Frontdoor, Inc.

Ladies and gentlemen, welcome to Front Door's third quarter 2021 earnings call. Today's call is being recorded and being broadcasted 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'll 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 2021 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 two 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 materially differ from those discussed here today. These risk factors are explained in detail in the company's filings with the FDC. Please refer to the risk factor 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, October 28th, 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. I'll now turn the call over to Rex for opening comments.

Rex? Thanks, Matt, and good afternoon, everyone. In the third quarter, Front Door delivered strong financial results. Other speaks to the progress our organization has made. There's still much more we are doing to build a strong foundation for the future. Starting on slide four, since the onset as a public company, Front Door's vision is to redefine the home services space and become a top provider of residential repair and maintenance solutions, and this vision remains as strong as ever. We believe the total addressable market for U.S. home services is approximately $400 billion, and no one company has yet to provide an ideal homeowner experience. We believe that Front Door is well-positioned to become the industry leader over time. Home repair represents about 25% of the addressable home services market, and it's the most challenging segment to operate in as the customer already has something broken, and that's where we have mainly operated over our 50-year history. Looking ahead, the long-term roadmap includes expansion into home maintenance services and eventually home improvement as a way to appeal to a broader customer base. We are doing this by transforming the way we evolve the customer experience from a difficult manual process to a seamless and digital best-in-class experience that homeowners will love. Our long-term vision remains the same, to provide excellent service and take the hassle out of homeownership. While the pandemic has presented a number of challenges to us, our contractors, our vendors, and our customers, we still have made significant progress over the last few years. However, we're not satisfied at the pace of change and need to accelerate the advancement of our technology initiatives as fast as possible. I'll speak more about that in a moment. our first priority is to pivot and narrow our near-term focus on improving the customer experience for core home service plan customers we'll do this by providing digital self-service options and prioritizing a mobile first strategy this includes developing an application or app to better interact with our customers which we are targeting to launch next year we already offer a self-service option through our mobile web customer portal but we'll further enhance this functionality for our app additionally We will also further leverage the synergies and functionality of Stream, our proprietary remote video communications platform, and ProConnect, our on-demand service, across our core business to improve the overall experience. We see a future of a digital-first approach to customer problem-solving through Stream, as well as providing more maintenance services through ProConnect for a more holistic approach to solving everyday hassles of homeownership. Providing home service plans represents the vast majority of our business today, and our success is due to offering a dual-value proposition of providing critical budget protection from unplanned out-of-pocket expenses and the convenience of using our qualified network of providers to complete the appliance or system repair. That's why it's critical we improve the customer experience to achieve our long-term objectives in the larger home services space. By making it easier and seamless for customers and contractors to do business with us, We will improve the customer and contractor retention, drive revenue growth, improve service efficiency, and move further toward a best-in-class offering. We're also expanding into the larger home services market through our on-demand offering, ProConnect, and believe we are well-positioned to emerge as a leader in home services space over time. One of the main reasons I joined Front Door was the appealing proposition of transitioning an established nationwide network of contractors focused on home service plans to support an on-demand offering And that is still the case today. We remain on track to deliver over $20 million of on-demand revenue in 2021 as we have expanded the depth of our services in the market. Looking forward, we expect Proconnex growth to continue to be strong. However, it may be somewhat slower than the outlook I shared with you late last year. A lot has changed over the last year and a half or so. Building a new business takes time and investment, and we are now moving forward with an intentional balance between cost and growth, especially during this period of continued uncertainty. We've had several learnings during the first year of operating ProConnect, and I firmly believe in the symbiotic relationship between our home service plan and on-demand businesses. While we have been driving higher demand through ProConnect's standalone digital marketing efforts, there's still more we need to do to enhance our overall standalone digital sales process. We also would like to create more job leads through our existing and prospective home service plan customer base. We're seeing mid-single-digit repeat business within the ProConnect customer base that is primarily driven by our appliance trades. Our plumbing electric trade expansions took longer to ramp, but we are now beginning to perform. We are continuing to apply these and other learnings, and we'll adjust our go-to-market strategy to obtain optimized results. As a result, we are now targeting ProConnex