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spk02: Ladies and gentlemen, welcome to Front Door's first quarter 2022 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.
spk05: Thank you, Operator. Good afternoon, everyone, and thank you for joining Front Door's first quarter 2022 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 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 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, May 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 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 will now turn the call over to Rex for opening comments. Rex?
spk08: Thanks, Matt, and good afternoon, everyone. Front Door delivered another strong quarter of revenue growth despite continuing macroeconomic headwinds. Today, we plan to focus our discussion on two near-term external challenges, cost inflation and the real estate market, and our long-term opportunity. Beyond these challenges, the rest of our business is generally on target with what we laid out last quarter. Turning to slide four, where we will provide an overall business update and how we are addressing the challenging macroeconomic environment. First, we are moving with urgency to address accelerating inflation. Brian will address this topic in more detail, but in short, U.S. inflation rates are rising at the highest level since 1981. Inflation in the home services space is rising faster than the overall economy. As a result, we are seeing service costs accelerate faster than we anticipated and higher than we priced for. In response, we are redoubling our efforts to address rising inflation and support our customers and contractors during this extraordinary time. Contractors across the country are experiencing record costs as they help us resolve the hassle of owning a home. We are intentionally working with our contractor network to find innovative ways to reduce costs and improve customer service in these unprecedented times, but this comes with a near-term cost. Separately, our real estate channel continues to be impacted by a historically strong seller's market as a result of extremely low home inventory levels. This is driving a decline in our first-year real estate sales, and I'll address this topic shortly. Much of the near-term pressure from inflation in real estate is macro in nature. It is not intrinsic to our normal business operations. We remain focused on improving the key drivers of our business and focusing on controlling the controllable. While we continue to work on mitigating the external factors, many of them remain beyond our control in the near term. Despite these challenges, it is in this environment that our resilient business model and scale demonstrates the ability to grow revenue and generate strong cash flow. While others are cutting back, we are able to continue investing in our customer experience and develop our contract community in order to drive long-term performance. We believe we have a tremendous growth opportunity ahead of us and continue to propel our strategic initiatives while building a strong foundation for future success. Now turning to the real estate channel on slide five. In short, the real estate channel has been underperforming our expectations. When we provided our previous full-year outlook in February, we expected to sell approximately the same number of home service plans in our real estate channel as we did in 2021. However, it remains increasingly difficult to sell a home service plan when inventory levels remain extremely low and the seller has significant leverage in a transaction. There are three market statistics from the National Association of Realtors, or NAR, that we believe highlight this trend, including days on market declined to 17 days in March, according to NAR. This was down from 18 days in the prior year period and less than half of the levels seen before the pandemic. The second metric is inventory of unsold homes, which NAR reported was approximately 950,000 at the end of March, or only two months of supply. This is well below a normal market of around four to five months of inventory. The third metric is the percentage of cash sales, which NAR reported was approximately 30% in March. This is up from 23% in the prior year period. This dramatic increase, reflecting the significant percentage of homes being purchased by investors, has been a contributing factor impacting our ability to sell home service plans since these investor buyers are not naturally inclined to buy our product themselves, and they shrink the inventory levels available to individual purchasers that are more likely to purchase a service plan. As a result of external market pressure, we are now expecting our real estate channel revenues to significantly decline in 2022. In response to this environment, we continue to be focused on the following actions. First, investing more in our direct consumer or DDC channel and our renewal channel to help offset some of the impact from lower real estate channel sales. We're also expanding our partnership strategy to help diversify our revenue over time. Within the real estate channel, we're aggressively looking to expand our channel share with our largest real estate partners. are completing a strategic realignment of our real estate sales organization to focus on key geographic markets and we've recently launched the new good better best home service plans in our real estate channel a comparable product we launched last year in our dnc channel they're the most comprehensive products we've ever offered and we believe will help us better