Item 1. Business
ITEM 1. BUSINESS.
Company Overview
ADT Inc., together with its wholly-owned subsidiaries (collectively, the “Company”, “we”, “our”, “us”, and “ADT”), is a leading provider of security, interactive, and smart home solutions serving residential, small business, and commercial customers in the United States (“U.S.”). With the acquisition of Sunpro Solar in December 2021, we are now also a leading provider of residential solar solutions. Our mission is to empower customers to protect and connect to what matters most - their families, homes, and businesses - by delivering safe, smart, and sustainable lifestyle-driven solutions through professionally installed, do-it-yourself (“DIY”), and mobile or other digital-based offerings supported by our 24/7 professional monitoring services.
The ADT brand is one of the most recognized and trusted brands in the security industry, which we believe is a key competitive advantage and contributor to our success due to the importance customers place on reputation and trust when purchasing our products and services. The strength of our brand is based upon a long-standing record of delivering high-quality, reliable products and services; expertise in system sales, installation, and monitoring; and superior customer care, all driven by our industry-leading experience and knowledge.
We serve our customers through our nationwide sales and service offices; monitoring and support centers; and a large network of security, home-automation, and solar-installation professionals in the U.S. As of December 31, 2021, we had approximately 6.6 million recurring revenue customers.
Formation and Organization
ADT Inc. was incorporated in the State of Delaware in May 2015 as a holding company with no assets or liabilities. In July 2015, we acquired Protection One, Inc. and ASG Intermediate Holding Corp. (collectively, the “Formation Transactions”), which were instrumental in the commencement of our operations. In May 2016, we acquired The ADT Security Corporation (formerly named The ADT Corporation) (“The ADT Corporation”) (the “ADT Acquisition”), which significantly increased our market share in the security systems industry making us one of the largest monitored security companies in the U.S. and, at the time, Canada.
In January 2018, we completed an initial public offering (“IPO”), and our common stock, par value $0.01 per share, (“Common Stock”) began trading on the NYSE under the symbol “ADT.”
ADT Inc. is majority-owned by Prime Security Services TopCo (ML), L.P., which is majority-owned by Prime Security Services TopCo Parent, L.P. (“Ultimate Parent”). Ultimate Parent is majority-owned by Apollo Investment Fund VIII, L.P. and its related funds that are directly or indirectly managed by affiliates of Apollo. As of December 31, 2021, Apollo owned approximately 67.5% of our outstanding common stock, including Class B Common Stock (as defined below) on an as-converted basis, and excluding unvested common shares.
Key Business Developments and Recent Initiatives
The following represents key business developments since our IPO:
• In December 2018, we acquired Fire & Security Holdings, LLC (“Red Hawk”) (the “Red Hawk Acquisition”), which accelerated our growth in the commercial security market and expanded our product portfolio with the introduction of commercial fire safety and related solutions.
• In November 2019, we sold ADT Security Services Canada, Inc. (“ADT Canada”), which resulted in the substantial disposition of our operations in Canada.
• In January 2020, we acquired Defender Holdings, Inc. (“Defenders”), our largest independent dealer at the time (the “Defenders Acquisition”), which represented approximately 55% of our indirect channel in 2019.
• In 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.
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• In July 2020, we entered into a Master Supply, Distribution, and Marketing Agreement (the “Google Commercial Agreement”) with 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.
• In September 2020, we issued and sold 54,744,525 shares of Class B common stock, par value $0.01 per share (“Class B Common Stock”), for an aggregate purchase price of $450 million to Google in a private placement pursuant to a securities purchase agreement dated July 31, 2020 (the “Securities Purchase Agreement”).
• 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 (as discussed below).
• In July 2021, we introduced the concept of Virtual Service Support, which allows us to meet customer demands and preferences while reducing costs of truck rolls for certain service visits. Virtual Service Support delivers a scalable, cost-efficient means of servicing our customers through live video streaming with our skilled technicians to troubleshoot and resolve service issues.
• In December 2021, we acquired Sunpro Solar, which entered us into the residential solar market with the launch of ADT Solar, which will leverage ADT’s brand awareness and trust among consumers to accelerate growth. ADT Solar provides residential customers with solar and energy storage solutions, energy efficiency upgrades, and roofing services.
• In January 2022, we announced that together with Ford Motor Company (“Ford”), we will be forming a new entity, Canopy, which will combine ADT’s professional security monitoring and Ford’s AI-driven video camera technology to help customers strengthen security of new and existing vehicles across automotive brands. Ford and ADT’s investment in Canopy is subject to certain conditions, including regulatory approvals, and initial funding is expected to close in the second quarter of 2022. ADT and Ford expect to invest approximately $100 million collectively during the next three years, of which ADT will contribute 40%.
• In January 2022, we successfully launched the integrated Google doorbell, and we are jointly solidifying the timeline for subsequent product launches with a focus on optimal customer experience and quality.
Google and Next-Generation Platform Update
Our partnership with Google represents the combination of the leading security brand and the leading technology brand joining forces to introduce the next-generation smart and helpful home. As part of this partnership, each company will contribute $150 million upon the achievement of certain milestones towards the joint marketing of devices and services; customer acquisition; training of our employees for the sales, installation, customer service, and maintenance for the product and service offerings; and technology updates for products included in such offerings.
