The ADT Corporation

INVESTOR DAY PRESENTATION

DECEMBER 6, 2013
2013 ADT LLC dba ADT Security Services. All rights reserved.

Forward Looking Statements/Safe Harbor

Our reports, filings, and other public announcements may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements relate to anticipated financial performance, managements plans and objectives for future operations, business prospects,
outcome of regulatory proceedings, market conditions and other matters. We make these forward-looking statements in reliance on the safe harbor protections provided under the Private Securities
Litigation Reform Act of 1995. All statements, other than statements of historical facts, included in this presentation that address activities, events or developments that we expect, believe or anticipate will
exist or may occur in the future, are forward-looking statements. Forward-looking statements can be identified by various words such as expects, intends, will, anticipates, believes, confident,
continue, propose, seeks, could, may, should, estimates, forecasts, might, goals, objectives, targets, planned, projects, and similar expressions. These forward-looking statements
are based on managements current beliefs and assumptions and on information currently available to management that are subject to risks and uncertainties, many of which are outside of our control,
and could cause future events or results to be materially different from those stated or implied in this presentation. Specific factors that could cause actual results to differ from results contemplated by
forward-looking statements include, among others, the following:
competition in the markets we serve, including new entrants in these markets;
entry of potential competitors upon the expiration of non-competition agreements;
unauthorized use of our brand name;
risks associated with ownership of the ADT brand name outside of the United States and Canada by Tyco International Ltd., our former parent company (Tyco);
failure to enforce our intellectual property rights;
allegations that we have infringed the intellectual property rights of third parties;
failure to maintain the security of our information and technology networks;
interruption to our monitoring facilities;
an increase in the rate of customer attrition;
downturns in the housing market and consumer discretionary income;
our ability to develop or acquire new technology;
changes in U.S. and non-U.S. governmental laws and regulations;
increase in government regulation of telemarketing, e-mail marketing and other marketing upon cost and growth of our business;
risks associated with our non-compete and non-solicit arrangements with Tyco;
shifts in consumers choice of, or telecommunication providers support for, telecommunication services and equipment;
our dependence on certain software technology that we license from third parties;
failure or interruption in products or services of third-party providers;
our greater exposure to liability for employee acts or omissions or system failures;
interference with our customers access to some of our products and services through the Internet by broadband service providers;
potential impairment of our deferred tax assets;
risks associated with acquiring and integrating customer accounts;
potential loss of authorized dealers and affinity marketing relationships;
failure to realize expected benefits from acquisitions;
risks associated with pursuing business opportunities that diverge from our current business model;
adverse developments in our relationship with our employees;
potential liabilities for obligations of The Brinks Company under the Coal Act;
changes in our credit ratings;
risks related to our increased indebtedness;
capital market conditions, including availability of funding sources;
potential liabilities for legacy obligations relating to the separation from Tyco;
failure to fully realize expected benefits from the separation from Tyco; and
difficulty in operating as an independent public company separate from Tyco.
Given the risk factors and uncertainties that could cause our actual results to differ materially from those contained in any forward-looking statement, we caution investors not to unduly rely on our forwardlooking statements. These risk factors should not be construed as exhaustive. We disclaim any obligations to and do not intend to update the above list or to announce publicly the result of any revisions
to any of the forward-looking statements to reflect future events or developments. If one or more of these risks or uncertainties materialize or if our underlying assumptions prove to be incorrect, actual
results may vary materially from what we projected, including the market prices of our common stock during the term and after the completion of the accelerated share repurchase, the ability of the broker
selected by us to buy or borrow shares of our common stock, the ability to complete the share repurchases within the proposed timing or at all, the number of shares that ultimately will be repurchased, and
the uncertainty regarding the amount and timing of future share repurchases by ADT and the origin of funds used for such repurchases. Consequently, actual events and results may vary significantly from
those included in or contemplated or implied by our forward-looking statements. More detailed information about these and other factors is set forth in ADT's most recent annual report on Form 10-K, our
quarterly reports on Form 10-Q and in other subsequent filings with the U.S. Securities and Exchange Commission.
1

Introduction
Naren Gursahaney
Chief Executive Officer

Michael Geltzeiler
Chief Financial Officer

Alan Ferber
President, Residential

Luis Orbegoso
President, Small Business

Don Boerema
Senior Vice President and
Chief Corporate Development Officer

Agenda
Business Overview
Year One Progress and FY14 Outlook
Growing Our Business

Residential Security and Automation

Small Business Security and Automation
PERS/Health
M&A and Other Adjacencies

Financial Overview and Cost Efficiency Program

Concluding Remarks
Q&A

What We Are Excited to Share About ADT Today

Leading Player in Residential and Small Business

Security and Automation Markets
1

Leading Player in Residential and Small Business Security & Automation Markets

Large, Resilient and Growing Industry with Strong Growth Outlook

ADT Has Clear Competitive Advantages:

Leading Brand
National and Local Scale for Sales, Service and Monitoring
Standard-setting Technology, Products and Services
Unique Multi-Channel Sales Network

Consistent Mid-Single Digit Revenue Growth, Industry-leading Profit Margins and Customer
Return Metrics that Drive Cash Flow Generation and Shareholder Returns

Leading Player in Residential and Small Business

Security and Automation Markets
Residential
Security & Automation
Market Size
Market Growth
Market Penetration

$11.0 Billion
4%-5% (1)
19%

Small Business Security &

Automation
$2.4 Billion
3%-4% (2)
50%

(3)

Market Share

25%

13%

Rank in Market

#1

#1

Contribution

92% of RMR

8% of RMR

Source: ADT Segmentation Study; ADT Penetration Study; IMS Americas Market for Remote Monitoring Services.
Note: Markets include US and Canadian monitoring & services and installation/equipment revenues, unless otherwise noted.
(1)
Monitoring & services only, based on Bain HS&A national consumer survey estimate of household growth, 80% driven by automation services with premium RPU.
(2)
IMS Americas Market for Remote Monitoring Services , US and Canadian monitoring and services revenue growth.
(3)
Bain HS&A national consumer survey, based on number of subscribers.

Large, Growing and Resilient Market

Strong Growth
Outlook

Consistent Historical Growth

US Monitoring & Services Revenue ($ in Billions) (1)

Continuous growth throughout

market downturns

$14.4

$14.5

$15.9

$16.3

4% - 5%
$17.2

$18.0

$19.4

Residential
Security and Automation
Annual Growth (2)

3% - 4%
Small Business
Security and Automation
Annual Growth (3)

2006

2007

Residential

2008

2009

Small Business

2010

2011

2012

Commercial & Other

$21B total ADT addressable market once non-compete expires in September 2014 (4)
(1)
(2)
(3)
(4)

Barnes Industry & Market Overview. Residential and Small Business data based on IMS Americas Market for Remote Monitoring Services.
Monitoring & services only, based on Bain HS&A national consumer survey estimate of household growth, 80% driven by automation services with premium RPU.
IMS Americas Market for Remote Monitoring Services, US and Canadian monitoring and services revenue growth.
ADT Segmentation Study; ADT Penetration Study; IMS Americas Market for Remote Monitoring Services; Bain analysis. Addressable market includes monitoring & services and
installation/equipment revenues for residential, fire, small and medium businesses in the US and Canada. Non-compete provisions with Tyco expire on September 29, 2014.

Clear Market Leader with Competitive Advantages

6x size of our next largest competitor

ADT Advantages
25%

Leading Brand Awareness

Residential
Security &
Automation
2013E Number of
Households

59%
Thousands
of Others

4%
4%

3%

Vivint

Monitronics
Protection 1

2% Slomins
2% Guardian
<1% MSOs Combined

National and Local Scale in Sale, Service, and

Monitoring
Standard-Setting Technology, Products, and
Services
Diverse Distribution Channels

Source: Bain analysis.

ADT Has Leading Brand Awareness

~90% Brand Awareness
Among Consumers(1)
(% Residential Security Intenders)

Most Considered by
Consumers When Choosing
Their Security Provider (1)(2)
(% Residential Security Intenders Who Would
Consider Each Company for Security Service)

88%

41%

50% of ADT Customers Did

Not Consider Any Other
Competitor During Their
Purchase Process (3)
(% ADT Customers)
I did not consider
any other
companies

50%

Traditional 1

23%

Cable 1

6%

All Others

8%

Cable 1

20%

Traditional 1

5%

Cable 1

7%

5%

Telco 2

4%

Traditional 1

4%

(1)
(2)
(3)

Telco 1

14%

Traditional 2

Telco 2

13%

Telco 2

3%

Bain HS&A national consumer survey (N=1,461).

Companies considered by <3% of respondents excluded.
ADT New Customer Welcome Survey (February-September 2013, N=51,405). When asked to check all companies customers were considering for home security service.

