ADT Inc. Q4 2025 earnings call

Good morning, and thank you for joining us today to discuss ADT's fourth quarter and full year results. Speaking on today's call are Jim DeVries, ADT's Chairman, President, and CEO, Jeff Likosar, our CFO, and Omar Khan, our Chief Business Officer. We are structuring today's call a bit differently, with the majority of the call focused on our strategy and key priorities to position ADT for the future. Jim will start with a broad strategic update, focusing on how we're reshaping the future of smart home security. Omar will then describe more about our recent acquisition of Origin AI, and then Jeff will briefly describe our 2025 financial results, as well as our long-range financial outlook and capital allocation priorities. After their prepared remarks, we'll open the call for analyst questions. This morning, we issued a press release and presentation summarizing our financial results. Both are available at investor.adt.com.

We'll reference our non-GAAP financial measures today. Reconciliations to the most comparable GAAP measures are included in the earnings presentation on our website. Unless otherwise noted, all financials and metrics discussed reflect continuing operations. Non-GAAP cash flow measures include amounts related to our former solar business through 2Q 2024. Included in our remarks today are a number of forward-looking statements that fall within the safe harbor provided by the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that are laid out in the earnings presentation on our website and in our SEC filings. Actual results may differ materially. Please refer to our SEC filings for more details. Now, I'm happy to turn the call over to Jim.

Thanks, Elizabeth. Good morning, everyone. I'm pleased to report that ADT again delivered a solid quarter. Our overall performance for 2025 was within the guidance ranges we shared at the beginning of the year and updated on our October call. Jeff will share more regarding 2025 financial results later on this call. He'll also comment on our longer-range financial outlook and capital allocation priorities. I'll spend the next several minutes sharing our vision for ADT and how we're reshaping smart home security, emphasizing our strategic focus areas, key initiatives, and investment priorities for 2026 and beyond. As you know, ADT is the most trusted brand in smart home security. We have remained the leader in our space throughout our 150-year history.

We have a national footprint, unmatched monitoring and service infrastructure, and long-standing relationships with millions of customers who rely on us every day. ADT's mission to protect and connect what matters most remains consistent. We are focused on providing peace of mind to our customers. As I've shared before, our overall strategy is anchored in three core differentiators: unrivaled safety, premium experience, and innovative offerings. We deliver best-in-class protection anchored by our professional monitoring and delivered with top-notch service. During my tenure as CEO, customer expectations, the state of technology, and the manner in which we fulfill our mission have evolved with increasing speed. Homes are more connected, technology is more intelligent, customer expectations regarding responsiveness, personalization, and convenience are higher than ever before. Security is no longer just about reacting to alarms.

We see the future of smart home security differ from the past. ADT is leading the way to transform the delivery of, and even the definition of, smart home security. At the core of that strategy is a simple idea, combining ADT's human experience with intelligent technologies to deliver better outcomes for our customers and with better economics for the business. More specifically, we're building technology that, combined with our more than 12,000 professionals, will provide solutions to provide increased peace of mind for our customers.

Our vision is to provide protection that is always available, powered by artificial intelligence, enable real-time and split-second response with deeper information and context during emergencies, deliver a personalized experience that lives and evolves with the customer tailored to lifestyles and life stages, and offer solutions for everyone across all U.S. households, small businesses, and families through a variety of use cases, protection that follows people, not just properties. We have made substantial progress in the foundation for this vision in recent years. These include the launch and expansion of our ADT+ platform and features, the transition to virtual service, early accomplishments in AI, and consistent improvements in our go-to-market model. A key objective during 2026 is to invest in the acceleration and broadening of our progress. We're investing in product technology, both in ADT+ as well as in our new technology related to ambient sensing.

We're investing in customer service and artificial intelligence, as well as our related IT infrastructure. We're investing in customer acquisition efficiency, including marketing to new segments and refining our channel strategy. I'd like to share a little more detail on these key investments in 2026. First, investments in product technology. We have built a solid proprietary platform which enables more rapid innovation and more explicit differentiation. Following the launch of Trusted Neighbor in late 2024, we continue to add more use cases and features. Just recently, we launched Live Light, a lighted outdoor ADT sign enabling first responders to visually identify and verify an address during an emergency. We also launched My Safety, enabling on-the-go mobile security integrated with the ADT+ ecosystem.

