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ADT Inc. (NYSE:ADT)
Q3 2020 Earnings Call
Nov 5, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for standing by. This is the conference operator. Welcome to the ADT Inc. Third Quarter 2020 Earnings Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Derek Fiebig, Vice President, Investor Relations. Please go ahead.

Derek Fiebig -- Vice President of Investor Relations

Thank you, operator, and thank you, everyone, for joining ADT's Third Quarter 2020 Earnings Conference Call. This afternoon, we issued a press release and slide presentation on 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 and uncertainties that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These risks can include, among others, matters that we've described in our press release issued this afternoon and in our filings with 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 historical 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 their 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 in the room and available for Q&A is Don Young, our CIO and EVP of Field Operations; and Jason Smith, Senior VP of Finance. With that, I'll turn the call over to Jim.

James D. DeVries -- President and Chief Executive Officer

Thanks, Derek, and good afternoon, everyone. We appreciate your interest in ADT, and we're glad you joined our call today. I'll begin by highlighting our results for the quarter. I'll touch on some growth opportunity areas for us. And of course, I'll share an update on our partnership with Google. Jeff will then cover our financial results. ADT had an outstanding third quarter, a testament to the strength of our business model and made possible by the efforts of our 20,000 associates who have served our customers exceptionally well throughout the year. I'm pleased with both, our continued operating performance and our financial results. We are increasing our full year 2020 outlook for revenue, adjusted EBITDA and adjusted free cash flow. We see continued consumer demand in the products and services ADT provides.

We're seeing the benefits of near- and long-term external demand catalysts, the urbanization, household formation, growth in smart home adoption and escalating consumer demand for security. We're also leveraging our strong operational execution in driving internal initiatives leading to our growth. Our progress has led to year-to-date net positive subscriber growth and we're positive for the third quarter on a completely organic basis. Our gross RMR additions were one of a number of highlights for the quarter, up 10% in the U.S. on a year-over-year basis. We benefited from the trends I mentioned a moment ago as well as improved marketing efficiency, sales conversion rate and self-generated field sales volume. Our dealer performance was exceptional. And we're just beginning to see the growth benefits of our D.R. Horton relationship.

With the introduction of our new DIY products, this part of our business also continues to grow, and we're very optimistic about DIY going forward. Capital-efficient growth remains our North Star. Revenue payback, a key measure of our subscriber acquisition efficiency, improved substantially versus the prior year as well as sequentially and is now at an all-time low of 2.2 years. We've improved productivity. We delivered higher installation revenue per job, and we're benefiting from the scale advantages of our higher additions. We're also benefiting from the execution on two of our early 2020 strategic initiatives. Our consumer financing program launched during the first quarter continues to deliver great results.

And the integration of our Defenders acquisition, which will be completed in a few months, is driving more efficient customer acquisition. Both initiatives are helping to create sustainable improvements to our efficiencies and costs. Now I'll turn to customer retention, which we continued to improve in the third quarter. As of September 30, our trailing 12-month attrition is at a record best 12.9%. The improvement of 60 basis points versus the prior year was widespread across our residential business. I'm proud of our care centers and our work-from-home performance, which actually started strong earlier this year and has steadily improved over time. During the pandemic, ADT monitoring maintained healthy customer satisfaction and Net Promoter Scores. We're obviously very pleased with our improvements in customer retention. The magnitude of the change underscores our performance as well as the ADT value proposition to our customers.

I would note, though, as we've shared in the past, we don't look at attrition in isolation. We weigh it with other metrics such as revenue payback and growth. We're focused on optimizing the entire economic equation for capital-efficient growth. Although we're beginning to see early signs of an uptick, our sales to commercial customers have clearly been impacted by the pandemic. On a sequential basis, total commercial revenue improved modestly in the third quarter. Monitoring and service revenue has been stable, and we've grown our RMR from commercial customers on a year-to-date basis. New installation volume is improving, and we're encouraged that our third quarter sales increased from second quarter levels and our backlog for both installation and recurring monthly revenue ended the quarter at their best position of the year.

Dollar Tree, Family Dollar is off to an excellent start. And Operation Warp Speed, the federal program associated with the distribution of potential COVID-19 vaccination, was a recent win for ADT commercial. We've been entrusted to secure distribution centers on behalf of one of the government-authorized distributors for a vaccine, and this is yet another clear validation of our business. Looking ahead, while there are still a number of economic and political uncertainties, we're optimistic about our ability to compete in the commercial space and returning to growth in 2021. High-quality commercial tuck-in acquisitions will continue to be a part of our playbook. And as the economy recovers, we remain optimistic about this part of our business.