National / Local Scale in Sales, Service, and Monitoring

Unparalleled Scale of
Over 6.5 Million Customers

Proven Scale Benefits

National Scale
Reduces Sales
and Marketing
Costs

Local Scale
Reduces Cost to
Serve

> 50k customers

10k-50k customers
< 10k customers

Monitoring Centers

Other ScaleDriven
Advantages

Established and trusted across

North America
Lower marketing and sales costs
per subscriber relative to main
competitors
High regional density reduces
monitoring and service costs
Lower cost to serve per
subscriber relative to main
competitors

Leverage scale to enhance

Pulse upgrade campaigns

Enables more robust

technological innovation
Platform for partnering and M&A

10

Standard-Setting Technology, Products and Services

Life Safety

Comprehensive Safety
and Automation
Product Solutions

The foundation and heritage of

ADTs offer

Obsession with
Protection

Lifestyle
Connections
Automation and scheduling
Alerts

Energy

Industry-Leading
Innovation

Entertainment

Lifestyle

Smart
Meter

Life Safety

Energy
Savings from consumption
management and rate
reductions

Entertainment
Superior Customer
Experience

Media integration and control

Real-time content

11

Video: Our Greatest Advantage

17,000 Employees
who are Security Experts
11 years
Average tenure of service technicians

7 years
Average tenure of install technicians

4 years
Average tenure of call center representatives

3 years
Average tenure of sales representatives

12

Multi-Channel Model Provides Unique Advantages

Complementary customer segments, marketing channels, geographies and promotional strategies
Efficient use of overflow capacity
Innovation driven by leveraging best practices and processes from ~350 potential sources
Insulates against volatility
Ability to leverage lower-cost channel at any point in time

Direct

Indirect

Broad network of 3,900 sales

professionals and 4,300
installation and service
technicians

Largest dealer network in North

America consisting of ~350
authorized third-party dealers
Strategic sales partners

Residential

National Sales
Center (NSC)

Authorized Dealers

Builder / HOAs
(Lead Generators)

Small Business
(SB)

Health

3rd-Party (Lead &

Sales Providers)

Affinity
(Lead Providers)

M&A
Grow customer additions
through acquisitions
Proven history of integration
capabilities

Large Bulk
Acquisitions

13

New Entrants Highlight Attractiveness of Industry

While ADT Continues to Win
ADT Winning Consistent Share of New
Customers Despite New Entrants

Subscribers Lost to Cable / Telecom Account

for Only 0.2% of Customer Base

Share of Total Subscribers by Installation Date (1)

18%

23%

4%
3%

10%
15%

49%

13.9%

1.4%

Lost to
Competition

1.4%

Voluntary
excl. Lost to
Competition

Cable/
Telecom
0.2%

3.9%

25%
16%

46%

48%

44%

Past 12M

1-3 Years

>3 Years

ADT
(1)
(2)

Other Security Firms

ADT
Stability

Cable/Satellite

Non-Pay

3.6%

Relocation

5.0%

FY2013
LTM Attrition

Other
Competitors
1.2%

Lost to
Competition(2)

Telecom

AlphaWise, Morgan Stanley Research, Survey of US Residential Security Market (2013, N=1,192).
Based on July 2013 internal survey results.

14

Favorable Market Dynamics and Competitive

Advantages Drive Financial Performance

$4
$4

$3.0

$3

$2.3

$3

$1.8

$2
$2
$1

43.8%

$1

47.5%

51.1%

Attractive Account Growth Opportunities

FY 2013 Customer Additions (000s)

Strong Recurring Revenue Growth

600

2007

2010

Recurring Revenue

2013

EBITDA Margin (2)

Customer IRRs well

above weighted
average cost of capital
Total Resi.
Direct
Dealer

400

Resi. Direct
Trad.
Resi. Direct Pulse

200
Devcon

$0

Weighted
Average Cost
of Capital

SB Trad.
SB - Pulse

5%

10%

Large Bulk
Purchase

IRR (3)

Health

15%

20%

Consistent ~$1 billion of steady-state free cash flow generated every year
(1)
(2)
(3)

Pro-forma acquisition of Broadview Security in 2010.

EBITDA is before special items and is a non-GAAP measure. For a reconciliation to the most comparable GAAP measures please see the Appendix.
IRR is calculated on a 15-year after tax. basis

15

Agenda
Business Overview
Year One Progress and FY14 Outlook
Growing Our Business

Residential Security and Automation

Small Business Security and Automation
PERS/Health
M&A and Other Adjacencies

Financial Overview and Cost Efficiency Program

Concluding Remarks
Q&A

16

Significant Progress Made In 2013, First Year as a

Public Company
Enhanced
Management
Team

Built
Momentum in
Pulse

Mike Geltzeiler
Chief Financial
Officer

Alan Ferber
President,
Residential

Luis J. Orbegoso
President, Small
Business

Kathleen McLean
Chief Information
Officer

Arthur Ordua
Chief Innovation
Officer

>30 years of public

Broad information Emerging technology
Track record of
Deep security
company finance improving customer industry expertise in
technology and
and product
leadership
operating
management
retention in
commercial markets
experience
experience in
experience in cable
subscriber business
telecom market
industry

Rolled out Pulse across all channels

32% Pulse take rate in Q4 resulting in 26% Pulse take rate for FY 2013
Continuing to expand capabilities and enhance customer experience

Small
Business
Growth

More than doubled recurring revenue growth in FY2013

Accelerated Pulse take rates to 34% in Q4
Expanded security solutions offerings and cross-selling capabilities

Successful
M&A
Execution

Devcon added 117k customers with attractive retention profile

Further strengthened self-generated sales via Absolute acquisition
Added 34k accounts via bulk purchase

Returned
$1.4B of
Capital

$1.3 billion in share repurchases and $112 million in dividends

Committed to additional $1.2B of share repurchases and dividend increase
subsequent to close of fiscal year
17

Connecting Key Operating Levers and Financial

Metrics to Drive Total Shareholder Return
Key Levers

Financial Metrics

Customer Additions

Attrition
Average Revenue Per
User (ARPU)

Recurring
Revenue
Pre-SAC
EBITDA Margin
EBITDA Margin

Cost to Serve
(CTS)

Steady-State Free
Cash Flow

Subscriber Acquisition
Cost (SAC)
Cash Tax Rate
Capital Structure &
Share Repurchases

EPS using Cash

Tax Rate

M&A
18

Customer Additions

Adding Over 1 Million Customers Per Year

Unique Multi-Channel Approach Boosts
Customer Additions

Direct Channel Growth Accelerating with

Housing Recovery

(Thousand Customers)

2013 Direct Additions

(Thousand Customers)

1,025

971

459

464

1,088

491

1,161

527

1,224

173

117
453
161

163

157

507

566

597

634

654

2009

2010

2011

2012

2013

Gross Direct Additions

Gross Dealer Additions and Bulk Purchases
Tuck-In Acquisitions

Q1 2013
Y-o-Y
Growth

(1.3%)

Q2 2013
0.6%

Q3 2013

Q4 2013

4.5%

8.1%

19

Attrition

Industry-Leading Customer Retention,

Committed to Further Improvements
LTM Net Attrition is More Stable than Peers
~170 bps lower on a unit basis and
excluding customers that moved and re-signed
with ADT: most comparable to peers
13.9%

13.5%

13.0%
12.2%

Net Attrition as
(1)
Reported

Y-o-Y

(1)
(2)
(3)
(4)
(5)

+40bps

Net Attrition on a Unit

Basis(2)

+30 bps

Net Attrition
Adj. for
(2)(3)
Recaptures
N/A

Vivint

(4)

+330bps

12.6%

Monitronics

(5)

+60 bps

T12M RMR of canceled subscribers divided by the T12M average total RMR. Net of dealer chargebacks (replacements contractually provided by dealers) and resale units (new subscribers
at a location with previously installed ADT system).
T12M number of canceled subscribers divided by the T12M average number of subscribers, net of dealer chargebacks and resale units.
Net of relocated customers who re-enter contract with ADT at new location.
20
Vivint investor presentation, as of September 30, 2013.
Monitronics filings, as of June 30, 2013.

ARPU

Consistent Growth in Revenue Per User

Pulse Adds Driving Higher RPU

Regular Price Increases

RPU of Pulse customers is 25% higher

than non-Pulse customers

Price Escalations
(% of trailing 12 months recurring revenue)

FY2013
YoY

$42.99

$38.87

Q4
2012

$43.36

$39.27

Q1
2013

$43.94

$39.66

Q2
2013

$44.20

$44.24

3.1%

4.6%
2.8%

$40.08

$40.31

Q3
2013

Q4
2013

2.8%

2.7%

2.8%

Q2
2013

Q3
2013

Q4
2013

3.7%

Q4
2012

Q1
2013

New Customers RPU

Average RPU All Customers
21

SAC

Majority of SAC Increase Driven by Pulse Adoption

Increase in SAC Partially Offset by Higher ARPU of New Customers - Modest Increase in Net
Creation Multiple Reflects More Valuable Pulse Customers
($ / Customer Addition)
$1,354

$1,326

$1,197
$10
$1,187

28.2x

FY 2012

$1,273
$22
$1,251

$1,277

$32

$32

$1,294

$1,322

$1,245

28.8x

28.3x

Q1 2013

Q2 2013

Net Subscriber Acquisition Cost

$32

Upgrade Cost

29.9x

29.3x

Q3 2013

Q4 2013
Net Creation Multiple

(1)

22

(1)

Excludes upgrade costs associated with traditional customers upgrading to Pulse service. Estimated cost of $750-$800 per subscriber upgrade.

Cost to Serve

Leveraging Scale for ADT Cost Advantage

Multiple Sources of Scale Advantage Driving
Down Costs

Cost to Serve is Lower than Peers

(Cost to Serve per Customer per Month)

$18

$14

High local density of subscribers leading to

high economies of scale for monitoring and
customer service

$13

Large and diverse customer base reducing

concentration risk of bad debt

Synergies from acquisitions as a result of

integrating operations and capabilities
FY2013

(1)
(2)

Monitronics

(1)

Vivint

(2)

Estimated based on Monitronics public filings as of September 30, 2013.