We are expanding penetration of our ADT+ app to more channels, including, most importantly, a third-party network of more than 100 dealers who will transition to ADT+ in the third quarter. A topic which I'm very excited about is our recent acquisition of Origin AI, which, using advanced presence sensing technologies and intelligence, will enable use cases and features unique to ADT. Omar Khan, our Chief Business Officer, will share more detail about Origin AI shortly. The theme of our customer service initiatives is the power we can uniquely bring to our customer by supplementing our 12,000 employees with the power of artificial intelligence. We've made substantial progress in service and efficiency in recent years. A highlight is our virtual service initiatives, under which we now handle approximately 50% of our service calls via remote diagnosis and resolution rather than utilizing a truck roll.

This has led to meaningful customer service through improvements with positive feedback while also improving our cost efficiency. In addition, our initial artificial intelligence efforts in 2025 have led to 23% of our calls being routed through AI with steadily improving levels of containment. That is, handling the call without any human engagement. We exited 2025 with all of our chats first routed through AI. Importantly, we continue to benefit from highly trained employees available in situations where a human interaction is the best solution, both in the event of an emergency or when an on-site service visit is the best way to resolve a customer concern. During 2026, we are planning to advance our service-oriented artificial intelligence within our call center operation and, importantly, also invest in AI beyond our call centers.

Our primary focus is to strengthen our understanding of customers, which we'll accomplish via transcription and analysis of a large percentage of customer interactions with our agents. We'll use these insights to improve our interactions, in some cases by prompting employee agents and in other cases, reducing the need for human involvement. I'm especially excited by the opportunities here to proactively identify and resolve customer needs or desires rather than reactively after a customer reaches out to us. We anticipate this rich information will facilitate improvements in customer satisfaction, speed of issue resolution, and cost efficiency. Working with an outstanding AI partner, Sierra, we're also beginning to leverage artificial intelligence within our lead to sale processes, which we believe will bring higher levels of conversion. The third area in which we're making 2026 investments is improvements in new segments and acquisition efficiency.

We already enjoy the benefits of a very strong and trusted brand and a variety of routes to market. During 2025, we shifted a majority of our sales transactions to a model that effectively combines sales with system design, configuration, and installation into a single role, most often accomplished in a single home visit. We also refreshed our advertising platform to our When Every Second Counts campaign, and we continue to benefit from our capabilities to selectively buy accounts in bulk and integrate them into ADT. Among our key priorities in 2026 is expansion into e-commerce channels and the launch of a new product line, which we're calling ADT Blue, to appeal specifically to more value-conscious and DIY customers. This will include more marketing investment to target those customers more specifically than we have in the past.

We believe our ADT Blue launch will help us acquire customers for both our DIY and DIFM solutions as we now appear in e-tail channels where many customers shop. We're refining our overall marketing approach with an objective of rationalizing our highest cost acquisition sources, which includes affiliate marketing partners and in some cases, our dealers. We expect this to have a near-term effect of reducing our organic new subscriber additions while strengthening longer-term economics for our overall go-to-market ecosystem. We'll also continue to evaluate bulk account purchase options and potentially full acquisition opportunities in our industry with attractive economics. Our intent and core objectives are threefold. The first is to drive more growth. This includes in our core residential business, as well as DIY-oriented or more price-conscious consumers, along with small businesses and aging in place or health-oriented customers.

The second is to strengthen customer loyalty, improving our customer retention. The third is to improve efficiency, specifically in customer acquisition to fund growth. Overall, we are focused on delivering unparalleled and differentiated customer value propositions, capitalizing on large and fast-growing smart home and security markets. Our scale, our professional monitoring expertise, our employees, our advanced technologies, and our installed base give us advantages that are very difficult to replicate. Our 2026 initiatives and investments are designed to create the next generation of smart home security. We expect these initiatives to generate benefits, including growth in our core, expanded participation into adjacent TAMs, improved attrition, and greater efficiency. We have the team in place to execute this strategy. We are building on ADT strengths while revolutionizing the manner in which we deliver smart home security.

We're focused and disciplined and absolutely committed to creating long-term value for our customers and shareholders. Before Jeff shares more about our financial outlook and capital allocation plans, I'll turn the call to Omar, who will share more about why we're so excited about our acquisition of Origin AI. Omar?

