Timothy J. Perrott - Vice President-Investor Relations Naren K. Gursahaney - President, Chief Executive Officer & Director Michael S. Geltzeiler - Chief Financial Officer & Senior Vice President.

Charles R. Clarke - Credit Suisse Securities (USA) LLC (Broker) Ian A. Zaffino - Oppenheimer & Co., Inc. (Broker) Jason Boisvert Bazinet - Citigroup Global Markets, Inc. (Broker) Jeffrey T. Kessler - Imperial Capital LLC.

Good day, ladies and gentlemen, and welcome to the ADT Corp. Q3 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to Mr. Tim Perrott, Vice President of Investor Relations. Please go ahead, sir..

Thank you, Candice, and good morning to everyone and thank you for joining us for our call to discuss ADT's third quarter results for fiscal year 2015. With me on the call today are Naren Gursahaney, ADT's CEO and Mike Geltzeiler, ADT's CFO.

Let me begin by reminding everyone that the discussion today contains certain forward-looking statements about the company's future performance, which are subject to the risks and uncertainties and speak only as of today.

Factors that could cause actual results to differ from these forward-looking statements are set forth within today's earnings release, which we expect to furnish to the SEC in an 8-K report, and in our Form 10-Q for the quarter ended June 30, 2015, which we expect to file with the SEC later today.

I once again, we wanted to apologize that our third quarter earnings release was posted later than usual due to factors that were beyond our control as the wire service had an outage that was causing the delay.

In our third-quarter 2015 earnings release and slides which are now posted on our website at adt.com as well as on our Investor Relations app we have provided a reconciliation of the company's non-GAAP financial measures to GAAP. We urge you to review that information in conjunction with today's discussion.

For those of you following on the webcast, we will be using this slide deck to supplement our commentary this morning. Please note that unless otherwise mentioned, references to our operating results exclude special items and these metrics are non-GAAP measures. Now, I would like to turn the call over to Naren.

Naren?.

Thanks Tim and good morning everyone. Thank you for joining our call today. I hope you had a chance to at least briefly skim our earnings press release which was issued a little while ago and highlights our results for the third quarter of 2015.

This morning I will discuss our key performance highlights for the quarter and the progress that we're making on our initiatives to drive future profitable growth. Then Mike will provide additional details on our financial and operational performance.

As can see from our results, we delivered another quarter of improved operational performance, drove solid financial results and made progress on our plans for future growth. We drove quality gross add growth and delivered strong revenue in the quarter.

On our key operational metrics once again moved in the right direction highlighted by another quarter of improved attrition.

We further strengthened our foundation for the future by making smart investments to improve our customer experience and fund our growth initiatives which are targeted at the mid-sized commercial, health and un-penetrated residential markets.

Also established some exciting new partnerships which will allow us to bring new services to our existing customers, and better enable us to pursue customers in these new market segments. Overall, our performance this quarter reinforced our market leadership position and moved us further down the road towards achieving our longer-term goals.

Before I get into more details on the quarter, I would like to discuss our performance in the context of our strategy and share with you my thoughts on the current status of our industry. First on the industry, the market for Home Security and Automation Services continues to be very dynamic creating exciting new growth opportunities for ADT.

As I have highlighted on previous calls and during our recent Investor Day, the growing interest in the smart home and Internet of things has been one of the key drivers of market growth. And security remains at the top of the list of reasons consumers are buying smart home devices and associated services.

In fact, a survey conducted by a major retailer indicated that over 60% of Americans cited security and home monitoring as the top beneficial reason to own a smart home solution. Needless to say this is great news for ADT.

The evolution of the smart home and the Internet of things; coupled with the changing needs of consumers in an always on connected world are opening up new market segments for ADT.

The definition of security is evolving as consumers want to be safe and connected at all times, with a simple and secure way to interact with their families and their homes.

And as the industry evolves, ADT is also evolving to meet the needs of the market with our smart security approach that provides higher engagement through differentiated and flexible service offerings.

These changing market dynamics in the residential market combined with the investments we're making to help us pursue new customers in the commercial and health markets result in a very large playing field for ADT.

In total we expect our addressable market for residential, business and health to nearly triple over the next five years to over 70 million potential customers. From a competitive standpoint, our traditional market continues to be relatively stable. The evidence of this is in our sustained improvement in operating performance.

