ADT, Inc. Aktie

Hello, everyone. Thank you for joining us, and welcome to the ADT Third Quarter 2026 Earnings Conference Call. I will now hand the conference over to Elizabeth Landers, Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining us today. Speaking on today's call are Jim DeVries, ADT's Chairman, President and CEO; and Jeff Likosar, our Chief Financial Officer. As you know, on October 29, we announced that ADT has entered into a definitive agreement to be acquired by Thrive Holdings. In consideration of the pending transaction, we will not be taking questions on today's call.

Additionally, we will not be providing financial guidance and are withdrawing previously issued guidance.

This morning, we issued a press release and presentation summarizing our third quarter results. Both are available at investor.adt.com. During today's call, we'll reference certain non-GAAP financial measures. Reconciliations to the most comparable GAAP measures are included in the earnings presentation on our website. Unless noted otherwise, all financials and metrics discussed reflect continuing operations.

Our remarks today also include forward-looking statements that fall within the safe harbor provisions provided by the Private Securities Litigation Reform Act, including statements regarding the proposed transaction. These statements are subject to risks and uncertainties that are described in the earnings presentation and in our SEC filings, including the risks related to timing and completion of the proposed transaction. Actual results may differ materially. Please refer to our SEC filings for more details.

We also refer you to the information in our press release regarding the proxy statement ADT intends to file with the SEC in connection with the proposed transaction and regarding participants in the solicitation. Investors and stockholders are urged to read the proxy statement when it becomes available. And now I'm happy to turn the call over to Jim.

Thanks, Elizabeth, and good morning, everyone. I'll keep my remarks brief this morning, focusing on the transaction we announced last Thursday, and then Jeff will walk through our third quarter results.

On Thursday, October 29, we announced that we have entered into a definitive agreement to be acquired by Thrive Holdings in an all-cash transaction. Under the terms of the agreement, which our Board of Directors unanimously approved, ADT stockholders will receive $10 per share in cash upon completion. $10 represents a premium of 46% to ADT's unaffected closing share price on October 27 and 52% to our 30-day volume-weighted average share price ending on that date. The agreement values ADT at approximately $7.6 billion in equity value and $15.3 billion in enterprise value.

We believe this transaction represents an important next chapter for ADT, bringing together our more than 150 years of security experience, nationwide service network and trusted customer relationships with Thrive Holdings' long-term capital and engineering capabilities. I am pleased with this outcome, which recognizes the value built by our more than 12,000 employees and dealer partners, our long-standing commitment to providing peace of mind and our continued advancement of ADT's capabilities and technologies. Our progress and this transaction deliver an attractive cash premium to our stockholders.

ADT's leadership in smart home security is built on a legacy of trust, long-standing customer relationships and the dedication of our people. And importantly, for our customers, ADT's data and privacy policies will remain unchanged and no new data sharing will occur without customer permission.

We anticipate this transaction to close in the first quarter of 2027, subject to customary closing conditions, including approval by ADT's stockholders and receipt of U.S. antitrust approval. This is an all-cash transaction, and Thrive expects to finance it through a combination of equity, debt and preferred equity.

As outlined in our announcement, the merger agreement includes a go-shop period that runs through November 28. As is customary, we do not intend to disclose developments with respect to that process unless and until we determine disclosure is appropriate or otherwise required.

Until the transaction closes, ADT will continue to operate independently as a public company. Importantly, with this transaction, ADT's focus has not changed. We remain committed to serving our customers, supporting our dealers and partners and executing our key initiatives.

During the quarter, we continued to make progress across our 3 core differentiators: unrivaled safety, premium customer experience and innovative offerings. We introduced Unusual Activity Alerts in ADT+, advanced pilots of our Origin AI presence sensing technology, expanded ADT Blu to Walmart.com and launched ADT Partner Services through which we will install and service select products for Apple Retail and its customers beginning later this month.

Before I turn the call over to Jeff, I want to thank our employees, our dealers and partners and the first responders we work alongside every day. Your commitment is what has earned ADT the trust of millions of customers for more than 150 years. I'll now turn the call over to Jeff.

Thanks, Jim, and good morning, everyone. I'll take the next few minutes to describe our third quarter with all comparisons year-over-year unless I note otherwise.

In summary, I'm very pleased to report that ADT again delivered strong results with continued revenue growth, solid earnings and robust cash generation, all in line with our expectations. Our consistent performance, while we continue to invest in our business, underscores the strength of our cash generation capabilities, which remain a highlight of our results.

Adjusted free cash flow, including interest rate swaps, was $217 million, up 4% in the quarter. On a year-to-date basis, we're up 46%, having generated more than $1 billion through the first 3 quarters in excess of last year's full year level. Key drivers include lower cash taxes and interest, along with working capital management and some timing favorability.

On the top line, total revenue was $1.35 billion, up 4%. Installation, product and other revenue was $265 million, up 32%, driven by a higher mix of professionally installed systems under our outright sales model.

Monitoring and related services revenue was $1.08 billion, down 1%, which includes the revenue loss from the October 2025 divestiture of our multifamily business. Ending recurring monthly revenue was $360 million compared to $362 million a year ago, with that decline also primarily reflecting the multifamily divestiture.

Adjusted EBITDA was $665 million, down 2%. This reflects higher general and administrative costs, including technology investments, partially offset by the margin on our higher installation revenue. Adjusted EPS was $0.24, up 4%. And on a year-to-date basis, we have generated $0.71 of adjusted EPS, up 6%, benefiting from a lower diluted share count along with lower interest expense.

Turning to operational metrics. Gross customer revenue attrition was 13.1% compared with 13% a year ago, with elevated nonpay cancellations partially offset by fewer voluntary disconnects. Trailing 12-month revenue payback was 2.3 years, consistent with the prior year.

Gross RMR additions were $12.1 million on 195,000 gross unit additions. Direct professional install unit and RMR additions continued to perform strongly, improving versus the prior year, offset by lower volume from dealers and bulk account purchases.

During the quarter, we completed a bulk account purchase of approximately 8,000 customer accounts for $9 million in cash. In August, we secured $100 million of incremental borrowings under our First Lien Term Loan A due 2030. We designated the proceeds for general corporate purposes, which may include repayment of a portion of our 2027 notes. Including these proceeds, we ended the quarter with $228 million of cash and cash equivalents with no borrowings under our revolving credit facility.

Net leverage was 2.7x adjusted EBITDA compared with 2.8x a year ago. During the quarter, we returned $64 million to shareholders, including $23 million in share repurchases and $41 million in dividends. Year-to-date, we have returned $748 million to shareholders through dividends and the repurchase of 89 million shares.

To conclude, we delivered solid overall third quarter results with revenue growth, strong year-to-date cash generation and stable core operating metrics, all while continuing to invest in our business for the long term.

As Elizabeth mentioned, due to the pending transaction, we won't be taking questions today. Thank you to our employees for their continued dedication, and thank you to our customers, dealers, partners and our investors.

And thank you all for joining us this morning. Operator, that concludes today's call.

This concludes today's call. Thank you for attending. You may now disconnect.

Hello, everyone. Thank you for joining us, and welcome to the ADT Second Quarter 2026 Earnings Conference Call. After today's prepared remarks, we will host a question-and-answer session. [Operator Instructions]

I will now hand the conference over to Elizabeth Landers, Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining us today to discuss ADT's Second Quarter 2026 results. Speaking on today's call are Jim DeVries, our Chairman, President and Chief Executive Officer; and Jeff Likosar, our Chief Financial Officer.

Following their prepared remarks, we'll be joined by Omar Khan, our Chief Business Officer, and will open the call for analyst questions. Earlier today, we issued a press release and an earnings presentation summarizing our results. Both are available on the Investor Relations section of our website. During today's call, we'll reference certain non-GAAP financial measures. Reconciliation to the most comparable GAAP measures are included in the earnings presentation on our website. Unless otherwise noted, all financials and metrics discussed reflect continuing operations. Our remarks today also include forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act. These statements are subject to risks and uncertainties that are described in the earnings presentation and in our SEC filings. Actual results may differ materially. Please refer to our SEC filings for more details. And with that, I'm happy to turn the call over to Jim.

Thanks, Elizabeth. Good morning, everyone, and thank you for joining us today. I'll focus my remarks this morning, mainly on the key highlights in the second quarter and our continued progress on the strategic priorities we shared earlier this year. Then I'll turn the call over to Jeff to walk through our financial results and outlook in more detail.

Let me start with a few key takeaways from the quarter. We delivered a solid second quarter with continued strength in cash flow and disciplined execution across the business. Cash generation was again a highlight with adjusted free cash flow, including interest rate swaps, up nearly 50% versus last year. Through the first half of the year, our strong cash generation has supported significant returns to shareholders totaling $684 million.

During the second quarter, Apollo sold its remaining holdings in a secondary offering and following the closing of that offering is now no longer an ADT shareholder. ADT repurchased 29 million shares in connection with that secondary offering, reflecting our conviction in the value of our business and our disciplined approach to capital allocation.

Total second quarter revenue grew 2% to $1.3 billion, and our end-of-period recurring monthly revenue was $360 million. Adjusted earnings per diluted share was $0.23, flat to last year.

Based on our first half financial performance, we are modestly raising our full year outlook which Jeff will describe in more detail later on our call. Turning to our operational metrics. Trailing 12-month attrition remains at approximately 13%. Subscriber and recurring revenue trends remain consistent with the first quarter with softness in our dealer channel and relatively stronger performance in direct. Also during the quarter, we completed a bulk purchase of approximately 10,000 accounts.

By comparison, last year's second quarter included a bulk purchase of approximately 50,000 accounts. As we've shared previously, the pipeline for quality bulks can be episodic and will continue to evaluate bulk and other acquisition opportunities with a focus on attractive economics. We're operating well in a dynamic and competitive environment, and our priority remains on generating strong economic returns while improving core metrics. This includes balancing growth, retention and cash generation in a way that drives long-term value creation. We remain focused on the strategy we laid out earlier this year. We believe ADT is well positioned as the leader in smart home security with a differentiated model built on our trusted brand, professional monitoring and integrated technology platform. We continue to invest in 3 priority areas during 2026: Product technology, service excellence and customer acquisition efficiency improvement.

Let me briefly walk through how we're executing against our key initiatives. First, on product technology. We continue to expand the capabilities of our ADT+ ecosystem and advance our road map to include more intelligent connected solutions. As part of that evolution, we broadened our reach this quarter with the launch of ADT Blue, a lower-cost self-installed security solution that pairs the convenience of do-it-yourself setup with the flexibility of the ADT's platform and professional monitoring. While it is very early, we are pleased with the customer receptiveness and reviews.

Separately, our third-party dealer network which has historically represented more than 1/3 of our gross additions is beginning to transition to the ADT+ platform. We expect to migrate dealers onto our proprietary ecosystem in phases over the next year.

Through the first half of this year, approximately 30% of our new customer additions were on ADT+. We are also making progress on our path to commercialization of a new presence sensing offering based on the technology we acquired earlier this year.

We advanced manufacturing and integration of a Wi-Fi-based smart plug that will bring privacy-preserving presence sensing into the ADT+ platform for security and aging in-place use cases.

We expect customer pilots to begin this fall ahead of a planned launch in early 2027.

Next on our initiatives is service excellence, where we remain focused on improving both customer experience and operating efficiency. We are seeing good momentum from our AI initiatives. During the quarter, we combined AI-driven call routing with our virtual AI agents to improve first call resolution and reduce transfers. As a result, we handle nearly 20% fewer customer contacts through human agents and reduce service tickets by a similar amount, all while achieving improved customer satisfaction. Our deployment of these technologies is generating both a better customer experience and more efficient service model, including cost savings.

Looking ahead, we will be expanding AI across the enterprise. In the third quarter, we will begin transcribing and analyzing our sales and service calls, enabling customers to engage with our virtual agents through SMS and rolling out AI-enabled fleet safety technology across our technician fleet. These efforts are designed to improve responsiveness, increase containment and ultimately drive better outcomes for both our customers and our business, including customer retention and sales conversion. We believe we're still in the early stages of this opportunity and that these initiatives will be a meaningful contributor to both growth and margin expansion. Importantly, ADT employees continue to handle situations where human expertise matters most, such as during emergencies or when an on-site, highly trained service technician is the best way to resolve a customer issue.

In the third area, customer acquisition efficiency, a key objective this year is migration to lower cost sales tactics and channels. A highlight in our quarter that I already mentioned was our ADT Blue launch, which is now available through phone and online channels, including Amazon. This offering broadens ADT's reach to more value-conscious and DIY-oriented customers, a market segment we have not historically targeted.

Over time. It also gives us a path to convert a subset of these customers to our professionally monitored solutions. During the second half of the year, we will scale our presence on Amazon and build ADT Blue momentum through additional advertising. We expect volumes to begin to grow in the third and fourth quarters.

Beyond ADT Blue, we're continuing to drive efficiency across our go-to-market activities, including rationalizing spend in our highest cost channels. As we've said, some of these changes may temporarily affect subscriber additions but are designed to improve our long-term returns. We're working to improve the economics in our most costly channels as we optimize long-term economics. Through these changes, our direct DIFM sales engine continues to perform well with residential adds up in the high single digits and SMB up mid-single digits for the quarter. Across all of these key initiatives, our focus is consistent: driving better customer engagement, improving efficiency and ultimately supporting more sustainable growth.

In closing, our financial performance demonstrates the resilience of our model with strong cash generation, disciplined cost management and consistent capital allocation. I want to thank our employees, partners and customers for their dedication and their contributions through the first half of the year. I'm excited about the opportunities ahead. With that, I'll turn the call over to Jeff.

Thanks, Jim, and good morning, everyone. I'll start by adding some detail on our second quarter results and then share an update on our outlook for the remainder of the year. .

As Jim noted, we again delivered solid financial performance with very strong cash generation as a continued highlight. Adjusted free cash flow, including interest rate swaps, was $406 million, up $133 million or 48% compared to last year. On a year-to-date basis, we have generated $820 million, up more than $300 million or 64% versus the prior year. This result was driven primarily by working capital timing, lower cash taxes and interest and lower subscriber acquisition spending. Our cash flow was also stronger than we expected entering the quarter due to the benefits of some tax planning progress and working capital management as we repurchased shares, including an Apollo secondary offering.

On the top line, we delivered total revenue of $1.3 billion, up 2%. Monitoring and services revenue was down 1% with an ending recurring monthly revenue balance of $360 million, reflecting the revenue loss from the multifamily business we divested last October.

Installation revenue was $230 million, up 17% due to a high mix of outright equipment sales. Adjusted EBITDA for the quarter was $671 million, and adjusted income from continuing operations was $180 million or $0.23 per diluted share.