Turning to our Google partnership. We're off to an excellent start and have two important updates to provide. First, through the coordinated efforts of a number of our existing partners, Google and ADT associates, we will be accelerating the timing of when we roll out our first ADT + Google professional to reform the offering. The second update is that we finalized our interactive platform strategy. ADT will develop and own our next-generation platform. I'll share a bit more on both updates. First, the accelerated offering. We now plan to go to market with a first-generation do-it-for-me or professionally installed offering in partnership with Google in the second half of 2021. The offering will feature co-branding with Google, integrate Google Maps products and offer their extraordinary video analytics platform. This offering will leverage our recently introduced and very well received Command and Control platform to the end of 2022.

With this first-generation offering, we'll pull many of what we described as Horizon two benefits expected to occur in 2022 into 2021, allowing us to go to market as ADT + Google much sooner. This, combined with the momentum we are already seeing in our core business, will accelerate our ability to capitalize on the growth of the home automation market. Now more about our platform decision. When we first announced the Google investment in ADT and the long-term strategic partnership, we shared that one key outcome of the relationship would be a next-generation platform with new home security and automation, products and peripherals, deeper device integration and enhanced alarm verification.

Following a comprehensive review of our alternatives, we've concluded that ADT should and will own our next-generation platform, which will be developed entirely within Google Cloud. Further, the platform will be developed in coordination with Google to leverage native integration in the multitude of works with Google integration already available. Our decision allows ADT to have full control of our future road map and will enable ADT + Google to deliver operational and efficiency benefits, better long-term economics and ensure that we continue to be the leader in home automation and security into the future. Our development work is already well under way with teams from both ADT and Google engaged.

As a reminder, our partnership includes a commitment for Google to contribute $150 million subject to certain milestones toward the development of new technology, marketing investments, customer acquisition and related employee training and other expenditures. In summary, we're very pleased with the partnership and early progress we've made with Google. And as I already described, we're also excited about the momentum of our current business, which we expect to continue into the fourth quarter and into 2021. With that, I will now turn the call over to Jeff to cover our financial results and improved 2020 financial outlook. Jeff?

Jeffrey Likosar -- Chief Financial Officer

Thank you, Jim, and thank you, everyone, for joining today's call. As Jim mentioned, we have performed very well during the challenging 2020 macroeconomic environment, and we are very pleased with our overall third quarter results and our improved outlook for the full year. We are even more excited about the actions we have taken and progress we have made during 2020 to position ADT for long-term growth and success. Our strong performance this year continues to demonstrate the resilience of our business and the fortitude of our teams who have risen to the challenge and remain passionately focused on delivering for our customers in both the near and longer term. I will summarize some of our key financial and operational measures, along with a brief update on our outlook, and we'll then open the call for questions.

Our total reported revenue in the quarter was essentially flat year-over-year despite the 2019 disposition of our Canada operations, which previously represented approximately 4% of our revenue. Installation and other revenue increased by $46 million, driven mainly by higher reported residential outright sales revenue resulting from the Defenders acquisition. This increase was partially offset by lower installation revenue to commercial customers resulting from the COVID-19-driven economic challenges we have encountered in that part of our business during 2020. Monitoring and services revenue declined by 4% on a total company basis and was up slightly year-over-year, excluding the effect of the Canada disposition.

Our ending -- recurring monthly revenue, or RMR balance, a primary driver of monitoring and services revenue, grew by approximately 2% in the U.S. compared to the prior year, including an increase in commercial RMR. A highlight in the quarter, which Jim already mentioned, was improvement in our gross revenue attrition, which declined by approximately 60 basis points versus the prior year to a record low of 12.9%. Our improvement here was again driven by several factors, including continued focus on service, the effectiveness of our retention initiatives and some of the environmental tailwinds Jim described, including fewer relocations. Our adjusted EBITDA of $564 million was up slightly on a sequential basis compared to the second quarter. Our cash generation remained very strong both in the third quarter and year-to-date despite higher cash interest due to a shift in coupon timing, which will reverse in the fourth quarter.

