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ADT Inc. (NYSE:ADT)
Q2 2020 Earnings Call
Aug 5, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to ADT Inc. Second Quarter 2020 Earnings Conference Call. [Operator Instructions]

I will now turn the conference over to Derek Fiebig, Vice President, Investor Relations. Thank you. You may begin.

Derek A Fiebig -- Vice President, Investor Relations

Thank you, operator, and thank you, everyone, for joining us on today's call. This afternoon, we issued a press release and slide presentation on our financial results. In addition, on Monday, we issued a press release and posted a slide presentation related to our Google partnership. 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 we disclaim any obligation to update our forward-looking statements, which speak only as of the time they are made. During today's call, we'll also 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 and our slide presentation issued this afternoon, both of which are also available on our website.

With me today on today's call are ADT's President and CEO, Jim DeVries; our CFO, Jeff Likosar. And also joining us and available for Q&A are Don Young, our CIO and EVP of Field Operations; as well as Rich Rot, SVT of Business Operations; and Jason Smith, SVP of Finance.

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

Jim DeVries -- President and Chief Executive Officer

Thank you, Derek, and its a pleasure to welcome everyone to today's call. As you know, on Monday, we announced our long-term partnership with Google, which we believe positions us for a major leap forward in our development and long-term growth potential. Our existing initiatives, combining with our Google partnership enable us to continue to lead the industry well into the future. I hope many of you were able to join our call on Monday, where we discuss this exciting alliance in more detail.

I'll share a brief recap of our agreement in a moment, but first, I'd like to spend some time discussing ADT's very strong second quarter performance. In early May, we shared with you the transformational efforts by our team to navigate the COVID-19 environment, highlighted, especially by an extraordinary shift of our nearly 5,000 call center employees to a work-from-home environment. As we progressed through the second quarter, we accomplished many similar objectives toward adjusting our business operations, including extraordinary customer service provided by our entire field organization. I am both pleased and proud that the ADT team quickly moved from navigating during a challenging time to simply thriving. From a customer care standpoint, the pandemic has allowed us to rethink the art of the possible, and we are encouraged by the high level of service and effectiveness we achieved. These efforts resulted in a healthy year-over-year improvement in our NPS score to an all-time high.

During the quarter, we also introduced our first artificial intelligence, chat bot to handle customer service issues. Additionally, we delivered our highest ever first call resolution rate and saw an increase in our customers' use of our self-service interactive voice response. In our field operations, ADT technicians continue to safely and efficiently service both new and existing customers. The second quarter also represented our best quarter for technician productivity, while acknowledging the many economic challenges throughout the country. The demand for ADT's products and services remains firm overall, with strength in residential demand, partially offsetting a softer environment for our commercial customers. In May, we actually began adding technicians to our team and expect to continue to do so through the balance of August.

These strong customer service and satisfaction levels supported customer retention and as our 12-month gross customer revenue attrition improved by approximately 40 basis points sequentially to 13.1%. We experienced improvements across both our direct and dealer channels, and actually, in every category we track, including customer relocations. As we've highlighted a number of times before, progress in the customer retention will not always be linear, but I'm pleased with our performance during the quarter. We'll continue to drive the customer service initiatives I shared earlier, which we expect will result in higher customer satisfaction and strong retention over the long run.

Turning to our Residential business. New residential sales also finished the quarter strong with each month better than the prior month. As shared during our first quarter call, COVID-19 and shelter-in-place restrictions, negatively impacted our business in late March and in April, before sales demand improved during the course of May and spiked higher in June. With our June U.S. residential RMR additions up on a year-over-year basis. Net customer additions remained positive for the first six months of the year. We're monitoring the resurgence of COVID-19 and the broader macroeconomic situation carefully. Despite the near term uncertainty, the resilient characteristics of our business are illustrated with consumers placing a high-value on safety, security and peace of mind.

Looking further into the future, we're increasingly encouraged by current and potential long-term market trends. On a per household basis, consumers continue to desire more services and more helpful home services, and we expect that macro trend to continue for years to come. Record low interest rates, recent trends toward deurbanization and a growing millennial population seeking new homes, all bode well for housing and home automation over time. These trends present both short-term and long-term opportunities for us.

