The ADT Corporation’s (ADT) fourth quarter fiscal 2014 GAAP net income declined to $82 million or 47 cents per share from $96 million or 45 cents per share in the year-ago quarter. The year-over-year decrease in net income was primarily due to high operating costs during the reported quarter 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 $97 million or 55 cents per share in the reported quarter, versus $99 million or 46 cents per share in the year-ago quarter. The quarterly adjusted earnings exceeded the Zacks Consensus Estimate by 6 cents.

The Adt Corporation - Earnings Surprise | FindTheBest

For fiscal 2014, ADT reported net income of $304 million or $1.66 per share compared with $421 million or $1.88 per share in the previous fiscal. Despite higher revenues, earnings for fiscal 2014 declined year over year primarily due to high operating expenses. Adjusted earnings for fiscal 2014 were $369 million or $2.02 per share compared with $413 million or $1.84 per share in fiscal 2013. Adjusted earnings for the reported fiscal beat the Zacks Consensus Estimate of $1.97.

Quarter Details

Revenues for the quarter increased 4.4% year over year to $883 million and exceeded the Zacks Consensus Estimate of $872 million. Recurring revenues of $819 million, which accounted for 93% of total revenue in the reported quarter, was up 5.5% compared with the year-earlier period. Recurring revenue growth was largely driven by an increase in average revenue per customer, which was up 3.7% year over year to $42.32. ADT closed the quarter with 6.7 million customer accounts.

Earnings before Interest, Taxes, Depreciation and Amortization (:EBITDA) remained relatively flat year over year at $425 million. However, EBITDA before special items improved 6.3% to $458 million. Adjusted EBITDA margins before special items improved 100 basis points to 51.9% 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 51% of customer additions to propel customer base to over 1 million subscribers or around 16% of the total customer base of the company.

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 40 basis points to 13.5% on a sequential basis, while unit attrition in residential and small business channels was up 30 basis points sequentially to 13.2% due to relocations associated with the housing recovery and non-pay customers.

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.

During the quarter, ADT closed the acquisition of Reliance Protectron, Inc. – one of the largest security monitoring and installation companies in Canada. With the deal, ADT has strengthened its Canadian presence to better serve over 800,000 local customers with the best of products and solutions along with superior customer service in the security industry. In addition, the strategic buy will offer a steady revenue stream to ADT as Protectron reportedly has higher levels of customer retention than other major players in North America.

Balance Sheet and Cash Flow

Cash and cash equivalents at fiscal end 2014 were $66 million compared with $138 million in fiscal 2013, while long-term debt aggregated $5,096 million compared with $3,373 million in the previous fiscal. Cash from operating activities totaled $1,519 million for fiscal 2014 compared with $1,666 million in the prior-year period. Free cash flow before special items decreased to $54 million in the reported quarter from $91 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 35 million shares for $1.4 billion during fiscal 2014 under its $3 billion share repurchase program at an average price of $38.49 each.

Fiscal 2015 Guidance

ADT offered initial guidance for fiscal 2015. The company expects recurring revenues to grow 5%-6% with EBITDA (before special items) of $70 million-$100 million. Unit attrition rate is expected to be below 13%. Steady free cash flow (before special items) for fiscal 2015 is expected to be over $1 billion.

Moving Forward

We remain impressed with the strong quarterly and fiscal 2014 results for this Zacks Rank #3 (Hold) stock. Other stocks that look promising in the industry include Gartner Inc. (IT), Exponent Inc. (EXPO) and CBIZ, Inc. (CBZ), each carrying a Zacks Rank #2 (Buy).

Read the Full Research Report on ADT
Read the Full Research Report on IT
Read the Full Research Report on CBZ
Read the Full Research Report on EXPO


Zacks Investment Research