Frontdoor, Inc.

ladies and gentlemen welcome to front door's first quarter 2023 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'll begin today's call please go ahead mr davis thank you operator good morning everyone and thank you for joining front door's first quarter 2023 earnings conference call

Joining me today are Front Door's Chairman and Chief Executive Officer, Bill Cobb, and Front Door's Chief Financial Officer, Jessica Ross. Let me start by reminding you that we are coming off our Investor Day in early March, and there is a lot more detail about our company and our strategy in the Investor Day presentation, which we will be referring back to during today's call. 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. There's also additional detail about our new Front Door brand at frontdoor.com and in our new mobile app that you can download in the App Store and on Google Play. As stated on slide 3 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 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, May 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 will now turn the call over to Bill Cobb for opening comments. Bill?

Thanks, Matt, and good morning, everyone. Before we get into the details of our first quarter earnings policy, I wanted to address our full year 2023 outlook. Let me be clear. While we had a tremendous first quarter, we will not be raising our full year 2023 outlook at this time. It is not our practice to raise our outlook after just one quarter. It's too early to do that. We are heading into our peak summer season, which typically has much higher claims. Additionally, our first quarter financial results benefited from favorable timing around SG&A spend and weather. On the revenue side, our go-to-market channels remain challenged, and it is still too early to assess the revenue profile of our new front door brand. So with that, let's jump into slide four of the web deck. I am pleased to report that we are making good progress on advancing our strategic initiatives that we laid out at our investor day in March. As I just mentioned, our first quarter financial results were significantly better than expected. We saw gross margins expand as our prior pricing actions are flowing through, cost pressures continue to moderate, and our process improvement initiatives are beginning to take hold. For example, we drove a significant increase in preferred contractor utilization, which rose 270 basis points to a 10-year high of 84% in the first quarter. Additionally, We continue to make progress in sourcing more parts and replacement equipment for our contractors, where our larger size enables us to purchase at a substantial discount. We also increased our direct-to-consumer or DTC demand, which I will cover in more detail shortly. And in April, we launched Front Door, our one-stop app for all things home maintenance and repair. While it remains early in the year, we are delivering on what we said we would do, and we look forward to continuing our progress throughout the rest of 2023. Now let's turn to slide five, where I will cover the new front door app that was launched in April. We reviewed the new offering in detail at our investor day. In short, we believe that we have really differentiated our offering through the video chat with an expert feature. which will revolutionize how homeowners maintain and repair their homes. Our team has supported this launch with an innovative and talked-about marketing campaign. Some of you have probably already seen our fun and compelling TV and digital spots. Our robust marketing effort also leverages several strategic partnerships, such as Major League Baseball's opening week, Home and Garden TV, and NFL Draft Week. We also have a program with Amazon, which will land the Front Door brand on millions of doorsteps across the country through our customized box design. That will happen mid-summer. All of these efforts are working. Since our launch three weeks ago, the app has now been downloaded over 165,000 times. We look forward to sharing more details next quarter, but for now, We are very pleased with the pace of downloads. Now let's turn to slide six, which serves as a quick reminder of our Front Door product lineup. Front Door Basic is a free offering where consumers can download the app at no cost and get one free video chat with an expert. The free product also includes rich content, including maintenance tips and repair videos. It's a great way to introduce the product and encourage upgrading to our to our more robust offering, Front Door Prime. At $99 per year, Prime includes everything in the basic plan, but members get three video chats per year. They also get access to steeply discounted HVAC systems with available financing and special member pricing on home products and services. If you haven't already done so, I encourage you to download the app and try it out for yourself. You can also go to FrontDoor.com for more details. Now, moving to Front Door Pro, on-demand home services with a la carte pricing. This is our service delivery channel rather than a consumer-facing offering. Its services are available through both the Front Door and AHS brands. We are very excited about the potential growth in Front Door Pro, which could be one of the largest revenue streams for the new brand. Specifically, we are extremely optimistic about our HVAC upgrade offering that is exceeding our revenue expectations so far this year. Turning to slide seven and our upcoming front door premium product that will be coming out