On a year-to-date basis, our adjusted EPS is $0.47, up $0.03. Beyond the effect of revenue and gross margins, our earnings reflect ongoing efficiency actions and cost controls, some offsetting investment in growth initiatives and increased amortization, including from our Origin acquisition. On a per share basis, we also benefited from lower share count due to the repurchases enabled by our cash generation and efficient capital structure. We added 190,000 gross new subscribers in the quarter with $11.9 million of RMR. As Jim mentioned, we had fewer bulk account purchases than last year, along with softness in our dealer channel which we partially offset with growth in direct subscriber and RMR additions. Net cash SAC was $345 million, down 7%, driven primarily by fewer bulk purchases, partially offset by the timing of consumer financing flows. Attrition was 13.1%, flat to last quarter with revenue payback also holding at 2.3 years.

Now turning to capital allocation. A core attribute of our business is consistently strong cash generation, and we continue to deploy that capital in a disciplined manner to drive returns. Through the first half, we directly returned $684 million to shareholders, including $594 million to repurchase and retire 86 million shares and $90 million of dividends.

Through this week, we have repurchased approximately 89 million shares, and we have approximately $885 million remaining under our $1.5 billion 3-year repurchase authorization.

Our overall capital structure and liquidity position remains strong with our $800 million revolving credit facility undrawn. In May, we secured an additional $100 million of borrowings under our 2030 Term Loan A. While we used these proceeds to fund repurchases, we expect this incremental debt to ultimately support our August 2027 notes refinancing. We ended the quarter with net debt of approximately $7.4 billion with leverage of 2.8x adjusted EBITDA at a weighted average cost of approximately 4.3%. We remain very comfortable with our capital structure and our overall capital allocation priorities are unchanged.

We will invest in the business where returns are compelling, both organically and through periodic acquisitions. We will return capital directly to shareholders. And we will maintain healthy balance sheet with an objective of further reducing leverage, targeting 2.5x.

Turning to our expectations for the rest of the year. We are modestly raising our full year 2026 outlook based on our year-to-date performance and share repurchases and expected progress in the second half. We now expect total revenue to grow approximately 2%, mainly reflecting installation revenue trends. We expect adjusted EPS to also grow 2% with the improvement a result of the timing of share repurchases. And we expect adjusted free cash flow to grow approximately 30% with the improvement driven primarily by tax planning and working capital management.

While we are very pleased with our full year 2026 cash generation, we do expect higher cash taxes and cash interest in 2027. As Jim outlined, our primary focus during the second half is execution of our investments and growth initiatives and improvement in our new subscriber additions and retention. Within the second half, we expect fourth quarter income to be somewhat higher than the third quarter due to the timing of some of these investments, seasonal dynamics and other items. We expect revenue and cash to be similar in the third and fourth quarter. Our full year outlook and our performance through the first half reflect the resilience of our model and our disciplined execution, while we also continue to invest in our business for the long term.

I'm very excited by the advancement in our technologies and capabilities and the new ways we will be able to serve our customers to deliver peace of mind with innovative offerings, unrivaled safety and the premium experience. Thank you again for joining us and for your continued support. Operator, please open the call for questions.

[Operator Instructions]

Your first question is from the line of George Tong with Goldman Sachs.

Gross RMR additions fell 17% year-over-year and gross unit additions declined 22%, which you attributed largely to fewer dealer and bulk account purchases. How much of the current pressure reflects intentional changes to your acquisition strategy versus underlying end market demand? And what does the path back to gross additions growth look like?

George, it's Jim. I'll share a little bit of overall context on gross adds and ask Jeff if he has anything to contribute on this question as well. You're correct on the biggest difference between this quarter and Q2 of last year being related to unit bulks.

We completed a 10,000 unit bulk this quarter, 50,000 bulk in Q2 of last year. And when comparing quarter to last year, absent the difference in bulk, we had about 10,000 fewer adds this quarter. That was attributable really to 2 things. The first is we talked about in earlier quarters, dialing back our reliance on expensive channels like affiliate channels. And so we've seen some decline in affiliate. And then we've had some softness in our dealer channel as well. One dealer actually in particular. But between affiliates and dealer and the bulk, that makes up more than the gross add shortfall versus Q2 of last year.

Worth mentioning our core DIFM business, our direct organic business is up high single digits year-to-date. SMB is up organically about 4% over last year. And so we feel good about the organic muscle. It's going to take a little bit of time to replace the volume from affiliate and some of the softness in dealer, but the underlying engine we feel excellent about.

One last thing, and I'll give it to Jeff, also worth mentioning the per unit economics remain really strong for us. Installation revenue per unit net SAC is really solid.

Yes. So I'd add just a couple of comments. So we always want more adds, but focused on the strong economics, as Jim described, we feel really good about our overall quarter. And even the adds was generally consistent with our expectations and very excited about the growth initiatives that start to contribute later this year and into next year and even more pleased that we were able to raise our guidance across each of the 3 measurements, revenue and earnings per share and especially a really strong cash and our cash outlook for the rest of the year.

And then as a follow-up, as you think about improving retention rates and serve costs and customer economics, those attributes are basically central elements of the ADT+ thesis should help with all those things. And with the dealer rollout beginning in the second half of this year, when would you expect ADT+ platform adoption to become large enough to produce measurable improvement in attrition, service costs and customer lifetime value?

Omar, you want to take that one?

George, so we began at the beginning of this month rolling out ADT+ to dealers. We've launched our West region. We're in the process of actually launching our Eastern region. The initial feedback, George, from the dealer community has been very positive, both from the training and uptake as well as the installation progress on ADT+. It's going to be about a 3 to 4 quarter migration of the dealer community across the board. We're being very thoughtful and very intentional about that rollout. So -- and as you know, about 1/3 of our adds come from the dealer community, so it's going to be, like I said, about a 3 quarter to 4 quarter transition for the dealer community to ADT+. So you'll see that benefit phasing in over time, over the next, call it, 9 to 12 months.

George, I'm going to add to that, not directly related to ADT+ but a couple of items we're sharing with you. Short term, I'd say, proof points for us. NPS Is modestly up over Q2 of last year. All of our operating metrics and customer service, first call resolution, digital self-service, are tracking nicely. Relatively speaking, retention team, we have lower employee turnover in the retention team than we've ever had before. And then a little bit longer-term influence here is we've tightened up our credit standards a bit. There's been some changes around how we do proactive save offers, some of the process changes that we made, I think, will start to layer in to help us move the needle on attrition and then to Omar's point in your question, I think, product experience essentially deeper, more frequent customer engagement bodes well for us longer term. .

Next question is from the line of Ashish Sabadra with RBC Capital Markets. Please go ahead.

Really strong momentum in free cash flow. I was just wondering if you could help parse out some of the tailwinds that we are seeing from some of the working capital, tax planning but also lower SAC. So if you could quantify that. But also if you could just provide some preliminary color on how should we think about some of the increased -- sorry, interest expense and cash taxes in '27. And just maybe a follow-up on this would be just how should we think about the free cash flow trajectory now over the midterm. The free cash flow obviously has significantly exceeded our expectation and your original guidance as well. So how should we think about over the midterm?

Okay. I'll take that. It's Jeff. We feel, as I already mentioned, really good about our cash performance. So far in the year, the most significant reason that we were able to increase our outlook is progress on some tax planning initiatives that we've undertaken.

But setting that aside and just looking at the results we're up on a year-to-date basis, a little bit more than $300 million. About half of that is working capital management. There's a discrete item or 2 associated with timing of some payroll outflows. And aside from that, it's inventory and payables. We also benefit, as you'll see in our results meaningfully from not having made a material cash tax payment this year related to the point I earlier made.

And then our interest is also lower year-over-year. driven by mainly coupon timing, along with the benefits of all of our recent refinancing activities.

And then SACs is a little bit lower. There's always a lot of puts and takes in in cash flow and working capital timing specifically. And I'll also note that we -- while we always manage working capital tightly, we did so especially this quarter due to the attractiveness of our stock price and in support of Apollo secondary to be able to repurchase shares. Then your question about longer range outlook, we, of course, haven't given any particular guidance or specific guidance beyond the current year. But taxes we would expect to become a pure cash taxpayer next year.

We exhausted our NOLs a couple of years ago, last year -- last year, our cash taxes were $142 million. We expect less this year, but probably more next year. We're always working to optimize and minimize but likely headwind there. And then likewise, on interest expense, this year, I mentioned lower than last year, but we do still have some attractive interest rate swaps that expire at the end of this year. And our upcoming refinancing next year is at 3 and 3/8% and unlikely in current market conditions, we won't be able to refinance at that rate.

So both of those items are probably $50 million to $100 million each of headwind next year, but of course we will continue to work to optimize that and find other ways to continue to generate strong cash.

That's very, very helpful color. And maybe if I can just ask a quick question on ADT Blue. I was just wondering if you could share any initial feedback from the launch? And then as this scales, how do you think about the ARPU and SAC for ADT Blue compared to your more traditional customer acquisition channel? .

Yes. So for ADT Blue, it's still very early from a progress perspective. We just launched. The ARPU is obviously lower because we have plans starting at around $10 per month for video only, but we're encouraged with the initial results. And it's going to play out over time as we expand our channels, but the initial results show a majority of customers adopting and engaging with us in the fully monitored security package, which tends to obviously price higher at $34, $99 and above, depending on the choices of accessories. So we're seeing very good progress from an ADT Blue perspective. And while the overall ARPU is lower, we're trending higher than general market in terms of adoption of full security packages as well as fully monitored security. But that's going to play out over time. The initial results are positive.

Yes. A little context, Ashish. The -- for DIY, for ADT Blue, our launch was almost exclusively on the Amazon platform in the second quarter. And so the customer response to Omar's point, has been really positive. We feel great about customer receptivity, but we're really early in the process and just -- really just now starting to put some advertising fuel behind ADT+ that we're optimistic will get us some incremental volume.

And maybe worth mentioning, too, that the economics that we seek on our self-install offerings are very similar with respect to the returns that we will generate on the SAC that we deploy. So even though the average pricing is lower and other characteristics are different, it's important that the subscriber acquisition cost to take on these customers is also much lower.

Your next question is from the line of Manav Patnaik with Barclays.

This is Ronan Kennedy on for Manav. I was hoping that please, if you may unpack attrition and the trends and drivers there. Also, if you could comment on the impact of non-pay cancellations, the trends there relative to where you exited '25. And any retention benefits you're seeing from ADT+, My Safety, Trusted Neighbor or -- and/or increasing engagement with the ecosystem?

Good morning, Ronan, it's Jim. I'll answer that one for you. So we ended the quarter a rounding the 13.1% attrition, flat sequentially. The metric, as you know, measures trailing 12 months. If we zoom into the last 3 months, we're actually flat to last year. A little more color and specific to your question, relocation losses were flat. There was modest pressure from nonpayment cancellations. They were higher than last year, but only modestly so. Voluntary cancels were better than last year. I'd mentioned earlier on the call that our customer service metrics are tracking very, very nicely, and we're seeing the benefit of that in fewer voluntary cancels. The sale of multifamily was a small headwind for us compared to last year and small business was flat to last year, about 14% or so attrition for a small business.

Interestingly, and I think noteworthy non-pay cancels in small business were actually a little bit better than last year. So the -- and while attrition is flat overall, canceled demand is down modestly and a handful of leading indicators that I mentioned earlier, team stability, customer service metrics, the process changes that we're making are all moving in the right direction.

And your question about credit losses. The drivers there are very similar. It's almost a different manifestation of the exact same dynamics for non-pay. There is some different recognition of that expense as we have more outright sales because with that outright sale, we record the install revenue, much of it is finance.

Therefore, we record our estimate of the credit loss at the time that we record that install revenue. It's a cost we consider when we evaluate subscriber economics almost like a cost of sale, we're always fine-tuning our credit policies. So while credit losses and related provisions are elevated year-over-year. Generally, it's in line with our expectations.

That's very helpful. And then shifting gears, please, if I may. I think you had highlighted nearly 20% fewer customer contacts by human agents and a similar reduction in service tickets and then also commented on how AI initiatives could potentially be a meaningful contributor. So just looking for some more context on this in terms of, say, what AI applications currently have the highest ROI and are expected to, whether that's the customer care and marketing sales conversion, the field optimization or even the product innovation? And then can you help us think about how much of that benefit is already showing up, I think that would be primarily now from the cost standpoint? And then the opportunities there over, say, the next 12 to 24 months?

There's a lot there. So I'll give you some tree tops perspective on the business and where we're deploying AI and the progress that we've made. And maybe a couple of comments about some areas that we'll be leaning into here in the back half of the year and then invite Omar to talk about AI on the product side and share some perspective. Most of our focus in AI so far has been around the call center, call routing technology and virtual AI agents and driving more calls to AI agents and more chats to AI agents and doing so while we continue to improve NPS. And I'd say, generally, that's going pretty well. We're no longer in the early innings. We're in the middle innings now and beginning to focus our next generation of AI efforts in areas like call transcription and insights, two-way SMS, essentially lead nurturing.

We're deploying Gemini across the enterprise to move it from sort of a -- move AI from a buzzword to an employee productivity tool. We're using it in fleet safety. So virtually every area of the organization is being exposed to AI as we ramp up and more fully scale it.

And then Omar, maybe a couple of comments on the product side.

Yes. Thank you. This is Omar. So a couple of things. I'll first, talk about AI in terms of internal efficiencies on the product side. We started using AI from a coding perspective and software perspective, third quarter of last year. In the first year, we've seen incredible uptake across our software organization from an adoption and efficiency perspective. Last month, as an example, over 3/4 of our code generated by our product software team was generated and accepted and committed from AI. And so we're moving very quickly, and that helps us improve our efficiency of new feature launches and prototyping in our software organization. Shifting to the product side, specifically, there's 2 areas that you're going to see from us over the next several quarters in terms of AI impact for customer experience in the app.

One area, which we can talk about a little bit more deeply is Origin AI. So the AI features from Origin that include everything from motion intelligence, the ability to classify motion, alarm event intelligence, which is in the event of an alarm, guiding first responders in terms of how to respond to that alarm event and then zone-based intelligence in the home are all AI model-driven capabilities that we'll be rolling out in the first half -- starting in the first half of 2027 to our customers.

And then video analytics and video-based AI solutions in terms of insights generated by AI processing of our video for customer insights as well as helping our monitoring centers as well. So those are all the areas that we are both working on and we'll start to roll out at the beginning of next year to our customers through ADT+.

Your next question is from the line of Greg Parrish with Morgan Stanley.

I just -- I wanted to go back to Ashish's question on ADT Blue. I think, Omar, you said the majority of customers are adopting the fully monitored package. I just wanted to clarify that. Do you mean one of the monitoring, you don't mean to professionally monitored? Because I know uptake of that and this channel tends to be pretty low. And then maybe just to double click, like of ADT Blue customers, how many are choosing the professionally monitored $35 package?