Co-branded offerings are and will continue to be available in the form of both professionally installed and DIY solutions and will include the integration of leading Google devices paired with Google video and analytics services initially through our current technology platform and the Google Home platform. We plan to transition these offerings to be supported by our ADT-owned next-generation professional security and automation technology platform, which is currently being developed in coordination with Google. Our comprehensive interactive technology platform is expected to provide customers with a seamless experience through a common application across security, life safety, automation, and analytics. Additionally, our platform is expected to integrate the user experience, customer service experience, and back-end support.
COVID-19 Pandemic Update
The COVID-19 Pandemic, including variants such as Delta and Omicron, caused certain notable adverse impacts on general economic conditions, including temporary and permanent closures of many businesses, increased governmental regulations, supply chain disruptions, and changes in consumer spending. Our employees are susceptible to COVID-19 in the ordinary course of their work. 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 in response to the COVID-19 Pandemic, which include (i) detailed protocols for infectious disease safety for employees, (ii) employee daily wellness checks, (iii) certain work from home actions, including for the majority of our call center professionals, and (iv) investments in personal protective equipment for our employees. We continue to monitor the impact of the COVID-19 Pandemic including the health of our employees, protection of our customers, and our ability to continue to operate all aspects of our business.
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Segment and Geographic Information
We evaluate and report our segment information based on the manner in which our Chief Executive Officer, who is the chief operating decision maker (the “CODM”), evaluates performance and allocates resources. Prior to 2021, we had a single operating and reportable segment. Beginning in the first quarter of 2021, we reported results in two operating and reportable segments, Consumer and Small Business (“CSB”) and Commercial. Upon consummation of the Sunpro Solar Acquisition in the fourth quarter of 2021, we began reporting results for a third operating and reportable segment related to the ADT Solar business (“Solar”). There were no further changes to our CSB and Commercial segments.
Where applicable, prior periods have been retrospectively adjusted to reflect our current operating and reportable segment structure.
We organize our segments based primarily on customer type as follows:
• CSB - The CSB segment primarily includes (i) revenue and operating costs from the sale, installation, servicing, and monitoring of integrated security, interactive, 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 or Solar segments. Customers in the CSB segment are comprised of residential homeowners, small business operators, and other individual consumers of security and automation systems.
Results for the Company’s 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 - The Commercial segment primarily includes (i) revenue and operating costs from the sale, installation, servicing, and monitoring of integrated security, interactive, 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. Customers in the Commercial segment are comprised of larger businesses with more expansive facilities (typically larger than 10,000 square feet) and multi-site operations, which often require more sophisticated integrated solutions.
• Solar - The Solar segment primarily includes (i) revenue and operating costs from the design and installation of solar systems, energy storage solutions, and other related solutions and services; (ii) other operating costs associated with support functions related to these operations; and (iii) dedicated corporate and other costs. Customers in the Solar segment are primarily comprised of residential homeowners who purchase solar systems and energy storage solutions, energy efficiency upgrades, and roofing services.
For the results of our operations outside of the U.S., which consist of our operations in Canada prior to the sale of ADT Canada, refer to Note 3 “Segment Information” in the Notes to Consolidated Financial Statements.
Products and Services
We primarily offer our portfolio of products and services under our ADT brand, which includes burglar alarm, security automation, and other smart home solutions and fire detection, suppression, and access control systems (referred to collectively as security systems, solutions, or offerings), as well as solar systems and energy storage solutions for residential customers.
Our core security offerings are designed to detect intrusion; control access; sense movement, smoke, fire, carbon monoxide, flooding, temperature, and other environmental conditions and hazards; and address personal medical emergencies such as injuries or incapacitation. In our Commercial business, we also sell, install, integrate, maintain, and inspect commercial building safety and management technologies, which include fire detection and suppression, video surveillance, and access control systems. We also offer our customers routine maintenance and the installation of upgraded or additional equipment, which provides additional value to the customer and generates incremental recurring monthly revenue. With the acquisition of Sunpro Solar, we design, install, and sell custom solar systems and energy storage solutions, energy efficiency upgrades, and roofing services.
The vast majority of new residential customers choose our automation and smart home solutions, which provide customers the ability to remotely monitor and manage their environments. Through our customized web portal via web-enabled devices (such as smart phones), customers can arm/disarm their security systems, record/view real-time video, and program their systems to react to defined events, as well as automate custom schedules for connected devices such as lights, thermostats, appliances, garage doors, and cameras. Our technology can also integrate with various third-party connected and wearable devices allowing us to serve customers whether they are at home or on-the-go. Additionally, our personal emergency response system products
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and services utilize our security monitoring infrastructure to provide customers with solutions helping to sustain independent living and encourage better self-care activities. Our recently acquired solar operations, now ADT Solar, combines our legacy leading smart home security with sustainable home energy management solutions through a single, trusted provider. ADT Solar offers customers solar solutions through dedicated and specialized in-house sales and marketing teams, design and engineering, and installation.
Customer Contracts
New CSB and certain Commercial customers typically require us to make an upfront investment related to installation costs (such as labor, including commissions, materials, and overhead), which are partially offset by upfront fees charged at the time of installation. The economics of an installation can vary depending on the customer acquisition channel and product, but we generally achieve revenue break-even in less than two and a half years. We periodically adjust the standard monthly monitoring rate charged to new and existing customers, while our ability to increase our average selling prices for individual customers depends on a number of factors, including the quality of our service, the introduction of additional features and services which increase the value of our offerings, and the competitive environment in which we operate.
