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ADT Inc. (ASX:ADT)
Q4 2017 Earnings Conference Call
March 15, 2017, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the ADT Fourth-Quarter and Full-Year 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Jason Smith, Senior Vice President of Finance and Investor Relations. Please begin.

Jason Smith -- Senior Vice President of Finance and Investor Relations

Good morning and thank you for joining us on ADT's Fourth-Quarter 2017 Earnings Conference Call. This morning, we issued a press release with our fourth-quarter 2017 results. A copy of the release is available on our website at investor.adt.com. Today's call is being webcast and is accompanied by a slide presentation, which is also available on our website. Please refer now to Slide 2 of that presentation.

Our remarks and answers will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we have described in our press release issued this morning, a prospectus related to our initial public offering filed with the SEC, and other filings we make with the SEC. Please note that all forward-statements speak only as of the day of this call and we disclaim any obligation to update these forward-looking statements.

During our call today, we'll make reference to non-GAAP financial measures. Our forward-looking non-GAAP financial measures exclude special items which are difficult to predict and are primarily dependent upon future uncertainties. For a complete reconciliation of historical non-GAAP to GAAP financial measures, please refer to our press release issued this morning and our slide presentation, both of which are available on our website at investor.adt.com. Joining me on the call today are our CEO, Tim Whall, our President, Jim DeVries, as well as our CFO, Jeff Likosar. I'll now turn the call over to Tim.

Timothy J. Whall -- Chief Executive Officer

Thanks, Jason, and good morning, everybody. Welcome to our first call as a public company, and personally, it's my first call as the CEO of a public company. I'm happy to be with you. I'd like to thank the current shareholders for the trust you've placed in us. It was a pleasure meeting many of you out on the roadshow. At this end, it looks like we're doing the roadshow with none of you here -- I'm sitting around with Jeff and Jim again -- but we look forward to sharing the results and being able to talk about how the actual business is doing. So, it's a pleasure to be with you.

Fourth quarter for us caps a very strong 2017 fiscal year. If I look at it in a baseball term, for spring training, I think we went five for five. Revenue was up year over year, earnings were up year over year, cash flow was up year over year, attrition came down year over year, and subscriber acquisition cost was reduced year over year, so we're feeling good about how '17 looks and what we'll share with you in '18.

This morning, Jim and I will briefly share our view of the company and give you a high-level operating approach on how we drive shareholder value. As I think you guys know, it's not our first time with this model and playbook. We'll share our progress to date, and then Jeff, of course, is going to share financial results with you, and then we'll open up for Q&A. So, as you know, ADT has a lot of attractive company characteristics. We're five times the next largest competitor in our fragmented and growing market. We're uniquely positioned at the center of security, smart home, and automation with 2 million-plus interactive customers already. 90% of our business is contractually recurring, high-margin revenue, and we operate in a recession-resistant industry.

This may be my first public CEO call, but it's not my first day doing this. I literally grew up in this business since I was 13, working in a small family business. I had a chance to compete with ADT almost my entire life. It's truly an honor and a privilege to be able to lead the ADT at this point in my career. It's an iconic brand and one that everyone in the space is well aware of. So, our team has made significant progress to date. Probably, the highlight of the show -- as Jim will talk about -- is 200-plus basis points of attrition regardless of how you measure that. We substantially reduced our subscriber acquisition spend, and that results in a substantially changed cash flow profile of the business.

We're in a very early part of the opportunity. Most of us have been in this less than 24 months as we get going. We had a heavy focus on integrating two companies last year, and now, of course, most of that work has been done. We're just now using one common set of data to drive decisions. As you know, ADT is out of the commercial space for several years, but obviously, we're back in it now. It's a well-known name and we're accelerating our reentry.

As you move along with the slide deck, go to No. 5. It's a good slide for us. At the core, we're a service provider. We're out there with our technicians in homes and businesses with an unmatched footprint, unmatched capabilities, and scale. Our mission is to protect what matters most to people. Trust is the key attribute of our service. Our typical customer buys professional installation and maintenance of those phones. We're not a manufacturer. It works well for us because we're product-agnostic. Jim and the team have done a terrific job expiring some of the contracts that we inherited as legacy equipment and have done a great job partnering with some manufacturers to deliver best-in-class products that will roll out in 2018.

We do partner with a lot of brands, as you know, whether it's Amazon for the Alexa, Google with their Nest, Sprague with their locks, Honeywell, et cetera. We're in a unique position because we can partner with the largest brands wherever it's popular in that home for security or home automation. We're compatible as we move forward. Our average install, just to give you some facts and figures, takes about six hours. We put in 15 to 30 devices in that time and we maintain those systems after we do the initial installations, whether that's with scheduled maintenance service, preventive maintenance, or service on demand. Those are all things that we provide.

As a service provider, we've got a couple main goals. One is to continue to improve the level of service we provide our customers. In '17, we did a lot with speed of answer and moving our call centers to live answers, with people picking up the phone in one ring and two rings. We also did a great job of delivering our technicians out inside of 24 hours to respond when a tech was needed. Obviously, as we go forward, we'll look to improve those levels of service. You can picture a day when a customer can go to their app and pick the time they'd want our tech to show up and have us show up in that window for them.

Also, as a service provider, how do we bring new services to bear into the marketplace? This has gone very well for us early in '18. We introduced our Security On the Go service and we'll talk about that a little longer. Also, protecting the network, and if Jamie, our CMO, was on the phone with us right now, she would tell us, "Hey, listen, we're trying to redefine security so it's not just the premise, but it's also the premise, the network, and the person when they're outside the home." So, again, a big key to us is great service, trusted provider, and owning that last five feet into the home.