We generated $127 million of adjusted free cash flow during the third quarter. And through the first nine months of 2020, our adjusted free cash flow of $532 million is up more than 15% from the $459 million during the same period in 2019. Our strong year-to-date cash performance comes from a variety of factors that more than offset the higher cash interest, including subscriber acquisition cost efficiency and the benefits from some favorable cost base trends in our current operating environment, along with some timing items.

A highlight of our strong cash performance is that we have concurrently grown our subscriber and RMR base, which has been enabled by improved efficiency in net subscriber acquisition costs, or SAC. During the third quarter, we decreased our net SAC by 1% while growing our additions to RMR by 7%. Excluding the effect of the Canada disposition, our U.S. RMR additions grew by 10%. This substantial RMR growth on lower net SAC led to our best ever revenue payback at 2.2 years on a trailing 12-month basis, down from 2.4 years a year ago. As Jim shared earlier, the benefits of our consumer financing program, better pricing and other sales and marketing efficiencies, including benefits from the Defenders acquisition, contributed to this improvement.

After two full quarters of our new pricing and financing model, we are very pleased with the progress we have seen in higher installation revenue per unit from our residential customers. Additionally, the mix shift toward noncapitalized SAC, driven in the third quarter mainly by legacy Defenders outright sales, was less pronounced than during the first half due to our ongoing transition to our historical ADT ownership model, which will continue as we further integrate Defenders. Overall, we delivered very solid operational and financial results during the quarter despite the COVID-19 challenges, and we did so while also improving our longer-term position due to progress on the Google partnership and several other initiatives.

Turning now to the balance sheet. We also continued to improve our capital structure during the third quarter. A highlight is that we issued $1 billion of new 2027 notes and used the proceeds to redeem our 2021 notes. We priced this issuance with a 3.375% coupon, substantially lower than the 6.25% coupon on our 2021 notes, which will result in run rate interest savings of almost $30 million. Collectively, after a series of transactions during 2019 and 2020, we have decreased our average borrowing cost by approximately 100 basis points. Additionally, with the closing of the Google transaction, we received $450 million in cash for Google's investment and approximately 55 million shares of ADT Class B common stock.

As we have described, we intend to use proceeds from the Google transaction for a combination of growth funding and debt repayment. And to that end, we are announcing today our intent to repay a minimum of $300 million of debt during the fourth quarter of this year. Before moving to Q&A, I want to share a brief update on our outlook for full year 2020. As Jim mentioned, our business continues to perform well and exceeded our expectations during the third quarter. We consequently are once again revising our full year outlook higher. Our new revenue range is $5.2 billion to $5.35 billion, up from $5.05 billion to $5.3 billion.

Our revised adjusted EBITDA range is $2.15 billion to $2.225 billion, an improvement from $2.1 billion to $2.2 billion previously. And our refreshed adjusted free cash flow range is $650 million to $725 million compared to the prior range of $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 growth investments to generate future period returns, some of which we are considering during the remainder of 2020. As we develop our 2021 plan, we are focused on investing in and positioning our company for long-term growth and building on our progress from the past few years.

We look forward to sharing more on our next earnings call in early 2021. To conclude my comments today, I want to emphasize that we are very pleased with our strong results through the first nine months of 2020. We are thankful for our committed team of 20,000 employees and their perseverance and performance during a challenging year. And we are excited by the progress we have made positioning ADT for the longer term and by the resulting opportunities in front of us. Thank you, again, everyone, for being on today's call. Operator, we will now open the line for questions.

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from the line of George Tong with Goldman Sachs. Please proceed with your questions.

George Tong -- Goldman Sachs -- Analyst

Hi, thanks. Good afternoon. You're accelerating the launch of the professionally installed co-branded offerings with Google into [Technical Issues] partnership with Alarm, Pulse?

James D. DeVries -- President and Chief Executive Officer

George, we didn't -- there was some interference on our end. Could you repeat that question?

George Tong -- Goldman Sachs -- Analyst

Sure thing. So again, you talked about accelerating the launch of your professionally installed co-branded offering with Google into 2021. Can you elaborate on the product road map for the Google partnership and how it may pertain to your partnership with Alarm/Pulse?

James D. DeVries -- President and Chief Executive Officer

Sure. So I'll give a little bit of detail on the platform decision and the road map and then ask Don to add anything that I may have missed. So a few points to make. First, the discussions with Alarm.com that we had in accelerating the road map resulted in a great outcome for both parties and included the launch of a first-generation ADT + Google offering developed through the commitment by Alarm.com that will result in several things.