I'm also excited about ADT's new long-term partnership with D.R. Horton, the nation's largest homebuilder, to one of our most exceptional dealers, Safe Haven, ADT is now the exclusive provider for D.R. Horton and will professionally deliver smart home security and automation solutions for new homes built by D.R. Horton. This will include connected thermostats, video doorbells, door locks, lights, in addition to security. We're excited to be a partner to D.R. Horton now and for many years to come. The strength we experienced in residential demand offset weakness stemming from COVID-19-related pressure in our commercial business. Throughout 2019 and early 2020, we experienced low double-digit organic growth rates in commercial revenue, with a large portion of the growth coming from the installation of new systems and ongoing service visits.

As shared previously, in March, our commercial business experienced a year-over-year decline due to COVID-19, which continued into the second quarter with revenue ending down approximately 15% from a year ago. However, we continue to make progress in our long-term commercial position. And while we believe that many of our growth prospects are deferred, they are not diminished. A great example of this growth announced in May was our largest commercial partnership ever with Dollar Tree/Family Dollar. We anticipate this partnership to eventually span more than 15,000 locations across the United States. While we've experienced pockets of success and progress during the quarter, we remain cautious about the balance of the year and expect to see continued year-over-year pressure in this part of our business, which is factored into our total company guidance.

However, we'll look to continue to strengthen the commercial business through integrating our existing operations, adding to our capabilities and acquiring new talent to position commercial for 2021 and grow well into the future. Overall, we're pleased with our financial performance, especially our cash generation, and Jeff will describe additional details in a few moments. As mentioned, our trailing 12-month revenue attrition ended at 13.1%, improving by approximately 20 basis points from a year ago and approximately 40 basis points sequentially. Our subscriber acquisition or SAC efficiency improved over the past year as well with our trailing 12-month revenue payback coming in at 2.3 years, down from 2.4.

In summary, ADT performed very well during the second quarter, thanks to the efforts and accomplishments of our dedicated employees, along with our dealer partners, who worked tirelessly to deliver essential services to millions of customers in this challenging environment. Our strong second quarter performance demonstrates not only the resilience of our business model, which features recurring contractual revenues, strong cash flow and flexibility and expenditures, but also our team's ability to stay focused on the business at hand, while continuing to prioritize health and safety.

Before turning things over to Jeff, I'd like to take a moment to revisit our announcement from two days ago regarding Google. On Monday, as most of you already know, we announced a transformational, long-term strategic partnership with Google that significantly enhances ADT's long-term growth opportunities. Over time, this groundbreaking partnership will enable us to develop new offerings, new products and technology to service the rapidly growing smart home market. Our shared vision, mutual commitment to serving customers, complementary strengths, significant equity investment and meaningful go-to-market funding, position our partnership for success for many years to come. I'd encourage you to review Monday's recorded call and slide presentation for more information on our partnership with Google.

I'll now turn the call over to Jeff to provide further details on our second quarter results, along with an updated outlook for 2020.

Jeff Likosar -- Chief Financial Officer

Thank you, Jim, and thank you, everyone, for joining today's call. As Jim mentioned, we are very pleased with our overall second quarter results and our accomplishments through the first half of 2020. Our performance demonstrates the resilience of our business and the fortitude of our teams, who have delivered these strong near-term results, while concurrently strengthening our long-term position despite the challenging macro environment so far in 2020. Our total reported revenues in the quarter grew by approximately 4% year-over-year despite our 2019 Canada disposition and the 2020 effects of COVID-19.

The main contributor to revenue was installation and other revenue, driven mainly by higher reported residential outright sales revenue, which more than offset softness in sales to commercial customers. Monitoring and services revenue declined by 4% on a total company basis with the divestiture of Canada. However, U.S. recurring monthly revenue grew by approximately 1% in the quarter, even with the COVID-19 related slowdown, which has especially affected sales to commercial customers. We are pleased that our adjusted EBITDA of $563 million grew sequentially by approximately 4% compared to the first quarter.