At the time of initial equipment installation, our CSB and Commercial customers typically contract for both monitoring and maintenance services, which are generally governed by multi-year contracts. If a customer cancels or is otherwise in default under a monitoring contract prior to the end of the initial contract term, we have the right under the contract to receive a termination payment from the customer in an amount equal to a designated percentage of all remaining monthly payments.
The standard contract terms for CSB customers are two, three, or five years, with automatic renewals for successive 30-day periods, unless canceled by either party. Residential customers are typically charged an upfront fee, which qualifying customers can pay over the course of the contract, and are then obligated to make monthly payments for the remainder of the initial contract term. Monitoring services are generally billed monthly or quarterly in advance, and more than 80% of our residential customers pay us these fees through automated payment methods, with new residential customers generally opting for these payment methods.
The standard contract term for commercial customers is typically five years with automatic renewals ranging from 30-day periods to one year. In some commercial arrangements, we may install a system without an on-going contractual monitoring or maintenance service relationship.
The standard contract for solar customers varies based on specifics of the job and generally covers the time from signing of the agreement to completion of installation. Additionally, a substantial portion of sales are financed by third parties.
Monitoring Centers
Upon the occurrence of certain initiating events, our monitored security systems send event-specific signals to personnel at our monitoring centers who then relay 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 based on the customer’s contract and preferences. We continue to focus on our alarm verification technologies and partner with industry associations and various first responder agencies to help prioritize response events, enhance response policies, and develop processes that allow us to send data to emergency response centers directly. Additionally, our SMART (System Monitoring and Response Technology) Monitoring differentiates our offerings, aims to result in faster and higher-quality responses, and is expected to reduce annual false alarms and customer care calls.
As of December 31, 2021, we operated nine monitoring centers listed by Underwriters Laboratories (“UL”) located throughout the U.S. in order to provide 24/7 year-round professional monitoring services to our customers, with three of our monitoring centers also providing outsourced monitoring services for other security companies. To obtain and maintain a UL listing, a security systems monitoring center must be located in a building meeting UL’s structural requirements, have back-up computer and power systems, and meet UL specifications for staffing and standard operating procedures. Many jurisdictions have laws requiring that security systems for certain buildings be monitored by UL-listed centers. In addition, a UL listing is required by insurers of certain customers as a condition of insurance coverage. Our monitoring centers are also fully redundant, which means all monitoring operations can be automatically transferred to another monitoring center in case of an emergency such as fire, tornado, major interruption in telephone or computer service, or any other event affecting the functionality of one of our centers. During 2020, we implemented certain work from home actions as a result of the COVID-19 Pandemic, including for a majority of our monitoring center professionals in compliance with UL work-from-home standards.
In addition to our monitoring centers, our Network Operations Center (“NOC”) houses a group of highly-experienced, certified engineers, system administrators, and network analysts capable of designing, provisioning, and maintaining security-only networks for our Commercial customers. The NOC also provides other managed services to support and enhance our customer’s security systems. Employees in our NOC hold a multitude of vendor certifications in addition to classic Cisco and
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Cisco Meraki Certifications. Our NOC was one of the first security integrators to earn the Cisco Cloud and Managed Services Express Partner Certification and remains one of the few in our industry to hold this specialized certification.
Field Service and Call Centers Operations
We staff our sales and service offices across the U.S. with qualified individuals who make sales calls, install security systems, and provide service and support to our customers, and we utilize third-party subcontract labor when appropriate to assist with these efforts. Our objective is to provide a differentiated service experience by resolving customer issues remotely whenever possible and scheduling service visits at times convenient for the customer. Additionally, we implemented Virtual Service Support in July 2021, which enables our technicians to live-video stream with certain customers to satisfy customer demand for service while reducing some of the costs of in-home visits.
Our call center operations provide support 24 hours a day on a year-round basis, and all requests are routed through our customer contact centers to ensure technical service requests are handled promptly and professionally. In many cases, customer care specialists can remotely resolve non-emergency inquiries regarding service, billing, and alarm testing and support. We continue to offer customers additional choices in managing their services through customer-facing self-service tools via interactive voice response systems and the Internet.
We believe a strong selling point for multi-site customers is our ability to serve our largest multi-site customers from our National Accounts Operation Center (“NAOC”) in Irving, Texas, which allows the customer to call one location to resolve all support issues, including billing, installations, service calls, upgrades, or other service-related issues.
We provide ongoing training to call center and field employees and our authorized dealers, and we continually measure and monitor customer satisfaction-oriented metrics across each customer touch point.
Sales and Distribution Channels
We utilize a complementary mix of direct and indirect sales and distribution channels, as discussed below.
• Direct Channel
Our direct channel customers are generated by our direct response and other marketing efforts, general brand awareness, customer referrals, and lead generation partners, and are supported by our internal sales force located in our national sales call centers as well as our nationwide network of sales and service offices. In many scenarios, we close the sale of a basic system over the phone and allow our field force to augment the system at the time of installation. In other cases, field sales consultants work directly with the customer to select an ideal system. Driven by consumer preferences, we also market to customers through retail and e-commerce channels, which are expected to grow in the next few years, and we have been supplementing existing channels to meet consumers where they prefer to shop.
Our security field sales consultants undergo an in-depth screening process prior to hire. Each field sales consultant completes comprehensive centralized training prior to conducting customer sales presentations, as well as participates in ongoing training in support of new offerings and the use of our structured model sales call. We utilize a highly structured sales approach, which includes, in addition to the structured model sales call, daily monitoring of sales activity and effectiveness metrics and regular coaching by our sales management teams.
