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ADT Inc. (NYSE:ADT)
Q1 2020 Earnings Call
May 9, 2020, 8:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to ADT Inc.'s First Quarter 2020 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to your host, Mr. Derek Fiebig, Vice President, Investor Relations. Sir, you may begin.

Derek A Fiebig -- Investor Relations

Thank you, operator, and thank you, everyone, for joining ADT's First Quarter 2020 Earnings Conference Call. This afternoon, we issued a press release and slide presentation of our financial results. These materials are available on our website at investor.adt.com. Our remarks today will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we've described in our press release issued this afternoon and in our filings with the SEC. Please note that all forward-looking statements speak only as of the time they are made, and we disclaim any obligation to update these forward-looking statements.

During today's call, we'll make reference to non-GAAP financial measures. Our historic and forward-looking non-GAAP financial measures include special items, which are difficult to predict and/or may be mainly dependent upon future uncertainties. For a complete reconciliation of historical non-GAAP to the most comparable GAAP financial measures, please refer to our press release issued this afternoon and our slide presentation, both of which are available on our website. With me today on today's call are ADT's President and CEO, Jim DeVries; our CFO, Jeff Likosar. Also joining us and available for Q&A is Don Young, our CIO and EVP of Field Operations; and Jason Smith, Senior Vice President of Finance.

With that, I'll turn the call over to Jim.

Jim DeVries -- President and Chief Executive Officer

Thank you, Derek, and welcome, everyone, to today's call. I'd like to begin by expressing that our thoughts and well wishes are with all those impacted by the COVID-19 global pandemic. Throughout the crisis, our highest priority has been the health and well-being of our employees, our customers and the communities that we serve. I'm pleased to underscore the ADT business model is strong and resilient. And throughout the crisis, we have continued providing an uninterrupted essential service for millions of our customers across the country. In a few minutes, I'll share some comments regarding our first quarter, but I'd like to begin by outlining our immediate and comprehensive response to the COVID-19 pandemic, which was executed with an eye toward ensuring ADT emerges even stronger on the other side of these unprecedented events.

In today's slide presentation, we've listed many of the specific actions we've taken to protect the welfare of our workforce and customers and optimize our approach during the crisis. We significantly enhanced communication for both employees and customers. We deployed protective equipment throughout our field organization. We instituted a health checklist for ADT employees who interact directly with customers. We implemented a number of flexible scheduling options and temporarily discontinued door-to-door sales. The strength of our business model and our cash flows enabled us to provide steady employment for the majority of our employees. Voluntary turnover, as would be expected, has significantly improved. Realizing that some associates would be better served by taking voluntary furloughs, we made these temporary unpaid leaves available to our employees as well. This well-received practice had the benefit of helping to manage short-term supply and demand while also managing our costs.

Notably, we implemented a work-from-home policy that was embraced by ADT employees, including the vast majority of our call center associates. In response to the coronavirus, we were able to move more than 90% of our call center employees to work remotely in the span of weeks, an effort that was previously almost unthinkable. Productivity has been maintained, and across a number of metrics, performance has actually improved. We're already developing plans to implement longer term learnings we've experienced during the crisis. I couldn't be more proud of the performance and collective effort of 20,000 employees and 200 dealer partners. They've delivered on our brand promise throughout the crisis, proving ADT is an essential business in all environments.

I'd like to turn to our first quarter performance. It was a strong quarter for us to start the year, during which, we successfully balanced our financial, operational and strategic objectives. Our first quarter revenues of $1.4 billion increased 10% over the prior year despite the loss of contribution from our Canadian operations, which we sold last year. This growth was led by higher reported installation revenues, reflecting an increase in our mixture of outright sales to residential customers and the continued successful execution of our commercial growth strategy. We also benefited from our continued strong residential interactive penetration. As anticipated, our adjusted EBITDA of $539 million was down from $621 million in the prior year period, largely due to the expensing of previously capitalized costs associated with the acquisition of our leading dealer, Defenders, as well as the sale of our Canadian operations last year. Our free cash flow before special items remained very robust at $173 million. Jeff will provide additional detail on these topics shortly. Of particular note, we had a strong quarter adding new customers, aided by Defenders in a bulk acquisition and finished with more subscribers at the end of the first quarter than we had at the beginning of the year. This is the first net adds in any quarter for ADT since 2015. Along with unit adds, our recurring revenue, or RMR additions, were also strong and brought our quarter end RMR balance to $339 million, up over $6 million sequentially from the fourth quarter.