First, it leverages the foundation and extends Command and Control until the end of 2022, and then beyond that, allows that platform to support our end customers for a very long time. And we believe these customers -- these Command and Control customers with integrated Nest product and services will perform well on an attrition basis. The second thing, integrated Google Nest services and Google Video services will be available and accelerate our go-to-market with a co-branded offering in the second half of 2021 instead of mid-'22. So in short, the agreement that we put in place and negotiated with Alarm.com allows us to pull forward many of the benefits that are resident in the ADT + Google partnership. two quick additional points.

First, the platform decision and the road map really allows us, George, to control our destiny. Our partnership with Alarm.com has been extraordinary, but we now think, in coordination with Google, that we're better positioned to own and develop our own platform. two reasons for that. We think, at a high level, we'll capture efficiencies -- efficiency benefits as a result. And then secondly, the point I made earlier about controlling our destiny, we can better navigate our own unique product road map to create differentiation for us in our products and services in a better way.

Donald M. Young -- Executive Vice President of Field Operations & Chief Information

So George, this is Don. Jim covered it very well. Pulse and Command, as we've already talked -- or Jim already talked about, will have fully integrated in that second half. That invites all the Google product suites into kind of our ecosystem. But regarding our new platform, just to add a little bit to what Jim said, we're looking not just to go to make our smart platforms smarter, we're looking to make it more helpful. And that's leveraging Google's prowess in ML and AI to fuel what Google calls ambient computing. And if you can imagine for a moment, in today's world, we have to educate our customers, make them smarter about to leverage their system in different ways with rules and automation, that kind of thing.

What we want to do is we want to make our customers not smarter necessarily but more comfortable sharing information that ambient computing opportunity and actually create the rules automatically without the customer having the intelligence to do it themselves. And we see that the way that the customers value in their system without the necessary investment of additional devices or even educating them on how to resonate themselves.

George Tong -- Goldman Sachs -- Analyst

Got it. That's helpful. You generated positive net subscriber growth organically in the quarter. Can you discuss the sustainability of this growth in net subscribers and the top factors/initiatives to fuel this growth going forward?

Jeffrey Likosar -- Chief Financial Officer

Yes. Thanks, George. It's Jeff. We feel really good about our performance in the quarter. We talk often about bouncing various objectives in pursuit of strong ROI over the long term. And in this quarter, we delivered on all of those objectives. We reduced our SAC spending. We improved our customer acquisition efficiency. We exceeded our EBITDA objectives. And as I said in my prepared remarks, we're really excited that we did that while generating such strong cash flow.

So there's a whole variety of factors that goes into that, many are to do with their own performance, we've also benefited from some of the macroeconomic and macro-environmental factors. And we think many of those will stay with us and that we will have some wind at our back for a period of time in continuing to drive improvements in the business as we head into 2021, and that's what we're focused on doing.

George Tong -- Goldman Sachs -- Analyst

Got it. Thank you.

Operator

And our next question comes from the line of Seth Weber with RBC. Please proceed with your question.

Seth Weber -- RBC -- Analyst

Hi, guys. Good evening. I guess just first on the Google announcement. Can you just -- I'm just trying to make sure I'm understanding it. Is the pull forward, is that a more simplified version of what you're planning on rolling out in sort of mid-2021? Or is it basically the same offering that just got accelerated? And then I guess can you just talk to how that -- the acceleration weighs on the $150 million marketing spend and how we should think about timing of that from both you and Google? Thanks.

James D. DeVries -- President and Chief Executive Officer

Sure. Seth, it's Jim. The -- what we will roll out with Alarm.com and Google Video is part of that offering. What we roll out and go to market with as ADT + Google in the second half of '21 is very nearly what we had anticipated rolling out in mid-'22. It's not precisely what we intend to do in '22, but it has almost all of the benefits and features that we had envisioned and will be pulling forward. In terms of the $150 million from Google, that comes in three tranches.

The second and third tranche are dependent on volume commitments that we're exceptionally confident we'll achieve. The first $50 million will go toward product development, marketing, training in some way -- in some proportion that we've not yet finalized. A healthy portion of it will be for product development, but exactly how much is yet to be determined.

Seth Weber -- RBC -- Analyst

Okay. And then maybe if I could just switch to the commercial side for a second. I mean, your commentary was pretty positive about the backlog and sort of sequentially improving trends there. Can you talk to -- that was part of your business that was growing double digits pretty nicely pre-COVID. Do you envision that getting back to sort of a double-digit revenue growth once the environment kind of settles back down?

