Good morning. My name is David. I'll be your conference operator today. At this time, I'd like to welcome everyone to the ADT First Quarter 2023 Earnings Conference Call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question-and-answer session. If you'd like to ask a question during this time, simply press the Star key followed by number one on your telephone keypad. If you'd like to withdraw your question, press Star one once again. Elizabeth Landers, Senior Director of Investor Relations, you may begin your conference.
Thanks, operator. Good morning, everyone. We appreciate you joining ADT's First Quarter 2023 Earnings Call. Speaking on today's call will be ADT's President and CEO, Jim DeVries, and our EVP and CFO, Ken Porpora. Following the prepared remarks, we'll take analyst questions. Joining us for Q&A are Don Young, EVP and Chief Operating Officer, and Jill Grew, SVP of Finance, Investor Relations, and Communications. Earlier this morning, we issued a press release and slide presentation of our financial results. These materials are available on our website at investor.adt.com. Before we start, I do need to mention that today's remarks include forward-looking statements that represent our beliefs or expectations about future events. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of the factors that may cause differences are described in our SEC filings.
We will also discuss non-GAAP financial measures on the call. The most directly comparable GAAP measures, along with the reconciliation to those measures, are available on the ADT Investor Relations website. With that, I'll turn the call over to Jim.
Thanks, Elizabeth. Good morning, thank you to everyone for joining us today. This morning, ADT released our first quarter earnings. I'm pleased to share that we had a solid start to the year with growth in revenue, adjusted EBITDA, adjusted free cash flow, and adjusted EPS, each growing nicely year-over-year, while concurrently, our net leverage ratio continued to decline. Our total top line grew 4%, with commercial delivering very strong growth at 15%, and we ended the quarter with a record recurring monthly revenue balance of $378 million. Our revenue payback now stands at a record low of 2 years, down from 2.3 a year ago, with gross attrition remaining at a record 12.5%.
These factors are driving better capital efficiency and drove a year-over-year increase in adjusted free cash flow, including interest rate swaps of over $70 million versus Q1 last year. This improvement is consistent with our goal of growing this cash flow metric by 20% for a second consecutive year. Looking forward, the resiliency of our business is evident. There are many favorable factors that have ADT well-positioned to meet our 2023 guidance. First, the market is showing strong spending and supply chain pressure is easing, boosting our commercial segment to outperform our expectations and capture market share. While commercial revenue grew 15%, our installation backlog remained steady at approximately $420 million, demonstrating the enormous strength of recent sales and reinforcing a strong pipeline for continued revenue growth. Equally impressive within commercial was our profitability. EBITDA margins exceeded 12% for the quarter.
Second, overall customer retention rates are stellar, and ending RMR continues to grow at a healthy rate. As a reminder, when homeowner relocations are down near the levels experienced recently, there's an inverse relationship between existing customer retention and new customer adds. Worth mentioning, we're benefiting in retention from both the macro move trends and the continuous innovations to improve the customer experience. Third, in partnership with State Farm, we've just launched our initial offering in three states with plans to expand to six more states before the end of the year. Our Google partnership is helping improve our product offering and increasing our installation revenue per unit, which is up $150 over the prior quarter and $300 over the prior year period.
We continue to see high attachment rates on Nest doorbells and cameras compared to our previous offering. Customers are buying more devices, increasing the average device per system by more than 20% year-over-year. In February, we launched ADT Self Setup, the first system to integrate our internally developed ADT+ app with Google's Nest products. The launch of these products led to over a 30% increase in DIY sales this quarter versus the first quarter of 2022. We're driving more awareness of our integrated product offerings with our new No Worries marketing campaign, which is being partially funded by Google success funds. We anticipate receiving the first $50 million of success funds this year and are working collectively to unlock the next $50 million tranche. Most of this fund will be spent in various forms of marketing to accelerate subscriber growth.
We expect our Google partnership to accelerate even more when we introduce an integrated Pro Install solution later this year. Finally, we're advancing our CSB cost reduction efforts by streamlining our organization, right-sizing our real estate portfolio, and placing greater focus on our key priorities. We expect to generate meaningful cost savings through these efforts and believe our efforts will lead to increased speed and efficiency. There are many positive outcomes in our business, but we're also cognizant of and monitoring the external environment we're operating in. For example, in our CSB segment, consumer economic pressures are resulting in somewhat higher non-pays and attrition. The solar business has experienced some continued pressure as well. At an overall industry level, higher interest rates are pressuring growth as financing for residential solar has become more expensive and more sensitive, which is offsetting some growth potential from the Inflation Reduction Act.