We're continuing to drive year-over-year increases in gross adds while attrition in the voluntary and lost to competition category is lower than it was a year ago. New and resale revenue per user continues to rise driven by higher Pulse take rates while average revenue per user for the base benefits from Pulse mix and price escalations.

All of these indicate that price competition remains stable and we are able to demonstrate the value of our services to customers. In addition, we remain focused on improving the efficiency of bringing on new customers and our improvement in SAC creation multiples proves that we can attract new customers with favorable economics.

Overall, market dynamics remain positive for ADT and we believe we are in the best position to capture the growing opportunities today and in the future. No one else in our industry has the scale, brand recognition and installation sales service and monitoring capabilities that ADT has to take advantage of these expanding opportunities.

As shown on slide three, our strategy for creating shareholder value is relatively simple. First, we are growing our traditional business by improving customer retention and adding quality new customers to our existing base. Our focus on improving the customer experience has yielded steady improvements in customer retention.

In addition, we are in enhancing our Pulse platform which has better retention characteristics than traditional offerings by opening up our Pulse ecosystem to partners like Nest Labs.

This allows us to give our customers the security and monitoring they need to protect their most important assets along with the smart home and automation technologies they desire. Second, we are expanding into natural adjacencies leveraging our competitive advantages in the business and health channels.

In our business channel, not only are we pursuing larger footprint small business and national accounts, we've also started to target midsize commercial businesses with security and fire protection service.

This expanded focus dramatically increases the addressable market in our business channel going from about $2.5 billion to about $24 billion as we rollout our capabilities across our footprint.

Lastly, later this year we will be introducing new solutions to target the portion of the residential market that hasn't been reached by traditional security services. This is what I'd referred to in the past as the other 80% of the market that does not have a monitored security solution. This market has tremendous potential for ADT.

As we discussed at our Investor Day, we've partnered with a major consumer electronics manufacturer to develop an attractive all-in-one security device that will be supported with many of the monitoring and response service, our current 6.6 million customers receive today.

We're coupling these growth initiatives with our strong balance sheet and management's focus on optimizing our capital structure and capital allocation.

We're continuing to reinvest cash to grow our core business, remain disciplined in our strategic M&A activities, and are returning excess capital to our shareholders via dividends and opportunistic share buybacks. Of course underpinning all of this is a relentless focus on the operating levers that drive our business.

And as you will see on the next slide, it is clear that we are continuing to execute on our plan and are on the right path. Slide four shows our performance over the past 12 months against four operating levers that are impacted by the competitive environment.

Year-over-year, we have delivered increases in gross adds across all lines of business, improved customer retention by 150 basis points, increased new and resale ARPU by about 2.5% and reduced our direct sales channel creation multiple, which is the cash payback period for newly generated accounts in this channel.

I view this chart as evidence that we are extending our market leadership position, while improving business performance. Touching on a few operational highlights for the third quarter as shown on slide five. We grew gross subscriber additions by about 5% with year-over-year increases in both our direct and authorized dealer channels.

We accomplished this despite more stringent customer screening efforts in our direct sales channel which filtered out about 4,000 lower quality prospects in the quarter. Continued strong close rates in phone sales, which were up about 12% year-over-year contributed to our growth.

Our focus on quality customer growth and our investments in improving the customer experience have led to unit and revenue attrition once again reaching new lows since we became a public company.

We lowered revenue attrition to 12.4%, 150 basis point improvement versus last year and we reduced unit attrition to 12.3%, 120 basis point year-over-year improvement.

While our improvement initiatives allowed us to offset the effects of a more active housing market, the normal seasonal impact of summer movers drove higher disconnects than gross adds resulting in a loss of about 28,000 customers in the period.

This is a meaningful improvement over the loss of 39,000 customers in the third quarter of last year and we remain committed to turning to net add positive during 2016. Moving on to our growth initiatives starting on slide six, I would like to highlight our team's progress in our business and health channels.

First in our business channel, we're continuing to see strong momentum in our small business and commercial expansion efforts. Our small business channels continues to exhibit very strong growth as we've improved sales execution and are now pursuing the larger footprint opportunities in this market.

In total, business gross adds were up over 15% while new and resale ARPU increased over 6% compared to last year. In the commercial market, we're continuing to invest in our product portfolio and expanding our sales force to position us to better serve midsize commercial customers.

Our commercial efforts continue to gain traction, growing total revenue to $1.6 million during the quarter, a sequential increase of nearly 75%. In the health market, we are continuing to capitalize on new product introductions from late last year and earlier this year and new distribution channels to generate growth.