James D. DeVries -- President and Chief Executive Officer

Absolutely. We're very optimistic about the commercial business. Total revenue was up sequentially in Q3. We believe we'll return to growth in '21. The business includes a large recurring revenue base. 30%, 35% of the revenue in that business is recurring. So it's buoyant and durable, highly diversified stuff. I think we're just shy of 250,000 customers in the commercial business.

We have upside in new and growing verticals, healthcare, education, government, critical infrastructure. And as we've talked about a number of times before, we have the best service in the space, and that's the most critical source of differentiation. So we're optimistic about the commercial space and expect to grow again next year.

Seth Weber -- RBC -- Analyst

I appreciate that. Thank you very much.

Operator

And our next question comes from the line of Manav Patnaik with Barclays. Please proceed now with your question.

Gregory R. Bardi -- Barclays -- Analyst

This is actually Greg calling on. Maybe to stick on the commercial side. Just wondered what you're seeing from the small business customers as we go further along here and some of the stimulus wears off? Are those guys hanging in? And what's the outlook?

Donald M. Young -- Executive Vice President of Field Operations & Chief Information

Yes. We feel good about small business. Your question with regard to how they're doing if the stimulus wears off, we so far feel good about attrition levels. Delinquency in that area of our business has held strong. And generally speaking, we feel great about the SMB business, and it's continued to perform in a healthy way for us.

Jeffrey Likosar -- Chief Financial Officer

Yes. The way I might describe it is that our small business customers, in general, have performed more analogous to our residential customers than to our larger commercial customers.

Gregory R. Bardi -- Barclays -- Analyst

Okay. That makes sense. And then maybe again on the Google partnership, I think you said that very nearly what you anticipated for 2022. Any color on what will be the things that need to be added from there? What's missing versus initial expectations? And how do you continue to roll once you get the product out in 2021?

Donald M. Young -- Executive Vice President of Field Operations & Chief Information

Yes. This is Don. So we have mentioned before, we're going to have the Google product suite fully integrated with our Command and Control and Pulse platforms. On the newer platform, we're looking to go beyond this device integration. We're looking to go and leverage the ML and AI. I mentioned before ambient computing in addition to something I didn't mention, which is alarm verification.

We see great opportunity to go and then collect data, analyze it and help verify and score alarm activity. In the future, we think that's an added value to our customers as a result of some of the strain that police department have across the country, first responders, and we're excited about that. There's also a bit of an imagination phase that begins in 2022, kind of the opportunity as possible. And we're looking forward to that.

Gregory R. Bardi -- Barclays -- Analyst

Okay. Thank you.

Operator

Our next question comes from the line of Gary Bisbee with Bank of America. Please proceed with your question.

Jay Hanna -- Bank of America -- Analyst

This is Jay Hanna on for Gary today. My first question just, you earmarked $300 million of the $450 million from the Google investment for debt reduction. Is it safe to assume the remaining $150 million will be used also for these two initiatives you guys have come in with Google?

Jeffrey Likosar -- Chief Financial Officer

Yes. So we said a minimum of $300 million. We feel really good about our capital structure and the progress we've made over the last couple of years. We've done -- I think it's four refinancing transactions between 2019 and 2020, collectively would reduce our cost of debt by almost a full point. And the Google proceeds because of our strong cash generation, as we said, are available for a combination of debt repayment and growth.

And the reason -- for now, we're saying $300 million or minimum thereof is because we are continuing to evaluate some of the questions that have already come up and the exact amounts and timing in addition to some other things unrelated to Google that are on our radar screen for the fourth quarter headed into next year.

Jay Hanna -- Bank of America -- Analyst

Okay. So that -- is that potentially be referenced to those account acquisitions that were mentioned in the slide?

Jeffrey Likosar -- Chief Financial Officer

Yes. I'd say there's a normal course of business things, we might pursue M&A that we may pursue and just trying to remain flexible. And then we'll -- as we work our way through budgeting and planning for 2021, when we look out into the horizon, not just for the fourth quarter, but into next year. And again, we said minimum $300 million. But depending on how that plays out, the exact timing and the exact mechanics and even the exact amount is a little bit still to be determined.

Jay Hanna -- Bank of America -- Analyst

Okay. And then just with regard to Defenders, could you give an update on how that's, I guess, helping drive customer acquisition and some efficiencies?