Our trailing 12-month revenue attrition remained stable at 13.5%, up 10 basis points sequentially. Looking forward, as many of you know, relocations drive about 1/3 of our attrition. And partially because relocations are lower in the current environment, our April retention was better than our internal budget. Our trailing 12-month revenue payback improved to 2.3 years, down from 2.4 a year earlier, with the improvement driven by higher installation revenue, benefits from the successful national launch of our consumer financing program and efficiency in sales and installation spend. Turning to the recession resiliency demonstrated by our business. While acknowledging there is significant uncertainty that remains and we don't know precisely how COVID-19 and the macroeconomic environment will play out, I believe sharing some color on our business characteristics as well as some early second quarter trend will help validate why we're still able to provide strong guidance ranges during this pandemic crisis. For residential sales, we're seeing a reasonably resilient outcome through April and early May. As mentioned, we temporarily suspended some of our sales practices, but we're already beginning in certain markets to return to our traditional approaches. While we obviously see a lower number of leads, we've witnessed a significantly higher sales conversion rate, reflecting strong intent to buy security. It's more of a qualitative observation, but our sense is that shelter-in-place consumers are more aware than ever of the value of ADT security and automation systems in their homes. The brand is strong and trusted. And in the truest sense of the word, our service is considered essential.

Also continuing to perform well throughout the crisis has been our new financing program and pricing changes. The acquisition of Defenders, which closed in early Q1, now provides us with several strategic and financial benefits. In the first quarter, we realized the volume and improvements and creation costs that was expected from the transaction. The integration has gone very well, and we're engaged in optimizing the combined sales ecosystem. We also launched a controlled pilots or an e-commerce offering of our Pro Install solutions during the quarter, and we continue to drive smart, meaningful partnerships. I'm very bullish about the inroads we're making with multifamily partners and large U.S. homebuilders. We have a highly variable residential SAC model, providing a near-term financial hedge against declines in the short-term sales and supporting strong near-term cash flow generation. Given market dynamics, we're exploring very high-quality bulk acquisitions as an option for deploying capital for low-risk, high-return growth. In short, with our residential businesses, we have a recession-resilient business model with high-recurring revenues that will continue to perform well in this environment. Our small business and commercial channels represent 17% of our RMR balance and 29% of our total revenue. As you might expect, these portions of our business have been more impacted as many businesses we service had been temporarily closed. We started the strong year in commercial with a 10% organic growth rate through February before declining in March as COVID-19 effects came into play, and we ended the quarter with 6% organic growth. While it's still early, we expect the new commercial sales impact to be more pronounced than with our residential sales and the pressure are expected commercial installation revenues on a year-over-year basis.

With that said, we are highly focused and believe our commercial growth over time will be deferred, but not diminished. Going forward, we believe the environment will give us the opportunity to aggressively compete with weakened and smaller competitors. In 2020, we will focus on completing our integrations, continue to seek attractive tuck-in commercial acquisitions and on managing our costs. We'll also continue to focus on providing world-class service as well as new sales. Worth mentioning, our National Account organization received a global commitment just this week for the largest retail deal in the history of our company. We'll be working through contractual details and plan to begin this project in the second quarter. In summary, we're managing well through the COVID-19 crisis, protecting the health and well-being of our employees and customers, while also advancing our strategies to create long-term shareholder value. We had a strong first quarter with robust free cash flow continuing the momentum developed in 2019. Even in this highly fluid environment, I'm as confident as ever, we'll continue to drive efficient growth over time, generating strong free cash flow and performing well. We have a number of initiatives taking root across core residential, commercial and DIY, which will further enhance long-term shareholder value.

With that, I'll now turn this call over to Jeff, who will take us through more specifics related to our performance, strong financial position and our updated outlook for the year.

Jeff Likosar -- Chief Financial Officer

Thank you, Jim, and thank you, everyone, for joining us today. I will take a few minutes to summarize our first quarter results, share some perspective on 2020, and then we'll open the call to questions. We are very pleased with our overall first quarter financial and operational performance, especially during this challenging environment. We remain highly focused on generating positive cash flows. And the highlight for the quarter is free cash flow before special items of $173 million, which was stronger than the first quarter of 2019 despite more than $65 million in higher cash interest due to the timing of our debt coupons.

An important component of our free cash flow growth was efficiency in net subscriber acquisition costs, which were down year-over-year. We concurrently enjoy customer and RMR additions, as Jim mentioned, including an opportunistic high IRR group of bulk accounts that we acquired in late March, along with the benefits from having acquired Defenders. This results in improvement in our revenue payback, which on a trailing 12-month basis, declined from 2.4 times to 2.3 times in the first quarter of 2019. Contributing factors here include the realization of some early benefits of our new consumer financing and revenue model, our acquisition of Defenders, continued commercial revenue growth and our ongoing efforts to drive cost efficiencies. We are always focused on delivering strong net SAC efficiency and free cash flow before special items and this is especially true during 2020, given some of the recent changes in our business in the current environment in which we are operating.

