The most important quarter for ADT in 2026 was the one just reported, the three months ended June 30, 2026, and the print was a tale of two metrics moving in opposite directions. Total revenue grew 2% to $1.31 billion and adjusted free cash flow including interest rate swaps grew 48% to $406 million, while recurring monthly revenue, the contracted monthly monitoring billings that determine the steady-state value of the business, slipped 1% to $360 million and trailing-twelve-month gross customer revenue attrition widened 30 basis points to 13.1%. The capital-allocation story is the one management wanted the market to hear: $478 million of share repurchases in a single quarter, including 29 million shares bought back alongside Apollo's complete exit via a 102-million-share secondary offering, $45 million of dividends, $906 million of remaining buyback authorization, and a leverage ratio that closed at 2.9x net debt to trailing adjusted EBITDA, which is the lowest the company has run since the commercial-business divestiture in late 2023. We read this quarter as confirmation that the bull case for ADT has shifted from "the subscriber base is durably growing" to "the cash conversion is durable enough to fund capital returns at scale even as the customer file slowly shrinks." The single load-bearing risk is whether gross customer revenue attrition, the percentage of recurring monthly revenue lost to cancellation each year, continues to drift higher into 2027; the falsifiable clock is the third-quarter print scheduled for late October, where management will report whether the outright-sales go-to-market transition, the Origin AI ambient-sensing integration, and the second-half subscriber acquisition plan have stabilized the RMR base or allowed the underlying customer count to keep eroding.
The mechanism by which this story re-rates, in our view, runs through the cash flow statement rather than the income statement. ADT generates roughly $1.3 billion of operating cash flow in the first six months of 2026 and approximately $820 million of adjusted free cash flow including interest rate swaps, a 64% increase year over year, and the company has chosen to return essentially all of that to shareholders. With 2.9x leverage, an $800 million undrawn revolving credit facility, and a debt ladder that has no material maturity until August 2027, management has the balance sheet capacity to keep buying back stock at a $7-handle price even if monitoring revenue continues to compress. What the market is missing, we think, is the implication: at a 5x enterprise value to adjusted EBITDA multiple and a 2.9x leverage ratio, every incremental dollar of free cash flow retired through buybacks at the current price transfers directly to per-share intrinsic value rather than to fixing the top line.
The single load-bearing risk is straightforward. RMR is down 1% year over year to $360 million, the subscriber count is roughly flat at 6.1 million, and attrition is 30 basis points wider at 13.1%, with management explicitly describing the environment as "dynamic and competitive." If attrition widens to 13.5% or higher in 2027, the recurring revenue base erodes faster than price increases and outright-sales installation revenue can offset, and the equity story reverts to a slow-decline multiple rather than a capital-return story. The next data point that tests this is the third-quarter 2026 print, where the question is whether outright sales, which now account for 40% of new subscribers and are the company's primary growth engine, can produce a positive RMR reading in a quarter that seasonally carries the lowest gross customer additions of the year.