James D. DeVries -- President and Chief Executive Officer

Well, it's going very well. The integration has resulted in us capturing both the cost synergies and the revenue synergies that we anticipated. One of the great strengths of Defenders was their direct marketing capability. And together with our own marketing organization, we're seeing terrific benefits in terms of SAC efficiency. And I'd say feel great so far about the integration of Defenders.

Jeffrey Likosar -- Chief Financial Officer

And one thing I would add, and I love when people ask that question. We even talked about it internally. We have so many things that are working in the positive direction that it becomes difficult to disaggregate a bunch of those things to figure out what's the precise contribution of each one.

But when you look at our improvement in our subscriber acquisition efficiency, we have the Defenders integration and some improvements that we've made in marketing more generally have the benefits of our new pricing model that we rolled out just in the first quarter of this year and then also exposure to some of these trends that you see on the slide, Slide five in our deck around the urbanization, household formation and each of those dynamics. So we feel really good about all of them. But to be honest, we struggled to precisely parse out our performance and to the exact contribution from any one of those factors.

Jay Hanna -- Bank of America -- Analyst

All right, Jeff. Thank you.

Operator

[Operator Instructions] Our next question comes from the line of Jeff Kessler with Imperial Capital. Please proceed with your question.

Jeff Kessler -- Analyst

Thank you. Could I follow on with regard to some of your metrics, your cost to create and then again -- and your cost to serve and attrition? To some extent, they are interrelated. Getting good customers obviously potentially makes them longer live. But what I'm asking about is beyond Defenders and getting into your third-party financing.

How are you using that? And how are you finding the ability to effectively make it efficient that they take the right -- they finance the right customers for you, and you either take on or finance those other customers that don't meet the standards so that you don't have upticks in attrition so that everybody knows who's on -- who's playing on what board here?

James D. DeVries -- President and Chief Executive Officer

Jeff, this is Jim. I'll take the attrition question, answer it a little more broadly and then come back to a point on Defenders. And then you touched on consumer financing and how that's going, I'll ask Jeff to comment on consumer financing. So I'll start at a high level on attrition. We feel great about retention in the third quarter. As we announced, there was a record low 12.9% for us. The improvement was super widespread across geographies, all categories, across all business areas. SMB was flat, but residential and core commercial improved.

But a couple of reminders on attrition, and one of them precisely addresses your question. The first is while attrition is an important metric, and all attrition is bad attrition, it's only a part of the value equation, along with other measures. Cost to acquire probably the most important. And then secondly, and to your question, when we acquired Defenders, we continued to receive charge-back benefits for accounts sold to the acquisition. And that benefit expires over a 12-month period and will be a slight metric headwind in the subsequent 12-month period for us.

So we feel great about customer retention. We're optimistic about it from a long-term perspective. Especially as we enter the smart home space more assertively, we know more customers use their systems, the more device kind of fall in the home, the more the systems are integrated into their daily activities, their retention improves. But because that charge-back from Defenders will go away in January, it'll be a slight metric headwind in the subsequent 12 months.

Jeffrey Likosar -- Chief Financial Officer

And Jeff, you started your question, you talked about cost to create, cost to serve and attrition, Kind of similar to George's question, I mean, those things along the growth along with cash generation or what we seek to bounce every period when we talk about how we're not trying to optimize anyone. But in the third quarter, like, we achieved or exceeded our objectives on every single one of those. So we feel really good about our performance in that regard. And then the -- there's some noise in the year-on-year because the Canada disposition, the Defenders acquisition, rollout of the financing and the ownership model that goes with it.

But really good about overall performance is the way we feel. And then when you ask more specifically about financing and customer selection, I would emphasize that the growth that we've generated in our RMR additions is coming at higher average install revenue per unit, and a significant driver for that and notwithstanding my earlier point about the difficulty parsing every factor, but one of the drivers is, for sure, our new pricing and our financing model. So we're using that as a selling tool -- by and large, as a selling tool for all customers. But all customers don't end up taking the financing option. In many cases, we use it as a sell-in tool, but we end up collecting upfront in cash.

And then your question about how we select, it's based on a combination of the customer and the order size and the credit scoring and the same kinds of things that we've used historically. And then just a reminder in terms of how it works, the customer's relationship is with ADT. We offer the financing to ADT, and then we monetize it in partnership with Mizuho Bank with an advance rate based on some of the same characteristics I just described. But we're only two full quarters in, off to a really, really good start, and we will continue to fine-tune exactly how we present the offer to maximize the effectiveness and utilization over time.