Estimated based on Vivint public filings and press releases as of September 30, 2013, based on YTD 2013 figures, adjusted for transaction costs.

23

Strategy in Place to Drive Growth and Margin

Expansion in FY2014
Customer Additions
Comment

Attrition

Outlook

Continued penetration
in Residential
Dealer channel
optimization
Expansion in Small
Business and Health
Successful M&A
execution

Comment
New initiatives and
Pulse will help offset
the impact of the
housing recovery

SAC
Comment
Impact of Pulse take
rates offset by
initiatives to reduce
cost, holding creation
multiple relatively
constant

ARPU
Outlook

Comment

Outlook

Increasing Pulse take

rates to drive higher
ARPU
Consistent price
escalations

Cost to Serve
Outlook

Comment

Outlook

Programmatic G&A
reduction
Initiatives in place to
streamline processes
and reduce cost

24

Strengths and Opportunities Driving ADT Priorities

Favorable Environment

ADT Priorities
Accelerate innovation and enhance
leadership position in Residential

Large, resilient and

growing industry

Invest in
Growth

Optimize Dealer network and stabilize attrition

Expand presence in Small Business
Capture opportunities in Health
Leverage M&A to accelerate growth

ADT well positioned to grow

as clear leader with
competitive advantages

Advantaged position as
industry acquirer/partner
of choice

Efficiency program focused on cost to serve

and subscriber acquisition cost
Optimize Cost
Structure

G&A reduction

Strengthen business platforms to support

efficiency improvements and growth
Optimized capital structure

Balanced
Capital
Allocation

Dividend growth

Strategic M&A
Opportunistic share repurchases
25

Agenda
Business Overview
Year One Progress and FY14 Outlook
Growing Our Business

Residential Security and Automation

Small Business Security and Automation
PERS/Health
M&A and Other Adjacencies

Financial Overview and Cost Efficiency Program

Concluding Remarks
Q&A

26

Growing Our Business

1

Accelerate Innovation and Capture

Opportunities in Residential Security and
Automation Business

Expand Presence and Market Share

in Small and Medium Business Market

Customer Adds

ARPU

Customer Adds

Attrition

ARPU

Strengthen PERS Platform and

Capitalize on Health Opportunity

Leverage M&A to Further Grow Share

and Improve Economics

Customer Adds

Customer Adds

ARPU

Cost to Serve

27

Alan Ferber President, Residential

Areas of Expertise
20+ years in technology-based, consumer subscription services
(wireless)
Marketing, sales, operations and customer service expertise
Driving loyalty through customer-obsessed culture and differentiated
customer experience

Prior Experience
Former Chief Strategy and Brand Officer and
Executive Vice President Operations at U.S.
Cellular
Co-founded Traq Wireless

Education
MBA from Northwestern University's Kellogg
School of Management
Bachelor of Arts from the University of
Michigan

Earlier career positions with Ameritech

Corporation and First Chicago Corporation

28

Residential Security and Automation Market

Market Snapshot

Market Size
Market Growth
Market Penetration
Market Share

Rank in Market
Contribution

Competitive Landscape (2)

$11.0 Billion
4% -5% (1)

25%

19%

25%

(2)

#1
92% of RMR

59%
Thousands
of Others

Residential
Security &
Automation
2013E
Number of
Households

4%
4%
3%

Vivint

Monitronics
Protection 1

2% Slomins
2% Guardian
<1% MSOs Combined

Source: ADT Segmentation Study; ADT Penetration Study; IMS Americas Market for Remote Monitoring Services.
Note: Markets include US and Canadian monitoring & services and installation/equipment revenues, unless otherwise noted.
(1)
Monitoring & services only, based on Bain HS&A national consumer survey estimate of household growth, 80% driven by automation services with premium RPU.
(2)
Bain HS&A national consumer survey, based on number of subscribers.

29

Clear Path to Grow Residential Business

Positive Industry
Momentum

Significant room for increased penetration

Market growth expected to accelerate with housing recovery,
automation trend and technological innovation
Invest in Pulse to drive ARPU and net customer additions

Automation Growth
Leverage consumer insights to drive innovation

Net Customer
Additions Growth

Optimize Dealer channel and expand partner network

Focused efforts to stabilize attrition

Clear Path to Growing Net Customers and Recurring Revenue

30

Positive Industry Momentum

Significant Room for Further Penetration

Automation
Net Customer Additions

Market Penetration of Home Services (U.S.)

Opportunity to expand

100%

market by 3x if
penetration reaches that
of other home services

83%

75%
64%

19%
1%
Wireless

Internet

HDTV

Landline Phone

Security

Home
Automation

31

Source: Industry Journals; penetration of home security from ADT 2010 Penetration study and 2008 Parks Associates.

Positive Industry Momentum

Automation

Positive Industry Momentum

Net Customer Additions

Key Macro Considerations Indicate

Positive Industry Momentum
Key Considerations

Potential impact

Pace of Growth to Accelerate with

Housing Recovery

75% of new ADT customers start monitoring

Housing
Market

when they move into a new home (1)

Technology
Development

(Units in Millions)

US Housing Market (2)

Customer
Demand
Demographic Trends

4.2

4.0

4.1

2009

2010

2011

4.5

4.9

5.1

5.5

Economy & Consumer

Confidence
Crime
Rates
Regulatory
Environment
Aggregate
Impact

(1)
(2)

Per ADT customer survey response to question why start monitoring?; n=1440.
National Association of Home Builders (September 2013).

2012 2013E 2014E 2015E

Existing Home Sales

New Home Sales

32

Positive Industry Momentum

Home Automation Solutions to Drive Growth

Automation
Net Customer Additions

Automation Expected to Drive 80% of Market Growth

2013E-2018E Expected Sources of Growth(2)

20% of current security users have or

intend to purchase automation services (1)

45% of home security intenders also

intend to pursue automation service (1)

(1)
(2)

Bain HS&A national consumer survey (N=1461).

Bain HS&A national consumer survey, estimated growth from 2013E to 2018E.

20%
Home
Security

80%
Home Security
and Automation

33

Well Positioned to Capture Growth in

Automation Services

Current 8% Pulse penetration reflects

untapped potential within existing
customer base

Pulse adoption has just begun in Dealer

channel and is accelerating

Continued innovation will drive growth

and additional partnership opportunities

Positive Industry Momentum

Needed to Win in
Automation Market

Automation
Net Customer Additions

ADT?

Leading Home Automation

Solutions

Positive Customer Service

Performance

Preferred Industry Partner

Status

Leading Security Capabilities

National and Local Scale

34

Source: Barnes Associates; Bain HS&A national consumer survey (N=1461)

Positive Industry Momentum

Automation

Pulse Take Rates Continue to Increase

Net Customer Additions

Pulse Take Rates

54%

(% of New Customer Adds)

54%
48%

49%
39%
35%

35%

27%

27%

23%

19%

19%
11%

8%

8%

1%

1%
0%

0%
FY 2011

13%

13%

11%

FY 2011
FY 2012
Direct New Only
(Excluding Devcon)

FY 2012
FY 2013
New
Resale
Directand
New
Only
(Including
(Excluding Devcon)
Devcon)

FY Q4
2013
2013
Dealer
New and Resale
(Including Devcon)

Dealer

Pulse Customers have 25% Higher ARPU and Better Retention Characteristics
35

Positive Industry Momentum

Further Innovation Driven by Consumer

Insights and Quick to Market Approach
Expanding Solution Set

Additional peripherals

Shift from physical to

physical + digital security

Net Customer Additions

Benefits

Shift from fixed / premise based to

mobile / personal security
Enhanced user interface

Automation

Increased customer engagement

to drive ARPU and loyalty

ADT Everywhere increases

competitive differentiation

Big Data generates new

partnership and value creation
opportunities

36

Positive Industry Momentum

Dealer Channel Continues to Contribute

High Quality Customer Accounts

Automation
Net Customer Additions

Historical Dealer Channel Customer Additions

Consistent creation multiple

Increase in ARPU more than offset
slight increase in SAC

491K

527K
453K

$44.61

$41.10

$42.57

29.6x

29.5x

28.2x

2011

2012

2013

High credit quality customers

Average of 700+ credit score

Initiatives underway to drive FY2014

growth in Dealer customer additions

Avg. New
Customer
Credit Score

714

715

718

Gross Dealer Adds

Net Dealer Creation Multiple(1)
Dealer New ARPU
37

(1)

Cost to acquire a dealer sourced customer, net of chargebacks.

Positive Industry Momentum

Strengthen and Optimize the Dealer Channel

FY2013 Dealer
Dynamics

Funding &
Incentives

Termination of a
Major Third Party
Lead Generator

Staffing &
Operational
Support

Dealer
Rationalization

Net Customer Additions

Initiatives Underway to Support Dealer Channel

Improvement

Pace of Pulse
Adoption

Changes Among our

Largest Dealers

Automation

Training &
Nurturing

Execute
Reach &
Frequency

Improved funding to drive Pulse adoption

Improved funding for existing dealers

New Dealer recruitment

Additional sales support, managerial
oversight, realignments
New recruitment and development team
Enhanced install, sales and Pulse training
Business-in-a-Box comprehensive
startup program
Reach 100% of our Dealers each year
with greater frequency for planning &
performance management
Business reviews with Top 50

38

Positive Industry Momentum

Expanding Lead Sources, Distribution

Channels and Innovation Partners
Builders

Automation
Net Customer Additions

Home Insurance

Lead generation

Lead generation

Take advantage of uptick in

home construction rates

Mitigate insurance risks

Early access to movers

Pulse / product integration

Broadband

Energy

Lead generation

Lead generation

Leverage broadband
infrastructure
Early access to movers

Early access to movers

Retail

Pulse / product integration

Strategic Technology Partners

Lead generation

ADT Everywhere

Distribution opportunities
including peripherals

Enable innovation

39

Positive Industry Momentum

Initiatives to Drive Further Improvements in

Attrition and Mitigate Relocation Impact

Automation
Net Customer Additions

40bps of Overall Increase in Attrition in FY2013 Driven by Relocations

Disconnect Units by Reason (U.S.)