In our solar business, we obtain sales primarily through third-party and self-generated leads, as well as through a referral app for our customers.
• Indirect Channel
Our indirect channel customers are generated mainly through our network of agreements with third-party independent dealers who sell equipment and ADT Authorized Dealer-branded monitoring, interactive, and other services to residential end users (the “ADT Authorized Dealer Program”). As opportunities arise, we have in the past engaged, and we may continue to engage, in selective bulk account purchases, which typically involve the purchase of a set of customer accounts from other security service providers.
As of December 31, 2021, our network of authorized dealers consisted of approximately 200 authorized dealers operating across the U.S. Our authorized dealers are contractually obligated to offer exclusively to us all qualified monitored accounts they generate, but we are not obligated to accept these accounts. We pay our authorized dealers for the acquisition of any qualified monitored accounts (referred to as dealer generated customer accounts) we purchase from them. In certain instances in which we reject an account, we generally still indirectly provide monitoring services for that account through a monitoring services agreement with the authorized dealer. Dealer generated customer contracts typically have an initial term of three years with automatic renewals for successive 30-day periods, unless
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canceled by either party. If a purchased account is canceled during the charge-back period, which is generally thirteen months, the dealer is required to refund our payment of the purchase price for the canceled account.
Authorized dealers are required to adhere to the same high-quality standards for sales and installation as our own sales and service offices. We monitor each authorized dealer’s financial stability, use of sound and ethical business practices, and delivery of reliable and consistent high-quality sales and installation methods.
Marketing and Strategic Partnerships
We have been focusing on driving revenue through increased consumer awareness and preference; enhancing consumer purchasing flexibility; and refreshing, refining, modernizing, and customizing our go-to-market approach. To support the growth of our customer base, improve brand awareness, and drive greater market penetration, we consider new customer channels and lead generation methods, explore opportunities to provide branded solutions, and form strategic partnerships and alliances with various third parties.
We strive to optimize our marketing spend through a lead modeling process, whereby we dynamically allocate spend based on lead flow and measured marketing channel effectiveness. We market our offerings through national television, radio, and direct mail advertisements, as well as through Internet advertising, which includes national search engine marketing, email, online video, local search, and social media. We also have several affinity partnerships with organizations that promote our services to their customer bases. In addition, we market through social media influencers and celebrity spokespersons representing the ADT brand. Our strategic partnerships and alliances include home builders, property management firms, homeowners’ associations, insurance companies, financial institutions, retailers, public utilities, and software service providers. For example, we have existing partnerships with national leaders in home construction and ride sharing, and we believe there is a healthy pipeline of future partnership and alliance opportunities.
Our goal is to maximize customer lifetime value for both new and existing customers by (i) continuing to evaluate our pricing and product offerings; (ii) managing costs and service strategies to provide enhanced value; (iii) upgrading existing customers to our interactive services, internet protocol (“IP”) video solutions, or other upgraded solutions whenever possible; and (iv) achieving long customer tenure.
Our Markets
We serve our customers in the following three primary markets: Consumer and Small Business, Commercial, and Solar. We also seek opportunities to leverage our brand name, our core focus on security, and our high degree of trust among our customer base to pursue new customers in complementary markets such as DIY offerings, smart home technologies, and personal on-the-go security and safety. We have seen an increase in interest in smart home offerings and other mobile technology applications, which we believe is attributable to a variety of factors, including advancements in technology, younger generations of consumers, and shifts to de-urbanization. We believe our strategic initiatives will help us satisfy consumer and commercial demands in light of these macro-level dynamics and position us for sustainable growth for years to come.
Consumer and Small Business
Our consumer and small business market primarily consists of owners of single-family homes or small businesses, renters, and other DIY customers. The market is generally characterized by a large and homogeneous customer base with less complex system installations. Many of our residential and small business customers are driven to purchase monitored security and automation services as a result of moving to a new location; a perceived or actual increase in crime or life safety concerns in their neighborhood; significant events such as the birth of a child or opening of a new business; or incentives provided by insurance carriers, who may offer lower insurance premium rates if a security system is installed or may require that a system be installed as a condition of coverage.
Commercial
Our commercial market ranges from large single-site commercial facilities to multi-site national companies. The market is characterized by higher penetration rates, driven in part by fire and building codes and insurance requirements, and by a higher degree of complexity with respect to system installations. Most business customers require a basic security system for insurance purposes, and certain commercial premises are required to install and maintain fire alarm, and sometimes fire suppression, systems to meet the requirements under applicable building codes and insurance policies. Additionally, businesses may also leverage our IP video solutions for operational purposes such as employee safety, theft prevention, and inventory management.
We have been focused on increasing our market share and penetration in the commercial market. While we experienced significant growth in our commercial channel during 2019, our commercial growth was negatively impacted by the COVID-19
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Pandemic during 2020 and 2021. However, we saw improvements beginning in 2021 and believe we are poised to return to commercial growth organically and through opportunistic value-add acquisitions.
Solar
Our solar market consists primarily of residential property owners. The market is highly fragmented, under-penetrated, and has a longer lag between sale/contract and installation than our residential security market. With the shift in consumer preference toward clean energy, we believe there are numerous opportunities to increase market share within the solar industry. Sales are typically financed by third party financing institutions, which reduces risk associated with collections. Additionally, we believe there is a large cross-selling and bundling opportunity with our CSB markets as consumers adopt smart home automation.
