Frontdoor, Inc.

Ladies and gentlemen, welcome to Front Door's fourth quarter and full year 2021 earnings call. Today's call has been 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'll begin today's call. Please go ahead, Mr. Davis.

Thank you, Operator. Good afternoon, everyone, and thank you for joining Front Door's fourth quarter and full year 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 differ materially 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 filing 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, February 24th, 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've 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. Turning to slide four, our team delivered another strong year as we continued to build a solid foundation for success. And we remain extremely optimistic about Front Door's long-term vision. Before I review our near-term objectives, I would like to take a moment to ground us all on why we believe there's an incredible opportunity ahead of us at Front Door. The broader home services industry is roughly $500 billion with repair and maintenance comprising roughly half of the market opportunity. Our core home service plan business is primarily focused on home repair, but we're also growing into home maintenance services through our Shield Platinum offering and our ProConnect business more broadly. the home service plan category remains significantly under-penetrated. There are an estimated 6 million home service plan customers in the US compared to roughly 130 million single family homes for a penetration rate of approximately 4%. This is a substantial opportunity in the home repair category alone and creates two distinct opportunities for Front Door. First, we are reimagining how homeowners consume home services and believe there is a real opportunity to create a digital first service experience whether that be for home repair or home maintenance. We need to eclipse the days of sending out someone to understand the problem and move to the days where we can diagnose and troubleshoot remotely, providing a digital experience that is good for the customer, cost-effective for our company, and better for our environment. Second, beyond our core home service plan business, ProConnect and Stream are pivotal to providing deeper category penetration of the home services industry. ProConnect is the emerging on-demand business that straddles both home repair and maintenance services while Stream technology is an enabler for the entire home service industry. Used outside of our traditional business, Stream is also a fast recurring revenue platform with external customers using our technology. As we move more towards a digital-first experience, we have the opportunity to provide that experience and technology to other companies outside of Front Door. As the home service plan founder and leader, Front Door is positioned to be the primary beneficiary of the growth from that digital-first experience. In order to realize that potential, we need to reimagine home repair and maintenance, provide a more consistent customer experience, and expand our value proposition. Transformations are rarely easy, and we are still in the early stages of digitizing our operations by enhancing the growth of our core business and further expanding ProConnect and Stream. Although we have experienced some near-term headwinds impacting our recent financial performance, we remain steadfast in our mission and strong in our resolve for the future of this business. I would like to remind our listeners that we've spent the vast majority of our public company life in the middle of a pandemic. Still, in spite of that, we have shown a highly resilient business model that has grown annual revenue nearly 30% and generated nearly $1 billion in adjusted EBITDA since we spawned in 2018. We are just getting started, and imagine what we can do once the short-term market pressures and the pandemic subside. Now turning to slide five, an overview of our 2021 performance. Last year, Front Door delivered strong results. Brian will walk through the numbers in a moment, but a few highlights to consider. We increased revenue 9%, which is our highest annual growth rate as a public company. We did this despite a 4% decline in our real estate channel revenue. We also grew gross margin, increased adjusted EBITDA 11% to $300 million, and generate over $150 million in free cash flow. Additionally, Brian and our finance and legal team did a great job refinancing our debt structure in the middle of last year to significantly improve our financial profile. They also utilized over $450 million of cash to repay approximately $350 million of debt and then launched our share repurchase program in September. In just four short months, we repurchased over $100 million in shares as part of our efforts to return value to shareholders. I want to acknowledge that our fourth quarter performance was significantly impacted by the sharp increase in inflationary pressure that emerged in the second half of the year. I think it's no secret that inflationary pressures are real across all businesses, but we look forward to walking through our approach to help mitigate this new reality. Additional 2021 highlights include launching our new direct-to-consumer or DDC product lineup, over-delivering our ProConnect revenue target of $20 million, but also driving operational improvements that help offset much of the external pressures, specifically in the second and third quarter of last year when we exceeded our adjusted EBITDA outlook. Lastly, I'm proud of the launch of our first sustainability report. I'd like to thank all the team members who are instrumental in producing it. This is a strong first step in increasing investor transparency in our company's efforts and an example of our commitment to enhancing the environment, expanding our social initiatives, and evolving our governance practices. For example, There has been meaningful progress over the past year on our ability to reduce contractor truck rolls as a result of using stream technology and the ongoing annuity of environmental benefits we expect it will