Before describing some of the other first quarter measures, I want to highlight a few dynamics that are relevant to our reported revenue and adjusted EBITDA and related year-over-year comparisons. First, as a reminder that we sold our Canadian operations in the fourth quarter of last year, which previously comprised approximately 4% of our total revenue and adjusted EBITDA. The second is that our acquisition of Defenders, formerly our largest dealer, will cause us to incur significant additional expenses in our P&L despite the positive cash and economic benefits, as we've shared previously. We expect this to be more than offset by lower capitalized tax. The third is that as we initially launched our consumer financing program and transitioned many of our residential transactions to outright sales. Defenders transactions are also of an outright sales nature. This differs from ADT's historical ADT-owned model and therefore, leads to the recognition of higher installation revenue and the associated costs. Please read our 10-Q and earnings materials for further information. Our total reported revenues in the quarter grew by approximately 10% year-over-year. The main contributor was installation and other revenue, which increased by $151 million, driven mainly by the higher residential installation revenue I described, along with continued growth in sales to commercial customers.

Overall, monitoring and services revenue grew 2% in the U.S., but declined by 2% on a total company reported basis with the divestiture of Canada. Commercial revenue started very strong before some COVID-19 pressure in March, ending with approximately 6% organic growth for the quarter. Our adjusted EBITDA of $539 million was, as expected, down compared to the prior year, with the decline primarily attributable to expenses recognized in our P&L as a result of the Defenders acquisition, the loss of the contribution of Canada's EBITDA and in light of the current environment, an increase in our allowances for credit loss. As I mentioned, our net subscriber acquisition cost improved in the first quarter, with, as you can see on slide 13, a shift between capitalized and non-capitalized SAC due to the Defenders acquisition and higher outright sales. The net effect of these dynamics, along with other factors, is the strong free cash flow before special items performance I mentioned earlier. Turning to our balance sheet. We have continued to drive movements in our capital structure. You can see our well-laddered debt maturities on slide 16 in our quarterly earnings deck. As we discussed on our March call, during the first quarter, we issued new 6.25% second lien notes due 2028, the proceeds from which we used to redeem our 9.25% notes that were previously due in 2023. Our net debt maturity is not until October of 2021.

As we also discussed during our March call, we completed the Defenders acquisition in January for considerations that included $260 million of cash, which we funded partially from our existing revolving credit facility. In addition, we today declared a quarterly dividend of $0.035 per share payable in early July. I also want to remind everyone that as part of our consumer financing program and associated revenue model adjustments, we have partnered with Mizuho Bank, which enabled us to enjoy the cash flow benefits we originally piloted with a third-party consumer loan program, but in a way that is largely transparent to our customers and avoids the need for our customers to apply for takeout and administer individual loans with a third-party bank. We received our first cash inflow from Mizuho in the month of April. We are excited by this program and encouraged by the early results we have seen in higher installation revenues. We have now launched nationally. And over time, we expect this program will reduce our net cost to acquire new customers while also increasing the propensity of residential customers to select and configure more comprehensive systems.

Now I'll turn to our updated outlook for 2020, which you can see on slide 17 in our deck. As a reminder, we shared preliminary guidance in March and referenced some uncertainty as a result of our new revenue model, the Defenders acquisition and the emerging unknowns associated with COVID-19. We described then that we expect to generate strong free cash flow before special items during the year. And we today remain confident in our cash generation capabilities even in challenging macroeconomic environment. Consequently, we are holding the same midpoint on this measure, but widening the range, reflecting our intent to pursue high IRR growth if we continue to selectively invest for the future as we navigate through this uncertain environment. We are maintaining our range for total revenue at $5 billion to $5.3 billion. Compared to our preliminary guidance in March, we expect some pressure in revenue associated with COVID-19, especially in our sales to commercial customers. We still expect to be in our initial preliminary range due to higher residential installation revenue. During the course of 2020, we expect to transition the majority of our residential transactions back to our historic ADT-owned structure. This transition will result in lower reported residential installation revenues in the second half of the year compared to the first half of the year. We are slightly lowering the range for adjusted EBITDA to $2.075 billion to $2.175 billion. The main driver of this change is the lower commercial revenue I just described.

