ADT Inc. Q2 2026 earnings call

Good morning, thank you for joining us today to discuss ADT's second quarter 2026 results. Speaking on today's call are Jim DeVries, our Chairman, President, and Chief Executive Officer, and Jeff Likosar, our Chief Financial Officer. Following their prepared remarks, we'll be joined by Omar Khan, our Chief Business Officer, we'll open the call for analyst questions. Earlier today, we issued a press release and an earnings presentation summarizing our results. Both are available on the investor relations section of our website. During today's call, we'll reference certain non-GAAP financial measures. Reconciliation 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. Our remarks today also include forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act.

These statements are subject to risks and uncertainties that are described in the earnings presentation and in our SEC filings. Actual results may differ materially. Please refer to our SEC filings for more details. With that, I'm happy to turn the call over to Jim.

Thanks, Elizabeth. Good morning, everyone, thank you for joining us today. I'll focus my remarks this morning mainly on the key highlights in the second quarter and our continued progress on the strategic priorities we shared earlier this year. I'll turn the call over to Jeff to walk through our financial results and outlook in more detail. Let me start with a few key takeaways from the quarter. We delivered a solid second quarter with continued strength in cash flow and disciplined execution across the business. Cash generation was again a highlight, with adjusted free cash flow, including interest rate swaps, up nearly 50% versus last year. Through the first half of the year, our strong cash generation has supported significant returns to shareholders totaling $684 million.

During the second quarter, Apollo sold its remaining holdings in a secondary offering, and following the closing of that offering, is now no longer an ADT shareholder. ADT repurchased 29 million shares in connection with that secondary offering, reflecting our conviction in the value of our business and our disciplined approach to capital allocation. Total second quarter revenue grew 2% to $1.3 billion, and our end-of-period recurring monthly revenue was $360 million. Adjusted earnings per diluted share was $0.23, flat to last year. Based on our first half financial performance, we are modestly raising our full year outlook, which Jeff will describe in more detail later on our call. Turning to our operational metrics. Trailing 12-month attrition remains at approximately 13%. Subscriber and recurring revenue trends remain consistent with the first quarter, with softness in our dealer channel and relatively stronger performance in direct.

Also during the quarter, we completed a bulk purchase of approximately 10,000 accounts. By comparison, last year's second quarter included a bulk purchase of approximately 50,000 accounts. As we've shared previously, the pipeline for quality bulks can be episodic, we'll continue to evaluate bulk and other acquisition opportunities with a focus on attractive economics. We're operating well in a dynamic and competitive environment, and our priority remains on generating strong economic returns while improving core metrics. This includes balancing growth, retention, and cash generation in a way that drives long-term value creation. We remain focused on the strategy we laid out earlier this year. We believe ADT is well-positioned as the leader in smart home security, with a differentiated model built on our trusted brand, professional monitoring, and integrated technology platform.

We continue to invest in three priority areas during 2026: product technology, service excellence, and customer acquisition efficiency improvement. Let me briefly walk through how we're executing against our key initiatives. First, on product technology. We continue to expand the capabilities of our ADT+ ecosystem and advance our roadmap to include more intelligent, connected solutions. As part of that evolution, we broadened our reach this quarter with the launch of ADT Blu, a lower-cost, self-installed security solution that pairs the convenience of do it yourself setup with the flexibility of the ADT+ platform and professional monitoring. While it is very early, we are pleased with the customer receptiveness and reviews. Separately, our third-party dealer network, which has historically represented more than a third of our gross additions, is beginning to transition to the ADT+ platform.

We expect to migrate dealers onto our proprietary ecosystem in phases over the next year. Through the first half of this year, approximately 30% of our new customer additions were on ADT+. We are also making progress on our path to commercialization of a new presence sensing offering based on the technology we acquired earlier this year. We advanced manufacturing and integration of a Wi-Fi based smart plug that will bring privacy preserving presence sensing into the ADT+ platform for security and aging in place use cases. We expect customer pilots to begin this fall ahead of a planned launch in early 2027. Next on our initiatives is service excellence, where we remain focused on improving both customer experience and operating efficiency. We are seeing good momentum from our AI initiatives.

During the quarter, we combined AI-driven call routing with our virtual AI agents to improve first call resolution and reduce transfers. As a result, we handled nearly 20% fewer customer contacts through human agents and reduced service tickets by a similar amount, all while achieving improved customer satisfaction. Our deployment of these technologies is generating both a better customer experience and more efficient service model, including cost savings. Looking ahead, we will be expanding AI across the enterprise. In the third quarter, we will begin transcribing and analyzing our sales and service calls, enabling customers to engage with our virtual agents through SMS and rolling out AI-enabled fleet safety technology across our technician fleet. These efforts are designed to improve responsiveness, increase containment, and ultimately drive better outcomes for both our customers and our business, including customer retention and sales conversion.

We believe we're still in the early stages of this opportunity, and that these initiatives will be a meaningful contributor to both growth and margin expansion. Importantly, ADT employees continue to handle situations where human expertise matters most, such as during emergencies or when an on-site, highly trained service technician is the best way to resolve a customer issue. In the third area, customer acquisition efficiency, a key objective this year is migration to lower cost sales tactics and channels. A highlight in our quarter that I already mentioned was our ADT Blu launch, which is now available through phone and online channels, including Amazon. This offering broadens ADT's reach to more value conscious and DIY-oriented customers, a market segment we have not historically targeted. Over time, it also gives us a path to convert a subset of these customers to our professionally monitored solutions.