Our new on-the-go mobile PERS product and new distribution channels have led to a 29% increase in gross additions and a 10% increase in ARPU. We are also evaluating new partners and distribution channels to accelerate future growth. Turning to slide seven.

We are continuing to invest to enhance our customer experience which will further reduce attrition, not only by driving new Pulse sales and upgrades but also by introducing new technologies and processes.

These include rolling out our new electronic order management platform, which we have now fully adopted in our small business channel, and is nearing completion across our residential channel. We are also continuing to deploy the new wireless Total Security panel in our Pulse automation installation.

These new tools and products yield both productivity – operational productivity and a better customer experience. In future support of our customer service improvement efforts this quarter we continued to invest and to reduce the meantime to repair and install systems for our customers.

And as you likely saw in our press release last week, we announced the initial rollout of a partnership with Nest Labs and the launch of our new Pulse mobile app. I'll talk more about these on the next slide.

As shown on slide eight, we have expanded the service options and enhanced the experienced for our customers as our Pulse platform now supports the Nest learning thermostat.

A critical part of our smart security approach involves combining best-in-class smart home security and energy management technology, providing our customers the security and monitoring they need along with the smart home and automation technologies they desire.

We are now offering the Nest thermostat as part of certain Pulse automation packages in Atlanta, Chicago, Denver, and Miami and expect to expand nationwide by the end of the year. This partnership with Nest is an example of our efforts to deliver advanced technology and differentiated solutions to enhance the experience and choice for our customers.

Our Nest Labs partnership adds to a growing list of home automation partners for ADT. We expect to continue to collaborate with other players in the security and home automation industry, as we have recently developed an API architecture to accelerate the integration of innovative products within our Pulse platform.

Last week, we also announced the release of our new Pulse app, significantly enhancing the mobile experience for our Pulse customers. That app features a more intuitive and user-friendly experience making managing home automation security simpler and more effective.

The new Pulse app also supports our open API strategy allowing for future integrations with other best-in-class third-party solutions. The app is available for download for all Pulse customers via the Apple App Store and Google Play.

Another key component of our efforts to improve the customer experience and reduce churn is our continued investment in Pulse, our primary interactive services platform. Pulse continues to be an important driver behind our results and in Q3 Pulse take rates again increased year-over-year.

On slide nine you can see that over 57% of our total gross adds during the quarter were Pulse units, up from 49% a year ago. And in our residential direct channel the Pulse take rate for new and resale units was 63% while more than 75% of all new residential customers added via this sales channel were Pulse customers.

In our dealer channel, the Pulse take rate ramped to 54% from about 43% last year and in our small business channel the Pulse take rate was 40%. In addition to new system sales of Pulse, we also upgraded about 30,000 existing customers this quarter. Pulse upgrades allow us to provide additional services to our existing customers and yield higher ARPU.

In addition, these upgrades allow us to enhance the customer experience and enter into new contracts. We now have approximately 1.4 million Pulse customers with total interactive customers now comprising about 21% of ADT's customer base.

As we highlighted during our Investor Day presentation back in May, Pulse customers continue to demonstrate better retention characteristics than traditional security customers. Our analysis shows that Pulse customers overall have better retention stats and retention further improves when customers choose automation features.

Pulse automation customers, those using Pulse to control devices in their home like door locks, thermostats or cameras have significantly lower attrition.

Equally important, our initial data shows that the resell rate, the rate at which we sign up a new customer who moves into a home where Pulse automation is already installed is higher as compared to non-Pulse customers.

As I previously mentioned, another important component of our strategy is to pursue customer growth in the non-traditional residential market previously not served by ADT or other traditional monitored security service providers.

During the third quarter, we announced a new partnership and a new product and service bundle designed to target customers in this segment. Turning to slide 10, at our Investor Day in May, we announced that we are working with LG Electronics to launch a new all-in-one security device with ADT Services for this unpenetrated market.

This market represents a significant component of the 70 million plus addressable market available to ADT in the future. The new offering is a Plug & Play solution with no installation required. You simply plug it in, download the app, connect it to your Wi-Fi network and you're off and running.

It has all you need from a basic security perspective and it can connect with many other home automation devices, allowing you to control these devices through the app. All you need is power and an internet connection.

ADT will be offering service bundles which include professional monitoring and (18:55) video storage and retrieval, a very robust interactive platform and many of the other services that we provide to our current customers. Needless to say we are very excited about this opportunity.