Overall, we feel very confident in our ability to drive growth, deliver strong free cash flow before special items and to position our business for continued long-term success. Before turning to Q&A, I'd like to mention a few notable items in our GAAP results. As part of the Defenders acquisition, we allocated approximately $81 million of the transaction consideration to the settlement of a pre-existing revenue sharing relationship, which is recorded directly into earnings. In addition, we incurred a $65 million loss on extinguishment of debt associated with our refinancing of the second lien notes I mentioned earlier. Also, certain of our interest rate swap cash flow hedges were de-designated in March as the decrease in interest rates caused the hedges to no longer be highly effective. This resulted an approximately $66 million mark-to-market changes reported into earnings. Wrapping up my comments today, I want to emphasize that we are pleased with our strong overall first quarter results and excited by the opportunities in front of us. We know that we are operating in a second quarter environment with considerable macroeconomic uncertainty and we expect to encounter some near-term challenges, which we have considered in our full year ranges. We feel very fortunate to be able to continue to generate strong positive free cash flow before special items and really use 2020 to leverage the strength of our model position our company to come out of the crisis in an even stronger position. Thank you again for being on today's call. And with that, operator, please open the line, and we'll be happy to take questions.

Derek A Fiebig -- Investor Relations

Cathy, if you could please remind participants how to queue up for the question-and-answer period, please.

Questions and Answers:

Operator

[Operator Instructions] And we'll go first to Manav Patnaik of Barclays.

Greg Bardi -- Barclays -- Analyst

Hi. This is actually Greg calling in. I was just hoping to get a little flavor on potential exposures in commercial and small business part of the operation. Maybe some of the exposures relates to retail or restaurants or anything that we should think about where it's potentially more at risk?

Jim DeVries -- President and Chief Executive Officer

This is Jim. Thanks for the first question. I'll give you some context on COVID-19. And then hopefully, let's get to your question. To start with, ADT is really in the life safety business. We have commitments to our customers, our employees, no matter what circumstances we're in. We're considered as an essential business because we are an essential business. We've never closed and provided uninterrupted service to our customers. While we were doing this, we were focused on the safety of our employees, safety of our customers. We did what a lot of organizations did around communicating and educating the work for flexible scheduling. And then to ensure uninterrupted customer service, we moved to work from home for a large portion of our workforce. Work from home had the silver lining, in that, we're actually going to change our model going forward. We had great employee retention, productivity has been stellar. We see an opportunity for lower real estate costs.

And then in terms of how we're thinking about and managing through the crisis, we've made the conscious decision to take care of our employees, focus on the longer term, and our business model gives us that opportunity. So I'd say probably the most important takeaway in the answer is we're a resilient business. We're operating in a unique environment right now, obviously. We've been focused on playing defense across all our businesses, managing costs closely, navigating the expected challenges, especially in our commercial business, but we're also focused on playing offense. We're implementing changes like the work-from-home model, I just mentioned, focused on recruiting best-in-class talent. We're looking at commercial M&A via tuck-in acquisitions. And then even considering high bulk opportunities that are made available to us in the environment at terrific returns. So it gives you some context for how we're managing the business across both high volume and commercial.

Greg Bardi -- Barclays -- Analyst

Okay. And then maybe just some color on how important historically door-to-door sales has been to the acquisition model? I imagine a lot of that is tilted toward the month to begin with. So just any color there on how to think through the moving pieces?

Jim DeVries -- President and Chief Executive Officer

Yes. The door-to-door sales, we suspended relatively early in the process. We have started to unwind the suspension of door-to-door in markets where shelter-in-place has been easing. It is most important in our dealer organization. They use door-to-door in a more prevalent way than indirect. And it's somewhat important in the SMB market for direct as well. So it's been suspended. It's starting to unwind. The unwind has started about a week or so ago, and we're taking it market-by-market and open it up again.

Operator

Thank you. And next, we'll go to Toni Kaplan of Morgan Stanley.

Toni Kaplan -- Morgan Stanley -- Analyst

Thank you. Could you talk about April trends in both the residential and commercial side? Just trying to understand if you've seen just an acceleration of further challenges? Or if you've seen a stabilization in both of those businesses?

Jim DeVries -- President and Chief Executive Officer

Hi, Toni, it's Jim. Thanks for the question. Of course, it's a very fluid situation still. We anticipate Q2 to be the worst of it. There were weeks in April where we were at 80% or so of our normal run rate for gross adds. I'd mentioned it on the prior answer that as states begin to relax shelter-in-place, we're seeing very early optimistic signs. From a business standpoint, commercial will probably be the most impacted. And the duration of that impact really depends on the duration of the crisis. Not unimportantly, and I think relevant to your question, the commercial business has less than 10% of new business from construction. So we continue to be bullish about commercial over time, but that will most definitely be the most impacting.

And then on the residential side, we anticipate will remain strong. We think that our business model performs well in this kind of environment. And overall, we feel we're in a very good position during an obviously challenging time.

