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

Well, good afternoon, everyone, and welcome to the Truist Securities Tech, Internet & Services Conference 2021. It's a pleasure to have Rex Tibbens, Chief Executive Officer; Brian Turcotte, Chief Financial Officer; and Matt Davis, Head of IR at frontdoor. Thank you, guys, for making the time for us today. So before we begin, let me just read the following disclaimer and then we get going. This call is arranged by Truist Securities Research for use by institutional investors and issuer clients as defined by FINRA. If you are not an institutional investor or issuer, please disconnect at this time. For required disclosures, please see our website at truistsecurities.com or our equity research library.

All right. So Rex, let me start with you and at kind of the highest level, just to level set the conversation for those who may not be as familiar with frontdoor. Can you please just speak to the consumer problem you're trying to solve, your value proposition today relative to what your peers offer?

Sure. And thanks, Youssef, for hosting us today. A pleasure to be here virtually. Looking forward to the day we can do this in person again. frontdoor spun out of ServiceMaster in October of 2018. We're the largest provider of home service plans in the U.S. We're about 4x larger than our closest competitor. And the 2 real value propositions of a home service plan are budget protection and convenience or peace of mind. We really think that especially during the pandemic budget protection is certainly one aspect that plays well with our customers. But I think that convenience or peace of mind is also something that we continue to expand on at frontdoor. So in terms of kind of how big frontdoor is we'll -- we did a little over $1.4 billion in revenue last year. But we're very focused on a much larger opportunity. And that's the $400 billion opportunity, that's home services overall. And we think half of that category is maintenance and repair. And the great thing about frontdoor is that we have 17,000 contracting firms, roughly 60,000 technicians in the trades that you need, which are the skilled trades, HVAC, appliance, plumbing and electric, pool, spa, et cetera. And our goal is to really expand beyond the current TAM, which for just home service plans, it's roughly 5 million homes to the 130 million homes for single-family homes that would be available to us from really expanding beyond just home service plans and then begin the offering on-demand service. So that's kind of where we're going with our AHS ProConnect offering. Unnecessarily have to have a home service plan, you can consume these services à la carte.

So on that basis, maybe can we step back a little bit. So you joined a little before the spinoff from ServiceMaster. You've made some major changes to the platform, both from a technology and a product standpoint. Where are you in that process? And do you feel that you have all the key elements in place today to execute against the strategy and go after the TAM you just spoke to?

Yes. I think the honest answer is we're working our way towards that. If you look at kind of -- we've been a public company for, what, 2.5 years now, quickly approaching 3 as time is flying by, but we have really transformed the company. I tell people we're a $4.5 billion start-up because it's a 50-year-old company with a lot of -- a lot to offer, especially around data. But what we're doing is we're really transforming the company operationally, technically and even culturally, to go after this larger total addressable market. And so we launched our on-demand product just last year. Well, we've expanded to 35 cities. We've rebranded under AHS ProConnect, so that we can really take advantage of the 30 million people who visit our website. It'd be great if all 30 million bought a home service plan, but a lot of people are looking for a repair or someone to help them. And that's why we think that we have a real opportunity here. And so I think it depends on where you're looking in the organization, whether we're in early innings or late innings. Certainly, from a home service plan perspective, one can argue, if you've been doing it for 50 years, you're in the later innings. But I think there's real opportunity here to even transform that space. And if you think about things, we purchased Streem in 2019 to really change how people think about what to do when you have a problem. We really have the opportunity instead of, I call it, internally, going from the Mad Men to the Jetsons, and [ giddy ] myself, I'd say the Jetsons I know. But there's a real opportunity here. Instead of having to roll the truck to kind of see what's the problem and really have a long cycle time, we're building capabilities so that we can have a 2-way conversation via your smartphone, really understand what's going on and hopefully send a truck once to repair or replace something. I know it's a better customer experience. But from an ESG perspective, it's frankly better for our environment. So we're pretty excited about transforming all the areas of our business.

What about on the tech stack side of things? So you've moved to the cloud, your customer support is pretty massive, but to grow into the type of company you need to grow to, it probably needs to scale that much high -- much more probably using technology. Can you just speak to the back-end infrastructure?

