Frontdoor, Inc.

ladies and gentlemen welcome to front door's second quarter 2023 earnings call today's call is being recorded and broadcast on the internet beginning today's call is matt davis vice president investor relations and treasurer as 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 second 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. 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 is also additional detail about our Front Door brand at frontdoor.com and our new mobile app that you can download in the App Store and at Google Play. 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, August 2nd, 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?

Thank you, Matt Davis, and good morning, everyone. Let me start by saying we had a great second quarter. I am especially excited to see that many of the headwinds continue to turn in our favor. And this was especially true for the second quarter, as everything seemed to fall our way. Jessica will cover our financial results in more detail, but let me hit the highlights. In the second quarter, revenue increased 7%. Gross profit increased 840 basis points to 52%. Adjusted EBITDA jumped 57% to $121 million. We repurchased $50 million of stock through July, and we are raising our full-year outlook for revenue, adjusted EBITDA, and share repurchases. We have come a long way over the last year, and I am proud of how the team is executing across all functions. Now, turning to slide five, while it is encouraging to see our margins start to rebound, we still have work to do on driving revenue across our two growth engines, the Front Door and American Home Shield brands. To that point, I want to use this call to provide you with a mid-year update on the strategy we laid out at our investor day in March. First, I want to acknowledge that the home service plan category has recently been in a state of decline. We now estimate that there are about 5 to 6 million active home service plans in the United States, but we know there is a lot more opportunity. We continue to target a total addressable market for American Home Shield at 13 million owner-occupied homes. Based on our third party research, we believe demand for the category was down somewhere around 10% in 2022. And we believe that the decline has accelerated to the first half of 2023. While it is disappointing for all of us that sell home service plans, we believe our overall category share has actually improved. The real challenge has been attracting new customers to our home warranty product and value proposition that has not substantially evolved over the years. As a category leader, we are committed to updating our marketing and core consumer value proposition to attract new customers. Once they become a customer, they are highly likely to stay, as shown in our strong second quarter retention rate. Now, turning to slide six and the renewals channel, where our retention rates continue to perform well, Our overall retention rate increased 190 basis points year-over-year to 76.3%. This is especially strong when you consider our 11% realized price increase in 2023. While a large portion of this improvement is driven by a lower mix of real estate customers, we have also been doing some smart things on the execution front. better personalization of customer communications, enhancing our dynamic pricing model, and continuing to improve service quality. One way we have improved our customer service is from our process improvements to optimize contractor capacity and maximize use of preferred contractors. This not only provides us with a lower cost of service, but it also results in a higher quality customer experience. During the second quarter, our deployment of preferred contractors increased to approximately 84% versus 82% a year ago. As a result of all these efforts, we are seeing clear progress. Customer five-star ratings of contractors are now at a decade high, with one-star ratings at an all-time low. Now, turning to slide seven in our real estate channels. The National Association of Realtors, or NAR, recently came out with housing market statistics for June. Existing home sales declined 23% during the first half of the year. This closely correlates with the decline we are seeing in our real estate channel, which is highly dependent on the overall real estate environment. Further, it was reported that only 14 homes out of 1,000 changed hands in the first half of the year, the lowest rate in a decade. Inventory remains tight at 3.1 months of supply, which contributed to driving median home prices up to $410,000. Prices are rising because there is more demand than supply, and we are seeing bidding wars come back in certain markets. In fact, some homeowners are reluctant to move because they have a substantially lower mortgage rate than the current market of nearly 7%. In short, the resurgence of a strong seller's market continues to delay the transition to a more balanced buyer-seller environment. While we believe that the housing market will eventually become more conducive for us to sell a home warranty, it is taking longer than we expected. Now, moving to slide eight. Last quarter, I discussed some of the challenges facing our DTC channel. This includes the impact of changing consumer behavior due to evolving macroeconomic conditions, higher price sensitivity for home service plans, and reduced marketing spend. Let me be clear. Growing our DTC demand is our top focus as we head into the back half of this year. To that end, we have several work streams to re-energize this channel. First, we are optimizing our discounting strategy. We have been testing into various discounts And I am pleased to report that we are seeing some positive results as our sales are coming in higher than our original plan. Second, we are increasing our marketing investment. Given that the Front Door brand has generated such substantial consumer awareness, we are now able to reallocate $20 million to the American Home Shield brand. When including the $10 million increase we made in the first quarter, total DTC marketing spend is up $30 million compared to our original plan. This means that we are now virtually flat on our DTC marketing investment on a year-over-year basis. Now, longer term, we know we need to update and enhance the AHS brand to reevaluate our core value proposition so that we can engage more consumers in new and compelling ways. This is exactly what Kathy Collins and her team are working on as we speak to bring some of that front door brand marketing magic to American Home Shield. More to come here, which includes conducting extensive consumer and competitive research, evaluating product improvements, and finding ways to better connect our offerings with consumers. Now let's turn to slide nine of the web deck where I'll dive into more details on the front door brand strategy. Just a quick reminder that we previewed the Front Door brand at our Investor Day on March 2nd. We launched the brand on April 11th, and then on June 6th, we launched Front Door Premium. I want to start by highlighting our on-demand services, which totaled $20 million in the second quarter. This is higher than we first anticipated when we decided to pursue HVAC upgrades at the start of the year. As a reminder, an HVAC upgrade is when we partner with our preferred contractors and leverage our scale to sell new HVAC units to our existing members at a steep discount. We are now targeting approximately $45 million of revenue from our Front Door Pro on-demand home services in 2023. Now I'd like to turn to the Front Door marketing campaign, which has been a tremendous success in driving consumer brand awareness. As of today, the app has been downloaded nearly 950,000 times, significantly exceeding our original expectations. Additionally, we have received consistently positive customer feedback, including rave reviews on the video chat with an expert feature and the easy to use app. In all my years around marketing, I have never seen awareness of a new brand take off like this. And just four months after launching, Said another way, we drove a sizable level of awareness at a much lower price and in a much shorter timeframe than originally planned. As a result, we are now able to reallocate that $20 million of marketing spend to help drive DTC sales within our American Home Shield brand. As I mentioned at our investor day, we want the flexibility to invest across both the front door and American Home Shield brands. This allows us to optimize where our marketing dollars are being invested, which is exactly what we are doing with you, which is exactly what we are doing now. But let me be very candid with you. Despite extremely strong brand awareness, conversion to paid membership services has not been what we anticipated. We are working to address this by developing a robust strategy to monetize that high consumer awareness into paid services. And we look forward to sharing more about where we're going next quarter. We remain very bullish about the new Front Door brand. Our research shows there is significant untapped consumer demand. The number of downloads is a strong validation of the opportunity. And now we just need to do a better job of unlocking the revenue potential. Before I hand it over to Jessica, let me briefly summarize where we are. We had an exceptionally strong second quarter performance, and we are raising our full year outlook across the board. On the operational front, we are improving execution. The previous cost headwinds we saw last year have largely turned, and we have had some extremely favorable trends, driving gross margins higher. But to be clear, we still have much work to do. While consumer awareness at front door has been tremendous, We need to be better at converting app downloads into actual revenue. On the DTC front, we understand the challenges there as well and are deep into making significant improvements to get this channel back on track. This is our top focus in the back half of the year. I will now turn the call over to Jessica to review our financial results. Jessica?