Slide 6 is our high-level operating approach. It's a playbook that we've used in all previous companies. The goal is to drive cash flow. Three components of that: Retain the existing customers, acquire new customers more efficiently, and obviously, optimize adjusted EBITDA. I'll take the first one at the top: Gross attrition. The customer is at the center of all we're doing. Jim is going to talk more about this. We do measure gross versus net attrition. There's some conversation about that. To me, it's simple. Gross attrition is what it is. The fact that net attrition can improve if gross attrition actually goes up -- that's not intuitive to me. Gross attrition -- how many dollars left, how many customers left. It's very pure, it's true north, and I don't know about you, but I like to read the stats with as few footnotes as possible. Again, this one does it for me.

2.) In terms of acquiring customers more efficiently -- again, for us, this is RMR, and again, another discussion in terms of units versus total dollars. I've never looked at it as units. Whether we've got our general managers out there in the field and they're paid and compensated to grow their markets, whether they bring me one customer that pays me $1,000.00 or 100 customers that pay me $10.00 a month, it's still $1,000.00 for them, and again, we don't limit the way they go to market. Each one of those people runs their own business. They understand where the sweet spot is and how to achieve that for us. RMR growth is a core to what they're expected to deliver for us.

When you look at EBITDA, this has been a good story. We've improved by 500 basis points since 2015. Outlier management is the key for us here. Understanding the differences in terms of how our branches perform against one another. When you look at the numbers at ADT, each of those numbers is basically the combination of 150 to 200 smaller numbers built up into that and our ability to identify and isolate the smallest numbers, manage small, and move it to the middle has been a key tool for us that's been very successful. Jim and the team have done a great job shrinking the variances in each one of these areas, whether it's for attrition, subscriber acquisition costs, or EBITDA itself.

As I mentioned earlier, our daily scorecard is our primary tool that we rolled out that allows the branches to see the accumulation of all the transactions they did yesterday, and again, they're measured against budget, they're measured against themselves, they're ranked in terms of top to bottom across the company as we go forward. It's a great tool as we continue to drive efficiencies inside the business. At this time, I'd like to turn the call over to Jim and let him talk more about attrition and customer acquisition costs.

Jim DeVries -- President

Thanks, Tim. We have a number of operating improvements in the fourth quarter and throughout 2017. I'd like to share some brief thoughts on one of them: Customer retention. As many of you know, we're focused on key customer retention metric, and that metric is gross attrition. This is defined as recurring revenue lost due to customer cancellations divided by recurring revenue enforced. Focusing on gross attrition enables our organization to view any single customer lost as an opportunity to improve -- or, better said, an opportunity to save. On the other hand, net attrition -- because it includes resales -- can dilute or even overshadow the real opportunities that exist to improve customer attrition. In short, gross attrition is a truer and more accurate reflection of customer sentiment.

You can read on Slide 7 that legacy ADT gross attrition was consistently above 16% on a trailing 12-month basis, and we're now below 14%, finishing the calendar year at 13.7%. Admittedly, we had the benefit in Q2 of 2016 of combining legacy ADT with Protection 1, which had much better attrition levels, but you also see on the chart that since then, we've continued progress each and every quarter on this key customer retention metric.

This improvement can be attributed to two strategic actions. First, smarter, more disciplined customer selection. This primarily includes credit screening and a greater focus on the up-front payments from customers. The higher the customer's initial cash outlay in the system, the greater their retention. The second parallel lever we've used to improve attrition is related to customer service -- most notably, nothing short of transformational improvements in our call center performance as well as field service -- that is, on-site service to the customer's home or place of business.

While we've already made significant strides, all of us are confident and committed to continued improvements in customer retention. Every year we add customers under the parameters of our Smart Growth initiative, we will add stickier customers to our base, plus we'll continue to advance our operating and customer service improvements. While we acknowledge that improvements going forward may not be as rapid as those delivered in the last 18 months, we remain quite optimistic that meaningful improvements lie ahead.

Moving to Slide 8, we wanted to share a little more color than we described on the roadshow as to how we approach subscriber acquisition, including some additional detail on the mix of our business. Different types of customers have different characteristics, and our focus is on maximizing the returns and cash flows for every customer we acquire. A key measurement of customer acquisition efficiency is revenue payback, which is simply our net cost of customer acquisition and installation expenditures divided by the recurring revenue we acquire over time. Compared to 2015, the payback has improved from 2.7 to 2.5 years. You can see a summary of our customer profile in the upper left corner of Slide 8: Approximately 7.2 million customers, with the majority of our revenue base generated by residential customers.

Within residential and small business, we've improved revenue payback results by focusing on three goals: Higher up-front revenue, more efficient marketing spend, and productivity improvements. Within large commercial and multisite, we've been able to leverage the proven playbook from Protection 1, now under the brand and larger scale of ADT. We continue to trend positively. These customers tend to have better attrition and revenue payback characteristics compared to residential customers.

Like improvements in our attrition metrics, the efficiency in SAC has driven better unlevered cash returns over the last 24 months. While the economic characteristics of our channels are different, the returns are very healthy, and as with attrition, we see a path of continued opportunity to improve these returns by focusing on the three levers Tim mentioned earlier: Retaining existing customers, improving our cost-to-serve margins, and acquiring customers more efficiently. With that, let me turn it over to Jeff Likosar.

Jeff Likosar -- Chief Financial Officer

Thanks, Jim, and thanks, everyone, for joining the call today. While Jim just shared some detail on customer dynamics beyond what we described during our roadshow, I'm going to spend the next few minutes summarizing our fourth-quarter results, and we'll focus on the core metrics we use to evaluate and monitor progress against the top objectives Tim and Jim mentioned earlier. I also want to note that we will be filing our 10-K later this afternoon, which will include more detail.