As in the first quarter and as expected, our adjusted EBITDA was down year-over-year, driven primarily by expenses recognized in our P&L as a result of the Defenders acquisition, the disposition of Canada and the lower volume of commercial transactions. Cash generation, which benefits from the Defenders acquisition was again a highlight in the quarter, and we generated $232 million of adjusted free cash flow during the second quarter and $405 million on a year-to-date basis. This compares to $292 million for the first half of last year.

As I will describe in a bit more detail later, our adjusted free cash flow for the first time includes net inflows from our new consumer financing arrangement and Mizuho partnership, which contributed $19 million in the quarter. The benefits of our consumer financing program contributed to efficiency in net subscriber acquisition costs, or SAC, which were down 19% year-over-year on a 14% reduction in addition to recurring monthly revenue, or RMR. Customer revenue payback on a trailing 12-month basis improved to 2.3 versus 2.4 years. Additional contributing factors to net SAC efficiency, include improved pricing to Defenders acquisition and our ongoing cost efficiency actions.

As in the first quarter, net SAC shifted between capitalized and non-capitalized due to the Defenders acquisition and the shift to more residential outright sales. Another highlight in the quarter was improvement in our gross revenue attrition, which declined by approximately 20 basis points versus the prior year and approximately 40 basis points on a sequential basis. As Jim mentioned, attrition improvements were driven by several factors, including fewer relocations, a number of positive customer service trends and the effectiveness of our retention initiatives. From a demand perspective, we entered the quarter with widespread softness due to COVID-19-related shutdowns, as we described on our last call.

However, Residential's new unit demand strengthened throughout the quarter with volumes improving in May versus April and in June versus May. We exited the quarter at a run rate moderately above the prior year's levels, and we saw a strong increase in net customer count during June. While U.S. residential RMR additions were down for the full quarter, they increased year-over-year in the last month of the quarter.

Turning now to the balance sheet. Our overall capital structure did not materially change during the second quarter. As a result of our strong cash generation, we repaid during the second quarter, the $220 million balance outstanding on our revolving credit facility as of the end of the first quarter. In addition, we today declared our quarterly dividend of $0.035 per share payable in early October. I also want to point out that in consideration of recent market strength, we are considering accessing the capital markets in the near-term to refinance our 6.25% notes due in October of 2021.

Now I'll share a brief update to our outlook for full year 2020. While the economy continues to face uncertainty as a result of COVID-19 and other dynamics, we are fortunate to benefit from our recession resilient characteristics, exposure to favorable trends and demonstrated strong execution in the first half. Consequently, we have improved our overall financial outlook relative to the ranges we shared in May. Our new revenue range is $5.05 billion to $5.3 billion. Our adjusted EBITDA range is $2.1 billion to $2.2 billion, and our adjusted free cash flow range is $625 million to $725 million. As always, we will continue to balance short- and longer-term objectives with a focus on the pursuit of selected incremental investments to generate future period returns.

Before turning to Q&A, I want to mention a couple of other items related to our results and outlook. First, as I mentioned earlier, our second quarter results, for the first time, include the net cash inflows from our new pricing model changes and consumer receivables facility with Mizuho, which we entered into during the quarter. Due to the inclusion of this new inflow, which we had included and described in our original 2020 financial outlook, we are now using the term adjusted free cash flow to describe our primary non-GAAP cash flow measure. The inclusion of this new planned inflow is the only change to the measure, which you can see in more detail in our earnings materials.

Secondly, as I mentioned on our first quarter call in May, 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 in approximately $28 million in mark-to-market changes recorded in the second quarter earnings. Third, as we also described during our first quarter call, our transition back to a predominantly ADT-owned equipment model, which we began during the second quarter for legacy ADT residential sales will result in lower reported installation revenues in the second half of the year compared to the first half.

Lastly, the outlook range, as I just shared, consider our current expectations for the near-term effects of our newly announced partnership with Google. However, because we have only recently signed and announced this exciting partnership, we are in the early stages of building our near and longer-term investment plans. We will share any relevant updates as we announce our third quarter earnings.

To conclude my comments today, we are very pleased with our strong results through the first six months of 2020 and excited by the progress we have made positioning ADT for the longer-term and the resulting opportunities in front of us. Thank you again for being on today's call.

Questions and Answers:

Operator

[Operator Instructions] Our first question is from George Tong with Goldman Sachs.

