Frontdoor, Inc.

ladies and gentlemen welcome to front door second quarter 2020 earnings call today's call is being recorded and broadcast on the internet beginning today's call is matt davis vice president of investor relations and treasurer and he will introduce the other speakers on the call at this time we will begin today's call please go ahead mr davis thank you operator

Good afternoon, everyone, and thank you for joining Front Door's second quarter 2020 earnings conference call. Joining me today are Front Door's chief executive officer, Rex Tithman, and Front Door's chief financial officer, Brian Turcotte. The press release and slide presentation that will be used during today's call can be found on the investor relations section of Front Door's website, which is located at investors.frontdoorhome.com. As stated on slide three of the presentation, I'd like to remind you that this call and webcast may contain forward-looking statements. These statements are subject to various risks and uncertainties which could cause actual results to differ materially from those discussed here today. These risks are explained in detail in the company's filings with the FCC. Please refer to the risk factors section in our filings for a more detailed discussion of our forward-looking statements and the risks and uncertainties related to such statements. All forward-looking statements are made as of today, August 5th, and, except as required by law, the company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise. We will also reference certain non-GAAP financial measures throughout today's call. We have included definitions of these terms and reconciliations of these non-GAAP financial measures to the most comparable GAAP financial measures in our press release and the appendix to the presentation in order to better assist you in understanding our financial performance. Finally, like most of you, we continue to work remotely. Please bear with us as we do our best to manage through any audio issues that might occur. I'll now turn the call over to Rex for opening comments. Rex?

