Frontdoor, Inc.

For adjusted EBITDA, we expect to be in the range of $197 to $207 million. This reflects higher revenue conversion, partially offset by the timing of the weather benefit from Q2 and incremental second half SG&A investment. And while the external environment has grown more complex, our execution combined with the multiple levers we have to offset inflation gives us confidence in our ability to deliver another record year in 2026. With that, back to you, Bill.

Thank you, Jason. Before we open it up to questions, I want to emphasize three key takeaways. First, our total member count is past the inflection point. Even with one of the most challenging housing markets we've seen in a generation, we're growing total member count again. Second, our operating model is doing what we built it to do quarter after quarter, and we are delivering structurally higher margins in line with our long-term targets. and third, we expect to finish our latest share repurchase authorization by the end of this year, almost a full year early. None of these results happen on their own. They happen because 2,000 plus associates and thousands of contractors show up for our members every single day. To all of you, well done. You are the driving force behind this performance. Operator, please open the line for questions.

Thank you. Ladies and gentlemen, at this time we will be conducting our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question is coming from Mark Hughes with Truist. Your line is live.

Yeah, thank you. Good morning. In the real estate channel, that 7% growth in member count seems pretty strong in this environment. How much price sensitivity or elasticity do you see there? Is the price useful in terms of trying to improve attachment rates?

Yeah, we're using not at the level of the DTC area, but we do use some discounting in real estate on a selective basis. But really, I think that it is a tough backdrop. We're very pleased with the work that our real estate team did This quarter. And, you know, I think it just shows that, you know, as we focus more locally and, you know, combine it with a lot of education about, you know, I talked about our app and all the improvements we've made there. I think it's a combination of things, you know, it's a grind, but I think 7% was a good showing for Q2.

Yeah. You talked about kind of refining some of the strategy around 210. How do you position 210 differently than the American Home Shield brand? What's the dynamic there that differentiates in the mind of potential customers?

Yeah, it's not really that different. It's just we call it our multi-brand strategy. We think that the basic value proposition for home warranty is the same. You know, we're obviously focused on the – excuse me. The Renewal Book of 210, which has been very strong, especially as it's come up on the platform. But we've gone after it, and, you know, it has its strength in certain markets, but we come at it with what we call our multi-brand strategy, which is a consistent strategy driving the value proposition for a home warranty.

Very good. And then I think, Jason, you had alluded to Maybe July or July weather. Could you expand on that? Seems like there's a lot of hot weather out there. How meaningful was that in terms of the start of the 3-2 here?

Yeah, Mark, what I was really trying to highlight is June was a little milder than we expected and then we saw some of that come back in July. So we viewed it as a bit of a timing item and we just wanted everybody to be aware of that as we think about kind of the Q2 and Q3 results combined. If you think about that summer season and when the weather really hits. So that's really what I'm trying to highlight.

And it's where the weather hits, too, Mark, because, you know, depending on, you know, as you know, the home warranty business is kind of the smile states. And so depending upon how weather is in California, Texas, Florida, et cetera, has an impact. But I think we're just trying to show that in Q3 we had a weather benefit we estimated about $5 million. And we anticipate, especially the way July started with all the heat, that will, you know, that will reverse in Q3. Yeah.

Yeah. And then just quickly, were there any reserve gains in the quarter? You didn't call any out.

Yeah, it was about $4 million of favorable cost development. That's part of the beat there too, Mark. We saw claims costs come in a little better, and so it's $4 million, and I think that compares to about $4 million in the same period a year ago. Very good. Thank you.

Thanks, Mark.

Thank you. Our next question is coming from Sergio Segura with KeyBank. Your line is live.

Hey, Sergio. Hey, Jason. Good morning. I'll keep it to a few questions here. Maybe first just talking about and building on Mark's question about whether just if you could talk about The EBITDA margin outperformance. I mean, you're coming off a record year last year and we saw some expansion in the first half. And I think you're guiding to expansion for the full year. So can you just talk about the key factors driving the expansion even versus last year's record performance? How much of that is weather and how much of that is just other things within the business driving that performance?