position our products in the market to be clear now these actions will fix our real estate channel overnight However, we believe that this channel is core to our home service plan business, and we'll continue to rebuild our demand footprint over time as the macro market factors become more favorable and our improvements take hold. Now turning to slide six in our review of our top objectives for 2022. I'll start by reminding you that our objectives have not changed since our last call. Let's now dive deeper into some of these priorities and how we are progressing through the early part of 2022. back into their DSC channel where the team continues to perform well after making improvements in late 2021. We remain on target of providing double-digit revenue growth as we did this quarter. Our comments from last quarter still hold true. The marketing team stabilized our platform late last year. We expect that to continue through 2022. Our spending, media footprint, and conversion funnel are all operating as expected, and we continue to make minor changes to optimize the platform. For example, our e-commerce platform is working well, and we are catching a broader net with our media coverage than this time last year. In the renewal channel, our team continues to improve the renewal process. We've increased the number of customer outreach touchpoints, improved call center staffing and training, and leveraged technology to make it easier to renew your home service plan. In fact, we are just launching a new feature where you can upgrade your plan through our online platform. While it's still early, we believe there is a lot of potential around upgrading more of our customer base to the more inclusive Platinum offering, which provides both coverage and maintenance services. We are still looking to improve overall customer retention in 2022. However, the decline in real estate sales and higher pricing will have an impact on our total customer count. In response, we continue to progress these initiatives I've spoken about previously. We are working to improve the service experience by leveraging technology in our digital-first focus, such as Stream, to make it easier for customers to interact with us and for us to walk in their shoes. For example, we just began offering a new click-to-call feature that allows customers to more easily launch a Stream call to drive better customer adoption. We're also committed to further our progress on the service delivery experience by allowing for more digital self-service options, utilizing more preferred contractors, and by continuing to optimize dynamic pricing. Over the last few years, we have improved our self-service capabilities and are now processing more than half of our initial customer interactions through My Account or automated phone system. As we roll out our customer app later this year, we think we can make our self-service capabilities even better. While Front Door is facing some near-term external challenges around accelerating inflation rates in the macro real estate environment that are beyond our control, we remain focused on improving the key drivers of our business and focusing on controlling the controllable. We strongly believe in our long-term vision of transforming the home services space and taking the hassle out of home services. I leave you with three reasons to believe in Front Door. First, we continue to prosperly grow this business despite the pandemic and current macroeconomic conditions. As I stated in our last call, we spent the majority of our public company life in uncertain times, and yet we continue to deliver profitable growth. Second, we are uniquely positioned to transform an antiquated and inefficient industry, one that begs for disruption. We strongly believe we have the knowledge and scale to transform into a digital first model that allows you to solve your home hassles in a much more delightful way. Last, we continue to build products that bundle traditional home service plans and new maintenance services to provide a more holistic and complete set of offerings for not only our current customers, but for those who may not need a home service plan, thus reaching a much larger audience. This industry is ripe for digital transformation and has a massive opportunity to grow into on-demand services, and that's exactly what we plan to do. I'll now turn the call over to Brian to review our financial results. Brian?
spk05: Thanks, Rex, and good afternoon, everyone. Please turn to slide seven and I'll review our first quarter 2022 financial results. First quarter 2022 revenue increased 7% versus the prior year period to $351 million as a result of higher pricing and a mixed shift to higher-priced products in our home service plan business. Looking at our home service plan channels, first quarter revenue derived from customer renewals was up 10% versus the prior year due to improved price realization, and growth in the number of renewed home service plans. First-year real estate revenue was down 20% versus the prior year, reflecting a continued decline in the number of home service plans in this channel, offset in part by improved price realization. The decline in the number of home service plans in this channel was higher than we had projected due to the continuation of the challenging seller's market, driven in part by extremely low home inventory levels across the U.S. First-year direct-to-consumer, or D2C, channel revenue was up 14% versus the prior year due to improved price realization and a mixed shift to higher-priced products. First-quarter revenue reported in our other