George Tong -- Goldman Sachs -- Analyst

Hi, thank you. Good afternoon. Thanks. I wanted to dive deeper into the potential financial implications of the new Google long-term partnership. You've laid out three times horizons for the partnership to ramp. Could you perhaps put a framework around what the timing is around each of the Horizons? What that corresponds to from a your perspective? And then which horizon would you expect to see a material financial impact from the partnership?

Jim DeVries -- President and Chief Executive Officer

HI, George, thanks for the question. It's Jim. Clarity on the horizon. First, the horizons aren't necessarily sequential. We've been working with Google for almost a year now on their technology and how that can advance the ADT plus Google vision for smart home. And how we can transform the industry and really create a special customer variance. And so it's not necessarily sequential. But let me speak to your question. Horizon one is essentially the introduction of products available today to our current and to our legacy customers that will occur over the next 12 months. Then Horizon two is a fully integrated solution that utilizes Nest products.

In Pro Install, there's some additional features like enhanced alarm verification. And the Pro launch of Horizon two is no later than June of 2022. And then probably what we're most excited about, what we call the reimagination horizon that's all about the art of the possible. And rethinking the smart home experience using AI, machine intelligence, and then building a platform that ties all of that together. We're not prepared to give quantitative impacts at this point for each of those horizons, but that's a timeframe and a little descriptive for you on what the horizons look like.

Jeff Likosar -- Chief Financial Officer

George, I'd add one thing I'd add to that, too, is the way we're thinking about this is it fundamentally changes our long-term growth trajectory. And so that's kind of when the Horizon two, Horizon three. But it exposes us to more quickly growing markets, smart home market in addition to our core security market. It makes us appeal to consumers who might be a little bit more smart home first instead of security first. It gives us a more compelling broader set of offerings, even for those security first customers.

And it gives us more differentiation, which some of the stuff that Jim mentioned about differentiated monitoring, video analytics, possibly prioritized alarm response. And then to the art of the possible point, even over the last 24, 36 hours, we've gotten a lot of inbound ideas of other places that this could go over time. And we're excited to have this thing now signed and in motion and more to share later. But I emphasize that approach.

George Tong -- Goldman Sachs -- Analyst

That's helpful. Yes. And just to follow-up on the partnership. How does the Google partnership differ fundamentally from your Amazon partnership? How does it augment the market and the addressable opportunity differently than the Amazon partnership did?

Jim DeVries -- President and Chief Executive Officer

Yes. So on the so the Amazon partnership really orbited around Alexa and using Alexa Guard as an audio detection device in the home. And outside of those two swim lanes, that was the extent of the Amazon relationship. The Google relationship, George, is just a fundamentally different partnership. It involves deep integration. You know about the investments and the incremental $150 million in growth funds. We viewed and still view the Amazon relationship is helpful to the organization, but the Google relationship is really a growth accelerator for us, and an exceptionally deep integration. Product road map, joint marketing, co-branding, all part of what's involved with Google.

George Tong -- Goldman Sachs -- Analyst

Got it. Very helpful, thank you.

Jim DeVries -- President and Chief Executive Officer

Thank you.

Operator

Our next question is from Toni Kaplan with Morgan Stanley. Please proceed.

Toni Kaplan -- Morgan Stanley -- Analyst

Thanks very much. The attrition rate in the quarter was exceptionally strong. I was hoping you could help break down the drivers. I know you mentioned fewer relocations, and that makes sense since COVID, I think, would lead to fewer people moving during the period. But just talk us through the factors and how sustainable the number looks from here? I expect that potentially, it could tick up a little bit if it is driven by the fewer moves?

Jim DeVries -- President and Chief Executive Officer

Thanks, Toni. So first, just a little bit of context on attrition. Our number one objective is, as you know, is capital efficient growth. And that involves balancing a number of metrics that cost to acquire customers, customer retention, cost to serve, a number of other factors. Attrition is obviously extremely important. And it receives sometimes more attention than warranted because it's a balancing act for us to drive capital efficient growth. That said, we're unbelievably proud of the improvement in attrition. We've shared a number of times, the improvement won't be linear, but we like what we saw in Q2. NPS for us was at record levels. Customer satisfaction with our service agents was at record levels.

