As we reported earlier this morning, its downsized 105.0 million share IPO priced at $14, well below the $17-$19 expected price range. The deal was originally expected to consist of 111.1 million shares. So, in total, its IPO raised $1.47 billion in gross proceeds, about $530 million less than anticipated. With a mountain of debt on its books ($10.4 billion), due to it being taken private in 2016 by Apollo Management, ADT certainly could have used that capital to pay down more of its debt.
The silver lining, however, could be that the lower valuation will lure more investors in when it begins trading later this morning on the NYSE. At $14 per share, its market cap now stands at $10.57 billion, giving it an estimated P//Adj EBITDA of roughly 4.5x FY17 figures.
Handling about 15 million alarms annually, ADT is the well-known provider of monitored home and business security systems. It is by far the leader in security monitoring, approximately six times the size of the next largest competitor (Vivent) in the residential market. The company offers customers in the U.S. and Canada a set of burglary, video, access control, fire and smoke alarm, and medical alert products.
It also provides interactive smart-home technology that control access, react to movement, and sense carbon monoxide, flooding, and changes in temperature, as well as address personal emergencies. Through "ADT Pulse", customers can access these features through their smart phones, tablets, and laptops.
ADT's business model is characterized by recurring revenue. Specifically, over 90% of its revenue is recurring from contractually-committed monthly payments under terms that are generally three to five years. Also, after being taken private, ADT's operating metrics improved, including a reduction in customer revenue attrition from 16.5% to 13.9% and a reduction in customer revenue payback period to 2.5 years from 2.7 years.
In its IPO prospectus, ADT provided some preliminary results for FY17. Specifically, it guided for revenue of $4.26-$4.32 billion, which would equate to year/year growth of 8.6%, at the mid-point. It did not provide an estimate for operating income, but, it did project Adj. EBITDA of $2.33-$2.37 billion, up 7.8% year/year. Also, it says that gross customer revenue attrition came in at 13.6-13.8%, which is an improvement over FY16's 14.8% mark.
Taking a look at its actual results for the nine months ended September 30, 2017, revenue increased by 3% year/year on a Pro Forma basis to $3.2 billion. Operating Income, however, decreased by 39% to $187.4 million. But, it's not as bad as it seems, because, most of this decrease is attributable to non-cash depreciation and intangible asset amortization, which climbed by 20% to $1.39 billion.
Furthermore, Adjusted EBITDA increased by 8% to $1.75 billion and the company generated $228.4 million in free cash flow for the nine months ended September 30, 2017.
The most obvious knock on ADT's financials is the mountain of debt it is carrying, at a staggering $10.4 billion.