ADT announced its financial results for the fourth quarter and full year of 2014 this week, both of which were slight improvements over 2013.
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ADT on Wednesday announced that it has entered into an agreement to acquire Reliance Protectron, a subsidiary of Reliance Comfort Limited, for $500 million.
According to a statement issued by the company, the acquisition of Protectron, which is one of the leading providers of monitored security services in Canada, will “significantly strengthen” ADT’s operations in the country. In addition, the acquisition will bring ADT 400,000 residential and commercial customers including 31,000 contract monitoring accounts, accounting for $11 million in associated recurring monthly revenue.
During an investor conference call on Wednesday, ADT CEO Naren Gursahaney called the acquisition an “attractive opportunity” for the company.
“It complements our Canadian business, fits well with our strategic objective to strengthen our core business and adds to our capabilities,” explained Gursahaney. “Protectron has a high-quality subscriber base with industry leading attrition performance and longer tenured contracts with about two-thirds of their new account growth on five-year initial contracts and approximately 60 percent of their total base still under contract.”
Gursahaney said that ADT paid an RMR multiple of 46x for Protectron, which will be funded through cash on hand and an existing line of credit. “In summary, this transaction provides many of the benefits of a roll-up in a very attractive and stable market for ADT,” Gursahaney added.
Although both companies have a footprint that cuts across Canada, Gursahaney said that Protectron’s strengths are really centered around Quebec, while ADT’s presence is the country is focused in Ontario and also in the western part of the country.
“This is a company we’ve known for years,” said Gursahaney. “We’ve competed against them. We have a lot of respect for the capabilities they have from a management perspective, from their sales both direct and dealer channel and, as we learn more through the acquisition process, some of the practices they have around customer retention.”
ADT said that Protectron will remain headquartered in Montreal and that it will continue to operate under the Protectron name.
“The creation of a strong, standalone business in Canada with a dedicated management team will position us to accelerate our growth in this important and attractive market,” Gursahaney added.
“Protectron enjoys a well-earned reputation for industry-leading customer service, and we are pleased that ADT will continue to use the Protectron brand after we become part of the ADT family. We look forward to sharing best practices to build a stronger combined company that is better able to meet the security needs of Canadian homeowners and business owners,” said Protectron President and CEO Daniel Demers.
ADT said that as it strengthens its Canadian focus that it will relocate certain administrative functions that are currently being run out the U.S. to Canada.
“This is a compelling financial and strategic transaction for our shareholders, demonstrating important progress in executing our capital allocation and growth strategies. Protectron has low levels of attrition and a great track record for net subscriber growth, which are two important things we look for in an acquisition. The deal also creates opportunities for operational and administrative synergies, resulting in a more-efficient, more-successful ADT,” said ADT CFO Michael Geltzeiler.
The completion of the transaction is subject to customary closing conditions, including regulatory approvals. The company expects the transaction to close this summer.
Q2 Financial Results
Also on Wednesday, ADT announced the financial results for the second quarter of its 2014 fiscal year. The company reported revenues of $837 million, which is an increase of 1.9 percent when compared to the same quarter last year. Recurring revenue, which made up 92 percent of revenue in the quarter, was $773 million which is up 2.2 percent compared to the same time period last year.
However, Geltzeiler said that gross customer adds were flat sequentially and remained a challenge during the second quarter. He also said that gross adds in the company’s direct channel were down slightly due to an expanded rollout of their enhanced customer screening process, which is intended to improve the quality of new customers ADT brings into the fold. Additionally, gross adds in their dealer channel, excluding bulk purchases of customer accounts, were also down compared to last year due to a lower number of dealers.
Excluding any revenue impact from the acquisition of Protectron, Gursahaney admitted to investors that they do not expect to reach revenue target for the year. Shares of ADT plunged in January after the company’s first quarter profits for 2014 failed to meet analysts’ expectations. At the time, the company blamed its lackluster performance on the fact that they added fewer customers to their roles than expected, as well as a year-over-year increase in its customer attrition rate.
Gursahaney believes, however, that some of the changes they’ve made will help right the ship moving forward.
“We’ve made organizational and process changes to help address the two biggest drivers of attrition – relocations and non-pay customers. In addition, my entire executive leadership team is reviewing our customer disconnect performance and our attrition initiatives on a weekly basis to make sure our efforts get the resources and support they need,” he said. “Our balanced approach to growth is the right path as we are increasing our focus on adding high-quality subscribers and reducing attrition and not just growing solely for the sake of growth.”