Good afternoon. Welcome to ADT First Quarter 2021 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.
I would now like to turn the conference over to Derek C. Big, Vice President of Investor Relations. Go ahead.
Thank you, operator, and we appreciate everyone joining ADT's Q1 2021 conference call. Speaking on today's call will be ADT's President and CEO, Jim DeVries and our CFO and President of Corporate Development, Jeff Likazar. Jim will provide an overview of our Q1 performance and our progress against the company's strategic objectives. Jeff will then cover More detail on our financial performance and 2021 outlook.
Also joining us for Q
and A are Don Young, Our EVP and COO and Jason Smith and Joe Greer, who are Senior Vice President for Finance. This afternoon, we issued a press release and slide presentation on our financial results. These materials are available on our website at investor. .Com. In our materials, you will see that as of the Q1, we have now begun to provide operating segment information.
Our two segments are Consumer and Small Business or CSP and Commercial. Today's remarks include forward looking statements. These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those forward looking statements. Some of the factors that may cause differences are described in our SEC filings. Today's call will also include non GAAP For a complete reconciliation of our non GAAP financial measures, please refer to our press release.
With that, I'll turn
the call over to Jim.
Thank you, Derek, and welcome everyone to our call. Our year is off to a great start, And I want to thank the entire ADT team and our dealer partners for their dedication in taking such exceptional care of our customers. While conditions are still challenging as we work through the COVID pandemic, we remain focused on making our customers' lives Safe and simple at home, at work and on the go. On our call last quarter, I outlined several key priorities for 20 21, including growing our RMR additions and monthly revenue base, improving the performance of Our commercial business and driving innovation both internally and through our partnerships. Our first quarter results reflect the Progress we're continuing to make on each of these fronts.
We're off to a strong start in delivering on our growth objectives. In our consumer and small business segment, we're seeing solid customer demand for our products New gross subscriber additions increased by more than 30% versus the year ago quarter And 86% of our internally generated new customers opted for our interactive services, up 4 percentage points from the start of last year. Concurrently, our total company customer attrition held sequentially at just over 13%. Next subscriber growth combined with rising average revenue per unit on internally generating new customers Drove 25% growth in overall RMR additions or 14% excluding this year's initial Ackerman Account purchases and the smaller bulk account purchase we mentioned on our Q1 results last year. With this strong start to the year, We are firmly on track to achieve our full year target of mid teens RMR growth.
To get there, we still plan to spend $150,000,000 to $250,000,000 In subscriber acquisition, the majority of that incremental investment is expected to hit in the first half of the year, Including $116,000,000 in the Q1. We continue to take a disciplined approach to growth. This quarter, we increased net subscribers and grew our RMR additions, while also maintaining our revenue payback at 2 point Our path to achieving our operating margin target involves a number of important tactics With 2 of the more important ones being first, to increase the reach of our products and services and secondly, To expand the value proposition for customers, our partnerships with D. R. Horton, Lyft and Instacart DISH partnership along with Ackerman as a new dealer is expected to expand our reach into more geographies As we further build national scale that no other provider can offer.
We also continue to And strengthen our commercial capabilities with tuck in acquisitions. We're also developing partnerships that allow customers to receive even more value from their relationship with ADT. For example, we joined forces with both established And new insurance tech firms like Branch and Hippo to give customers more options to protect their life, Property, family and assets and save money on their homeowners insurance. We're regularly engaging with potential new partners Plus meet customers' increasing demand for smart security products across all aspects of their personal and professional lives. So as we think about our key priority of capital efficient RMR growth, not just this year, but also into the future, We believe our initiatives around subscriber acquisition efficiency and customer value will be boosted by external demand catalysts.
We expect the increase in home builds, trends toward deurbanization, evolving interest in security and in Particular, growing smart home adoption will all contribute to long term revenue growth. Our second priority is to improve the performance of our commercial business. After a challenging 2020, largely As a result of the pandemic, we returned to revenue growth and margin expansion during the Q1 and generated a $20,000,000 increase in EBITDA. We still have work to do both on revenue growth and margin rate, Which remains below 2019 levels and we'll continue to invest in the commercial business throughout the year. Importantly, our Backlog in this part of the business remains at record levels.
We've expanded ADT's commercial footprint With the acquisition of Safe Electronics and through our exclusive partnership with WG Security Products, a technology driven provider of shoplifting prevention solutions. This acquisition and partnership combined with the Premium services our team provides and the gradual reopening of customer premises post COVID are producing great momentum in our commercial business. We're also making progress on priorities around innovation Smart home products and analytics and ADT's best in class premium service and smart and safe home innovations. We shared our plans to gradually roll out Google hardware into the ADT ecosystems. Our customers can now purchase Google products.
