ADT Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. INTRODUCTION The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Annual Report”), which was filed with the United States (“U.S.”) Securities and Exchange Commission (the “SEC”) on February 25, 2021, to obtain a more comprehensive understanding of our financial condition, changes in financial condition, and results of operations. The following discussion and analysis contains forward-looking statements about our business, operations, and financial performance based on current plans and estimates that involve risks, uncertainties, and assumptions. Actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause such differences are discussed in the sections of this Quarterly Report on Form 10-Q titled “Cautionary Statements Regarding Forward-Looking Statements” and “Item 1A. Risk Factors.” OVERVIEW ADT Inc., together with its wholly-owned subsidiaries (collectively, the “Company,” “we,” “our,” “us,” and “ADT”), is a leading provider of security, automation, and smart home solutions serving consumers and businesses in the U.S. We offer many ways to help protect and connect customers by providing 24/7 professional monitoring services as well as delivering lifestyle-driven solutions through professionally installed, do-it-yourself (“DIY”), mobile, and digital-based offerings for residential, small business, and larger commercial customers. We are one of the largest full-service security and home automation companies with a national footprint, and we deliver an integrated customer experience by maintaining the industry’s largest sales, installation, and service field force, as well as a 24/7 professional monitoring network. As of June 30, 2021, we served approximately 6.6 million recurring customers, excluding contracts monitored but not owned. Our security and automation offerings involve the sale, installation, and monitoring of security and premises automation systems designed to detect intrusion; control access; sense movement, smoke, fire, carbon monoxide, flooding, temperature, and other environmental conditions and hazards; and address personal emergencies, such as injuries, medical emergencies, or incapacitation. Upon the occurrence of certain initiating events, monitored security systems send event-specific signals to our monitoring centers. According to the type of service contract and customer preference, our monitoring center personnel respond to alarms by relaying appropriate information to first responders, such as local police, fire departments, or medical emergency response centers; the customer; or others on the customer’s emergency contact list. We continue to invest and innovate in our alarm verification technologies as well as partner with industry associations and various first responder agencies to help prioritize response events and enhance response policies. The breadth of our solutions allows us to meet a wide variety of customer needs. The vast majority of our new customers enroll in our interactive and smart home solutions, which allow our customers to remotely monitor and manage their environments. Depending on the service plan and type of product installation, customers are able to remotely access information regarding the security of their residential or commercial environment, arm and disarm their security systems, adjust lighting or thermostat levels, monitor and react to defined events, or view real-time video from cameras covering different areas of their premises through a customized web portal from web-enabled devices (such as smart phones, laptops, and tablet computers). Additionally, our interactive and smart home solutions enable customers to create customized and automated schedules for managing connected devices such as lights, thermostats, appliances, garage doors, and cameras. These systems can also be programmed to perform additional functions such as recording and viewing live video and sending text messages or other alerts based on triggering events or conditions. As part of our product innovation, we are extending the concept of security from the physical home or business to personal on-the-go security and safety with SoSecure, our mobile safety application, and other offerings. Our technology allows us to integrate with various third-party connected and wearable devices enabling us to serve our customers whether they are at home or on-the-go. Customers’ increasingly mobile and active lifestyles have also created new opportunities for us in the fast-growing market for self-monitored DIY products and mobile technology. Additionally, we offer personal emergency response system products and services that are supported by our monitoring centers and utilize our security monitoring infrastructure to provide customers with solutions helping to sustain independent living and encourage better self-care activities. BASIS OF PRESENTATION All financial information presented in this section has been prepared in U.S. dollars in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and includes the accounts of ADT Inc. and its wholly-owned subsidiaries. All intercompany transactions have been eliminated. 27 Segment Change Effective in the first quarter of 2021, the manner in which our Chief Executive Officer, who is the chief operating decision maker (the “CODM”), evaluates performance and makes decisions about how to allocate resources changed. Therefore, we now report results in two operating and reportable segments, Consumer and Small Business (“CSB”) and Commercial, rather than a single operating and reportable segment. Where applicable, prior periods have been retrospectively adjusted to reflect the new operating and reportable segment structure. We organize our segments based on customer type as follows: • Consumer and Small Business (CSB) - Customers in our CSB segment are comprised of residential homeowners, small business operators, and other individual consumers. Our CSB segment primarily includes (i) revenue and operating costs from the sale, installation, servicing, and monitoring of integrated security and automation systems, as well as other offerings such as mobile security and home health solutions; (ii) other operating costs associated with support functions related to these operations; and (iii) general corporate costs and other income and expense items not included in the Commercial segment. Results for our Canadian operations prior to its sale in the fourth quarter of 2019 are included in the CSB segment based on the primary customer market served in Canada. • Commercial - Customers in our Commercial segment are comprised of larger businesses with more expansive facilities (typically larger than 10,000 square feet) and/or multi-site operations, which often require more sophisticated integrated solutions. Our Commercial segment primarily includes (i) revenue and operating costs from the sale, installation, servicing, and monitoring of integrated security and automation systems, fire detection and suppression systems, and other related offerings; (ii) other operating costs associated with support functions related to these operations; and (iii) dedicated corporate and other costs. Our CODM uses Adjusted EBITDA, which is the segment profit measure, to evaluate segment performance. Our definition of Adjusted EBITDA, a reconciliation of Adjusted EBITDA to net loss, and additional information, including