Frontdoor, Inc. (FTDR) Earnings Call Transcript & Summary

Okay. Great. Good afternoon. This is Ralph Schackart. Thanks for virtually attending our annual growth stock conference, and I hope everyone on this call and your families are safe and well. So my name is Ralph, and I'm the research analyst here at William Blair & Company, covers frontdoor and other Internet companies. I'm required to inform you that for a complete list of our research disclosures or potential conflicts of interest, please visit our website at williamblair.com. So with that, today, we have Rex Tibbens, CEO from frontdoor, here to join us for a fireside chat. Rex, thanks for joining us, and how are you doing today?

Hi, Ralph, thanks for having me. I appreciate it.

A nice looking background. It's a little bit different than mine. Rex, maybe just to kind of kick things off for investors that may not be as familiar with frontdoor. Maybe we'd just start, if you could provide an overview of frontdoor in terms of your historic relationship with ServiceMaster, some of the products and services, newer ones that are offered, and maybe just some perspective on the customer base, demographics and anything else you think would be a good jumping off point.

Yes, yes. Thanks. So we spun the company out of ServiceMaster in October of 2018. And obviously, in that short amount of time, and since then, we're a very different company. Primarily it was then American Home Shield, it's primarily the cash cow for ServiceMaster. And one of the things that we were really intrigued about as we spun the company out until I joined, is that there's a real opportunity to really expand beyond just home service plans, which is where we are today, or where we were always put. So we're the U.S. largest provider of home service plans for about 4x larger than our closest competitor. And we provide home service plans to customers in all 50 states. In terms of demographics, what we do is our most popular plan is our combo plan, which covers 21 -- or sorry, covers 21 systems and appliances and really allows customers to -- our goal is to take the hassle out your home. So that's what a home service plan is meant to do. In terms of the demographics, one of the things that I think is a misconception of home service plans is that it skews more towards lower income families. But in all actuality, when we look at our demographics, whether it's age, average or medium income or medium home value, it actually skew right in line with demographics. And when you talk about our direct-to-consumer product, and I'll explain what the differences are in a moment, it actually skews higher to those who make over $100,000 a year. So the real value proposition of the home service plan is both budget protection and convenience. And so those folks, certainly, even if you make over $100,000, you're still worried about your budget, but they might be more focused on the convenience aspects of this having 1 person to go to, to get the things fixed around your home. So that's who we are from a demographics perspective. And then since joining, my background is the COO of Lyft. And then prior to that, I was Vice President at Amazon and Dell before that. And I will bore you with all the other companies I've been at. But I see a real opportunity here. A few times in your career, you can be involved with really transforming industry, and that's why I left Amazon and go to Lyft. And that's why I really see a big opportunity here with frontdoor. And that the total addressable market for home services is about $400 billion. And I think we're really positioned well to help transform that industry as well. There's no clear winner. So that combination, we started or we spun the company out, it was a company that was kind of run on averages and spreadsheets. We really dug into build a data platform so that we can run the company by the inputs. So everyone in the company inspired me talking about managing to the inputs. But imagine building your financial model and every input was an average. Well we get a terrible financial model, so that was job 1 for us. It also allowed us to really lean in on some pretty big cost containment opportunities that we focused on early on. So things like our dispatch algorithm, so ensuring that we're dispatching to our preferred contractors who are about 20% of our contractors and about 80% of our volume. The reason why they're important is that our labor rates will be roughly half of that from retail. So for every preferred provider you can provide or you can send out on a job, obviously, that's a more better gross margin for all of us. So really focused on cost containment. And then last year, we began to focus on retention and growth, which I think will continue to pay dividends. And then we also have been focusing on the customer experience since I arrived as well. We still have plenty of opportunities there as well and we continue -- let's say, it's a journey, not a quick fix, so we're continuing to improve our processes and improve our technology in order to do that.

Great. Maybe just hit on one more before I move on. It's just I think one of the big improvements that you and the team have made is to bring the concept of dynamic pricing at frontdoor. Would you maybe sort of touch on the old pricing model, the new model and what impact that's had on the business?