Competition
Success in acquiring new customers depends on a variety of factors, including (i) brand and reputation, (ii) market visibility, (iii) service and product capabilities, (iv) quality, (v) price, and (vi) the ability to identify and sell to prospective customers. Technology trends are also creating significant change in our industries. While providing us with many opportunities, innovation has also lowered the barriers to entry for automation, interactive, and smart home solutions, and new business models and competitors have emerged. We are focused on extending our leadership position in the traditional residential and commercial security markets while also growing our share of emerging and adjacent markets, including solar. We believe a combination of increasing customer interest in lifestyle and business productivity and technology advancements will support the increasing penetration of automation, interactive, smart home, and solar solutions.
The traditional residential and commercial security markets in the U.S. remain highly competitive and fragmented, with a low number of major companies and thousands of smaller regional and local companies, which is primarily the result of relatively low barriers to entry in local geographies and the availability of companies providing outsourced monitoring services but not maintaining the customer relationship.
We believe our principal competitors within the traditional residential security market are Vivint Smart Home, Inc., Brinks Home Security (operating brand of Monitronics International, Inc.), and Xfinity Home Security (a division of Comcast Corporation). Additionally, with our recent investments and enhancements in DIY offerings, as well as our partnership with Google, we are positioning ourselves to grow our market share in the DIY space, facing competition from SimpliSafe Home Security Systems, Apple’s HomeKit, and Amazon’s Ring Smart Security System. We believe our principal competitors within the commercial security market are Johnson Controls International plc. (“Johnson Controls”), Convergint Technologies, STANLEY Security (a division of Stanley Black & Decker, Inc.), and Securitas Electronic Security, Inc. (a division of Securitas AB).
Furthermore, ADT competes with point solutions (products with one intended application) and home automation-only systems, because in some cases customers believe that point solutions and/or smart home devices replace the need for full-scale security systems. Additionally, while we continue to see a shift toward self-installation of security and smart home devices, third-party professional installers are available in market which offer low-cost, professional installation alternatives, including Best Buy’s Geek Squad, OnTech, and Angi. Also, some self-monitored solutions are available which don’t require a monthly fee for home automation services, including Blue by ADT (self-monitoring), Samsung SmartThings, and Ring Alarm (self-monitoring). With these solutions, customers are not required to pay a monthly fee for access to home automation and/or self-monitored security, which means there are no-cost alternatives to professionally monitored (monthly fee-based) solutions. While self-monitored solutions do not replace the need for professionally monitored solutions, as more features and functionality are built into the free, self-monitored solutions, it could reduce the demand for some customers to opt for more expensive, professionally monitored options.
With our acquisition of Sunpro Solar, our principal competitors in the solar industry are Sunrun, Inc., Sunnova Energy International, Inc., SunPower Inc., Trinity Solar, Inc., Titan Solar Power, and Power Home Solar, LLC. We also face competition from companies that offer solar solutions in addition to their core business.
Our approach to competition is to emphasize the quality and reputation of our services, our superior customer service, our industry-leading brand, our monitoring centers, our commitment to consumer privacy, and our knowledge of customer needs. In addition, we continue to add new features and functionalities to further differentiate our offerings, including the potential benefits of offering security and solar solutions together, and support a pricing premium.
We believe we are well positioned to compete with traditional and new competitors due to our focus on safety, security, and pricing; our nationwide team of sales consultants; our solid reputation for and expertise in providing reliable security and monitoring services through our in-house network of redundant monitoring centers; our reliable product solutions; our highly skilled installation and service organization; and our partnership with Google.
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Resources Material to Our Business
Materials and Inventory
We purchase equipment and components of our products from a limited number of suppliers and distributors and utilize dual sourcing methods (when possible) to minimize the risk of a disruption from any single supplier. We also rely on various information technology and telecommunications service providers as part of the functionality and monitoring of our systems.
Inventory is primarily held in our regional distribution centers at levels we believe are sufficient to meet current and anticipated customer needs; and we maintain inventory of certain equipment and components at our field offices and in technicians’ vehicles. Additionally, third-party distributors generally maintain a minimum stocking level of certain key items to cover supply chain disruptions.
We are subject to risk associated with certain supply chain disruptions. While we have only experienced minimal impact in our Commercial operations and in the development of new products due to supply chain disruptions in 2021, we could experience a material impact to our sales and revenue, operating results, cash flows, and ability to commercialize new products in the future.
We are continuously monitoring global supply chain disruptions, and we do not currently anticipate any major interruptions in our supply chain in the near term.
Intellectual Property
Patents, trademarks, copyrights, and other proprietary rights are important to our business and we continuously refine our intellectual property strategy to maintain and improve our competitive position. We register new intellectual property to protect our ongoing technological innovations and strengthen our brand, and we take appropriate action against infringements or misappropriations of our intellectual property rights by others. We review third-party intellectual property rights to help avoid infringement and to identify strategic opportunities. We typically enter into confidentiality agreements to further protect our intellectual property.
We own a portfolio of patents that relate to a variety of monitored security and automation technologies utilized in our business, including security panels and sensors as well as video and information management solutions. We also own a portfolio of trademarks, including ADT, ADT Pulse, Protection 1, ADT Commercial, Blue by ADT, and ADT Solar. In addition, we are a licensee of intellectual property, including from our third-party suppliers and technology partners. Patents extend for limited periods of time in the various countries where patent protection is obtained. Trademark rights may potentially extend for longer periods of time and are typically dependent upon the use of the trademarks.