a description of the limitations relating to the use of Adjusted EBITDA, are provided under “—Non-GAAP Measures.” FACTORS AFFECTING OPERATING RESULTS Our subscriber-based offerings require significant upfront investment to generate new customers, which in turn provide predictable recurring revenue generated from our monitoring and other services. In order to optimize returns on customer acquisitions and cash flow generation, we focus on the following key drivers of our business: disciplined, high-quality customer additions; efficient customer acquisition; best-in-class customer service; customer retention; and costs incurred to provide ongoing services to customers. Our ability to add new customers depends on the overall demand for our products and services, which is driven by a number of external factors. The overall economic condition in the geographies in which we operate can impact our ability to attract new customers and grow our business in all customer channels. Growth in our residential customer base can be influenced by the overall state of the housing market. Growth in our commercial customer base can be influenced by the rate at which new businesses are formed or existing businesses grow. The demand for our products and services is also impacted by the perceived threat of crime, as well as the price and quality of our offerings compared to our competitors. Monthly fees generated from any individual customer vary based on the level of service provided and customer tenure. We offer a wide range of services at various price points from basic burglar alarm monitoring to our full suite of interactive services, as well as our fire detection and suppression systems and other Commercial offerings. Our ability to increase monthly fees at the individual customer level depends on a number of factors, including our ability to effectively introduce and market additional features and services that increase the value of our offerings, which we believe drives customers to purchase higher levels of service and supports our ability to make periodic adjustments to pricing. In addition, we may experience an increase in costs associated with offering a wider variety of products and services, as well as an increase in costs associated with providing more interactive services. A portion of our customer base can be expected to cancel its service every year. Customers may choose not to renew or may terminate their contracts for a variety of reasons, including relocation, cost, loss to competition, or service issues. Attrition has a direct impact on our financial results, including revenue, operating income, and cash flows. 28 COVID-19 Pandemic During March 2020, the World Health Organization declared the outbreak of a novel coronavirus as a pandemic (the “COVID-19 Pandemic”). While responses have varied by individuals, businesses, and state and local municipalities, the COVID-19 Pandemic has had certain notable adverse impacts on general economic conditions, including the temporary closures of many businesses, increased governmental regulations, supply chain disruptions, and changes in consumer spending due to significant unemployment and other effects attributable to the COVID-19 Pandemic. In order to continue to both protect our employees and serve our customers, we have adjusted and are continuously evolving certain aspects of our operations, such as (i) detailed protocols for infectious disease safety for employees, (ii) employee daily wellness checks, and (iii) certain work from home actions, including for the majority of our call center professionals. While the COVID-19 Pandemic has impacted our commercial businesses to a greater extent than our residential businesses, we believe our overall recurring revenue and highly variable subscriber acquisition cost model provides a solid financial foundation for strong cash flow generation. Accordingly, during the challenging macroeconomic environment brought on by the COVID-19 Pandemic, we anticipate maintaining sufficient liquidity and capital resources to continue (i) providing essential services, (ii) satisfying our debt requirements, and (iii) having the ability to return capital to our stockholders in the form of a regular quarterly dividend. We have not sought or requested government assistance as a result of the COVID-19 Pandemic, but we did experience a favorable cash flow impact and other benefits associated with certain income tax and payroll tax provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). While we have incurred additional costs associated with providing personal protective equipment for our employees and implementing certain work from home actions, we also instituted various cost control measures. Furthermore, we believe uncertainties around the economic environment and COVID-19 Pandemic increase consumer and business awareness of the need for security. In 2020, we experienced a lower volume of customer relocations and used temporary pricing and retention initiatives for existing customers, which we believe helped counterbalance any increase in gross customer revenue attrition as a result of changes in consumer or business spending caused by the COVID-19 Pandemic. As the economic environment continues to evolve in response to the COVID-19 Pandemic, we may continue to experience an increase in the number of relocations or other factors, which could impact our results including gross customer revenue attrition. In addition, we believe the COVID-19 Pandemic affected the seasonal trends we have historically experienced with respect to residential customers. Prior to 2020, new customer additions and our disconnect rates have typically been higher during the second and third calendar quarters of each year relative to the first and fourth quarters. Several factors, including the timing of household moves, caused deviations in these trends during 2020. We are currently unable to determine the ongoing impact the COVID-19 Pandemic will have on our seasonality, and we may experience fluctuations in certain trends in the future. We considered the on-going and pervasive economic impact of the COVID-19 Pandemic in our assessment of our financial position, results of operations, cash flows, and certain accounting estimates as of and for the three and six months ended June 30, 2021. Due to the evolving and uncertain nature of the COVID-19 Pandemic, it is possible that its effects could materially impact our estimates and financial results in future reporting periods. Radio Conversion Costs During 2019, we commenced a program to replace 3G and Code-Division Multiple Access (“CDMA”) cellular equipment used in many of our security systems as a result of the 3G and CDMA cellular network providers notifying us that they will be retiring their 3G and CDMA networks during 2022. We estimate that we will incur between $250 million to $300 million of net costs over the course of the program, which consists of costs, net of any revenue we collect from customers, associated with these radio replacements and cellular network conversions. From inception of this program through June 30, 2021, we have incurred $196 million of net costs, of which $119 million was incurred during the six months ended June 30, 2021. We seek to minimize these costs by converting customers during routine service visits whenever possible. However, the replacement program