First call resolution was at or near record levels. And then we did have fewer relocations, and that certainly was a driver, but we improved in retention in every single category we track. Nonpay voluntary lost competition. And not unimportantly, we improved in every region of the country and in customers generated from direct and dealer. So we think Q2 retention is an excellent proof point to highlight recession resistance and the value the customers place on our service. So we feel good long term. We know that attrition won't be linear, but attrition improvement won't be linear, but we feel great about the performance in the quarter.

Toni Kaplan -- Morgan Stanley -- Analyst

That's great. And on the Google partnership, we've received a number of questions on what it could mean for your resi pricing? And also, if there would be any cannibalization of the Pro Install business? I was hoping you could share your perspective on that? And also, if you could clarify if there's a revenue or a profit-sharing component to the sale of each unit, that's something people have asked us about as well?

Jim DeVries -- President and Chief Executive Officer

Yes. The so the Google relationship will involve both our DIY segment and our do-it-for-me segment. There isn't a revenue-sharing aspect to the agreement per se. We're excited about what we can do with Google in both segments. But I would say most of our attention, and frankly, most of the attention and the reason why Google was attracted to us was because of our do-it-for-me segment. Our 5,000-or-so technicians, our deep experience and expertise in distribution, the brand, our trusted reputation, and the ability for us to be the curator of Google product in the smart home is where we focused a great deal of attention. And at the end of the day was really what tipped Google to be to choose ADT as their strategic partner.

Jeff Likosar -- Chief Financial Officer

And Toni, to your pricing question, too, I want to add that not related to Google, of course, in the quarter, but we continue to make really good progress on our new pricing model that, as you may recall, we rolled out in the first quarter and launched nationally toward the end of the first quarter. So the second quarter was our first quarter where we had our new structure in place. And our focus there was to have a simpler pricing structure. It was to enable our sales teams to sell more comprehensive solutions to customers and rely less on discounting, all enabled by the availability of a financing solution.

So after our first quarter having that in place, we're very pleased with the progress that has led to us realizing more install revenue for the average residential installation, which is a meaningful contributor to the SAC improvement that you see in the revenue payback that you see year-over-year. And Google is just going to help that more because it gives us both products and services that we think give us additional differentiation relative to other solutions that might be other.

Toni Kaplan -- Morgan Stanley -- Analyst

Sounds like good progress. Thank you.

Operator

Our next question is from Seth Weber with RBC Capital Markets. Please proceed.

Seth Weber -- RBC Capital Markets -- Analyst

Hi guys, good afternoon. Hope you're doing well. I wanted to ask a little bit on the commercial business, the commercial side of the business, down 15% in the quarter. Can you just give us any color as to trend rate through the quarter? And then I guess just it looks like the customer count was pretty flat. So are you expecting things to get a little bit worse before they get better here going forward?

Jim DeVries -- President and Chief Executive Officer

Thanks, Seth. It's Jim. So the commercial business grew about 10% in Q1. Obviously, the impact of COVID-19 changed the trajectory pretty significantly in the second quarter. I'll give maybe three or four takeaways on the commercial business for you. First, we expect softness in EBITDA and revenue essentially through the remainder of the year, that's baked into our guidance. Secondly, we think the softness is temporary as the country navigates through the pandemic. We're long-term bullish about this part of our business. And third, we're using this time to position ADT commercial to be even stronger over the long term. We're focused on the integration of Red Hawk.

We had a big systems milestone just completed this past weekend. We continue to look at tuck-in M&A. That remains part of our ongoing strategy here. And we're opportunistically reviewing those options. And then we're actually still in the market from a commercial talent acquisition standpoint, especially on the technician front, and we'll continue to focus on that important work. So ultimately, share gain in growth here is about customer service. That's our sweet spot. And as I mentioned, we're bullish about this business. When we think about the opportunity here, we think it's deferred not diminish.