in June. Premium is our reinvention of the home service plan. It is our goal to make this an easy, convenient, one-stop shop for everything homeowners need to repair and maintain their homes. It's an annual membership plan that starts at $35 per month. Premium includes all the benefits of Front Door Basic and Prime. And it will cover the same systems and appliances that we do today under American Home Shield with an additional option for HVAC coverage. For premium members, it is easy to make service requests through the app for a flat service fee of $100. We will fix the covered item or the member will be provided with a payout of $500. In the case of those who elect HVAC coverage, the payout will be $1,000. This process allows for a more digitally enhanced and transparent experience while enabling us to better predict costs. Additionally, for premium members receiving a payout, we will work with them to replace their system or appliance. This includes all of the prime discounts previously mentioned. Now, turning to slide eight, where I will provide a business update on American HomeShield, starting with the DTC channel. First, I want to be clear that we have two growth engines, and we are as equally focused on growing American HomeShield as we are on launching the new front door brand. DTC has been a tremendous growth platform for us, and while it has been challenged recently, we are redoubling our efforts to get this channel back to positive customer growth. In fact, our team has really been digging into the main drivers of the recent decline. While it is an ongoing body of work, the team has identified three main issues impacting near-term demand. The first main issue is price. Over the past year, we significantly raised price for our home service plans in response to inflation. This was done with the goal of getting our gross margins back to historical levels. As part of our deep dive, the analysis showed that price had a bigger impact on our go-to-market channels and that the category for new consumers might not be as inelastic in this market environment. On the other hand, we have been pleasantly surprised by the stronger than expected elasticity in our renewal channel as our renewal rates have improved. Inflation is the second main issue impacting near-term demand. we have seen that higher inflation has impacted consumer sentiment and behavior. Further, with inflation comes rising media costs, creating additional pressure on our go-to-market strategies. In response to these recent findings, we have pivoted our discounting strategy. Since we last spoke to you at our Investor Day, we have explored new discounting strategies and continue to test and learn how to better attract new DTC members. While we are pleased with these learnings and some of these early sales trends, we want to see more results before we adjust our full-year DTC expectations. Additionally, we have also taken steps to improve conversion. We are becoming more efficient at converting the demand we do generate. This is through efforts such as upgrading our call center leadership and training. DTC marketing spend is the third main issue impacting near-term demand. We had reduced DTC marketing spend in our original 2023 operating plan for AHS. This was done to improve overall marketing efficiency. Now that we are seeing better marketing effectiveness, we have decided to increase our spend compared to our initial plan in 2023. We will also work to continue to optimize marketing throughout the remainder of the year. Those are the near-term actions we are taking to address the decline in DTC sales. Longer term, we will continue to enhance branding and marketing as well as the value of American Home Shield. Specifically, we need to further differentiate and promote our products over the competition. We are also continuing our work to optimize pricing and discounting as we refresh our value proposition with key consumer segments. Now turning to slide nine and our real estate channel. the National Association of Realtors updated the adjusted annual rate of existing home sales for March to 4.4 million homes, or a 22% decline over the prior year period. Inventory levels remain low at only 2.6 months of supply, which is one of the main drivers delaying the transition to a more balanced buyer and seller market. Regardless of market conditions, Our sales team is focused on improving sales accountability through data usage and market level dashboards. But at this point, it remains a challenging market to sell home service plans. Now turning to slide 10 and our renewal channel. As I mentioned earlier, customer retention rates are coming in better than expected despite a targeted realized price increase of 11% in 2023. Retention rates actually increased 180 basis points to 75.9% in the first quarter. While channel mix shift is clearly a driver, our dynamic pricing strategies are delivering a price increase that our existing customers still find tremendous value in. We also continue to work on process improvements to drive members to renew. Now in closing, we are off to a great start in 2023. We continue to expect our financial results to improve over 2022 as our prior pricing actions take hold, inflation headwinds continue to moderate, and as we expand our process improvement efforts. As I told you at our Investor Day, we now have two growth engines that are focused on different consumer segments that will drive the business for years to come. I will now turn the call over to Jessica to review our financial results. Jessica?