Toni Kaplan -- Morgan Stanley -- Analyst

That's great. And then I was hoping you could also give an update on the 3G conversion. I'm assuming that home visits are required to switch out the radios. And so I was wondering if there is any sort of push pushing back on the costs associated with that program just because of not being able to go into people's houses, tell me if I'm wrong? And just any update on expectations there?

Jeff Likosar -- Chief Financial Officer

Hey, Toni, it's Jeff. One thing I'll add to Jim's comment to on April trends we're seeing in March. Jim had mentioned a voluntary furlough program and some other accommodations. We have been able to reasonably well balance our labor with the demand to maintain more efficiency than we otherwise would. Your question is a good question, in that lower activity has led to fewer radio conversions. You'll note in our 10-Q that we're we have not changed our range over the life of the program because we don't see any change over the life of the program, but we have lowered the amount that we expect to spend during the course of 2020. And that's because we're doing fewer homes for other reasons. And in light of an environment, we are not launching proactive the way that we otherwise might have. We've always said it continues to be the case that there's a whole host of things that we're pursuing and considering to manage this program over time, including some accommodations from vendors, including technology solutions and including trying to do as many as we can. And we're there for other purposes. So no change to the range overall, but we do expect to spend less during 2020.

Operator

Now we'll go to George Tong of Goldman Sachs.

George Tong -- Goldman Sachs. -- Analyst

Good afternoon. You mentioned you're seeing 80% of the normal run rate for gross adds moving through April. Can you talk about how attrition rates and pricing in residential and commercial performed in the month of April as well?

Jim DeVries -- President and Chief Executive Officer

George, this is Jim. Thanks for the question. I noticed some weeks in April where we were as low as an 80% run rate the business overall, I think I mentioned this on the earlier answer, the business overall, we see probably April as the toughest month from a gross add perspective. Attrition was better than our budget. We have some tailwinds because of relocation. Relocation, as you know, is about 1/3 of the is the cause for about 1/3 of our disconnects. And with the current situation, we have meaningfully fewer relocations. So we've got some tailwind on that front. So soft month on gross adds. Pretty strong month on attrition. And as I mentioned earlier, commercial is the business of the area that we expect to struggle most with.

Jeff Likosar -- Chief Financial Officer

Hey, George, one thing I'd add Jeff is that we also while Jim's comments are reflective of the company in total and in aggregate, we have observed some market differences at different times in different parts of the country. As you can imagine, as the rate of infection changed or as governmental actions changed, we saw ebbs and flows in one part of the country that's been here what we saw in another part of the country and more variation than we have had in normal circumstances.

George Tong -- Goldman Sachs. -- Analyst

And then any comments on the pricing?

Jeff Likosar -- Chief Financial Officer

Yes. Generally, pricing has is more affected by the changes that we've recently made. We're very pleased with the progress that we've made in our overall revenue and pricing model during the first part of 2020, that included the introduction of some financing options. We rolled this out nationally in earnest during the course of February. So we were off to a really good start. We're very, very pleased with what we saw out of the gate, mainly leading to more installed revenue per unit, also leading to enhanced ability to sell more comprehensive systems. So there we had good progress increasing our installed revenue per unit. And while there was some pressure in leads, as Jim described, we haven't changed anything or seeing any material changes in our efforts to roll out and launch that initiative.

George Tong -- Goldman Sachs. -- Analyst

That's helpful.

Jim DeVries -- President and Chief Executive Officer

And George, you asked about April, but I want to give just a little bit of color on the quarter on both sides, the high-volume side and the commercial side. On the high-volume side, it was a great quarter for us. We picked up some extra accounts via the Defenders acquisition. But even excluding those accounts, we were net positive in adds. And I think that's the first time in five years. And it's without a change on our focus. We're still focused on capital efficient growth, still focused on disciplined growth. And so we feel really good about the quarter from a gross adds perspective on high volume. And then in commercial, we had been targeting a 10% growth rate, had a strong start to the year, January, February, both at 10%, March started to be impacted by the crisis. And so we came in single-digit on organic growth for the quarter. But we felt great about the start in the pre-COVID experience on commercial, and then we felt great about gross adds across the board for the quarter in high volume.

George Tong -- Goldman Sachs. -- Analyst

Got it. That's helpful. And just a quick follow-up on cost actions. Your subscriber acquisition costs are highly variable in nature. Can you talk about some of the more fixed costs that you might be addressing in order to maintain your free cash flow midpoint?