Yes. So we've -- yes, I don't think we could virtualize the company in 8 days if we didn't already have a great tech stack in place. Now is it where we want to be? Absolutely not. But I think if you ask any tech company, they would say, it's not where they wanted to be. We still -- we've been rapidly fixing 50 years of tech dev but we're also building a lot of products here. If you look at our new appliance portal, we're building for customer or the contracted portal, I think those are all kind of proof points of the various stages that we're in as a company. Now to your point of how much more investment do we need to make, I think I'll give you a consultant's answer. I think it depends, right? It depends on what part of the business you're talking about. I still think there's a lot of investment opportunity for Streem and for ProConnect. I think we still have to make improvements in our core business as well. But that's really around this transformational thing I'm talking about. We're really trying to leverage Streem as much as we can to give you that Jetsons-like experience.

Okay. Yes. That's interesting. If we can dig a little deeper into the business. So you guys report your business in 3 segments: renewals, direct-to-consumer, real estate. All 3 segments performed pretty well. I mean it's a pretty tough COVID environment. Your guidance for 2021 calls for double-digit growth for all 3 segments, which is a first since you've been public. So congrats on that. Maybe can you talk to the drivers of the growth in each of the 3 segments and kind of the sustainability of that growth beyond this year?

Yes. Our mission is to be a sustainable double-digit growth company. I think this is the first year. It's the first proof point for us in that area. When you look at renewals, which is 2/3 of our business, we've really focused a lot on the reasons why a customer wouldn't renew. And I think that's really helped us, especially in light of the pandemic. We have dedicated retention team. We focus a lot on moving and sold. It's a lot of block and tackling, making sure that we don't have any credit card issues, things that seem simple, but we have 2.2 million customers, things can get lost sometimes. The real kind of step function change in that area going forward is really going to be reducing cycle time and kind of really this transformational experience I'm talking about, where we provide more delighters than detractors in terms of the experience. And we think that Streem definitely helps us get there. We think a much cleaner and frankly, robust way of replacing your appliances, so that's -- it's an easy process for customers and something that's delighting type for them. So for example, let's say, they've changed their stainless steel refrigerator, but they're still top of the list, black or -- you've [ got a bit of ] avocado, right? This really gives them the opportunity. We'll let them know what we think the replacement value is. And if they want to upgrade to the stainless steel one, they can do this on this new portal. And so it's a real, I think, more delightful experience. So that's certainly the renewal space. It's all about cycle time and continued focus on retention. For real estate, we continue to help our real estate partners transform as it relates to technology. I think you'll see deeper API integration with those who are consuming APIs. But really, I expect there to be somewhat of a tailwind for real estate coming off we hope is -- will be through the pandemic kind of mid-year. And we focused solely on buyers, which is the opposite of what we normally do, which is focus on sellers. Because it's such a tight buyer's market, we think that that's the right area to really focus on, and that's where we've been solely focused since we've seen such a strong buyer's market. As it relates to direct-to-consumer, I think we saw the proof point during the pandemic. We really leaned in to digital and broadcast, and we saw great improvements there. We hired a new CMO in March, who also has a technical background, and we're beginning to really develop our marketing technology to continue to focus on things like conversion, for example. So this year, although we're spending more on marketing from a CAC perspective, it's flat because we're totally focused on conversion. So those are really the big things and there's thousand little things behind that, that we think that really helped us kind of get to that sustainable double-digit growth.

If you were to step back and kind of dream the dream where ProConnect can take you on-demand products away from the subscription business, how big do you think that part of the business could become? Can you envision a space, a time when you're actually running a business that's 50% subscription, 50% non-on-demand?

I do. And the reason why, as you look at that TAM difference, the home service plan business is kind of growing as fast as we're willing to invest in marketing, but $5 million versus $130 million, that's a much larger opportunity as we continue to get the right experience. I would expect that, that would grow at a much more rapid pace. And yes, it's going to take a long time to become $1.5 billion, $1.6 billion in revenue, right? But I do think that there's a real growth opportunity there because I think the reason why no one's really cracked the code is they're not really focused on the customer experience. And we think the customer is looking for pricing transparency, scheduling transparency, and someone to guarantee it's going to be done. And then last one is the -- I think it's been the Achilles heel for a lot of companies. And we think our relationship with our contracting firms really allows us to have the ability to guarantee that the work is going to be done in [ that ] way.