Additionally, we still have work ahead of us integrating ADT Solar. This quarter's decline in revenue is not the performance we expect, and we're executing a number of strategic actions to improve operations, customer experience, and financial results. These actions include scaling our cross-selling, launching a new dealer program, and implementing and streamlining the business to improve costs and efficiency. In light of these actions and our efforts to strengthen our foundation for growth, we anticipate meaningful improvement in ADT Solar performance by the end of the year. In closing, we remain focused on achieving progress among all our segments and advancing toward our 2025 goals. We believe ADT has a recession-resilient business model, and we have plans to manage the challenges presented in our solar business and across the broader macro environment.
We have encouraging momentum in our CSB and commercial businesses and great partners in Google and State Farm. ADT's impressive results reflect the dedication and determination of our 20,000-plus employees and dealer partners. I want to thank them for all they do to take care of our customers every day. I'll now turn the call to our CFO, Ken Porpora, who will take you through our results in more detail. Ken?
Thank you, Jim. Thank you everyone for joining our call today. As Jim mentioned, we're off to a solid start this year. Total company revenue was $1.6 billion for the quarter, up 4% versus prior year, with CSB and commercial showing strength at up 7% and 15% respectively. Recurring monthly revenue, or RMR, from our subscriber base was up 4% year-over-year to $378 million, a company record and outcome of our continued higher average pricing and improved customer retention. This translated to Adjusted EBITDA of $625 million, up 4% versus prior year, with strong margins in both CSB and commercial. Adjusted net income for the quarter was $102 million or $0.12 per share, our fourth consecutive quarter of positive adjusted net income.
Moving to segment highlights, our consumer and small business or CSB segment delivered total revenue of $1.1 billion in the first quarter, up 7% versus prior year. CSB adjusted EBITDA increased by $34 million or 6% for the quarter, driven by increased revenue combined with cost discipline. We are continuing to see strong demand for Google Nest products, which have accelerated our SAC efficiency and are driving a record revenue payback of 2.1 years within CSB, an improvement over 2.4 years from a year ago. Our installation revenue per unit for Pro Install is now approximately $1,450, up 27% versus prior year. Our attachment rate for Nest doorbells is approximately 50% and realizing a roughly 20% increase in cameras per home versus the same time last year.
New customers are buying larger interactive systems, the new RPU for residential Pro Install is over $4 per month or approximately 8% higher than our average existing customer base. We are also seeing benefits from the ADT Virtual Assistance program, which continues to drive high levels of customer satisfaction with roughly 50% of all service tickets currently being satisfied virtually. As committed in our Investor Day just over a year ago, we are improving returns in our CSB business by now generating an average core customer value of approximately $3,000 per subscriber, up about $500 since 2021. The ratio of customer lifetime value to net SAC per subscriber is up to 3.2x versus 2.8x in 2021.
As a reminder, core customer value equals the estimated recurring revenue during the expected subscriber life, less net SAC and less expected service costs. Turning to our commercial segment, we delivered total revenue of $335 million in the quarter, up 15% versus prior year, with strength in both sales and installation revenue. This strong revenue performance drove commercial adjusted EBITDA of $41 million, up 73% versus prior year, and margin expansion of 400 basis points to over 12%. We continue to be very pleased with the momentum we have in our commercial segment. Our solar segment posted revenue of $145 million in the quarter, with an Adjusted EBITDA loss of $11 million. In the quarter, we also took a non-cash goodwill impairment charge of $193 million associated with the solar segment.
This charge was a result of current macroeconomic conditions and operating results of ADT Solar relative to expectations and has been excluded from Adjusted EBITDA. As Jim mentioned, we anticipate our actions will improve Solar's growth and profit performance by the end of this year. Turning our attention to cash flow. Adjusted free cash flow, including interest rate swaps, was $16 million in the quarter, up $71 million versus prior year as lower SAC from efficiency and lower volume of customer additions was partially offset by higher technology investments. Strong EBITDA growth in our CSB and commercial segments and improved capital efficiency helped us overcome the shortfall in our Solar segment. Our improved efficiency enabled us to grow our ending RMR by 4% on 27% lower year-over-year SAC spend, which is reflected in our record two-year revenue payback. We continue to focus on strengthening our balance sheet.