Jeff Likosar -- Chief Financial Officer

Yes. So George, we have a good amount of flexibility in our subscriber acquisition costs with certain portions of our subscriber acquisition costs are highly variable. So dealer additions, for example, are almost 100% variable. On the direct side, the equipment cost is, of course, variable. Incremental labor is variable. And then you get into things like overhead that is a bit less variable and there are components of advertising can be less variable. So we're managing this closely. The door-to-door piece we talked about earlier, that's a 100% variable. So if those aren't happening in the dealer channel, I mean, we're incurring no cost. And as we manage through the rest of the year, we're looking to balance the maintenance of our capabilities, the maintenance of certain advertising, the continuity of our workforce against appropriately reducing our cost structure, where we need to, to the extent that we see lower demand.

Operator

And now we'll go to Seth Weber of RBC Capital Markets.

Seth Weber -- RBC Capital Markets -- Analyst

Hi guys, good afternoon. I wanted to ask about the comment about the allowance for credit losses. Is there any color if you see that more tilted toward residential or maybe the small business side? And then just as a follow-up, can you give us any color on the profile of the customers that are kind of signing up for the new consumer lending program?

Jeff Likosar -- Chief Financial Officer

Yes. So first, on the credit losses, there in fact, there was some accounting guidance asking all firms to go revisit their credit loss policy. So we, of course, did that. The place where we where the first focused and the most focused was in the commercial and SMB space. And we have exposure to a wide variety of industry verticals in our large commercial, some of which are relatively unaffected. Healthcare, as an example. And others that are more highly affected, mall-based retail as an example. So we assessed our provisions. We made some adjustments that led to an increase. And then on the higher volume side, the consumer and SMB side, we would expect as the economy deteriorates or has deteriorated and there's job loss, we would expect over time to incur more bad debt than we normally would in SMBs and in residential. We've considered that, of course, in our full year outlook ranges and it's too early to draw firm conclusions on how that's actually going to play out.

And then the second part of your question?

Seth Weber -- RBC Capital Markets -- Analyst

Just if there's any kind of profile, demographic or anything you could share about the customers that are signing up for the new consumer lending program?

Jeff Likosar -- Chief Financial Officer

Yes, not so much a demographic of the customer, it's we offer it to all of our customers. There's nothing noteworthy that I would highlight as to what kind of customer takes it versus doesn't take it. But what I would tell you is that customers who avail themselves of the financing option, you tend to take more comprehensive systems. It's also noteworthy that luminous is a sales tool for all customers enables us or has enabled us to generate better economics even in the cases where the customer chooses to pay us upfront. So as I said a tool and arsenal of our sales force that we found effective even in cases where the customer doesn't end up taking.

And another comment I'll make that is relevant to what Jim was saying earlier. In terms of the first quarter being very strong, it was very strong despite the fact that we made what were pretty substantial changes to the way we go to market. The sales motion that every individual sales rep has to go through, the script they use, the closing process, they use changed and we had internally expected that might cause us to suffer for some lower volume during start-up. And in fact, we held our volumes very well while we were able to generate more pricing. So we're very pleased with the progress out of the gate.

Operator

Now we'll take a question from Gary Bisbee of Bank of America Securities.

Gary Bisbee -- Bank of America Securities -- Analyst

Hey guys, good afternoon. Let me just follow-up on that one. What do you attribute the better Q1 adds in the residential monitoring business, too? I mean, there's a bunch of things going on. The consumer finance, although that was partway through the quarter. You talked about several other factors that could impact. Like what's the key what got better from last quarter? Is it tenders in there talked about their marketing capabilities? Or what are the handful of things driving that?

Jim DeVries -- President and Chief Executive Officer

Yes, it's not Gary, it's Jim here. Thanks for the question. It's not any one thing, we had success across the board in the quarter. We're leveraging the talent that we talked about leveraging at Defenders. The marketing organizations have come together and are working very well. We're doing a lot more work around data and the use of data and more precisely marketing. We had a terrific quarter from a self-generated perspective, sales being self-generated. It was really a collective of hitting on all pistons in virtually all geographies that came together for us. And I'd say the special highlight would be the marketing prowess and combination of the marketing organizations between ADT and Defenders coming together to be stronger.

Gary Bisbee -- Bank of America Securities -- Analyst

Okay. And is there any reason to believe that other than, obviously, the impact of the COVID situation is having on consumer behavior that, that would prove to be more of a one-off? Or would you other than the short-term issue, would you is there a case to make that this momentum builds for a while?

Jim DeVries -- President and Chief Executive Officer

Yes. We think so. Absolutely. The integration with Defenders is proceeding smoothly. The teams are performing well together. We like our we've talked about our new product, and we like our new product. DIY is operating from a fairly small base, but we see strength in that area. We're getting good traction, differentiated product and experience. So we are bullish about it, Gary.

Gary Bisbee -- Bank of America Securities -- Analyst

And then on the new consumer finance offering, does the fact that we're going into a recession. Obviously, consumers are going to be in worse shape overall. Does that give you any pause to how this is set up and effectively taking more risk in the way this program works? I know why operationally, it's better than the pilot you'd had with the third-party taking that risk or you comfortable you can manage that?