First, on Slide 10, we are very pleased to have continued our strong progress, lowering attrition by 110 basis points year over year, as Jim described. As a reminder, every 100 basis points of attrition equates to an approximately $100 million reduction in the annual cost we'd otherwise incur to replace lost revenue, so this is a key value driver for us. Our total revenue grew by 5% in the fourth quarter to $1.106 billion. Our monitoring and services revenue of $1.012 billion grew 2% during the fourth quarter, consistent with the rest of 2017. As a result of our attrition improvements, we've been able to maintain this revenue growth despite our tighter customer selection process.

Installation and other revenue grew by more than 50%, about half of which was driven by improvements in outright sales revenue across our business, with the remainder split between new revenue from our 2017 acquisitions and incremental amortization of deferred installation revenue. I also want to mention that, as required, we are adopting the new ASC 606 revenue accounting standard in the first quarter of 2018, which we do not expect to affect our overall revenue in a material way. It will, however, result in a very small amount of revenue shifting to installation rather than monitoring and services during 2018.

Slide 11 highlights our progress in customer acquisition efficiency. The left side shows our customer revenue payback, which we have reduced from 2.7 to 2.5 years. As Jim explained, this metric reflects the number of years it takes us to recover our net subscriber acquisition costs, or SAC, through the generation of new recurring revenue in a period. SAC is comprised of our expenditures to acquire new customer revenue and install equipment net of revenue we collect upon installation.

The right side of the page shows our SAC spending for the fourth quarter. As many of you heard us explain on the roadshow, the majority of this spend is on capitalized subscriber system assets, where we retain ownership of the equipment or where we purchase accounts generated by our dealer network. The remainder is expensed as incurred. This portion of SAC is comprised of the installation costs associated with outright sales of equipment net of up-front revenue, along with other period costs such as advertising and certain selling expenses.

In aggregate, you can see that we reduced our SAC spend by 4% during the fourth quarter while we grew our recurring revenue additions by 2%. Our progress results from improved effectiveness in advertising and selling activities, efficiencies in labor installation, and access to generate more up-front revenue at the time of installation. We are encouraged by the progress we've made during 2017 in this area.

Moving to Slide 12, you can see we generated $598 million of adjusted EBITDA in the fourth quarter, 8% higher than last year. Our performance was driven by margin on increased revenue, the lower expense net SAC I described, and other cost reductions partially offset by some service-driven investments. As a percentage of monitoring and services revenue, we improved 59.1% in the fourth quarter of 2017 compared to 55.6% in the prior year.

We are also happy with our cash net income performance, as you can see on the right side of the slide. Cash net income is adjusted EBITDA less capitalized SAC, cash interests, and cash taxes. We grew from $11 million last year to $76 million this year, and we similarly improved our free cash flow before special items. Our cash generation progress is evidence of the strength of our business model and results from the effect of balancing of our core objectives to reduce attrition, improve customer acquisition efficiency, and optimize our EBITDA.

Slide 13 summarizes the same key metrics I just described on a full-year basis, and we are very pleased with our overall total 2017 performance, which exceeded our internal plans. We improved attrition by more than 100 basis points, improved our revenue payback from 2.7 to 2.5 years, and grew our EBITDA by 8%. We also substantially reduced our SAC spend and we grew cash net income by more than 20%. We achieved these results while also integrating our ADT and P1 field operations in several related IT systems and platforms throughout the company, and while also making meaningful improvements in our customer service culture and capabilities, all of which we expect to generate benefits in 2018 and beyond.

I will be brief on Slide 14, which shows our cash net income and free cash flow in a bit more detail. As Tim said, we are focused on optimizing cash generation over time, and toward that end, we generated more than $400 million of free cash flow excluding special items in 2017, which was up more than 20% compared to 2016 despite only a partial year's interest expense in 2016.

Slide 15 highlights our capital structure. As you know, we generated $1.47 billion from our January IPO. We used the proceeds to redeem $594 million of principal on our second-lien notes and escrowed $750 million to redeem our Koch preferred securities later in the year. Pro forma for the transaction and preferred securities redemption, our net debt is $9.75 billion, and we are levered at 4.1x.

As we described during the roadshow, we plan to deploy the cash we generate in 2018 and subsequent years toward a combination of the things you see on the right side of the slide. We will invest in organic growth as we see strong opportunities and we will selectively pursue acquisitions, especially in the commercial space.

As you read in our press release, we also declared today a quarterly dividend of $0.035 per share to begin returning some capital to shareholders. We will also use excess cash to pay down debt and delever over time with an objective to reduce leverage into the 3s during 2018. Overall, we are comfortable with our leverage and liquidity positions.

Turning to Slide 16, I will share some perspective on 2018. We will continue to execute our strategy to drive additional progress in each of our key objectives this year. We are planning on continued attrition improvement, moving us into the lower 13s. We expect total revenue growth of 3% to 5%, the result of lower attrition combined with new recurring revenue additions and more installation revenue during the year. As in 2017, we expect installation revenue to grow more quickly than monitoring and services.

We are guiding to EBITDA in a range of $2.415 billion to $2.335 billion, the result of revenue growth and continued efficiency improvements. Also, as you see on the slide, we expect free cash flow to be in a range of $475 million to $525 million at a budgeted level of new revenue additions. One specific cash-related item I want to mention is cash taxes. We finished 2017 with $3.7 billion of net operation losses, and after analyzing effects of the 2017 tax reform package, we still expect to be a very low-cash taxpayer, as we described in our S1. Overall, we are very optimistic about our prospects to deliver another strong year in 2018.

I want to conclude by reiterating my excitement for our business and the progress we've made during 2017 along with my enthusiasm for the opportunities in front of us. Now, I'm going to return the call to Tim, who will share some thoughts on our growth framework.

