A wild start to public company life…
ADI reported its first quarter as a public company last week. One number changed our targets and most of the rest confirmed the setup. The new CFO put the real GM run rate at 21.35%, about 100 points below the base the July targets were built on. Reported margins had been flattered by tariff pricing and a $20M one-time refund. The targets move from $8, $30 and $58 to $7, $26 and $39, struck the same way as before (1yr downside, 1yr upside, 3yr upside). The bull case, a residential recovery, yields adds $33 and $49 at the same multiples.
The tape has been wild. I do not have good trading color to justify these moves. The stock was added to the Russell 2000 and S&P 600, but REZI was already a part of these. Mechanically, this should mean the index received the spinoff shares so was not a large buyer in the market. We also do not have any insider filings yet. The one-year target now offers 23% and the three-year offers 81%, about 19% a year. Importantly, a long term investor can look out three years to a resi recovery and see a 25% IRR from here. That’s worth doing the work on.
The size of the change deserves a clear statement. Our July numbers had 2028 EBITDA at $429M, but the clean, updated figure is $370M in our base case. This change was driven almost entirely by GMs, falling 100bps (100bps on $5.4B of revenue is $55M of the $59M cut). The demand call was right and the margin base was wrong.
The same arithmetic hits management’s plan. Their bridge ran 22.3% to above 22.7%, a task of 40 to 50bps. From 21.35% the identical target needs 135. At roughly 35bps per point of EB mix, that is four points, 18% to 22%, which is exactly their stated plan. Their target is internally consistent. Their $500M for 2030 also compounds off a lower base now. From this year’s guide it requires 15.1% a year vs. our clean path compounds 12.1%.
Results
Four things moved our numbers. First, GM ran 21.3% to 21.4% in both quarters this year, and management called that the run rate of the business. The July targets started from 22.3%. Second, the mix engine stalled, it seems. EB revenue fell almost 3%. Management disclosed that roughly three quarters of the $800M program sits in residential AV, the one market still declining. A clear negative vs. expectations, but also provides cyclical kicker should the housing market thaw. Third, the guide itself of $275M to $295M of standalone EBITDA, below last year’s $295M, and about $265M excluding the refund. In addition, there were 4 analysts on the call asking questions, but all shorter term - good questions and trying to figure out the near term noise in numbers which is not uncommon in spins.
The call also laid bare the cost of the savings program, we’ll call this the The Savings Treadmill… $80M gross cost program nets against merit, inflation and growth spending to roughly zero. EBITDA growth therefore has to come from gross profit. Management said both part aloud. Sixty million of savings are already actioned, and operating expenses next year should not grow “significantly, if at all.” Flat opex is the win. The program costs money though.
The call. Our base case is the clean path below, because the savings are contracted and commercial demand is intact. Security is back to mid-single-digit growth, and management says most of the share lost in the system conversion has returned. The next print confirms it if net operating expenses decline as guided and the newly filed exclusive-brands revenue split holds steady. A residential turn moves us to the bull case. EB mix and GM flat together through mid-2027 ends the thesis.