So what I meant by the comment was specifically around fully monitored the $35 package. So it's still pretty early in the adoption cycle. But the initial data is showing us that customers are choosing the full security package, which includes not just cameras but sensors and the base, not the camera-only package from a self-monitoring perspective. So the fully monitored package. And -- but I do believe that over time, we'll see that balance out because our goal is for us to bring in customers from an earlier stage perspective using camera only in self-monitoring and moving them up the value chain when it comes to adoption and for them to adopt security products in addition to their cameras.

The goal for us here is to actually get additional customers coming in at the entry level and move them up the chain. But the initial data that we're seeing is a majority of customers choosing the full security packages, which include sensors and our base.

Okay. That's pretty impressive uptake there.

And maybe for just a follow-up. You talked about rationalizing marketing spend in your highest cost channels, which you've been doing for some time. You talked about subscriber adds being temporarily impacted from that. I just want to think about the strategy going forward. Do you expect to increase adds in other channels to sort of offset that? Or is this sort of a change of go-to-market marketing strategy and you expect adds in the pro-installed channel to improve? Just help us think through the puts and takes of those.

Yes. That's the objective, absolutely. The -- I mentioned this and it's worth sharing again, the core do-it-for-me business, the organic business for us is up high single digit year-to-date. and SMB is sort of mid-single digit, I think, 4-ish percent or so. And a handful of areas where we have optimism from a unit add perspective is related to ADT+ expansion, more assertive, more differentiator-oriented advertising. We have some advances in AI technology and the Origin product and lastly, DIY entry. I'd mentioned, it's early in the game, Amazon only, but we're just getting to e-commerce, talking to a handful of retail partners and are generally optimistic on gross adds from DIY.

Your next question is from the line of Peter Christiansen with Citigroup.

Nice execution here. Just following questions. Jeff, if you can walk us through working capital a little bit deeper here. I know you called out some timing elements and some onetime-ish kind of items. How should we expect working capital to flow over the next 2 quarters and how should we think about normalized contribution to free cash flow going forward here?

Yes. So over the next couple of quarters, I would expect it to be less of a benefit. It's implicit in our cash flow guidance in the second half will be lower than the first half. And as I mentioned earlier, there's lots of drivers that go in various directions on timing items, but the net of all of those things is such that I would not expect it to be a benefit, the -- a couple of specific things I've mentioned earlier. One, there was a discrete item associated with some payroll timing that benefited us in the first half of this year. We also -- as I think I also mentioned, we're very tight on managing working capital because of our desire to repurchase shares at such attractive prices. And most of those things have to do with the management of timing of inventory and payables. And as we head into 2027, I wouldn't expect it to be as much a benefit as it was in 2026, but we're always working to optimize our working capital.

Fair enough. And then. On installation, the pickup in installation revenue, the acceleration there, is there a way you can give us a sense of that how much outright system sales are contributing to that acceleration?

Yes. Our total installation revenue in the quarter was up 17%. Outright sales was up about 30%. The main driver there, as we've talked about in the past, is us transitioning or moving away from our historic model where we generally retained ownership of the equipment and with the launch of ADT+, we began transitioning equipment ownership to the customer. There's a variety of reasons that we made that decision and made that change. And during this year, we're continuing to progress in the direction of moving more and more of our customers to an equipment ownership model where the customer owns the equipment even a non-ADT+ offerings, and that will continue.

So I would expect to continue to see higher growth in outright sales in the third and fourth quarter, after which we will have largely completed the transition, so less growth in installation revenue next year. But I would expect second half to continue to grow like you've seen in the last couple of quarters.

We have reached the end of the Q&A session. I will now turn the call back to Jim DeVries, CEO, for closing remarks. Please go ahead.

Thank you, Fern, and thanks, everyone, for taking time to join us today. ADT delivered another solid quarter. We continue to feel good about the direction of the business and confident in our 2026 plans, both operational and the investments that we're making for a stronger future.

I'd like to extend my appreciation to our ADT employees and dealer partners. Congrats on a good first half of the year. And thanks again, everyone, and have a great day.

This concludes today's call. Thank you for attending. You may now disconnect.

Hello, and welcome to ADT First Quarter 2026 Earnings Conference Call. Please note that this call is being recorded. [Operator Instructions] I will now hand the call over to Elizabeth Landers, Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining us today to discuss ADT's First Quarter 2026 results.

Speaking on today's call are Jim DeVries, our Chairman, President and Chief Executive Officer; and Jeff Likosar, our Chief Financial Officer. Following their prepared remarks, we'll be joined by Omar Khan, our Chief Business Officer, and will open the call for analyst questions.

Earlier today, we issued a press release and an earnings presentation summarizing our results. Both are available on the Investor Relations section of our website.

During today's call, we'll reference certain non-GAAP financial measures. Reconciliation to the most comparable GAAP measures can be found in the earnings presentation. Unless otherwise noted, all financials and metrics discussed reflect continuing operations.

Our remarks today also include forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act. These statements are subject to risks and uncertainties that are described in the earnings presentation and in our SEC filings. Actual results may differ materially. Please refer to our SEC filings for more details.

And with that, I'm happy to turn the call over to Jim.

Thank you, Elizabeth. Good morning, everyone, and thank you for joining us today. I'll focus my remarks this morning, mainly on the key highlights from our first quarter. I will also build on the strategic update and longer-range outlook we shared on our last call in March. Then I'll turn the call over to Jeff to walk through our financials and outlook.

Let me start with a few key financial highlights. I'm pleased to report that ADT delivered a strong start to the year. Our results were consistent with our plans with particularly strong cash generation. Adjusted free cash flow, including swaps was at $414 million, and adjusted earnings per diluted share was $0.23, up 10% year-over-year. Our durable recurring monthly revenue was $359 million, flat versus prior year. Gross revenue attrition remained at 13.1% and our revenue payback period was 2.3 years.

Cumulatively, these results reinforce the durability of our model and progress strengthening ADT's business, prioritizing high-quality ads and more efficient acquisition channels.

Turning to our key initiatives. The strategic update we shared on our last call emphasized the consistency in our overall mission. We also outlined how we are reshaping and redefining the delivery of smart home security. Our mission remains clear: to protect and connect what matters most and to provide our customers with peace of mind. Our overall strategy remains anchored in 3 core differentiators: unrivaled safety, premium experience and innovative offerings.

As we described, during 2026, we are accelerating progress with investments in 3 key areas: product technology, service excellence and customer acquisition. Together, these investments support our vision to deliver always-on security and convenience with split second and proactive response and solutions that evolve with our customers, whether they're at home or away.

First, on product technology. Our proprietary ADT+ platform continues to gain traction. ADT+ brings together professional monitoring with leading smart home devices, including Google Nest and Yale products, enabling a more flexible and modern experience for customers. In the first quarter, approximately 30% of our new customer additions included ADT+. We expect to continue expanding penetration of our ADT+ ecosystem and app to more channels including, most importantly, our third-party network of dealers who will begin transitioning to ADT+ this summer. Dealers represented more than 1/3 of our total gross additions last year and as they adopt ADT+, we expect more than 2/3 of new subscribers will be on our proprietary platform.

We also expanded ADT+ features in the first quarter with the launch of two new innovations that extend the platform's capabilities. Live Light as the industry's first illuminated wireless yard sign that directly connects to the ADT+ system and illuminates during an alarm event, giving first responders an immediate visual signal and letting potential recruiters know a home is actively protected. My Safety is a personal mobile safety service in the ADT+ app that provides customers with the same protection they know and trust from ADT at home, but while they are on the go, including seamless connection to ADT's nationwide monitoring network wherever they are.

We already have 35,000 customer activations. With innovative features such as these, ADT is improving security and demonstrating our belief that safety is not just about intrusion detection, it's about awareness, visibility and response and most importantly, peace of mind.

As discussed on our last call, we acquired Origin AI in February, which will add AI-driven ambient intelligence technology into the ADT+ platform, creating a new layer of home intelligence. This privacy first WiFi-based sensing technology allows customers to understand what's happening in their homes without cameras or wearables. Over time, this will become an integrated part of the ADTs experience enabling richer resolution and awareness while continuing to protect our customers' privacy.

Concurrent with this acquisition, we also entered into a long-term technology licensing agreement with Verisure, reinforcing the global relevance and scalability of this platform and the practical use cases already deployed in Europe. Since closing the acquisition, we are rapidly progressing both technical development and commercialization plans. And during the first quarter, we completed the design of a smart plug that will enable integration into our core offerings.

Key priorities over the next 2 quarters include initial manufacturing and pilots of these smart plugs and technical development for integration into our ADT+ platform for security and aging-in-place use cases and integration into a third-party router. As we deepen our plans to deploy this sensing technology and work with the team, I'm even more excited about the role these capabilities will play in our evolution to proactive peace of mind.

Next, our second area of investment service excellence. ADT's best-in-class team of employees continue to deliver outstanding service and support for our customers. Alongside the AI-enabled features in our product offering, we are also increasingly using AI to deliver better service for our customers while delivering better economics for the business. We're deploying AI-powered virtual agents across both chat and voice interactions to improve responsiveness and consistency, enabling customers to get accurate answers faster while allowing our human teams to focus on the highest value customer interactions.

As of the first quarter, all chat interactions and approximately half of our phone calls are initially routed through AI. Containment continues to improve, meaning more issues are resolved without any human intervention. These efforts are both improving the customer experience and beginning to structurally lower our cost base.

Additionally, our unique combination of AI capabilities and human expertise have lifted our Net Promoter Score. We're also seeing record levels of customer self-service powered by an expansion of AI use cases, enabling deeper customer engagement and a significant reduction in high-cost field service appointments. Importantly, ADT employees continue to handle situations where human expertise matters most, such as during emergencies or when an on-site, highly trained service technician is the best way to resolve a customer issue.

And finally, our investment in customer acquisition. While ADT already enjoys the benefits of a very strong and trusted brand in a variety of routes to market, I'm excited about several areas we will advance this year. One highlight is our expansion into e-commerce with the launch of ADT Blue, a new product line designed to appeal to more value-conscious and DIY-oriented customers. This launch includes lower-cost cameras, expanding our product portfolio and enabling lower price points to appeal to a different segment of customers. ADT Blue will debut on our own website in late May and then in additional e-tail channels, including Amazon over the summer.

We're excited to unlock these new routes to market and to begin targeting this segment of customers, which we believe represents incremental TAM. We anticipate more volume from more price-conscious or DIY-oriented customers from this launch. And while some prospective customers may choose these lower-priced DIY solutions, we also envision converting a subset of them to our more traditional professionally installed solutions.

Additionally, we are continuing to drive efficiency in our overall go-to-market approach, including rationalization of our marketing spend and our highest cost channels. So far, we've lowered third-party affiliate lead fees by $100 per installation, and we're working on efficiency changes to our dealer model. As I mentioned on our last call, these changes may temporarily impact subscriber additions, but they're designed to improve long-term efficiency. As we've shared previously, we will also continue to evaluate bulk account purchase options and potentially full acquisition opportunities in our industry at attractive economics.

In closing, we remain focused on executing on these initiatives, which we have outlined and positioning ADT for long-term value creation. I am confident in ADT's outlook and our ability to deliver on our commitments for 2026 and beyond. I want to thank our employees, partners and customers for their dedication and trust in ADT. I'm proud of our team's performance and excited for the opportunities ahead.

With that, I'll turn the call over to Jeff.

Thanks, Jim, and good morning, everyone. I will take the next few minutes to add some detail on our first quarter results and share an update on our outlook for the rest of the year and the second quarter.

I'm very pleased with our start to 2026, which was consistent with our plans and the outlook we shared in March. As Jim mentioned, cash flow remains a significant highlight. And in the first quarter, we generated $414 million of adjusted free cash flow, including interest rate swaps, which was up $187 million or more than 80% versus last year. This result was driven primarily by lower cash interest, the timing of some payroll-related disbursements and other working capital items and our overall profitability.

We continue to enjoy a very strong capital structure and liquidity position with our $800 million revolving credit facility and $119 million of cash available at the end of the quarter. Notably, this was after funding the Origin acquisition and returning $161 million to shareholders.

Earlier this year, our Board authorized a $1.5 billion 3-year repurchase program and during the first quarter, we retired approximately 18 million shares for $116 million. We do not believe our current stock price reflects the intrinsic value of our business and have therefore deployed additional capital towards share repurchases in April. Our year-to-date repurchases total approximately 35 million shares for $230 million.

Turning to earnings. Adjusted EBITDA for the quarter was $674 million, up 2% versus last year and adjusted earnings per share was $0.23, up 10%. This performance reflects the durability of our high-margin revenue and our overall efficiency across the business, allowing us to deliver solid results while also investing for the future.

Our first quarter results also include a favorable legal settlement loss recovery, partially offset by an increase in our allowance for credit losses. In addition, earnings per share benefited from last year's share repurchases enabled by our cash generation and our efficient capital structure.

On the top line, we delivered first quarter total revenue of $1.3 billion, up 1%. Monitoring and services revenue was relatively flat with an ending RMR balance of $359 million. I will note our prior year results include the multifamily business we divested last October, which represented approximately 200,000 subscribers and $2.6 million of RMR. On a year-over-year basis, higher average pricing across our subscriber base largely offset the absence of multifamily revenue.

Installation revenue in the quarter was $198 million up 7%, reflecting a higher mix of outright equipment sales related to our transition to the ADT+ platform. We added 161,000 gross new subscribers with $10.1 million of RMR on lower cash stack.

We remain focused on delivering strong subscriber economics and returns on the capital we deploy and have consequently continued to bounce SAC spending with other uses of cash. Our overall capital allocation priorities remain unchanged. We are investing in the business where returns are compelling, both organically and via periodic acquisitions, we are returning capital directly to shareholders and we are maintaining a healthy balance sheet with an objective of further reducing leverage.

After several refinancing and repayment transactions last year, our weighted average maturity is approximately 5 years and our cost of debt is currently around 4.3%. We remain very comfortable with our current leverage at 2.7x adjusted EBITDA with net debt of $7.3 billion. Earlier this month, we repaid the remaining $75 million of our 2020 notes at maturity with our next maturity in August of next year.

Before I conclude, I want to briefly reiterate the full year 2026 outlook we shared in March. We expect a very strong adjusted free cash flow growth of approximately 20% and revenue and adjusted EPS to be approximately flat to last year. This outlook reflects our ongoing prioritization of cash generation, disciplined subscriber acquisition spending and share repurchase plans. It also incorporates planned investments benefiting future periods, which Jim described earlier, along with expected tariffs.

For the second quarter, we expect revenue and EPS to be slightly lower than the first quarter due primarily to higher advertising spending with the ADT Blue launch, along with other initiative investments. We also expect adjusted free cash flow to be $100 million to $150 million lower sequentially due to higher seasonal sack spending, the timing of working capital flows and tax payments.