Timothy J. Whall -- Chief Executive Officer

Thank you very much, Jeff, and as guidance reflects, we expect '18 to be another five-for-five year, as we executed on the strategy, earnings to go up, revenue to go up, cash flow to go up, attrition to continue coming down, and subscriber acquisition costs to keep coming down. I'll talk a little bit about growth. You guys are familiar with the three basic buckets that we've put it in. Obviously, the core business is our consumer business, growing out our commercial plans, and then what we call our "new markets" area. You see a little bit of the puts and takes that's been illustrated for you with A, B, and C below to get you into a 4% to 5% annual growth, along with some percentages of how they go in each of those buckets.

Of note is we don't really put anything into the new markets and market growth. We put it into the core business as well as commercial expansion. Obviously, on the core side, it's no different than in our operations, which have gone very well. There's plenty of variance between performance, and whether that's in self-gens in a particular branch office, or a closing rate, or mono leads generated, we've got work to do to really start to fine-tune that. We've got some outstanding players at the top of the house, we've got some great folks in the middle, and we're going to work hard to get those lower numbers into the middle to continue to grow this part of the business.

Commercial expansion is just how fast, how much, and we're going to stay disciplined as we move forward. You saw some small acquisitions where we acquired some talent. Most of that goes with they sell products, and then we come in there and show them some of the services we're able to provide, and then we grow from there. It's a very low-cost RMR to create, so we'll continue to push forward. Our national accounts group had an outstanding year in 2017 and our commercial growth was above plan as well.

So, if I look at new markets and new growth, this is again where we bring new services to bear, so if you think of our ADT Go feature, that's security outside the home. It's a great feature if you have children you want to keep an eye on, you want to know where they are, they got to school, they got home, et cetera, that's great. You can picture all the colleges across the country and students out there having easy access to ADT's SOS. You've got press of a button, you've got help in a minute's notice out there. It also gets the young people thinking about ADT in a different way than their parents might have as they go forward.

You look at that cyber offering -- we've done a great job. That's how we bought Data Shield in the fourth quarter. That gives us a nice platform. Jay Darfler and the team of [inaudible] have been working very hard on our consumer offering. You can imagine you're going out there with your iPad, your laptop, your cellphone, et cetera, into the different places and logging on to public Wi-Fi. Imagine if we were able to give you your own private Wi-Fi as part of ADT. Again, as Jamie would say, redefining the security to be not just the premise, but the premise, your network, and people outside the home. So, this is what they've been working on.

We obviously made a strategic partnership with Samsung last year for the less sophisticated systems and the DIY market, and again, for us, we continue to think for the small apartments, getting those buyers to think ADT at an earlier point in their purchasing careers -- not someone who's going to put 20 to 25 of protection, but two to three points of protection that may provide the security that they need. We'd love it if they started that relationship with ADT earlier in their lives and built on it from there.

As we go forward, I'm optimistic about 2018, excited about what we've been able to do in '17. It's a good chance for me to say thank you to the great men and women at ADT for what they've delivered to date, the improvements they've delivered to the business, and again, we're looking forward to getting on these calls and talking about the performance of the business for the rest of this year. So, with that, I'll turn the call back to the operator and we'll open it up for question and answer.

Questions and Answers:

Operator

Thank you. At this time, we will conduct a question and answer session. We ask that all the analysts please limit themselves to one question and one follow-up and reenter the queue. If you would like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing *. One moment please while we poll for questions. Our first question comes from Toni Kaplan with Morgan Stanley. Please proceed with your question.

Toni Kaplan -- Morgan Stanley -- Executive Director

Hi, good morning. Could you talk about the potential impact that you see from Amazon's acquisition of Ring? Do you think that this increases the threat from new tech offerings given Amazon's scale? Are you able to go after the monitoring for this contract? Maybe discuss how you see your positioning in the market given that Amazon and Google are in this home automation space, encroaching into home security. Thanks.

Timothy J. Whall -- Chief Executive Officer

I think you see a little change in the competitive landscape. When we were trying to put this deal together a few years ago, it was more AT&T, Verizon, Time Warner, Comcast coming in -- more of a service offering. Now, you see Google Nest coming out there with products, you see Amazon, potentially Apple coming out more on the hardware side and getting things started with more of a DIY offering, some of what I will term as a less sophisticated system with a few devices that comes out there.

So, again, with our typical buyer, our technician is in the home for six hours with 15 to 30 devices, so I think it provides -- our hope is that it gets people buying systems sooner with more people in apartments, and some of these applications are very good. That's why we partnered with Samsung, to make sure ADT was participating in that market space as well. But, the idea that someone can buy a couple pieces of gear, put it in themselves, and get started, and then perhaps even want to get the professional monitoring -- we think that's positive.

I haven't had a conversation with anybody about doing the monitoring for them at that point. I have been in conversation with Amazon about Amazon Key and some of the other features. But again, I think this is positive. You see a change going from service provider to trying to sell equipment as a DIY and entry-level offering, so hopefully, that's the thing that -- for years, we've talked about driving penetration rates past 20%, and perhaps this is one of the things that'll help us with that.

Toni Kaplan -- Morgan Stanley -- Executive Director

Okay, great. And then, I really like the disclosures in Slide 8 with the customer account broken out within residential and commercial. Basically, one of the themes that I've been hearing from investors since January is they'd like to see subscriber count and RPU. That would help with their modeling. So, could you just talk about whether it would make sense to provide these on a regular basis and directionally about your expectations for the year? So, should we expect a modest or deliberate decline in subscriber account, but that's offset by pricing and attrition, or is that not the right way to look at it? Thanks.