As of the end of the first quarter, our net leverage ratio declined to 3.8 times, down substantially from 4.4 times at year-end 2021. This gets us closer to that ratio being at or below 3 times by the end of 2025. In March, we used the senior secured term loan A facility to redeem $600 million of 2023 notes. We plan to redeem the approximately $100 million remaining outstanding balance at or prior to maturity in June 2023 using proceeds from our term loan borrowing and cash on hand. Following that repayment, we have no meaningful maturities left this year, allowing us to shift our focus to maturities coming due next year.
Today, we are redeeming $150 million of the $750 million 2024 notes with cash on hand, reflecting our confidence in our continued cash generation. By the end of the second quarter, we will have completed approximately $220 million in debt pay down this year. We are planning to reduce total debt by over $400 million in 2023, a solid step to achieving our goal of $1 billion in net debt reduction by 2025. With manageable debt maturities, limited variable rate exposure, and our strong recurring revenue mix, we are well-positioned against rising interest rates. Finally, turning to guidance.
We remain on track to achieve the full year 2023 guidance metrics that we first announced on February 28th, as we continue to expect the momentum of our business to overcome macro trends and result in growth in revenue, earnings, and cash flows for the full year. Before we transition to Q&A, I'd like to add my sincere thanks to the entire ADT family for their extraordinary effort this past quarter. I am confident that we are on a path to achieve our 2023 guidance, illustrating continued progress towards our 2025 long-term goals. With nearly 11% free cash flow yield, we believe our stock represents an attractive opportunity for investors. Operator, please open up the call for questions.
Thank you. At this time, I'd like to remind everyone in order to ask a question, press star, then the 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. We'll take our first question from Peter Christiansen with Citigroup. Your line's open.
Thank you. Good morning, guys. Thanks for the question. Jim, obviously, you've shown quite a bit of improvement in efficiency the last many quarters actually, and the latest attrition that looks particularly nice. At the same time, though, you are seeing CSB new unit growth declining. I'm just curious, you know, how are you thinking about the balance between efficiency versus growth? Perhaps, I guess, once we get into the do it for me Google release later this year and into 2024, do you think that that balance could shift? Thank you.
Thanks for the question, Pete. Yeah, Q1 for us on the gross adds side was most definitely impacted by the macro environment. As you know well, relocations represent a significant portion of our of our adds, and that coin is a two-headed coin. It benefits us from a retention perspective, provides a little bit of headwind when it comes to gross adds, and we experienced some of that in Q1. I feel good about the product launch that you just mentioned coming later this year when we integrate our DIFM product with Google. I'm bullish, continue to be bullish about State Farm. I think some of our dealers are coming around nicely, so I think we can offset it.
The relocations, the lack of relocations is definitely an impact from a, from a macro perspective.
Thanks. That's helpful. Then just as a follow-up, I want to dig a little bit into Solar. Obviously, we know California was 40% of the market, pre-changes in net metering and it's likely a sore spot today. I was just wondering if you could juxtapose and certainly interest rates are a factor for everyone, but just wondering if you could juxtapose some of the traction you're getting in California and outside, and just so we can get a sense of, how you see the market evolving over the next coming months as consumers digest some of the new economics.
Yeah. The, there's obviously puts and takes. For us, the California market is relatively small, less than 5% of our...
Installations are in California. The net metering impact for us within California has been pretty modest. Interest rates are definitely an issue, making solar more expensive. There's some puts and takes there. The Inflation Reduction Act, as you know, will be a nice tailwind for this business. As utility rates increase, energy prices increase, that is somewhat of a offset as well. We're long-term bullish on solar, Pete. We've got some work to do from an operations perspective to get our legs under us, but I continue to think we continue to think that this market is a significant growth market for us going forward.
Really helpful. Thank you, Jim. Take care.
Thank you. Next we'll go to George Tong with Goldman Sachs. Your line's now open.
Hi. Thanks. Good morning. You talked about launching the new joint State Farm offering in three states, and then plan to launch in six more states this year. Can you talk about traction that you're seeing with customer adoption with the offerings that you've launched so far and some of the terms that are involved with the, with the joint offering?
Sure, George. Thanks for the question. The vision here with State Farm is to transform the homeowner insurance business from purely restoration to include prediction and prevention, to essentially avoid losses. The product is a what we call Circle of Protection, we are using fire, intrusion, and water detection devices to help mitigate claims. We rolled out in Indiana a few weeks ago. We rolled out in Illinois and Pennsylvania last Thursday. We're very early on in the experience. The teams are working well together. I think we have something in the zone of 100 sales or so. But we're excited about it. You know, we'll be in at least another six states throughout the rest of the year.
