ADT Earnings Call Insights: Dealer Performance and the $2 Million Buyback

ADT Corporation (NYSE:ADT) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Dealer Performance

Jeffrey Sprague – Vertical Research Partners: Naren, I was wondering if you could shed a little more light on what’s going on in the dealer channel, in particular this notion that maybe somebody got a little over their SKUs on financially and they are kind of reeling it in back in. How do you manage that and do you view that as kind of an isolated incident?

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Naren Gursahaney – CEO: Yes, Jeff, I would say as I look at the dealer performance in Q1, I would kind of break it down into three pieces looking at the year-over-year comparisons. The first is, we did have one large dealer that as you articulated, got a little bit over their SKUs and this was a dealer that has grown rapidly; and as you know, when you grow rapidly you can really extend your cash flow if you are not managing it very, very closely. So I really do view this as a one-off, we worked very closely with this dealer as well as their partners including their product suppliers. I think we’ve got a good program with them and you will see them ramp back up over the next couple of quarter in a very methodical approach. I think we want to make sure that they don’t overextend themselves and get them into the same challenges but I really view that as a one-off. So that was probably about a third of the shortfall or the decline. Another (curve) that is really just a tough compare from Q1 of last year, we had some timing issues from Q4 of the prior year to Q1 that moved some dealer funding, just between quarters. This is normal funding. As you know, we have a steady stream of dealer units coming to us, but we also do some bulks for some of those accounts that may not meet the (beating) score upfront, they hold them for a period of time. So, the timing of those bulks does create some normal lumpiness in our quarter-to-quarter production. I would say then, the thi9rd piece of it was a combination of hurricane Sandy, which impacted both of our channels as well as just some softness on the lead generation side, some of our dealers have built relationships with lead generation partnerships as they’ve expanded their business and we’re just working with them to find more lead generation partners and sources to help them continue to grow their business.

Jeffrey Sprague – Vertical Research Partners: The Pulse statistics obviously look great, I’m just wondering if you could shed a little more light on how that’s playing with dealers, obviously you rolled it out and said you’re off to a – it looks like a quick start, could you characterize what percentage of dealer force is actually now out there trying to sell Pulse and where the dealer Pulse ARPU is, is it below that 50 fleet average you’re seeing on the internal stuff.

Naren Gursahaney – CEO: Pulse is now available to all of our dealers, they’re all going through a methodical ramp out, and introducing — generally similar to the way we did to do it on a region-by-region basis. I don’t have a specific number for you, but I can tell you it is ramping up nicely as I mentioned in my comments, if you look our October to November to December, now even into January, we’ve seen a good steady increase, we had our operating review with our largest dealer yesterday and I can tell you not just their excitement about Pulse, but really what they’ve articulated from they’re hearing from their sales people and their customers, they’re very excited about the solution. The ARPU we’re seeing from our dealers is consistent with what we’re seeing from our direct channel, so there’s no drop-off at there.

The $2 Million Buyback

Ian Zaffino – Oppenheimer & Co.: The question would be on I know you talked about the buyback, $2 billion buyback and I think previously you’d said we are waiting to see what happens with competition I think that was one of the factors you had cited for not buying back as much shares as you probably should, one of the factors. What are you seeing now as far as competition how long are you going to give this before you make a further decision on what you are going to do and how long is it going to take you to sort of assess the competitive landscape?

Kathryn Mikells – SVP and CFO: From my perspective we announced $2 billion buyback over three year period of time and with respect to fiscal 2013 we said we are anticipating returning about $1 billion to shareholders through dividends and share repurchases. That would yield a roughly call it $900 million share repurchase program over the course of this fiscal year and to-date including the ASR we have $700 million of that program clearly behind us. So from my perspective we are executing exactly what we intended and said we were going to execute and I think we are fairly far along in the programs for the year and that’s very consistent with the overall capital structure and capital allocation that we talked about at the end of November. I’d say if we then turn the comment toward the competitive environment from our perspective the competitive environment really hasn’t changed quarter-to-quarter we are seeing the same level of overall competition. We continue to look at our results both in areas where we have new entrant competitors where we don’t and while some of those metrics kind of ebb and flow overall the metrics are holding up very well. Naren?

Naren Gursahaney – CEO: I agree. I think Kathy hit the nail on the head. We’re not seeing any significant change, but clearly it’s a dynamic environment. We’ve got new competitors coming in and we are going continue to monitor it very closely.