So just, again, staying with ProConnect because we do think it's the most exciting part of the story. How do you see it ramping up, right? I think right now, we are across about 35 metros. How many jobs or how many skills does that encompass? And are you able to leverage the same SPs on both platforms? Or are the SPs for the ProConnect separate?

Yes. For the most part, with the skilled trades, we plan to leverage our existing supply base, but also it's a great recruitment tool to bring on additional service providers who want to do both the ProConnect as well as our traditional core HSP business. For those 35 cities, we're only in appliances. And so this year, in order to get to our 80,000 completed jobs, it's about rolling out our additional trades, right? So moving from appliance to appliance, plumbing, electric, that type of thing. So that kind of rolling thunder approach, if you will, allows us to really start to get density within those 35 cities. Those 35 cities are your NFL, NBA cities, right? So I think before we kind of get to Tier 2, Tier 3 cities, I really want to make sure that from unit economics perspective, it makes sense.

Yes. Yes. Switching back or switching to another topic, which is just the COVID and the impact COVID has had on you guys. It seems that this work-from-home phenomenon is likely to be with us for quite some time, at least, to a certain degree. How do you think about your value proposition in this kind of new environment where the wear and tear is likely to have gone up, right? And how do you think about pricing your product today versus, say, pre-COVID, right? And then switching to you, Brian, just how should we think about the gross margin impact of this whole phenomenon?

Yes. So well, I think I should have mentioned earlier in terms of our transformation is really dynamic pricing. We've built, I think, some pretty cool technology that allows us to really throttle the business around gross margin. We can look at not only the risk of an area, but also the usage of customers, and so we did that on a ZIP plus 9 basis, which is essentially subdivision level. And we were able to make pricing changes when we saw the real change in appliances and to the earlier part of your question, that's really work from home. I don't think you really use your HVAC more, right? But you absolutely use your refrigerator more. I mean refrigerators are broken at a historic pace, and that's not just us, it's industry-wide. And I think refrigerators and dishwashers are probably the 2 that if things kind of -- we believe that we will see a slowdown in appliance claims. But they'll probably be a little more elevated than pre-COVID because we do think there's a lot of people that will continue to work from home or as most companies are looking at some sort of hybrid strategy where you work from home and you collaborate from the office. So dynamic pricing really allows you to leverage those things. And we made pricing changes back in November for our renewal business, which is 2/3 of our revenue. We made a change in January for direct-to-consumer. I mean we leverage the same models for real estate. Real estate is a little more tricky and it's not automated in that we still have a lot of our partners don't consume APIs. And so it's still a little bit of pen and paper, still a little bit of Mad Men. So we still leverage the models to provide pricing. But it's a little more manual than I'd certainly care for, but that's what it takes to work with our providers. In terms of gross margin, I'll pass it over to Brian.

Yes. Thanks, Rex. To your question, Youssef, we gave guidance of 48% gross margin for 2021, and that was based on the continued high level of appliance and plumbing service request through midyear. And then in the back half of the year, somewhere between historic levels of incidents for appliance and plumbing and what we saw in '20. So still elevated level because people will be working from the home in a hybrid model. We'll still have continued pressure on appliances and the plumbing systems. So that goes into the calculus for the 48%. And also, we talked about on the earnings call, low single-digit inflation with our contractors, which is normal each year. And then steel prices have skyrocketed, and we use a lot of steel in water heaters and things that we place for customers. So we're waiting to see what the impact will be on us from that. We also factored in higher weather impact in '21. We had 2 really favorable years in a row from a weather impact. We didn't have severe cold or severe hot. So we did factor in a higher AC this year. And as we saw last month, the deep freeze across most of the country impacted us, and that was built into our Q1 guidance.

Okay. What about when you look at it over time beyond just 2021? I think your guidance historically were -- you spoke to a 50% gross margin as kind of a steady-state, good -- gross margin in a decent environment. Maybe can you speak to that?

