The ADT Corporation (ADT) reported strong first quarter fiscal 2015 results on solid execution of operational plans, driven by a double-digit gross subscriber growth and lowest levels of customer attrition since its inception as a public company over two years ago. GAAP net income for the reported quarter was $72 million or 41 cents per share compared with $77 million or 39 cents per share in the year-ago quarter.
The year-over-year decrease in net income was primarily due to merger and restructuring costs associated with being a standalone public company. However, earnings improved year over year on a per share basis due to lower number of outstanding shares in the reported quarter.
Excluding non-recurring items, adjusted net income stood at $89 million or 51 cents per share in the reported quarter, versus $86 million or 43 cents per share in the year-ago quarter. The quarterly adjusted earnings exceeded the Zacks Consensus Estimate by 2 cents.
Quarter Details
Total revenue for the quarter increased 5.7% year over year to $887 million and exceeded the Zacks Consensus Estimate of $882 million. Recurring revenues of $825 million, which accounted for 93% of total revenue in the reported quarter, was up 6.5% compared with the year-earlier period.
Recurring revenue growth was largely driven by an increase in average revenue per customer, which was up 5.3% year over year to $47.28. ADT closed the quarter with 6.7 million customer accounts, representing a year-over-year improvement of 4.3%.
Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) increased to $427 million from $411 million in the prior-year period. EBITDA before special items improved 6.3% to $453 million. EBITDA margins before special items improved 30 basis points to 51.1% due to productivity improvements and cost efficiencies.
In its earnings release, ADT provided key insights in some of the initiatives it has taken to accelerate growth, improve cost efficiencies, and optimize capital structure. In order to capture a greater pie in the market, the company invested heavily in its ADT Pulse platform and launched several new products. ADT Pulse take rates climbed to 53.4% of customer additions.
The company added over 130,000 Pulse customers in the quarter and upgraded over 31,000 existing customers to Pulse to account for around 18% of the total customer base. Gross customer additions in the quarter were 262,000, which represented a year-over-year increase of 13.4%.
During the quarter, ADT aimed to reduce customer attrition by initiating tighter credit screening policies, implementing resale efforts and customer loyalty programs. Revenue attrition improved 120 basis points to 13.0% year over year, while unit attrition in residential and small business channels was up 70 basis points to 12.9% due to a stable housing market, strong resale efforts and robust customer loyalty programs.
In order to reduce subscriber acquisition costs, ADT implemented new technology and installation procedures and optimized lead management, sales conversion and marketing activities across all channels. The company reaped huge benefits from all these initiatives as exhibited by improvement in sales leads, healthy demand for ADT Pulse, traction in small business and mid-size commercial space, higher gross additions over prior year and lowest levels of customer attritions.
Balance Sheet and Cash Flow
Cash and cash equivalents at quarter end were $70 million, while long-term debt aggregated $5,254 million. Cash from operating activities totaled $369 million for the reported quarter compared with $335 million in the prior-year period. Free cash flow before special items decreased to $46 million in the reported quarter from $68 million in the prior-year quarter due to higher customer acquisitions and other investments, as well as higher interest burden on incremental debt in the quarter.
ADT repurchased 2.9 million shares for $94 million during the quarter under its $3 billion share repurchase program at an average price of $32.35 each. Subsequent to the quarter end, ADT announced a 5% year-over-year hike to its dividend payout. The quarterly dividend now comes to 21 cents or 84 cents per share on an annualized basis.
Moving Forward
We remain impressed with the strong quarterly results for this Zacks Rank #4 (Sell) stock. Other stocks that look promising in the industry include CoreLogic, Inc. (CLGX) and Corporate Executive Board Co. (CEB), both carrying a Zacks Rank #2 (Buy) and Stantec Inc. (STN) carrying a Zacks Rank #1 (Strong Buy).
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