Research Question: Will cable/telecom home security offerings materially affect ADT’s customer growth and/or attrition rate in the next six months?
Companies Covered: ADT Corporation (ADT), Tyco International (TYC), Google (GOOG), Comcast (CMCSA), Verizon Communications (VZ), Time Warner Cable (TWC), DirecTV (DTV)
Report Available: January 16, 2015
Blueshift’s initial research shows ADT reaching most of its financial goals and talking a big game regarding its potential in the underpenetrated security market, but competition from Tyco and cable/telecom as well as other security issues may slow the company’s efforts.
- ADT’s Q4 results were mixed as sales came in ahead of expectations but profits dipped. Q4 revenue increased 3%, however net income fell 14.5% to $82 million. Total accounts grew 3.7% to 6.7 million customers, and unit attrition rate fell to 13.2%. ADT attributed the recurring revenue growth to a 7% increasein its organic average revenue per customer and the consolidation of its previously announced acquisition of Reliance Protectron for 11 weeks in the quarter. On Dec. 5 Moody’s issued an unflattering Ba2 rating on ADT’s new debt offering, and a week later Barclays downgraded ADT due to the abounding debt it has accumulated, most of which was borrowed to purchase 26% of its outstanding shares in the last two years.
- ADT’s 2015 plans include: growing its Pulse suite, investigating more M&A opportunities, boosting flat sales in its dealer channel, reducing attrition below the 13% mark, and expanding its commercial and personal health systems franchise. ADT Pulse now has more than one million customers, makes up 16% of ADT’s customer base, and is chosen by 70% of new customers. ADT’s expansion into the $7 billion mid-sized commercial market is underway as the company recently added 45 employees to spearhead this segment. Within the commercial segment, ADT will bundle fire monitoring and multi-location services with standard commercial security plans. ADT believes the home security market is underpenetrated, and that it has the potential to expand its services by 3x if the home security penetration rate of 19% and home automation rate of 1% were to reach similar penetration levels of other household services, such as wireless, internet, HDTV, and landline phone, all which have a 64% penetration rate or higher in homes.
- Telecom and cable companies continue to grow their home security offerings to its enormous customer bases. DirecTV is calling its customers offering its discounted home security service, Life Shield. Unlike ADT, LifeShield and other up-and-coming home security offerings have relatively good customer satisfaction rates. ADT must now consider TycoIS a significant threat in small business security space. TYC is poised to expand its small business footprint with the launch of a new HD IP cameraline bundled with an app and standard options priced below ADT’s comparable offering. TYC’s small business line has kicked off in five markets and will expand once it fully understands the smaller business model, likely in late 2015. The quality of ADT’s security recently came into question when an Illinois class action lawsuit claimed ADT’s wireless signal is unencrypted and can be hacked with a $10 radio available on the open market. The hackers can exploit these flaws to disable the system, cause false alarms to go off, and even use the system’s cameras to spy on people in their homes.
- Our 23home security customer survey predictably found ADT the predominant home security company, but respondents indicated a growing amount of trust in cable/telecom companies’ ability to run home security systems. Subscribers who chose ADT did so based on perceived quality over price, and cable/telecom home security subscribers were enchanted by the value of bundled services. Customers with lower incomes were increasingly found subscribing to home security systems. Our Oct. 10 report found ADT was fending off cable/telecom companies and making little progress in its commercial business. ADT was not found to have improved in its service performance. Pulse reviews were mixed, with some saying the service was not unique and others claiming it benefited from telecom/cable companies’ advertising. Our July 23 report had similar findings in regard to competition from cable/telecom companies. Twelve out of 14 sources stated cable/telecom was not a threat to ADT. The company was ramping up its marketing campaigns focusing on safety and reliability rather than price.
To determine if ADT can gain share in the commercial market and keep telecom/cable companies at bay, Blueshift will gather data and issue a market research report from independent sources in the following areas: Traditional home security system dealers, traditional home security installers, home security installers from cable and telco companies, small-to-medium sized business owners, and industry specialists.
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