Certain trademarks associated with the ADT brand that we own within the U.S. and Canada are owned outside of the U.S. and Canada by Johnson Controls (as successor to Tyco International Ltd., “Tyco”). In certain instances, such trademarks are licensed in certain territories outside the U.S. and Canada by Johnson Controls to certain third parties. Pursuant to the Tyco Trademark Agreement entered into between The ADT Corporation and Tyco in connection with the separation of The ADT Corporation from Tyco in 2012, we are generally prohibited from registering, attempting to register, or using the ADT brand outside the U.S. and its territories and Canada. As a result, if we choose to sell products or services or otherwise do business outside the U.S. and Canada, we do not have the right to use the ADT brand to promote our products and services.
In connection with the sale of ADT Canada in 2019, we entered into a non-competition and non-solicitation agreement with TELUS Corporation (“TELUS”) pursuant to which we will not have any operations in Canada, subject to limited exceptions for cross-border commercial customers and mobile safety applications, for a period of seven years. Additionally, we entered into a patent and trademark license agreement with TELUS granting (i) the use of our patents in Canada for a period of seven years and (ii) exclusive use of our trademarks in Canada for a period of five years and non-exclusive use for an additional two years thereafter.
Seasonality
Our security and home automation business has historically experienced a certain level of seasonality with respect to residential customers. Since more household moves take place during the second and third calendar quarters of each year, our disconnect rate and new customer additions are typically higher in those quarters than in the first and fourth calendar quarters. There is also a slight seasonal effect on our new customer installation volume and related cash expenses incurred in investments in new customers. However, other factors such as the level of marketing expense and relevant promotional offers can mitigate the effects of seasonality. In addition, we may see increased servicing costs related to higher alarm signals and customer service requests as a result of inclement weather-related incidents.
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We believe the COVID-19 Pandemic affected some of these seasonal trends beginning in 2020 and continuing into 2021. We also believe the lower volume of customer relocations we experienced during 2020 and our use of certain pricing and retention initiatives for existing customers 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. We are currently unable to determine whether there will be any ongoing impact on our seasonality, and we may continue to experience fluctuations in certain trends, such as relocations, in the future.
In our Solar business, seasonality may be impacted by customers’ desires to obtain tax credits towards the end of the year, which could cause sales to be higher during the last calendar quarter, and may also be impacted by regional weather patterns.
Government Regulation and Other Regulatory Matters
Our operations are subject to numerous federal, state, and local laws and regulations related to occupational licensing, building codes, tax, and permitting, as well as consumer protection and privacy, labor and employment, and environmental protection. Changes in laws and regulations can positively and negatively affect our operations and impact the manner in which we conduct our business.
Licensing and Permitting - Most states in which we operate have licensing laws directed specifically toward professional installation and monitoring of security devices, as well as solar installations. Our business is also subject to requirements, codes, and standards imposed by local government jurisdictions, as well as various insurance, approval and listing, and standards organizations. We maintain the relevant and necessary licenses related to the provision of installation of security and solar systems and related services in the jurisdictions in which we operate.
Additionally, we rely extensively on telecommunications service providers, which are regulated in the U.S. by the Federal Communications Commission (“FCC”) and state public utilities commissions, to communicate signals as part of the functionality and monitoring of security and solar systems.
Our security business is subject to various state and local measures aimed at reducing false alarms. Such measures include requiring permits for individual alarm systems, revoking such permits following a specified number of false alarms, imposing fines on customers or alarm monitoring companies for false alarms, limiting the number of times police will respond to alarms at a particular location after a specified number of false alarms, requiring additional verification of an alarm signal before the police respond, or providing no response to residential system alarms.
Our Solar business is exposed to federal, state, and local government regulations and policies concerning the electric utility industry, as well as internal policies of the electric utility companies, which often is exposed to electricity pricing, tax credits and other incentives, and the interconnection of customer-owned electricity generation.
Consumer Protection and Privacy - Our advertising and sales practices are regulated by the U.S. Federal Trade Commission (“FTC”) and state and consumer protection laws, which may include restrictions on the manner in which we promote the sale of our products and services and require us to provide most consumers with three-day or longer rescission rights.
Our communications with current and potential customers are regulated by federal and state laws, which include restrictions on the use of telemarketing, auto-dialing technology, email marketing, and text communications.
Labor and Employment - Our operations are subject to regulation under the U.S. Occupational Safety and Health Act, or OSHA, and equivalent state laws. Failure to comply with applicable OSHA regulations or other federal, state, and local laws and regulations, even if no work-related serious injury or death occurs, may result in civil or criminal enforcement and substantial penalties, significant capital expenditures, or suspension or limitation of operations.
Additionally, in certain jurisdictions, we must obtain licenses or permits to comply with standards governing employee selection, training, and business conduct.
Environmental Protection - We continue to monitor emerging developments regarding environmental protection laws. At this time, we do not believe that federal, state, and local laws and regulations relating to the discharge of materials into the environment, or otherwise relating to the protection of the environment, or any existing or pending climate change legislation, regulation, or international treaties or accords are reasonably likely to have a material effect in the foreseeable future on our business.
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Human Capital and ESG
As we seek to accomplish our corporate mission and execute on our strategic initiatives, our activities both directly and indirectly impact our customer base, our employees, and the communities we serve. We place a strong emphasis on environmental, social, and governance issues, and we believe such emphasis enhances our corporate performance, while enabling us to hire and retain top talent who share these values and passion about our organization.