We're pleased with our strong start to the year and remain confident in our ability to deliver 2026 results while also investing in initiatives that generate growth in future years. Thank you again for joining our call today and for your continued support. Operator, please open the call to questions.

[Operator Instructions] Our first question comes from the line of Ashish Sabadra from RBC Capital Markets.

As you have improved the efficiency and the overall go-to-market approach, you talked about several things that you've worked on and also increased your upfront revenues that you're getting on these installations. How do we think about the customer acquisition cost trending over the next 3 to 5 years and the benefit to the free cash flow from that?

Yes. Thanks, Ashish. It's Jeff. We think there's meaningful opportunity. We, for some time, have been focused on reducing our cost of subscriber acquisition including especially for more installation revenue as customers buy more comprehensive systems, what we're focused on especially this year, is go-to-market efficiency. And there are several things we could highlight, but one I will highlight specifically is the transition as we launch our ADT Blue platform to e-tail type channels, which we believe will be more efficient methods of adding subscribers.

And then the other that Jim alluded to in his prepared remarks, is transitioning away from some of our highest cost lead sources and higher-cost channels, and we think there's meaningful opportunity there over the coming years, which is reflected in the long-range guidance we put out where we said we were targeting getting to revenue payback more like 2x or lower.

That's very helpful color. And maybe just on the bulk account purchases as well as potential full acquisition opportunities. Can you talk about the pipeline there?

Thanks, Ashish. It's Jim. I'll share some perspective on the bulk front. As you know, we think about bulk acquisition and tuck-in M&A as an effective lever for growth in our business. We've executed bulks in the last 6 years. We did not do a bulk in Q1. We were unable to reach terms. We're looking for returns in bulk, which are generally consistent with our dealer business. And if we can't get those returns, we won't pursue the deal. We're almost always engaged with sellers. I expect that will continue. But for Q1, none of the opportunities we considered quite met our standards. But we're pretty consistently engaged. We're engaged now and it will continue to be an option for us as they lever for subscriber adds.

Our next question comes from the line of George Tong from Goldman Sachs.

You shared some color just now on your bulk account purchase strategy. If you look at your organic strategy for driving RMR additions, what are some of your top initiatives to fuel a return to stronger gross RMR additions growth?

Yes. So I'll comment -- I'll give you some color more broadly, George, and then zero in on your question, but some context. Candidly, I would have liked to have seen stronger adds for the quarter. Dealer was a little soft relative to last year. Our multifamily business, as you know, was sold last year, State Farm adds aren't coming in. We actually tightened our credit standards a bit. And as Jeff and I have been talking about, we have continued to reduce our reliance on high-cost channels.

But we're making some investments that we don't think will yield immediate results, but they're good for the long-term health of the business. I'll mention 3 of them. The first is around product technology. We're excited in particular about Origin and ambient sensing and integrating that into ADT+ and then the subsequent commercialization of the product features associated with it.

Second area is around AI investments. We're not just going to leverage AI in customer service but begin to leverage AI and marketing and sales. And then Jeff just mentioned something that we're really excited about around new routes to market, e-tail, retail, new offerings targeted to the DIY-oriented customer. We are just in the second quarter getting started, and I think this will be an attractive opportunity for us to add subscribers.

Very helpful. And then turning to free cash flow, you're guiding to 20% plus growth this year. Your multiyear framework calls for 10% plus growth. Can you elaborate a bit on what's driving the outsized growth this year? And how long free cash flow growth can stay above 10%?

Yes. So maybe I'll remind a bit about our approach to the overall year, which is focused, especially on really strong cash generation as we work through the deployment of all of the initiatives that we have described and that goes with in our overall guidance for the year, flattish revenue and EPS growth, and our guidance reflects meaningful investments in the initiatives that we expect to drive those longer-range outcomes. As a result, we're not spending as much SAC this year as we otherwise might. We also, as we get into subsequent years, we'll have likely a bit more tax expense.

So that -- those are among the reasons why this year is stronger than what we have in our longer-range framework. And I also mentioned, even though you didn't ask specifically, the first quarter was exceptionally strong. it was largely consistent with our expectations, and that was to do with the timing of interest payments, the timing of some other working capital payments. So we feel really good about our start to the year on cash flow, especially and are well positioned to deliver what we suggested on a full year basis.

Our next question comes from the line of Pete Christiansen from Citi Group.

Jim, I want to dig back into the question on more organic RMR growth initiatives. I'd imagine, particularly in this next-gen iteration of your dealer strategy that potentially give some avenues at least regionally. If we take in a regional scope, are there areas where ADT from this organic less dealer reliant avenue can lean into certain regions to help improve share and gain RMR additions? Is there an opportunity there that could help accelerate overall RMR additions?

I think so, Pete. And thanks for the question. The -- I don't know that I would categorize any given region is particularly more attractive than others. But I would say that the opportunity for tuck-in M&A with large regional players and local players. As I was mentioning on an earlier question, is a real opportunity for us in terms of adding gross subscribers, a roll-up strategy of sorts, I think, is something that's available.

As you know, we've stuck with bulks and not buying complete companies but I think the pipeline for both bulk and for M&A is an option for us, and it's available in just about every part of the country.

That's encouraging to hear. And then on the attrition incremental nonpays here, it's interesting consumer credit has gone through a bunch of changes right now. Curious if you could just -- we can get to that next level. See if there's any discernible trends that you're seeing in non-pay activity we've seen, obviously, K-shaped economy, higher fuel costs, those sorts of things are now in the play when people think about consumer credit going forward. Just if you could dig into a next level there.

And I know you mentioned that you're lifting your FICO threshold, which is a smart idea. But is there anything else that you can do to navigate some of the changes that you're seeing more broadly into super credit?

Great question, Pete. I'll share some context around your question related to attrition, and then Jeff will address the nonpay more directly. As you know, attrition was flat for us at 13.1%. We had modest pressure from nonpay cancellations. They were just a touch higher than last year. Relocation cancels were flat and voluntary cancels were meaningfully better than last year. I should mention small business, which we're keeping an eye on, was also flat to last year and the sale of multifamily was actually a modest tailwind for us.

A couple of things that are going well in the short term, and then I'll mention a couple of things that are a little longer term that are reasons for optimism. Short-term NPS for us is coming in really about as high as it has been over my 10 years here. All of the operating metrics, first call it resolution, agent satisfaction, digital self-service, all of that's going up and to the right. And so short term, I feel really good about our operations and our ability to retain customers.

A couple of things longer term that are worth mentioning. You referenced the tightening of credit standards that's in place and will bode well for us. A little bit of pressure on gross adds, but it will bode well from a retention perspective. Longer term, better product experience, deeper, more frequent customer engagement is something that Omar and the product team are working on. We're excited about leveraging AI. In a couple of weeks here, we're going to implement AI-driven call routing and begin to implement AI for churn propensity modeling.

So I think all of those will be positive for us. It's not going to be next quarter. but it will bode well for us in the longer term. In terms of nonpay specifically, Jeff, do you want to share some perspective?

Sure. It's a topic, of course, we monitor very closely. We consider it very carefully. Fundamentally, it is part of our overall subscriber economic model. We recognize that we will suffer some nonpayment as part of that and are always looking at the right trade-off between our credit policy and the effect it might have on either, a, ads or importantly, b, installation revenue. So as we make refinements, the refinements we're making are both to whom we offer credit, how much credit we offer. And if we offer less, we likely or in many cases, would still get the subscriber just potentially with less installation revenue, which has a margin that goes with it.

So we assess that against what we think might be the credit losses and while we are not perfect at predicting them, we have gotten pretty good and a lot better at predicting them. And as we continue to make those refinements, it's with the lens towards optimizing overall subscriber economics overall return on invested capital. And then I'll mention just because I mentioned in my prepared remarks that we did record some higher allowance for credit losses. Part of the reason for that is as we transition to more of our transactions being outright sales to customers, it means we're recording the revenue earlier. And if we record the revenue earlier under the accounting rules, we have to record an appropriate bad debt provision.

So while we've seen some slightly negative trends, we think we have our arms around it, and we'll continue to adjust to optimize both the short-term and long-term economics.

That's helpful. I didn't realize the cost method accounting there, but Jeff, thank you for that clarification.

Our next question comes from the line of Manav Patnaik from Barclays from Barclays.

This is Ronan Kennedy on for Manav. If I may, please, a multiprioritization of the high-quality ads and more efficient channels gross adds still decline. How much of that volume decline is intentional versus underlying demand dynamics? And how are you quantitatively defining that high-quality adds? Is it the payback, the IRR, expected lifetime value or just discuss the credit? And how have those thresholds changed?

Two -- we've got tag-team this for you, Ronan. It's Jim. I'll start, maybe reiterating just a bit on what I mentioned earlier for gross adds. I would have liked to have seen more adds in the quarter. So not all of it was intentional. Much of it was. We're about flat in direct installations. The reason why we're down tends to be mostly from dealer and in fact, one dealer in particular. We have a little bit of tailwind on the multifamily sale. But some of the changes that we made, the tightening of credit standards and dialing down the reliance that we have on some of our higher-cost affiliates, all of that is intentional.

It's hard to give you a percent on how much was intentional and how much was not. I would say something more than half of our miss was versus last year was intentional. But I feel good about those changes even in this year and getting on track with our direct ads. Jeff, did you have more?

Yes. I would emphasize, we get the question also on attrition of parsing the individual components. It's difficult. We think of it as an overall ecosystem. And the main thing I would add or reiterate is that our first quarter was largely consistent with our plans. Our full year revenue guidance was to be approximately flat. We were slightly better than that in the first quarter. The key driver of our revenue is monitoring and services revenue. The key driver of that is our overall RMR balance.

So you could deduce even though we don't specifically guide to RMR that it was pretty consistent outcome in aggregate and overall in consideration of all things, including the ads, including the attrition, including price escalations. So we feel really good about our start to the year. And even though, as Jim mentioned, we always want to have more ads, but we were out of the gate very similar to the way we expected to be out of the gate through the first 3 months.

Got it. That's helpful. And on the AI routing, I think roughly half calls 100% at chats. Are you quantifying realized cost savings to date and how much incremental margin opportunity remains there?

I'll give some context on AI, Ronan, and ask Jeff or Omar to jump in if they have more to add. There's 3 or 4 areas that we're focused on within AI right now. On the top of the list is containment and advancing our containment. Most all of the calls, the calls in the call center will be handled through AI this year. But a couple of stats for you to demonstrate how quickly this is accelerating for us. Our chat containment in Q1 was 45%. And at the end of April, it's 60%. Call containment was 16% for the first quarter. By the end of April, it was 25%.

And I'm not sure that it will continue to be linear like that, but we have a fantastic internal leadership team, great partners in Sierra, the Google team and expect to continue to make real significant advances in -- on the call center side of our business. Next up for us is transcription, analysis of calls, as you know, from an earlier answer, we've got churn propensity modeling on the docket. And then lastly, we're not just using AI for cost reduction, we're also implementing AI into our marketing and sales motion. Outbound calls, for example, for low converting leads will now be done principally by AI.

AI is involved in the prequalification process, just helping us to be much more efficient from a go-to-market standpoint.

Yes. And to your question about quantification, while we haven't specifically shared a quantitative target, I would tell you it's in the millions, many millions, even tens of millions if I count the benefit of reducing the quantity of truck rolls. We think it's more over time. And it's among the reasons in our full year guidance, we're able to overcome the headwinds from investments and from tariffs and with flattish revenue still have a profitability or EPS in the flattish range. So a very meaningful contributor, AI and cost discipline and cost management more generally across the business, and our teams are doing a great job executing both AI and costs more broadly.

And I'll add in. This is Omar. Just a couple of examples. As an example, our product engineering group that has led the adoption of cursor AI tools in our workflow. We've been extremely successful. As of last month, over half of our committed software code is being written by AI. So not only has that increased our velocity, but it's also increased our capacity while holding our engineering head count flat. And we anticipate that to continue as we adopt across the organization from an efficiency perspective. In addition to all the efficiency metrics that Jim, Jeff and I are talking about, we're also using AI to engage our customers within ADT+.

So we're going to be rolling out Gemini AI features. And as you know, Origin's AI features will start to roll out within ADT+ as well as other stand-alone solutions in the next year or so.

Our last question comes from the line of Greg Parrish from Morgan Stanley.

Congrats on the strong results. Just trying to talk about DIY and ADT Blue rolling out here. This is a channel you've been overly assertive in historically, right, economics are quite as good. And maybe just help frame for investors why now? Is it DIY profitable now? Do you have more avenues to convert them to do it for me? Just maybe from a strategic perspective, why the change in approach to DIY now?

Omar, do you want to?

Yes. So I think for the first time, we as ADT have developed a hardware and software customer experience that's purpose-built from the ground up for DIY customers in terms of both how they buy, how they activate and how they interact with the technology. We are taking this market opportunity seriously as a significant TAM opportunity, as has been demonstrated in the market already by other DIY camera-only and security providers that are having success in that market. I think for too long, we, as ADT have seeded this market where we both have -- where we feel like we have a strong right to play and to win and we're committed to a long-term roadmap of enhancements to our offering.

We're going to be bringing out additional products from a hardware feature perspective as well as new AI features. And I think even more importantly, it's going to be one of the areas where we begin to integrate Origin AI sensing technology into the DIY offering to differentiate ourselves in the market and capture our fair share of the DIY market from a TAM perspective.

Yes. A couple of things I'd mention, Greg. The first is, historically, because of some contractual obligations that we had with some of our suppliers we were limited in how assertive we could be in this market. And now that the economics -- those contracts have been renegotiated, the economics are different for us today and give us a little more elbow room in competing in this marketplace. And as Omar just mentioned, he and his team have built from the ground up hardware and software set ready made to compete economically in DIY.

And you're right about profitability in DIY versus DIFM but we think we can get a good return. All of the -- most all of the DIY subs will be incremental for us and then not unimportantly, part of our playbook will be to treat those DIY customers from a lifetime perspective and convert them as their needs change or their interest change to DIFM to pro-install customers where the profitability is much higher.

Yes. Okay. Great. That's really helpful color. Appreciate that. Maybe just lastly, I just wanted to circle back. You made some comments on second quarter. If I heard correctly, Jeff, I think you said revenue and EPS down sequentially in the second quarter. Call that higher ad spending, which explains the EPS part. So I just want to double click on the revenue part. Is there anything specific driving that? I mean, typically, second quarter is higher sequentially. So maybe there's some accounting nuance like install, recognition or something. But maybe just help us understand the revenue step down sequentially.

We don't expect revenue down sequentially. We expect our cash flow down sequentially is the most significant item I would highlight, and that's because of a combination of seasonal SAC spending and the normal course flows of working capital being less beneficial in the second quarter than in the first quarter, the timing of tax payments as an example. And then we are accelerating most of our investments, we have Origin, for example, for the full quarter, which we didn't have for the full quarter ADT Blue advertising rollout or some other engineering work across the business.

