Frontdoor, Inc.

Ladies and gentlemen, welcome to Front Door's third 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 third 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 information about our Front Door brand at frontdoor.com. and in 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 sections 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, November 1st, 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 will now turn the call over to Bill Cobb for opening comments. Bill?

Thanks, Matt. And what a quarter. We crushed it. It was just over a year ago when Front Door was experiencing some of the lowest margins ever as a result of an extremely challenging macroeconomic environment. Our team responded to these challenges and took decisive action to improve the business. Fast forward a year, and we have had an exceptional turnaround in our financial performance. Third quarter revenue increased 8% to $524 million. and our gross margin has rebounded 760 basis points to 51%. This drove a $48 million increase in adjusted EBITDA to a record high for a quarter of $128 million. Given these results, we are raising our full year outlook for revenue, adjusted EBITDA, and share repurchases for the second time this year. While things continue to fall our way, we have also done a lot of smart things to drive process improvements, which are contributing to better margins. Jessica will describe these in more detail shortly. The key message is we expect the benefit of these process improvement initiatives and cost trends to largely continue into next year. Now I want to highlight an important point. At our investor day in March, we laid out a target of $2 billion in revenue and at least $300 million in adjusted EBITDA for 2025. We have already surpassed our adjusted EBITDA target, and we are working extremely hard to close the gap on our revenue objectives between now and then. I believe Front Door is an extremely compelling investment. And while I don't normally comment on our share price, I want to call out our current valuation, which is at one of the lowest points in the last five years. This is truly an inflection point for Front Door. And while some of this is market driven, we are taking advantage of this opportunity to increase our 2023 share repurchase target to $125 million. Now turning to slide five, we want to clarify the difference between our two brands. Let me be clear right up front. The American Home Shield brand will continue to focus on selling home warranties, while the Front Door brand will now evolve to selling on-demand home services. You can think about American Home Shield as our 12-month home warranty contract and Front Door as our pay-as-you-go model. It is our current assessment that the home warranty category is both undifferentiated and a bit stale. And we strongly believe that we have an opportunity to breathe new life into American Home Shield through a brand relaunch in 2024. We want to celebrate what a home warranty can offer. As our consumer research shows, there are still millions of homeowners who are naturally inclined to buy our products because they want that financial protection and peace of mind for when home systems and appliances inevitably break. Now moving to slide six and our direct to consumer channel. Let me be clear. We are keenly aware of the drop in our customer count as part of a larger category trend. But let me assure you that it is our top priority to turn that around. The current macroeconomic environment has resulted in a pullback in consumer demand for home warranties. In the near term and prior to our rebrand early next year, we will be tactical with our approach. We will continue to utilize our discounting strategy, which is evolving to maximize demand conversion. And in the fourth quarter, we are increasing the actual marketing spend behind our American Home Shield brand to drive brand awareness. In the long term, our strategy is grounded in relaunching the American Home Shield brand to unlock the full potential of home warranties. I strongly believe that the home warranty space continues to offer massive growth opportunities. I look forward to providing more specific details on how we plan to capture that demand at our next earnings call. But for now, know that we will be supporting the brand relaunch with a new marketing campaign. Our goal is to bring some of that front door marketing magic to American Home Shield. And from the early creative development that I have seen so far, I think we are well on our way to doing that. Now turning to slide seven in our real estate channel. The National Association of Realtors, or NAR, recently released housing market statistics for September, and the market remains severely challenged. Existing home sales declined 22% through the first nine months of the year, and full year expectations have declined to just under 4 million homes. As you can see from this chart, that is a substantial decline from the 6 million existing homes sold in 2021, as high mortgage rates and home prices have diminished consumer affordability. At the same time, inventory remains tight. NAR also reported properties remained on the market for just 21 days in September, and that all cash sales increased to 29% of transactions. a segment that has generally not been conducive to buying a home warranty. This all adds up to an extremely challenging environment for our real estate channels. Now turning to slide eight in the renewal channel. While demand in our DTC and real estate channels remain soft, we continue to be pleasantly surprised by the performance of our renewal channel where our rates remain strong. In the third quarter, our overall retention rate increased 90 basis points to 76.2%. This is especially impressive considering that we are implementing an 11% realized price increase this year. We are building on the impressive work that the renewals team has done. Improved onboarding, increased engagement throughout the customer journey, and elevating the service experience through greater deployment of our preferred contractors. In short, we continue to take the right actions to sustainably drive higher retention. Now let's turn to slide nine of the web deck, where I will go into more detail on the front door brand monetization strategy. We launched the front door brand earlier this year as a new growth engine to sell services to a fundamentally different segment of homeowners. As I said at our investor day, we intentionally launched the brand quickly as a first mover advantage and to learn our way into a new market. What we have found is that the essence of the brand remains strong, which is comprised of app-based customer interactions and the video chat feature with one of our experts. Just six months since the launch of Front Door, we have over 1.3 million downloads, and account registrations have grown to 133,000. But I want to be transparent with you. We went to market with a new version of a home service plan, front door premium, that did not sell the way we thought it would. So we have quickly made the decision to stop selling it. Our offering in the market today is a lower price product, only $25 per year with unlimited video chats for consumers to take advantage of the unique user experience with our experts. So that's today. Our strategy in the future is an on-demand offering. I believe this new focus, based on our research and the success of our HVAC upgrade program, will be a compelling proposition for a much larger group of homeowners who want an a la carte experience. Our value proposition for Front Door is based on two key components. The first is on-demand access to our network of experts that will allow homeowners to get repairs, maintenance services, and upgrades. This is paired with a modern app-based interaction that is anchored by our video chat with a live expert. Membership also includes discounts to appliances and systems, as well as how-to content. We are still working on the exact products and timing for what the Front Door brand will offer in 2024, but we are largely coalescing around three main categories, on-demand repairs, maintenance services, and upgrades for home systems and appliances. Starting with repairs, on-demand repairs will address a real pain point for consumers when home appliances and systems inevitably break. We are currently building out the booking flow within the Front Door app so the consumer and contractor will have a simple and seamless a la carte experience. Second, we will provide on-demand home maintenance for those who want to ensure their home continues to run well. This could be anything from filter replacements to tuning up your HVAC before the season changes. And finally, we will offer on-demand upgrades for when it makes more sense to replace a home system or appliance rather than fix it, as validated by the great success we continue to see with our HVAC upgrade program, which was about $20 million of revenue in Q3, trending toward a total of $50 million for 2023. Our value proposition here is to partner with our contractors and share our bulk buying power to provide discounted pricing on new appliances and home systems. This is a win for our customers, contractors, and for Front Door. We'll provide more details on the Front Door brand on our next earnings call, but I believe that we are on to something big here. We know we have great brand awareness, and we now have a clear strategy for monetizing that demand through a suite of paid services we plan on offering next year. In closing, I am thrilled with the turnaround in our financial results, which reinforces my belief in the power of this business and the actions we have been taking. We have demonstrated that we can quickly reestablish our margins through pricing and process improvement initiatives. We continue to take bold and decisive steps that will lay a strong foundation for future growth, and I am very optimistic about where we are heading. I will now turn the call over to Jessica to review our financial results. Jessica?