revenue to be more than double in 2022 from the $20 million target in 2021, and we will provide further updates on our outlook in February. That's turning to slide five in a discussion of the historically challenging market dynamics impacting our real estate channel. Similar to past quarters, the National Association of Realtors, or NAR, reported a tight existing home sales market with homes remaining on the market for only 17 days and overall inventory levels at a near record low of 2.4 months. Additionally, you can see that NAR reported a significant rebound in existing home sales late last year that contributed to the tight market conditions. In this seller's market, we expect it will continue to be difficult to sell a home service plan as part of a real estate transaction for the next several quarters as this tight market does not show signs of loosening anytime soon. Data from the home service plan industry is limited, but we are confident that most of the decline in our unit sales is due to the unprecedented market dynamics and that similar challenges are being faced by many of our competitors. We also believe that this decline is transitory and that we will see improvements after the housing market reverts to more of a normal supply-demand balance. Now turning to the business update on slide six. Let me start by saying that we continue to look for opportunities to mitigate the impact of the seller's market and reinvigorate our revenue growth within our real estate channel. As I mentioned on our last call, we are responding in three ways. First, our DTC channel launched a marketing campaign that is specifically crafted for targeting recent homebuyers. While we are seeing early success from this program, it is very new and will take time to grow. We have a new real estate channel campaign that is aimed at reinforcing the value proposition of home service plans with both real estate agents and home buyers. We're also continuing to focus on top brokers and agents to drive growth across our top national accounts. And third, we are focused on expanding our strategic partnership opportunities beyond our current real estate brokerage agreements. Further diversifying our partnership and distribution channels will open new channels for growth, as well as help mitigate swings in the real estate market. we remain focused on doing just that by expanding and growing into new segments over the next several years. While we expected first-year real estate channel to decline in the third quarter, we also faced some headwinds in the direct consumer or B2C channel and in renewals. Let me provide details in each of these areas. After a very strong performance in 2020, we've had some challenges in our B2C channel this year as a result of a number of changing dynamics. The good news is that we believe most of these challenges are largely behind us, that we will regain our momentum over the next few quarters. Let me provide some additional context on the challenges we faced. The primary drivers were lower than expected customer demand and higher than expected advertising costs driven by competition for advertising inventory. For example, we saw a nearly 20% decline in internet search demand for the home service plan category in the third quarter of 2021 compared to the prior year period as customers emerged from lockdown and drove lower TV viewership and less digital search. You'll recall that we saw strong marketing efficiency last year as our value proposition resonated extremely well with customers sheltering at home and advertising rates were very favorable. The transition to the current environment has been more challenging than expected with our B2C broadcast rate increasing more than 50% during the second and third quarters of 2021 compared with prior year period on a like-for-like basis. This was much more than we anticipated as demand rebounded back from the pandemic-driven lows we saw late last year. In response, we have diversified our demand mix, pivoted to find new sources of demand, and re-evaluated our conversion funnel to improve the sales process. This includes moving to new digital sources and implementing an expanded broadcast strategy. We believe these changes will return customer demand for our products to levels we originally projected. Second, we launched our good, better, best product lineup. However, our sales teams took longer than expected to ramp and become proficient at selling our higher-priced but higher-value new products to customers. We quickly responded and improved how our sales team positioned our new products through better training and technology. We've already seen improvements to expected performance levels from earlier in the year. And third, the transition of technology from our legacy e-commerce platform to a more modern architecture took longer than expected. While we intended to drive better lead conversion, the initial transition did not optimize our search traffic as well as we would have expected. In response, we've improved our e-commerce platform through additional A-B testing and optimization to help drive the higher conversion for customers navigating our website. Finally, the team understands DGC is our biggest lever for new unit growth, and we simply must execute our plan more quickly and flawlessly going forward. This is a channel that can return to double-digit revenue growth next year, but again, it'll take a few quarters for our volume improvements to show up in reported revenue. The good news is that we will see more price and mix driving strong revenue growth as unit volume recovers to more normalized levels. We remain laser-focused on improving our customer retention rate. However, our customer retention rate rounded down to 74% in the third quarter. While the decline is mostly due to a drop in new customers, specifically in our real estate channel, it is also being impacted by our dynamic pricing model, continued challenges across the global supply chain, and the overall customer experience.