and pace of replacement are subject to change and may be influenced by our ability to access customer sites due to the COVID-19 Pandemic; cost-sharing opportunities with suppliers, carriers, and customers; and the extent to which we are able to implement our Cell Bounce solution, as described below. As of June 30, 2021, we provided services to approximately 800 thousand customer sites that transmit signals via 3G or CDMA networks, of which approximately 80% have sunset dates in early 2022. Given the current network retirement dates, we estimate that we will incur most of the remaining costs during 2021, and we expect to continue to collect a portion of the incremental revenue thereafter. During November 2020, we acquired Cell Bounce, a technology company with proprietary radio conversion technology in the form of a user-installable device, which was intended to facilitate the transition of customers on 3G networks in a cost efficient and timely manner. However, as a result of recent worldwide shortages for certain electronic components, we expect to 29 continue to replace 3G radios primarily using traditional methods, and we will use Cell Bounce product to complement these traditional methods to the extent possible. Google Commercial Agreement In 2020, we entered into a Master Supply, Distribution, and Marketing Agreement (the “Google Commercial Agreement”) with Google LLC (“Google”), pursuant to which Google has agreed to supply us with certain Google devices, as well as certain Google video and analytics services (“Google Services”), for sale to our customers. The Google Commercial Agreement also sets forth certain termination rights of the parties, certain exclusivity obligations of the Company in favor of Google, and certain other rights and obligations of the parties, all as described in our public filings with the SEC. The Google Commercial Agreement further specifies that each party will contribute $150 million towards the joint marketing of devices and services; customer acquisition; training of our employees on the sales, installation, customer service, and maintenance of the product and service offerings; and technology updates for products included in such offerings. Each party is required to contribute such funds in three equal tranches, subject to the attainment of certain milestones. Next Generation Platform In November 2020, we announced the ongoing development of our ADT-owned next generation professional security and automation technology platform, which is currently being developed in coordination with Google. Our comprehensive interactive platform is expected to provide customers with a seamless experience across security, life safety, automation, and analytics through a common application. Additionally, our platform is expected to integrate the user experience, customer service experience, and back-end support. We expect to incur costs of approximately $50 million associated with the development of our next generation platform in 2021. These initiatives are in the early stages, and it is possible that we could experience a material increase in the related costs. SIGNIFICANT EVENTS The comparability of our results of operations has been impacted by the following events: Revenue Model Initiative and Equipment Ownership Model Change During February 2020, we launched a new revenue model initiative for certain residential customers, which (i) revised the amount and nature of fees due at installation, (ii) introduced a 60-month monitoring contract option, and (iii) introduced a new retail installment contract option that allows qualifying residential customers to pay the fees due at installation over a 24-, 36-, or 60-month interest-free period. Due to the requirements of our initial third-party consumer financing program, we also transitioned our security system ownership model from a predominately Company-owned model to a predominately customer-owned model (the “Equipment Ownership Model Change”). During March 2020, we entered into an uncommitted receivables securitization financing agreement (the “Receivables Facility”), which allowed us to receive financing secured by retail installment contract receivables from transactions under a customer-owned model. During April 2020, we amended the Receivables Facility to also permit financing secured by retail installment contract receivables from transactions occurring under a Company-owned model. As a result, we began transitioning our security system ownership model to a predominately Company-owned model in May 2020. In addition, our residential transactions included a temporary increase in transactions sold under a customer-owned model as a result of, and subsequent to, the acquisition of Defender Holdings, Inc. (“Defenders”) (the “Defenders Acquisition”) in January 2020. Since March 2021, substantially all new residential transactions take place under a Company-owned model. The transition to a predominately Company-owned model is expected to continue to impact our results of operations and cash flow presentation during 2021 compared to 2020 due to different accounting policies applicable to a Company-owned model versus a customer-owned model. We cannot be certain that our revenue model initiative, as described above, or the transition to a predominately Company-owned model, will achieve the desired outcomes. Accordingly, these actions could have a material adverse effect on our business, financial condition, results of operations, cash flows, and key performance indicators. 30 KEY PERFORMANCE INDICATORS In evaluating our results, we utilize key performance indicators, which include non-GAAP measures as well as certain other operating metrics such as recurring monthly revenue and gross customer revenue attrition. Our computations of key performance indicators may not be comparable to other similarly titled measures reported by other companies. Additionally, our operating metric key performance indicators are approximated as there may be variations to reported results in each period due to certain adjustments we might make in connection with the integration over several periods of acquired companies that calculated these metrics differently, or otherwise, including periodic reassessments and refinements in the ordinary course of business. These refinements, for example, may include changes due to systems conversions or historical methodology differences in legacy systems. Recurring Monthly Revenue (“RMR”) RMR is generated by contractual recurring fees for monitoring and other recurring services provided to our customers. We believe the presentation of RMR is useful because it measures the volume of revenue under contract at a given point in time. Gross Customer Revenue Attrition A portion of our customer base can be expected to cancel its service every year. Customers may choose not to renew or may terminate their contracts for a variety of reasons, including relocation, cost, loss to competition, or service issues. Gross customer revenue attrition has a direct impact on our financial results, including revenue, operating income, and cash flows. Gross customer revenue attrition is defined as RMR lost as a result of customer attrition, net of dealer charge-backs and reinstated customers, excluding contracts monitored but not owned and DIY customers. Customer sites are considered canceled when all services are terminated. Dealer charge-backs represent customer cancellations charged back to the dealers because the customer canceled service during the charge-back period, which is generally thirteen months. Gross customer revenue attrition is calculated on a trailing twelve-month basis, the numerator of which is the RMR lost during the period due to attrition, net of dealer charge-backs and reinstated customers, excluding contracts monitored but not owned and DIY customers, and the denominator of which is total annualized RMR based on an average of RMR under contract at the beginning of each month during the period. Adjusted EBITDA Adjusted EBITDA is a non-GAAP measure that we believe is useful to investors to measure the operational strength and performance of our business. Our definition of Adjusted EBITDA, a reconciliation of Adjusted EBITDA to net loss (the most comparable GAAP measure), and additional information, including a description of the limitations relating to the use of Adjusted EBITDA, are provided under “—Non-GAAP Measures.” 