Yeah. And thinking about year over year, Sergio, for the quarter, We estimated weather at about a $5 million better impact this year. That helped offset what we're calling low single-digit inflation, kind of cost inflation at the contract cost level. We had a little bit of other favorable incidents. And then we did have some small benefit as we brought 210 onto our platform and kind of started to normalize their cost structure towards ours. I'd give a lot of credit to our contractor relations team. They're doing a great job. managing cost against, you know, we were, I think we were a little conservative coming into the quarter just with uncertain macro. If you think about the news changing daily with world events, but, but the team's doing a really, really good job there keeping that inflation number down. So I think percent of preferred remains near all time highs. You know, so both cost and service are doing really, really well there.

You know, the other thing Sergio is, and I'm really proud of the company we make, and I talked about it on the, in the script, that we make these small improvements that compound over time. And it's almost every facet of the business. I went through the renewal journey, and Jason just referenced the contractor relations team and our service ops teams. We continue to get better at just operating the company. And I think that on the margin, it helps us year over year.

Sergey, I'd probably add to, you know, as we thought about our Margin targets are long term targets. This was a big part of how we we had the confidence to raise that to the mid 20s.

Yeah, that makes sense. And maybe just one on the raised outlook on both the renewal channel and the realized pricing. Is there any broad based pricing increase in there or is it more just kind of dynamically pricing and you guys are seeing the benefit from that?

We attribute that mostly to the optimization around dynamic pricing, Sergio. We are also seeing continued strong performance in our renewal rates. Right. So I'd say it's a combination of both, but we just get better. As Bill said, it's that incremental investment even in our tools like dynamic pricing where we get better and better each day.

Understood. Thanks, guys. Thanks, Sergio.

Thank you. As a reminder, ladies and gentlemen, if you do have any questions or comments, please press star 1 on your telephone keypad. Our next question is coming from Ian Zafino with Oppenheimer. Your line is live.

Hi. I just wanted to drill down a little bit more on the real estate business and member care. So nice growth there, but can you tell us maybe you know because if we look at it existing home sales were kind of flat but yet your customer count grew how much of that was you know driven by which is a attachment rate or maybe just market share gains and and maybe specifically could tell us what kind of this local strategy is and and what people are doing on your side to to sign more real estate customers updates

Yeah, the local strategy, you know, we had been investing a lot of money in MSAs and kind of changed our strategy on that. We still have a couple, but we wanted to take that money and effectively invest it at the local level with the local franchisees and brokers. And really, you know, as opposed to trying to write the big check to the corporate area, we really wanted to put that money into the field. and that has really helped and it's a number of issues. We've had an increase in the number of sessions we've had with agents and really the catalyst for that is also showcasing our technology, both the app and the video chat with an expert. We did introduce discounting about nine months ago or so. which is having an effect because it gives people something to sell against. So because I think a lot of the times with the real estate agent, it's a more matter of, you know, having them giving them something to sell. And then finally, you know, we touched on the inventory levels increasing. So what that does is it has an ability for people to begin sellers to begin to attach a home warranty more than they did a few years back. So That combination of things, but it's a great it's it's a grinding business. I mean, it's it's one that our agents are out grinding against calling on agents and brokers every day. And that's why I said in the call, you know, I'm really proud of the real estate leadership, our real estate, our market managers, et cetera, who are doing this every day for us. And so. being able to drive against that attached rate, how many more home warranties can you generate is really, I think, what combined to drive it up 7%.

Okay, thanks. And then on the HVAC upgrade side, that's actually going very well. How do you feel about future growth in that business and what you're seeing? And maybe to touch upon you know margins a little bit and then any kind of comments on how the business performs with with refrigerant changes you know there's the you know 410a um you know changes or at least implementations of that so um maybe any color there too thank you yeah i'll start and then Jason you can kick in on the margin stuff um

you know I think we're on to something here in we think we've got to refine the model as we said we're applying our pricing tools now we're getting more targeted geographically when we first started this we just you know would go anywhere to do it but now it we were engaging contractors all across the country we've continued to increase the number of contractors participating and you know I think we mentioned in one of the slides you know we've we penetrated about three percent of the of the business over time. And that's if we start back and you add up all the revenue. And I think it's, Jason, you did this the other day. It's like $450 million worth of historic revenue is done here, which is, you know, up against about 60, 65 million, 60 or 65,000 of our customers. So we think the penetration rates can go very high here because HVAC equipment wears out and it wears out at different times. And so We think we're getting to a point where we continue to drive that. And the downstream effect is really positive because with newer equipment there, we reduce claims. So with that, I'll let Jason talk about the margin profile.