Yes. Great call out. So one of the things that we noticed when both Brian and I arrived at the company is we historically -- and American Home Shield kind of founded the industry, so it was our own fault, so to speak. But we noticed that the old pricing is done on a state-wide level. Well you can imagine that obviously, San Francisco from a labor rate perspective is very different than stock in California. And if you're in New York, Manhattan is radically different than Poughkeepsie, right? So it makes sense to us that we really think about the frontdoor in terms of ZIP plus 9, meaning kind of the subdivision level. And we're seeing almost 50 years of data. Why don't we begin to really dynamically price based on labor rates as we build these models out now that we have the opportunity to ingest more data like medium household income, medium home price and really think about pricing curves by neighborhood? So we launched dynamic pricing last year for our direct-to-consumer, first year direct-to-consumer. We launched this year for -- we're going to launch -- sorry, inverse. We launched for renewals, which is 2/3 of our revenue in Q4 of last year. We're launching direct-to-consumer this year. And then the last thing will be real estate, which will take a little longer because of the integration with our realty partners. But what this really allows us to do, Ralph, is to balance our gross margin really based on the household rather than those averages I talked about before.

Great. You touched on real estate, so that's a good segue to talk about COVID here, so we can do a lot of companies. Maybe just some perspective, if you could share on how it's impacted the business. Maybe March and then April and May, and to the extent that you could add any further commentary, that would be helpful.

Sure. So first and foremost, our thanks and appreciation go to all the first responders. What a crazy world we live in today when it comes to this pandemic. And we think they're the true heroes. We made clear and decisive action in early March to basically virtualize the company and send folks home. The majority of our head count is call centers, so it's truly a herculean effort to get everyone home and working. And that -- we did that kind of early to mid-March. Team hasn't missed a beat. It's important to us because we're still in essential service. For those of you who don't know, frontdoor, we're the skill trades. So we're HVAC, appliance, electrical, plumbing, et cetera. So even during a pandemic, people need to keep a neat air, they need hot water, you might wait to fix a leaky faucet, but that's a small part of our volume. So it was important to us that we kept -- we kind of keep our associates safe. It's important to us that we keep our customers safe. We added special hotlines for those who have been diagnosed with COVID-19. And then we had social hotlines for our contractors and how to deal with that. We purchased a company called Streem back in December. Streem really allows you to have a virtual one-on-one, if you will, with the customer, kind of walk in their shoes and kind of see what's wrong. We implemented Streem to our contractor base for preferred contractors who want to start using it. We also provided it for free to our realty partners, our larger realty partners, because the show must go on, so to speak. So those 2 things were very much appreciated by both our partners and our contractors and both in realty firms as well. So we haven't really missed a beat as a company. In terms of -- I think on our last earnings call, we talked about April was a little light from a claims perspective, but it was also -- we had favorable weather. And so towards end of the -- end of April, we saw the heat come back in Arizona and Texas and California, other places. And our claims volume kind of went back to normal. So we don't foresee COVID-19 really causing any issues from a claims perspective. I get asked the question a lot, well, people are at home, and they're using their air-con -- or use their air conditioner more, or they're using their refrigerator more and that's what those things are for. It doesn't necessarily lower the life of that unit. So we're not expecting any changes, if you will, based on people being home more.

Great. And that's kind of a good segue. Last one on COVID. Obviously, states are starting to reopen more and just curious, have you seen any incremental claim activity since then? Or any sort of odd behavior or different behavior than you would expect to see with the states reopening?

Yes. So we talked about -- because we're essential service, we don't foresee any changes, if you will. One of the things we also did is we provided -- we started purchasing in bulk PPE for our contractors, so that they wouldn't be afraid, so to speak, to go into folk's homes. But again, if you're air conditioner is broken or you're heating or your hot water, those are all things we didn't really see people holding back, if you will.