31 RESULTS OF OPERATIONS Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020 The following table presents our condensed consolidated results of operations and key performance indicators: (in thousands, except as otherwise indicated) Three Months Ended Results of Operations: June 30, 2021 June 30, 2020 $ Change Monitoring and related services $ 1,083,520 $ 1,041,379 $ 42,141 Installation and other 220,897 290,008 (69,111) Total revenue 1,304,417 1,331,387 (26,970) Cost of revenue (exclusive of depreciation and amortization shown separately below) 381,585 376,347 5,238 Selling, general, and administrative expenses 445,636 414,711 30,925 Depreciation and intangible asset amortization 474,271 477,869 (3,598) Merger, restructuring, integration, and other 4,804 12,038 (7,234) Operating (loss) income (1,879) 50,422 (52,301) Interest expense, net (166,525) (187,265) 20,740 Loss on extinguishment of debt — — — Other income 1,533 2,271 (738) Loss before income taxes (166,871) (134,572) (32,299) Income tax benefit 41,021 27,831 13,190 Net loss $ (125,850) $ (106,741) $ (19,109) Key Performance Indicators: (1) RMR $ 352,428 $ 338,780 $ 13,648 Gross customer revenue attrition (percent) 13.3 % 13.1 % N/A Adjusted EBITDA (2) $ 541,865 $ 563,110 $ (21,245) _______________________ (1) Refer to the “—Key Performance Indicators” section for the definitions of these key performance indicators. (2) Adjusted EBITDA is a non-GAAP measure. Refer to the “—Non-GAAP Measures” section for the definition of this term and reconciliation to the most comparable GAAP measure. N/A—Not applicable. Monitoring and Related Services Revenue (“M&S Revenue”) The following table presents M&S Revenue in total and by segment: Three Months Ended (in thousands) June 30, 2021 June 30, 2020 $ Change CSB $ 965,233 $ 935,957 $ 29,276 Commercial 118,287 105,422 12,865 Total M&S Revenue $ 1,083,520 $ 1,041,379 $ 42,141 The increase in total M&S Revenue was primarily attributable to higher recurring revenue in CSB, which was driven by (i) improvements in average pricing as new and existing customers selected higher priced interactive and other services and (ii) an increase in the number of customers over the period primarily due to a higher volume of dealer-generated and bulk account purchases. The increase in Commercial was driven by higher recurring revenue primarily due to an increase in the number of customers over the period, including the acquisition of businesses and customer accounts and improvements in customer retention. Refer to the discussion below under “—M&S Revenue” for the six months ended June 30, 2021 compared to 2020 for changes in RMR and gross customer revenue attrition. 32 Installation and Other Revenue The following table presents installation and other revenue in total and by segment: Three Months Ended (in thousands) June 30, 2021 June 30, 2020 $ Change CSB $ 57,414 $ 166,229 $ (108,815) Commercial 163,483 123,779 39,704 Total installation and other revenue $ 220,897 $ 290,008 $ (69,111) Total installation and other revenue decreased primarily due to a lower volume of outright sales transactions in CSB, driven by our transition to a predominately Company-owned model, partially offset by an increase in the current period in outright sales transactions in Commercial as compared to the prior period that was impacted by the COVID-19 Pandemic, as well as from acquisitions. Cost of Revenue The following table presents cost of revenue in total and by segment: Three Months Ended (in thousands) June 30, 2021 June 30, 2020 $ Change CSB $ 187,766 $ 215,301 $ (27,535) Commercial 193,819 161,046 32,773 Total cost of revenue $ 381,585 $ 376,347 $ 5,238 Total cost of revenue remained relatively flat year over year and included a decrease in CSB offset by an increase in Commercial. The decrease in CSB was primarily driven by a decrease in installation costs due to a lower volume of outright sales transactions as a result of our transition to a predominately Company-owned model. The decrease was partially offset by higher field service and call center costs primarily due to an increase in service ticket and call volume as compared to the prior period that was impacted by the COVID-19 Pandemic. The increase in Commercial was driven by an increase in installation costs in the current period as compared to the prior period that was impacted by the COVID-19 Pandemic, partially offset by cost savings initiatives. Selling, General, and Administrative Expenses The increase in selling, general, and administrative expenses was primarily driven by: • increases in radio conversion costs of $57 million primarily related to an increase in the number of conversions of customers in our CSB segment; • decreases in the provision for credit losses of $18 million and $4 million in our CSB and Commercial segments, respectively, primarily due to the impact of the COVID-19 Pandemic in the prior year; and • decreases in share-based compensation, as well as lower selling costs (primarily commissions) partially offset by an increase in amortization of deferred subscriber acquisition costs. Interest Expense, net The decrease in interest expense, net, was primarily driven by an unrealized loss of $14 million on interest rate swaps contracts not designated as cash flow hedges during the three months ended June 30, 2021, as compared to an unrealized loss of $28 million during the prior period. Income Tax Benefit Income tax benefit for the three months ended June 30, 2021 was $41 million, resulting in an effective tax rate for the period of 24.6%. The effective tax rate primarily represents the federal statutory rate of 21.0%, a state statutory tax rate, net of federal benefits, of 2.8%, and a 0.6% favorable impact from prior year tax return adjustments. 33 Income tax benefit for the three months ended June 30, 2020 was $28 million, resulting in an effective tax rate for the period of 20.7%. The effective tax rate primarily represents the federal statutory rate of 21.0%, a state statutory tax rate, net of federal benefits, of 2.9%, a 9.7% unfavorable impact from non-deductible charges primarily due to the Defenders Acquisition, partially offset by a 6.7% favorable impact related to a decrease in unrecognized tax benefits. The effective tax rate can vary from period to period due to permanent tax adjustments, discrete items such as the settlement of income tax audits and changes in tax laws, as well as recurring factors such as changes in the overall state tax rate. Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020 The following table presents our condensed consolidated results of operations and key performance indicators: (in thousands, except as otherwise indicated) Six Months Ended Results of Operations: June 30, 2021 June 30, 2020 $ Change Monitoring and related services $ 2,146,286 $ 2,087,336 $ 58,950 Installation and other 462,835 613,803 (150,968) Total revenue 2,609,121 2,701,139 (92,018) Cost of revenue (exclusive of depreciation and amortization shown separately below) 762,751 784,333 (21,582) Selling, general, and administrative expenses 895,238 868,015 27,223 Depreciation and intangible asset amortization 944,080 966,893 (22,813) Merger, restructuring, integration, and other 25,311 120,832 (95,521) Operating loss (18,259) (38,934) 20,675 Interest expense, net (214,249) (412,632) 198,383 Loss on extinguishment of debt (156) (65,843) 65,687 Other income 3,336 4,580 (1,244) Loss before income taxes (229,328) (512,829) 283,501 Income tax benefit 55,584 105,795 (50,211) Net loss $ (173,744) $ (407,034) $ 233,290 Key Performance Indicators: (1) RMR $ 352,428 $ 338,780 $ 13,648 Gross customer revenue attrition (percent) 13.3% 13.1% N/A Adjusted EBITDA (2) $ 1,083,996 $ 1,102,599 $ (18,603) _______________________ (1) Refer to the “—Key Performance Indicators” section for the definitions of these key performance indicators. (2) Adjusted EBITDA is a non-GAAP measure. Refer to the “—Non-GAAP Measures” section for the definition of this term and a reconciliation to the most comparable GAAP measure. N/A—Not applicable. Monitoring and Related Services Revenue The following table presents M&S Revenue in total and by segment: Six Months Ended (in thousands) June 30, 2021 June 30, 2020 $ Change CSB $ 1,916,481 $ 1,873,989 $ 42,492 Commercial 229,805 213,347 16,458 Total M&S Revenue $ 2,146,286 $ 2,087,336 $ 58,950 The increase in total M&S Revenue was primarily attributable to higher recurring revenue in CSB, which was driven by (i) improvements in average pricing as new and existing customers selected higher priced interactive and other services and (ii) an increase in the number of customers over the period primarily due to a higher volume of dealer-generated and bulk account purchases. The increase in Commercial was driven by higher recurring revenue primarily due to an increase in the number of customers over the period, including the acquisition of businesses and customer accounts and improvements in customer retention. 34 Total RMR was $352 million and $339 million as of June 30, 2021 and 2020, respectively. The increase in RMR was primarily due to improvements in average pricing and net customer additions. Gross customer revenue attrition was 13.3% and 13.1% as of June 30, 2021 and 2020, respectively. The increase in gross customer revenue attrition was attributable to a lower volume of dealer charge-backs primarily related to the Defenders Acquisition in 2020 and an increase in relocations, partially offset by fewer non-payment disconnects and the benefit of customer retention initiatives. Installation and Other Revenue The following table presents installation and other revenue in total and by segment: Six Months Ended (in thousands) June 30, 2021 June 30, 2020 $ Change CSB $ 144,771 $ 339,364 $ (194,593) Commercial 318,064 274,439 43,625 Total installation and other revenue $ 462,835 $ 613,803 $ (150,968) Total installation and other revenue decreased primarily due to a lower volume of outright sales transactions in CSB, driven by our transition to a predominately Company-owned model, partially offset by an increase in the current period in outright sales transactions in Commercial as compared to the prior period that was impacted by the COVID-19 Pandemic, as well as from acquisitions. Cost of Revenue The following table presents cost of revenue in total and by segment: Six Months Ended (in thousands) June 30, 2021 June 30, 2020 $ Change CSB $ 381,137 $ 440,302 $ (59,165) Commercial 381,614 344,031 37,583 Total cost of revenue $ 762,751 $ 784,333 $ (21,582) The decrease in total cost of revenue was primarily attributable to CSB partially offset by an increase in Commercial. The decrease in CSB was primarily driven by a decrease in installation costs due to a lower volume of outright sales transactions as a result of our transition to a predominately Company-owned model. The decrease was partially offset by higher field service and call center costs primarily due to an increase in service ticket and call volume as compared to the prior period that was impacted by the COVID-19 Pandemic. The increase in Commercial was driven by an increase in installation costs in the current period as compared to the prior period that was impacted by the COVID-19 Pandemic, partially offset by cost savings initiatives. Selling, General, and Administrative Expenses The increase in selling, general, and administrative expenses was driven by: • increases in radio conversion costs of $111 million primarily related to an increase in the number of conversions of customers in our CSB segment; • decreases in the provision for credit losses of $39 million and $15 million in our CSB and Commercial segments, respectively, primarily due to the impact of the COVID-19 Pandemic in the prior year; and • decreases in share-based compensation, as well as lower selling costs (primarily commissions) partially offset by an increase in amortization of deferred subscriber acquisition costs. Depreciation and Intangible Asset Amortization The decrease in depreciation and intangible asset amortization expense was primarily due to decreases related to contracts and related customer relationships and subscriber system assets. 35 Merger, Restructuring, Integration, and Other During the six months ended June 30, 2021, merger, restructuring, integration, and other primarily included an $18 million impairment charge due to lower than expected benefits from the Cell Bounce developed technology intangible asset as a result of recent worldwide shortages for certain electronic components. During the six months ended June 30, 2020, merger, restructuring, integration, and other primarily included losses of $81 million associated with the settlement of a pre-existing relationship in connection with the Defenders Acquisition and $12 million due to fair value remeasurements on a strategic investment. During the six months ended June 30, 2021 and 2020, amounts included in merger, restructuring, integration, and other primarily related to our CSB segment. Interest Expense, net The decrease in interest expense, net, was primarily driven by an unrealized gain of $92 million on interest rate swap contracts not designated as cash flow hedges during the six months ended June 30, 2021, as compared to an unrealized loss of $98 million during the prior year. Loss on Extinguishment of Debt During the six months ended June 30, 2020, loss on extinguishment of debt totaled $66 million and related to the call premium and write-off of unamortized deferred financing costs in connection with the $1.2 billion redemption of second lien notes in February 2020. Income Tax Benefit Income tax benefit for the six months ended June 30, 2021 was $56 million, resulting in an effective tax rate for the period