Jeff Likosar -- Chief Financial Officer

And Seth, when we grew we started doing acquisitions to grow our commercial presence. Part of that was to diversify the portfolio. And while that part of our business isn't performing quite as well in the COVID-19 world, we're very fortunate to have the diversification and resilience in our in the Residential side. So some of the trends that Jim described earlier about the suburbanization, more demand for peace of mind, fewer relocations, has led our sales to residential customers and retention of those customers to remain strong, which goes into us being in a position, even despite the COVID-19 dynamics affecting commercial to have raised our guidance in the period.

Seth Weber -- RBC Capital Markets -- Analyst

Right. No, I appreciate that. I was just trying to get a finer point as to whether the trends in June were different from April, May? Whether you saw any improvement through the quarter on a year-over-year basis, just if you're willing to address that or if you don't want to get that granular, that's fine, but that's really the spirit of the question.

Jeff Likosar -- Chief Financial Officer

Yes. I would say, well, we have I mean there's macroeconomic uncertainty. We have a wider range in our guidance than we normally would. It was clear on the residential side, as we mentioned in the prepared remarks, that the trends improved over the course of the quarter. Less clarity, I would say, at this point as to how commercial is likely to play out between now and the rest of the year.

Seth Weber -- RBC Capital Markets -- Analyst

Okay. And can you just talk to whether you're seeing any challenges on the collection side on the credit sorry, on the commercial side of the business, just credit quality, anything that you'd call out there that we should be aware of?

Jeff Likosar -- Chief Financial Officer

Yes, it's something we're watching closely. We increased our credit loss provision in the first quarter. We didn't materially change it in the second quarter. That we've had some exposure to some of the kinds of businesses that you can read about going through some difficult times. I would add, though, that our commercial exposures are reasonably diverse, and some of those exposures are to hard to segments of the economy that are less affected. So we're watching this closely, manage it closely, trying to balance the risk with our growth objectives. But so far, I'd say it's played out a little bit better than we maybe would have expected going in.

Jim DeVries -- President and Chief Executive Officer

And Seth, Jeff was talking about the commercial side, it's probably worth mentioning the SMB part of our business as well, where I know there was there has been some concern expressed year-to-date retention in our small business segment is through June 30, similar to last year. It's a There's a slight mix shift with cancels for nonpay, as you might expect, being higher in the current economic environment. But overall, year-to-date retention in SMB is the same as last year through June 30. So we're monitoring nonpay in SMB closely. Our past due is a bit higher than expected, but it's flat for last year, and we feel good about that.

Seth Weber -- RBC Capital Markets -- Analyst

I appreciate it guys. Thank you very much.

Jim DeVries -- President and Chief Executive Officer

Thank you.

Operator

Our next question is from Jeffrey Kessler with Imperial Capital. Please proceed.

Jeffrey Kessler -- Imperial Capital -- Analyst

Thank you. Good afternoon, guys. Can you elaborate a little bit on one of the in terms of commercial, you did get a boost to keep it from being down further from what I will call the winning the Dollar Group, the installation, the beginning of the installation there. Can you describe what you have done what you showed because your the competition who had it had some pretty good technology. What have you been doing with your national accounts? And what are you doing and on a broader basis, what are you doing in terms of implementing of technology to get assuming that COVID begins to relax in 2021 and you're positioning yourselves to take advantage of the marketplace, what are you doing to take advantage and get greater share through, both technology and the types of service you're telling the potential clients you can give them that their incumbent can't give them?

Jim DeVries -- President and Chief Executive Officer

Yes. So I'll give a little bit of color and then at a high level, Jeff, and then hand it over to Don. Ultimately, we like I mentioned this earlier, we see share gain here is about customer service. And no one in this space provides the level of service that ADT does that Red Hawk and ADT together do. And we think that, that has been and will continue to be the single most important source of growth for us. Specifically to your question on Dollar Tree/Family Dollar, we announced that in May, and that was our largest national account partnership ever announced.

The work has already started. It didn't have a material impact on the quarter. Ultimately, that could be as large as 15,000 locations, and we think that there continues to be a pretty significant opportunity in the national account space, again, driven principally by world class service.

Don Young -- Chief Information Officer and Executive Vice President, Field Operations

So Jeff, this is Don. Let me just offer. From a technology standpoint, Family Dollar had a one-stop shopping solution offer to them by the incumbent, phone service, broadband, security, etc., they shifted their focus. They came up with other alternatives for the broadband and the phone service with less security as a primary reason for seeking a new alternative. And then we just basically was able to close the deal just based on our prowess and our service levels.