Jeff Likosar -- Chief Financial Officer

Yes. We like this structure better for a whole host of reasons, much more seamless to the customer, much easier for our sales team. And we retain good control of the customer relationship. It also gives us more flexibility in downstream in the months to come with the customer for upgrades and add-ons and other things. So there's a lot of considerations, but this is a better structure for us for all those reasons.

Gary Bisbee -- Bank of America Securities -- Analyst

Okay. And if I could just sneak one more. In a quarter ago, you sort of defend, I should say, pushed off or didn't provide a lot of commentary on the financial impact of Defenders just other than the, obviously, shift from capitalized to expense cost on the marketing front. Now that you own it, is there any more color you can give us like how many accounts came with that? Sort of what the profit was they've been earning that now accrues to your benefit? Anything else change because of that? Just looking for a little more color to justify the price paid for that asset?

Jeff Likosar -- Chief Financial Officer

Yes. So the acquisition of Defenders, of course, caused us to transition from buying accounts from Defenders to now we have all the Defenders' infrastructure, and the cost that shows up on the various line items in our P&L. So it caused there to be a pretty significant shift as we expected of expenses into our P&L. If you look in our slide deck at slide 13, you can see our net subscriber acquisition spend is down. One of the drivers is that there is no more Defenders' margin in there. But what you also see is a big shift in that the non-capitalized portion of SAC has increased and the capitalized portion has decreased. But the having Defenders is among the contributors to our lower net subscriber acquisition cost.

Another thing I would point to is we previously, with Defenders and with all of our dealers, we had a revenue-sharing arrangement where we paid to the dealer, a portion of the revenue on an ongoing basis over the life of the customer. That of course had gone away. And then that the biggest benefit over time is going to be the integration of all the various capabilities, particularly the marketing capabilities for purposes of generating new accounts and we're off, we believe, to a good start there. And then there's some cost to reduce over time as well.

Operator

And next, we have Jeff Kessler of Imperial Capital.

Jeff Kessler -- Imperial Capital -- Analyst

Thank you. Thank you for taking my question. Firstly, you mentioned that one of the things that you're looking at to grow the business is bulk acquisitions. Bulk acquisitions can be good, and they can be not so good, particularly if you're looking at a [Technical Issues] Well, I'm thinking of is, what are the criteria? What are you holding up? What are those shift points that you're going to make sure that number one, what is the type of group that you're trying to buy in the bulk acquisition that may be different for every state? But what is are there minimum criteria that you will set to essentially protect yourself against bad things happening from that from when people change when people find out that they're being bought by ADT, and they're now going to have an ADT loan for their house, and you try to keep them just get them to stay? That hasn't always happened, that hasn't always worked for other companies.

Jim DeVries -- President and Chief Executive Officer

Jeff, it's Jim. I'll start by saying this. The North Star for us is capital efficient growth. And so we look at everything through that lens, including bulk deals. In this environment, we have an opportunity to be incredibly selective with bulk. So we're starting with high quality. We're looking for high internal rate of return on the deals. We have attrition protection built into the deal. We're looking for geographic density that helps from a that helps from the perspective of servicing the accounts. We're looking for high-quality customer base and looking at credit scores to ensure that, that's the case. But all of the criteria come together and need to align around the objective, which is capital efficient growth. So as I said, the environment is allowing us to be incredibly selective, perhaps replace some of the accounts and that we are currently losing in the dealer channel and efficiently deploy SAC. So is that helpful?

Jeff Kessler -- Imperial Capital -- Analyst

Yes. I would have 15 questions here. Obviously, I'm limited to 2. I'm wondering if you can talk a little bit about the, let's say, bounce of project. The project of getting their verification technology to a point at which you have partners in this project, there are there's obviously in this type of environment, there's going to be a lot of there's going to be a lot of residential accounts and cities under pressure financial pressure who are going to want find ways of getting money out of any place they can. And there may be more pressure on those places that have more false alarms. What are you doing in that area to work with these other companies to either accelerate or move along the project to essentially verify these alarms and essentially separate yourself from the rest of the industry?

Don Young -- Chief Information Officer and EVP, Field Operations

Yes. So Jeff, this is Don. Good question. We just recently launched or piloted something we call signal chat. That allows the customers to engage us directly if you text and chat messaging, if you will, to tell us whether or not their alarms are real or false, that's a major contributor to us to try to verify the alarm. We're excited about that, and it's going extremely well. We've reduced our number of false alarms just on our sample set by up to 30% or 40%. So we're seeing some really good success there. That's all part of the journey that we've talked about before, Jeff, to go ahead and create that ADR, the additional data repository, using machine learning and AI to try to go in and leverage other data sources. Data sources that are coming from partners that we'll be announcing in the future to combine to our own combine with our own data sources, to basically qualify the alarms are something that either deserves a response or deserve maybe even a higher priority response. That journey continues. We think there will be more incremental deliverables in the months ahead.

