ADT Inc. (ADT) Earnings

Management highlights

### Capital Allocation & Shareholder Returns • Through the first half of 2026, ADT returned $684 million to shareholders, including $594 million for share repurchases and $90 million in dividends. ADT repurchased 29 million shares in connection with Apollo's secondary offering of its remaining holdings, after which Apollo no longer holds any ADT shares. • As of the call, the company has repurchased ~89 million shares under its $1.5 billion three-year repurchase authorization, with ~$885 million remaining. The capital structure remains strong, with an undrawn $800 million revolving credit facility, net debt of ~$7.4 billion, and leverage of 2.8x adjusted EBITDA; the long-term target leverage is 2.5x. ### Product Technology Initiatives • Launched ADT Blue, a lower-cost, self-installed security solution that integrates with the ADT Plus ecosystem and includes optional professional monitoring, initially launched primarily on Amazon. Approximately 30% of new customer additions in the first half of 2026 are on the ADT Plus platform. • The third-party dealer network is beginning a phased migration to the ADT Plus platform, expected to complete over the next 9-12 months. A new privacy-preserving presence sensing offering (based on 2026 acquisition technology) is on track for customer pilot launches in fall 2026, with a full commercial launch planned for early 2027. • AI is already driving productivity in software development: over three-quarters of new code committed by the product team in the most recent month was AI-generated. AI-powered product features (including motion intelligence, alarm event classification, and video analytics) will roll out to ADT Plus customers starting in H1 2027. ### Service Excellence & Efficiency • Combined AI-driven call routing and virtual AI agents reduced customer contacts handled by human agents and reduced service tickets by nearly 20% in the quarter, while also improving first call resolution and customer satisfaction, generating both better experience and cost savings. • Upcoming AI expansions for H2 2026 include transcription and analysis of sales/service calls, SMS engagement with virtual agents, and AI-enabled fleet safety technology for the technician fleet, aimed at improving responsiveness and retention. ### Customer Acquisition Efficiency • The company is actively rationalizing marketing spend in high-cost acquisition channels (such as affiliate channels), which has temporarily pressured gross subscriber additions but is expected to improve long-term returns. Core direct do-it-for-me (DIFM) residential organic gross additions are up high single digits year-to-date, and SMB organic additions are up mid-single digits. • ADT Blue expands ADT's reach to value-conscious, DIY-oriented customers, a segment the company has not historically targeted; the company will scale Amazon presence and advertising for ADT Blue in H2 2026 to drive volume growth, with a long-term path to upgrade customers to higher-tier professional solutions.

Guidance

• Based on strong first half 2026 performance and share repurchase activity, management modestly raised its full year 2026 guidance: it now expects total revenue growth of ~2%, adjusted EPS growth of ~2%, and adjusted free cash flow growth of ~30%, with the improved cash outlook driven primarily by tax planning and working capital management. • Management expects fourth quarter 2026 income to be somewhat higher than third quarter 2026 due to investment timing, seasonal dynamics, and other factors, while revenue and cash flow are expected to be similar across the two quarters. • Management noted that while full year 2026 cash generation is very strong, 2027 will face headwinds from higher cash taxes (after utilizing existing net operating losses, and following low cash tax payments in 2026) and higher cash interest expense (as favorable interest rate swaps expire at the end of 2026, and upcoming 2027 debt refinancing is expected to occur at higher current market rates); these two factors are expected to create a combined $100 million to $200 million of headwind to 2027 free cash flow. • No explicit mid-term free cash flow guidance was provided beyond the current year, though management reaffirmed it expects to continue generating strong cash flow through efficiency initiatives.

Segment performance

Total second quarter 2026 revenue grew 2% year-over-year to $1.3 billion, with ending recurring monthly revenue (RMR) of $360 million. Monitoring and services revenue decreased 1% year-over-year, which reflects the revenue loss from the multifamily business divested in October 2025. Installation revenue was $230 million, up 17% year-over-year, driven by a higher mix of outright equipment sales as the company transitions away from its historical equipment-retention model. Adjusted EBITDA for the quarter was $671 million, adjusted income from continuing operations was $180 million, and adjusted diluted earnings per share was 23 cents (flat year-over-year). Adjusted free cash flow (including interest rate swaps) was $406 million, up 48% year-over-year, with year-to-date adjusted free cash flow reaching $820 million, up 64% year-over-year. The company added 190,000 gross new subscribers in the quarter with $11.9 million of RMR; net customer acquisition cost (net SAC) was $345 million, down 7% year-over-year, driven primarily by fewer bulk account purchases. Trailing 12-month subscriber attrition held steady at 13.1% (flat sequentially and year-over-year), and revenue payback remained at 2.3 years. There is no separate segment performance breakdown provided for distinct product segments beyond the revenue categories noted above.