Okay. Maybe we can segue to area that we get a lot of investor interest. I'm sure you get a lot of questions on Candu. Maybe just for the broader audience, maybe talk about the service, the opportunity today. Where are you today from a number of cities? I know you have a release out today. And then how do you frame the opportunity?

So as I talked about before, the larger home service marketplace is about $400 billion, half of that is home repair and the other half is repair and maintenance. Certainly, I look at, in terms of like number of homes, roughly 130 million homes, 5 million, which has a home service plan. So this is a much larger market opportunity for us. One of the things that I learned from both Amazon and Lyft is about marketplaces. And I do -- I truly think that there's a real marketplace opportunity here. We have 17,000 contractor firms, roughly 60,000 technicians that are in the core trades that are hard to get. So one of the things that we were very focused on kind of early on is, can we build an on-demand business, where you don't have to necessarily be a home service plan customer to utilize the service. So we started with appliances. We're in 5 cities now. We started with appliances in Atlanta. And we really believe that the customer is looking for kind of 3 things, so looking for pricing transparency, so how don't I get ripped off? They're looking for scheduling transparency, when can you come out? And can I kind of work around my schedule versus having to show up when the contractor wants to show up? And then will you guarantee the work? And that's really been kind of our tenets as we think through the Candu service. And so we started with flat fee appliance repair. We also do diagnostics if the customer prefers that. We've recently announced the rollout of trade expansion. So HVAC, electric, plumbing and garage door in certain -- some parts of those 5 cities. They'll come later in other parts. So that now we can begin to really expand on that vision of being able to offer pricing transparency, scheduling transparency and guarantee. For things like air-conditioning, more likely, the service is going to be more around the diagnostics so that we can kind of walk the customer through what's wrong and they can kind of choose what they want to do. They want to repair, they want to replace it. We'll have those options available for them. So really, we think that this is a much better proposition than having to go on the web, having to get a quote or basically a lead from someone who then gives you a quote. And the time -- all the back and forth time of that versus just, here's what's wrong, here's who can fix it, here's the cost to diagnose and here's the cost to fix it. It's a much better business model. So that's Candu. We plan to -- we built the product or the start of the product at the end of '19. And 2020 is a year of discovery and scale. And then '21 is really the year where we really scale and optimize. And how we do that is, because we already have the supply in the hardest part of the marketplace, now it's really about making sure that we have the right unit economics, the right marketing TAC to expand across the country.

Maybe I had an investor question earlier before we started the segment. She had asked about the Candu pricing. Is it a stated price, can it be dynamic over time? Anything you could do to sort of help with that question would be great.

Sure. So for -- obviously, for a flat fee, it's static at the time that we give to the customer. But even on a flat-fee perspective, there's opportunity for -- to be done in it. As the service grows and we give more adoption, there's an opportunity to charge different amounts depending on when you wanted to service. So there's a lot of flexibility to that service. So that's why we really like the model.

Great. One more on Candu. I saw the announcement today that you expanded, I think, Houston, Memphis, Denver and Dallas, added some new services like you touched on. So as you're thinking about these incremental markets, give us a sense of the strategy behind it, any lessons that you've learned from Atlanta that's making those incremental markets easier? And if I can put a pitch in for Chicago, that would be great.

Yes. So obviously, we started in places where we have great supply position and very willing contractors to -- in '19, we worked together to kind of develop the service. We -- as we expand the trades, it's really about making sure we have the right contractors to work with us. As I said before, 17,000 contractors, it's not hard to scale. It's been really about the marketing cost, right? So as we look at each one of these expanded services, I would kind of test them in the market, we feel good about the service and the customer experience. Now you're going to have to figure out how to scale it from a marketing perspective. So that's kind of the reason for trade expansion. To get the right unit economics, you need people to use it more than once, obviously. And so by offering a variety of different training, that gives you opportunity to test the customer multiple times. We chose the cities that we did. Obviously, Denver and Memphis are where we have offices. So under the old parody, either we were drinking our own champagne or eating our own dog food, depending on how it goes. I think it's important that our engineers are close to the customer, they're close to the product, understanding the product books as well. They're all living and breathing it every day. So that's why we're in Memphis and in Denver. And then for the other cities, this is more taking large, call it, NFL cities and testing the different dynamics of those. I can tell you that Atlanta is not the same as Houston or Dallas, right? So having the different market dynamics is important to us as we expand. And I'll keep Chicago in mind.