What differentiate this from other offerings in the marketplace is that it's secured by ADT with a direct connection to ADT's monitoring centers and associated response team along with many of the other services that our 6.6 million customers enjoy today.

The initial target market are customers who need smaller premises, renters and frequent movers who need a flexible security solution with no long-term contracts. The device also has an incredibly simple and intuitive mobile user interface.

We've received positive response from our retail validation process and we are targeting making this new product and service available later this year as we enter the holiday season. As we get closer to the launch, we will provide more details on the go-to-market strategy, pricing and other details.

However, we can say that this will be a low to no SAC product and a recurring revenue model for the monitoring and video storage. Now let me turn things over to Mike to provide some additional details on our financial and operational performance during the quarter..

Thanks Naren. We delivered another quarter of solid operational and financial results. The focus remains the same as it's been the entire year. One, improve the key customer facing levers that drive long-term value and grow our customer base; gross adds, attrition and ARPU. Two, improve operating efficiencies in both cost to serve and SAC.

And three, reinvest some of these efficiencies to enhancing the customer experience and our growth initiatives as discussed earlier by Naren. Medium term this plan will drive higher levels of profitability, free cash flow and net customer gains.

In the quarter, we made improvements in our key operating levers and drove higher recurring revenue, pre SAC EBITDA and free cash flow.

Some of our investment initiatives have immediate or very sure paybacks, while others such as the expansion of our commercial business and our DIY efforts will take more time to develop but represent large material opportunities. We're excited about the future for ADT and the opportunity to create value for shareholders.

Over the next few slides I will review our Q3 performance and highlight our accomplishments during the quarter. Slide 11 summarizes our GAAP and non-GAAP results for the quarter. In Q3, recurring revenue, which accounts for approximately 93% of our total revenue grew 6.2% to $834 million and total revenue increased by 5.8% to $898 million.

When adjusting for the decline in the Canadian dollar, recurring revenue was up 6.8% and total revenue increased by 6.2%. We are reporting the FX impact only on ADT Canada since Protectron was not part of our business at this time last year.

However, our total Canadian operations including Protectron represents almost 10% of our total company revenues. Canadian dollar is now worth $0.76 which is approximately 16% lower than when we gave guidance. In Q3, reported operating expenses before special items were up 11% over last year with D&A increasing 9%.

The increase in total expense was driven primarily by the addition of Protectron and the change in accounting for dealer payments. Excluding Protectron and the impact of the marketing efficiency program, total operating expenses before special items were up 5.8% from last year.

Most of the increase is related to investments such as enhancing the customer experience, entering the commercial business, expanding our health channel, rolling out the new Pulse Mobile App and developing a new all-in-one product targeted at the DIY market. Excluding Protectron D&A before special items rose by 5.8%.

We continue to make progress in SAC and in the creation cost to acquire a new customer. As a subscriber based business we incur an investment when adding new customers during the first year and is diluted to EBITDA, EPS and free cash flow.

And we typically don't begin to see the benefit of a new customer addition in our financial results until year two. This impact is more evident when we generate higher levels of new customer additions as we have done all year. When you adjust for the expenses incurred to acquire new customers you get a better sense of our company's operating results.

In Q3, we grew pre-SAC EBITDA before special items by $16 million to $560 million, a 3% increase versus last year. Pre-SAC EBITDA margin was 66%. Protectron operates at a lower margin to ADT, so the consolidation of its results has had dilutive impact to our total company margins when compared to prior year.

This impact ends this quarter as we approach the one-year anniversary of the Protectron acquisition in July. EBITDA before special items for the quarter was $451 million.

The year-over-year EBITDA comparable was negatively impacted $2 million from the weak Canadian dollar and $6 million related to the change in accounting for our marketing efficiency program as well as from our growth investments an efforts to improve customer service levels. We expect these items to be negative drags to EBITDA growth in Q4 as well.

At Investor Day, we indicated that 2G spending would be reduced in the third quarter as we evaluate some alternatives to extend the conversion period. We continue to pursue these efforts, but are less optimistic than a month ago, and will be accelerating our efforts to convert and upgrade the relevant customer base by calendar 2016 year-end.

GAAP EPS was $0.44 a share. Excluding special items non-GAAP diluted EPS was $0.49 which includes the impact of $0.02 per share related to this change in how we account for the dealer payments for leads through the marketing efficiency program. This compares to non-GAAP diluted EPS of $0.55 a share in 2014.