Timothy J. Whall -- Chief Executive Officer

Again, when we look at our model out there, we run a general manager out there as opposed to a siloed model by our sales channels. We look for RMR growth. Obviously, plenty of feedback in terms of what are the subscriber counts. I think as we shared on the roadshow, we basically instituted tougher credit checks. I think you saw a 9% drop in adds from '15 to '16, and '16 to '17 was 5%.

We're very pleased in the fourth quarter, and it was up 2%, so we feel like we got where we needed to go with that piece of the business. It really was answering a common question that was being brought to us out there. In terms of how we look at the business, RMR growth is what I'm anchored on, Toni. That's what we ask our branches to deliver. If they're particularly good in small business versus commercial or national in their area versus residential, what they're accountable for is delivering RMR growth for us. Jeff, anything you'd add with guidance?

Jeff Likosar -- Chief Financial Officer

We're just trying to be responsive to some of the questions we got on the roadshow and since, and therefore provided a little bit more information to show some of the dynamics between our different customer sets, and also on the page Jim talked about as well, to describe the comparison between the way legacy ADT looked at attrition on more of a net basis compared to the way we look at it on a gross basis, which was another question we got. So, hopefully, those additional disclosures help everybody understand our business a little bit better.

Toni Kaplan -- Morgan Stanley -- Executive Director

Thanks a lot. I appreciate the color. Congrats.

Operator

Once again, ladies and gentlemen, please limit yourselves to one question and one follow-up. Our next question comes from Manav Patnaik with Barclays. Please proceed with your question.

Manav Patnaik -- Barclays Capital -- Director

Thank you. Good morning, gentlemen. My first question is more on the commercial side. It's nice that you've already done two tuck-ins since the IPO and I think you had talked about a pretty healthy tuck-in M&A pipeline. I was just curious what the appetite would be for a larger asset because it sounds like some of the multi-industrial guys who own some of those might be willing to part with them, and I was just curious what your thoughts there would be.

Timothy J. Whall -- Chief Executive Officer

That's an interesting dynamic for us to contemplate, Manav. Obviously, as we shared, most of what we do is in acquisition every day with our resi accounts, commercial, and national, and frankly, a lot of the accounts Bobby brings us at the national level are bigger in scope than some of the acquisitions we're actually doing, but we've typically tried to get talent and finding where we can deploy greater talent that wants to join across the country and build out our footprint, which your suggestion would be very interesting to us were we to be able to have those conversations. We saw some of those assets come out of the marketplace. That would be very interesting for us.

Manav Patnaik -- Barclays Capital -- Director

Got it. That's helpful. And then, the broader question is in terms of improvement over the next three to five years -- the continued improvement, I should say -- I know you haven't set any targets, but if we look back at what you and your team did at P1, HSM, and so forth, would you characterize the opportunity here at ADT to be as good or better than what you did at those companies?

Timothy J. Whall -- Chief Executive Officer

I'd say it's as good because there's no reason -- there's nothing different. It's a little better because there's more opportunity with more branches, and when you use a tool like we do in terms of variance performance management and outlier management, always going for "Why is it a little different here?", and our historic ability to move those bottom numbers into the middle, we're very encouraged and we've got some good benchmarks of what we've been able to do in the past that we've said it targets for the team, and it's a competitive team. They want to do best in class for us.

Manav Patnaik -- Barclays Capital -- Director

Thanks a lot.

Jeff Likosar -- Chief Financial Officer

One thing I'd add there to remember is we're very early days on a lot of these improvements. In 2016, the company came together. A lot of time and effort was focused on integrating back-office G&A functions. Last year, there was a lot of effort integrating the field operation, and these tools like the scorecard we talked about, the concept of variance performance management, and the cultural changes to get the organization more focused on the customer -- those happened during the course of 2017 and aren't even complete yet, so we think there's a lot of opportunity in front of is.

Manav Patnaik -- Barclays Capital -- Director

Got it. Very helpful. Thanks, guys.

Operator

Our next question comes from George Tong with Goldman Sachs. Please proceed with your question.

George Tong -- Goldman Sachs -- Analyst

Hi, thanks. Good morning. Your free cash flow guidance at the midpoint for 2018 is $500 million. In 2017, you generated $403 million in free cash flow, so the increase is approximately $100 million. I would have estimated interest expense savings alone would generate about $85 million in an increase in free cash flows. And then, the attrition rate guidance of 13.2% for 2018 is improved from 13.7% in 2017 -- so, 50 basis points of improvement -- and that alone should translate into another $50 million in free cash flow increase, and that doesn't yet include benefits for margin expansion or SAC leverage. So, can you elaborate on the bridge for free cash flow growth going from 2017 to 2018 and what the specific components are?

Jeff Likosar -- Chief Financial Officer

Sure. George, our cash flow model is generally driven by EBITDA less how much we spend on subscriber acquisition costs. As I mentioned, we're a very low-cash taxpayer, and then, interest expense, of course. We're estimating our interest expense going down by something on the order of $60 million year on year, and then we have EBITDA growth. If you take the midpoint of the range, EBITDA goes up by about $70 million.

The difference in free cash flow and part of the reason we have a range -- the difference is how much we spend on subscriber acquisition costs and one of the things that we talked about on the roadshow that Tim mentioned briefly is we're in the process of turning from being in a mode where we have taken on fewer new adds year over year toward a mode where we take on more margin and more new adds year over year. So, we were up on revenue adds in the fourth quarter. We expect to be up on revenue adds as we go through the year. So, even though we will have some efficiency improvements on our subscriber acquisition costs relative to the revenue we take on, we do not expect to have the same reductions in absolute dollars of subscriber acquisition cost as we had in the last couple years.