So that's among the reasons that our EPS, along with the share count dynamics, but part of the reason our EPS in the first quarter on a year-over-year basis was higher than what we have said for our full year outlook, but we don't expect revenue down quarter-over-quarter.

Okay. Okay. Good. Yes, maybe I misheard and the transcript caught it wrong. So I'm glad I clarified that.

Thank you. I will now turn the call over to Jim DeVries for closing remarks.

Thank you, Jeannine, and thanks, everyone, for taking time to join us today. ADT delivered a solid quarter. We continue to feel good about the direction of the business. We're confident in our 2026 plans, both operational and the investments that we've been discussing and the impact that they'll have for a stronger future. One last time, I'd like to extend my appreciation to ADT employees and our dealer partners. Congrats on a very good start to the year. And thanks again, everyone, and have a great day.

That concludes our conference call for today. You may now disconnect.

Thank you for standing by, and welcome to the ADT Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions]

I'd now like to turn the call over to Elizabeth Landers, Vice President, Investor Relations. You may begin.

Good morning, and thank you for joining us today to discuss ADT's fourth quarter and full year results. Speaking on today's call are Jim DeVries, ADT's Chairman, President and CEO; Jeff Likosar, our CFO; and Omar Khan, our Chief Business Officer.

We are structuring today's call a bit differently with the majority of the call focused on our strategy and key priorities to position ADT for the future. Jim will start with a broad strategic update, focusing on how we're reshaping the future of smart home security. Omar will then describe more about our recent acquisition of Origin AI and then Jeff will briefly describe our 2025 financial results as well as our long-range financial outlook and capital allocation priorities. After their prepared remarks, we'll open the call for analyst questions.

This morning, we issued a press release and presentation summarizing our financial results. Both are available at investor.adt.com. We'll reference our non-GAAP financial measures today. Reconciliations to the most comparable GAAP measures are included in the earnings presentation on our website. Unless otherwise noted, all financials and metrics discussed reflect continuing operations. Non-GAAP cash flow measures include amounts related to our former solar business through 2Q 2024.

Included in our remarks today are a number of forward-looking statements that fall within the safe harbor provided by the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that are laid out in the earnings presentation on our website and in our SEC filings. Actual results may differ materially. Please refer to our SEC filings for more details.

And now I'm happy to turn the call over to Jim.

Thanks, Elizabeth, and good morning, everyone. I'm pleased to report that ADT again delivered a solid quarter and that our overall performance for 2025 was within the guidance ranges we shared at the beginning of the year and updated on our October call. Jeff will share more regarding 2025 financial results later on this call and he'll also comment on our longer-range financial outlook and capital allocation priorities. I'll spend the next several minutes sharing our vision for ADT and how we're reshaping smart home security emphasizing our strategic focus areas, key initiatives and investment priorities for '26 and beyond.

As you know, ADT is the most trusted brand in smart home security, and we have remained the leader in our space throughout our 150-year history. We have a national footprint, unmatched monitoring and service infrastructure and long-standing relationships with millions of customers who rely on us every day. ADT's mission to protect and connect what matters most remains consistent and we are focused on providing peace of mind to our customers. As I've shared before, our overall strategy is anchored in 3 core differentiators, unrivaled safety, premium experience and innovative offerings. We deliver best-in-class protection anchored by our professional monitoring and delivered with top-notch service.

During my tenure as CEO, customer expectations, the state of technology and the manner in which we fulfill our mission have evolved with increasing speed homes are more connected, technology is more intelligent, customer expectations regarding responsiveness, personalization and convenience are higher than ever before. Security is no longer just about reacting to alarms. We see the future of smart home security different from the past and ADT is leading the way to transform the delivery of and even the definition of smart home security. At the core of that strategy is a simple idea. Combining ADT's human experience with intelligent technologies to deliver better outcomes for our customers and with better economics for the business. More specifically, we're building technology that combined with our more than 12,000 professionals will provide solutions to provide increasing peace of mind for our customers.

Our vision is to provide protection that is always available, powered by artificial intelligence, enable real-time and split second response with deeper information and context during emergencies deliver a personalized experience that lives and evolves with the customer tailored to the lifestyles and life stages and offer solutions for everyone across all U.S. households, small businesses and families through a variety of use cases, protection that follows people, not just property.

We've made substantial progress in the foundation for this division in recent years. These include the launch and expansion of our ADT + platform and features, the transition to virtual service early accomplishments in AI and consistent improvements in our go-to-market model.

A key objective during 2026 is to invest in the acceleration and broadening of our progress. We're investing in product technology, both in ADT as well as in our new technology related to ambient sensing. We're investing in customer service and artificial intelligence as well as our related IP infrastructure. And we're investing in customer acquisition efficiency, including marketing to new segments and refining our channel strategy.

I'd like to share a little more detail on these key investments in 2026. First, investments in product technology. We have built a solid proprietary platform, which enables more rapid innovation and more explicit differentiation. Following the launch of trusted neighbor in late 2024, we continue to add more use cases and features. Just recently, we launched Live Light a lighted outdoor ADT sign, enabling first responders to visually identify and verify and address during an emergency.

We also launched My Safety, enabling on-the-go mobile security integrated with the ADT+ ecosystem. We are expanding penetration of our ADT+ app to more channels, including most importantly, a third-party network of more than 100 dealers who will transition to ADT+ in the third quarter. A topic which I'm very excited about is our recent acquisition of Origin AI which using advanced present sensing technologies and intelligence will enable use cases and features unique to ADT. Omar Khan, our Chief Business Officer, will share more detail about Origin AI shortly.

The theme of our customer service initiatives is the power we can uniquely bring to our customer by supplementing our 12,000 employees with the power of artificial intelligence. We've made substantial progress in service and efficiency in recent years. A highlight is our virtual service initiatives under which we now handle approximately 50% of our service calls via remote diagnosis and resolution rather than utilizing a truck roll. This has led to meaningful customer service through improvements with positive feedback while also improving our cost efficiency.

In addition, our initial artificial intelligence efforts in 2025 have led to 23% of our calls being routed through AI with steadily improving levels of containment that is handling the call without any human engagement. We exited 2025 with all of our chats first routed through AI. Importantly, we continue to benefit from highly trained employees available in situations where a human interaction is the best solution both in the event of an emergency or when an on-site service visit is the best way to resolve a customer concern.

During 2026, we are planning to advance our service-oriented artificial intelligence within our call center operation and importantly, also invest in AI beyond our call centers. Our primary focus is to strengthen our understanding of customers, which will accomplish via transcription and analysis of a large percentage of customer interactions with our agents. We use these insights to improve our interactions in some cases, by prompting employee agents and in other cases, reducing the need for human involvement. I'm especially excited by the opportunities here to proactively identify and resolve customer needs or desires rather than reactively after a customer reaches out to us.

We anticipate this rich information will facilitate improvements in customer satisfaction, speed of issue resolution and cost efficiency. Working with an outstanding AI partner, Sierra, we're also beginning to leverage artificial intelligence within our lead to sale processes, which we believe will bring higher levels of conversion. The third area in which we're making 2026 investments is improvements in new segments and acquisition efficiency. We already enjoy the benefits of a very strong and trusted brand and a variety of routes to market.

During 2025, we shifted a majority of our sales transactions to a model that effectively combine sales with system design, configuration and installation into a single role most often accomplished in a single home visit. We also refreshed our advertising platform to our when every second counts campaign and we continue to benefit from our capabilities to selectively buy accounts in bulk and integrate them into ADT.

Among our key priorities in 2026 is expansion into e-commerce channels and the launch of a new product line, which we're calling ADT Blue to appeal specifically to more value conscious and DIY customers. This will include more marketing investment to target those customers more specifically than we have in the past. We believe our ADT Blue launch will help us acquire customers for both our DIY and DIFM solutions as we now appear in e-tail channels where many customers shop. In addition, we're refining our overall marketing approach with an objective of rationalizing our highest cost acquisition sources which includes affiliate marketing partners and in some cases, our dealers. We expect this to have a near-term effect of reducing our organic new subscriber additions while strengthening longer-term economics for our overall go-to-market ecosystem.

We'll also continue to evaluate bulk account purchase options and potentially full acquisition opportunities in our industry with attractive economics. Our intent and core objectives are threefold. The first is to drive more growth. This includes our core residential business as well as DIY oriented or more price-conscious consumers, along with small businesses and aging in place or health-oriented customers.

The second is to strengthen customer loyalty, improving our customer retention. And the third is to improve efficiency, specifically in customer acquisition to fund growth. Overall, we are focused on delivering unparalleled and differentiated customer value propositions, capitalizing on large and fast-growing smart home and security markets. Our scale, our professional monitoring expertise, our employees, our advanced technologies and our installed base give us advantages that are very difficult to replicate.

Our 2026 initiatives and investments are designed to create the next generation of smart home security. We expect these initiatives to generate benefits, including growth in our core, expanded participation into adjacent TAMs, improved attrition and greater efficiency. We have the team in place to execute this strategy. We are building on ADT's strengths while revolutionizing the manner in which we deliver smart home security. We're focused and disciplined and absolutely committed to creating long-term value for our customers and shareholders.

Before Jeff shares more about our financial outlook and capital allocation plans, I'll turn the call to Omar, who will share more about why we're so excited about our acquisition of Origin AI. Omar?

Thanks, Jim, and good morning, everyone. Last week marked a defining milestone in ADT's history with the acquisition of Origin AI. This acquisition reflects a strategic decision to integrate ambient intelligence directly into our platform, unveiling the next layer of home intelligence. 2 years ago, we launched our proprietary platform, ADT Plus, which we have been advancing and scaling with hardware and software features to support additional channels and customer types. We expect AI sensing to become an integrated offering for ADTs customers over the next 12 to 18 months. advancing all aspects of our product and services platform.

With this acquisition, we now own what we believe to be the world's leading WiFi-based signal processing engine, algorithms and AI models. backed by over 200 global patents and 50 talented innovators, Think of it as a 6 sense that knows what's happening inside the home without the use of cameras or listening devices. This technology uses existing WiFi signals, the ones that are already bouncing off your walls and off your body and uses proprietary algorithms and AI models to interpret the smallest changes in deflections. We call it AI sensing. It can distinguish a human from a dog, a fall from an app and even detect a person's breathing pattern, low without requiring a single wearable device or a camera.

This is a privacy-first security that solves notification fatigue by significantly reducing false alarms and providing zone-based knowledge of where someone is in the home when there is a life safety incident. Why origin? Because they've spent years perfecting the intellectual property that everyone else is just starting to talk about. For ADT, this is foundational. It allows us to evolve from the best-in-class reactive alarm company to a proactive peace of mind company. and build new use cases such as smart aging, allowing families to monitor elderly parent for falls or changes in gate. It's also incredibly scalable.

Because it works on existing WiFi signals, we expect that we can, over time, turn on these features for certain of our 6 million existing households by a software update in simple hardware like Smart Plugs, our consumer market research shows customers have a high demand and willingness to pay for these AI verified presence, motion classification and health-related features.

Simultaneous with the acquisition, we've signed a 5-year agreement with a minimum value of $30 million plus activation fees with Verisure, the leading smart home security provider in Europe and Latin America who will continue to scale Origin's technology across their footprint. We believe over time, our newly acquired technology will accelerate our user engagement, increase our role in customers' lives drive subscriber and RMR growth and will reduce our subscriber acquisition cost.

We expect to launch a pilot this year with the commercialization across the ADTs platform and app starting in 2027. In short, we now own the brain of the smart home. We are moving the industry from get the door open to is my family okay. and we are doing it with the most advanced privacy compliant AI on the market.

I'll now turn the call over to Jeff and look forward to answering any of your questions related to Origin and product strategy for ADT.

Thanks, Omar, and good morning, everyone. I'll take just a couple of minutes to highlight our fourth quarter and 2025 financial results, which you can see in the deck and press release we issued earlier this morning. As Jim mentioned, we are very pleased with our overall performance with all guidance measurements within the ranges we shared at the beginning of the year and updated in our October call.

We continue to focus, especially on strong cash generation, and we grew our adjusted free cash flow, including interest rate swaps by 16% in 2025. This reflects our disciplined capital allocation and our balanced approach to investing in our business while also returning capital to shareholders. Along with our capital structure improvements, this enabled us to return nearly $800 million of capital directly to shareholders during 2025. This included roughly $600 million in share repurchases and $187 million in dividends.

Full year revenue was $5.1 billion, up 5% with adjusted EBITDA of $2.68 billion, up 4%. The key positive year-over-year drivers included growth in monitoring and services revenue, higher install revenues and margins, efficiency improvements and general cost controls, enabling funding of our investment priorities. Adjusted EPS was exceptionally strong, up 19% to $0.89 per share, benefiting from EBITDA growth and lower share count. Attrition ended at 13.1%, behind our record level from earlier in 2025 due mainly to elevated nonpaid disconnects.

As a reminder, we divested our multifamily business in October, which represented approximately $2.6 million in RMR from roughly 200,000 subscribers. Including the effect of this disposition, our 2025 ending RMR balance was approximately flat to 2024. I'll touch more on our capital structure and flexibility in a moment, but I want to also highlight that we reduced our leverage to 2.7x adjusted EBITDA with several debt transactions during 2025. During the fourth quarter, these included the refinancing of our 2028 notes and all but $75 million of our April 2026 notes.

Our 2025 performance in progress positions us well heading into 2026, where, as Jim described, we are focused on executing several initiatives that position us for the future. I'll spend the rest of the time describing how these key initiatives and priorities fit into our financial model and our commitment to generating shareholder returns. The strategy we're executing is designed to reinforce and build upon the strengths of our business model. stable recurring revenue, strong margins, durable free cash flow and more recently, our capital allocation flexibility. As we invest in technology, service excellence and more efficient customer acquisition, our goal is to improve long-term growth and unit economics, not just near-term results.

We enjoy very durable recurring revenue resulting from our annuity-like $4.3 billion annualized recurring monthly revenue balance. With its high gross margins, this is a core asset and the foundation of our cash generation and shareholder return capabilities. We have been very disciplined in management of that asset in recent years with a focus especially on growing our cash generation while continuing to invest in our business.

Our 2025 adjusted free cash flow, including interest rate swaps, has more than doubled since 2021. During that period, we have generated more than $3 billion of adjusted free cash flow while investing in subscriber acquisition spending sufficient to have grown our recurring monthly revenue balance by 9%. Our focus on unit economics facilitated by higher install revenue per unit has contributed to that progress. We've also invested in the technologies and infrastructure that provide the foundation for the growth initiatives we have described today, and we will continue to invest in 2026.

Because we believe our stock is very attractively priced, we have also prioritized capital allocation towards repurchase in recent years. Including dividends, we have returned $1.6 billion to shareholders since 2021. Our flexibility to do this is enabled by the refinancing transactions I mentioned earlier and are having repaid more than $2 billion of debt during that time.

