Frontdoor, Inc.

Ladies and gentlemen, welcome to Front Door's third 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 third quarter 2020 earnings conference call. Joining me today are Front Door's Chief Executive Officer, Rex Tibbins, 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 forwarding statements. These statements are subject to various risks and uncertainties, which could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the company's filings with the SEC. 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, November 4th, 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 their 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. I'll now turn the call over to Rex for opening comments. Rex?

Thanks, Matt, and good afternoon, everyone. We recently celebrated our second year as a standalone public company. Since that time, we have made significant strides in reshaping Front Door. Our transformation is far from over, but I'm extremely pleased with our progress to date. Despite the pandemic and extremely challenging external environment, the team has continued to deliver by accelerating our revenue growth, expanding dynamic pricing, and growing our on-demand business by launching our new ProConnect service offering. Let's now turn to slide four and review our current business progress. Last quarter, we talked about leaning into marketing investments for digital and broadcast media. I'm happy to report that this strategy to accelerate revenue growth is working. We increased our direct consumer unit growth by over 20% in the third quarter. Additionally, our direct consumer revenue growth was firmly in the double digits in the third quarter, and we expect that to continue into 2021. This is a result of the halo effect from our efforts to date, even though we are reducing our fourth quarter marketing investments due to higher media costs from the election. Our real estate channel performed better than we originally expected this quarter on much stronger real estate fundamentals. We are seeing the same drivers as you. Families leaving urban centers to move to the suburbs, low mortgage rates and strong demand for second homes. The National Association of Realtors, or NAR, reported existing home sales increased 13% in the third quarter because of these trends. These factors are driving up prices and resulted in the lowest home inventory on record, according to NAR. As a result is a strong seller's market which has the potential to negatively impact the industry's capture rate for home service plan sales compared to existing home sales. This is because sellers are less inclined to provide a home service plan as part of the transaction. Despite the potential impact on capture rates, we still benefit from a much stronger real estate market. This means that we now have a strong macro tailwind for our real estate channel going into 2021. Given the drivers I just mentioned, we now expect the top of our sales funnel or the combined growth of our first year direct consumer or real estate home service plans to be about 1% higher than 2019. This is a tremendous accomplishment given the significant COVID-19 headwinds. I am also pleased to report that our efforts to increase customer retention are working despite the challenging external circumstances. Customer retention is now at 76%, and our home service plan growth was up 4% in the third quarter. We will continue to monitor how the challenging near-term environment could impact our customer retention, but we believe we are taking the right steps on our journey to move the retention rates into the 80% range. Now turning to dynamic pricing, where we just launched our next phase of the product in our direct consumer channel last month. We believe this effort will expand our potential customer base to those previously priced out of the market due to the industry's historical practice of state-level pricing. Additionally, we expanded our dynamic pricing models in the renewal channel, where we will start to ingest additional customer information such as service request history and plan tenure into our dynamic pricing algorithms. We are now able to use dynamic pricing to update prices for over 80% of our customers. This will help better balance our dual goals of growing our customer base and protecting gross margins across geographies. From an efficiency standpoint, it allows for real-time price adjustments to offset increased costs and inflation. Our dynamic pricing capability is a critical product, allowing us to be more nimble than ever as we manage through the current external environment. As a reminder, approximately 70% of our customers are auto-renew and auto-pay plans. This recurring revenue, subscription-based model is a huge advantage that dynamic pricing has helped to optimize. In fact, by the end of 2021, we expect to cover most of our increased service request costs related to COVID-19 with additional price. We will deliver this increase through dynamic pricing in a way that minimizes the impact to overall retention. As I mentioned earlier, COVID-19 has resulted in an increase in service requests, primarily in the appliance trade, as our customers spend more time at home. On one hand, we view the elevated service request levels as long-term tailwinds since customers who utilize their plan tend to renew at a meaningfully higher rate. We also expect higher direct consumer demand as the pressures causing elevated levels of service requests also drove a 20% increase in web searches for the term home warranty in the third quarter. On the other hand, higher service requests are impacting our near-term results, which Brian will speak to shortly. At this point, we expect an elevated level of appliance service requests to continue at least through the end of the year. Additionally, we expect industry-wide availability challenges for appliances and parts to continue through early next year based on what we're hearing from our suppliers. Keep in mind, these issues are not unique to Front Door. We are navigating through an industry-wide issue of low appliance availability. Demand has been significantly higher and appliance production has not been able to catch up from earlier supply disruptions. I'd point out that over the last few years, our team has developed the operational muscle to mitigate these types of swings in our business. For example, we are addressing the higher service requests in the appliance trade by taking the following actions. First, we are targeting a mid-single-digit overall price increase in 2021. We're starting with price increases in our renewal channel now, our direct consumer channel in January, and we'll finish with real estate in February of 2021. Second, we