Frontdoor, Inc.

Ladies and gentlemen, welcome to Front Door's first quarter 2024 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 2024 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. 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 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 very much, Matt Davis, and hello again, everybody. Front Door, Inc. continues to operate extremely well, and we are off to a great start in 2024 as we delivered another quarter of record results. As you can see on slide four, revenue grew 3% to $378 million. Gross margin increased 510 basis points to 51%. Adjusted EBITDA rose 33% to an all-time first quarter high of $71 million. And as a result of our strong first quarter financial performance, we are increasing our full year 2024 adjusted EBITDA outlook. So while we continue to exceed expectations on the margin side, our top priority remains growing our customer base. Let's be clear right up front. Demand for home warranties has been down due to some challenging market conditions, but we view this as a temporary cyclical issue. The main cause of lower demand has been real estate. As I've said before, we sell our products as part of the real estate process, and as the number of existing homes has declined from 6 million in 2022 to just over 4 million homes today, we have had significantly fewer opportunities to sell our products. This was due in part to rising mortgage rates, which recently reached a one-year high. At the same time, existing home inventory has been extremely tight. This has not only limited existing home sales, but it has also resisted in a significant power shift to the seller over the last several years. As a result, our real estate channel sales are less than half of what they were five years ago, and this continues to impact our customer count, revenue growth, profitability, and cash flows. And from everything that we see, this is true for the rest of the home warranty category. So while we are still optimistic that the real estate channel will eventually come back, we are waiting to see more tangible proof of the turnaround. Now turning to the direct-to-consumer channel where we have also seen lower demand. For those of you new to our story, home warranties have historically been sold primarily through the real estate channel. It was only about 25 years ago when we started marketing and selling directly to homeowners. This was a powerful growth engine for us as we saw a strong correlation between marketing spend and our sales. However, about a year after COVID, we began seeing a decline in consumer demand. As a recent indicator of this, Google searches for the term home warranty were down 7% this past March. We have known that something needed to change, and here are some of the things we learned from really digging into consumer research. First, consumers have a hard time understanding home warranties. They easily confuse it with homeowners insurance or other products. Second, consumers want to feel like they've got someone in their corner. What really resonated with our focus groups is when we grounded them in the higher level benefits of a home warranty, like peace of mind, freedom, and happiness. Third, we have not done enough to stand out from our competition. The category has been defined by what we call a sea of sameness among providers, and we realized we needed to take action to break out from the competition. Additionally, consumer behavior has been impacted by the larger macro environment as a result of rising inflation and higher costs. This has been echoed by several other companies as recently as this morning who have mentioned consumers are pulling back on spending. We view this as a temporary reset of consumer spending, as consumers have not been prioritizing the budget protection and convenience of home warranties. I will go into how we are addressing this shortly. Now, turning to renewals, which continues to be a bright spot for us. For the first quarter of 2024, our retention rate grew to 76.3%. While this includes a lower mix of real estate customers, retention continues to perform very well. Our team has done a great job of implementing a wide range of initiatives to improve retention, such as better engaging our consumers specifically during the onboarding process, expanding dynamic pricing to minimize churn, continuing to improve the customer experience, with a large part of that effort coming from increasing utilization of our preferred contractors. This is the dual benefit of lowering costs while delivering a better experience. And finally, we have increased the number of customers on auto pay, which remains at a record 86% in the first quarter, which makes them much more likely to renew their home warranty. We know there is more we can do to improve our customer service, and we are diligently working on those initiatives. But I am super proud of our team's accomplishments in this area. We've also been very proud of our new HVAC sales program, which delivered over $50 million of revenue in 2023. As you would imagine, most of this came in the second and third quarter, and we are expecting a similar pattern this year as we head into our peak summer season. In fact, we recently enhanced the front door app so that all users can now buy a new HVAC system. We are also continuing to grow into alternative revenue streams by building out our technology capabilities for additional on-demand services. Our vision is to provide a consolidated ecosystem where customers have access to video chats with an expert, which might then turn into purchasing a la carte repair and maintenance services, or even new systems and appliances, all through our app. More to come here, but we know that the market opportunity is significant, and we will continue to work to find ways to monetize that demand. Let's now turn to slide six in our opportunity. As I said in our last call, there are about 5 million homes in the US that have a warranty. We believe that figure could be approximately three times higher if consumers better understood the value of a home warranty. Which brings us to the American Home Shield brand relaunch, which is a primary component of our strategy to increase demand. And I'm very excited that we successfully kicked off the relaunch in early April. We took a holistic approach to the relaunch, which has the following components. At the highest level, we wanted to break out from that sea of sameness in the home warranty category. And that starts with a new strategy that truly brings a refreshed and high energy look to our brand. We also wanted to connect to new and larger audiences. So we came up with an innovative ad campaign with a new voice and a new brand visual identity. We wanted to have a catchy, recognizable tagline, and that's why we came up with, don't worry, be warranty. This tagline captures that feeling we want homeowners to take away, peace of mind, freedom, and happiness. It's proactive and goes right at the main word that defines our services. We also needed a new logo so that consumers can better distinguish us from our competition. So we refreshed it with brighter, bolder colors and a more modern look. We wanted to use comedy and a strong, well-known personality to do something different to break through to consumers. That's why we're extremely excited about our new celebrity spokesperson, Warren Tina, starring Rachel Dratch, which we believe will drive greater interest in our products. And finally, we wanted a comprehensive media campaign with new marketing partners, as shown on slide A. This is now a true omnichannel campaign that is highly visible. We developed great new partnerships that better reflected our customer base. For example, we launched a campaign on WrestleMania. We were also on CNN's coverage of the solar eclipse in a big way, with our website traffic hitting new highs that day. Speaking of the website, I encourage all of you to visit ahs.com and hope you notice it not only has an updated look, but it also has a more intuitive interface and navigation tools that will improve conversions. In summary, we are truly bringing a refreshed and high-energy look to our brand. However, we know we have relaunched our brand in the face of a challenging macro environment for home warranties. But that is the point. As the leader in our category, it is our job to turn demand around. And we are optimistic this relaunch will improve the growth trajectory for home warranties for years to come. With this much change, it would be premature to talk results thus far. However, we are excited about what we're seeing in web traffic and in other areas, and look forward to providing you more details on our next call. Before I turn the call over to Jessica, I want to reiterate that we are off to a great start in 2024, and our first quarter performance continues to show that Front Door, Inc. is operating extremely well. Jessica?