Human Capital Management
As of December 31, 2021, we employed approximately 25,000 people, including approximately 3,600 security system sales consultants and 2,000 solar sales consultants; 6,200 security installation and service technicians and 1,200 solar installation technicians; and 4,500 customer care professionals.
Approximately 5% of our employees are covered by collective bargaining agreements, and we believe our relations with our employees and labor unions have generally been positive.
In December 2021, we acquired Sunpro Solar and are continuing to integrate them into our human capital programs.
Performance Culture
ADT defines a Performance Culture as our shared values, priorities, and principles that shape beliefs and drive behaviors and decision-making that drives high levels of performance at an individual, team, and organizational level. We are committed to fostering a culture and environment where every team member feels valued and empowered to collaborate and achieve business results. In 2021, we made adjustments to our annual performance reviews across key talent areas to focus on performance differentiation, such as introducing individual performance components as part of certain team members’ annual incentive plans.
Talent Recruitment and Management
We are committed to attracting, retaining, and developing a strong and dedicated workforce as our success depends in large part on our hiring and retaining top talent across the entire organization, with primary emphasis on our management team and our employees who interface directly with our customers (such as sales representatives, installation and service technicians, and call center personnel), which make up the majority of our organization. We focus on having a diverse, inclusive, and safe workplace, while offering competitive compensation, benefits, and health and wellness programs. We provide training and learning opportunities, rotational assignment opportunities, and continuous feedback in order to further our employee development. In addition, our long-term equity compensation is intended to align management interests with those of our stockholders and to encourage the creation of long-term value.
In 2021, we shifted to a mix of hybrid, remote, and in-person work based on role to support talent attraction and retention. We offer ADT employees a variety of learning opportunities, tuition reimbursement, and opportunities for employee mobility by supporting internal promotions to fill open positions, all of which are designed to allow employees to be successful throughout their careers.
Inclusive Diversity and Belonging (“IDB”)
We are committed to building a culture of diversity and inclusion for our employees. We believe our employees should reflect the communities where we live and serve, and we strive to hire and retain a workforce that is truly representative of our markets. We track our workforce composition data over time to determine if we are making appropriate progress in advancing gender, racial, and ethnic representation within our employee demographics. As of December 31, 2021, approximately half of our workforce consisted of racially and ethnically diverse employees and approximately one-third consisted of female employees. ADT’s Inclusive Diversity and Belonging Council (the “AIDBC”) and Business Employee Resource Groups (“BERG”) help advance our IDB efforts.
In 2020, we took a meaningful step on our journey to create a work environment where inclusion, diversity, and belonging can thrive by establishing the AIDBC. The AIDBC represents a broad cross section of our organization, including executive and senior management, and focuses on driving IDB commitments and priorities by identifying and prioritizing action, taking accountability for achieving results, and ensuring timely updates are provided to our Chief Executive Officer. In 2021, the AIDBC established ADT’s IDB “North Star,” which states that everyone deserves to feel safe and to succeed. We strive to create a workplace that encourages the sharing of diverse ideas, celebrates differences, sees value in diversity, and provides the resources, space, and opportunity for employees to grow and succeed. Along with the establishment of the IDB North Star, each of the council members partnered with their respective business executive to establish IDB commitments and priorities for each
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respective business area, which focus on attracting, growing, and developing talent through participation in business initiatives and community work.
We also support and enable our employees to participate in BERGs, which offer specific opportunities for employees to partner and collaborate through learning and networking channels, volunteer projects, and mentoring. Our BERGs also participate in various business initiatives; and officers and executives from across the Company leverage their time, networks, and resources to support our various BERGs and advance IDB efforts, which have grown in 2021.
Employee Well-being and Health & Safety
We show our commitment to caring for our employees’ well-being by devoting significant resources to team members’ wellness, health, and safety. In January 2021, we launched an annual well-being program available to all team members, which includes a variety of education and coaching programs, as well as monthly and quarterly well-being sessions. Employees enrolled in our self-insured medical plan are eligible for cash incentives by completing certain well-being activities. More than 6,500 employees registered for the well-being portal, with 1,500 employees and spouses/domestic partners completing both a health assessment and a biometric screening. Additionally, enhanced safety guidelines, cleaning protocols, and social distancing practices remain in place for both in-office workers and branch and field team members during the ongoing COVID-19 Pandemic. In order to continue to both protect our employees and serve our customers in response to the COVID-19 Pandemic, we have adjusted, and are continuously evolving, certain aspects of our operations, as discussed above under the section “Key Business Developments and Recent Initiatives.”
Our Environmental, Health, and Safety (“EHS”) vision is to build a culture that promotes safe behaviors on each task, every day, to achieve zero incidents and enhance employee wellness, and to minimize our environmental impact. In order to achieve our vision, we strive to incorporate our values of people, prevention, and accountability into our business and the decisions we make each day. We believe that all occupational injuries and illnesses, as well as environmental incidents, are generally preventable, and we focus on compliance with all applicable environmental, health, and safety requirements. We have implemented an EHS management system that includes expectations for compliance, accountability, sustainability, and continuous improvement to foster a culture of safety that enables our employees to minimize risk and to understand and follow safety rules, as well as to identify, avoid, and correct unsafe actions, behaviors, or situations. For example, we continue to institute fleet safety initiatives across our fleet of vehicles, including installing and maintaining collision warning and auto braking technologies on all of our vehicles.
