Sometimes the reality of an outcome is far different from what our perceptions would tell us. Such is the case with The ADT Corporation (NYSE: ADT) and the perceived effects that new market entrants are having upon its operations. ADT shares retrenched in 2013 due to both Comcast Corporation (CMCSA -6.06%) and AT&T (T -1.67%) jumping into the home security and automation market with bundled offerings. ADT shares lost some lustre as investors believed increased competition from well-capitalized firms would lead to a less secure market position. Fortunately for ADT, being the most recognized leader in a contested market can buoy subscriber growth and mitigate losses to competitors.
Competition not as it seems
Comcast entered the market with its Xfinity Home offering that ranges from at $19.95-$49.95/month while AT&T is now offering similar pricing for its Digital Life service in 21 markets. ADT presented details of this competitive landscape at its investor day earlier in December. The reality is that Comcast and AT&T have yet to make a dent in ADT's business one year after they began offering security and automation services. As the chart below demonstrates, only 20 basis points of ADT's attrition over the past 12 months can be attributed to loss of subscribers to cable/telecom competitors. Taking a different spin on that piece of data, ADT lost approximately $5.9m in revenue to Comcast and AT&T, a minimal amount of the $3.0bn in sales that ADT generated in FY13. At the same time, ADT has also increased its take of new customers subscribing for services industrywide. Over the past 12 months, ADT secured 46% of new subscribers, which is up from 44% since 2010.
(ADT 2013 investor day presentation)
FY14 outlook
ADT's outlook into 2014 encompasses the new competitive dynamics of the industry where mid-single digit recurring revenue growth can be leveraged to increase margins. Management is guiding for 4-5% recurring revenue growth after tallying 4.8% for FY13. EBITDA margins are forecasted to increase 50 basis points on lower cost to serve and subscriber acquisition costs. ADT has the industry's lowest ongoing cost to serve expenses which is one factor underlying its leading margin profile. The company is also returning a large chunk of its cash to shareholders via repurchases. $1.2 billion has already been deployed for repurchases with shares outstanding declining by over 20% since FY12.
Final thoughts
To this point, Comcast and AT&T have taken negligible share and ADT is securing its market position. Although the competitive environment will indeed increase in coming years as competitors build out offerings and brand awareness, ADT looks to be well positioned as the industry leader to take the largest slice of a growing market. Reality is not always what we perceive it to be. For ADT, and the industry as a whole, a different question sits at the forefront of my mind. The unknown to be determined factor becomes will pricing turn south and relegate home security and automation services to large scale providers with cost-advantages such as ADT? This outcome is ultimately difficult to predict with any clarity and that could continue to drag on ADT shares.