generate. In addition, we seeded our first campaigns to drive awareness to the prospects of a career in the skill trade by providing trade school scholarships and investing in hands-on work experiences for high school students. Now turning to slide six, and a review of our five top objectives for 2022. First, we are focused on increasing demand growth in our core home service plan business. Second, we are looking to advance the customer service experience and increase customer retention, which requires us to rethink our service delivery strategy. Third, we're going to further strengthen our business processes, continue to dynamically adjust prices, and leverage our scale to address rising cost inflation. Fourth, Our team is working hard to expand the depth of our ProConnect offering and increase utilization of our stream technology in our core business as well as with third party commercial customers. And fifth, digital transformation. The technology team will be making progress to advance our digital transformation that will support our objective to continue to build a strong foundation for the future. Let's dive deeper into some of the top priorities I just outlined on slide seven. I am pleased to report that our DTC business is showing some green shoots from the improvements we talked about on our last earnings call. As previously discussed, the team faced several challenges in the middle of 2021 that impacted sales growth. The team quickly pivoted and implemented a set of improvement efforts. These efforts have been working well, and we feel these issues are largely behind us as we ended the year on a positive note in terms of customer addition. The DTC team is currently executing against their new plan, and we now have visibility that those actions have been working. These efforts include growing our audience and expanding into new media partners by increasing the investment in our DTC channel. We continue to focus on diversifying our marketing spin into new mediums. Some of these efforts will also help us optimize our customer acquisition costs by improving our advertising effectiveness. Additionally, we continue to aggressively invest in optimizing our e-commerce platform and digital marketing efforts to improve our conversion funnel by utilizing data science and machine learning. And finally, we are also diversifying our demand mix, including further expanding DTC sales to recent home buyers, as well as adding insurance and mortgage partnerships. We expect these new commercial partnerships to start small and then grow over time. Turning to our real estate channel, where we have been seeing volatility as a result of the unprecedented seller's market. In 2021, Existing home sales hit a 15-year high of 6.1 million units sold, which creates a large pool of homes to sell home services plans to. However, we struggle to place our products as part of those real estate transactions. The macroeconomic environment for home service plans remains under pressure amid very low home inventory. The National Association of Realtors, or NARV, reported that inventory of unsold existing homes fell to a new all-time low of 860,000 at the end of December, or only 1.6 months of supply. This compares to a normal market of around four to five months of inventory. Meeting existing home prices increased nearly 16% to $350,000, the longest earning string of increases on record. As a result, Front Door's real estate channel declined in 2021, which will create some near-term pressure in our renewal channel as well. For 2022, NAHAR is forecasting a 3% decline in existing home sales to approximately 6 million homes. Our real estate channel is predicting that the tight seller's market will largely continue despite expectations of rising mortgage rates and some improvement in inventory levels. In response to this environment, we are taking the following actions. Aggressively looking to expand our channel share with our largest real estate partners, completing a strategic realignment of our real estate sales organization to focus on key geographic markets. And further, we'll be launching a newly expanded product lineup in the real estate channel that is comparable to our new DTC products in the next few months. Similar to our DTC channel, we expect this tiered product lineup will be well received by customers and our real estate broker partners given the improved coverage. Real estate is a great channel for us, and we are determined to rebuild our demand footprint. But given the decline in new customers last year and tight home inventory levels, it will take time. As I stated last quarter, we continue to look to expand commercial partnerships that would offset the volatility within the real estate portion of our business. Within the renewal channel, we are redoubling our efforts to improve our customer retention rate from 74.2% at the end of last year and get closer to 75% by the end of 2022. While the decline is mostly due to a drop in new customers, specifically in our real estate channel, there is much we can do to empower every homeowner to feel confident and in control of their home through initiatives such as working to significantly improve the service experience and reduce our cancel rates over time by leveraging a digital-first mindset and by continuing to optimize dynamic pricing, properly setting member expectations by simplifying our contract language and enhancing our product's coverage, building on our success of offering ProConnect maintenance services to current HSP members by expanding the assortment of services available to them, and optimizing the renewal experience through deeper personalization and better use of technology. Now turning to slide eight and a review of our technology objectives. The North Star for our technology team is to improve the service experience through a digital-first approach for both our customer and contractor experiences. While telephone calls will remain an important option for customers and contractors to communicate with front door, we are focused on creating simple and efficient digital self-service experiences that will, over time, become the default