The Google Voice Assistant, the Nest Hub and the Max Hub Can all be purchased and integrated in your customer's smart home system by ADT's unrivaled network of technicians. While we expect to roll out more integrated products in our joint go to market branding As we move through this year and into 2022, I want to underscore that this is a long term relationship. Our initial focus On building a solid foundation that will allow both ADT and Google to drive the most long term value for our customers. This partnership approach and the transformation it will drive across ADT positions the company to compete and win And the rapidly growing smart home market. In addition, we have a long and proud history of innovation at ADT With a robust and growing internally developed portfolio of patents and other valuable intellectual property, As well as the developers, engineers and other innovators who will help turn our proprietary data and Right.
And the innovative new services and products for our customers. We are increasing our innovation investments this year, call. Planning an initial $50,000,000 on next generation solutions that will power our future services, products and customer experience. With ADT owned and developed solutions combined with Google's hardware and technology, We can further differentiate our company in the eyes of customers. And while we have strong momentum in our business, We, like most companies, also face challenges.
While access to customer premises is much improved today versus last year, The pandemic is still affecting our operations and we're managing customer interactions carefully with a focus on safety. Our 3 gs radio conversions remain on schedule so far this year. However, the worldwide Chip shortages affecting many industries are adding some complexities, including limiting the benefits we can achieve with our sell downs product. While we have meaningfully increased our technician capacity during the past year, we're also faced recruiting challenges in labor markets, which are increasingly tight. We're focused on managing these challenges as We did in the Q1 and excited by the ongoing growth we intend to deliver through 2021.
In closing, 2021 is off to a very strong start and we're excited about the continued evolution of ADT. We have a durable revenue model and our focus on growth is producing a better top line With a trusted brand, national scale and the best technicians in the industry, we have an unmatched set of competitive advantages And we are driving innovation and transformation across all aspects of the business, not just for 2021, but for many years ahead. With that, I'll turn the call over to Jeff for a more detailed review of our Q1 results and our outlook for the year.
Thank you, Jim, and thank you everyone for joining our call today. I'll reiterate Jim's comment that we are off to a solid start to 2021. The highlight of our Q1 was our very strong growth in recurring monthly revenue additions or RMR, which includes our Acumen account purchases. These growth trends are as planned with positive net unit additions and increase in average pricing and strong attrition performance. Our results in base of RMR grew by approximately $6,000,000 compared to the 4th quarter and $10,000,000 compared to the prior year.
Over time, we expect these trends will lead to more growth in monitoring and services revenue, which grew by 2% in the Q1 compared to last year. Our adjusted EBITDA at $542,000,000 was essentially flat year over year and slightly better than our internal plan. The key positive adjusted EBITDA drivers included growth in monitoring and services revenue and commercial improvement, which were offset by the non cash effect of our ownership model change. Before going into more detail, I want to add some color to our segment change. Effective in the Q1 of this year, we adjusted our operating structure and our reporting to segregate our consumer in small business or CSB operations from our commercial operations.
The resulting separation of these segments will add transparency to our results. The commercial segment, which comprised approximately 20% of 1st quarter revenue, is composed of large commercial customers with expansive facilities and or multi site operations, which often requires sophisticated integrated solutions. The CSB segment is made up of all other customers, including residential homeowners, Small business operators and other individual consumers. Our key segment services include our core premise based security and smart home solutions in addition to other offerings such as health and mobile security. You can see our first overview of the 2 segments in our earnings deck, including some historical details in the appendix.
The highlight for the Q1 in our CSD segment was our strong increase in addition to units in RMR. Beyond the Acumen account acquisitions, our deal was especially strong overall in the Q1. We also continue to sell more interactive services, which is becoming the norm for new subscribers. Interactive customers now make up more than 50% of our total CSB subscriber count. The resulting mix shift is helping produce a modest increase in revenue per unit for this segment.
The highlights for our Commercial segment is a return to year over year growth after a challenging 2020 pandemic driven environment. Both revenue and adjusted EBITDA increased in the Q1 as gradual reopening of customers' locations increased demand for and fulfillment of our services. Commercial EBITDA grew by around $21 due to the stronger revenue and margins, including the benefits of net improvements in provisions for credit and overall cost discipline. We have strong backlogs for commercial demand and expect results to continue to recover with an objective of Turning to 2019 run rates during the course of 2021. Turning to cash flow and the balance sheet.
