing elaborate systems and insisting on three-year contracts. According to Consumer Reports, signing up for service with ADT would cost $2,425 over five years, including $925 for hardware. Do-it-yourself systems are significantly less expensive, costing as little as $620 for hardware to cover 15 windows and two doors, and nothing for monitoring. Amazon isn’t the only tech company eyeing ADT’s market. Google owns the home-technology company Nest, which is pushing cheaper alternatives to traditional security monitoring. In a March conference call, ADT Chief Executive Tim Whall acknowledged new competition from tech giants. “Now you see Google Nest coming out there with products,” Whall said. “You see Amazon, potentially Apple.”
Research

Motley Fool says ADT stock dropped due to threat from SimpliSafe and Ring

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After pricing its initial public offering at $14 back in January, the home security company has seen its stock price plummet to around $8. Investors have soured on ADT's prospects -- and for good reason. In fact, here are three reasons ADT's stock price descent may not yet be over. 1) Intensifying competition: A new company is starting to make a name for itself: SimpliSafe. With far lower equipment costs and easy, do-it-yourself installation, SimpliSafe offers consumers an attractive value proposition. And they've been signing up in droves; more than 2 million people have already become SimpliSafe customers, making it the fastest growing home security company. 2) New entrants: Ring makes camera-equipped doorbells and other security video equipment, and it recently debuted a comprehensive home security system with alarm monitoring priced at only $10 per month. Ring's equipment costs and monitoring fees drastically undercut those of ADT. In addition, Ring's home security system is expected to add full integration with Amazon's Alexa smart assistant platform. This newfound competition with Amazon may further slow ADT's customer growth and make it much more difficult for ADT to raise prices, which could severely crimp its profit margins. 3) Debt is a burden: ADT's nearly $10 billion in debt -- compared to only about $260 million in cash -- is another risk factor for investors. The cost to service this debt will continue to weigh on ADT's profits for the foreseeable future.
Research

Parks Associates forecasts 5 year CAGR of 19% for DIY vs. only 2% for professional install

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The residential security market is fragmented and competitive, with ADT owning an estimated 30% share. The competitive landscape includes traditional operators, cable/telecom MSOs that sell alarm monitoring as an add-on to existing customers, and more recently, technology-based companies offering security and automation products direct to consumers, supporting the DIY sub-segment with self-monitoring capabilities and outsourced monitoring as an option. ADT has to compete against well capitalized companies such as Vivint (owned by Blackstone) and Monitronics (Ascent Capital), Comcast, Spectrum, AT&T, and DIY companies. According to Barnes Associates, DIY generated ~$30m in RMR in 2016, or less than 10% the RMR of ADT. However, it was projected that DIY RMR grew ~27% in 2016 and a Parks Associate report projects self-install to show a 19% CAGR 2017-2022 versus 2% for professional install.
Research

Parks Associates points out that home security remains underpenetrated overall and DIY remains in minority of home security

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Parks Associates estimates that adoption of security systems among all U.S. households will be roughly 27 percent, or 30 percent of broadband households, by 2021. This will leave 70 percent of broadband households untapped by the security industry. While the emergence of smart home products extends the value of a security system, it also increases competition, as smart devices are often sold independently of a traditional security system. Many are self-installable, meaning consumers are increasingly becoming accustomed to self-installing systems. Parks has noticed a growing trend of self-installed security systems, Abdelrazik noted. “Self-installed systems have slowly been taking a larger share of the overall security systems market. They remain, however, in the minority,”
Research

ADT announced a deal with Amazon selling ADT professional installation

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ADT Inc. today announced a new strategic initiative with Amazon. Starting later this year, ADT will support integration of Amazon's new Alexa Guard feature with the ADT Pulse security system, helping ADT customers enhance their home's security capabilities by detecting specific sounds via the customer's Echo device when they're away from home. Once available, ADT professional installation and monitoring solutions will be offered to customers through the Alexa Guard website and Amazon mobile app. By building partnership with leading IoT companies, ADT may be able to provide its vast monitoring infrastructure to customers who want to be connected to their home devices helping ADT maintain its customer base.
Research

ADT's newer "Interactive" home automation offerings have grown 14% CAGR the last 2 years

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Strong ADT Interactive growth necessary to offset traditional weakness. The combination of both Pulse and the recently released Control, ADT's home automation offerings,now have ~3.05M total users and has averaged quarterly user growth of ~14% since the beginning of 2017. This strong growth within ADT's Interactive offerings has helped to offset declines in its non-Interactive business (primarily ADT's traditional offering), which we estimate has averaged a 7% quarterly decline since the beginning of 2017, but still represents ~50% of ADT's customer base of ~7.1M customers. Besides faster user growth, ARPU within Interactive is also higher than ADT's traditional offering, with pricing running ~$50+/month compared to the traditional offering closer to ~$40. This pricing differential compounds the importance of Interactive growth,as revenue from Interactive customers needs to grow at a significant rate to offset customer losses within the traditional business.
Research

