ADT Inc.

Furthermore, technological improvements and demand for smart home automation solutions have encouraged new competitors to enter the market, including technology goliaths such as Amazon and Google as well as smaller, more price-competitive independent monitoring companies. This poses an ongoing threat to ADT's topline growth prospects as most new entrants focus on the residential market, where ADT generates the majority of its revenue. The stable outlook reflects our expectation that ADT's operating performance will remain stable as it reduces customer churn, broadens its home automation solutions and service offerings, and grows its commercial and DIY businesses over the next 12 months. We forecast FOCF to debt in the low- to mid-single-digit percentage area and high-single-digit revenue growth in 2019. We could

...ADT benefits from its leading market position and substantial scale compared to its peers in the U.S. alarm monitoring industry. ADT is about five times the scale of the 2nd-largest player Vivint. However, the industry is competitive and fragmented, has modest product differentiation, and has low barriers to entry. As a result, ADT is exposed to priced-based competition and high customer attrition rates. We expect annual attrition rates to hover around 13%-15%, which is high but generally on the lower end of its peer set. We anticipate ADT spent around $1.3 billion-$1.4 billion in 2019 to maintain and grow its subscriber base with about a 30-month cash payback period. Despite the company's high leverage, it is the only rated alarm monitoring company that generates free operating cash flow (FOCF). ADT's long-term customer contracts and recurring revenue base (more than 90% of revenues) facilitates operating cash flow generation. This is further supported by price escalations, an improving...

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