Yes. And Rex can jump in as well. But we certainly think we can get back to 50% gross margin for our home service plan business, even though we may have continued pressure from wherever the world is going forward as far as the work environment, there are many things we can do on the cost side to mitigate that. So we certainly believe we're going to get back to 50% gross margins.

Yes. I totally agree.

Okay. And I guess I should have asked this question earlier. But to that double-digit growth that you're planning on for this year and hopefully, going forward, if we look at volume versus pricing, how would you kind of recommend that investors look at the mix?

Yes. Brian, can you take them?

Yes, right. We were about 50-50 price/volume for 2020, and for 2021, we're looking at a little more than half weighted towards volume versus [ price ] which is a really good story, right, that we're getting more units driving our revenue versus just price. And going forward, I think that will continue going forward, just more unit-based than price-based.

Yes, yes. I guess switching to geographical expansion. I think as we think longer term, there are certainly some pockets in the country where you guys are super strong, right? Texas is an example. But there are some pockets which are underrepresented as a percentage of revenues. How do you think about geographic expansion strategically, either organically or through M&A?

Yes. So we are in all 50 states. I think maybe a little lighter in the Northeast, although that's been growing pretty rapidly. Pacific Northwest have been growing pretty rapidly. I think that as we had kind of changed our focus around direct-to-consumer, we really have the opportunity to target from a geo perspective. From a realty firm, I think, the real estate team has done an amazing job of -- we're in all top 10 realty firms. So I think we have a great geographic expansion there. Certainly, in the Mid-Atlantic area, we've seen a lot of growth. So we continue to leverage those partnerships, from a real estate perspective. We continue to focus from a direct-to-consumer perspective. But also, to me, the most important thing is we've tied both our marketing team and our supply team together to ensure that we have the right levels of supply, so that it's almost an arbitrage opportunity to roll and that as we see, we have more supply in the area, we should ramp up marketing efforts to make sure that we're covering as much preferred contract capacity as we have. And I think that's definitely been a sea change for us over the last couple of years, especially look at our percent of preferred ratio, it's not an accident.

Yes. And Brian, maybe can you talk a little bit about the supply side impacting gross margin? I think back a year ago, there was talk about some issues with importing products from China, et cetera, other. And you guys were pivoted pretty quickly to having a several suppliers instead of -- or expanding the number of suppliers. Can you speak to the state of that side of the business? And how comfortable you feel about your ability to acquire the top of appliances or replacement, et cetera, that -- and potential impacts on gross margins, short term?

Sure. And Rex can jump on the supply side as well. But yes, a few years ago, we had the Chinese steel tariff that hit us pretty hard. And we had to factor that into our forecast for gross margin. That has not left. The Biden administration has not relaxed those tariffs as far as I know. And now we've got the new issue with the steel prices rising as the auto industry rebounds, steel's in scarcity. So the prices have gone up at least 70% last time we looked from last year. So that's a factor. We're -- and on the -- as far as getting units of appliances, the OEMs are still struggling a bit to get production back to meet the demand. We think by midyear perhaps, they'll be in better shape than they are today on the appliance side. And the parts will follow that. The parts are a big issue for us because we're having to replace some appliances versus repair them because we just can't get the parts on some units. So we need both of those to get back in line with demand on the supply side. And that will be a big benefit to our gross margin. I don't know, Rex, anything else you wanted to add to that?

No, I think you're spot on.

Okay. All right. Then let's switch to Streem, which is, I think you mentioned it a couple of times already, I think it's really, really interesting. But I think on the last earnings call, you talked about integrating Streem a little more broadly, [ talk about ] your core offerings. Where does that stand right now? And what areas in particular, kind of do you think are the low-hanging fruit from that acquisition and from that integration?