Environmental
We are committed to reducing our impact on the environment by promoting environmental stewardship throughout our organization. In 2021, we began providing virtual service appointments as an option to our customers, reducing our truck rolls and related greenhouse gas emissions. We also acquired Sunpro Solar and believe that we can grow our solar business in a meaningful manner to help reduce the negative impact that certain traditional or non-sustainable energy sources have on the environment. We have also implemented our ADT Environmental Absolutes framework, which represents our focus on complying with environmental requirements, addressing proper disposal of waste streams, and promoting recycling of materials. We invest significant time and resources to reduce our greenhouse gas emissions and have focused on efficiency improvements in lighting, air handling, and data operations. We continually explore methods to reduce greenhouse gases from our motor vehicle fleet, including through the purchase of newer vehicle models having greater fuel efficiency and the use of hybrid vehicles. We employ waste recycling and diversion programs and continue to evolve new initiatives such as the placement of sensors inside our trash dumpsters to monitor waste levels and reduce unnecessary trash hauls. We will continue to look for new, and to improve existing, initiatives that reduce our carbon footprint. We are also assessing the impact of climate change on our operations and supply chain as one aspect of our enterprise risk management review process and will continue to do so on an ongoing basis.
Social
Our volunteerism and philanthropic social initiatives are varied and widespread across the organization and the communities we serve. Our team members across the U.S. give back to their communities as part of ADT Always Cares, a corporate-wide citizenship program comprised of employee-directed volunteerism and philanthropy. We contributed approximately $750,000 to over 100 non-profit organizations in 2021, ranging from local soup kitchens and homeless shelters to many national organizations like Habitat for Humanity and the Ronald McDonald House. Additionally, we identified five students to receive four-year scholarships as part of our support for the United Negro College Fund, and we also provided each student ongoing mentoring from ADT leaders. ADT Always Cares also supports inclusion, diversity, and belonging initiatives by contributing to causes involving our BERGs.
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Through our LifeSaver Awards program, we provide support to first responders, especially volunteer firefighters, an effort which has been a long-standing commitment of ADT as we know it is important for customers to receive a timely response to their alarm activations during an active emergency. In December 2021, ADT granted an aggregate of $50,000 to five volunteer fire departments that were unable to hold their regular fundraisers in their communities due to the impact of the COVID-19 Pandemic. Helping ensure first responder agencies are set up for success with the proper equipment, training, and other needs is paramount to meeting security service customer expectations.
Governance
We are committed to making sure every team member understands and embraces our core values of trust, collaboration, service, and innovation. That charge begins with our Code of Conduct, which outlines our commitment to our customers, our investors, our communities, and to one another. Our Code of Conduct outlines what is expected of our employees and ensures we continue to foster a culture of high integrity. Our Code of Conduct is supplemented by a variety of additional policies applicable to all team members which are designed to further foster ethical and sound business practices including, for example, policies with respect to non-retaliation, equal employment opportunity, anti-harassment, information technology security, personal data protection and privacy, conflicts of interest, intellectual property and the protection of confidential information, insider trading, anti-bribery and corruption, and the approval of transactions with related persons. In addition, our Audit Committee, which is comprised solely of independent directors, is responsible on behalf of the Board for the oversight of our enterprise risk management program. As one part of this program, on an annual basis, management reviews with the Audit Committee and the Board the Company’s Risk Appetite Statement with respect to the level of risk that the Company is willing to accept in pursuit of its goals and the risk tolerances management could assume with respect to those risks that are relevant to the Company. We adhere to the governance requirements established by federal and state law, the Securities and Exchange Commission (the “SEC”), and the NYSE, and we strive to establish appropriate risk management methods and control procedures to adequately manage, monitor, and control the major risks we may face day to day.
We also believe that strong governance is essential to achieving our commitments around ESG. To this end, we have established a working group of leaders from throughout the company who are focused on ESG. During 2021, we conducted a materiality assessment across certain of our employees, investors, customers, and suppliers to help determine what might be the important areas of focus for our ESG initiatives. We also formalized our ESG reporting under the Audit Committee of our Board of Directors.
In February 2022, we adopted the following ESG Commitment Statement: Our commitment to respect the environment, promote social responsibility, and lead with responsible governance is fundamental to who we are and guides our safe, smart, and sustainable business practices.
As we progress our ESG program during 2022, we will focus our initiatives in one or more of the following areas, which we determined to be important to our stakeholders through our materiality assessment: (i) data privacy and cyber security; (ii) inclusive diversity and belonging; (iii) employee well-being and development; (iv) customer and community health and safety; (v) environmental management; (vi) climate change risk management; (vii) responsible governance; and (viii) product safety and quality.
Available Information
Availability of SEC Reports
Our website is located at https://www.adt.com. Our investor relations website is located at https://investor.adt.com. We make available free of charge on our investor relations website under “Financials” our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, reports filed pursuant to Section 16 of the Securities Exchange Act of 1934 (the “Exchange Act”), and any amendments to those reports that are filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file or furnish such materials to the SEC. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding our filings at http://www.sec.gov .
Use of Website to Provide Information
From time to time, we have made, and expect in the future to use, our website as a means of disclosing material information to the public in a broad, non-exclusionary manner, including for purposes of the SEC’s Regulation Fair Disclosure (Reg FD). Financial and other material information regarding the Company is routinely posted on our website and accessible at https://investor.adt.com. In order to receive notifications regarding new postings to our website, investors are encouraged to enroll on our website to receive automatic email alerts. None of the information on our website is incorporated into this Annual Report.
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