Yeah, and we're pretty excited about this business opportunity. As Bill mentioned, You know, it started with our scale and purchasing power around equipment, and we found a way to monetize that and increase share of wallet. I think we've said before the margins are lower than our home warranty product. They're probably low 20%, I'd say, is where we are right now. But as we've implemented dynamic pricing, we look to move that up over time. And then, as Bill mentioned, we get the ancillary benefit kind of as that new equipment rolls into the system. One other part of your question, you asked about the impact of refrigerant. We're constantly monitoring that. I wouldn't say it's had a big impact one way or the other on our ability to sell and implement the upgrade program. And we're constantly aware of that as a normal part of our business, even on the home warranty side.

All right, great. Thank you very much.

Thank you. Our next question is coming from Michael Reindos with Benchmark Company. Your line is live.

Good morning, everybody. Thanks for taking the question. Can you comment more on the real estate side? Are there any particular brokers that you're more or less aligned with, given that industry continues to consolidate?

Yeah, I probably wouldn't comment directly on which, you know, with the size of our business, we have to deal across all brokers. I think, you know, there's been a lot of talk about the fact that we no longer have an MSA with Compass. We still continue to do a lot of business with Compass. As you know, that's not an exclusive arrangement. We had it for years. We have a great history with a lot of their agents and brokers. So we're dealing with virtually all of the companies because I think we have to run a national business like that.

Okay. And when you talk about your service providers and your preferred contractors, can you comment a little bit on How do you feel about your coverage there over major MSAs? Is this something that the company might consider improving, or is it comfortable with its level of coverage of preferred contractors? What's the direction there and the impact on the cost side?

We have about 17,000 contractors in our network, of which about 4,000 are what we call preferred contractors. It's national coverage. We don't limit where we service clients. So we feel that we're constantly refreshing that amount because we do rate our contractors on both cost and quality. So we want to make sure the service experience is the most important part. But I think we have national coverage. And like I said, like Jason said, Jacob's our guy who runs contractor relations. They do a nice job of bringing on new contractors, bringing some up to the preferreds. With retirements and such, we have to keep feeding that group. I don't know, Jason, if you want to add anything.

I'd just echo your comments, Bill. I'd say directly, Michael, we have very good coverage in major MSAs, as you would expect. As Bill said, that mid-80s is near all-time company highs. We like that percentage. It's both a combination of cost and quality. I'd highlight our preferreds deliver our best service experience on average, so we like that. The last piece I'd say, you asked about the impact. We estimate a 1% change in the preferred rate is somewhere between $8 and $10 million worth of gross profit, and so we stay focused on that, and the execution there has been terrific by the team.

Got it. and I didn't hear any comments on appliance sales. I thought that was part of the strategy somewhat along with the HVAC. Is that still ongoing?

Yeah, that's our next trade that we're moving into. It's moving out of pilot now. We're expanding it more in Q4. So, yeah, so we're on pace to what we had said. We feel good about the pilot, how it's going. We think we've established the essence of the model with HVAC. It's different because it's a lower price point, but there are a lot more appliances, obviously, in the home. So we think it'll be a good business, but we're in motion on that. And it's going to be the second trade that we start to expand nationally.

Gotcha. And just lastly, when you talked about dynamic pricing, can you Let's expand a little bit on that. What are the dynamics that contribute to dynamic pricing?

We've refined our dynamic pricing models over the last four to five years. I'd say our primary focus there is in the renewal book, as you would expect. There are multiple, I think we're now up to over 60 factors that go into the model. But the easiest way I'd say it is you could think about things like geography, where the home is based, size of the home, past experience with us, and then things we learn about the home over time. So we take all those factors and that allows us to get much more precise on the amount of price, We can charge a customer and any related impact on retention. So we think there's a really nice balance there, and that's something we think we are very differentiated on against our competitors.

And like with all machine learning tools, it gets better over time as it gets more information, et cetera. So it's constantly evolving, and we think we're getting better and better at it. And obviously, I think the proof point is that our retention rates continue to be so strong.

Great. That's it for me. Thank you.

Thanks, Michael.

Thank you. If there will be any final questions, please indicate so now by pressing star 1. Okay. As we have no further questions at this time, this will conclude our question and answer session and today's call. You may disconnect your line at this time. Sorry, sir. Continue.

Oh, I just said thanks, everybody.

Thank you. You may disconnect your lines at this time and we thank you for your participation. Have a great day.