In RBC's Home Security Survey, only 15% of homeowners thought DIY was as good as professionally-installed security

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The emergence of DIY security options (e.g., SimpliSafe, Frontpoint, Nest) and Amazon’s acquisition of video doorbell maker Ring have ratcheted up discussion and angst around the competitive landscape and ADT’s positioning therein. No doubt, we see DIY as having a place in the home security landscape; however, we do not believe it represents ADT’s demise. We believe DIY is well suited for apartments, condos or small homes (and perhaps renters), but less effective for ADT’s core demographic of homeowners with families. In our RBC Home Security Survey, just 15% of responders indicated they felt DIY was as good as professional installed/monitored service, whereas 30% said they don’t trust the service. Thus, we see DIY as a way to expand the monitored security market, from the current ~20% penetration where it has been for some time. We see opportunity for ADT to capitalize on a growing market via its offerings and outsourced monitoring, gaining access to a previously untapped market.

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Research

43% of ADT homes pay more for smart home monitoring, up from 38% one year ago, and Amazon co-sales launched strong

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The company reports that 43% of its total residential install base is now using smart home systems, either Command and Control or its predecessor ADT Pulse. That figure is up from 38% one year ago. That is significant because ADT is able to command a higher monthly monitoring fee for its smart home equipment versus its traditional alarm-only options. Meanwhile, the company reports the launch of its new Amazon Alexa Guard system went well, with 15,000 installations performed during the quarter integrated with either Command and Control or Pulse.
Research

Many DIY security product owners are young and may add professional monitoring when they are older

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In a survey of 3,001 adults in the U.S., only 38% of Americans own a home security product. The survey also showed that younger cohorts (18-34) are more likely to own a security system.Younger generations are more likely to own some kind of home security device than older generations, especially less expensive DIY options like smart locks and self-monitored systems. Younger generations are digital natives and are more comfortable with tech in the house. As this generation gets older, they may opt to combine a professionally monitored system with IoT devices such as Nest, Alexa, etc (ADT Pulse integration)
Research

Hellman & Friedman's Simplisafe and Blackstone's Vivint offer professional monitoring but haven't taken much share from Apollo's ADT

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ADT is the market share leader and its two primary professional monitored competitors are Simplisafe and Vivint. Simplisafe (acquired by Hellman & Friedman for $1 billion) says it is “now protecting over two million Americans.” Don’t take that to mean the company is monitoring two million customers (not even close), or that two million people are actually using the system. Pricing for SImpliSafe's service starts at $15/month with professional monitoring (compared to $40+ / month for ADT). Vivint was acquired by Blackstone for $2 billion in 2012 and has 1.4M customers. Vivint's service cost $30-$40/month for monitoring + $12 -$23/month for equipment financing with a 60-month contract period.
Research

As ADT integrated smart home products with its monitoring service, annual attrition fell from 14.1% to 13.6%

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ADT continues to make headway in the smart home market, reporting that 40 percent of its total 7.2 million clients now use ADT Pulse. That total penetration is due to the fact that nearly three out of every four new customers of the security giant now opts for Pulse, up from two-thirds a year ago. Introduced back in 2010, ADT Pulse centers on the interactive home, offering connections to security, lighting, thermostats and cameras. ADT has partnered with Z-Wave, Kwikset, Netgear, Ring, Nest and others to make the Pulse app compatible with a variety of connected home devices.Tim Whall, CEO of ADT, told investors Pulse is attractive because it brings higher revenues and retention rates. Pulse provides ADT with higher monthly subscription revenue than traditional stand-alone security. By integrating with interactive home products, ADT is helping reduce customer attrition and keep market share: Attrition fell from the same period last year by 0.5 percent, from 14.1 percent of subscribers to 13.6 percent.
Research

In a survey, police agencies & healthcare providers said they don't trust alarms from DIY systems but do trust professional security services

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In a survey of 400 Police Agencies and Healthcare Providers, significant majority of responders still regard traditional monitoring centers asmore trusted sources of verified alarms, and are more likely to respond faster to calls from them, than from self-monitored do-it-yourself (DIY) users. Despite the wave of positive trade and general publicity surrounding new entrants into the residential security and automation market, the results indicate that this segment’s growth is also viewed by responders in law enforcement and health care as the cause for the increase in false alarms, according to our survey. The results of our survey indicate to us that the attitudes of the primary responders, police and health care providers, may be slower in moving away from servicing more traditional models than some investors already believe. This is not to say there will not be change in the industry, but it does seem to indicate that historical, trusted relationships likely will hold on for some time.