Thanks. I had a question actually submitted from a client as it relates to Candu, so I'm going to go ahead and read it. Question reads, "Where have they seen the most success in the Candu rollout? Is it their existing home service plan customer base or newer engagement with the company?" And the follow-up question is, "Any opportunity from an M&A perspective to enter in newer territories on the HSP front?"

Sure. So in terms of where we've had success, we just rolled out trade expansion. So it's just been appliance only. Primarily these are new customers, not HSP customers. So yes, it's been great that we're kind of getting beyond our kind of core customer set. We have marketed to our existing customers that if they don't have the combo plan and they want something repaired, we still see that as an opportunity as we expand into both the trades and to the cities. And in terms of M&A, we think of M&A in a couple of different lights. Certainly, we think that, as I said in our last earnings call, we think there will be opportunity in the market. We're not looking to kind of overpay for anything. But if there's a regional player out there or a larger player that may fall on hard times, or they've decided that it's time to hang it up, we're certainly be interested in a roll-up strategy from an HSP perspective. We'll continue to look for great things like Streem on the technology side. So if something helps us propel Candu even faster or technology that helps us take care of the customer faster, we're going to continue to be inquisitive there as well.

Right. I have another one here, Rex. How much further investment is required to gain scale? I'm assuming that means Candu. Then the follow-up is, will this come at the expense of margin expansion?

Yes. Well, so far, it hasn't, right? So we know we're a public company, and we're not -- we're focused on balanced growth. So might take us a little longer to scale, but we're not looking for any outsized investments. We have -- beyond this year, we haven't got our plans approved by the board. So certainly, we'll lay out the ROI to our Board, and if we need to have a deeper investment, then we'll look at that time. But so far, we've been pretty happy with the investment that we've made. And as a reminder, as I've built a couple of marketplace businesses, the real expense here is building supply, which we already have. So now you're down to the second part of the equation, which is marketing spend. And we can certainly gate that and balance the company in terms of margins. So I wouldn't be too concerned about eroding margins.

Great. Maybe we can move on to Streem. It's obviously a newer service or product. Maybe just a quick overview of what it does, how do you see it integrating into the broader portfolio services post-COVID here?

Yes. Well, in terms of looking at a crystal ball, you can pick a better acquisition than Streem a few months ago. What Streem in a nutshell will do for you is that you don't have to have any special app or anything. We can text the customer link. You open the link, and you're basically having a FaceTime-like session. Now how it's different is that, through AR capability, we're able to capture things like make, model and serial number. A great use case would be hot water heaters. So now the customer can show us kind of what's wrong. So in the past, first, I'm going to call in for a hot water, "I don't have hot water." You wait a day, someone would come out and look at it like, "Oh, your tank is ruptured, I'll order a new tank." It's a very 1950s experience. So now with Streem, once fully integrated, we can ask the customer to have a Streem session, look and see if that's leaking from the bottom. We know it's an automatic replacement. Streem will capture make, model and serial number, will capture the -- how big the opening is. So make sure the replacement tank is going to fix -- fit without having to -- making modifications. We can look at how the plumbing is already -- how it's plumbed, rather. So that now, as we send all the information to our contractor, they show up with the right tank, and they're ready to make the fix. That's just one use case. So that's why we were so excited about it when we purchased the company. And as we roll that out, we think there's a real opportunity to continue to lower our operating costs in the future. And the other real value with Streem is that this goes beyond just what we're doing, right? So because it can measure things, it can really understands, it can take spatial mapping, now we can ensure things are going to fit. And now if you're another company, especially during COVID, whether you're a utility or a cable company, a big-box retailer, we signed a deal with Lowe's that we announced last week, it's very much you can integrate Streem into your product and now offer that same great customer experience well beyond just home service plan customers. So we think there's a third-party revenue opportunity here. We think there's an ability for people to build around Streem like a new ecosystem. And then, obviously for us, just making our customers' lives better by rolling less trucks are all kind of the main evidence for buying Streem.