Jeff Kessler -- Analyst

Okay. My follow-up is -- I thought my follow-up obviously could be with Don, it would be a 10-minute discussion. So I don't want to do that at this point. The follow-up question is actually on your commercial industrial business. I know it's been touched on a couple of times, but could you give us a little bit more clarity on which areas -- maybe which verticals or which types of accounts -- you have national accounts and then you have like a large one, one-campus types of businesses.

Where are you able to start seeing people being able to get on premises to start installing again? Or where are you able to negotiate agreements where if -- to make it a little bit easier now that -- given the fact that this pandemic is not going to go away anytime soon, and yet companies are learning how to deal with it, what are you doing to learn how to deal with it on the commercial side so that you can keep those numbers going?

James D. DeVries -- President and Chief Executive Officer

Jeff, it's Jim. I think as customers are to deal with the pandemic, we realize the benefits as a result. And our ability to get on-premise today is markedly better what our -- versus what our ability was three or four months ago. We think there's a way to go for the overall market as the pandemic and economy are still somewhat unknown.

But we finished Q3 with strong backlogs, the highest of the year, roughly equivalent September 30 of this year to September 30 of last year. And we had solid sales in install in October as well. So it's broadly diversified, much of it tied with getting access to the premises. And as I mentioned earlier, we feel really good about the commercial business and returning to growth next year.

Jeffrey Likosar -- Chief Financial Officer

And Jeff, I would add to that, building a little bit on some of what I was saying earlier about all the factors that go into this year between Canada and Defenders, the new pricing models. It's also, of course, a higher degree of uncertainty with COVID-19 and some of the challenges to the top line, especially in our commercial business, partially offset by some benefits from lower spending in other parts of the business. Our teams have performed very, very well. It's increasingly clear that we have this exposure to be favorable environmental trends.

But as we go into 2021, for sure, there's a higher degree of uncertainty that we're managing through. To build on those trends, you'll manage the uncertain environment, including commercial recovery, the return to normal behaviors more generally. And we're really focused on strengthening our capability to grow our subscriber and RMR additions for the long term, including consideration of an investment in the Google partnership platform, other initiatives. And we'll, of course, talk more about the future and 2021 on our earnings call earlier in the year.

Jeff Kessler -- Analyst

Great. Thank you very much.

Operator

Next question comes from the line of with JPMorgan. Please proceed with your question.

Dewas -- JPMorgan -- Analyst

Hi. I'm wondering if you're going to take any steps to better align your compensation to your ESG metrics and execution. And then as a follow-up to that, I'm wondering what is being done at the Board level with regard to the underperformance of the stock. Thanks.

James D. DeVries -- President and Chief Executive Officer

Yes. I'll answer the question. The -- so in terms of management compensation, we have a compensation program that is heavily weighted toward equity. The management team is exceptionally aligned to shareholders. And we think that the way that the annual incentive plan is designed sufficiently in sense management to drive lead indicators that will ultimately be realized in the stock price. In terms of your question on the Board, we're not prepared on this call to talk about Board interaction and planning.

Operator

And we have no further questions from the phone lines at this time.

Derek Fiebig -- Vice President of Investor Relations

Okay. Jim, if you want to make some closing remarks.

James D. DeVries -- President and Chief Executive Officer

Yes. Just a couple of things. So needless to say, we're very pleased with our operational and financial results. Our 10% growth in RMR additions, record low revenue payback of 2.2 years, net sub growth, record low attrition, all serve to underscore our strong operating capability and a really highly durable business model. The Google partnership is off to an outstanding start, and we're very optimistic about our trajectory going forward. So thank you, everybody, for calling in tonight, and have a great evening. [Operator Closing Remarks].

Duration: 52 minutes

Call participants:

Derek Fiebig -- Vice President of Investor Relations

James D. DeVries -- President and Chief Executive Officer

Jeffrey Likosar -- Chief Financial Officer

Donald M. Young -- Executive Vice President of Field Operations & Chief Information

Jeff Kessler -- Analyst

George Tong -- Goldman Sachs -- Analyst

Seth Weber -- RBC -- Analyst

Gregory R. Bardi -- Barclays -- Analyst

Jay Hanna -- Bank of America -- Analyst

Dewas -- JPMorgan -- Analyst

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