George Tong -- Goldman Sachs -- Analyst

Got it. Very helpful. As a follow-up, I wanted to go back to the question around the Amazon Ring acquisition and the potential there for partnership. The company decided to forego a partnership with Nest earlier due to economic reasons, and the contract ended up going to Monitronics. Can you comment on what economic terms you would need to see in order to strike a successful partnership with Amazon Ring?

Timothy J. Whall -- Chief Executive Officer

We're a service provider with the brand, so again, there's some version of what we find to be attractive to us to provide that service as we go forward as opposed to an equipment arrangement, if you would. So, again from our side, it's our ability to serve, whether that's simply the 24/7 piece or whether that would be with technicians in the home. Those are the things that we would strive to deliver.

George Tong -- Goldman Sachs -- Analyst

Got it. Thank you.

Operator

Thank you. Our next question comes from Jeff Kessler with Imperial Capital. Please proceed with your question.

Jeff Kessler -- Imperial Capital -- Managing Director

Thank you. My first question is -- and, I've asked this question of Verisure and Maize, so you guys are fair game for it. What do you believe is the base case for the customer experience that you're looking for to gain not just the reputation, but gain new customers through referrals as well as improving the financials of those customers as they remain as your customers? At what point do you get that customer because you're doing it? At what point does one lose a customer because they can't produce that customer experience? Where is that line?

Timothy J. Whall -- Chief Executive Officer

As we said, we'd like to have a best-in-class customer experience. A big part of our sales pitch right now is to have -- if you're looking at a competitor, just dial their 800 number and see what happens. If that was an emergency, what would you do? So, there's a lot of focus on our end in terms of our call centers answering the phones with live bodies in one or two rings, a lot of improvements in the past year under Jim's leadership to deliver technicians inside of 24 hours to the house.

This year, what they're focused on is every time the customer calls, why are they calling? What can we do to make that a frictionless experience so that we're smooth in and out of the transaction? Customers typically don't want to be bothered with having to call about their electronic security systems or home automation systems, so what can we do to really maximize that experience when we do get them on the phone?

As we look out, we see technology helping us under Don Young's leadership. Can you go to your app, can you say, "I'd like a technician 6:15 on Tuesday, I'd like a technician 11:00 a.m. Saturday," get a quick response -- "Here's your tech" -- et cetera. So, I think we have to keep raising the bar in terms of what our customers can expect from us from a delivery standpoint, and then, as Jamie keeps thinking through, what services can we bring them that make it part of their daily lives? We've been focusing heavily in consumer and commercial on protecting people against cyberattacks as we go forward. I think we've got some good things planned for 2018 in that arena as well as security outside the house. So, I think it's a little bit of delivery, Jeff, as well as the services we provide.

But, we anchored in '17 on the experience on the phone and with the technician at the home. This year, we're doing a better job with analytics. Why are they calling? What can we do to stop the calls proactively? As we look out a little further, it's developing the apps and the capabilities to extend our hours of service delivery and be more customer-friendly with when they'd like it -- be there when they're asking us as opposed to inside our schedule. That's how we're looking forward on this. Again, I think we should make it hard to compete with ADT on these service deliveries. That's kind of our cornerstone.

Jeff Kessler -- Imperial Capital -- Managing Director

Thank you. And then, my follow-up is you've just made a couple of acquisitions of companies that I know really well -- Aronson and Acme -- and Phil, if you're on the phone, congratulations. The problem -- the difference is that these are very specific cultures that have been built up over a long time, particularly at a place like Aronson. How are you going to manage the integration of those cultures? I'm assuming you're going to be making more of these types of high-end or high-quality integrator acquisitions to build up your commercial base. How do you integrate them over a period of time or through people to make sure that 1.) They eventually do become ADT-ized, so to speak, and 2.), that they become productive sooner rather than later?

Timothy J. Whall -- Chief Executive Officer

A couple things on how we look at those. Again, Aronson is just a great reputation, terrific company out there in the Northwest, really helps us with our footprint and expand our capabilities. They've done a good job. There was a story in one of the industry trades last year that talked about our owner's club and the last ten deals that we've done, and the owners all still work here. Dan Bresingham has led this initiative for us over the years, and again, we're very up front with what our new partners can expect from us and what we expect from them.

I think we do a first-rate job of explaining that. We were at dinner the other night with the guys from Camtronics, who was our first acquisition in 2012, and all three of the partners are still with us today. If you look at Joe Nuccio at ASG, he can talk to how that integrated for us, and whether it's Ken Schafenberg with Integration Logistics -- we have a set model and a way we do this to bring the companies along. So, again, they've got their identity. We're trying to get them to grow what they did on a bigger scale, and whether it's Robert McDonald and the team at Vintage, et cetera, they've flourished with this because typically, on the commercial side, what we look for, Jeff, is you're selling more installation revenue and you're selling more product out there, and we bring a little different level of service and service capability.

In this case, with Phil, he's got some core relationships with some great buyers. Is there a way we can take advantage of the relationships he's created and the trust he has with those buyers to deliver against a bigger footprint as we move forward? And, whether that's some of the larger names with the Microsofts and Nikes out there in that part of the country, how do we bring our service capabilities across the country to bear? So, this has been a key area of growth for us in the commercial space, but I think we're particularly good at integrating the teams as we go forward.

Jeff Kessler -- Imperial Capital -- Managing Director

Thank you very much.

Operator

Our next question comes from Gary Bisbee with RBC. Please proceed with your question.

Gary Bisbee -- RBC Capital Markets -- Managing Director

Hey, guys. Good morning and congratulations on completing the IPO. The first question from me -- you've talked a lot about attrition as one of the key things, but one strategy we haven't heard as much about is what exactly you're doing to improve the efficiency of the SAC spend. I know part of it is you've spent less because you put in tighter, more disciplined standards, and part of it is, certainly, with attrition improving, you have to spend less, but outside of those two factors, what exactly are you doing and what is the runway to continue to deliver more efficiency in the per-household-added type of cost going forward?