Using our Q3 cash tax rate of 4.5%, our diluted earnings per share before special items was $0.68 for the quarter. Our effective tax rate was slightly below 33%. We delivered our fourth consecutive quarter of year-over-year growth in both gross adds and revenue per unit which can be seen on slide 12.

Total company gross adds increased by nearly 5% year-over-year, driven by improved performance across both channels, and in resi, business and health. Gross adds in our direct channel were up nearly 4%, despite the headwinds caused by our enhanced credit screening which management estimates filtered out about 4,000 potential sales.

We have seen the attrition benefits from the credit screening and expect this benefit to increase. Gross adds in our dealer channel rose more than 6% from last year, as we experienced higher sales from existing dealers and benefited from Protectron's dealer channel production.

We have worked diligently to optimize our dealer channel and are pleased with the results as they have now delivered year-over-year growth for the fourth consecutive quarter. Average and new and resale ARPU both grew again this quarter as we benefit from a more favorable mix of Pulse customers in our base and higher Pulse take rates.

Success of Pulse, expanded service offerings in our business channel, and the launch of our premium priced on the go emergency response system in our health channel, have all helped drive higher revenue per user over the past year.

For the quarter, new and resale ARPU was $48.19, an increase of nearly 2.5% over the prior year, and ARPU for our overall customer base was $42.50, up nearly 1%. Adjusting for Protectron which sells at different price points and the impact of a weaker Canadian dollar new and resale ARPU was up nearly 4% while average ARPU was up 3.6%.

Increasing retention remains our top priority. This is being driven by improvements to the customer experience and higher levels of resales to former customers or new owners of ex-ADT customer homes. Slide 13 shows these initiatives are paying off as we improved attrition for the fifth consecutive quarter.

Q3 trailing 12 month net revenue attrition was 12.4%, a sequential improvement of 10 basis points and a significant reducti on of 150 basis points versus last year.

Unit attrition, which measures customer attrition for just our residential and business customers was 12.3% for the quarter, a 20 basis improvement versus Q2 and 120 basis points lower than Q3 last year.

Although we guided at our Investor Day for attrition to stabilize over the summer months we are internally targeting considerably lower levels of attrition over the next few years.

As discussed during our Investor Day meeting the summer months are a time of increased relocation disconnections which offset the higher amount of customer additions we generate during the same period.

Compared to last year, we reduced our net customer losses by more than 30% in Q3, but gross disconnections offset our new customer additions by 28,000. We've made tremendous progress in our year-to-date net customer losses reducing the organic loss figure year-over-year by over 80,000 customers.

We remain committed to reporting net subscriber growth in fiscal 2016. Moving onto slide 14 which shows our quarterly results for recurring revenue margin and SAC creation multiples. For the quarter, recurring revenue margin on our existing customer base was about 66% below the abnormally high 68% in Q3 last year.

The decrease in margin is due to the consolidation of Protectron which impacted our recurring revenue margins by 50 basis points investments in launching new products and efforts to establish a commercial channel.

Increased spending to improve our customer service levels such as reducing meantime to repair has also impacted margins but it's had a positive impact in enhancing the customer experience and improving attrition.

We reported lower subscriber acquisition costs versus prior quarter and lower net creation multiples versus prior year despite higher Pulse take rates.

Excluding Pulse upgrades, our combined net creation multiple improved by 0.3 times to 30.7 times in Q3 while our net creation multiple in our direct channel fell to 30.7 times, a 0.4 times improvement from last year. Dealer net creation multiples also improved from last year and were at 30.6 times.

Net SAC in our dealer channel – in our direct channel fell below $1500 to $1477 per install. Greater sales efficiency, the introduction of our new TS Panel and lower cost peripherals combined with the implementation of electronic contracts, all helped reduce SAC and increased efficiency in the installation process.

Slide 15 details the Q3 components of free cash flow as cash we generated from existing customers and the cash associated with new subscriber acquisitions. For the third quarter, free cash flow was $99 million, up slightly versus last year despite a 5% increase in gross adds.

Free cash flow before special items for the first nine months was $244 million. This is already above the $240 million we baselined for the full year 2015 in our Investor Day presentation.

As I mentioned earlier, the growth in pre-SAC EBITDA before special items was driven by our operational improvements, cost reduction initiatives and our growth in Pulse customers. Pre-SAC free cash flow before special items this quarter was $513 million, up $33 million from last year.