-15bps
40% of
Disconnects

38% of
Disconnects

Voluntary

Improve lifecycle
management
Drive Pulse adoption

+60bps
34% of
Disconnects

36% of
Disconnects

FY2012

FY2013

-5bps
27% of
Disconnects

26% of
Disconnects

Relocations

Non-Pay

Leverage data to
increase resales and
recaptures

Enhance attractive
customer metrics
through tighter credit
screening

40

Positive Industry Momentum

Comprehensive View of Customer Lifecycles

Improves Customer Experience and Retention

Customer Life

Attrition Risks

Proactive
Customer Experience
& Retention
Programs to
Lengthen Lifecycle

Automation
Net Customer Additions

Characteristics of customers with long lifecycle:

Larger system installation / investment
Have more services and interaction with system
Use automated payment methods

Non-Pay Risk

Reactive / TriggerBased Risk

Relocation Risk

Welcome /
On-Boarding

Loyalty / Save Desk

Resale & Recapture

Auto-Pay Adoption

Upgrade Campaigns

41

Positive Industry Momentum

Higher Pulse Penetration to Improve

Customer Retention
Pulse Customers Show Better Retention
Characteristics
Cumulative Residential Customer Attrition Rate (1)

Automation
Net Customer Additions

Initiatives
Increase Pulse take-rates across all
channels

After 24 months, residential

cumulative Pulse attrition is
30% lower vs. non-Pulse
attrition

New and upgrade promotions

Targeted base marketing efforts
Leverage 2G3G truck rolls
Focused pursuit to upgrade nonconverters

Pulse Customers
Non-Pulse Customers
0

12
18
Months After Installation

Continued innovation of Pulse to drive

adoption

24

42

(1)

Estimated based on FY2011-2013 new customers.

Resale and Recapture Efforts to Mitigate

Impact of Relocations
Relocation Disconnects vs.
Resale and Recapture

Positive Industry Momentum

Automation
Net Customer Additions

Initiatives
Faster detection of potential relocations
and planned response through more
vigilant customer tracking processes

Net
Relocation
Disconnects

Recapture

Resale

Increase sales capacity dedicated to

resale
For every relocation
disconnect today, we
are generating ~0.5
customers through
new sales, our goal is
to generate 1.5 new
sales per relocation
disconnect

Increase resales by leveraging all sales

channels and strengthening training
programs

Enhance centralized relocation desk

FY 13 Relocation Disconnects

43

Positive Industry Momentum

Implementing Enhanced Credit Screening to Lower

Attrition and Reduce Collection Costs

Automation

Net Customer Additions

National Rollout of New Enhanced

Screening Program
New enhanced screening leverages
internal credit criteria and third-party
credit models
Customers who fail screen are
asked to pay annual monitoring
fees up front

Non-Pay Attrition Predictability

6% of new sales representing 45% of non-pay
attrition by the 8th month
100%

100%

55%
94%

National rollout of Phase 1 screening

program has begun

45%

6%

Final rollout targeted for Q2 FY2014

New Sales

Cumulative Non-Pay Attrition

8 Months After Sale
Customers who Fail Credit Screening
Customers who Pass Credit Screening

Revised customer credit screening will impact Direct channel gross additions in the
short term but provide a dramatic improvement in overall non-pay attrition over-time
44

Clear Path to Grow Residential Business

Capture fair share of overall market growth

Customer Adds
Increase net customer additions
Dealer channel optimization
Targeted customer retention initiatives
ARPU

Increase partnerships
Invest in Pulse to capitalize on premium
ARPU and better retention characteristics

Attrition

Assert market leadership position through

continued innovation

45

Growing Our Business

1

Accelerate Innovation and Capture

Opportunities in Residential Security and
Automation Business

Expand Presence and Market Share

in Small and Medium Business Market

Customer Adds

ARPU

Customer Adds

Attrition

ARPU

Strengthen PERS Platform and

Capitalize on Health Opportunity

Leverage M&A to Further Grow Share

and Improve Economics

Customer Adds

Customer Adds

ARPU

Cost to Serve

46

Luis Orbegoso President, Small Business

Areas of Expertise
Commercial and Enterprise Security products and services

Commercial and Enterprise Fire products and services

Software and Electrical products development and manufacturing
Sales, Marketing, Six Sigma, P&L leadership

Prior Experience
Former President of the Global Detection and
Alarm segment of United Technologies
Corporation (UTC)
Former President of Lenel Systems International,
a division of UTCs Fire and Security segment

Education
MBA from Northwestern Universitys Kellogg
School of Management
B.S.M.E. from the University of Cincinnati

Chief Marketing Officer of GE Equipment Services

10+ years at GE Healthcare in various
commercial leadership roles

47

Growing Small Business Market with Further Upside

Market Snapshot

Competitive Landscape
Number of Addressable Small Businesses(2)

Market Size
Market Growth
Market Penetration
Market Share

Rank in Market
Contribution

$2.4 Billion
3%-4% (1)
50%

13%

100%
90%

7.0M

3.5M

No Security

80%
70%
60%

SelfMonitored /
Unmonitored
Security

All Other
Players

50%
40%

#1

30%

8% of RMR

10%

20%

Professionally
Monitored
security

Monitronics
Vivint
Protection1
ADT

0%
Security Use

Source: ADT Segmentation Study; ADT Penetration Study; IMS Americas Market for Remote Monitoring Services.
Note: Markets include US and Canadian monitoring & services and installation/equipment revenues, unless otherwise noted.
(1)
IMS Americas Market for Remote Monitoring Services, US and Canadian monitoring and services revenue growth.
(2)
Bain HS&A national consumer survey, based on number of subscribers.

Monitored Security

48

ADT Outpacing Small Business Market Growth

Growing Small Business Security Market

ADT Has Outpaced Market Growth

US and Canada Alarm Monitoring & Equip/Install Revenue (1)

Recurring Revenue ($M)

$2.4
$2.3

$247

$2.3
$231

$2.2

$224
$209

2010

2011

2012

2013

2010

2011

2012

2013

49

(1)

ADT Segmentation Study; ADT Penetration Study; IMS Americas Market for Remote Monitoring Services.

Increased Focus Has Accelerated ADT Share Gain

Focused Initiatives

Subscriber Growth (%) (1)

7.8%

Investment in
Field Tools and
Resources

Increased
Level of
Accountability

Salesforce.com
investment
1200 iPads for the field
Model sales call

(1.0%)

Region realignment

FY 12

Forecasting tool
Revamped sales
processes

Recurring
Growth
RecurringRevenue
Revenue Growth
(%)(%)
6.9%

Technology Pulse
Small
BusinessSpecific
Marketing

FY 13

Optimizing media
Business Journals ads
Restaurant Stakeout
sponsorship

2.9%

FY 12

FY 13

50

(1)

Includes accounts acquired through Devcon acquisition.

Higher Pulse Penetration Will Benefit Attrition

Pulse Customers Show Better Retention
Characteristics

Pulse Take Rates are Accelerating

Cumulative Small Business Customer Attrition Rate (1)

Small Business Pulse Take Rates (2)

Small Business Pulse
customers have 27%

After 24 months, small

business cumulative Pulse
attrition is 40% lower vs.
non-Pulse attrition

higher ARPU than

non-Pulse customers

34.2%
27.6%

10.0%
Pulse Customers
Non-Pulse Customers
0

(1)
(2)

12
18
Months After Installation

Estimated based on FY2011-2013 new customers.

Includes Devcon.

24

0.6%
FY2011

FY2012

FY2013

Q4 2013

51

Video: Small Business Solutions

52

Vertical-Specific Approach Will Accelerate Growth

Store-Front

Food & Beverage

Clinical

Office

Mechanical

Retailers
Convenience
stores

Restaurants
Bars/grills

Doctor offices
Health clinics
Laboratories

Financial advisors
Tax preparers
Insurance agents

Auto service
stations
Small distributors

Needs

Employee theft
Shoplifting
Time and
attendance
Monitor premises
Secure high value
inventory

Ensure food safety

Adhere to
regulatory policies
Employee efficiency
Process
standardization
and control

Secure and
monitor drug
inventory
Restricted areas
Compliance
Automated
reports (Audits)

Protect
confidential
information
Selective
employee access
to sensitive areas
Digital security

Ensure customer/
employee safety
Restrict access to
hazardous areas
Some have retail
components (gas
stations)

Market
Size

$350M

$375M

$190M

$400M

$190M

Customer
Value

High

Medium

Very High

High

Medium

Vertical
Examples

Products

Bundled security products that address specific needs by vertical

53

Source: Bain analysis; ADT Segmentation Study; IMS Americas Market for Remote Monitoring Services.