Timothy J. Whall -- Chief Executive Officer

So, subscriber acquisition costs -- four main buckets. What you do in marketing and advertising, your cost in the sales department, your cost of product, and then, the job cost, which is the technicians on the site. Leaving the first two out that we've talked through, Jim did a great job renegotiating a new contract for us as we go, so we've got a little bit of a one-time pop in '18. That's not something that we bake in.

But, the other piece of this, Gary, is the job cost. As I mentioned earlier, we spend about six hours on average with our basic system with 15 to 30 devices. There's a big spread there between how that goes in each branch, how that goes with each technician, how that goes with each sales rep. You may be a sales rep that when you sell ten hours labor, on average, it takes us 12 hours to put yours in. I may be a technician that when I'm assigned ten hours of work, it takes me 13 hours to get that in. If you and I combine on a job, there's a good chance that job is going to run over. Jeff is selling them, and he sells ten hours of labor, and it takes us on average eight. What is he doing in that regard? If Jason is the technician and when he gets ten hours of work, he does it in nine, we've got some efficiency.

So, it's Don Young's ability to give us the data that lets us see those variances across the country, and this is one that just gets a little bit better all the time. At P1, for instance, this thing went down six turns in six years, and the ability to be able to see those, highlight those differences between your different players, your different branches, whether it's on the sales side or the installation side, and data analytics is something that's a strength of ours as we move forward. So, again, this is one that gets a little bit better, and we've never gotten to the bottom yet in terms of where it can go. So, whereas with attrition, you get some bigger pops when you do bigger initiatives, this is more blocking intact on a daily basis.

Jeff Likosar -- Chief Financial Officer

Two things I would add, too. This is another example of what I described earlier as being early days on some of these improvement opportunities. So, the job cost that Tim's talking about -- that opportunity is very much still in front of us. The second point is to date, we haven't really realized any material benefit in equipment costs, and we have opportunities as we go into 2018 and beyond to add equipment cost savings on top of the other things that we've had helping us in 2016, 2017.

Gary Bisbee -- RBC Capital Markets -- Managing Director

Great, thanks. And then, Jeff, the follow-up for you -- given the leverage of around 4x pro forma for the IPO, you've got some really expensive debt still on the balance sheet, and I know that there's some timing issue around how much and when you can call the second-lien notes, but it would strike me that there's a massive opportunity to do a wholesale refinancing, even if there are some fairly meaningful short-term fees to take out the next five years of that at an exorbitant interest rate. So, how are you thinking about the plan of attack from here? We won't necessarily hold you to it, but is that likely, or are you thinking more of chipping away at that slowly over time?

Jeff Likosar -- Chief Financial Officer

The best opportunity to do that -- it becomes a whole lot less expensive to do that in the first part of 2019, so we're working through and evaluating different ways to address the debt structure over time, but specifically, the second-lien notes -- which is what I assume you're talking about -- are more economical to do some kind of a refinancing transaction in the first part of next year.

Gary Bisbee -- RBC Capital Markets -- Managing Director

But, you're allowed to call 40% before that. You did only roughly half that in the IPO. Is there any reason just because the premiums are high that you wouldn't do that more quickly? I think one could argue rather than paying... The delta in the interest versus what you could refinance it at is such that it might make sense to be fairly aggressive.

Jeff Likosar -- Chief Financial Officer

There are also some provisions related to the use of IPO proceeds and restricted payment in some of our other debt instruments that goes into the equation.

Gary Bisbee -- RBC Capital Markets -- Managing Director

All right. Fair enough. Thanks, guys.

Operator

Thank you. Our next question comes from Kevin McVeigh with Deutsche Bank. Please proceed with your question.

Kevin McVeigh -- Deutsche Bank -- Analyst

Great, thanks. I wonder if you can give us a sense -- I appreciate the range of the revenue and EBITDA guidance in attrition. What would cause you to come in at the low end versus the high end? Any way to think about that?

Timothy J. Whall -- Chief Executive Officer

It's just the multiple levers, Kevin. If you look at attrition, if you look at SAC, if you look at margin -- all three of those -- at the better end, it's obviously going to be a terrific year. Each of those levers moves independently, but again, if all three go in one way for us, that's how you get to the high end. Again, '17 was great. It was a key improvement in our five measurables. We're giving guidance that we're going to have improvement in all five measurables again in '18. But, you get to the high end when all three of those key drivers end up at the better end of the year for you.

Kevin McVeigh -- Deutsche Bank -- Analyst

That's super helpful. Again, really nice job on the attrition. As you look at the improvement going forward, should we think about that combination of better underwriting standards in service, and is there any way to think about the split on that, and/or is there anything else you can do to continue to drive that forward as we look for continued improvement?

Timothy J. Whall -- Chief Executive Officer

I think in '16 and '17, we got most of the tighter credit screen and customer selection, and then it shifted into the customer service levels. Phone and tech delivery were the key focuses at the end of '17 that they've delivered on. In '18, you see much more focus between our branches and our centers in terms of managing each interaction with each customer and understanding why that interaction happened, making sure there are no second calls, doing this work. So, again, a lot of work to do to bring our branches and our centers together throughout the year, and then, as we look forward, we look toward using technology from Don in the IT group to how to make dealing with ADT even easier, tools we've never been able to deploy before.

