Report: DIY, Cable Companies Not a Problem for ADT

When ADT introduced its ADT Pulse home automation solution a few years back, naysayers said the move toward higher-end multi-system offerings versus standalone security systems signaled the beginning of the end for the security giant. Boy, were they wrong.

A recent stock analyst article from Seeking Alpha offers a deep glimpse into the status of ADT using internal presentation memos. The overall conclusion is the No. 3 company on the CE Pro 100 has basically been unaffected by the increasing number of DIY security products on the market. It also has not felt any wounds from the entry of the telecom and cable companies.

Finally, ADT Pulse is a huge success financially for the company across the board, now representing 43 percent of all systems sold. Moreover, the move to home automation has allowed the Boca Raton, Fla.-based company to reduce attrition, boost its RMR, and winnow down its dealer program.

The report, written by Terrier Investing, is aimed at potential investors considering ADT stock. It spends copious paragraphs describing other speculation on the stock performance, but in the end concludes that the stock is greatly undervalued. So much so that it is actually challenging investors who are shorting the stock to “eat their shorts.”  Moreover, the report says that once the housing market stabilizes to the point where people are moving with more frequency, the upside potential for ADT is even higher.

Among some of the key data points from the report are:

1. Currently, 12 percent of all ADT customers have ADT Pulse, or more than 700,000 clients.
2. Among new customers only, ADT Pulse had a take-rate of 64 percent.
3. ADT dropped about 100 dealers who were not adopting selling the ADT Pulse system well.
4. In Q2 2014, 43.5 percent of all new and existing ADT clients will adopt ADT Pulse. That is up from a 3.4 percent adoption rate back in Q2 2011.
5. ADT Pulse customers earn the company a 25 percent higher average revenue per user than security-only customers.
6. In Q2 2014, dealers in the ADT Dealer Program had a 35.8 percent take-rate on Pulse. During that same quarter, ADT’s direct residential sales team sold 50.6 percent of new and existing clients into Pulse.
7. According to calculations from Terrier Investing, ADT needs customers (among all customers, not just Pulse) to remain for 3.7 to 3.8 years to breakeven on a gross margin basis and pay back its subscriber acquisition costs, including marketing.
8. Citing a consumer study from Bain Capital, the report says “90 percent of consumers recognize the ADT brand, and 50 percent do not even consider a competitor during their purchase process.”
9. The report calls DIY products “more complementary than cannibalistic” in terms of their effect on ADT. The author notes: “Saying that DIY apps will significantly cannibalize ADT’s potential customers is a bit like saying that a new model of the Kia Rio will significantly cannibalize sales of the BMW 3-series. To quote “Pulp Fiction”, it’s not just not in the same ballpark-it ain’t even the same sport.
10. ADT Pulse’s garage door control system is set for launch in the second half of 2014.

>Read the full report from Seeking Alpha.

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