Frontdoor, Inc.

Ladies and gentlemen, welcome to Front Door's fourth quarter and full year 2025 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 fourth quarter and full year 2025 earnings conference call. Joining me today are Bill Cobb, Chairman and CEO, and Jason Bailey, Senior Vice President and CFO. 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 www.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 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, February 26th. 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 this 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. We had a great 2025. But before I get into the financial highlights, here are three key takeaways for today's call. First, we expect ending member count to grow in 2026. Second, we are raising our long-term adjusted EBITDA margin target. And third, this business generates significant cash, and we are on track to complete our current share repurchase authorization by this time next year, well ahead of schedule. With that, let's get to the financial highlights for the year. Revenue increased 14% year-over-year to nearly $2.1 billion. Gross profit margin increased 150 basis points to a record of 55%. Net income grew 9% to $255 million. Adjusted EBITDA grew 25% to $553 million. And we bought back a record $280 million worth of shares. Now, Before we step into 2026, I want to connect our results back to our priorities for 2025 laid out on slide five. Our first and most important focus is to grow and retain Home Warranty members. And in 2025, we achieved an important milestone. We stabilized our member count. This was supported by traction across the business with growing demand and improving conversion in DTC, strong second half momentum in the first year real estate channel, and higher renewal rates. Our second strategic priority, scaling non-warranty revenue, is playing an important role as we expand the way we serve our members and create value. The new HVAC program grew an impressive 48% to $128 million, and we still have a massive opportunity ahead. We also took the next step in broadening our portfolio by launching our appliance upgrade program in select markets. And we're complementing that momentum with outside partnership opportunities with our contractor network, such as our Moen program that delivered $15 million in its first full year. Finally, our third strategic priority is optimizing the integration of 210. This was a highly strategic acquisition, and execution has exceeded our expectations. We have already realized more than $20 million of cost synergies, way ahead of our original 2025 target of $10 million. We are well on our way to a fully synergized multiple of less than seven times by 2028. And we are actively working on revenue synergies, including migration of the 210 home warranty platform to our systems in 2026, and creating additional opportunities with 210 builders. The 210 acquisition was a great deal, and there is still a lot of runway left. Now let me take a moment to double-click on our number one priority front door to grow and retain our home warranty members. Slide 6 captures the outcome, member count stabilized in 2025. This was an excellent result and well ahead of schedule. And what is even more impressive is that we build momentum as the year progressed. Tariff concerns eased, housing supply improved, and our consistent execution paid off. Let's turn to slide seven and take a deeper look at the real estate backdrop in 2025. There are two distinct dynamics. First, existing home sales volumes remain constrained near historic lows. This weighed on our ability to sell home warranties in this channel. Second, the market began shifting toward a better balance between buyers and sellers, one of the most important drivers for our business. Inventory increased, with average supply exceeding four months for the first time in five years. And over 60% of homes sold below their original list price, the highest level since 2019. In addition, our team moved quickly to capitalize on this changing market dynamic. We increased localized investment. We deepened engagement directly with real estate agents. And we launched promotional pricing in the real estate channel for the first time. And the result? We had two consecutive quarters of sequential member growth to close out last year, the first time this has happened in the past five years. Now turning to slide eight. Direct-to-consumer has been a source of consistent momentum for the business. Our differentiated strategy, discipline, and focus drove 3% member growth in the channel for 2025. At a high level, our DTC strategy is built around three pillars, brand leadership, growing demand, and improving conversion. Starting with brand leadership. We continue to hold the highest levels of awareness, interest, and trust in the category. Our technology enhancements through the AHS app and virtual experts have increased member value while further sharpening our differentiation with consumers. Second, growing demand. We continue to strengthen our value proposition to deliver more targeted and relevant messaging to key segments, including younger homebuyers. Utilization of AI in our marketing has allowed us to reach higher-intent consumers more effectively. And finally, we are improving conversion. Through website and SEO enhancements, promotional pricing, and AI tools to prompt our sales agents, we are creating a more personalized experience for prospects, aiding us in getting them across the finish line. Turning to slide 9. Renewal rates improved by 150 basis points to 75%. This is a very big deal. I am particularly proud of our performance with direct-to-consumer members. First-year DTC renewal rates improved, even as members moved away from introductory prices and into the renewal channel. This reinforces that our promotional pricing strategy did not come at the expense of renewals. Our performance is being driven by continued improvements in the member experience and includes the following actions. First, adoption of the AHS app continues to grow since its launch in October of 2024, and we now have nearly 600,000 member downloads. Second, video chat with an expert has become a clear point of differentiation. Since launching in February 2025, we've completed about 80,000 chats. helping resolve issues virtually. Third, we increased the number of members on monthly auto pay by about 100 basis points to 84%. Additionally, we've strengthened onboarding, continued strong usage of our preferred contractors, and improved our internal processes. The impact of these efforts is showing up clearly in member feedback, with record-high five-star reviews alongside record-low one-star reviews for all of 2025. Now, turning the slide, then, with a strong foundation in our core membership base, we continue to advance our second priority in 2025, scaling non-warranty services. And the most meaningful driver within non-warranty today is our new HVAC upgrade program. In 2025, new HVAC upgrade revenue grew by $41 million to $128 million. And we remain in the early innings with only about 55,000 installations programmed to date, leaving substantial opportunity across our 2.1 million members. Let me spend a moment now on new HVAC upgrade margins because this is an area we feel very good about. Growth margins for our new HVAC program are currently around 20%. While this is lower than our core business, the economics are favorable for three reasons. First, increasing share of wallet with our members supports higher engagement, satisfaction, and retention. Second, contractors value the program, supporting stronger adoption, And third, we get higher revenue and incremental gross profit and EBITDA with little to no customer acquisition costs. Now let's look forward and talk about our aggressive long-term goals on slide 11. First, drive member growth, still the number one priority at front door. Second, scale non-warranty revenue streams.