Investing in subscriber growth was the main driver behind our ability to generate future free cash flow. In Q3, our total capital expenditures were $336 million and over 92% of that amounted – was used to generate new customer additions. For the quarter total SAC before special items was $114 million up about 8% versus prior year.

The largest driver of the increased SAC spending was 5% growth in new subscriber adds as well as an increase in Pulse upgrades from 20,000 to 30,000 year-over-year. We are targeting free cash flow growth in fiscal 2016 despite expected further investments in the business as we grow our subscriber base through increased gross adds and lower attrition.

Slide 16 details -- provides details of our steady state free cash flow. We continue to make improvements in this long-term valuation metric which allows us to measure the free cash flow generated by maintaining the recurring revenue from our existing customer base before investing it in the new subscriber growth.

The key drivers to this metric, pre-SAC EBITDA, SAC creation multiples and attrition are all moving in the right direction. This is somewhat offset by our lower levels of pricing escalations as we more tactically deploy this initiative as part of our attrition reduction program.

For Q3 steady state free cash flow before special items ended at $936 million, up slightly versus prior year. Slide 17 highlights our capital allocation and debt levels for the quarter. Trailing 12 month leverage was 2.9 times EBITDA and trailing 12 month debt to pre-SAC EBITDA was 2.3 times.

We've added this second leverage ratio to report a harmonized view similar to how most if not all our security competitors report leverage. And to reflect that EBITDA was lower at about $18 million for the first nine months as a result of the change in how we reported the marketing efficiency program.

Our long-term guidance remains three times EBITDA -- debt to EBITDA. Our total cost of borrowing remains low and was below 4% in Q3. Having a low cost of borrowing allows us to continue investing in growth and to return capital to our shareholders.

We paid a quarterly dividend of $0.21 per share, a 5% increase over last year and continue to be opportunistic on our share repurchases.

We also used a portion of our cash to invest in what we believe is the best investment in the security industry and repurchased approximately $45 million of our own shares in Q3 contributing to the total $51 million in share repurchases since Q2. Year-to-date repurchases were approximately 5.6 million shares at an average price of $33.53 per share.

Repurchases this quarter helped us bring the average diluted share count to 171 million, a 27% reduction from our share count at spin. In July, we also announced that our Board of Directors approved a new share repurchase program authorizing us to purchase $1 billion of common stock throughout the next three years.

The new share repurchase program expires on July 17, 2018, and its incremental to the $192 million remaining in the current share repurchase program which expires on November 26, 2015. Now, I'd like to turn the call back over to Naren..

Thanks Mike. As you just heard we are delivering on our plan for the year improving our operational performance and making the right investments to position us for future growth and free cash flow generation. And against the backdrop of the predominately positive trends in our industry it's a very exciting time for ADT.

We have the scale and brand strength along with the right strategy focused on quality growth and upside opportunities and adjacencies in non-traditional markets in place in order to grow our business and drive shareholder value. Our team remains committed and energized to realize our vision and capture these opportunities.

With that, I would like to open up for questions.

Candice, can you provide the details on how to ask a question?.

And our first question comes from Charles Clarke of Credit Suisse. Your line is now open..

Hey, guys..

Hi Charlie..

Just again, just didn't know if you could talk about just net adds and whether or not we are going to start to see the change kind of early next year just kind of – as a goal for the year? And whether or not you think it's going to come more from the disconnect side or from the additions side? And whether or not just a bigger addressable market for you guys is really going to be the major source of new gross adds or whether or not that's going to come in the core business?.

Charlie, I will echo some things Mike talked about it in our Investor Day.

Because of the normal seasonality in this business with a higher number of disconnects in the back half of the year tied to the summer relocation, the first half of the year is generally better than the second half of the year on an actual basis, so clearly we are going to be – we're committed to being net add positive in 2016.

You would expect us to stay favorable in the first half of the year and then kind of be able to offset or mitigate the impact of relocations in the back half of the year.

Mike I don't know, if there's anything you want to add?.

No, I think you said it perfectly. I mean I think as we said at the Investor Day, when we started the year with 140,000, which it was just too big a net to get there in the first year.

When you're talking about a company that adds over 1 million new customers a year, a combination of improving attrition and growing adds, it's well within our plan and scope to make up what is about 40,000 customers net loss position that we're in today, much more meaningful number to sort of breakdown considering how much progress we have made from last year to this year just continue to rollover the progress.

