ADT Earnings and the Allure of Smart-Home Technology

Even when the broader stock market drops, a solid earnings report can push a stock higher. ADT (NYSE: ADT  ) delivered such a report today, as the leader in home security released its results for the September quarter and its full 2013 fiscal year. Yet as promising as the results were to investors, the biggest growth opportunity for ADT might well be not in its core home-security business but in the vast potential that broader offerings in smart-home technology could offer its customers. Let's take a look at ADT's earnings and then assess the opportunity that smart-home applications bring to the company.

A solid first year
In its first year as an independent company, ADT has continued to deliver solid growth. Recurring revenue grew by nearly 5% for the year, surpassing the $3 billion mark, and ADT now boasts a record high 6.5 million customers in its network. Despite its strength in the residential market, ADT also accelerated its growth rate in the small-business segment, showing 7% higher recurring revenue among its business customers. Even though it spent money acquiring Devcon Security and Absolute Security in its ongoing program to grow through buyouts, ADT returned $1.4 billion to shareholders through its dividend and an extensive share-buyback program.

The company also provided positive guidance for the coming 2014 fiscal year. ADT predicts that recurring revenue will rise another 4% to 5% next year, with further improvement in operating earnings and free cash flow growth of 5% to 10% pointing to a sustained upward trajectory for the business.

How ADT got here
Until last year, ADT was a division under the broader corporate umbrella of Tyco International (NYSE: TYC  ) , which has become famous throughout its history for spinning off many of its divisions to form separate businesses. With the spinoff last year, Tyco set free the largest home-security provider in the country, serving millions of customers and boasting an impressive growth rate in sales, customer counts, and cash flow from operations.

ADT has worked hard over the years at growing its business. Two years ago, ADT bought out the home-security division of primary competitor Brinks, building up its customer base and eliminating a major source of competitive pricing pressure. With one less major player in the industry, ADT was able to improve its retention simply by virtue of there being fewer viable alternatives for customers to use.

The promise of home automation
Perhaps the most important piece of ADT's report was the fact that the company boosted take-rates on its ADT Pulse service substantially during 2013, rising from 13% last year to 32% during the past quarter. Pulse is a smart-home technology offering that allows customers to monitor their homes remotely, with a wide variety of available functions helping homeowners go well beyond traditional security offerings. Homeowners can use Pulse to adjust their thermostats and lights, provide access for regular visitors like housekeepers, and provide notifications when children come home from school or contractors arrive to do work on their homes.

Of course, take rates don't automatically translate to signing up for the service, and ADT does face some competition in the space. Telecom companies like Verizon as well as cable providers using their presence in customers' homes to offer similar services. But with superior experience in dealing with home-related issues, ADT has big advantages over telecom and cable companies in giving customers the quality they'll demand.

ADT has plenty of room to grow, and smart-home technological advances should continue to make its Pulse service more attractive. That opportunity could prove to be ADT's biggest growth driver in the future.

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