So, again, to the earlier question, is ADT equal or better to the opportunities you've seen in attrition, we'd like to see it as better than what we've been able to do. But, '18 is going to be a year of managing through each of those conversations the customers are having with us electronically, via phone, or via one of our people in their homes, and really getting below that so there's never a second conversation. And then, again, we're giving guidance on meaningful reduction in attrition again this year, but plenty of work left to accomplish in that area, Kevin.

Kevin McVeigh -- Deutsche Bank -- Analyst

Super. Thank you.

Operator

Thank you. Our next question comes from Peter Christiansen with Citi. Please proceed with your question.

Peter Christiansen -- Citigroup Global Markets -- Analyst

Thank you. Good morning. Nice trends guide. So, you have a general benefit here with attrition, with the majority of that proportionally of customers you're losing out of the lower-RPU, more traditional packages. Can you talk about what that proportion is or maybe even outlay what the Pulse attrition rate is relative to the traditional? I think that would be helpful in describing that tailwind.

Timothy J. Whall -- Chief Executive Officer

For us, Pulse is our interactive service. That's those customers that want to be able to interact with their service from a remote location -- cellphone, typically. The adoption of that has become more the norm in the last few years in terms of what people buy. It's minimal in terms of any benefit we're gaining from the dollars of the prior cancels to the dollars of the new customers. There is some delta there, but it's not material in terms of the attrition metric.

What we're working toward is now better data analytics in terms of usage of the system. So, because you have interactive doesn't necessarily bring different characteristics, but it does bring us the insight to see how you use your system, and maybe you're once on in the morning, once on at night, maybe once on the weekend, maybe you're on and off all throughout the day, but it will allow us to see changes in those patterns, and we're hopeful that our ability to analyze those changes and patterns is going to allow us to be more proactive with customers to make sure they're still getting the benefit that they thought they would get on Day 1 when they purchased it, and how we use that with our insights, but that's in the early stages in terms of anything we're doing at this point.

Peter Christiansen -- Citigroup Global Markets -- Analyst

That's helpful. And then, could you remind us where ADT is with Amazon on the Amazon Key program? I know that you did some testing earlier last year. Do you see your DIY kit or even your traditional services being able to partake in a parcel delivery type of option, whether it's with Amazon or not?

Timothy J. Whall -- Chief Executive Officer

Yeah, there are a couple conversations going on with different providers in terms of that Key delivery, and again, taking advantage of ADT being a trusted brand, that's where most of the conversation has gone. It's a little too early to make any comments in terms of where those conversations go other than to say it's not a conversation just with Amazon. There are several people delivering products to the homes that are interested in a service like that. Again, ADT is a trusted brand that could help with that Key service. It's something we're in active conversations with, but too early to give any guidance on that.

Peter Christiansen -- Citigroup Global Markets -- Analyst

Thanks.

Operator

Thanks. Our next question comes from David Ridley-Lane with Bank of America Merrill Lynch. Please proceed with your question.

David Ridley-Lane -- Bank of America Merrill Lynch -- Vice President

Sure. So, we've gotten a lot of questions about the longer-term opportunity for you on attrition. We're looking at ADT versus peers, ADT versus the independents, and so on, but I wanted to ask about the variance within ADT -- ADT versus itself. If you looked at attrition at the top 20% of your branches, top 25% of your branches, what is attrition at those branches today?

Timothy J. Whall -- Chief Executive Officer

Through the fourth quarter...I'll give you some general guidance. We start at a range of 10% to 24%. I would say the current range is 8.5% to 16.5%. That's kind of where we are. So, upper ones are -- again, if it's current versus trailing 12, there's a question -- so, I think trailing 12 would be a little higher, but I would say the upper ones are still in that 14%, 15%, 16% range as we continue to drive that down. Again, we measure it as gross, and there's a reason for that. It's approximately 400 basis points better when you look at if you're going to deduct for many of the things that our competitors are saying is their net attrition that we don't use. So, again, it's a gross attrition metric that we're using here.

David Ridley-Lane -- Bank of America Merrill Lynch -- Vice President

Thank you. That's really helpful. And then, maybe a question for Jeff. What's the level of contribution from the recent acquisitions embedded into 2018 revenue guidance?

Jeff Likosar -- Chief Financial Officer

For our overall revenue guidance, I mentioned that install revenue will grow more quickly than monitoring service revenue. Recent acquisitions are not really material on monitoring and service revenue, but you can think of it as somewhere in the neighborhood of 1 point of total revenue can come from acquisitions, and that could be more like 2 points depending on what acquisitions occur during the course of 2018.

David Ridley-Lane -- Bank of America Merrill Lynch -- Vice President

Great. Thank you very much.

Operator

Thanks. Ladies and gentlemen, at this time, I would like to turn the call back over to Mr. Tim Whall for closing comments.

Timothy J. Whall -- Chief Executive Officer

We appreciate the time, we appreciate the interest, and we certainly appreciate the investment from our shareholders. I'll close by saying thanks to the employees for their hard work for '17 and what they're doing in '18 and a shout-out to our dealer partners for providing a great year for us as well in '17. So, thank you very much for the time today, everybody.

Operator

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.

Duration: 56 minutes

Call participants:

Jason Smith -- Senior Vice President of Finance and Investor Relations

Timothy J. Whall -- Chief Executive Officer

Jim DeVries -- President

Jeff Likosar -- Chief Financial Officer

Toni Kaplan -- Morgan Stanley -- Executive Director

Manav Patnaik -- Barclays Capital -- Director

George Tong -- Goldman Sachs -- Analyst

Jeff Kessler -- Imperial Capital -- Managing Director

Gary Bisbee -- RBC Capital Markets -- Managing Director

Kevin McVeigh -- Deutsche Bank -- Analyst

Peter Christiansen -- Citigroup Global Markets -- Analyst

David Ridley-Lane -- Bank of America Merrill Lynch -- Vice President

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