Thanks, Matt, and good afternoon, everyone. I'd like to start by expressing my appreciation to all of our associates and contractors for their hard work and dedication as we manage through a challenging external environment. I also want to thank those on the front lines of the COVID-19 pandemic, especially essential workers and those in the healthcare field. I continue to be amazed by the remarkable acts of kindness and professionalism that they and countless local heroes have shown over the last several months. It has inspired us to support organizations in the communities where we operate, such as donating to food banks that are assisting those in need, and Sourcing PPE for our contractors. Now let's turn to slide four, our current business focus. As you know, we have been on a transformational journey here at Front Door. We've been transforming the business from a technical, operational and cultural perspective. This pandemic has been a true test of what is working and where we need to increase focus. During the great financial crisis of 2008 and 2009, we grew top line revenue by 4% and 2% respectively. That said, I'm confident that we will still grow our company's top line by roughly 7% this year, a true testimony to the resiliency of our business model and our people. While COVID-19 has presented issues for many companies, including us, it has also opened up opportunities. Given where we are in our evolution and being a transformational company with a strong financial position, we are being opportunistic in our investment strategy. One of the main areas we have focused on is leveraging favorable advertising rates as a result of other companies pulling back on their marketing budgets. Since May, we've seen an improvement in the efficiency of our broadcast marketing compared with 2019. Given that improvement, and to offset a decline in our real estate channel, we feel it's important to ramp up our marketing spin until such time the efficiencies return to more normalized levels. In the second quarter, for example, Our marketing efficiency was at roughly a two-to-one ratio. This means that for every point increase in the cost of acquiring a customer or CAC, we achieved a two-point increase in unit sales and we anticipate a similar level of performance in the third quarter. Not only are the unit economics favorable, but we have also increased our unaided brand awareness by over 35% in a single quarter. We believe this increased brand awareness will have a long-term halo effect on both our direct consumer and real estate channels going into next year. While this investment impacts our near-term financial results, it will provide a long-term tailwind for our direct-to-consumer channel in terms of revenue growth and positively impact overall customer retention. Second, I am pleased to report that customer retention remains stable at 75% in the second quarter on a trailing 12-month basis. It actually increased slightly versus the prior year period, but still rounded the same number. As a reminder, customer retention decreased around 200 basis points during the global financial crisis in 2008. I credit the overall value proposition of our home service plan, the focus of our associates, investments in technology, and improvements in training and processes for keeping our retention stable in today's uncertain macroeconomic environment. We're also making investments to grow our emerging businesses. This includes Can Do, our on-demand offering, and the expansion of our stream technology platform. Last quarter, we announced CANDU expanded geographically and extended its trade offering to include heating and air conditioning, plumbing and electrical. Additionally, in the second quarter, we acquired a business that we expect will further accelerate the development of our on-demand business. We consider this to be a small, acqui-hire transaction that will allow us to leverage their intellectual capital, marketing expertise and core technology know-how across our We are excited to bring this new talent and expertise on board. This also expands our geographic presence for on-demand home services into new markets, albeit an extremely small scale as the vast majority of these new cities offer limited trades. The acquisition allows our team to learn faster and implement best practices from each business as we move forward. We are obsessed with constantly improving our customer experience. This acquisition will help us on this journey while also lowering our cost of customer acquisition and expanding our trade offerings and geographic reach. We have been actively developing new partnerships for our stream technology. We plan to monetize stream through a SaaS or software as a service business model. Given the importance of ensuring the safe delivery of essential home services and other pandemic related concerns, we have decided to extend our free stream trial to our key partners. This is consistent with our long-term mindset, as this helps deepen our relationship with those partners. Over time, we will look to develop and evolve these arrangements into a mutually beneficial financial and operating model. We're also beginning to integrate Stream into our core home service plan business operations. This was one of the original value propositions that really piqued my interest in this technology, as we can improve customer service while reducing costs. At this point, we expect to have our customer care associates actively using Stream with a portion of our customers and contractors by the end of the year. On a combined basis, we do not expect CanDo and Stream to have a material revenue impact this year if we continue to develop the operations and expand our presence. These are emerging businesses that we continue to believe will have tremendous future potential. Now moving to our next focus area, improving the customer experience. Since May, customer service levels have been unfavorably impacted by increased demand for service and reduced capacity from our call center partners. Specifically, we have an external call center partner that has seen a large decline in their available workforce as a result of travel restrictions from the pandemic. We have also seen a challenging environment for hiring our call centers. Although these are currently virtual roles, a lot of job candidates are waiting to see the impact of COVID-19 has on the economy and the next government stimulus program. We are working to increase our service capacity and we expect service levels to improve in the third quarter. At the same time, we are engaged in a range of additional service improvements, including advancing our call center training, investing in people, improving contractor responsiveness, as well as reducing cycle time. A key part of cycle time is our supply chain where we continue to make improvements with sourcing parts and negotiating new agreements with manufacturers to leverage our purchasing power. While several of our vendors are being impacted by COVID-19, we are relatively insulated from a single supplier disruption for our multi-vendor diversification strategy. At Front Door, we are obsessed with solving customers' problems. I am passionate about improving the customer experience. The last few months have only strengthened my resolve to advance our self-service capabilities and deploy technology solutions to speed the customer resolution process. We are on a journey, and I am committed to transforming the service experience by investing in technology and business processes that will set the standard across the home services industry. Now turning to slide five, Front Door delivered solid second quarter financial results with the second highest gross margin recorded. These results were in spite of increased service requests. We began to experience an increase in service request activity in May that continued throughout June. Tribal to customers sheltering at home in response to COVID-19 in March and April. The increase was concentrated in appliances and plumbing and is consistent with industry-wide trends. While we are seeing these higher demand trends continue into July, we are evaluating if the increase could be service requests being pulled forward from future periods. For example, we normally see a rise in our appliance volumes during the holiday. The good news for our business is that we are seeing strong demand for our services as that supports our long-term customer value proposition and overall customer retention. Additionally, our first year real estate sales continue to be impacted by COVID-19. While the decline in second quarter existing home sales was better than anticipated, the real estate space continues to face macro headwinds and tight inventory levels that has constrained transaction volume. Second quarter seasonally adjusted existing home sales from the National Association of Realtors showed an 18% decline versus prior year. The recent forecast is for a significant improvement off these low levels for the balance of the year. In this environment, we continue to strengthen our realty partnerships so that when the existing home sale market improves, we will be in an even stronger position. In conclusion, we are successfully managing through this challenging external environment from a position of strength with a focus on the long term. We have a powerful and resilient business model. We are in a strong financial position, and we are making investments today They will accelerate the trajectory of our revenue growth in the years ahead. I'll now turn the call over to Brian, who will cover our financial results in more detail. Brian?