Risks & headwinds

• Relying on bulk account acquisitions for growth is episodic, with inconsistent pipeline of high-quality opportunities, leading to year-over-year volatility in gross subscriber additions. • Migration of the dealer channel to the new ADT Plus platform is a multi-quarter process, and measurable benefits to attrition, service costs, and customer lifetime value will not materialize immediately, creating near-term pressure on growth metrics. • Macroeconomic conditions create modest pressure from slightly higher non-payment customer cancellations compared to prior year, though the impact has been small and in line with management expectations to date. • The transition away from high-cost acquisition channels creates temporary downward pressure on gross subscriber additions before long-term efficiency benefits are realized. • Forward-looking initiatives (including ADT Blue scaling, new product launches, and AI expansion) are in early stages, and actual customer adoption, operational benefits, and financial returns may differ from current expectations.

Analyst Q&A

• Q: How much of the current year-over-year decline in gross RMR and unit additions comes from intentional acquisition strategy changes versus weak end demand, and when will gross additions return to growth? When will the ADT Plus dealer migration deliver measurable improvements to attrition, service costs, and customer lifetime value?

  A: The vast majority of the year-over-year decline is driven by fewer bulk account purchases (10,000 accounts purchased this quarter versus 50,000 last year) and intentional cuts to high-cost affiliate channels plus softness from one large dealer. Core direct organic DIFM additions are up high single digits year-to-date, and SMB organic additions are up 4%, so underlying end demand for the core business is strong. It will take time to replace volume from the cut high-cost channels, but per-unit economics remain strong. The ADT Plus dealer migration is a phased 3-4 quarter process, so benefits will phase in gradually over the next 9-12 months; near-term process changes to credit standards and retention programs are already moving attrition metrics in the right direction.

• Q: What is driving the surprisingly strong free cash flow this year, and what should we expect for 2027 and mid-term free cash flow trajectory? What are initial results for ADT Blue, and how do ARPU and subscriber acquisition cost compare to traditional offerings?

  A: About half of the $300 million year-to-date free cash flow increase over last year comes from working capital timing (including discrete payroll timing benefits) and tight inventory management, with additional contributions from lower cash taxes, lower interest from prior refinancing, and slightly lower subscriber acquisition costs. 2027 will face a ~$50-$100 million headwind each from higher cash taxes and higher interest, totaling $100-$200 million in headwinds, but management will continue optimizing to generate strong cash. ADT Blue is still early post-launch, with lower average ARPU than traditional offerings (starting at $10/month for camera-only), but a majority of early customers have selected the full $34.99/month professionally monitored security package, which is higher than expected. SAC for ADT Blue is also much lower than traditional acquisition, so target returns are comparable to core offerings.

• Q: What are the current attrition trends, including non-pay cancellation trends, and what early benefits is ADT+ already delivering for retention? Which AI applications currently deliver the highest ROI, and when will broader benefits materialize?

  A: Trailing 12-month attrition held steady at 13.1% this quarter, with recent three-month attrition flat year-over-year. Non-pay cancellations are modestly higher than last year, but voluntary cancellations are better than last year, and non-pay for small business is actually improved. Higher credit loss provisions are in line with expectations from the shift to outright equipment sales, and all leading indicators (customer service metrics, retention team turnover, process changes) are moving in the right direction. To date, the highest ROI from AI has come from call center routing and virtual agents, which have already delivered material cost reductions while improving customer satisfaction. Over the next 12-24 months, AI will expand to employee productivity, fleet safety, product development, and customer-facing AI features, with incremental benefits building over time.

• Q: What share of ADT Blue customers choose the professionally monitored full security package, and will you offset volume losses from cutting high-cost channels with additions from other channels?

  A: Initial launch data shows a majority of ADT Blue customers are choosing the full professionally monitored security package (including sensors and base station) rather than just the lower-priced self-monitored camera-only tier, which is better than management expected. The long-term goal is to bring in entry-level DIY customers and upgrade them to higher-tier solutions over time. Management expects to offset volume losses from high-cost channel cuts with growth from ADT Plus expansion, new differentiated advertising, upcoming new product launches, and scaled DIY customer acquisition via ADT Blue, with core direct business already growing at healthy rates.