channel increased $5 million over the prior year, primarily due to continued solid growth at ProConnect and Stream. First-quarter revenue for ProConnect and Stream was $7 million and $2 million, respectively. and should continue to ramp up over the balance of the year. Gross profit declined 3% in the first quarter versus the prior year period to $144 million, and our gross profit margin was 41%. Net income declined $3 million in the first quarter of 2022 as lower gross profit and increased investments in sales, marketing, and technology, as well as higher personnel costs, more than offset lower interest expense. adjusted net income decreased $5 million over the prior year period to $3 million. Adjusted EBITDA was $25 million in the first quarter, or $11 million lower than the prior year period. Let's move to the table on slide eight, and I'll provide context for the year-over-year decline in adjusted EBITDA. Starting at the top, we had $21 million of favorable revenue conversion in the first quarter of 2022 versus the prior year period. Contract claims costs increased $24 million in the first quarter versus the prior year period. The increase was primarily in the appliance, plumbing, and HVAC trades due to accelerating inflationary trends, including rising contractor labor and fuel costs, as well as continued industry-wide parts and equipment availability challenges. This was partly offset by a lower number of service requests and process improvement benefits. Additionally, contract claims costs for the first quarter of 2022 include a $9 million unfavorable adjustment related to the adverse development of prior period claims, primarily from the fourth quarter of 2021. Sales and marketing costs increased $4 million in the first quarter versus the prior year period, primarily related to increased investments in the B2C channel and ProConnect. And finally, general and administrative costs increased $3 million in the first quarter due to increased professional fees, investments in technology, and higher personnel costs. Turning to slide nine, I'm now going into more detail on the significant claims cost inflation we're experiencing, the effects on the business, and our ongoing cost mitigation strategies. Based on the claims cost trends we experienced exiting last year, We assumed that a high single-digit year-over-year increase was appropriate based on higher contractor labor, parts, and equipment costs. However, our actual first quarter year-over-year cost inflation rate was in the mid-teens. There have been several changes since our last earnings call that have resulted in a greater acceleration of inflationary cost pressure than we originally anticipated. First, the war in the Ukraine has resulted in global cost inflation. especially fuel prices and supply chain uncertainty. Second, the COVID-related shutdowns in China have impacted the global supply chain by creating production issues and logistics challenges that could impact overseas parts and equipment availability for the foreseeable future. And third, we have seen an increase in overall inflation that has impacted the macroeconomic environment. These factors have all contributed to U.S. inflation rising at the highest rate since 1981, with the consumer price index increasing 8.5% in March. However, it's important to point out that cost inflation in the home services space is rising well ahead of this rate. For example, we're seeing our service request costs now rising at double-digit inflation rates as contractors pass along their higher labor rates, as well as higher fuel, parts, and equipment costs. While we have great visibility and an ability to influence our own direct purchases of parts and equipment, we don't have that same level of visibility into our contractor costs, especially when they supply their own parts and equipment. As a result of the current environment, we are aggressively addressing rising inflation and global supply chain challenges through a number of actions. First, we are implementing another round of price increases and now targeting an upper single-digit overall price increase in 2022 that will be delivered through dynamic pricing to minimize the sales unit impact. Our price testing continues to show that our customers are mostly inelastic to price, and we expect to be able to increase our price over time to cover the inflationary pressure. Second, we are implementing a host of process improvements with our contractors, such as increasing the percent of jobs assigned to our preferred contractors, redoubling our recruiting efforts, and driving broader adoption of technology and automating processes. Third, we are continuing to expand our supply chain efforts by broadening front door source parts and equipment for contractors. And fourth, we're taking SG&A cost reduction actions across the business. Please now turn to slide 10 for a review of our cash flow and cash position for the first quarter of 2022 compared to the prior year. net cash provided from operating activities was 47 million dollars for the three months ended march 31 2022 and was comprised of 14 million dollars in earnings adjusted for non-cash charges and 33 million dollars of cash provided from working capital the cash provided from working capital was primarily driven by seasonality net cash used for investing activities was eight million dollars and was primarily comprised of technology-related capital expenditures. Net cash used for financing activities was $47 million, primarily driven by $40 million used for share purchases. Free cash flow calculated as net cash provided from operating