Adjusted free cash flow of $64,000,000 was ahead of our internal budget driven mainly by timing items, but down from last year Due mainly to $116,000,000 increase in net subscriber acquisition costs or SAC. This higher SAC investment is as planned, It's consistent with our growth focus and includes approximately $73,000,000 from our initial Acumen account purchases. Our trailing 12 month revenue payback held flat to last quarter at 2.2x and is down compared to last year's 2.3x Despite the mix shift towards dealer generated accounts, which are slightly more expensive on an incremental basis than direct accounts. Our balance sheet remains in a healthy position to fund our growth initiatives. A highlight in the Q1 was our January 1st repricing transaction, which reduced the spread by 50 basis points and LIBOR 4 by 25 basis points, which translates to about $20,000,000 in lower annual interest Combined with other refinancing transactions in 2019 2020, we have collectively reduced our annual cash interest by well more than 100,000,000 As we look to the rest of 2021 based on demand trends and early results of our growth initiatives, We remain confident in the full year guidance we shared in February, which we affirmed in today's press release and included in our deck.
I also want to point out that our adjusted free cash Our adjusted EBITDA will likewise not be consistent by quarter due to our ownership model change and investment timing. We shared in February that our full year guidance RMR growth in the mid teens and we are off to a very solid start. Other things equal, More growth in RMR additions leads to more SAC investments. As always, we are managing several potentially offsetting items and we will update you on our guidance in August. One other note is that we made solid progress on 3 gs conversions in the Q1, during which we converted more than 500,000 radios.
We continue to estimate a range of $225,000,000 to $300,000,000 of total net cost for the program, which is excluded from our adjusted free cash flow measure. We have incurred a net of approximately $136,000,000 on this program to date, including $59,000,000 in the Q1. Finally, we announced on our last call that we are planning an Investor Day this year. We look forward to seeing many of you there hopefully in person. At that event, we plan to lay out our strategic vision that underpins our excitement and confidence in the future along with a longer range financial framework.
In conclusion, I'd like to join Jim in thanking the entire ADT team for their great work, and I want to thank all of you for your support and for joining our call today. Operator, please open the call for questions.
We will now begin the question and answer session. Our first question is from Kevin McVeigh from Credit Suisse. Go ahead. Great.
Thanks so much and congratulations
on the results.
Hey, Jim or Jeff, I wonder, just given The strength of the EBITDA in Q1 relative to the full year, was that kind of as expected? Or does that allow you to maybe do some incremental investment over the for the year. I guess, just how should we think about the fee relative to the reaffirmed guidance as we work our way through the balance of 2021?
Hey, thanks, Kevin. Yes, more or less as expected. It's a little bit better than our internal budget. Pockets of strength included commercial Recovery, monitoring and services revenue that grew. We're pleased with our adds.
We're pleased With our attrition, on a year on year basis, it's affected, of course, as we described by the ownership model change, but Off to a good start. And as always, we incurred some challenges, some of which Jim described, but we were able to execute some opportunities to offset those challenges. So we feel really good About a hard start to the year.
Awesome. And just real quick, because really the retention looks really, really good at 13 months. Is that still I mean, there's probably still some COVID impact to that, but is that starting to open up a little bit? And any other puts and takes? It feels like there's a little more And is that maybe more operational or just the commercial remixing?
Just any thoughts around that as it relates to the retention?
Yes. I'll start some Kevin on attrition. So how are you doing Kevin? So we ended the year at 13.1, Maintain that level in the Q1. It's an improvement of 40 bps from the Q1 last year.
Relocation cancels were worse year over year and we were favorable on loss to competition and non pay. So we shared we expected some headwinds from the absence of the defenders chargeback, But we were able to offset those headwinds. Underlying performance, Kevin, was strong. Q1 2021 NPS It was better than Q1 'twenty. Some of our operating metrics, 1st call resolution save rates are Cracking nicely.
And so we still think that we have some headwinds to face principally Relocation and the loss of the defenders chargeback, but we feel pretty good about attrition.
That's great to hear. Kevin, it's Jeff. One other thing I'd add too on your question on EBITDA, which I said in my prepared remarks, but there are some unusual dynamics year on year because of COVID, some of which Jim touched on in his response. So I wouldn't multiply Q1 by 4. We've held our guidance as we put it out originally.
So feel really good about where we are. It's expected to be a little bit more in the Q1 and our guidance is the same as we shared a couple of months ago.
Very helpful and congratulations Jeff on the new roles.
Thank you.