of 24.2%. The effective tax rate primarily represents the federal statutory rate of 21.0%, a state statutory tax rate, net of federal benefits, of 2.8%, and a 1.0% favorable impact of share-based compensation. Income tax benefit for the six months ended June 30, 2020 was $106 million, resulting in an effective tax rate for the period of 20.6%. The effective tax rate primarily represents the federal income tax rate of 21.0%, a state statutory tax rate, net of federal benefits, of 3.0%, a 2.8% unfavorable impact from non-deductible charges primarily due to the Defenders Acquisition, and a 1.3% unfavorable impact from an increase in valuation allowances primarily due to tax credits not expected to be utilized prior to expiration. The effective tax rate can vary from period to period due to permanent tax adjustments, discrete items such as the settlement of income tax audits and changes in tax laws, as well as recurring factors such as changes in the overall state tax rate. NON-GAAP MEASURES To provide investors with additional information in connection with our results as determined in accordance with GAAP, we disclose Adjusted EBITDA as a non-GAAP measure. This measure is not a financial measure calculated in accordance with GAAP, and it should not be considered as a substitute for net income, operating income, or any other measure calculated in accordance with GAAP, and may not be comparable to similarly titled measures reported by other companies. Adjusted EBITDA We believe that the presentation of Adjusted EBITDA is appropriate to provide additional information to investors about our operating profitability adjusted for certain non-cash items, non-routine items that we do not expect to continue at the same level in the future, as well as other items that are not core to our operations. Further, we believe Adjusted EBITDA provides a meaningful measure of operating profitability because we use it for evaluating our business performance, making budgeting decisions, and comparing our performance against that of other peer companies using similar measures. We define Adjusted EBITDA as net income or loss adjusted for (i) interest, (ii) taxes, (iii) depreciation and amortization, including depreciation of subscriber system assets and other fixed assets and amortization of dealer and other intangible assets, (iv) amortization of deferred costs and deferred revenue associated with subscriber acquisitions, (v) share-based compensation expense, (vi) merger, restructuring, integration, and other, (vii) losses on extinguishment of debt, (viii) radio conversion costs, net, (ix) financing and consent fees, (x) acquisition related adjustments, and (xi) other charges and non-cash items. 36 There are material limitations to using Adjusted EBITDA. Adjusted EBITDA does not take into account certain significant items, including depreciation and amortization, interest, taxes, and other adjustments which directly affect our net income or loss. These limitations are best addressed by considering the economic effects of the excluded items independently and by considering Adjusted EBITDA in conjunction with net income or loss as calculated in accordance with GAAP. Adjusted EBITDA The table below reconciles Adjusted EBITDA to net loss: Three Months Ended Six Months Ended (in thousands) June 30, 2021 June 30, 2020 $ Change June 30, 2021 June 30, 2020 $ Change Net loss $ (125,850) $ (106,741) $ (19,109) $ (173,744) $ (407,034) $ 233,290 Interest expense, net 166,525 187,265 (20,740) 214,249 412,632 (198,383) Income tax benefit (41,021) (27,831) (13,190) (55,584) (105,795) 50,211 Depreciation and intangible asset amortization 474,271 477,869 (3,598) 944,080 966,893 (22,813) Amortization of deferred subscriber acquisition costs 30,188 22,789 7,399 58,830 45,416 13,414 Amortization of deferred subscriber acquisition revenue (40,729) (29,540) (11,189) (77,888) (59,017) (18,871) Share-based compensation expense 13,587 24,828 (11,241) 29,606 48,327 (18,721) Merger, restructuring, integration, and other 4,804 12,038 (7,234) 25,311 120,832 (95,521) Loss on extinguishment of debt — — — 156 65,843 (65,687) Radio conversion costs, net (1) 60,635 5,031 55,604 119,364 11,670 107,694 Financing and consent fees (2) 399 10 389 3,745 5,260 (1,515) Other (3) (944) (2,608) 1,664 (4,129) (2,428) (1,701) Adjusted EBITDA $ 541,865 $ 563,110 $ (21,245) $ 1,083,996 $ 1,102,599 $ (18,603) ___________________ (1) Represents costs, net of any incremental revenue earned, associated with replacing cellular technology used in many of our security systems pursuant to a replacement program. (2) Represents fees expensed associated with financing transactions. (3) Represents other charges and non-cash items. The following table presents Adjusted EBITDA in total and by segment: Three Months Ended Six Months Ended (in thousands) June 30, 2021 June 30, 2020 $ Change June 30, 2021 June 30, 2020 $ Change CSB $ 509,897 $ 550,686 $ (40,789) $ 1,029,375 $ 1,087,761 $ (58,386) Commercial 31,968 12,424 19,544 54,621 14,838 39,783 Adjusted EBITDA $ 541,865 $ 563,110 $ (21,245) $ 1,083,996 $ 1,102,599 $ (18,603) Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020 The decrease in total Adjusted EBITDA was primarily attributable to CSB, which was driven by a decrease in installation and other revenue, net of the associated costs, from a lower volume of outright sales transactions primarily due to our transition to a predominately Company-owned model, as well as higher field service and call center costs. This decrease was partially offset by (i) higher recurring revenue, (ii) lower selling expenses (primarily commissions), and (iii) a lower provision for credit losses. The increase in Adjusted EBITDA in Commercial was driven by higher installation and other revenue, net of the associated costs, in the current period as compared to the prior period that was impacted by the COVID-19 Pandemic, as well as cost savings initiatives. The explanations above exclude amounts outside of our definition of Adjusted EBITDA, as applicable. Refer to the discussions above under “—Results of Operations” for further details. 37 Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020 The decrease in total Adjusted EBITDA was primarily attributable to CSB, which was driven by a decrease in installation and other revenue, net of the associated costs, from a lower volume of outright sales transactions primarily due to our transition to a predominately Company-owned model, as well as higher field service and call center costs. This decrease was partially offset by (i) higher recurring revenue, (ii) a lower provision for credit losses, and (iii) lower selling expenses (primarily commissions). The increase in Adjusted EBITDA in Commercial was driven by (i) higher installation and other revenue, net of the associated costs, in the current period as compared to the prior period that was impacted by the COVID-19 Pandemic, as well as cost savings initiatives, (ii) higher recurring revenue, and (iii) a lower provision for credit losses. The explanations above exclude amounts outside of our definition of Adjusted EBITDA, as applicable. Refer to the discussions above under “—Results of Operations” for further details. LIQUIDITY AND CAPITAL RESOURCES Liquidity We expect our ongoing sources of liquidity to include cash generated from operations, borrowings under our revolving credit facility