activities minus property additions was $39 million for the three months ended March 31, 2022, compared to $45 million for the prior year. We ended the first quarter of 2022 with $255 million in cash. Restricted net assets totaled $163 million and unrestricted cash totaled $92 million. Our unrestricted cash, combined with $248 million of available capacity under our revolving credit facility, provides us with a solid available liquidity position of $340 million. It remains our intention to return the majority of our excess cash to shareholders over the next few years through our share and purchase program, but we certainly could pause the program for strategic acquisition or other considerations as detailed in our public filings. I now conclude my prepared remarks with our current thoughts regarding the financial outlook for the second quarter and updated full year 2022 provided on slide 11. We expect our second quarter 2022 revenue to be within a range of $475 million to $485 million, which reflects an increase in direct-to-consumer and renewal channel revenue versus the prior year period, partly offset by a nearly 30% decline in real estate channel revenue. Second quarter just EBITDA is expected to range from $75 million and $90 million, which is significantly below the prior year period as a result of the accelerating inflationary cost trends. Turning to our updated full-year 2022 outlook, revenue is projected to be within a range of $1.66 billion to $1.69 billion. The full-year revenue growth assumptions include double-digit revenue growth in the D2C channel, comprised of higher price and the continued shift in product mix to higher-priced products, upper single-digit revenue growth in the middle channel, driven primarily by price realization and higher renewal customer accounts, and a mid-20% decrease in real estate channel revenue due to a decline in our expectations for this channel related to the historically challenging seller's market and the extremely low level of home inventory. On a consolidated basis, our core home service plan business revenue growth is now expected to be in the low to mid-single digits. Additionally, Customer count is now expected to decline slightly in 2022, primarily driven by the weakness in first-year real estate sales. In regard to our emerging businesses, ProConnect revenue is still expected to reach about $40 million, and stream revenue is targeted to be between $10 million and $15 million, as originally projected. Our full-year 2022 gross profit margin is expected to be between 44% and 45%, driven primarily by the acceleration of inflationary cost pressures, partly offset by higher pricing and process improvement efforts that are projected to have a greater impact in the second half of the year. For 2022, we anticipate that the inflationary pressure will drive cost-per-service requests to increase at a low teens percentage. while the actual number of service requests is expected to be flat to slightly down versus prior year. The rate of cost inflation is expected to remain elevated in the first half of the year and then improve in the second half of the year as we lap some of the increases from late 2021. I should note that while our long-term gross margin target for our core home service plan business remains the same, which is approximately 50%, Our goal is to provide you with the best real-time data we can as we navigate this volatile macroeconomic environment and take every action to mitigate the inflationary impact. We are now targeting full-year 2022 SG&A to range between $540 million and $565 million. The $10 million decrease from our previous guidance primarily relates to the SG&A expense reduction actions I mentioned earlier. Based on these updated inputs, full-year 2022 adjusted EBITDA is expected to range between $215 million and $245 million. In conclusion, we're doing our best to manage through this very challenging set of macroeconomic conditions by controlling the controllable and executing our internal business initiatives. While our near-term performance continues to be impacted by geopolitical and pandemic-driven inflationary cost pressures and a historically challenging real estate market, we're focused on delivering on an aggressive set of actions that will help us navigate through this challenging period. Despite these near-term pressures, We remain confident in our long-term business outlook, and we continue to invest in building a strong foundation for the future. With that, I'll turn the call back over to Matt to open the question and answer session. Matt? Thanks, Brian. As a reminder, during the question and answer session, we encourage you to ask any questions that you may have, but please note that our guidance is limited to the outlook we've provided. Operator, let's open the line for questions.
spk02: Thank you, Matt. If you'd like to ask a question today, please press star followed by one on your telephone keypad. And our first question is from the line of Jeff Schmidt from William Blair. Jeff, your line will be open now if you'd like to proceed with your question.
spk06: Hi. Good afternoon, everyone. Did you say that claims cost inflation was sort of in the lower mid-teens but then you're targeting kind of high single digit price increases. And I'm curious just because I guess, why not just push for, you know, 10 to 15% price increases to combat this? Or is it, is the market environment too competitive? I would think, you know, your, your, your competitors are going through the same type of pain. So I guess why not get a more, more aggressive on the pricing front?