channel for most interactions. This includes launching a customer-facing service app as part of the experience, which is a starting point on our journey to meet customers where they are today. Our goal is to fully integrate our street technology within the customer service process and within the self-contained app environment. We also need to drive customer adoption and continue enhancing our mobile capabilities over time. Additionally, we also believe there is an operational and cost opportunity for us to drive a digital-first experience by reducing the number of phone calls and reducing manual touchpoints along the repair journey. For contractors, we are working to improve interfaces and processes that will help improve service times. This includes digital-first solutions for contractors to utilize for coverages, authorizations, and to enable collection and sharing of service request activities. As a leader at HomeData, we want to make it easier and more straightforward to do business with us, and we will advance that goal this year. Within Front Door, we'll be leveraging technology to speed service delivery and enhance the customer experience. This includes improving the vendor selection process by using machine learning and better data integration across a unified service request platform for better and faster service delivery. We are also making additional investments to modernize our technology infrastructure and improve availability and scalability. This is expected to result in a gradual improvement over time, and we expect to see some of the benefit of these efforts this year. There is an abundance of opportunity to meaningfully advance our technology platforms this year. I look forward to updating you on our progress over the next several quarters. Now turning to slide nine in a review of our actions to grow ProConnect revenue to $40 million in 2022. We brought in a new leader for ProConnect with extensive market experience in tech-enabled on-demand businesses such as Uber and SmartHop. While we have the same strategy to move into the on-demand home services space, we'll be focusing our growth in key markets while continuing to add new services to those markets. Untapped demand exists for a convenient delivery of home services. we are working to provide the key ingredients for a digital-first, on-demand platform that changes the way people solve for their home services needs. Our vision for ProConnect is to become the one-stop shop for on-demand solutions that homeowners will go to when they're looking to resolve any of their home repair and maintenance needs. At the tap of a button, they will have access to vetted and highly-rated professionals. They'll be experts in solving their issues in a timely manner with top-quality service at a fair price. Let me expand on how we're planning on achieving our $40 million revenue target this year. Our target is based on an expectation that we will continue to build out the depth of our service offerings across the 35 cities we currently operate in. Specifically, we'll be laser focused on going deeper within the top 20 markets. We'll do this by adding maintenance services and HVAC upgrades in order to give customers more reasons to come back to the platform on a more frequent basis. We have a significant greenfield growth opportunity in front of us, and we are intentionally moving to strengthen our foundation. There is more work we can do on the marketing front by improving our marketing efficiency, increasing cross-selling opportunities among our brands, and further leveraging our contractor base. As we continue to leverage the symbiotic relationship with our core home service plan business and vetted stable of contractors, we expect to grow our ProConnect operations, including contractor density and response, by moving to a more automated process and then we'll be adjusting our marketing strategy. With the improvements we are making, I am optimistic that we will capture the opportunity to accelerate our journey to be customer and process and deliver the best possible experience every time. Now turning to slide 10 and our stream objectives for 2022, which are both internal and external. Internally, we are focused on expanding stream utilization across our core home service plan business to improve customer service, improve contractor engagement and response time, as well as improve our environmental impact. These efforts are primarily around driving customer and contractor adoption and further integrating virtual diagnosis into our service experience, especially for our appliance service requests. We completed over 100,000 stream AR sessions in our home service plan business in 2021, and we are looking to increase usage by roughly 50% this year by training more of our agents and contractors on how to use and offer upstream calls during a service request. Externally, we have great partners that are using AR-enriched technology to change the way they interact and engage with the customers. Our primary focus and reason for acquiring Stream was to use it as a catalyst for our digital first vision. Another benefit of this small but growing business is that it's a SaaS business model that we are monetizing. It also has the potential to be a higher lifetime value with multi-year contracts that allow for a land and expand business model. On this front, we are focused on expanding our enterprise customer base. For example, Stream and Lowe's recently announced a spatial commerce product that Lowe's will release in the coming months. In closing, our mission has not changed. Our North Star continues to focus on reimagining home repair and maintenance and being the enabler to remove the hassle from home ownership. We strongly believe that we have a robust long-term opportunity to deepen our reach in the larger $500 billion home services industry as we pursue on-demand home services and increased penetration in the home repair category. We are taking the right actions to build a strong foundation and drive sustainable long-term growth that will drive improved financial performance in the future. I'll now turn the call over to Brian. Brian?