As we enter 2026, our commitment to shareholder returns is stronger than ever. We expect the initiatives Jim outlined to generate more growth, improve customer loyalty and strengthen subscriber acquisition efficiency. We are targeting 1 million more subscribers by 2030 and with growth both in our core markets and adjacencies such as DIY and aging in place or health applications. We are targeting 11% attrition with loyalty from expanded use cases and our commitment to customer service. And we are targeting a 2-year revenue payback enabled by our broadened channel presence and reduced reliance on high-cost acquisition methods.

We are consequently sharing today a multiyear financial framework that targets compounded annual growth rates of 5% for revenue, 10% for EPS and adjusted free cash flow in excess of 10%. As part of our commitment to return capital directly to shareholders, we are today announcing a new 3-year $1.5 billion share repurchase authorization and we are maintaining our existing $0.055 per share quarterly dividend. Beyond direct shareholder returns, we also anticipate allocating more capital to M&A than we have in recent years. Some of this may be in the form of technology or capability development as in our recent acquisition of Origin AI, and some may be in the form of footprint expansion or account acquisitions.

We will also continue to responsibly manage our debt levels. While we are very comfortable with our current capital structure, we anticipate continuing to reduce leverage, targeting 2.5x adjusted EBITDA. We Relative to our longer-range framework, we expect 2026 will have very strong cash generation for which we are targeting 20% growth, which is above our multiyear framework with some offsetting pressure in 2027 from higher cash taxes and interest next year. We expect lower 2026 growth in revenue and EPS, both of which we expect to be approximately flat to 2025. This reflects our prioritization of cash generation and share repurchases. We are also investing approximately $50 million during 2026 in the product technology, service and go-to-market initiatives Jim described.

Like all companies, we face an uncertain tariff environment, and our guidance includes approximately $45 million in additional subscriber acquisition costs from tariffs. Our guidance does not include the purchase accounting effects of our Origin acquisition. We will provide an update on this on our next call. We expect this year's full year cash generation to be skewed towards the first quarter, driven by seasonally lower SAC spend and several timing items.

To conclude my remarks, I want to emphasize why we see ADT as such a compelling investment. We own the most trusted brand in the smart home security space. Our valuation is underpinned by a stable, resilient and recession-resistant recurring revenue base. We enjoy an unmatched footprint and scale with an unwavering commitment to delivering peace of mind. We increasingly own proprietary technologies and are leveraging artificial intelligence to improve both service and efficiency.

We have demonstrated an ability to generate exceptionally strong free cash flow, which we have deployed in a disciplined fashion and our flexibility from this cash generation and our efficient and well-laddered debt structure afford sufficient flexibility to return capital directly to shareholders.

Overall, we are very pleased with our 2025 results, and are excited by our future. Thank you again, everyone, for joining our call today, and thank you also to our more than 6 million customers or more than 12,000 employees and to the first responders across the United States.

Operator, please open the call to questions.

[Operator Instructions] Your first question today comes from the line of George Tong from Goldman Sachs.

You're guiding to 2026 revenue and EPS to be flat. You touched on the tariff impact that you expect this year on subscriber acquisition costs. Can you talk or about factors that you expect to constrain revenue and EPS performance this year?

Sure, George. It's Jim. Thanks for the first question. I'll touch on revenue. And Jeff, you want to hit earnings? So on the flat revenue, we're certainly aspiring to do better than flat in 2026, entering our year with RMR roughly flat to last year. As you know, recurring revenue makes up 85% of our revenue. And so we're coming in flat to last year, that's a headwind for 2026. We have also about 1 point of headwind from the sale of our multifamily business.

And then, George, you asked about some of the factors, which might impact at some of the changes that we're contemplating in dealer and affiliate partnerships have the potential for short-term disruption. I want to mention, I'm bullish on these investments. We're excited about ambient sensing, entry into some of the new TAMs, retail, e-commerce, we have a brand-new CMO, who brings a great deal of experience and talent to the table. And I see no reason why after our investments, we get back to our 5% revenue growth and 10% EPS growth, the numbers that Jeff outlined.

Yes. And I would add, Jim's comment about the very strong margins. We have a number of efficiency actions, some -- which are continuing from last year and some new ones that will lower some costs that goes with that revenue. And then that is largely offset by the cost of the investments that I mentioned, I mentioned around $50 million between technology in product, IT and AI related, particularly some marketing investments, also the tariff headwind.

On earnings per share, we will benefit a bit from net repurchases, offset somewhat by higher amortization, a little bit higher interest expense, we'd expect the tax approximately flat. And then I'll emphasize the cash where we're expecting a very strong cash year, and that's a result of a bit less SAC investment. It's also the result of having entered the year in a strong position and aware of some working capital opportunities during the year and cash interest, we expect to be lower in '26 than it was in 2025.

Got it. That's very helpful. And as a follow-up, you talked about initiatives you have in product technology, customer service and acquisition efficiency to support your new medium-term financial framework. Can you elaborate on which of these initiatives you consider to be relatively new or a departure from your prior strategy?

I'd offer a couple, George. The -- obviously, the investments in ambient sensing are new for us with the acquisition of Origin. We see this new technology is a very significant change that we'll be integrating into our product going forward. It's unmatched in the industry and a differentiator for us. We continue to advance our investments and our capability in AI, and I'm excited about what I see on that front.

Not only are we making advances in customer service, but now we're beginning to turn to sales, marketing and growth and leveraging AI capability there. And then a third one is we will be leaning more assertively into DIY for customers who are more value conscious. And we'll be in retail and e-commerce in a way that we haven't been historically.

And one thing I would add, implicit in that, and Jim mentioned this in prepared remarks is as we shift into some of those channels Generally, we expect those to be lower cost acquisition channels, and we will rationalize the amount of marketing and selling expense we spend in some of the higher cost acquisition channels. which is among the reasons why our revenue guide is as it is, is some potential near-term disruption as we work through that transition.

Your next question comes from the line of Peter Christiansen from Citi.

Nice free cash flow outlook for sure. Jim, I want to talk to you about some of these first steps you're making in AI first monitoring, obviously, a huge potential trend. What's your vision on how this could evolve, I guess, over the next I don't know, 5 or so years. And is there an opportunity here to really kind of change the calculus on ADT's kind of cost leverage.

Thanks for the question, Pete. I'll offer a couple of comments, and then Omar is with us today, and he'll have a couple of comments as well. The short answer to your question, I think so. I think ADT is a company that's built for AI to be just incredibly transformational. We, as you know, have had a really heavy focus on customer service, scaling AI in both voice and chat I think something -- 100% of our chat interactions are already channeled through AI.

Last year, about 20% of our calls were down through AI, containment continues to improve. And then even more exciting than how we're leveraging AI and customer service, leveraging AI in sales and marketing is sort of the next frontier for us. So we're partnered with Sierra a fantastic partner. They're helping us expand into the e-commerce experience. We're doing 2-way SMS to improve our lead contact rates I think we mentioned in the script, we're next leveraging AI and transcription to analyze all our customer interactions, not just customer service, but including sales, and so I think the future is really exciting on leveraging AI for us.

Thanks, Jim. And in addition to that, on the product and technology side, what Origin's AI sensing platform gives us for the first time is the ability to insert an intelligence layer between the signals that get generated in the home and our monitoring and response and the consumer. So for the first time, we'll be able to take the signals give some additional context from those signals. So for instance, if there is a sensor activity in the home or a sensor signal in the home, our ability now will be to know whether or not that whatever that motion is, how to classify it, whether it's a person, whether it's a pet, whether it's a mechanical vacuum cleaner.

In addition to that, we'll be able to help first responders in our monitoring centers to know where are those intruders or people may be in the home in the in the event of an emergency and then whether or not they're still in the home when the first responder gets there. So you can see that, that intelligence layer is going to give us a little more context real-time about what's happening in the home and will absolutely positively impact the efficacy and the efficiency of our monitoring and response in our first responder communications.

That's helpful. And Omar, I guess just generally across the industry, how do you think about this acquisition origin AI strengthening ADT's competitive moat more perhaps just AI in general creating more entrants potentially big tech, that kind of thing. Just I don't know how you frame that. I mean, we're in a different world these days. Just curious how you're thinking about the competitive setup.

Yes. No, it's a great question. And I think it's a core reason why we bought Origin AI and the IP portfolio because from a competitive set perspective, this gives us the ability to take off-the-shelf and traditional sensors and cameras, but augment it with additional signals that are privacy first and gives us the ability to both enhance the use cases in the security space by giving us more intelligence on what's happening in the home, how that -- and how first responders and monitoring can take advantage of those signals, but also start to push us into adjacent use cases like Jim talked about earlier on the call.

The ability for us to know changes in gate and changes in motion gives us an incredible opportunity to lean into the aging in place opportunity and grow that side of our business as well. So it becomes both a differentiator for us as well as an ability for us to capture additional markets and more growth.

Just one thing I would add, and I appreciate the way you framed the question. But as we begun our efforts or began our efforts in AI, it was at first focused on things that have hard cost reduction, easy to major cost reduction. We need to answer the phone fewer times, dispatch fewer trucks also with improved service next category is customer outcomes, more means of preventing customers from canceling proactively resolving customer needs.

But as I expect you can tell, the thing we're most excited about is this third category, which is better use cases for consumers to keep them safer, to make them more protected in their homes to open up new use cases, expand the TAM, as you see in the presentation deck, and you've already heard. But that's exactly why we're making investments we're making during 2026.

Your next question comes from the line of Manav Patni from Barclays. .

This is Ronan Kennedy on for Manav. Elements of this were asked and answered as part of George's question, George's question, but I would like to ask it another way, if I may, please. The framework '26 as a transition year. I mean, I want to confirm if that's how you would categorize it with revs and EPS flat. And then you have that return 5% revenues and 10% EPS growth over the longer term. Is there a specific operating or market inflection point, whether it's subscriber growth, attrition pricing, the new product that gives you confidence in what would appear to be a meaningful reacceleration after '26 rather than remaining in kind of range bound. Could you talk to those, please?

Yes. Sure, Ronan, I'll make a couple of comments, and then Jeff will add his perspective. First, just from a grounding perspective, we've been -- I think our [indiscernible] figure for revenue growth was 5%. And getting back to 5% to me, I see no reason why we don't get back to 5%. On the EPS front, I think the long-term objective we had was 10%. I think that is very doable, especially with substantial buyback and 10% free cash flow, our 5-year CAGR on cash is 21%. And so I don't think it's a significant trajectory change to get back to where we've been for the last 5 years.

That said, some of the things that give me confidence that these investments will be substantially positive for us. We're continuing to expand ADT plus our proprietary platform and having good success on that front. AI is probably a touch more advanced than I anticipated it to be. And I love the opportunities that we see with AI in sales and marketing.

Origin, as Omar just pointed out, that's a fantastic acquisition and the new technology will help us both from a use case perspective and from a differentiation perspective. I don't think Omar or Jeff mentioned this, but Verisure, the largest security player in Latin America and Europe already through licensing agreements, deploys the -- some of the use cases that we're talking about with WiFi sensing. and actually in hundreds of thousands of homes. So this isn't terribly far out.

And then the last thing I'd mention, Ronan, we will have a pretty substantial DIY investment in 2026. It will be meaningfully EBITDA negative during the year. But I like what we're seeing. We have a new leader over DIY. Year-to-date, we're up almost 23%, and that's prior to the new product being available in Q3 -- in Q2 and prior to being in retail and e-commerce in a meaningful way. So I think as those investments take shape, I feel really confident about the future.

Yes. And I would add a couple of points. One is that implicit in your question is how we deploy capital. And we have, for the past few years, been focused as we've described on cash generation having more than doubled our adjusted free cash flow between 2021 and 2025. The last couple of years, especially, but also over the last 5 years, we've returned significant capital to shareholders, $1.6 billion, we are announcing today a $1.5 billion share repurchase program. That is because we believe the stock is very attractively priced and doesn't reflect what we believe is the intrinsic value of the business.

So as this technology rolls out as we begin to commercialize it, as we execute the other things that Jim mentioned and as we undertake some of the actions to make our go-to-market more efficient, we would anticipate some combination of deploying more capital towards ads and/or enjoying more ads for the same amount of capital. So that also becomes the inflection point, just the allocation of more capital towards ads that will go along with the completion of the things that Jim described.

And as a follow-up in this multiyear framework, can you quantify or qualitatively characterize that targeted 5% revenue growth into major drivers, whether that's net subs growth, your installation activity adjacent TAM, the new entry pricing or even the M&A? How should we think about the major contributors to that targeted 5% growth.

Yes. The main contributor will be RMR just because RMR is our largest base of revenue. We noted an objective of 1 million more subscribers. It's maybe worth mentioning that some of those subscribers might be more value conscious or more price-centric. So those subscribers could be lower revenue per unit, but the crux of it will be more subs and/or RMR with the precise combination dependent to a certain extent on how well each is worth.

Maybe worth noting that we have internal plans and objectives that are in excess to that. And then we anticipate continuing to command within any particular segment of customers or cohort of customers a pricing premium because of the fact that we deliver the best service, the best protection, the best monitoring capabilities of anybody else in our space.

Your next question comes from the line of Ashish Sabadra from RBC Capital Markets.

I just wanted to follow up on the change in the customer acquisition strategy. Jeff, I believe you mentioned there was the success in the DIY year-to-date, which is I believe, is up 23%. So if you could just elaborate on that one, the kind of success that you're seeing? And how does these new product launches in Q2 or Q3 will be further tailwind for that strategy going forward? And maybe if I can just ask another question on the same topic would be just that focus on the e-comm channel. How might this shift from LLM adoption impact e-comm customer acquisition over the midterm?

Thanks, Ashish. Jeff and I will tag team this 1 as well. So on DIY, we have not historically leaned in, in a particularly assertive way there's a handful of reasons why. But over the course of the last 6 months or so, we have been paying more attention to this segment. One of the things -- a lens I'll say, that we contemplate DIY through is having a relationship with the customer when the customer is younger and has less sophisticated security needs. And then as their security needs develop, converting them to a DIFM customer.

From a customer lifetime value perspective, we need about 7, 8, maybe 9 or 10 DIY customers to create the same value as a DIFM customer. And so although we're excited about the growth, the key strategic challenge for us is to get really good at conversion. And this year, we've been paying a lot more attention to fishing in the pond of value-conscious customers. DIY, while it has a small denominators up just under 23%. And later this year, as we roll out a new product lineup and begin to advertise more aggressively in this space and develop our e-commerce capabilities we feel pretty good about this new segment.

