Frontdoor, Inc.

Greetings. and welcome to the Front Door Incorporated second quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode, and a question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Matt Davis, Vice President of Investor Relations and Treasurer. Sir, the floor is yours.

Thank you, Operator. Good morning, everyone, and thank you for joining Front Door's second quarter 2025 earnings conference call. Joining me today are Front Door's Chairman and CEO, Bill Cobb, and Front Door's CFO, 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, August 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 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 Davis, and good morning, everyone. Front Door continues to perform exceptionally well, and we've delivered another quarter of very strong financial results. This is the latest chapter in a continuing line of superior financial and operational performance. Our second quarter highlights include revenue increased 14% year-over-year to $617 million. Excellent operational execution contributed to a second quarter gross margin of 58%, a 130 basis point improvement over a prior year. Net income grew 21 percent to $111 million. Adjusted EBITDA grew 26 percent to $199 million. Additionally, we grew first-year DTC organic home warranties by 9 percent. We saw continued strong non-warranty revenue driven by the new HVAC program. The synergies from the 210 acquisition are ahead of schedule And we used strong cash flows to repurchase $150 million worth of shares year-to-date through July 31st. Altogether, when we combine results from the first and second quarters, Front Door has had an amazing first half of the year. Now for a quick refresh on our three strategic priorities that are driving value for our shareholders. First, grow and retain home warranty members. That's job number one. Number two, scale revenue from our non-warranty business. This is well underway, and we are now raising our outlook for new AFAC revenue for a second time this year. And number three, optimize the integration of 210 homebuyers warranty, which, as I mentioned, is ahead of schedule, and I'll address that in more detail shortly. Now, to provide some very important context, I'd like to take a step back. And look at the impact the macro environment has had on home warranties. As shown here, in 2020, Front Door had 460,000 first-year real estate home warranties. But the challenge of a strong seller's market driven by low inventories, 2 million fewer existing home sales, and record high home prices and mortgage rates combined to result in a 63% decline in our real estate unit over the last five years. Today, the real estate market remains challenging. According to the latest information from the National Association of Realtors, or NAR, in June 2025, existing home sales slipped 2.7% month over month to a seasonally adjusted annual rate of 3.93 million, among the lowest in 30 years. But there is some reason for optimism. NAR also said, the inventory of unsold existing homes in June rose 18% year over year to 1.53 million homes, or the equivalent of 4.7 months of supply. That's up from three and a half months in January of 2025. With inventory increasing, it appears that a transition to a buyer's market is underway, which will be welcome news for our home warranty attach rates. Now moving to the direct-to-consumer channel. In spite of the pressure real estate has put on our overall ending home warranty count, the DTC channel is performing well. In the second quarter, the number of home warranties grew organically by 9% versus the prior year. This is now four consecutive quarters, a full year of organic home warranty growth. Our success in DTC is due to several factors. Number one, we continue to refine and optimize our marketing campaign and media strategy, leading to record high brand awareness. We are targeting current and new audiences better. We are more effective in our digital advertising, particularly when homeowners are seriously considering a purchase. Finally, our discounting strategy continues to be a proven and highly effective way to fuel number growth. Moving on. we continue to be pleased with our retention rate, even with significant price increases and the continuing macroeconomic challenges. Through the second quarter, retention stood at 78.3%, near an all-time high. While this does include a lower mix of real estate members, retention is strong because we are creating a better member experience along with continued process improvements. Now, regarding the member experience, We are continuing with the heavy use of our preferred contractors who currently perform 84% of our member jobs. We are also using technology to enhance the member experience. To date, AHS app downloads are growing to 14% of members since we launched it in October. And usage of the video chat with an expert feature launched in February has proven to be a big hit with our members. Under process improvements, we continue to focus on early engagement with new members. Additionally, we are taking a more aggressive approach to reducing the number of cancellations through proactive engagement and selected incentives with members who are on the fence, resulting in an improvement in our member save rate. Finally, and very importantly, members on auto pay remain at a very strong 84%. So let's bring this all together. On slide 10, this shows our total home warranties across DTC, real estate, and renewal. What's most encouraging is that we have stabilized the trajectory of total home warranties. We have flown our way back from the nadir of 2023. After years of macro headwinds related to real estate and inflation, our efforts are working. Through organic DTC growth, the acquisition of 210, continued strong renewals, and the eventual return of the real estate market, we are now well positioned to grow overall home warranties. Let's now talk about our second strategic priority, scaling non-warranty revenue. Jessica will discuss our results in the broader non-warranty part of the business, but I'm going to focus now on the new HVAC program. To refresh, this program benefits our members who want to take advantage of our scaled purchasing power to proactively replace their HVAC. upgrading to a system that is new, more efficient, and compliant with the latest government standards. In short, this program continues to perform exceptionally well with huge upsides. We expect revenue to come in this year nearly 40% higher than last year, and we are raising our full-year outlook for this program to $120 million. We have many reasons to believe this program has much more runway. Penetration is currently less than 2% of our membership, so we know there is more opportunity here. In addition to the new HVAC program being great for our members, we have done a number of things to enhance its appeal. First, we introduced a new financing option, which includes an interest-free loan for the first 12 months. In the emerging non-warranty space, giving giving our members the flexibility to finance large purchases without breaking their budget is leading to greater demand. As such, usage of financing is up 75% in 2025. Next, contractors are also very excited about the new HVAC program. We've more than doubled their participation since 2023. And with the onboarding, training, and marketing materials we provide, contractors have helped us raise the number of quotes to members in the first half of the year. Our third strategic priority is optimizing the integration of 210. As a reminder, 210 was a great acquisition and strategic fit because it adds a complementary home warranty business. It diversifies our revenue stream through 210's new home structural warranty business, and it provides significant cost synergies and cross-selling opportunities. On the synergies front, we've reduced costs faster and better than we originally estimated with additional synergies in back office, sales and marketing, and service. In our estimate, we expected to derive about $10 million in synergies this year, but we now expect that to be closer to $15 million. When factoring in all of the expected synergies, the adjusted purchase price EBITDA multiple is now below seven times, underscoring the strength of this acquisition. In short, 210 was a great deal for us. Finally, before I turn it over to Jessica, I want to touch on what Front Door is doing to leverage artificial intelligence to enhance the member experience and increase operational efficiency. I'll keep this high level for competitive reasons, but we are partnering with best-in-class AI providers to progress our initiatives across the marketing, sales, and operations functions. In marketing, AI is helping us to enhance campaign performance through more accurate predictive modeling, delivery of more relevant and accurate search results, and smarter audience targeting. In sales, we are using AI to provide real-time coaching to agents during consumer customer engagements, as well as streamlining lead qualification and conversion. On the operations front, we are using AI to standardize and accelerate member support calls, and to enhance the accuracy and timeliness of authorization. Again, this is high level, but the key takeaway is that we are already seeing positive results using AI. On that high note, I'll now turn the call over to Jessica.