are re-evaluating all of our supply and service processes, primarily relating to those impacting the appliance industry. This includes deepening and expanding our supplier relationships, improving access to the fastest moving appliances, increasing speed of parts acquisition, and expanding our service provider network. Our preferred contractor deployment is at nearly 82% in 2020, despite higher demand. Also, our multi-vendor strategy helps mitigate the macro impact on our business as we are still able to source parts in these challenging times. These are two examples that validate our process improvements are working. For those of you trying to model 2021, we have not yet seen the impact for our actions to mitigate higher appliance service requests. We will see the full impact of these actions next year. Higher service request demand and COVID-19 related staffing challenges at our third party call centers have also driven a decline in our customer service levels. Simply put, we struggle to keep up with the call demand. This is more than a little frustrating for me as we have previously made really good progress in improving our overall customer service levels since our spinoff. This issue has been particularly acute in the appliance trade. Normally in the fourth quarter, we would scale down our call center operations to match the lower level of demand. However, this year we are investing an incremental $5 million in service expense during the fourth quarter to handle the higher number of service requests and improve the customer experience. Over the last several months, our team has been working on several initiatives to get us back to our targeted service levels by the end of the year. We have already begun to see improvements in late September and October as we continue to add and optimize staff around the globe. Finally, we are still committed to continuing our self-service journey and adding more service options for customers over time. I would now like to give you an update on our emerging businesses, beginning with Stream on slide five. 2020 has been a building year for Stream, which was a small startup team when we acquired them in late 2019. Stream's augmented reality was recently featured by both Apple and Google as a great product to help businesses operate better. Stream's platform is being leveraged by innovative brands including Lowes, Best Buy, Traeger, British Gas, and Clear Result. Additionally, we recently announced the release of software development kits, commonly referred to as SDKs, to show how powerful and easily customizable the Stream platform and technology can be for their businesses. In our business, we believe that STREAM can provide environmental health and cost benefits. We plan to do this by improving upfront diagnostics, which will drive an increase in the number of jobs completed in the first visit. The use of STREAM will reduce the number of truck rolls and related carbon emissions, limit face-to-face interaction in a COVID-19 environment, and improve cycle time. Looking ahead to next year, 2021 will be focused on leveraging the SDKs to grow Stream's business and their partnerships, as well as utilizing Stream to offer a richer service experience to our home service plan and on-demand customers. Now turning to our on-demand offering on slide six. Just a few days ago, we rebranded and enhanced our on-demand service offering, now called ProConnect, under the American Home Shield brand. ProConnect will leverage the strength, trust, and brand awareness of American Home Shield to dramatically scale our on-demand offering. We also expanded our on-demand offering from five to 35 cities, which extends our coverage to most major metro areas across the U.S. ProConnect will leverage the synergies of being part of American Home Shield by effectively drafting under the overall brand marketing umbrella. This will allow us to maximize existing traffic and improve search rankings for ProConnect. For example, we have over 2 million home service plan customers and over 30 million annual visitors to our AHS website that can generate low acquisition cost jobs for on-demand service. Many of the unique visitors to AHS.com do not purchase a home service plan, and we believe we can capture some of those prospective customers who might still need home maintenance and repair. It will also let us potentially upsell ProConnect customers into a home service plan if it better suits their needs. We will market ProConnect three ways. First, we'll continue to market on demand separately by investing in search and other digital marketing through ahs.com forward slash ProConnect. This will start with appliance and other services for most of our 35 markets. We'll expand services to our moat of licensed contractors over 2021 and look to add new markets in 2022. Second, we will market to existing AHS home service plan customers by focusing on cross-selling maintenance services such as HVAC upgrades. Maintenance services are a unique way to engage our customers for services they may need while also driving higher retention. Third, starting early next year, we plan to market to prospective new customers on the AHS website. We will also provide an expanded offering of repair, preventive maintenance, and move-in services in 2021. Our North Star for on-demand remains the same. We will offer convenient scheduling for same day or next day service, transparency with upfront pricing on select services, savings from affordable pricing, and peace of mind with a guarantee that the job will be done right. At this point, we anticipate ProConnect will complete approximately 80,000 service requests in 2021, 200,000 service requests in 2022, and 400,000 service requests in 2023. We expect our average revenue per job to vary as we add additional services. This translates into an estimated annual earned revenue of $20 million, $60 million, and $120 million, respectively, over the next three years. In conclusion, we have a powerful and resilient business model, we have a strong financial position, and we are making investments today that will accelerate our revenue trajectory over the next several years. Our investments to drive are working, and we are building a business focused on sustainable double-digit revenue growth and unlocking the full potential of our emerging businesses. Despite the pandemic, we intend to grow faster in 2021 and expect to deliver double-digit revenue growth. Finally, we are navigating the challenging external environment extremely well, and I am confident that we are becoming a stronger organization from our learnings this year. I'll now turn the call over to Brian, who will cover our financial results in more detail. Brian?