We feel confident..

And then just on the adds, as part of the reason you feel confident you can accelerate the gross adds not only because you feel a little bit more comfortable with the core business but also just is that addressable market is getting significantly bigger?.

Yeah I think clearly as we look at FY2016 the momentum we have in our business channel and in our health channel is very encouraging right now, but you've got to keep in mind these are still very relatively small compared to our residential business and our Canadian business, but we have got good momentum in those businesses..

Great, thanks guys..

Thanks, Charlie..

Thank you. And our next question comes from Ian Zaffino of Oppenheimer. Your line is now open..

Hi, great. Thank you. Trying to understand and I guess reconcile the comments that you made about the DIY system.

The DIY system you're talking about in the press release is what you talked about in the slides as it relates to this LG kind of all-in-one camera? Is that correct? Because I have a follow-up to that?.

Yes, that is the product that we are referring to..

Okay.

So now is there going to be I guess a true DIY product in your offering coming up anytime soon? How do you feel about that area? Because I know you have mentioned it before but we haven't really heard an update there and just curious where your guys heads are as it relates to like a fully robust self-installed home security system?.

Ian I guess I'll refer to the Total Security Panel that we've talked about in our residential business which is an all wireless solution that significantly reduces the installation time and effort.

As I mentioned we're rolling that out for our Pulse automation customers in our residential business, and then we will look to do that similarly on our dealer channel.

I think what we have to get comfortable with and candidly the industry has to get comfortable with this is do customers really want to and are they comfortable installing a complex security system in their home? I think the DIY product we've been talking about is a plug-and-play really no installation or limited installation required.

But again, we're continuing to look at ways to reduce our SAC creation multiple and one of the possibilities is more of a DIY type of solution for our traditional residential business..

Okay. Thank you very much..

Thank you. And our next question comes from Jason Bazinet of Citi. Your line is now open..

Thanks. I just had two questions. On slide 15, when you guys were going through the free cash flow, year-to-date you mentioned that it was essentially sort of on top of the full-year number that you gave at the Analyst Day of $240 million to $250 million.

Is the inference that you're sort of anticipating not generating cash flow in the fourth quarter? Or is it more apt that you exceed that baseline? And if you do exceed the baseline does it change the base case CAGRs? Does it lower them in other words? Should people expect lower free cash if the base in 2015 is higher than what you said at the Analyst Day?.

Jason I can't thank you enough for asking that clarifying question. That was not our intention. So I think basically what we're saying is clearly we expect to generate cash flow in the fourth quarter.

So we're just indicating that the cash flow was pretty strong this quarter and that we are with the $99 million that we did report, we happen to be above that baseline, so you can probably take it as – I don't want to add another forward-looking projection, but we're very confident of doing that – exceed those estimates we did.

I think once you get that baseline, all the assumptions really build off that baseline. So I don't want to continue to update that model. I think there was a scenario that – when we report the full-year results, we will give appropriate guidance for 2016..

Okay..

Suffice to say that there is definitely more cash in this business and I think as we continue to report higher cash flows from our existing customer base, offset by investments we make in new customer additions. I think what it really shows you is that was a model and a scenario.

We took everything in that number as being a very concrete three year projection where I think – I'd like to believe that our intentions are do better than what we projected at the Investor Day and that was just really a sensitivity analysis kind of scenario..

Okay.

And maybe a simpler question, the 1.4 million Pulse customers that you announced at the third quarter, is that as of June 30 or is that as of today?.

That is as of today..

Okay. All right, thank you very much..

Thank you. And our next question comes from Jeff Kessler of Imperial Capital. Your line is now open..

Thank you. My first question is in conjunction with your page seven on the investor slides. Given the rise in DIY and a lot of the point product systems, we're getting a lot of feedback from police that and in towns that basically false alarms are going up because these customers don't know how to use them that well.

And the question is, is what are you doing number one, to invest in your monitoring, the quality of your monitoring stations to differentiate yourself from other players in the industry to make sure that there's a higher trust factor between you and the police or the responders whether it would be healthcare or police and your competitors, whether they'd be your competitors in the alarm industry or your competitors that are coming in from telcos or from DIY?.

Yes, Jeff, we can probably spend a day on that topic. Our teams are [Technical Difficulty] (43:44-43:53).