Jeffrey Kessler -- Imperial Capital -- Analyst

Okay. Great. My follow-up question is, Don, you know what, I'm going to be what I'm going to be asking you. But this past quarter an appeals court upheld the Sandy Springs suit or their, if you want to call it, their owners their owner is fine and actually their police driven response types of rules for providers that and their customers, who have too many false alarms. What that brings up the question of differentiation in the marketplace. And where are you where do you where are you in the process of putting together a verification capability that will satisfy police from not so they'll put you at the top of their scoring system and so that you don't get hit your clients don't get hit by fines for false alarms? What where is that progress out at this point?

Jim DeVries -- President and Chief Executive Officer

Yes. So we've talked about this before, Jeff. Pinnacle Alarms and fire alarms have their own different category response and intrusion alarms, typically have been difficult to try to prioritize. The technology we've been working on literally for years, but more importantly, the last six months or so with Google's help, their analytical prowess really accelerates us to a place where we're very comfortable deploying a prioritized version of an intrusion alarm.

So basically categorizing that prioritization within the confines that we've had to suffer up to this point. Combine that with the scoring standard, and we think we're really well positioned to go-to-market with not only the technology to support it, but also a standard in the industry to go ahead and back it up.

Jeffrey Kessler -- Imperial Capital -- Analyst

Okay. Great. And is there a general timeframe on this? Is this something you hope to roll out in 2021?

Jim DeVries -- President and Chief Executive Officer

Probably difficult for me to go ahead and paint a picture from a time horizon standpoint. I would expect in 2021, a scoring standard or at least a first version of that to be available. And the technology to at least prioritize some portion of the intrusion alarms, mainly the video portion. The question that remains is how far and how fast we can go on the other sources of data. I would say video leads the way followed quickly by location information.

Jeffrey Kessler -- Imperial Capital -- Analyst

Okay, great, thank you very much.

Operator

Our next question is from Gary Bisbee with Bank of America. Please proceed.

Jay Hanna -- Bank of America -- Analyst

Hey guys. This is Jay Hanna on for Gary today. Just going back to that Google partnership's conversation, how should we expect some of the more immediate costs just from that initial integration process? Like, on your slide, it looks like the first step is just to combine DIY offerings. Is there going to be some cost there we should expect in the next two quarters? And is that reflected in the guidance you just updated?

Jeff Likosar -- Chief Financial Officer

Yes. Jay, it's Jeff. Yes, and I may have mentioned in my prepared remarks, but our guidance outlook for the year includes considerations of the initial investment associated with the recently announced partnership. Because we're so new to being formally aligned, we are in the process, as you can imagine, of working through the details and the specifics. And if anything, is meaningfully different. We'll, of course, talk about it on our next call. In the near term, we wouldn't expect to see a material difference outside of the guidance ranges I just shared. As we talked about earlier, what we're most excited about is using those near-term investments to drive a materially and meaningfully different set of opportunities for us over the longer term.

Jay Hanna -- Bank of America -- Analyst

Okay. Great. And then just quickly on the consumer financing offering, it sounded like it was nicely additive in Q2. Is there any concern on the credit risk side going forward? It strikes me that the typical customer that might pursue that offering might have some more obligations crop up elsewhere over the next couple of quarters?

Jeff Likosar -- Chief Financial Officer

Yes. It's something we watch close and we don't offer as you can imagine, we don't offer the financing program to every single customer. We evaluate and stick to credit standards. Because it's new, we're watching it super close. To the earlier question about commercial credit losses, we are very attuned to payment rates and credit card accept rates and ACH accept rates and all of those things have continued to perform in a range that so far is going OK. But as stimulus runs out and the depending on how the economy performs in the coming weeks and months, we will continue to watch that closely and potentially make some adjustments.

Jay Hanna -- Bank of America -- Analyst

Yeah. Thank you.

Operator

We have time for one more question, and that would be Bryan Wynn with Credit Suisse. Please proceed.