Our Capabilities Are Well Matched for Multi-Location

Accounts and Franchises
Multi-Location Accounts and
Franchises have Specific Needs

ADT has Unmatched Capabilities To

Serve These Accounts

Standardized Offerings

Consistent configurations, capabilities and

products
Pre-defined budgeting process/ROI

Account Management

Multi-location account organization: single

point of contact
Coverage augmented by 1,200 local reps

Consistent and Reliable Support

Nationwide coverage
200 Branches
4,300 technicians

54

Growth Strategy for Small and Medium Business

Consists of Three Phases
Secure

Optimize

Grow

Next 12 months

12-36 months

36-60 Months

Provide right solution set

Optimize field processes
with vertical-specific tools
and training
Vertical specific
marketing/brand
awareness
Pursue franchises and
multi-location accounts

Optimize customer
operations
Focus on
operational cost
reduction
Integrate solutions into
Pulse to drive business
efficiencies
Technology and
commercial partnerships

Provide insights and

management tools that
accelerate profit/margins
Leverage analytics that
can be easily monetized
E.g. buying patterns,
demographics, social
marketing
Uniquely positioned to
offer technologies and
insights to small
businesses previously
afforded by only giant
retailers

55

Growth Phase Store-Front Vertical Example

Business Owner Challenges
Attracting more customers

Business Management Tools

that Drive Growth

Sound investment decisions

Increased differentiation
Scaling effectively with growth
Effective marketing

Business Owner Benefits

Real-time promotions
Advanced video analytics

Customer insight on efficiency of

promotions
Increased sales and margins

56

Addressable Market Opens Up Significantly After

Non-Compete Expires on September 29, 2014
4x Current Addressable Market

Opens Opportunity to Offer New

Solutions to More Business Owners

After Tyco Non-Compete Ends

Addressable Small and Medium Business Market (1)
(Annual RMR in $ in Billion)

Medium Business/Fire Markets

available once non-compete
expires

Small Business Market

defined as sites
<7,500 sq. ft.
$2.2

2010

13E-16E
CAGR

Access solutions

$10.4
Fire

5.0%

Medium
Business

2.5%

Small
Business

2.5%

Fire-NICET certified

Multi-location billing and

management

$2.4

2013

Cross product integration

into Pulse

2016E

Source: ADT Segmentation Study; ADT Penetration Study; IMS Data; Frost & Sullivan.
(1)
Includes US and Canada monitoring & services and install/equipment revenues.

57

Expand Presence and Market Share in Small and

Medium Business Market
Growing small business market with further upside
from penetration and automation trend

Customer Adds

Increased focus on Small Business driving share gain

and ARPU growth

Vertical specific approach and three-phase strategy to

grow customer adds and returns
Capabilities well matched for national accounts and
franchises

ARPU
Addressable market to open up significant after noncompete expires

58

Growing Our Business

1

Accelerate Innovation and Capture

Opportunities in Residential Security and
Automation Business

Expand Presence and Market Share

in Small and Medium Business Market

Customer Adds

ARPU

Customer Adds

Attrition

ARPU

Strengthen PERS Platform and

Capitalize on Health Opportunity

Leverage M&A to Further Grow Share

and Improve Economics

Customer Adds

Customer Adds

ARPU

Cost to Serve

59

Don Boerema Chief Corporate Development Officer

Areas of Expertise
20+ years of experience in technology-based, consumer subscription
services (wireless/telecom)
Strategy, business development, marketing, sales, and operations
expertise
Creating new businesses leveraging disruptive technologies
Building partnerships that deliver win-win results

Prior Experience
Former Chief Marketing Officer for ADT North
America-Residential and Commercial

Education
MBA and B.S. from Eastern Illinois University

President and Chief Operating Officer at FDN

Communications
Senior VP Strategy & Business Development and
Senior VP Business Marketing at AT&T Wireless
Former leadership roles held at Pepsi and McCaw
Cellular Communications

60

Significant Opportunity in PERS and Health Market

Personal Emergency Response Systems (PERS)
Market Expected to Grow 10% per Year

ADT Has Significant Opportunity to Grow

Market Share

North America PERS Revenue ($B)

2012 North America PERS Market (subscribers)

Market
Share
1.9M

$1.7B

$1.5B

Other

$1.3B

$1.0B

$1.1B

$1.1B

$1.2B

Alert USA
ConnectAmerica
Tunstall
Alert 1

2%

Life Alert

Philips

2010 2011 2012 2013E 2014E 2015E 2016E

North America PERS Market

ADT has opportunity to grow Health revenue to >$100 million by 2016

61

Source: Frost & Sullivan Analysis of the NA Telehealth Industry; Parks Associates; SDM; ABI Research; Credit Suisse.

The Healthcare Environment and Demographic

Trends are Favorable to Health Business
Aging Demographics
Rising Cost of Institutional Care
Affordable Care Act Conducive to Home-Based Health Development

Tremendous Opportunities in Insurance Reimbursement

New Technologies Continue to Enhance Value Proposition

ADTs Potential Areas of Focus

User

Device

Hub

Data Transmission

Data User /
Institutions

62

Health Product Evolution and Customer Segment

Expansion Drive Long-Term Growth
Telehealth-Driven Business

PERS-Driven Business

Product Evolution

Integrated
Health
solution

Seamless integration
PERS, automation, telehealth

Shared functionality:
PERS, automation, telehealth
Mobile
Monitoring

Non-Emergency
mPERs

Telehealth
Monitoring

mPERS
In-premise
only

Cellular enabled in-premise PERS

POTS based PERS
Horizon I:
Focus on Elderly

Horizon II:
Bundle for Purpose

Horizon III:
Integrate with Lifestyle

Expand into New Customer Segments

63

Example of ADTs Remote Care Products Providing

Supportive Virtual Care at Home and On-the-Go
1

PERs
Motion sensors (Video)
Heart rate Monitoring

PERs
Motion sensors
Glucometer, Medication (box/cabinet)
Weight Scale Monitoring

5
6

Bathroom

PERs
Motion sensors, Video
Device on/off Sensors
Cabinet/Fridge door sensors
Door/window sensors

PERs
Motion sensors, Video
Thermostat control
HR, BP, Glucometer Monitoring
Medication (box/cabinet) + reminders
Door/window sensors (front door sensor)
Door locks
TV access
PERs
Motion sensors, Video
MPERs
Mobile Health Tracking
Activity Monitoring and Alerts

Daily activity
Wake-up

Outdoors around
the house

Meals

6
64

Strengthen PERS Platform and Capitalize on Health

Opportunity

Customer Adds

Opportunity for double-digit growth in PERS and

Health market
Leverage significant growth trajectory in Health
market to gain share and expand product offerings

ARPU

Continue to increase ARPU and expand customer

segments by integrating product functionalities into
Pulse ecosystem

65

Growing Our Business

1

Accelerate Innovation and Capture

Opportunities in Residential Security and
Automation Business

Expand Presence and Market Share

in Small and Medium Business Market

Customer Adds

ARPU

Customer Adds

Attrition

ARPU

Strengthen PERS Platform and

Capitalize on Health Opportunity

Leverage M&A to Further Grow Share

and Improve Economics

Customer Adds

Customer Adds

ARPU

Cost to Serve

66

M&A Strategy Aligned with Business Strategy

Strengthen
the Core

Extend Our
Leadership Position

Bulk account
purchases

Dealer account
purchases

Invest in
Adjacencies

Strengthen functional
capabilities

Pulse penetration

Small Business

Increase scale

Health

Leverage synergies

Other adjacencies

Expand geographic
coverage

Examples
Pinnacle

Broadview/Brinks

iControl

Absolute

Devcon Security

Ideal Life

67

Changing Security Market Will Witness Increased

M&A Activity Over the Next Few Years
Changing Market Factors

Increasing competitiveness of home security market place by well capitalized public companies

Interactive, internet-based technologies being deployed that drive complexity into business

Sunset of 2G wireless network by January 2017 will place financial pressure on all players

Combination of above dynamics is leading private-equity owned competitors to consider sale

Evolution of the market makes this an attractive time for M&A

68

ADT is Well Positioned as the Acquirer of Choice

Key Strategic Criteria
Addressed by M&A

Highly Fragmented Market

Scale / Density
25%

59%

Residential
Security &
Automation
2013E
Number of
Households

Thousands
of Others

Geography
4%

Vivint

4% Monitronics
3% Protection 1
2% Slomins
2% Guardian
<1% MSOs Combined

Top 20 actionable targets represent

Capabilities
Synergies

Growth Engine

$2.7B in recurring revenue

69

Source: Bain analysis.

Leveraging M&A to Strengthen Our Functional

Capabilities and Accelerate Organic Growth
Extend our
Leadership
Position

Strengthen
functional
capabilities

Increase scale

Leverage synergies

Expand geographic
coverage

Sales capabilities

Self-generating lead/door knocking

Fire-NICET/NFPA certification

Enterprise selling

Marketing capabilities

Data analytics

Mobile, social media, location based services

Installation

Other in-home services

Home entertainment

Service

Online customer self service

Billing

Technology

Intellectual Property

70

Devcon Acquisition An Example of Our Disciplined

Approach to M&A
Extend our
Leadership
Position

Acquired Devcon on July 31, 2013 for $146M (1)

$2.9M of RMR excluding Mutual and Stat-Land
41x 2013 RMR acquisition multiple

Run-rate synergies of $14M by FY2015

Represents 34% of projected operating costs

Strengthen
functional
capabilities

Increase scale

Leverage synergies

Expand geographic
coverage

On track to achieve synergies

One-time integration costs lower than plan

117,OOO high quality customers with low attrition

Efficient self-generating salesforce with lower SAC
Strong presence and operating model in the Homeowners
Association market
Overall business maintaining positive operating trajectory
Sales force successfully integrated into ADTs with rapid adoption of Pulse

Large commercial Mutual and Stat-Land business divested on

November 21, 2013 at a positive valuation
43x 2013 RMR

71

(1)

Net of cash acquired.