Ladies and gentlemen please standby, your conference call will resume in just a moment. Your conference call will resume momentarily. Speakers, you may resume..

Okay.

Jeff, are you here?.

Yes I'm here..

Sorry about that Jeff, we are not doing well with technology this morning. We've got a lot of initiatives underway in our monitoring centers. I will highlight a couple of them. First of all, we maintain very good local relationships with the local AHJs and we are working very closely with them. I'll highlight one.

If you look at our Pulse Solution, you actually will get a notification on your cellphone or mobile device or via email even before the signal would go to our monitoring center because of the required delays in the panel.

That gives the customer the opportunity to cancel an alarm if it's a false alarm and really gives us that chance to reduce those false alarms by having the customer know earlier that an alarm event was in their home and in some cases they can even look in on cameras. So that's one particular example.

We continue to work through the call list and we're looking at multiple technologies for example a motion detector plus a glass break or a door and window contact breach to verify that it is a true – if it is a true alarm event. But again there's a lot of initiatives going on both technology related and process related..

Okay.

Second question is related directly to page seven, and that is keeping the customer for another couple of years and adding to the IRR is obviously what this business is all about, and what are you doing? Can you go through not point-by-point but give an idea of what you're doing maybe different or better or for that matter where you have to catch-up in the customer care and customer experience area and who you think you may have a leg up against competition that's coming in new without that experience?.

Well, again, this is another area where there's a lot of initiatives in place and I think the success of those initiatives is reflected in the attrition performance we've got. We've demonstrated over – particularly over the past five quarters.

Again, when I look at us compared to what we see in the industry, we have more than caught the pack and in some cases are leading the pack, but we are still not happy with where we are.

Again I will give you couple examples; we are doing a lot more with data analytics than we've ever done before to identify potential at-risk customers, proactively reaching out to those customers where it's appropriate or at least routing those calls to more experienced representatives in our customer care organization that are capable of dealing potentially with more complex issues.

As Mike and I both mentioned in our comments, we've continued to make investments in our service infrastructure to reduce the meantime to repair as well as meantime to install and through our customer survey activity, we have seen steady improvements in that initial install customer satisfaction as well as the anniversary survey.

So again, there is no one silver bullet in this one. This is lots of work on the ground and Mike just commented, a big part of that is changing the culture of the organization.

We've had a historically a sales gross add driven culture and over the last three years, we have really been working to change that culture and get everybody focused on customer retention in addition to gross adds not in lieu of..

Final quick question. Canada, there wasn't that much talked about in Canada on Investor Day. I realize that Canada is a big deal because both Protectron and ADT Canada did not have high levels of Pulse take rates up there, what you have got to do it right to get Canada integrated.

Can you give us some update on how things are going up in Canada as far as integrating that business into the rest of your ecosystem?.

Yeah, again I think we've made great progress there. I think I talked a little bit of this Investor Day. Where we've got a new leadership team there brought in a President of the business from outside, got a great new strong CFO there, we put in a strong marketing leader. We took one of our top talent from the U.S.

to be the sales leader up there leading the direct and indirect channel. We've got the IT leader came out of the Protectron business as well as some of the key customer care people who are both from the Protectron and ADT side.

So I think we've got a very, very strong leadership team up there that's making a lot of progress now on the integration of the two businesses there. Now operating as a single management team leading the combined business and candidly, we don't talk much about Protectron versus ADT. We talk about the one ADT Canada business.

I think we're starting to see the synergies come through and I think in FY2016 you'll see more of that.

Mike you want to add?.

Yeah, I mean the synergy targets are certainly on track. As we've indicated we are a little delayed because we want to get the master team in place. The IT integration strategy is being laid out, is being executed now which would drive a lot of synergies. Some of the offices are being consolidated. So, we're very excited now.

I think we have the right team, the right vision. And to your earlier point about take rates, Protectron's take rates we have on one of the slides is 49% interactive. Okay, albeit it's (50:22) .com services but there're selling interactive services and it's at a higher level than they were selling before.

ADT continues to move-up the take rate as well in Canada. So, you absolutely right, selling more Pulse, selling more interactive systems in Canada is another opportunity. I think with the unified sales approach we will see that..

Okay. Thank you very much..

Great, Jeff. Thanks. And Candice, thanks we are at the bottom of the hour. We are going to end the call. Thanks to everyone for joining the call and we'll speak to you soon. Thank you..

Ladies and gentlemen thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Have a great day everyone..