So if you fast forward in a couple of years and you think about Candu, you think about Streem or perhaps anything else that you have on your whiteboard, are these nice-to-have sort of incremental revenue opportunities? Or do you think sort of in totality, these new products and services rolling out could be pretty substantial in terms of the impact on the business?

Yes. So we're a $1.4 billion company in terms of revenue. So it will take a little while to pass it up for sure. But at the minimum, you should think of frontdoor as a great cash-generating business from a home service plan perspective with a great option around all the technology that we're building. The where we're going is, well, I want to talk about that broader addressable market. If you tack on on-demand, you tack on Streem, we think that, that market opportunity is larger than the one we're in. So we think that -- we don't know what a year it is, but we can get to parity or beyond our current home service plan. So we think we're building something that's very scalable. We think we're building something that is very accretive to the business. Now those things will take time and money, but we think that this really helps expand frontdoor to its real -- our mission has to take the hassle out of home, not just provide home service plans.

And another question come through. I'm going to go ahead and read it, Rex. I think it's just a general question on can you talk about the competitive landscape? And then more specifically, how competitive is HomeServe? How big are they relative to frontdoor?

Sure. First, so from a home service plan perspective, we're -- again, we're 4x larger than our closest competitor, which should be primarily in the real estate space. They're insurance companies, they're title companies. I think HomeServe has been in the U.S. for a couple of years. As of yet, we haven't really bumped up against them from a selling perspective. They tend to kind of start in the utility space, utility line protection, which is very different than providing home service plan, but I think -- I'm sure they're -- like we are, they're competitive, and they want to win customers. So -- but we haven't really bumped up against them that much. From an on-demand perspective, obviously, the biggest competitor would be ANGI. And definitely have a friendly competition with those guys in terms of -- I think we have a very different business model. Where they're great at driving eyeballs and trying to sell leads to contractors, we're trying to sell jobs to contractors. So different model. I think we have a different way of approaching it, but those would be the biggest competitors from both a home service plan perspective and on-demand perspective.

Great. Maybe just the last one here. As you continue to shift marketing dollars towards the direct-to-consumer segment away from real estate, maybe talk to -- talk about what strategies are working, what's really resonating with the customers within the DTC segments, particularly as you're adding more services that will apply to that market?

Yes. So during the great financial crisis, we grew revenue 2% and 4%. This is -- the pandemic is well beyond the GFC. And we think that this year, we'll grow even better than those figures. So we think we would have a very resilient business model. And the reason why we have resilient business model is we have levers that we can pull. So we've moved every dollar we can out of real estate into direct-to-consumer. During this time, the biggest purchasers of -- or consumers of television ads or auto companies and travel companies, they've essentially stopped buying. So we were -- instead of buying a Retina TV, we're able to buy prime time spots for the same cost. So we took advantage of that. We also took advantage of a lot of our competitors kind of backed down from a spin perspective for digital, and we leaned in. So we see continue -- I think we'll continue to see those trends until the U.S. comes back online. And I think we'll continue at least to see a better or favorable rates from a television perspective until we get closer to election time. So those 2 factors allowed us to really lean into direct-to-consumer. As I said on our April call, we have a strong renewal base that wasn't waning. So that's -- our renewals are 2/3 of our revenue and really leaning in direct-to-consumer allows us to kind of blunt any downward trends.

Great. I'm getting the Flash Share that shot clock is up. So I just want to say thank you so much for your time, Rex. I really appreciate you joining us. For the investors that are on the Zoom call, thank you for your interest, and hope you're well, Rex, and we'll talk on the earnings call.

Thanks, Ralph. Appreciate it.

All right. Okay. Bye-bye.