The traction it's early in the game, but feels pretty good. We're still working on buy flow and training agents and the upsell process. We're out in the wild. It's early in the game. We feel good about it, George.
That's helpful. Thank you. You also mentioned you're undertaking a number of strategic actions to improve the operations of your solar business, including launching a new dealer program, various costs and efficiency initiatives. Can you elaborate on some of these plans, what your key milestones are, and how long it'll take you to improve overall underlying performance of solar to the point of where you would like to see the business grow at?
You bet. We're playing the long game in solar. I mentioned this on our last call, we're going slower, slow now so we can go faster later. Mid-year last year we ran into some challenges around permitting. One of our dealers liquidated. We went through a name change, a panel supplier change, and all of that caused solar to grow less rapidly than what we would have liked. It also exposed some operational challenges. We made the decision to invest in our reputation. We made the decision to invest in customer experience, clean up our backlog. Incompletes are down 50%, inspection backlogs down 50%. We're in the process of rebuilding our operations for scale. We opted, frankly, for short-term pain for the long term.
The sales cycle in solar is longer than in our CSB business. It's, you know, from sale to install, call it three to four months sometimes. For the improvements in our operations to start to show, that's gonna be later in the year. I think we start to turn the ship more materially in Q3 and expect more positive, more positive output in Q4, George.
Very helpful. Thank you.
Next we'll go to Toni Kaplan with Morgan Stanley.
Thank you so much. Wanted to actually follow up on that last question with the solar actions. I guess, is there an analogy, Jim, that you could give on have you had an example of operational challenges in the past where, like, you could point to that you've been able to turn it around? you know, I guess just give us confidence that solar will improve by the end of the year. you know, that'd be very helpful.
Yeah. The work, much of the work that we're doing now, Toni Kaplan, is around process improvement on the operations side of the house. We are investing, we're investing in infrastructure. We're improving cycle time. We're reducing leakage. We're doing a great deal of work in data analytics so that we can have better reporting. I mentioned a couple of the improvements earlier. Our backlog needed pretty significant cleanup. The inspection backlog's down a little more than 50%. Incompletes are down 50%. We are moving customers at record levels to PTO, to permission to operate. I like the early signs of improvement in solar. We've got a great team out there.
Like I shared with George, because of the cycle time, it's gonna take some time before we start to see the financial results. We wanted to shore up the operation before we turn on marketing again and before we lean into cross-selling. As we gain confidence that the customer experience will be what we need it to be, then we'll turn on the jet fuel.
Great. Wanted to ask about commercial as well. I thought that that looked pretty good this quarter. you know, maybe just talk about sustainability there, any sort of drivers in the quarter in particular to call out, and also the profitability was very good as well. maybe just any additional color on commercial?
Yeah. The commercial's hitting on most every cylinder. We're doing well in our day-to-day blocking and tackling. We're developing capabilities, I've mentioned this before, in new verticals that are starting to show green shoots in energy and education and government. Q1 was rock solid. Revenue up 15% against a solid quarter last year. EBITDA was up very significantly, and not unimportantly, we didn't grow that way at the expense of drawing down our backlog. Our backlog, both in IR and RMR, are still at record levels. This, Toni, is a business that's about service. We provide excellent value to our customers and the business has been rewarded for it. On the margin front, we continue to improve productivity.
The team has done a great job from a cost management perspective and, the EBITDA expansion is a result of that.
Thanks so much.
Thank you.
Next, we'll go to Brian Ruttenbur with Imperial Capital. Your line's open.
Yes. Thank you very much. Question on State Farm. Can you talk a little bit about the structure that you have right now, or ARPUs or anything that you can give us to grab on to as you're putting these systems in, you know, the fire, leak detection? You go into an existing State Farm homeowner, policyholder, and you put these in, and what is your ARPU? I assume it's lower than your normal, or is it higher than normal? Give us something to reference.
Brian, the ARPU is lower, as is the SAC. The return on this Circle of Protection business is pretty good for us. The way that the model works is it's a sort of think of it as smart home lite, where there's a handful of devices, including water mitigation, but excluding some of the Google products. The core Circle of Protection product doesn't include video doorbell or cameras. It's basically smoke, and water detection. When that product is installed, the tech engineer seeks to upsell the customer to other devices and other services. Again, this is very early, so it's too soon to curtain bow. But I think that the early experience suggests that the thesis of being able to upsell is real.