spk08: Yeah, this is, this is Rex. A couple of things. One is, In our last call, we talked about kind of a mid-single-digit price increase because we thought that's kind of where inflation was going to be. And so, as Brian mentioned, you know, now we're targeting, you know, kind of another round of price increases. So I think, you know, between those two things, as Brian mentioned, you know, over time, I do believe that that begins to mitigate the impact of inflation. Brian, I think you've added that.
spk05: Just to be clear, the inflation rate will be mid-teens for the first half of the year, and then end of the year, full-year basis and low-teens. So it trails off a bit in the second half as we lap some of the pressure from last year.
spk06: Okay. And a question on the new platinum plans, which I think you said included some kind of maintenance options.
spk08: uh you know what's the progress of that what type of growth are you seeing there and is there any cannibalization of i get the proconnect maintenance business at all uh no that so for for platinum we're actually seeing uh something that you know customers like the the blend of both uh home home service plan coverage as well as as maintenance services and so We're actually seeing a higher mix of platinum than we originally had forecasted for, which is always a great sign. We don't think it cannibalizes ProConnect at all. And we actually think that, you know, maintenance services is a great retention tool for, you know, for our customers longer term.
spk06: Okay. Thank you for the answers.
spk02: Thanks, Jeff. And our next question is from Ian Zafino of Oppenheimer. Ian, your line is now open.
spk04: I agree. Thank you very much. You know, on the pricing side, is there anything you can do to get pricing more immediately? Have you thought about surcharges or some other form of price increases that you could take to maybe offset some of the inflation better than you're able to do right now? Thanks.
spk08: Yeah, hey, it's Rex. You know, certainly it's something we've explored. I think, you know, since we sell an annual contract, there's not an opportunity to, you know, to have an immediate surcharge, if you will. But You know, a lot of the things that we've worked through with our pricing increases is, you know, we've taken kind of a data science approach to our models for dynamic pricing, you know, just to remind the group. Dynamic pricing, we look at, you know, both usage as well as, you know, kind of cost within uh the zip codes so uh between those things and the risk deciles we looked at you know we've been pretty uh i think surgical in terms of how we're how we're raising prices um keep in mind that our service contracts are are uh you know uh annual therefore we recognize the revenue at 12 at a time so uh that's that's why uh you know we think that you know this plays out over time but uh it's not going to be an immediate uh improvement
spk04: okay um and then just um a follow-up on the pro connect side um are you gonna be taking similar price increases to cover inflation there is there an opportunity to take more and i'm just trying to think of it how that kind of fits with your 40 million of guidance um you know if that's the case it might be higher than that um maybe help us understand that um thanks
spk08: Sure, so so certainly I think there for for some areas there's a potential opportunity, but it's also the areas that we're currently building within pro connect so uh this is a reminder you know we started with with appliances and and uh maintenance services you know certainly i think there's maybe a small opportunity in appliances uh but as we roll into both plumbing and electrical um you know there's an opportunity to to take more more price but it's also you know somewhat nascent that's the part that you're building up so um i think it'll it'll help i'm not sure um it's going to take us beyond our a revenue target of $40 million. Okay.
spk04: Thank you very much.
spk02: Our next question is from the line of Yusuf Squally of Truro Securities. Yusuf, your line is now open. Please proceed.
spk01: Great. Thank you. So two quick questions for me. One still on pricing. So versus the inflation assumption hitting you in the call it low to mid teens for the year versus the price increase in the high single digits. Arguably, as you institute the price increase, it's going to take time for it to roll over. How much are you assuming that you're going to be able to recapture from that, you know, call it low teens price inflation? And second, can you maybe talk about the marketing efficiency you're seeing in your DTC channel? Sometime back, I think you pulled back a little bit on marketing because marketing efficiency through that channel was not as good as you had hoped. Maybe your assumption about, you know, sustained double-digit growth in DTC, does that come at the expense of maybe ROAS or that's still within your acceptable ROAS? Thank you.
