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Why Shares of ADT Are Dropping on Tuesday

By Lou Whiteman – May 8, 2019 at 1:16PM

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The security firm isn't making great progress holding onto its customers.

What happened

Shares of ADT (NYSE: ADT) fell by more than 9% Tuesday after the home security systems provider reported first-quarter results that were well short of expectations and showed little progress bringing down the rate of customer defections.

So what

After markets closed Monday, ADT reported a first-quarter loss of $0.02 per share, well short of the $0.29-per-share consensus estimate, despite producing revenue of $1.24 billion that beat estimates by $20 million. The company reported a net loss of $66 million, significantly better than the $157 million net loss in the first quarter of 2018, thanks to lower interest expense, higher operating income, and a higher income tax benefit.

The company attempted to talk down full-year expectations back in March, but judging by the share reaction on Tuesday, the miss still caught investors off guard.

A woman setting a security alarm.

Image source: Getty Images.

The company is also making progress addressing its nearly $10 billion in total debt. In February, ADT redeemed $300 million in second-lien notes. In April, it issued $1.5 billion in new senior secured notes used to repay $1 billion in second-lien notes and $500 million from its term loan for total annualized interest savings of $35 million.

But ADT's gross revenue attrition rate remained stubbornly high at 13.3%, which, while down slightly from the 13.6% rate a year ago, is still well ahead of the 11% or 12% range the company is targeting. On a conference call following earnings reporting, CEO James D. DeVries acknowledged the issue but said the company expects it to improve over time.

While attrition improvement remains a key focus area for us, we did not make sequential progress during the first quarter nor as much year-over-year progress as we would like due partially to tough comparison resulting from a strong prior-year Q1 performance, which I mentioned on our last call. Attrition improvement will not always be linear, and we expect improvement ahead as we continue to emphasize high quality customer selection and superior customer service in all aspects of our business.

Now what

ADT shares have performed miserably since the company returned to public markets in January 2018, down 49% since its IPO. The company is making good progress lowering its interest expense, which should help boost earnings over time, but a more fundamental issue facing ADT is new competition from self-installed security products, including Alphabet's Nest, that are available at a lower monthly fee.

The company has a competing product, called Pulse, and is working on a partnership with that should roll out in the current quarter. It also acquired do-it-yourself home security provider LifeShield for $25 million to bolster its offering. But these investments will take time to pan out.

Until ADT can either strengthen its retention rate or show that it is making progress grabbing more of the business that is moving away from its core systems and toward DIY alternatives, expect investors to remain skittish.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Amazon. The Motley Fool has a disclosure policy.

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