Again, we don't have enough under our belt to celebrate, but early indications, you know, would lead to bullishness.
Okay. Just to follow up on that to understand fully, the State Farm representative gets a lead and says, "Hey, you need to sell it into X, Y, and Z house," and therefore that homeowner gets a discount of $10 a month or whatever off their insurance, so it basically becomes a wash for that kind of system. Is that the sale?
Yeah. The State Farm agent, during the process of selling insurance, introduces the customer to the alternative of the Circle of Protection. Customers, of State Farm that have monitored, smoke, fire, and intrusion have a discount. That discount varies by state, but the intent is for that discount to provide an offset, of sorts to the monitoring fee that the customer incurs.
Okay, perfect. Last question real quick on attrition. Last we spoke on the last call, you were looking for attrition to kind of be flattish on the year. I don't know if that was your exact words, flattish, but that's what I at least wrote as I'm rereading my stuff. Is that where you're thinking on the year is flattish attrition?
You know, tough to predict. We have a little bit of pressure on non-pay cancels. Relocation continues to be a tailwind for us. I'd say, Brian, like a lot of the leading indicators continue to be positive for us. Installation revenue per unit is right around $1,450. We know that the more a customer invests upfront, the stickier they are. Our service backlog is at just about a record low. We have an uptick in credit scores, the quality of our new customers has been excellent. You know, as of now, I'm feeling pretty good about it. With again, a little bit of pressure on non-pay cancels, but positive momentum in the other categories to offset it.
I'd also add, Brian-
Brian, thank you very much.
Hey, Brian, just a quick add to that one. In the last couple of weeks, and I think we've seen that nationally as well, you know, some of the delinquency rates have started to come down, which is a good sign. I think we felt a little bit of pressure in the first quarter, specifically in the delinquency side, but starting to see some positive signs in the last couple of weeks.
Great. Thank you for the additional color.
As a reminder, ladies and gentlemen, if you have a question, it's star one on your telephone keypad. Next, we'll go to Ashish Sabadra with RBC Capital Markets. Your line's open.
Thanks for taking my question. I just wanted to better understand on the gross RMR addition, how does the Google partnership and the State Farm also help you drive an improvement in the RMR addition going forward, particularly as you unlocked that $50 million of marketing fund on the Google partnership side and get 3,000 agents from State Farm also onboarded onto the program? Thanks.
Sure. Hey, Ashish, it's Ken. I'll grab this one if it's okay. On the State Farm side and Google, yeah, a number of catalysts start to kick in this year, and into next year as well, which has us, you know, bullish on the RMR going forward. On the State Farm side, as Jim mentioned earlier, we're only in 3 states for a couple of weeks now. We'll be in 9 by the end of this year and continue to expand there. The opportunity there is tremendous with State Farm as far as RMR adds, especially with the Circle of Protection package that Jim outlined earlier. Again, we'll start to see that more and more ramp.
We're learning in the pilots now, and then we'll accelerate as we get to more states and also tweak the offer and the packages as we learn more from the early customers. On the Google side, two main catalysts. By the way, back to State Farm for a sec. We also will tap into the opportunity fund, several hundred million dollars to kind of grease the skids on growing our subscriber count with State Farm is an exciting opportunity for us. On Google, two main call-outs. The first one is we just launched a couple of months ago our new DIY product with Google. This is the ADT Self Setup product.
We see that as an increasing opportunity to tackle some of that DIY TAM that's been accelerating in the last couple of years, this product is killer that we've designed essentially with Google and our partners. That is just essentially fresh in the market, we're seeing some really nice signs in DIY growth. Later this year, as we mentioned in the prepared remarks, we're launching our new next-generation Pro Install product with Google as well. That will be our next-generation hardware that will offer some very cool services with our ADT+ app, that'll allow us to fully tap into all of the marketing and opportunity and success fund there as well. Those couple of catalysts that we see with those key partners have us very excited over the near term and long term.
That's really helpful color. Thanks. Thank you.
All right. I show there are no further questions. I'd now like to turn the call back over to management for any additional or closing remarks.
Thank you, operator. Thanks everyone for taking the time to join today. As you heard today, we're effectively growing our business, building brand loyalty, improving our capital efficiency. We have good momentum in our businesses, catalysts for growth with State Farm and Google, we're off to a strong start in 2023. I'd like to extend my appreciation to our ADT employees and dealer partners for a terrific quarter. Our results are a direct reflection of your efforts. Thanks again, everyone, have a great day.
This concludes today's conference call. You may now disconnect.