ADT 2014 Annual Report Download - page 84

FORM 10-K
Our customer generation strategies through our authorized dealer and affinity marketing programs and
the competitive market for customer accounts may affect our future profitability.
A principal element of our business strategy is the generation of new customer accounts through our
authorized dealer program, which accounted for approximately 40% of our new customer accounts for our 2014
fiscal year. Our future operating results will depend in large part on our ability to continue to manage this
business generation strategy effectively. Although we currently generate accounts through hundreds of
authorized dealers, a significant portion of our accounts originate from a smaller number of authorized dealers. In
particular, during fiscal year 2014, one of our authorized dealers signed a 5-year renewal agreement with us and
accounted for approximately 18% of all our new accounts. We experience loss of authorized dealers from our
authorized dealer program due to various factors, such as authorized dealers becoming inactive or discontinuing
their electronic security business, non-renewal of our dealer contracts and competition from other alarm
monitoring companies. If we experience a loss of authorized dealers representing a significant portion of our
customer account generation from our authorized dealer program or if we are unable to replace or recruit
authorized dealers or alternate distribution channel partners in accordance with our business strategy, our
business, financial condition, results of operations and cash flows may be materially and adversely affected.
In addition, successful promotion of our brand depends on the effectiveness of our marketing efforts and on
our ability to offer member discounts and special offers for our products and services. We have actively pursued
affinity marketing programs, which provide members of participating organizations with discounts on our
products and services. The organizations with which we have affinity marketing programs closely monitor their
relationships with us, as well as their members’ satisfaction with our products and services. These organizations
may require us to pay higher fees to them, decrease our pricing for their members, introduce additional
competitive options or otherwise alter the terms of our participation in their marketing programs in ways that are
unfavorable to us. These organizations may also terminate their relationships with us if we fail to meet member
satisfaction standards. If any of our important affinity or marketing relationships, such as our relationships with
USAA or AARP, were terminated or altered in an unfavorable manner, we would lose a significant source of
sales leads and our business, financial condition, results of operations and cash flows could be materially and
adversely affected.
We face risks in acquiring and integrating customer accounts.
An element of our business strategy may involve the bulk acquisition of customer accounts. Acquisitions of
customer accounts involve a number of special risks, including the possibility of unexpectedly high rates of
attrition and unanticipated deficiencies in the accounts and systems acquired despite our investigations prior to
acquisition. We face competition from other alarm monitoring companies, including companies that may offer
higher prices and more favorable terms for customer accounts purchased, lower minimum financial qualifications
requirements for purchased accounts or lower prices for monitoring services provided. This competition could
reduce the acquisition opportunities available to us, slowing our rate of growth and/or increase the price we pay
for such account acquisitions, thus reducing our return on investment and negatively impacting our revenue and
results of operations. We cannot assure you that we will be able to purchase customer accounts on favorable
terms in the future.
The purchase price we pay for customer accounts is affected by the recurring revenue historically generated
by such accounts, as well as several other factors, including the level of competition, our prior experience with
accounts purchased in bulk from specific sellers, the geographic location of accounts, the number of accounts
purchased, the customers’ credit scores and the type of security or home/business automation equipment or
platform used by the customers. In purchasing accounts, we have relied on management’s knowledge of the
industry, due diligence procedures and representations and warranties of bulk account sellers. We cannot assure
you that in all instances the representations and warranties made by bulk account sellers are true and complete or,
if the representations and warranties are inaccurate, that we will be able to recover damages from bulk account
sellers in an amount sufficient to fully compensate us for any resulting losses. If any of these risks materializes,
our business, financial condition, results of operations and cash flows could be materially and adversely affected.
18