and Receivables Facility, and the issuance of equity and/or debt securities as appropriate given market conditions. Our future cash needs are expected to include cash for operating activities, working capital, capital expenditures, strategic investments, periodic principal and interest payments on our debt, and potential dividend payments to our stockholders. We may, from time to time, seek to repay, redeem, repurchase, or refinance our indebtedness, or seek to retire or purchase our outstanding securities through cash purchases in the open market or through privately negotiated transactions or through a 10b5-1 repurchase plan or otherwise, and any such transactions may involve material amounts. We believe our cash position, borrowing capacity available under our revolving credit facility and Receivables Facility, and cash provided by operating activities are, and will continue to be, adequate to meet our operational and business needs in the next twelve months as well as our long-term liquidity needs. We are a highly leveraged company with significant debt service requirements. As of June 30, 2021, we had $150 million in cash and cash equivalents. In addition, we had $400 million available under our first lien revolving credit facility (the “First Lien Revolving Credit Facility”) and an uncommitted available borrowing capacity of $70 million under our Receivables Facility that is dependent on the volume of eligible retail installment contract receivables that can be sold under our Receivables Facility. The carrying amount of total debt outstanding was approximately $9.6 billion as of June 30, 2021. Long-Term Debt Significant changes in our debt during the six months ended June 30, 2021 were as follows: First Lien Credit Agreement In January 2021, we amended and restated the first lien credit agreement dated as of July 1, 2015 (together with subsequent amendments and restatements, the “First Lien Credit Agreement”) to refinance the term loan facility (the “First Lien Term Loan due 2026”), which reduced the applicable margin for Adjusted London Interbank Offered Rate (“LIBOR”) loans from 3.25% to 2.75% and reduced the LIBOR floor from 1.00% to 0.75%. Additionally, the amendment requires us to make quarterly payments equal to 0.25% of the aggregate outstanding principal amount of the First Lien Term Loan due 2026, or approximately $7 million per quarter. We may make voluntary prepayments on the First Lien Term Loan due 2026 at any time prior to maturity at par, subject to a 1.00% prepayment premium in the event of certain specified events at any time during the six months after the closing date of the amendment. As of June 30, 2021, we had no borrowings outstanding under our First Lien Revolving Credit Facility. In July 2021, we further amended and restated the First Lien Credit Agreement with respect to the First Lien Revolving Credit Facility, which extended its maturity date to June 23, 2026, subject to certain conditions, and obtained an additional $175 million of commitments. After giving effect to the Amendment and Restatement dated as of July 2, 2021, aggregate commitments under the First Lien Revolving Credit Facility were $575 million. 38 Receivables Facility During the six months ended June 30, 2021, we received proceeds of $71 million under the Receivables Facility and repaid $17 million. As of June 30, 2021, we had an outstanding balance of $130 million and an uncommitted available borrowing capacity of $70 million under the Receivables Facility that is dependent on the volume of eligible retail installment contract receivables that can be sold. In March 2021, we amended the Receivables Facility to, among other things, extend the revolving period until March 4, 2022 and reduced the LIBOR floor from 1.00% to 0.85%. In July 2021, we entered into a Receivables Financing Agreement (the “Receivables Financing Agreement”), which amended and restated our Receivables Purchase Agreement related to our Receivables Facility. The Receivables Financing Agreement, among other things, maintains an uncommitted secured lending arrangement among the parties, and provides for certain associated revisions to funding, prepayment, reporting, and similar mechanics; and make certain revisions relating to and facilitating the potential future syndication of the loans made under the Receivables Facility to other lenders. First-Lien Notes Due 2029 In July 2021, we issued $1.0 billion aggregate principal amount of 4.125% first-priority senior secured notes due 2029 (the “First Lien Notes Due 2029”). The First Lien Notes Due 2029 will mature on August 1, 2029 with semi-annual interest payment dates of February 1 and August 1 of each year, beginning February 1, 2022. We intend to use the proceeds from the issuance of the First Lien Notes Due 2029, along with cash on hand, to redeem all of the $1.0 billion outstanding aggregate principal amount of the Company’s 3.50% notes due 2022 (the “ADT Notes due 2022”) that mature on July 15, 2022, and pay related fees and expenses in connection with these transactions. In July 2021, we issued a Notice of Redemption with respect to all of the outstanding ADT Notes Due 2022, and we expect to redeem the ADT Notes Due 2022 on August 28, 2021, at a redemption price calculated pursuant to the ADT Notes Due 2022 Indenture, plus accrued and unpaid interest. Debt Covenants As of June 30, 2021, we were in compliance with all financial covenant and other maintenance tests for all our debt obligations, and we do not believe there is a material risk of future noncompliance with our financial covenant and other maintenance tests as a result of the COVID-19 Pandemic. Dividends The following table presents our dividends declared on common stock during the six months ended June 30, 2021 and 2020: (in thousands, except per share data) Common Stock Dividends Class B Common Stock Dividends Declaration Date Record Date Payment Date Per Share Aggregate Per Share Aggregate Six Months Ended June 30, 2021 5/5/2021 6/17/2021 7/1/2021 $ 0.035 $ 27,268 $ 0.035 $ 1,916 2/25/2021 3/18/2021 4/1/2021 $ 0.035 $ 27,220 $ 0.035 $ 1,916 Total $ 0.070 $ 54,488 $ 0.070 $ 3,832 Six Months Ended June 30, 2020 5/7/2020 6/18/2020 7/2/2020 $ 0.035 $ 26,767 $ — $ — 3/5/2020 3/19/2020 4/2/2020 $ 0.035 $ 27,117 $ — $ — Total $ 0.070 $ 53,884 $ — $ — On August 4, 2021, we announced a dividend of $0.035 per share to holders of Common Stock and Class B Common Stock of record on September 16, 2021, which will be distributed on October 5, 2021. 