Other Investment Opportunities

Invest in
Adjacencies

Health

20% preferred ownership position

Board seat

Access to solution and platform

Rights worldwide
Integration with Pulse

Pulse Extension

Business

Health

Other Adjacencies

Pre-determined rights to expand

ownership position
Timing is performance based
100% pre-negotiated

Vehicle
Pulse integration with voice
management
Asset management

Software and solutions

Location based services
Video analytics
Intellectual Property

Data management and

analytics

Hardware
Industrial Design
Exclusive core elements

Entertainment
Actionable local content
Entertainment and Smart TV
integration

Monitoring
Solar, vehicle, healthcare

Identity Theft

72

Guiding Principles for Disciplined M&A

Be fast and nimble to take advantage of opportunities

Approach M&A collaboratively, internally and externally

Our M&A
Guiding
Principles

Measure all deals against quantifiable economic, operational

and strategic criteria target IRR of >12%
Position ADT as the Partner/Acquirer of Choice in the
marketplace
Involve integration team early in the deal process to enable fast,
effective integration activities

Identify unknown/exclusive deals to avoid auctions

73

Built Capabilities to Execute on M&A Opportunities

1

Deal Origination / Negotiation

Due Diligence

Deal Process
Oversee M&A function &
champion acquisitions
Ensure alignment with strategy
Manage process and diligence
Prioritize opportunities
Determine valuations
Develop relationships with
potential target companies

M&A
Team

Finance

IT

Operations

HR

Sales

Legal

Conduct diligence across all

functional areas
Synergies
Quality of customers and
operations
Growth engine
Identify risks/opportunities

Support contract negotiations

Integration Process
Integration
Leader

Finance

IT

Operations

HR

Sales

Customer
Experience

Develop integration plan with

timelines and key deliverables
Assimilate into ADT
Integration of sales and
operations
Deliver synergies
Execute terms of negotiated
contract with speed and quality

Ongoing assessment of performance and lessons learned

74

Leverage M&A to Further Grow Share and Improve

Economics

Customer Adds

Leverage fragmented, changing Home Security and

Automation landscape for attractive M&A
opportunities
Capabilities in place to integrate customer accounts
and operations
Capitalize on synergies that arise from consolidating
operations and capabilities to lower cost to serve

Cost to Serve

75

Agenda
Business Overview
Year One Progress and FY14 Outlook
Growing Our Business

Residential Security and Automation

Small Business Security and Automation
PERS/Health
M&A and Other Adjacencies

Financial Overview and Cost Efficiency Program

Concluding Remarks
Q&A

76

Mike Geltzeiler Chief Financial Officer

Areas of Expertise
Over 30 years of experience in finance executive roles, much of it at
businesses with subscription models
Public company CFO for past 13 years, with track record of creating value
for shareholders
Extensive capital markets experience
Expertise in large, complex M&A
International background, includes 7 years work experience abroad

Prior Experience

Education

Former Chief Financial Officer and Group

Executive Vice President at NYSE Euronext

MBA in Finance from New York Universitys

Stern School of Business

Former Chief Financial Officer at the Readers

Digest Association

CPA certification in the State of New York

Former Chief Financial Officer at ACNielsen

Corporation

Bachelor of Science in Accounting from the

University of Delaware

Served in a variety of senior finance positions

both in the US and abroad for Dun & Bradstreet

77

Favorable Market Dynamics and Competitive

Advantages Drive Financial Performance
Strong Recurring Revenue Growth

Attractive Account Growth Opportunities

$4
$3

$2.8

$3
$2

$2.9

$3.0

$2.3
$1.8

$1.9

$1.9
66.5%

66.7%

$2
$1
$1

43.8%

44.4%

46.3%

47.5%

49.3%

49.8%

51.1%

FY 2013 Customer Additions (000s)

$4

600

2007

2008

2009

2010

2011

2012

Recurring Revenue
(2)(3)
EBITDA Margin
(2)(4)
Pro-Forma Pre-SAC EBITDA Margin

2013

Customer IRRs well

above weighted
average cost of capital
Total Resi.
Direct
Dealer

400

Resi. Direct
Trad.
Resi. Direct Pulse

200
Devcon

$0

Weighted
Average Cost
of Capital

SB Trad.
SB - Pulse

5%

10%

Large Bulk
Purchase

IRR (5)

Health

15%

20%

Consistent ~$1 billion of steady-state free cash flow generated every year
(1)
(2)
(3)
(4)
(5)

Pro-forma acquisition of Broadview Security in 2010.

Before special items and non-GAAP. For a reconciliation to the most comparable GAAP measures please see the Appendix.
Not normalized for Dis-Synergies from spinoff from Tyco and Public Company Costs.
Normalized for Dis-Synergies from spinoff from Tyco and Public Company Costs.
IRR is calculated on a 15 year, after tax basis.

78

Overview of Long Term Financial Strategy

Operating Focus
on Five Value Levers
Customer
Additions

Optimize Capital
Structure to Propel
Growth

3x Leverage Target
Attrition

Average Revenue
Per User
(ARPU)
Cost to Serve
(CTS)

Organic Customer
Growth

Return Capital to
Shareholders

Dividend Payout
Ratio of
40%-50%
Share
Repurchases

Strategic M&A

Subscriber
Acquisition Cost
(SAC)

Total Shareholder Return and Valuation on a Per Share Basis

79

ADT Enterprise Valuation

Customer
Additions
Attrition

+1.1 million
new customers

+40 bps
net attrition

Average Revenue
Per User
+3.7%
(ARPU)

Cost to Serve
(CTS)

+$0.58
per subscriber(1)

Subscriber
+0.8x
Acquisition Cost
creation multiple(2)
(SAC)
Cash Tax Rate

5%-7% to 2022
$2.4B share

Capital Returns

Implied FY2013
Trading Multiples(5)

repurchases(3)

Recurring
Revenue
$3,041 M

EV / LTM RMR

47.3x
EV / Pre-SAC
EBITDA

Pre-SAC
EBITDA Margin
67%

5.8x
EBITDA Margin
51%

EV / EBITDA

7.1x
Steady-State
Free Cash Flow
$939 M

EPS using Cash

Tax Rate
$2.88

EV / SSFCF

12.8x

Cash P/E

14.2x

2% dividend yield(4)
M&A
Note:
(1)
(2)
(3)
(4)
(5)

Devcon and
Absolute

Unless otherwise noted, all figures are before special items and are non-GAAP measures. For a reconciliation to the most comparable GAAP measures please see the appendix.
Increase mainly due to dis-synergies and public company costs associated with Tyco spinoff.
Excludes subscriber upgrades.
Includes repurchases completed after fiscal year-end.
Based on a $41.00 illustrative share price, reflects increase in dividends announced after FY2013 year end.
Based on pro forma capital structure and a $41.00 illustrative share price.

80

Overview of Cost Efficiency Program

Significant Room to
Improve Cost Position

Cost
Component

Create lean support model and reduce G&A

FY2013 focus
Separation from Tyco
Establishing public
company capabilities

Cost to
Serve
(CTS)

Continued business simplification and

automation
Real estate optimization
Reduce CTS through improved maintenance
cost efficiency and use of tools and
technology

Driving a ramp-up in costs

Renewed focus on cost
efficiency moving forward

Drive down SAC through sales / marketing

optimization and installation / equipment
rationalization

Three year efficiency

program underway
Tangible opportunities
identified

Initiatives in Place

Subscriber
Acquisition
Cost
(SAC)

Optimize sales and marketing

activities across channels
Reduce installation costs and further
integrate and automate installation
activities
Deploy Common Order Entry platform
81

Efficiency Program Cost to Serve

Cost Component

Cost to
Serve
(CTS)

2013

G&A

$483M

Customer Service

$212M

Maintenance

$179M

Revenue Share

$77M

Bad Debt

$49M

Total Cost to Serve

$1,000M

Pre-SAC EBITDA Margin (1)

66.7%

Cost to Serve per Subscriber

$12.88

Cost Reduction Initiatives Impact

10% Overall Reduction

in Cost to Serve per
Subscriber by

2016

Including $50 Million

Reduction in G&A

82

(1)

Before special items and non-GAAP. For a reconciliation to the most comparable GAAP measures please see the Appendix.

Efficiency Program Subscriber Acquisition Cost

Cost Component

Subscriber
Acquisition
Cost
(SAC)

P&L
Portion
of SAC (1)

2013

Cost Reduction Initiatives Impact

Selling incl.
Commissions

$217M

Advertising &
Marketing

$171M

Installation
Cost

1x Reduction

$60M

in Net Creation Multiple (2)

51.1%

by 2016

EBITDA Margin (2)

Capitalized Direct SAC

$738M

Capitalized Dealer SAC

$555M

150bps Improvement

Installation Revenue (P&L and Capitalized)

($294)M

in EBITDA Margin (2)

Net Subscriber Acquisition Cost

$1,447M

Net SAC per Subscriber (3)

$1,277

Net Creation Multiple (3)

(1)
(2)
(3)

by 2016

29.1x

Over 90% attributable to Direct Subscriber Acquisition Cost.