Yes. I would add more generally, we're always fine-tuning our customer acquisition strategy. But part of what we're doing in '26 is a bit more than fine tuning. And just for context, we acquire customers, the phone sales, field sales, we mentioned that we have during '25 migrated to what we call a tech engineer model, which is something of a hybrid of both a salesperson or a person who configures the customer system and installs it. We have our dealer channel, we have bulk, we have e-commerce and moving to e-comm and retail. They all have different characteristics with respect to the cost of the sale and the commissions.

And then same on marketing. We spent marketing dollars on upper funnel brand advertising, affiliate partnerships, social, some of our marketing is with partners. So what we're doing this year more assertively is reducing the kinds of ads where we spend the most combined between the marketing cost and the commission cost.

And I think we have an opportunity to become more efficient, potentially, as I already mentioned, with some near-term disruption, which is part of the reason that we're not counting on as many new subscriber additions during 2026, as we otherwise would. But we think beyond that, we will have reset the cost of sales and marketing and go-to-market costs more generally.

That's very helpful color. And maybe just as a follow-up, how should we think about the EBITDA growth in 2026? Should it be more in line with revenue and EPS growth? Any color there would be helpful.

Yes. Yes. We're focusing on earnings per share. Many of the drivers, as you know, are similar. Earnings per share, of course, benefits from share repurchases. It also has the amortization interest, as I mentioned earlier. But the overall operational dynamics are the same. One of the reasons that we're emphasizing earnings per share more is because some of the things I just described in terms of the way we acquire customers, will have or may have different accounting manifestations.

As you know, there's a meaningful portion of our subscriber acquisition spending that we capitalize. If we acquire a customer through one channel, we would capitalize the marketing cost if we instead were to spend more money, just as they, for example, on upper funnel advertising, we would expense all of the related advertising costs. That effect is less pronounced in EPS over time than it is in EBITDA. But aside from that, the accounting manifestation, the operational drivers are the same.

Your next question comes from the line of Greg Parish from Morgan Stanley.

I just wanted to ask a high-level question about technology acquisition. You decided to buy this AI sensing technology. I think you spoke on the call about potentially more technology M&A in the future. So maybe just from a high level, why do you think it's advantageous for you to own rather than license some of this technology as it pertained to origin AI and then maybe as well for the potential future investments, too.

Yes, real quick. I mentioned on the call that in the coming years, we would anticipate potentially more on M&A than in recent years. Part of that is because we have not spent that much capital on M&A, the attractiveness of share repurchases being one of the reasons. And then we're always looking at the landscape. And as you know, sometimes there's good assets available sometimes not, sometimes we pursue 1 and end up walking away from it.

So it's always read too much into it other than then that we would -- we will continue to evaluate. And then the 2 broad categories would be technology-related as 1 category. Another category would be expansion of footprint, more subscribers kind of bulk like M&A, but I'll pass to Omar on the more specific question as to the advantages of owning.

Thanks, Jeff. I mean we're always undergoing analysis around buy versus build license versus acquire. And there are certain situations where it will make sense for Origin AI specifically, the reason it made sense to acquire was multiple fold. One was we're integrating this across our entire proprietary ADTs platform. So it's not something where we're licensing a specific use case for a small engine. We're actually integrating Origin's intelligence layer across our entire product portfolio.

It will impact pretty much every use case that we have in the company. So from a foundational perspective, it's incredibly important for us to own not just the technology, but on its trajectory over time so we can continue to control it. It's one of the main reasons we innovated and brought ADT + to market. The second area is that we did a fairly thorough IP analysis and Origin's IP is both seminal and foundation and it's incredibly exciting for us to continue leveraging the 50-plus professionals that are at Origin AI to continue propagating and developing new IP in the space.

So it's not just a point-in-time acquisition. We're also buying. We also bought an engine that will continue to produce next-generation intellectual property for us to leverage going forward.

Okay. Great. That's very helpful color. And then maybe Jomar, since you're on the call here and we're talking about potential technology M&A. I guess, what capabilities or technologies are out there that maybe could bolster the platform over time? Are there capabilities that you think that would sort of fit good in the portfolio that maybe the offering doesn't have today that you can see adding in the next couple of years?

Yes. I mean I think for us, as we look at it, there are both -- there's use cases that we see opportunities for us to go in, obviously, continue to expand the core business security use case. And in those areas, generally, we're looking at licensing or sourcing technologies. There's an area of adjacent use cases like aging place and additional types of health monitoring. In those spaces, we'll continue to look at leading-edge technology where IP or technology or product acquisition could become a differentiator for us.

But we're doing a lot of other work in the AI space, specifically related to sensor fusion and bringing those signals together to provide insights to our customers and to our monitoring centers. But right now, our focus is really taking advantage of the Origin AI acquisition, making that operational over the next 12 to 18 months and integrating it into our portfolio and launching additional services and capabilities to grow our subscriber base in our RMR.

Sorry, I was just going to emphasize again the balanced capital allocation, we don't want to come across this a dramatic shift, but we do anticipate more M&A just because we haven't spent as much and we just did 1 that was a relatively sizable outflow in the first part of this year. But I'll remind of the $1.5 reverse authorization, which we think is a very active use of capital.

And we have reached the end of our question-and-answer session. I will now turn the call back over to Jim DeVries for closing remarks.

Thank you, Rob, and thanks, everyone, for taking the time to join us today. We're confident in our plans for 2026. Key goals for our team will be to develop our investments into in product technology and to meet our commitments for gross adds and retention. I'd like to extend my appreciation to our ADT employees, our dealer partners. Congratulations on a good fourth quarter and a strong 2025. Thanks again for joining everybody, and have a great day.

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Hello, and thank you for standing by. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to the ADT Third Quarter 2025 Earnings Conference Call. [Operator Instructions]

Now I would like to turn the call over to Elizabeth Landers, Vice President, Investor Relations. Please go ahead.

Good morning, and thank you for joining us to discuss ADT's third quarter 2025 results.

Today's speakers are Jim DeVries, ADT's Chairman, President and CEO; and Jeff Likosar, our CFO. After their prepared remarks, we'll open the call for analyst questions.

This morning, we issued a press release and presentation summarizing our financial results. Those are available at investor.adt.com. We'll reference our non-GAAP financial measures today. Reconciliations to the most comparable GAAP measures are included in the earnings presentation on our website. Unless noted otherwise, all financials and metrics discussed reflect continuing operations. Non-GAAP cash flow measures include amounts related to our former solar business through 2Q 2024. Forward-looking statements included in today's remarks are subject to risks and uncertainties. Actual results may differ materially. Please refer to our SEC filings for more details.

And now I'm happy to turn it over to Jim.

Thank you, Elizabeth, and good morning, everyone. I'm very pleased to report that ADT delivered another quarter of solid revenue growth, robust cash flow and very strong earnings per share. Collectively reflecting the resilience of our business model and our team's continued execution of our 2025 strategy.

Let me start with a few key financial highlights. Total revenue grew 4% to $1.3 billion. Adjusted EBITDA grew 3% to $676 million with adjusted earnings per diluted share of $0.23, up a strong 15% year-over-year. Cash flow continues to be a highlight with adjusted free cash flow, including interest rate swaps reaching $709 million year-to-date. Additionally, year-to-date, we have returned $746 million to ADT shareholders through share repurchases and dividends. We ended the third quarter with a recurring monthly revenue balance of $362 million, up 1% year-over-year.

Turning to attrition. Earlier this year, ADT achieved record levels, and this quarter, we ticked up to 13%. While above our budget, our teams are focused on plans to continue improving customer retention and those actions are underway. As we've executed in prior quarters, during Q3, we completed a small bulk account purchase of 15,000 accounts for $24 million. Overall, consumer sentiment remains cautious and relocations continue at low levels.

We have remained disciplined in our SAC spending which resulted in lower new subscriber and RMR adds. Jeff will provide more specific details about our results and full year outlook later in our call. I'd like to spend the next few minutes updating you on ADT's 2025 progress and strategic focus areas, which continue to build on the priorities we've shared throughout this year.

ADT's commitment remains unchanged, delivering safety and peace of mind to our residential and small business customers. Our strategy is anchored in 3 core pillars unrivaled safety, innovative offerings and a premium best-in-class customer experience.

Unrivaled safety is at the heart of everything we do at ADT. As it has been throughout our entire 150-year history. We are constantly strengthening the ways we protect ADT customers and provide them with confidence in their security delivering peace of mind. As we execute on our near-term financial goals, we're also investing in our product and experience ecosystem, expanding and enhancing our differentiated offerings. These efforts give customers even more reasons to choose ADT and to remain loyal to our brand.

Our ADT+ platform continues to gain traction, enhancing the safety, convenience and experience we deliver to our customers. Our product and engineering teams are firing on all cylinders, in coordination with our strategic partners to drive a continued pipeline of innovative releases. Our product road map is robust, and we expect to continue expanding our suite of unrivaled offering every quarter to continue to gain share within the smart home.

An increasing percentage of our new customers are now enjoying ADT+, and many of these customers are opting for larger, more comprehensive ADT systems, leading to increased installation revenue, and we anticipate contributing to even stronger retention over time.

During 2025, approximately 25% of our new customer additions have been installed with the ADT+ platform, and we are continuing to expand to more categories of customers and channels. This quarter, we launched the ADT+ Alarm Range Extender further enhancing the capabilities, performance and dependability of the ADT+ platform. This device expands coverage between the ADT+ base and other connected devices in larger or more complex homes with a 24-hour battery backup and tamper alerts.

We also introduced new automation and AI-driven testing capabilities to streamline app development, reduce the need for manual testing and deliver faster, high-quality releases. These innovations help ensure a smoother, more reliable experience for our ADT + customers. We are actively evaluating new features, use cases and economic models and we'll continue to share additional information as these come to market.

I also have a few updates regarding our efforts to optimize our hardware portfolio. While we don't expect hardware savings to be material in 2025, we view this as a meaningful source of savings going into 2026. Beginning October 15, ADT refreshed our smart home security portfolio, and we now offer 5 new Google Nest camera models, reflecting the continued expansion of our partnership with Google. And we are working closely with our suppliers to mitigate our tariff exposure, which we do not expect to be material during 2025.

On the customer service front, we remain pleased with our progress with ADT's remote assistance program, which has eliminated approximately half of our in-home service calls reducing truck rolls and field service costs. Our current AI efforts remain focused on our customer care operations with an emphasis on improving the customer service experience for both our customers and our employee agents while also improving overall efficiency.

These AI initiatives continued to deliver positive results with an increasing number of customer service chats processed by AI agents, with nearly half of those successfully resolved without live agent intervention. We're also continuing to expand the rollout of AI agents for voice calls and early results are promising for both customer satisfaction and cost efficiency. AI-driven cost savings are beginning to materialize, particularly in our call center operations and we expect to provide more quantitative detail as these benefits scale.

Turning for a moment to State Farm. As mentioned during our last call, we have pivoted away from the past selling program, and we're exploring new opportunities for a digital relocation focused approach to jointly pursue new customers. Despite some ongoing macroeconomic uncertainty, including tariff pressures and elevated interest rates, ADT's business model remains resilient and very well positioned for the future.

In closing, we remain focused on execution, operational excellence and positioning ADT for long-term value creation. I remain confident in ADT's outlook and our ability to deliver on our commitments for 2025. I want to thank our employees, partners and customers for their dedication and trust in ADT I'm proud of our team's performance and excited for the opportunities ahead.

With that, I'll turn the call over to Jeff.

Thanks, Jim, and good morning, everyone. I will take the next few minutes to share some additional details on our third quarter and year-to-date results and our outlook for the rest of the year.

As Jim mentioned, cash flow remains a significant highlight. In the third quarter, we generated $208 million of adjusted free cash flow, including swaps, up 32%, and we have generated $709 million year-to-date, up 36%. Adjusted net income for the quarter was also very strong at $187 million or $0.23 per share. Year-to-date, we have generated adjusted earnings per share of $0.67, up 20%. Adjusted EBITDA for the quarter was $676 million, up 3% in the quarter and up 4% on a year-to-date basis.

This strong performance is driven by revenue growth, the associated margins and our overall efficiency, enabling continued investments for the future while delivering these results. Adjusted earnings per share also benefited from our repurchases enabled by our strong cash generation and our efficient capital structure. On the top line, we delivered total revenue of $1.3 billion in the quarter, up 4%. Monitoring and services revenue was up 2% with an ending RMR balance of $362 million.

Installation revenue was $200 million, up 21% and reflecting our continued mix shift to outright sales at higher average prices as more customers choose our ADT+ offerings. Gross subscriber additions were $210,000 in the quarter, adding $12.5 million in RMR. Our adds were down year-over-year, driven mainly by fewer bulk account purchases, approximately 49,000 accounts last year versus approximately 15,000 this year.

I will note that our third quarter results still include the multifamily business, which we divested on October 1. This business is comprised of customers who own or operate residential rental housing facilities such as apartment complexes. Its characteristics are akin to the commercial business we divested in late 2023, generating meaningfully lower EBITDA and cash flow margins than our core residential subscriber base.

We are consequently pleased with the $56 million sale price for this relatively small portfolio of approximately 200,000 subscribers and $2.6 million in RMR. We have also continued to return significant capital to shareholders while strengthening our balance sheet.

As Jim mentioned, we have returned $746 million so far this year from the repurchase of 78 million shares and our quarterly dividend distribution. We remain very comfortable with our leverage at 2.8x adjusted EBITDA with net debt of $7.5 billion at the end of the third quarter.

In October, we closed on a new 8-year $1 billion bond and a $300 million add-on to our 2032 Term Loan B. We used the proceeds to fully repay our $1.3 billion 2025 Second Lien Notes, which was our most expensive debt. We also closed on a new $325 million term loan A last week with those proceeds designated to repay some of our 2030 Term Loan B and our April 2026 notes.

In all cases, we were able to price the new facilities below the rates of the debt they replaced. Together with transactions from earlier in the year, we have extended almost $2.5 billion of upcoming maturities and lowered our borrowing cost to 4.3%. We also enjoy a continued strong liquidity position with an undrawn $800 million revolving facility and $63 million of cash on hand at the end of the quarter.

I'll close with a couple of comments on our outlook. With 2 months to go, we remain on track to deliver results consistent with the guidance we shared early this year. Reflecting this confidence, we have tightened and adjusted our guidance ranges, largely maintaining prior midpoint. We now expect total revenue of between $5.075 billion and $5.175 billion, with the midpoint consistent with our original guidance.

Our refreshed ranges include slightly higher adjusted EPS midpoint with an offset to the adjusted EBITDA midpoint. This is in consideration of the mix between expense and capitalized SAC and other factors, including a delayed planned legal recovery. We now expect adjusted EPS in the range of $0.85 to $0.89, and we expect adjusted EBITDA to be in the range of $2.665 billion to $2.715 billion.

Finally, we are maintaining our $800 million to $900 million range for adjusted free cash flow, including swaps, as we evaluate a handful of fourth quarter opportunities, including bulk account purchases. In summary, we are very pleased with our progress during the first 3 quarters of 2025. As we look towards the remainder of the year, we are confident in our ability to deliver on our commitments. We remain focused on driving operational efficiency, investing in innovation and generating long-term value for our stakeholders.