Our next question is from Jeff Kessler from Imperial Capital, go ahead.
Thank you. And again, I want to congratulate you guys on your new roles, including Don. Can you go through you went through fairly quickly at the very beginning of your presentation, Jim, The various subheadings of RMR growth And how one rolls into the other. Can you go through that again?
And clarify which part I I can provide more color, Jeff.
Just on what sub segments of RMR Or adding up to the larger mid teens total growth that Yes.
So our overall and Jeff, this is Jeff. Our overall RMR Ad growth was 25%. If I exclude from that the initial Ackerman account purchase and then exclude from that A bulk account purchase that we mentioned last year, we would have been up 14%. Our full year guidance was to be up in the mid teens and In that guidance, of course, was Acumen. We knew of Acumen when we gave the guidance, which we're counting on a full year basis, contributing Something in the mid single digits towards that mid teens growth.
Aside from Ackerman, our dealer channel Was particularly strong. So I would call that out as another driver and then commercial recovery, with RMR It's off a smaller base, but the commercial business coming back is encouraging as well. Okay.
Okay, thank you. With regard to your commercial business, commercial seems to have a very strong backlog, Maybe even a stronger pipeline. And again, while we're hearing while my sources in the industry basically Up and down the line are basically very, very bullish about this turning into revenue later In the year or maybe 2022, can you just talk a little bit about where your commercial industrial business is At this point in time, in being able to drive the backlog and maybe the pipeline that's supporting That backlog into revenue closings, actually, when are we going to see the result of that?
Jeff, it's Jim and I'll share some perspective on that. We're also very bullish about the commercial business. Results have been improving on a sequential basis and now we've improved on a year over year basis. We're pleased with our progress. We have a good bit of work yet to do.
A few headlines to Share with you, we believe that we can compete and win in this business. We have outstanding service. We think we have the best leadership team in the space. Secondly, we are confident that we'll return to double digit top line growth in 2021. We are Good about our sales pipeline and our backlog.
Our threethirty one backlog is at another record both for IR and RMR. And then lastly, we think we have some opportunity to improve margin. And on a run rate basis, we're That we can get to 2019 levels by the end of this year and longer term EBITDA margin rates in the 12% range. So Summary would be, we're also very bullish here. We'll continue to invest in commercial.
We're growing new verticals Like healthcare, education and government. And just as we did during the pandemic year, We're taking a long term view of this business, but feel really good about it.
Okay. And if I might just throw in one more since this is my last press conference. One of the areas, obviously, that I have been focused on for the last maybe 5 or 10 years Has obviously been the false alarm rates being generated by new players in the industry as well as old players who aren't You and so, well, who have legacy systems. As the industry kind of moves toward or as police departments kind of try to move toward a scoring system So that some people don't get serviced in 10 minutes and some people don't get serviced in 3 Get serviced some people get serviced in 3 hours. Where is ADT right now in the project with Obviously, with Google and other technology companies to bring some type of standard to this industry.
So Jeff, this is Don. Appreciate the question. As you know, we've been talking about this for a long time. No. As usual, ADT is leading from the front on this, both on helping to define the AVS-one standard that you were just referring to to help score Alarms differently, intrusion alarms specifically.
At the same time that the standards being developed and a standard meant for the entire industry to follow, We are working closely with Google as you know to develop the technology to live up to that standard. Everything from verifying location information at the time of the alarm event, Video verification, a number of data streams that we are using Google's cloud to provide us to be able to provide a real time Nothing is going to live up to that standard. We're really excited about it. We've seen some progress with the recently with the rollout of SignalChat, Small factoid, we actually have signal chat deployed over a 1000000 customers and we're seeing a 50% reduction in false alarms Just from that customer set alone. So we're already making waves on reducing false alarms and the next wave is really to leverage analytics
Thank you very much and good quarter and Good luck guys.
Jeff, I think if I have you've been covering ADT since 1980 And on behalf of the organization, good luck in your retirement. Thanks for your support over all these years. We're looking forward Working with Brian and very much wish you luck in retirement.
Thank you. I'm not leaving the whole industry, but I'm leaving these conference calls. I'm out of the sell side. Bye bye.
At this time, we have no questions. So this concludes our question and answer session. I would like to turn the conference back over to the company for any closing remarks.
Thanks, Kate. In closing, I'd like to extend my appreciation again to our employees and dealers. We had a Strong start to the year. I'm proud of your collective efforts. Thanks too for everyone joining our call this evening.
We're optimistic about the year As well as ADT's future and looking forward to the growth ahead. Have a good night everybody.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.