Before special items and non-GAAP. For a reconciliation to the most comparable GAAP measures please see the Appendix.
Excluding upgrade costs.

83

New Steady-State Free Cash Flow (SSFCF) Definition

Better Reflects Performance
Simpler,
More Intuitive
Calculation

More intuitive calculation reflects fundamental drivers of value

Ties back to key value and financial drivers:

Pre-SAC EBITDA
Direct and Dealer New RPU
Direct and Dealer SAC
T12M Disconnects Net of Price Escalation (trends with Net Attrition)

Captures full impact of all five key value drivers

SSFCF is an
Important
Financial
Metric

Best proxy for analyzing the cash potential of existing subscriber base
Equalizes deferments and capitalization for cost of replacing attrition
Strips out amortization complexities and inconsistencies

Calculation now more aligned with key peers and enhances transparency

New Methodology Enhances and Simplifies SSFCF Definition to Achieve Greater

Transparency, Understanding and Comparability
84

New SSFCF Definition Better Captures Performance

Prior Definition

New Definition
Q4 T12M
FY2013

Free Cash Flow before Special Items

(4)

+Interest Paid
+Income Taxes Paid, Net of Refunds
+Reduction in Dealer CAPEX
SSFCF before Special (Prior Definition) (4)
Trailing Recurring Revenue
Gross Attrition
Recurring Revenue Lost to Attrition

$507
107
(2)
283
$895
$3,063
17.1%
$524

Trailing Recurring Revenue from Price Escalation

Price Escalation %
Net Recurring Revenue Lost

$85
2.8%
$439

Direct Gross Additions (thousands)

Direct New ARPU
Recurring Revenue Created Through Direct

654
$43.4
$341

Recurring Revenue required through Dealer Channel

Gross Dealer Annual Creation Multiple
Dealer CAPEX Required to Maintain Recurring

$98
2.78x
$272

Dealer CAPEX Required Under Growth Scenario

Dealer CAPX Required for Steady State Scenario
Reduction in Dealer CAPEX

$555
$272
$283

Note:
(1)
(2)
(3)
(4)

5% -10% FY2014 Growth

Start
with fundamental
metric (Pre-SAC
EBITDA)

Simplify
and relate to
key drivers
(attrition and
creation
multiple)

Q4 FY2013

Last Quarter, Annualized EBITDA (Pre-SAC)

- SAC to Maintain Recurring Revenue

$2,108
($1,159)

- Maintenance CAPEX(1)

($10)

SSFCF Before Special Items

$939

Last Quarter Average RMR

$259

X T12M Disconnects Net of Price Escalation(2)

14.3%

X Last Quarter Gross RMR Creation Multiple(3)

31.3x

SAC to Maintain Recurring Revenue

$1,159

5% - 10% FY2014 Growth

All values in $ millions except per subscriber amounts.

Based on managements estimate of maintenance CAPEX spending in Steady State.
Average T12M recurring revenue disconnected net of price escalations. Disconnects account for dealer chargebacks.
Gross creation cost includes amount held back from dealers for chargebacks.
Free Cash Flow before Special and Steady-State Free Cash Flow before Special are non-GAAP measures. For a reconciliation to the most comparable GAAP measure, please refer to the
Investor Relations section of our website at www.adt.com.

85

Optimize Capital Structure - 3.0x Leverage

Business Model Supports
3.0x Leverage
Predictable Cash
Flow Generation

Scalable and
Flexible Sales
Channel

Attractive
Interest Rate
Environment

Recurring revenue
represents >90% of total
revenue, providing
stability and predictability
Provides flexibility in
downturns to reduce
spending on subscriber
acquisitions and limit
downside risk
Opportunity to lock-in
historically low interest
rates

Opportunity to Invest in Attractive

Investments and Return Capital
Attractive Organic
Growth
Opportunities

Well Positioned
as Industry
Consolidator

Capital Return to
Shareholders

Customer accounts IRR

of mid-teens is
significantly higher than
cost of capital
Leader in fragmented
and rapidly changing
industry

Opportunity to return
capital to shareholders
via share repurchases
and dividends

Increasing leverage to 3.0x provides flexibility to invest in organic growth and pursue
opportunistic M&A while also continuing to return capital to shareholders
86

Significant Sources of Capital Over Next Few Years

Sources of Capital

2014-2015

2016+
Annually

Incremental capital from increasing

leverage (2.0x to 3.0x Debt/EBITDA(1))

~$1.7B

$0.0B

Free Cash Flow generated(2) and

incremental capital from growing EBITDA(1)

~$1.7B

~$1.0B

~$3.4B

~$1.0B

Total Available Capital

~$3.4 billion of capital available for M&A and shareholder return over the next 2 years and
~$1.0 billion annually thereafter to invest in acquisitions and return to shareholders
Note: Figures are illustrative. Free cash flow estimates and incremental capital from growing EBITDA estimates are
contingent on ultimate allocation between acquisitions and share repurchases.

(1)
(2)

EBITDA before special items.

Free cash flow after special items.

87

2014 2015 Capital Allocation Framework

Sources of Capital

Uses of Capital
M&A Criteria

~$0.3B
~$1.2B of share
repurchases
already completed
in FY 2014

~$3.4B

~$3.1B

~$1.1B

~$1.9B

Capital Available

Dividends

Payout ratio of
40% - 50%

IRR target >12%

Accretive to SteadyState Free Cash Flow(1)
Alignment with
strategic criteria:
Scale / density
Geography
Capabilities
Synergies
Growth engine

M&A and Share Repurchases

Advantaged position as
industry consolidator, and
opportunity to return significant
capital to shareholders

Disciplined approach to capital allocation

Note: Figures are illustrative. Free cash flow estimates and incremental capital from growing EBITDA estimates are
contingent on ultimate allocation between acquisitions and share repurchases.
88

(1)

Before special items on a levered, after-tax, per share basis.

Pro-Forma Capital Structure

FY 2012
Actual

FY 2013
Actual

Pro-Forma

Total Debt

$2,527

$3,376

$4.5B

EBITDA

$1,609

$1,690

$1.7B

Debt / EBITDA

1.6x

2.0x

2.6x

Diluted Ending Shares

(% reduction)

235

212
(9.8%)

187
(20.0%)

before special items(1)

Note: Pro-forma incorporates subsequent actions taken since year end:

$1 billion debt offering closed Oct. 1, 2013

Net $75M increase in revolver borrowings ($150M repayment and $225M drawdown)
Share Repurchases: $300M open-market program (7.3 million shares), $400M accelerated
share repurchase program (initial delivery of 7.9 million shares), and $451M bulk purchase from
Corvex (10.2 million shares )
Note:
(1)

$ in millions unless otherwise noted.

EBITDA is before special items and is a non-GAAP measure. For a reconciliation to the most comparable GAAP measures please see the Appendix.
There were no pro-forma adjustments to FY2013 EBITDA.

89

FY2014 Guidance
Levers

Operational

Customer
Additions
Attrition
ARPU
SAC

Capital Allocation

Cost to Serve

Note:
(1)

Special Items

Share
Repurchase
M&A

Outlook
Consistent growth

FY2013A

FY2014E

Recurring
Revenue
Growth %

4.8%

4% - 5%

Improve with costreduction programs

EBITDA Margin %
(before special
items)

51.1%

50+ bps
Expansion

$50-$65M, ~50% allocated

to 2G conversion program
Restructuring, Devcon
integration and Tyco
separation costs

Steady-State Free
Cash Flow (1)

$939M

+5% - 10%
Growth

Expected to stabilize

Grow with Pulse and

escalations
Stabilize with
initiatives

$1.2B to date
Capitalize on advantaged
position as industry
consolidator

Unless otherwise noted, all figures are before special items and are non-GAAP measures. For a reconciliation to the most comparable GAAP measures please see the Appendix.
Based on new definition of SSFCF.