spk08: Yeah, sure. I'll take the direct-to-consumer question, and Brian, I'd ask you to comment on how our pricing will kind of lap into this year and next. So for direct-to-consumer, you're right. You know, late last year, the team faced a couple of challenges. But as we reported last quarter, you know, that's behind us. We're still seeing a great, you know, certainly things are more expensive, but I think the team has worked on both conversion and efficiency. We optimized our e-commerce platform and our digital marketing. We've spread over other areas, and so those things continue to perform well, and that's why we're still bullish on direct-to-consumer and still think that we'll have double-digit growth for the remainder of the year. But we're seeing it somewhat in price and mix first, but expect units towards the back of the year. But these actions that we've taken last year are definitely providing some green shoots as we look forward to the second half of this year.
spk05: And to your question about the pricing and reclaiming some gross profit or gross margin, as Rex said, it just takes time, right? It takes a few months to pull these price increases out. And then you recognize revenue monthly. And so you've got the cost up front and then you get the margin of recovery over time. It's not going to happen this year, as you saw from our forecast, a 44% to 45% gross margin. But as we get into next year, we'll be able to get more of that pricing benefit. And as we think about long-term, you know, generic pricing will certainly be a great lever for us, you know, to get back to 50% gross margins for the home service plan business. But it would be dependent on how quickly first-year real estate rebounds, et cetera. So, anyway, it's going to take some time to – long story short, to get back to the gross margins we need to get to.
spk01: Okay. Thanks for the clarification.
spk02: Thank you. And our next question is from Aaron Kessler of Raymond James. Aaron, your line is now open if you'd like to proceed.
spk07: Great. Thank you. There's a couple questions. Maybe first, if you can just talk about kind of customer acquisition costs. We're seeing and maybe specific to the D2C channel. And then I think you just, maybe just to clarify, I think you talked about inflation kind of in the mid-teens. What's kind of the rough mix between, in your estimates, between kind of labor costs as well as parts as well? Thank you.
spk08: Sure. So I'll take direct consumer and ask Brian to comment on the inflationary cost. So for direct consumer, certainly we're seeing slightly higher tax, but also keep in mind that with price increases and mixed changes to more of our Platinum product, that actually helps give us more headroom, if you will, from an LTV perspective. So we're, you know, certainly seeing some inflationary pressures there, but nothing, you know, out of the ordinary. Since we've, you know, transitioned to our e-commerce platform and changed our mixed profile, I think that, you know, the team is executing very well. We've, you know, we last year brought in some programs in-house and that continues to to provide, you know, green shoots for us. So as we spread our marketing across, you know, digital direct mail and broadcast, we're still pretty confident in our plan. Got it.
spk05: Great. Hi, Aaron. It's Brian. What was your inflation question again?
spk07: I'm sorry. Yeah, thank you. You kind of mentioned mid-seens overall inflation. Just curious, I think you may have mentioned labor costs about 10%. Does that mean kind of parts for up kind of the remainder, or how do we think about the mix between labor costs and parts, if you have a good sense?
spk05: Yeah. The data that we've seen shows that it looks like labor costs that are probably hitting our contractors are, you know, the mid to high single digits that they're facing with their technicians. And, you know, when they look at what they're paying for parts and equipment, Inflation is probably at a rate of 15% to 25% inflation, which is very high. We're facing more like 10% with what we buy due to our purchasing leverage. So that's pretty high. And think about fuel. They're paying 50% more today than they did a year ago for fuel for their trucks. So there's a lot of inflation that's really facing our contractors today. But from what we purchase, it's more like 10%. Is that helpful? Yeah, great. Yes, that is. Thank you.
spk02: Thank you. And our next question is from the line of Justin Patterson of KeyBank. Justin, your line is now open. Please proceed.
spk03: Great. Thank you, and good afternoon. I wanted to go back to some of the comments you left off with Rex about just investing more around improving customer service, improving the self-service capabilities. Can you talk about the timeline for that to phase into the business? And then as these investments start to bear fruit and macro conditions normalize, how should we think about the potential benefit that could add to both retention rates, margins, and pricing power over time? Thank you.