During the second half of the year, we will scale our presence on Amazon and build ADT Blu momentum through additional advertising. We expect volumes to begin to grow in the third and fourth quarters. Beyond ADT Blu, we're continuing to drive efficiency across our go-to-market activities, including rationalizing spend and our highest cost channels. As we've said, some of these changes may temporarily affect subscriber additions but are designed to improve our long-term returns. We're working to improve the economics in our most costly channels as we optimize long-term economics. Through these changes, our direct DIFM sales engine continues to perform well, with residential adds up in the high single digits and SMB up mid-single digits for the quarter. Across all of these key initiatives, our focus is consistent, driving better customer engagement, improving efficiency, and ultimately supporting more sustainable growth.

In closing, our financial performance demonstrates the resilience of our model with strong cash generation, disciplined cost management, and consistent capital allocation. I want to thank our employees, partners, and customers for their dedication and their contributions through the first half of the year. I'm excited about the opportunities ahead. With that, I'll turn the call over to Jeff.

Thanks, Jim, and good morning, everyone. I'll start by adding some detail on our second quarter results and then share an update on our outlook for the remainder of the year. As Jim noted, we again delivered solid financial performance with very strong cash generation as a continued highlight. Adjusted free cash flow, including interest rate swaps, was $406 million, up $133 million, or 48% compared to last year. On a year-to-date basis, we have generated $820 million, up more than $300 million, or 64%, versus the prior year. This result was driven primarily by working capital timing, lower cash taxes and interest, and lower subscriber acquisition spending. Our cash flow was also stronger than we expected entering the quarter due to the benefits of some tax planning progress and working capital management as we repurchase shares, including in Apollo's secondary offering.

On the top line, we delivered total revenue of $1.3 billion, up 2%. Monitoring and services revenue was down 1%, with an ending recurring monthly revenue balance of $360 million, reflecting the revenue loss from the multifamily business we divested last October. Installation revenue was $230 million, up 17%, due to a higher mix of outright equipment sales. Adjusted EBITDA for the quarter was $671 million, and adjusted income from continuing operations was $180 million, or $0.23 per diluted share. On a year-to-date basis, our adjusted EPS is $0.47, up $0.03. Beyond the effect of revenue and gross margins, our earnings reflect ongoing efficiency actions and cost controls, some offsetting investment in growth initiatives, and increased amortization, including from our Origin acquisition. On a per-share basis, we also benefited from lower share count due to the repurchases enabled by our cash generation and efficient capital structure.

We added 190,000 gross new subscribers in the quarter with $11.9 million of RMR. As Jim mentioned, we had fewer bulk account purchases than last year, along with softness in our dealer channel, which we partially offset with growth in direct subscriber and RMR additions. Net cash SAC was $345 million, down 7%, driven primarily by fewer bulk purchases, partially offset by the timing of consumer financing flows. Attrition was 13.1%, flat to last quarter, with revenue payback also holding at 2.3 years. Turning to capital allocation, a core attribute of our business is consistently strong cash generation, and we continue to deploy that capital in a disciplined manner to drive returns. Through the first half, we directly returned $684 million to shareholders, including $594 million to repurchase and retire 86 million shares and $90 million of dividends.

Through this week, we have repurchased approximately 89 million shares, and we have approximately $885 million remaining under our $1.5 billion three-year repurchase authorization. Our overall capital structure and liquidity position remain strong, with our $800 million revolving credit facility undrawn. In May, we secured an additional $100 million of borrowings under our 2030 Term Loan A. While we used these proceeds to fund repurchases, we expect this incremental debt to ultimately support our August 2027 notes refinancing. We ended the quarter with net debt of approximately $7.4 billion, with leverage of 2.8 times adjusted EBITDA at a weighted average cost of approximately 4.3%. We remain very comfortable with our capital structure, and our overall capital allocation priorities are unchanged. We will invest in the business where returns are compelling, both organically and through periodic acquisitions.

We will return capital directly to shareholders, we will maintain a healthy balance sheet with an objective of further reducing leverage, targeting 2.5 times. Turning to our expectations for the rest of the year, we are modestly raising our full year 2026 outlook based on our year-to-date performance and share repurchases and expected progress in the second half. We now expect total revenue to grow approximately 2%, mainly reflecting installation revenue trends. We expect adjusted EPS to also grow 2%, with the improvement a result of the timing of share repurchases. We expect adjusted free cash flow to grow approximately 30%, with the improvement driven primarily by tax planning and working capital management. While we are very pleased with our full year 2026 cash generation, we do expect higher cash taxes and cash interest in 2027.

As Jim outlined, our primary focus during the second half is execution of our investments in growth initiatives and improvement in our new subscriber additions and retention. Within the second half, we expect fourth quarter income to be somewhat higher than the third quarter due to the timing of some of these investments, seasonal dynamics, and other items. We expect revenue and cash to be similar in the third and fourth quarters. Our full year outlook and our performance through the first half reflect the resilience of our model and our disciplined execution, while we also continue to invest in our business for the long term. I'm very excited by the advancement in our technologies and capabilities and the new ways we will be able to serve our customers to deliver peace of mind with innovative offerings, unrivaled safety, and a premium experience.

Thank you again for joining us and for your continued support. Operator, please open the call for questions.