Kevin -- Credit Suisse -- Analyst

Thank you. Actually, Kevin [Phonetic]. Jim, with Google, do you think it accelerates the mix of the business to commercial in terms of discrete to capital to sell commercial more? Or I guess just how are you thinking about the business mix residential, commercial in the context so that there you see a partnership?

Jim DeVries -- President and Chief Executive Officer

Kevin, we couldn't make up most of what you said. Could you repeat that, please?

Kevin -- Credit Suisse -- Analyst

Is that better? I'm just trying to determine what the business mix looks like post the Google partnership, whether or not it allows you to accelerate the shift to commercial? Or how are you thinking about percentage of business residential versus commercial being in the context of the partnership that you just announced?

Jim DeVries -- President and Chief Executive Officer

Okay, Kevin. I got about one out of every four words. So I'm going to answer the question. I think you asked the Google partnership is focused right now on the residential and small business parts of ADT. We think that there's some optionality on the commercial side in the future. But right now, we are focused principally on high-volume residential and SMB.

Kevin -- Credit Suisse -- Analyst

Understood. And then I guess within the context of the retention with just a more diversified set of Google centered Nest products, do you look like the retention to get better than kind of some of the targets you put out there? Or how should we think about that for the future?

Jim DeVries -- President and Chief Executive Officer

Absolutely. Absolutely, the retention will improve. We know that the more that a customer uses their system, the more they interact with their system, the higher their retention. And a smart home customer that has more devices in their home that we curate will be a stickier customer. And not only is the retention advantageous there, Kevin, another advantage is from a SAC cost perspective, we have higher installation revenue, and we're able to acquire smart home customers more efficiently. So to answer your question on retention is, yes, we expect improved retention characteristics and also because of the install revenue, it will be a tailwind for us in SAC.

Kevin -- Credit Suisse -- Analyst

Great. And is there any way to think about the retention of what an average smart home retention is versus maybe traditional Tier 1?

Jeff Likosar -- Chief Financial Officer

Yes. I would say, Kevin, the go back to what Jim was saying earlier, that we're confident that all things equal this is going to lead to customers using their systems more and is going to lead to better retention over time. We're also balancing that, managing that with the cost to acquire customers who you can envision different models that have different contractual terms into the future. And then we balance that always also against the profitability of serving the customers.

So back to what Jim said at the beginning about our number one job being to optimize customer lifetime value and NPV of customers we take on. The way I would look at that is we're highly confident that this partnership is going to both enable us to do that. And also lead to meaningfully different long-term growth trajectory as the partnership fully comes together.

Kevin -- Credit Suisse -- Analyst

Thank you.

Operator

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Jim DeVries -- President and Chief Executive Officer

Thank you, operator. So it was obviously a very strong quarter for us, especially in the context of the environment of COVID-19. We're feeling very good about the anticipated benefits of our recent announcements as well. We had strong Q2 financials, outstanding cash generation. As I mentioned earlier, customer service is at record levels. Our customer retention was strong. Technician productivity, revenue payback are both pointed in the right direction. A number of operating KPIs were also terrific. We successfully partnered with one of the largest retailers in America, Dollar Tree/Family Dollar.

And then as most of you know, just last week, D.R. Horton, the largest builder in the country selected us as their exclusive partner. And then, of course, we announced our long-term partnership with Google this week, and couldn't be more excited about what that relationship will do to accelerate growth. Finally, I want to thank all the ADT employees and our dealer partners for their relentless commitment as we continue to navigate the pandemic and serve our customers. So thanks for taking the time this evening. We appreciate your interest in ADT. Good night, everyone.

Operator

[Operator Closing Remarks]

Duration: 52 minutes

Call participants:

Derek A Fiebig -- Vice President, Investor Relations

Jim DeVries -- President and Chief Executive Officer

Jeff Likosar -- Chief Financial Officer

Don Young -- Chief Information Officer and Executive Vice President, Field Operations

George Tong -- Goldman Sachs -- Analyst

Toni Kaplan -- Morgan Stanley -- Analyst

Seth Weber -- RBC Capital Markets -- Analyst

Jeffrey Kessler -- Imperial Capital -- Analyst

Jay Hanna -- Bank of America -- Analyst

Kevin -- Credit Suisse -- Analyst

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