ADT 2014 Annual Report Download - page 110

FORM 10-K
customers at higher rates largely driven by an increase in ADT Pulse®customers compared to total customer
additions, partially offset by lower average revenue per customer associated with customers acquired in the
acquisition of Protectron.
Gross customer additions were approximately 1.0 million during fiscal year 2014, reflecting direct and
dealer channel additions of 612,000 and 383,000, respectively. Additionally, we added approximately 373,000
customer accounts in conjunction with our acquisition of Protectron in July 2014 compared to approximately
117,000 customer accounts added in conjunction with our acquisition of Devcon Security Holdings, Inc.
(“Devcon Security”) in August 2013. Excluding these accounts, gross customer additions fell by 102,000, or
9.3%, during fiscal year 2014 as compared to fiscal year 2013, primarily due to lower dealer channel production,
29,000 fewer bulk account purchases and, to a lesser extent, lower levels of customer accounts generated through
our direct channel. The decline in our dealer channel production was primarily due to a lower number of dealers
for the majority of the year, in addition to dealers facing lead generation challenges as a result of the competitive
environment and tighter enforcement of telemarketing regulations. We continue to add new dealers and to work
closely with our existing dealers to help them strengthen their capabilities and better leverage ADT’s marketing
assets to grow their businesses, as evidenced by a 16% increase in dealer channel production from the quarter
ended June 27, 2014 compared to the quarter ended September 26, 2014, excluding bulk purchases. The decline
in customer accounts generated through our direct channel resulted from lead generation challenges partially due
to the impact of the competitive environment, the implementation of more stringent credit policies for new
subscribers and increased focus on ADT Pulse®upgrades for existing customers.
Our ending number of customers, net of attrition, increased by 233,000, or 3.6%, during fiscal year 2014
primarily due to the acquisition of Protectron during the fiscal fourth quarter. Our annualized customer unit
attrition and annualized customer revenue attrition as of September 26, 2014 were 13.2% and 13.5%,
respectively, compared with 13.3% and 13.9%, respectively, as of September 27, 2013. Attrition was impacted
favorably by several new programs implemented to address voluntary, non-pay and relocation disconnects, offset
by the impact of the competitive environment.
Operating Income
Operating income decreased by $76 million, or 10.3%, to $659 million for fiscal year 2014 as compared
with fiscal year 2013. Operating margin was 19.3% for fiscal year 2014 compared with 22.2% for fiscal year
2013.
Operating expenses for fiscal year 2014 totaled $2.7 billion, up 6.8% or $175 million as compared to fiscal
year 2013. Operating expenses included $17 million and $23 million of costs related to the Separation during
fiscal years 2014 and 2013, respectively. The increase in operating expenses is partially a result of $106 million
higher depreciation and amortization expense primarily related to increased depreciation of our subscriber system
assets, which included higher costs associated with ADT Pulse®additions and upgrades, and greater amortization
of dealer generated accounts and customer relationships. Additionally, there was a $101 million increase in cost
to serve expenses which was largely a result of $44 million of costs associated with our three-year conversion
program to replace 2G radios used in many of our security systems, an $18 million increase in restructuring and
other expenses primarily related to severance and a loss on the sublease portion of our office space, $15 million
of incremental costs associated with the operations of Protectron, and a $5 million increase in acquisition and
integration costs. After considering these items, cost to serve expenses increased by $19 million which was
primarily related to increased customer service and maintenance expenses from programs to improve customer
retention, incremental investments to strengthen our business platforms and capabilities to support our business
simplification, innovation and M&A opportunities and higher costs associated with being a stand-alone public
company.
As discussed above, we implemented a three-year conversion program for the replacement of 2G radios
used in many of our security systems which will continue to drive future incremental costs. We anticipate that we
will incur approximately $60 million to $70 million in fiscal year 2015 in conjunction with this program.
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