Thanks, Jim. Good morning, everyone. Last week marked a defining milestone in ADT's history with the acquisition of Origin AI. This acquisition reflects a strategic decision to integrate ambient intelligence directly into our platform, unveiling the next layer of home intelligence. Two years ago, we launched our proprietary platform, ADT+, which we have been advancing and scaling with hardware and software features to support additional channels and customer types. We expect AI sensing to become an integrated offering for ADT+ customers over the next 12-18 months, advancing all aspects of our product and services platform. With this acquisition, we now own what we believe to be the world's leading Wi-Fi-based signal processing engine, algorithms, and AI models, backed by over 200 global patents and 50 talented innovators.

Think of it as a sixth sense that knows what's happening inside the home without the use of cameras or listening devices. This technology uses existing Wi-Fi signals, the ones that are already bouncing off your walls and off your body, and uses proprietary algorithms and AI models to interpret the smallest changes in deflections. We call it AI sensing. It can distinguish a human from a dog, a fall from a nap, and even detect a person's breathing patterns, all without requiring a single wearable device or a camera. This is a privacy-first security that solves notification fatigue by significantly reducing false alarms and providing zone-based knowledge of where someone is in the home when there is a life safety incident. Why Origin? They've spent years perfecting the intellectual property that everyone else is just starting to talk about. For ADT, this is foundational.

It allows us to evolve from the best-in-class reactive alarm company to a proactive peace-of-mind company and build new use cases, such as smart aging, allowing families to monitor elderly parents for falls or changes in gait. It's also incredibly scalable. Because it works on existing Wi-Fi signals, we expect that we can, over time, turn on these features for certain of our 6 million existing households via software updates and simple hardware like smart plugs. Our consumer market research shows customers have a high demand and willingness to pay for these AI-verified presence, motion classification, and health-related features. Simultaneous with the acquisition, we've signed a five-year agreement with a minimum value of $30 million plus activation fees with Verisure, the leading smart home security provider in Europe and Latin America, who will continue to scale Origin's technology across their footprint.

We believe over time, our newly acquired technology will accelerate our user engagement, increase our role in customers' lives, drive subscriber and RMR growth, and will reduce our subscriber acquisition cost. We expect to launch a pilot this year with the commercialization across the ADT+ platform and app starting in 2027. In short, we now own the brain of the smart home. We are moving the industry from, "Did the door open?" to, "Is my family okay?" We are doing it with the most advanced, privacy-compliant AI on the market. I'll now turn the call over to Jeff and look forward to answering any of your questions related to Origin and product strategy for ADT.

Thanks, Omar, and good morning, everyone. I'll take just a couple minutes to highlight our fourth quarter in 2025 financial results, which you can see in the deck and press release we issued earlier this morning. As Jim mentioned, we are very pleased with our overall performance with all guidance measurements within the ranges we shared at the beginning of the year and updated in our October call. We continued to focus especially on strong cash generation, and we grew our adjusted free cash flow, including interest rate swaps, by 16% in 2025. This reflects our disciplined capital allocation and our balanced approach to investing in our business while also returning capital to shareholders. Along with our capital structure improvements, this enabled us to return nearly $800 million of capital directly to shareholders during 2025.

This included roughly $600 million in share repurchases and $187 million in dividends.

Full year revenue was $5.1 billion, up 5%, with adjusted EBITDA of $2.68 billion, up 4%. The key positive year-over-year drivers included growth in monitoring and services revenue, higher install revenues and margins, efficiency improvements, and general cost controls enabling funding of our investment priorities. Adjusted EPS was exceptionally strong, up 19% to $0.89 per share, benefiting from EBITDA growth and lower share count. Attrition ended at 13.1%, behind our record level from earlier in 2025, due mainly to elevated non-paid disconnects. As a reminder, we divested our multifamily business in October, which represented approximately $2.6 million in RMR from roughly 200,000 subscribers. Including the effect of this disposition, our 2025 ending RMR balance was approximately flat to 2024.

I'll touch more on our capital structure and flexibility in a moment, but want to also highlight that we reduced our leverage to 2.7x adjusted EBITDA with several debt transactions during 2025. During the fourth quarter, these included refinancing of our 2028 notes and all but $75 million of our April 2026 notes. Our 2025 performance and progress positions us well heading into 2026, where, as Jim described, we are focused on executing several initiatives that position us for the future. I'll spend the rest of the time describing how these key initiatives and priorities fit into our financial model and our commitment to generating shareholder returns. The strategy we're executing is designed to reinforce and build upon the strengths of our business model: stable recurring revenue, strong margins, durable free cash flow, and more recently, our capital allocation flexibility.