spk08: Hey, Justin. I think that this has kind of been an ongoing work I don't think. I know this has been ongoing work since we started, and we're really starting to see traction from a self-service perspective. I give the team a lot of kudos in terms of our My Account feature has definitely improved. Our automated phone systems have improved. So, you know, I think I said early on the last time I wanted to talk to someone was never, and we still believe that and that you should be able to resolve any issue you have through digital means. And so we think that if we roll out our app later in the year, that continues to strengthen what customers can do from a self-service perspective. We think that starting with a digital-first approach for resolving problems through stream, we now start a new click-to-call feature where You can bring the agent online to kind of walk on your shoes and understand your issue digitally. Those are all things that make the customer experience better. And the byproduct of that is they're also lower cost. And so the combination of those things should help us over time bring down our service costs. And then from a retention perspective, we think that a lot of these things are a more delightful experience and should, you know, drive retention because it would be a very different approach to solving the problem than we've seen in the industry. And so we think those combination of factors will help not only improve our support costs going forward, but also provide a more delightful customer experience, which then dovetail into better retention.
spk07: Thank you. You bet.
spk02: And our next question is coming from the line of Brian Fitzgerald from Wells Fargo. Brian, your line is now open.
spk00: Thanks, guys. A couple questions. You had nice performance in D2C in the quarter. Wondering if you could tease out volume versus pricing trends there. Many of the drivers and the strengths that you saw in the channel in the quarter. And then we actually talked about Upgrading customers to premium includes coverage and maintenance. Can you give us any trajectory there? What does the tangent look like? What's the conversion rates there? What's the penetration rates there? I'm trying to assess what kind of the opportunity and the momentum is there.
spk08: Sure. So from a direct consumer perspective, you should expect, um, you know, in the first half of the year, if you've driven primarily by, by price and mix, um, and then you'll see units, uh, come on towards the, uh, the latter part of the year. Um, you know, as it relates to our platinum products, you know, we, we, you know, we kind of test our way into, into platinum and, and realize that, you know, customers kind of enjoy having, uh, not just, you know, a break-fix kind of movement with us, but also rely on us for maintenance services as well. And the primary maintenance service for Platinum is an HVAC tune-up, but we'll be rolling out additional things in the coming months as well. So in terms of penetration, I don't think we've outlined our mix, but certainly Platinum is performing better than we thought. But, Brian, I don't know if you could comment on, you know, what we said publicly from a mixed perspective. But at least in my knowledge, I don't think we've given mixed numbers. And not at this time, no.
spk00: Okay. Thank you, guys. Appreciate it.
spk02: Absolutely. Thank you. And our next question is from the line of Corey Carpenter from J.P. Morgan.
spk04: call your line is now open please go ahead great thank you um it sounds like the change in the revenue guide is completely due to the real estate channel but uh rex and brian just wanted to confirm that with you and then um rex hoping you could talk more broadly just around what you're seeing in the competitive environment for a bit you know do you think you're gaining or losing any share um in the real estate or direct to consumer market uh more broadly thank you
spk08: Yeah, absolutely. For real estate, I think your summation is correct. Certainly, it's been challenging as we think about both inventory continues to go down. And then the more troubling thing for us was the higher percentage of investor buyers, which takes away even more inventory from traditional home buyer who we would be marketing to. So, you know, as it relates to direct consumer, you know, I think that, you know, we're focused on controlling the controllables and, you know, both direct consumer and renewals are two areas where I think we can really make headway. And so certainly direct consumer, we've, you know, diversified our spend conversions looking pretty well. And then from a renewals perspective, you know, We've optimized dynamic pricing. We continue to change our products from our good, better, best strategy. That's actually one of the – we're hopeful from a real estate perspective as we launch that what will help us. But in terms of share, I can't comment on kind of what other folks are doing, but historically – When we look at share, we're not losing share, so to speak, in real estate for sure. But certainly with a much lower inventory, the pie has gotten a lot smaller. But our portion of that pie, at least in our analysis, suggests that we're not losing share there. And then overall, I think we continue to perform, and we don't see any signs of weakness from a competitive perspective, certainly just weakness from a macroeconomic and inflationary perspective. So we're still focusing on the things we can control, and I think we'll continue to deliver profitable growth on those areas.
