ADT 2014 Annual Report Download - page 80

FORM 10-K
We rely on a significant number of our customers remaining with us as customers for long periods of
time.
We operate our business with the goal of retaining customers for long periods of time in order to recoup our
initial investment in new customers, and we generally achieve cash flow break-even in approximately three
years. Accordingly, our long-term profitability is dependent on long customer tenure. This requires that we
minimize our rate of customer disconnects, or attrition. The primary reason for disconnects is when customers
relocate and do not reconnect. Customer relocations are impacted by changes in the housing market. See risk
factor “We are susceptible to downturns in the housing market and consumer discretionary income, which may
inhibit our ability to sustain customer base growth rates.” Some other factors that can increase disconnects
include problems experienced with our product or service quality, unfavorable general economic conditions, and
the preference for lower pricing of competitors’ products and services over ours. If we fail to keep our customers
for a sufficiently long period of time, our profitability, business, financial condition, results of operations and
cash flows could be materially and adversely affected.
If we experience significantly higher rates of customer attrition, we may be required to change the
estimated useful lives of assets related to our security monitoring customers, increasing our depreciation
and amortization expense or impairing such assets.
We amortize the costs of our acquired and dealer-generated contracts and related customer relationships
based on the estimated life of the customer relationships. We similarly depreciate the cost of our internally
generated residential and business monitoring system assets. If attrition rates were to rise significantly, we may
be required to accelerate the amortization of expenses related to such contracts and the depreciation of our
subscriber system assets or to impair such assets, which could cause a material adverse effect on our financial
condition and results of operations.
We are susceptible to changes in the housing market and consumer discretionary income, which may
inhibit our ability to sustain customer base growth rates.
Demand for alarm monitoring services is affected by the turnover in the housing market. Downturns in the
rate of the sale of new and existing homes, which we believe drives a substantial portion of our new customer
volume in any given year, would reduce opportunities to make sales of new security and home automation
systems and services and reduce opportunities to take over existing security and home automation systems.
Recoveries in the housing market increase the occurrence of relocations which may lead to customers
disconnecting service and not contracting with us in their new homes. In addition, because of personal economic
circumstances, current security alarm and home automation customers may decide to disconnect our services in
an effort to reduce their monthly spending and may default on their remaining contractual obligations to us. Our
long-term revenue growth rate depends on installations exceeding disconnects. If customer disconnects and
defaults increase, our business, financial condition, results of operations and cash flows could be materially and
adversely affected. See risk factor “We rely on a significant number of our customers remaining with us as
customers for long periods of time.”
Shifts in our customers’ choice of, or telecommunications providers’ support for, telecommunications
services and equipment could adversely impact our business and require significant capital expenditures.
Certain elements of our operating model have historically relied on our customers’ continued selection and
use of traditional land-line telecommunications to transmit alarm signals to our monitoring centers. There is a
growing trend for customers to switch to the exclusive use of cellular, satellite or Internet communication
technology in their homes and businesses, and telecommunication providers may discontinue their land-line
services in the future. In addition, many of our customers who use cellular communication technology for their
security and home/business automation systems use our products that rely on 2G cellular technology, and certain
telecommunication providers have advised us that they will discontinue their 2G services in the future. Some
older installed security systems use technology that is not compatible with the newer cellular, satellite or Internet
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