39 During February 2019, we approved a dividend reinvestment plan (the “DRIP”), which allowed stockholders to designate all or a portion of the cash dividends on their shares of common stock for reinvestment in additional shares of our Common Stock. The DRIP terminated in accordance with its terms on February 27, 2021. Prior to termination, dividends settled in shares of Common Stock were not material during the three and six months ended June 30, 2021 and 2020. Share Repurchase Program During February 2019, we approved a share repurchase program (the “Share Repurchase Program”), which authorized us to repurchase shares of our Common Stock (up to a certain amount). The Share Repurchase Program terminated in accordance with its terms on March 23, 2021. Prior to termination, repurchases of shares of Common Stock under the Share Repurchase Program were not material during the three and six months ended June 30, 2021 and 2020. Cash Flow Analysis The following table presents a summary of our cash flow activity: Six Months Ended (in thousands) June 30, 2021 June 30, 2020 $ Change Net cash provided by operating activities $ 785,660 $ 629,007 $ 156,653 Net cash used in investing activities $ (777,162) $ (535,574) $ (241,588) Net cash used in financing activities $ (59,740) $ (96,027) $ 36,287 Cash Flows from Operating Activities The increase in net cash provided by operating activities was primarily due to (i) a decrease in the volume of residential outright sales transactions, (ii) a payment in the first quarter of 2020 of $81 million related to the settlement of a pre-existing relationship in connection with the Defenders Acquisition, and (iii) a decrease in cash interest of $23 million. The increase in net cash provided by operating activities was partially offset by higher net payments for radio conversion costs of $116 million. The remainder of the activity related to changes in assets and liabilities due to the volume and timing of other operating cash receipts and payments with respect to when the transactions are reflected in earnings. Refer to the discussions above under “—Results of Operations” for further details. Cash Flows from Investing Activities The increase in net cash used in investing activities was primarily due to (i) an increase of $202 million due to a higher volume of subscriber system assets expenditures primarily as a result of the transition in 2020 to a predominately Company-owned model and (ii) an increase of $195 million due to a higher volume of dealer generated customer accounts and bulk account purchases including accounts purchased from a third party in February 2021 and an advance payment received in 2020 for dealer charge-backs in connection with the Defenders Acquisition. The increase in net cash used in investing activities was partially offset by a decrease in cash paid for business acquisitions, net of cash acquired, of $163 million primarily due to the Defenders Acquisition in 2020. Cash Flows from Financing Activities During the six months ended June 30, 2021, net cash used in financing activities primarily consisted of $58 million of dividend payments on common stock and $28 million of payments on interest rate swap contracts that included an other-than-insignificant financing element at inception. These outflows were partially offset by $55 million of net proceeds under the Receivables Facility. During the six months ended June 30, 2020, net cash used in financing activities primarily consisted of $53 million of dividend payments on common stock, $34 million of net repayments of long-term borrowings, and $16 million related to the payment of deferred financing fees. These outflows were partially offset by $19 million of net proceeds under the Receivables Facility. COMMITMENTS AND CONTRACTUAL OBLIGATIONS In our 2020 Annual Report, we disclosed our commitments and contractual obligations. There have been no material changes to these commitments and contractual obligations, except as discussed below. 40 During the six months ended June 30, 2021, we entered into various commitments to purchase certain parts used in our program to replace 3G and CDMA cellular equipment used in our security systems. As of June 30, 2021, we had $ 55 million outstanding related to these obligations. In addition, we entered into an agreement in February 2021 with a third party to purchase customer accounts, if certain conditions are met, up to approximately $ 67 million over the course of the agreement. Refer to the discussion above under “—Liquidity and Capital Resources” for further details regarding significant changes to our long-term debt. OFF-BALANCE SHEET ARRANGEMENTS During the six months ended June 30, 2021, there have been no material changes to our off-balance sheet arrangements as disclosed in our 2020 Annual Report. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The accompanying condensed consolidated financial statements are prepared in accordance with GAAP, which requires us to select accounting policies and make estimates that affect amounts reported in the condensed consolidated financial statements and the accompanying notes. Management’s estimates are based on the relevant information available at the end of each period. Actual results could differ materially from these estimates under different assumptions or market conditions. In our 2020 Annual Report, we identified our accounting policies that are based on, among other things, estimates and judgments made by management that include inherent risks and uncertainties. Refer to Note 1 “Description of Business and Summary of Significant Accounting Policies” to the condensed consolidated financial statements for further information about recent accounting pronouncements and adoptions. CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report contains certain information that may constitute “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. While we have specifically identified certain information as being forward-looking in the context of its presentation, we caution you that all statements contained in this report that are not clearly historical in nature, including statements regarding anticipated financial performance; management’s plans and objectives for future operations; business prospects; outcome of regulatory proceedings; market conditions; our ability to successfully respond to the challenges posed by the COVID-19 Pandemic; our strategic partnership and ongoing relationship with Google; the expected timing of product commercialization with Google or any changes thereto; the successful internal development, commercialization, and timing of our next generation platform; and other matters, are forward-looking. Forward-looking statements are contained principally in the sections of this report entitled “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Without limiting the generality of the preceding sentence, any time we use the words “expects,” “intends,” “will,” “anticipates,” “believes,” “confident,” “continue,” “propose,” “seeks,” “could,” “may,” “should,” “estimates,” “forecasts,” “might,” “goals,” “objectives,” “targets,” “planned,” “projects,” and similar expressions, we intend to clearly express that the information deals with possible future events and is forward-looking in nature. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. Forward-looking information involves risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied in, or reasonably inferred from, such statements, including without limitation, the risks and uncertainties disclosed or referenced in Part II Item 1A. of this report under the heading “Risk Factors.” Therefore, caution should be taken not to place undue reliance on any such forward-looking statements. Much of the information in this report that looks toward future performance of the Company is based on various factors and important assumptions about future events that may or may not actually occur. As a result, our operations and financial results in the future could differ materially and substantially from those we have discussed in the forward-looking statements included in this Quarterly Report. We assume no obligation (and specifically disclaim any such obligation) to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.