spk05: And, Corey, your assumption was correct. Our outlook for D2C and renewals is really the same from the February call. The only change was the real estate, going from decline of just over 10% to mid-20% red decline. So you were correct.
spk04: Okay. Thanks, Brian.
spk02: Sure. And our final question today comes from Eric Sheridan of Goldman Sachs. Eric, your line is now open. Please proceed.
spk09: Thanks for squeezing me in. I want to come back to slide nine and maybe just ask a few follow-ups to things that were talked about already. You know, in framing aggressively mitigating the headwinds you're seeing, can you talk first about, you know, your confidence interval and the ability to raise price without causing any impact from a turn standpoint and how you sort of sort of ensure that you get that balance right looking out of the next couple quarters. On the second point of improving contractor processes, can you give us a little bit more color on what goes into that and the duration by which we could see that improvement as we go over the next couple of quarters? And then on expanding the supply chain, can you give us, again, a little bit more detail on how the duration of that plays out and how we can monitor that from the outside in as your results progress in the quarters ahead? Thanks so much.
spk08: Sure. So from a dynamic pricing perspective, you know, this is something that we watch very closely. Again, we have on a, you know, a zip plus nine basis, we look at, you know, our customers and we segment them by deciles. And so whether it's by usage or by risk, you know, we have a pretty, I think, pretty robust models around each one of those deciles and as we raise prices, you know, what is the level of elasticity for each one of those deciles. And we haven't seen any changes in that, even with, you know, the level of pricing increases that we've given. We do think there's an opportunity in our higher deciles where our customers are using this more than the norm to charge them an even higher premium. And we've seen that, you know, those customers are willing, willing to pay because they like that coverage. And so we haven't seen any changes to our models. We haven't seen any, you know, backlash, if you will, then from from what we expect from retention perspective for each one of those decile. So it seems to continue to be working very well for us. And then I'm sorry, on the other questions, Brian, if you want to take the inflation one and I'll – I can – actually, both of them I think you can handle.
spk05: Yeah, I think the second one was about the improving process improvements and cost improvements with contractors. Is that right, Eric?
spk09: Yeah, just on improving contractor processes and expanding supply chain, how should we think about the duration of those impacts playing out in the quarters ahead so we start to see benefits from that, whatever you're putting in place from a mitigation standpoint, just so we can understand that? Thanks.
spk05: Right. Yeah, and let's please jump in. Regarding the process improvements of contractors, improving the percentage of preferred from the historic, I guess, low 80% is pretty sudden. I mean, that's a quick impact. The more we can push our service requests to our percent preferred, the lower our costs are going to be. So that's pretty quick. It's just the amount of time it's going to take to raise that level. And I think the Contra team is doing a great job of that today. So we should be able to see more of that as we go forward. And regarding supply chain, as I mentioned, we're paying 8% to 12% more today for parts and equipment than we did a year ago. But our contractors are paying 15% to 25% round numbers. So anything we can shift to our side, save us money and help gross profit and gross margin. So again, that could be fairly quick as well. We just have to get them to allow us to purchase for them. Rex, anything else you'd like to add?
spk08: I thought I'd add two things. One is on our preferred contractors, they seem to have a much better you know, handle on being able to help us manage costs just because the volume they handle. And so that's why it's so important that we increase the percent of preferred because, you know, the kind of network contractors, if you will, are certainly a lot more expensive than our preferred. And then the second is, you know, I think there has been some work or will continue to do some work on optimizing our selection algorithms for contractors so that we can help increase that percent of preferred. So this is definitely a big unlock or cost mitigator for us, as well as what Brian spoke about in terms of what we source parts versus our contractors.
spk02: Great. And that is it for all our questions today. So I'd like to hand back to Rex Timmons for any closing remarks.
spk08: Thank you. In closing, while Front Door is facing some near-term external challenges around accelerating inflation rates in the macro real estate environment that are beyond our control, we absolutely remain focused on improving the key drivers of our business and really focusing on controlling the controllable. So thank you again for your time this afternoon, and we look forward to talking to you in our next earnings call.
spk02: Ladies and gentlemen, thank you again for joining Front Door's first quarter 2022 earnings call. Today's call is now concluded.
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