As we invest in technology, service excellence, and more efficient customer acquisition, our goal is to improve long-term growth in unit economics, not just near-term results. We enjoy very durable recurring revenue resulting from our annuity-like $4.3 billion annualized recurring monthly revenue balance. With its high gross margins, this is a core asset and the foundation of our cash generation and shareholder return capabilities. We have been very disciplined in management of that asset in recent years with a focus especially on growing our cash generation while continuing to invest in our business. Our 2025 adjusted free cash flow, including interest rate swaps, has more than doubled since 2021. During that period, we have generated more than $3 billion of adjusted free cash flow while investing in subscriber acquisition spending sufficient to have grown our recurring monthly revenue balance by 9%.

Our focus on unit economics, facilitated by higher install revenue per unit, has contributed to that progress. We've also invested in the technologies and infrastructure that provide the foundation for the growth initiatives we have described today, and we will continue to invest in 2026. We believe our stock is very attractively priced, we have also prioritized capital allocation towards repurchase in recent years. Including dividends, we have returned $1.6 billion to shareholders since 2021. Our flexibility to do this is enabled by the refinancing transactions I mentioned earlier and are having repaid more than $2 billion of debt during that time. As we enter 2026, our commitment to shareholder returns is stronger than ever. We expect the initiatives Jim outlined to generate more growth, improve customer loyalty, and strengthen subscriber acquisition efficiency.

We are targeting 1 million more subscribers by 2030 with growth both in our core markets and adjacencies such as DIY and aging in place or health applications. We are targeting 11% attrition with loyalty from expanded use cases and our commitment to customer service. We are targeting a two-year revenue payback enabled by our broadened channel presence and reduced reliance on high-cost acquisition methods. We are consequently sharing today a multi-year financial framework that targets compounded annual growth rates of 5% for revenue, 10% for EPS, and adjusted free cash flow in excess of 10%. As part of our commitment to return capital directly to shareholders, we are today announcing a new three-year, $1.5 billion share repurchase authorization. We are maintaining our existing five and a half cents per share quarterly dividend.

Beyond direct shareholder returns, we also anticipate allocating more capital to M&A than we have in recent years. Some of this may be in the form of technology or capability development, as in our recent acquisition of Origin AI, and some may be in the form of footprint expansion or account acquisitions. We will also continue to responsibly manage our debt levels. While we are very comfortable with our current capital structure, we anticipate continuing to reduce leverage, targeting 2.5x adjusted EBITDA. Relative to our longer-range framework, we expect 2026 will have very strong cash generation for which we are targeting 20% growth, which is above our multi-year framework with some offsetting pressure in 2027 from higher cash taxes and interest next year.

We expect lower 2026 growth in revenue and EPS, both of which we expect to be approximately flat to 2025. This reflects our prioritization of cash generation in share repurchases. We are also investing approximately $50 million during 2026 in the product technology, service, and go-to-market initiatives Jim described. Like all companies, we face an uncertain tariff environment, and our guidance includes approximately $45 million in additional subscriber acquisition costs from tariffs. Our guidance does not include the purchase accounting effects of our Origin acquisition. We will provide an update on this on our next call. We expect this year's full-year cash generation to be skewed towards the first quarter, driven by seasonally lower SAC spend and several timing items. To conclude my remarks, I want to emphasize why we see ADT as such a compelling investment.

We own the most trusted brand in the smart home security space. Our valuation is underpinned by a stable, resilient, and recession-resistant recurring revenue base. We enjoy an unmatched footprint and scale with an unwavering commitment to delivering peace of mind. We increasingly own proprietary technologies and are leveraging artificial intelligence to improve both service and efficiency. We have demonstrated an ability to generate exceptionally strong free cash flow, which we have deployed in a disciplined fashion. Our flexibility from this cash generation and our efficient and well-laddered debt structure affords sufficient flexibility to return capital directly to shareholders. Overall, we are very pleased with our 2025 results and are excited by our future. Thank you again, everyone, for joining our call today.

Thank you also to our more than 6 million customers, our more than 12,000 employees, and to the first responders across the United States. Operator, please open the call to questions.