Jeff Kessler -- Imperial Capital -- Analyst

And it's good to hear that pilots have started. It's encouraging. And look, I'll get you guys later. I have other questions, I don't want to get into the weeds too much.

Operator

We'll now go to our last question from Kevin McVeigh of Credit Suisse.

Kevin McVeigh -- Credit Suisse -- Analyst

Great, thanks. Great. Jim, breaking into bores probably on the month. Any thoughts on what drove the decision to shift to Mizuho from Citizens? And are you still running the Citizens program? Or is that kind of is that all kind of done by the wayside in favor of what you do with Mizuho?

Jeff Likosar -- Chief Financial Officer

Kevin, when we rolled out nationally, we rolled it out under an installment program that does not include the customer interacting with the third-party bank at all. So the customer interacts with us. We offer a variety of alternatives that include 24-, 36-month option, 50-month option, a variety of options. We then are partnered with Mizuho, who enables us to generate very similar economic benefits. And in fact, actually better economic benefits. But by collecting the cash in batches instead of every single individual loan. So much smoother for our customers because they don't have to administer and deal with two separate parties. Easier, as I said earlier, for our sales force. And that's what we rolled out with nationally and a lot less friction in the process and what we had seen previously when there are multiple parties involved.

Kevin McVeigh -- Credit Suisse -- Analyst

Got it. And then I guess on the installation side, I guess, probably are you seeing any impact in terms of how would you think about installations on the commercial versus a very residential side, getting some of the lots that do better place and probably to continue to install? Do you consider essential? Or just any thoughts around that?

Jeff Likosar -- Chief Financial Officer

Yes. A lot more effect on commercial. So as Jim was alluding to earlier, we've seen leads where our volume was down 20% or more. But in commercial and certain verticals, that's been more pronounced. And again, some verticals are relatively unaffected. But in some verticals, for periods of time, we couldn't get in at all. So it's a more pressure on installed in commercial businesses in certain market segments within commercial than in residential overall.

Kevin McVeigh -- Credit Suisse -- Analyst

Got it. And then just my last one would be on Defenders, have you seen any impact on the core ADT organization culturally from a marketing perspective? And is that kind of fully entrenched at this point? Or are you still on the integration phase from a marketing perspective from an internal perspective?

Jim DeVries -- President and Chief Executive Officer

I'd say, Kevin, on a marketing perspective, we were out of the gates fast. The teams culturally have come together nicely. As I mentioned earlier, the entire integration is proceeding smoothly. We're confident we're going to see the business case uptick that we had planned when we acquired Defenders. Couldn't possibly be more pleased with the high-performing talent. They're every bit as strong as we knew they would be. And I would tell you that marketing has led the way. They were the first to come together. They're working really well together. I think there's a lot of areas where there's complementary skills. And the net takeaway here is it's out of the gates fast and doing well.

Operator

And with that, I would like to turn the call back to our presenters for any additional or closing comments.

Jim DeVries -- President and Chief Executive Officer

Thanks, Cathy. I want to thank everyone again for joining tonight's call. I'd like to conclude by underscoring two points. First, while many companies are essentially focused on survival or simply managing through the next quarter or two, we're fortunate that ADT's business model and resilience in this environment allows us to instead focus on ways we can accelerate our revenue and free cash flow. Our objective is to emerge from the crisis even stronger. And sitting in early May, we're confident that, that objective will be reached. And then finally, once again, I'd like to underscore my appreciation to our employees and dealers. I'm amazed that the extraordinary things that they've collectively achieved over the course of the crisis. I couldn't be more proud of our employees and couldn't be more proud of the company. So thanks again, and we'll look forward to our next quarterly update with you.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Derek A Fiebig -- Investor Relations

Jim DeVries -- President and Chief Executive Officer

Jeff Likosar -- Chief Financial Officer

Don Young -- Chief Information Officer and EVP, Field Operations

Greg Bardi -- Barclays -- Analyst

Toni Kaplan -- Morgan Stanley -- Analyst

George Tong -- Goldman Sachs. -- Analyst

Seth Weber -- RBC Capital Markets -- Analyst

Gary Bisbee -- Bank of America Securities -- Analyst

Jeff Kessler -- Imperial Capital -- Analyst

Kevin McVeigh -- Credit Suisse -- Analyst

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