90

Longer Term Outlook

Recurring Revenue Growth
Residential

Small Business
Healthcare

Mid-single digits

Mid-to-high single digits

M&A

Mid-to-high single digits

Double digits

Adjusted EBITDA Margin Expansion

150 bps margin expansion over the next three years

Steady-State Free Cash Flow Growth

High-single digits

91

Agenda
Business Overview
Year One Progress and FY14 Outlook
Growing Our Business

Residential Security and Automation

Small Business Security and Automation
PERS/Health
M&A and Other Adjacencies

Financial Overview and Cost Efficiency Program

Concluding Remarks
Q&A

92

What We are Excited to Share About ADT Today

Strong and
Stable Core
Business
Actionable
Priorities for
Improvement

25% residential
market share

6.5 million
customers with
>90% recurring
revenue

Attractive
incremental returns

Stabilize attrition

Optimize Indirect
channel

Simplify the ADT

value creation story

Opportunity to
Meaningfully
Improve
Margins

Cost advantage opportunities in

cost to serve and subscriber
acquisition cost

G&A reduction through business

simplification and real estate
optimization

Clear Multi-year
Plan for
Success

Investing to grow organically

and via M&A

Key financial targets for long

term ADT business success

Right
Leadership
Team to Ensure
Success

Complemented existing ADT management team with strong new

additions over the course of the year

93

Q&A

2013 ADT LLC dba ADT Security Services. All rights reserved.

Appendix

2013 ADT LLC dba ADT Security Services. All rights reserved.

Non-GAAP Measures
Earnings before interest, taxes, depreciation and amortization (EBITDA), EBITDA margin, EBITDA (pre-SAC), EBITDA margin (pre-SAC), steady-state free cash
flow (SSFCF), and EPS at cash tax rates in each case before special items and/or pro-forma are non-GAAP measures and should not be considered
replacements for GAAP results.
EBITDA is a useful measure of the The ADT Corporations (the Company) success in acquiring, retaining and servicing our customer base and ability to
generate and grow recurring revenue while providing a high level of customer service in a cost-effective manner. The difference between Net Income (the
most comparable GAAP measure) and EBITDA (the non-GAAP measure) is the exclusion of interest expense, the provision for income taxes, depreciation
expense and amortization expense. Excluding these items eliminates the impact of expenses associated with our capitalization and tax structure as well as
the impact of non-cash charges related to capital investments.
EBITDA (pre-SAC) is a useful measure of the Companys success in retaining and servicing our customer base while providing a high level of customer service
in a cost-effective manner. The difference between Net Income (the most comparable GAAP measure) and EBITDA (pre-SAC) (the non-GAAP measure) is the
exclusion of interest expense, the provision for income taxes, depreciation expense, amortization expense, and subscriber acquisition related revenue and
expenses. Excluding these items eliminates the impact of expenses associated with our capitalization and tax structure, the impact of non-cash charges
related to capital investments, and the impact of growing our subscriber base.
In addition, from time to time, the Company may present EBITDA and EBITDA (pre-SAC) before special items, or on a pro-forma basis which are EBITDA and
EBITDA (pre-SAC), adjusted to exclude the impact of the items highlighted below. These numbers provide information to investors regarding the impact of
certain items management believes are useful to identify, as described below.

There are material limitations to using EBITDA and EBITDA (pre-SAC). EBITDA and EBITDA (pre-SAC) may not be comparable to similarly titled measures
reported by other companies. Furthermore, EBITDA and EBITDA (pre-SAC) do not take into account certain significant items, including depreciation expense,
amortization expense, interest expense, and tax expense, which directly affect our net income. Additionally, EBITDA (pre-SAC) does not take into account
expenses related to acquiring new customers. These limitations are best addressed by considering the economic effects of the excluded items independently,
and by considering EBITDA and EBITDA (pre-SAC) in conjunction with net income as calculated in accordance with GAAP.

96

Non-GAAP Measures (continued)

SSFCF is a useful measure of pre-levered cash that is generated by the Company after the cost of replacing recurring revenue lost to attrition, but before
the cost of new subscribers that drive recurring revenue growth. The difference between Net Income (the most comparable GAAP measure) and SSFCF
(the non-GAAP measure) consists of the factors discussed above regarding EBITDA (pre-SAC), on a quarter-to-date basis. EBITDA (pre-SAC) is then
annualized and adjusted for additional factors, described in the reconciliation below, required to maintain the steady-state. Certain components of these
inputs are determined using trailing twelve month information or information from the most recent quarter.
In addition, from time to time, the Company may present SSFCF before special items, which is SSFCF, adjusted to exclude the impact of the special items
highlighted below. These numbers provide information to investors regarding the impact of certain items management believes are useful to identify, as
described below.
The limitation associated with using SSFCF is that it adjusts for certain items that are ultimately within management's and the Board of Directors'
discretion to direct and therefore may imply that there is less or more cash that is available for the Company's programs than the most comparable GAAP
measure. This limitation is best addressed by using SSFCF in combination with other GAAP financial measures.
SSFCF as presented herein may not be comparable to similarly titled measures reported by other companies. These measures should be used in
conjunction with other GAAP financial measures. Investors are urged to read the Company's financial statements as filed with the Securities and
Exchange Commission, as well as the accompanying tables to this presentation for reconciliations of SSFCF to the most comparable GAAP measure.
EPS at cash tax rates is a useful measure of our earnings per share after considering the difference between our effective tax rate and our cash tax rate.
The difference between Diluted EPS (the most comparable GAAP measure) and EPS at cash tax rates (the non-GAAP measure) is the exclusion of the
impact of income tax expense and the inclusion of the impact of income taxes paid, net of refunds. Adjusting for these items provides information on the
impact of our net operating loss carryforwards on our diluted EPS. In addition, from time to time, the Company may present EPS at cash tax rates before
special items, which is EPS at cash tax rates, adjusted to exclude the impact of the items highlighted below. These numbers provide information to
investors regarding the impact of certain items management believes are useful to identify, as described below.
Special items include charges and gains related to acquisitions, restructurings, impairments, and other income or charges that may mask the underlying
operating results and/or business trends of the Company. The Company utilizes these measures to assess overall operating performance, as well as to
provide insight to management in evaluating overall operating plan execution and underlying market conditions. The difference between net income and
EPS before special items and net income and EPS (the most comparable GAAP measures) consists of the impact of the special items noted above on the
applicable GAAP measure. EBITDA, EBITDA margin, EBITDA (pre-SAC), and EBITDA margin (pre-SAC) before special items do not reflect any additional
adjustments that are not reflected in net income before special items. Pro-forma information is provided to adjust for the impact of certain dis-synergies.
The limitation of these measures is that they exclude the impact (which may be material) of items that increase or decrease the Company's reported
operating income and operating margin and net income and EPS. This limitation is best addressed by using the non-GAAP measures in combination with
the most comparable GAAP measures in order to better understand the amounts, character and impact of any increase or decrease on reported results.

97

EBITDA Before Special Items to Net Income

Reconciliation
($M)

2007

2008

2009

2010

2011

2012

2013

Net Income (GAAP)

$212

$222

$243

$239

$376

$394

$421

56

78

81

106

89

92

117

Income tax expense

130

121

150

159

228

236

221

Depreciation and amortization, net

517

546

560

674

813

862

930

$915

$967

$ 1,034

$1,178

$1,506

$1,584

$1,689

Separation costs, restructuring, and

other special items

18

11

(1)

Acquisition and integration costs

35

28

14

$922

$973

$1,040

$1,231

$1,534

$1,609

$1,690

43.8%

44.4%

46.3%

47.5%

49.3%

49.8%

51.1%

Interest, net

EBITDA

EBITDA before special items

EBITDA Margin before special items

98

Pro-Forma EBITDA Before Special Items (Pre-SAC)

to Net Income Reconciliation
($M)

2012

2013

Net Income (GAAP)

$394

$421

92

117

Income tax expense

236

221

Depreciation and amortization, net

862

930

$1,584

$1,689

Separation costs, restructuring, and other special items

11

(1)

Acquisition and integration costs

14

$1,609

$1,690

396

387

$2,005

$2,077

(22)

$1,983

$2,077

66.5%

66.7%

$3,228

$3,309

(247)

(196)

$2,981

$3,113

Interest, net

EBITDA

EBITDA before special items

Subscriber acquisition cost expenses net of related revenue
EBITDA before special items (pre-SAC )
Dis-synergies(1)
Pro-forma EBITDA before special items (pre-SAC )
Pro-Forma EBITDA Margin before special items (pre-SAC)
Revenue (GAAP)
Subscriber acquisition cost related revenue
Revenue (pre-SAC)

99

(1) Pro-forma adjusts 2012 amounts for the higher level of dis-synergies and corporate costs incurred in FY2013.

Steady-State Free Cash Flow Before Special Items to

Net Income Reconciliation
($M)

Q4
FY2011

Q4
FY2012

Q4
FY2013

($M)

Net Income (GAAP)

$93

$94

$96

Last quarter, annualized EBITDA

before special items (pre-SAC)

Interest, net

21

22

32

SAC to maintain recurring

revenue

Income tax expense

Depreciation and
amortization, net
EBITDA
Separation costs,
restructuring, and other
special items
Acquisition and
integration costs

EBITDA before special items

Subscriber acquisition
cost expenses net of
related revenue
EBITDA before special items
(pre-SAC)

64

51

$2,108

(997)

(999)

(1,159)

56

Maintenance capital
expenditures

(10)

(10)

(10)

Steady-state free cash flow

before special items

$969

$971

$939

Last quarter average RMR

$235

$247

$259

241

$382

$390

$425

Q4
FY2013

$1,980

223

Q4
FY2012

$1,976

204

(1)

Q4
FY2011

X T12M disconnects net of

price escalation(1)

14.1%

13.8%

14.3%

X Last quarter gross RMR

creation multiple(2)

30.1x

29.3x

31.3x

$997

$999

$1,159

$390

$401

$431

104

94

96

$494

$495

$527

SAC to maintain recurring

revenue

(1) Average T12M recurring revenue disconnected net of price escalations. Disconnects account for dealer chargebacks.
(2) Gross creation cost includes amount held back from dealers for chargebacks.

100

EPS Before Special Items at Cash Tax Rates to Diluted

EPS Reconciliation
2013
Diluted EPS (GAAP)

$1.88

Impact of income tax expense on diluted EPS

0.99

Impact of income taxes paid, net of refunds

0.01

EPS at cash tax rates

$2.88

Acquisition and integration costs(1)

0.01

Non-recurring separation costs(1)

0.10

Separation related other income(2)

(0.11)

EPS before special items at cash tax rates

$2.88

(1) Calculated using a tax rate of (0.3)% for the twelve months ended September 27, 2013.
(2) Relates to the 2012 Tax Sharing Agreement between Tyco, ADT and Pentair.

101