Thank you for your continued support. Operator, please open the line for questions.

[Operator Instructions] And your first question comes from the line of Peter Christiansen with Citigroup.

Great to see free cash flow growth really materialize this year, pretty impressive.

Jeff, really 1 question for me, Jeff. I was just wondering, we obviously know next year, a full cash taxpayer, but on the other hand, you've been able to lower the borrowing cost for the company. So I mean, those are pretty important key inputs as we think about 2026 free cash flow. Are there any other areas that we should think about when -- in our modeling, as we look to 2026, any components to free cash flow growth that stand out in your view?

Yes, you hit on the ones that have some dynamics that could cause them to change. So we've had some success managing our cash taxes will end up a little bit better on cash taxes, a couple of benefits from the recent legislation. We've done a really good job with a series of debt transactions, reducing our borrowing cost which makes that less of a challenge next year compared to what we once thought it would be. So we feel really good about our progress.

In 2025, we're on track to achieve our original guidance because of our improvements, we have a lot more flexibility in capital deployment. So while we're not sharing any specific guidance beyond '25 today. This is, of course, the time of the year where we're working on strategic planning and budgeting for next year, ongoing conversation.

With our Board evaluating several really interesting initiatives and opportunities for long-term growth. We continue to believe our stock is undervalued. So we've deployed capital there this year. And we plan to share more in the first part of next year in terms of a broader strategy and longer-range outlook along with our 2026 guidance. But I feel really, really good about where we are in 2025.

And your next question comes from the line of Ashish Sabadra with RBC.

So you mentioned efforts underway to improve retention, I believe, ADT+ and some of the AI initiatives are part of it. But I was just wondering if you could elaborate further on how should we think about some of these initiatives helping retentions going forward?

Sure. Thanks for the question. It's Jim.

I'll give a little bit of color on attrition overall and then talk about a couple of the improvement areas that we're focused on. As I said on the call, we ended the quarter rounding to 13%, up about 13 basis points from last quarter. As a reminder, we achieved record levels earlier this year and expect to drive attrition lower over time. Largely due to tailwinds on customer service and new offerings like ADT+, which should drive -- continue to drive more customer engagement and more usage.

On the quarter itself, the pressure on the quarter came from a couple of areas nonpayment cancels were higher than last year. Voluntary losses were worse than last year and relocation losses were modestly lower than last year.

A couple of areas to -- more specifically to your question, where I think there's cause for optimism. The team stability continues to improve, and more tenured employees perform at higher productivity rates, our customer experience metrics virtually across the board. NPS, customer sat, digital self-service, are all improving and going in the right direction. There's been some excellent improvement on life cycle management, which the team is advancing.

And then from a hardware perspective, ADT+ things like Trusted Neighbor, increased penetration with video, all drive improved usage of our services. And to the extent that usage increases, we know historically that retention improves, the more a customer uses the system, the higher they value it, and the higher retention. So the quarter ended at 13%, we ticked up, but there's a number of initiatives underway that I think long term, bode well for us.

That's great color. And maybe just on the RMR front, we saw some softness there from a growth perspective. How should we think about the puts and takes going forward?

Sure. So at the intersection of attrition being 13 basis points higher and gross adds not being quite where we'd like them to be. RMR ended the quarter less than what we had anticipated.

Our direct organic residential adds were actually up 1% year-over-year, dealer adds were down modestly. DIY, it's a small number, but DIY for us was up 13% year-over-year. The most significant impact on ending RMR for us this quarter from a comparison perspective is that we did a bulk of 15,000 this quarter comparing to 49,000 last year.

So RMR -- ending RMR ended a little lower than anticipated. We have some bulk in the pipeline. We'll be disciplined about pursuing that bulk but that should continue to be a source of growth for us going forward. Thanks for the question.

And one thing I'd add to or just to emphasize is our continued focus on returns and discipline in capital deployment, SAC deployment, especially It's, of course, a very important measure, but we're also focused on profitability, SAC efficiency, cash generation.

So really pleased to be still affirming our guidance that would have our adjusted free cash flow up 14% or 15% at the midpoint after 40%, I think it was a little bit above 40% last year. So as we're balancing all of these objectives, I want to emphasize the progress we made on cash generation.

That's great color. And congrats on good solid top line.

And your next question comes from the line of Manav Patnaik with Barclays.

This is Ronan Kennedy on for Manav.

Can you talk about the portfolio hardware optimization efforts? I believe you indicated not material savings in '25, but a potentially meaningful source of savings into '26. If you could please provide some color of that on that and also the benefits of the remote assistance program and your early AI initiatives, please?

Sure. Ronan, there's a lot packed into that question. I'll go tree tops on each of the 3, and we can go deeper in the after call, if you like.

On the product side, we're working with our ODMs, essentially leveraging our scale and their expertise to drive lower cost manufacturing. And we've had some good progress with ADT+. That now represents something in the neighborhood of 25% of our new sales, we'll continue to expand that to new order types, new channels, but all of the work that our engineering teams are doing with the ODMs are focused on driving down prices.

We'll have a little bit of tailwind. We've had a little bit of tailwind on that front this year. It's not material. But as we continue to expand ADT+ to more and more of our new installations, we'll see more progress on the savings front. AI continue to focus on customer service. We're now expanding into some sales applications, employee productivity. There, too, we've had savings in 2025 and expect that to begin to accelerate in '26 as well.

Chat volumes now 100% AI containments right around 50%. Voice is we're probably in the neighborhood of half of our calls have virtual agent of our voice calls containments flat at just below 20%, but I feel good about what we're doing on the AI front as well.

And then on remote servicing, that's maintained about -- at a level of about 50% of our service calls. And we've plateaued right about there for the last handful of quarters. I think there might be a little bit more improvement there, Ronan, but it's not -- shouldn't be meaningful. We're happy with where we are. The NPS and customer sat scores are very good with remote service. And I would expect that it will maintain right around half of our service costs.

Another, if I may, kind of multifaceted question, but more so on the macro and the strength of the consumer as you see it. I think you said our voluntary disconnects were up. I don't think you commented on nonpay. You also alluded to potential impacts of tariffs and a still higher interest rate environment.

So could we just have your characterization of the macro and the strength of the consumer? And if and how those could potentially impact you achieving your guidance for 4Q are going into '26, please?

Yes. We -- so absolutely. We -- so we reiterated on the guide. So I'd say overall, macro factors included -- we are confident with a couple of months to go that will be in the guide and therefore, reiterated. .

I'll make -- I'll share a couple of comments on attrition and macro overall and then ask Jeff to touch on your question with regard to tariffs. I think generally, Ronan, we're seeing a cautious consumer delinquency is up a bit. Our nonpay cancels, as I mentioned, were higher than last year. it's not meaningfully higher, but it's a number we're paying a lot of attention to.

I think that some of the process changes and collections that our team is making while early bode well for us, and we're definitely not seeing a continued erosion, those elevated nonpay cancels and delinquencies have stayed steady -- elevated but steady.

Another thing worth mentioning, you're pretty familiar with our business when we have relocations down -- the downside is we get fewer bites at the apple from a gross adds perspective, but it is a tailwind for us on attrition. And relocation losses were a bit less Q3 this year than Q3 last year. So overall, taking macro all the macro variables into consideration, I continue to feel good. Jeff continues to feel good about Q4.

Yes. And I'd add on tariffs. The environment has come into a little bit sharper focus, but still not perfect focus, so we continue to work with our vendors to mitigate cost. In some cases, it's negotiations, it's consideration of country of origin shifts, in some cases, nearer term, some cases, longer term, places where we make may make pricing adjustments to our customers.

And then I want to reiterate at the risk of repeating the point that we just feel really good about our ability to deliver our guidance from the beginning of the year. I recall in -- I think it was our first quarter call, noting that we expect the tariffs would put pressure on the midpoint of some of our guidance ranges, but we still would deliver the ranges and you're sitting here today in November, the tariffs have a bit of an effect on EBITDA.

There's a couple of EBITDA things between hitting the P&L and hitting the balance sheet, but we're able to overcome those in a couple offset in EPS. So you took our EPS up a couple of points and -- or a couple of cents, I mean. And then already made the point that we feel really good about our cash generation. So despite some of these uncertainties, our teams have done a really good job managing the puts and takes this year.

And your next question comes from the line of Toni Kaplan with Morgan Stanley.

I first wanted to ask about the lower SAC spend. Was that a deliberate strategy? It makes sense that you wanted to be more disciplined, but I guess, is there anything that sort of drove you to spend less this quarter? Or it just was that the customers that you saw weren't as high quality? Or was it sort of a deliberate you wanted to spend less?

Yes. I would say it's the combination of those things. Navigation of the point I was alluding to earlier, a variety of factors and offsetting directions and our commitment to deliver the guidance we put forth at the beginning of the year.

And the point I mentioned about disciplined and returns oriented in our approach and then maybe worth also mentioning that we do still have a range around our adjusted free cash flow outlook for the full year, even with a couple of months left and part of that is a continued evaluation of SAC and the largest chunks of SAC tend to be bulk account purchases that we will evaluate in the last handful of weeks here.

Great. And then on State Farm, I know you had talked about sort of changing course on the program that was originally rolled out because of this low pace. This one seems more targeted but also sort of more limited. So I guess, like maybe just talk about how did you sort of pick this new target customer base? Were they seeing higher adoption of like higher take rate of the ADT product during the initial phase? Or was there something else?

And I guess in terms of like your cost of this program, I imagine it's probably not that big, but I guess like how do you think about like what you're hoping to get for returns or things like that? And when do you sort of reevaluate on the new pilot.

Thanks for the question, Toni. It's Jim. I'll give a little bit of context on State Farm and then speak to -- speak more directly to your question about the digital program that we're contemplating. .

Our original agreement with State Farm was for a 3-year term. That concluded just this past October. As you know, and as I've mentioned on a few calls, volume has been below what we expected from the partnership. We didn't build meaningful adds into our 2025 budget program to date. We're at around 33,000 subscribers -- 32,000, 33,000 subscribers.

And so we have pivoted to explore a digital solution. This is effectively directed at relocating consumers. We're in the very early days of design. It's not necessarily the last effort trying the traditional distribution with State Farm, but it's a fresh tactic, and we're going to lean in here and see if we can get some traction.

An advantage is that it's in the potential buy flow. And so there's not a reliance on agent execution as there is in the traditional path. This is a digital process directed at relocating customers. I should also mention we're continuing our data sharing program with State Farm, where with customer consent, we share alarm activity at the customer's home with State Farm.

And so we continue to kick tires on that front to see if there's a source of value. But back again on your original question about the advantage of the digital program, I would say, is that it's included in the buy flow, a more natural process and one we hope we get better traction with.

And your next question comes from the line of George Tong with Goldman Sachs.

You outlined various drivers to improve your attrition rates. Can you talk about how long you think it might take for those improvements to materialize and drive year-over-year improvements in attrition?

Thanks for the question, George. I think that it's probably Q1, Q2 of next year. The -- It takes a little bit of time to bake on the NPS improvements. The digital self-service continues to get really good traction. We're better than ever at meeting customers where they choose to interact with us. So we're expanding the digital platforms.

There are some really interesting work that we're doing, leveraging AI to drive satisfaction. But I think it's a quarter or 2 before we start to see some improvement. I think the voluntary losses -- I anticipate voluntary losses will be the first to improve. And I'd mentioned earlier on our nonpayment cancels, there's been some process improvement on collections, where we essentially are dialing up our contact rates with delinquent customers and having some success there. And I'd expect some nonpay improvement as well.

That, of course, is pretty significantly influenced by the macro environment, so a little more difficult to predict. But I think our internal processes and the improvement we're making bode well for us, say, Q1, Q2.

And one other thing I'd add too is we made some adjustments and fine-tuning to our underwriting processes to whom we extend how much credit earlier in the year that we expect will have some benefit, but it also takes a few months to work its way through the system.

Got it. That's helpful. And you mentioned earlier, continuing to opportunistically pursue bulk account purchases. Can you remind us what's embedded in the guide in the full year with respect to future bulk account purchases? And what current economics look like with purchases?

Let's tag team on this one, Jeff. So I'll give you a little bit of color and Jeff will as well, George.

So we've got some bulk in the pipeline now. We -- as you know, we'll stay disciplined. We won't chase these bulks. We don't want ads just for the sake of ads. So if we can't get to the economics that we target. We won't pursue them. But there's 2 or 3 sizable bulk opportunities available to us. We're evaluating those. We may end up executing one in the fourth quarter.

And that, I think Jeff mentioned earlier, is largely the reason why we left the free cash flow guide wide. We tightened revenue, EBITDA and EPS, but left adjusted free cash flow at the $800 million to $900 million to in to -- principally to have the flexibility to pursue 1 of these bulks in Q4 if the economics work out.

Yes, I don't have a whole lot to add. Similar to Toni's question and even in the third quarter, as Jim had noted, one of the drivers that I noted also in the prepared remarks, that one of the drivers year-on-year was less bulk in the third quarter.

So of course, that led to less SACs spanning on those bulks. We're evaluating these in the fourth quarter. I'll just be echoing Jim's point about that. That's why the range is a bit wider than some of the other ranges.

And your next question comes from the line of Ashish Sabadra.

Just 1 quick question on capital allocation. You've been very opportunistic with the share repurchases. Can you just remind us how much more authorization do you have in place? And also from a liquidity perspective, can you talk about your opportunity to continue to do more opportunistic share repurchases going forward?

Yes, sure. So the authorization from the beginning of this year, we have fully consumed. So that was $500 million authorization. We also had another a little bit more than $100 million of repurchases in January under the prior year's authorization. In terms of capacity, we have access to our revolving facility.

As I noted, we feel really good about the debt transactions we've been able to undertake, including refinancing our most expensive debt just in the last couple of weeks. We also recently issued a term loan A. We used $200 million of those proceeds to repay our older, more expensive term loan B -- the 2030 Term Loan B. But we do have some of that cash still available. It's earmarked for debt repayment.

But from a liquidity perspective, as we sit here today, we have liquidity available. And as I already alluded to, significant flexibility. Our next upcoming maturity is $300 million on our April 2026 notes and we feel very confident we can manage that maturity and have some capital available for share repurchases, if there's a good opportunity or M&A or SAC or any of the other capital allocation priorities we've talked about.

There's no further questions at this time. I will now turn the call back over to Jim DeVries for closing remarks. Jim?

Thank you, Mark, and thanks, everyone, for taking the time to join us today. We look forward to finishing the year strong. We remain confident in achieving our financial commitments for 2025. I'd like to extend my appreciation to our employees and our dealer partners. Thanks again, everyone, and have a great day.

This concludes today's call. You may now disconnect.