Yes. I think as it relates to our internal processes, we're using it for appliances today, I think there's a much broader opportunity to go even deeper in appliances, making sure that we're leveraging Streem as much as we can. And then we have to branch out beyond appliances. And this really means creating this ecosystem with our contractors and that we have to get them excited and [ by a mile ], it's not -- I don't think it's an uphill battle, to use it throughout their business. Because to me, the real unlock here is this is the way that people should be solving diagnostic problems, whether it's a refrigerator or an HVAC system. Certainly, if you're in certain parts of the country and you're up in the attic, it's a little tough from a cell phone and lining perspective. But like that's just a technical challenge we've got to work through. And I am pushing the team hard and that we have to be at the forefront here because I frankly see our customers who use Streem doing it very well. I mean I think CLEAResult and British Gas are 2 companies that are using is well. Traeger can totally teach someone how to use their gas grill, like why in the world can we not solve the customer's problem virtually. And why can't contractors use this as the next tool. I'm sure there's a lot of people who have hesitation to use a chargeable drill when they -- their data was used when you plugged in. But now you don't see them on the job site anymore. So we think there's a cultural transformation we have to get through, but I'm 100% pushing us through that. I'd say the team is, that's not just me. And then Streem as a business is a great software play. And I think when we bought them in '19, there's a handful of people. So we've really expanded the engineering team at Streem. We are really excited. We've partnered with both Apple and Google around some of the cool features that the team has developed. And we think this will become the way people redesign their homes, place furniture and do a variety of things. We can measure the space to make sure that you -- although you maybe think you have a 36-inch range, you might have a 30-inch range, and the technology does that for you in a very helpful way. And so we're just scratching the surface on Streem's ability. I will continue to be impatient about how fast we can move and prove that out to our customers as well as our investors.

What's the revenue model today? And how do you see it evolving? Because it seems like it could be -- it could go in all the different ways. It could be a SaaS model, it could be a per transaction model, et cetera. Maybe speak to that.

Yes. I think purely, if you're just buying Streem, then it's more of a transactional model. We're morphing into an enterprise level model. And so you think of kind of a SMB play versus a true enterprise play, and that's something that we're working through with the team. But first and foremost, we got to continue to build the technology. Again, it was a handful of people that we're growing as fast as we can. Now you need to put the sales engine behind that. And I think we have some pretty marquee customers, Lowe's, Best Buy that see the value. Now it's time to put the team behind that and truly make a run of it.

And Best Buy, for instance, or Lowe's, how are they -- how are you pricing it to them?

It's enterprise contract. So kind of all-you-can-eat type contract.

All right. And in terms of costs or additional costs associated with which you need to put in Streem or even ProConnect, I think you talked about $30 million of additional investments for 2021. Brian, is that still the right number?

Yes, $30 million of OpEx between the 2 of them. Then we've got CapEx as well.

Yes. That's ProConnect and Streem, not just Streem.

Got it. Got it. Okay. All right. When you look at the competitive environment, both in the -- your subscription business and your ProConnect kind of à la carte or on-demand type of business, can you speak to how is the competitive environment evolving? So I'm thinking, would the pandemic, some of the smaller players may be kind of disadvantaged. Can you speak to the potential for you guys to -- you have a strong balance sheet, can you maybe speak to your appetite for maybe growing in that direction? And also on the ProConnect side, which, to me, seems like a lot more competitive environment, maybe you can speak to what you're seeing there in terms of either potential attractive acquisitions or just -- or is that, first and foremost, an organic growth situation?

Well, I think we continue to be inquisitive on kind of both our core business as well as our emerging businesses. What I don't want to do is just buy a book of business. I'm not sure that they'll ever pencil out. I think valuations are very high, even for companies that are struggling. We have an incredible scale advantage that we continue to widen the moat on. And one just has to look at 2020 to see how we fared in what has to be one of the most challenging years of certainly my career and maybe the century. Certainly, it dwarfed the great financial crisis of '08 and '09. So we are always opportunistic where it makes sense, especially as it relates to the home service plan businesses. For our emerging businesses, other technology plays like Streem, other software plays like Streem, are certainly attractive to us. Distribution channels for our products are also attractive. So we've looked at a variety of things. I think valuations are a little higher right now. But we'll continue to be very acquisitive. But we also -- we're trying to be a little rational in terms of -- 2 things that kill a deal are culture and synergy costs. And I just don't care to give all of our synergy costs to a buyer -- or to a seller, sorry.

So as a related question maybe for you, Brian, speak to the health of your balance sheet, maybe even capital allocation outside of M&A between stock buyback, potential dividend, et cetera. I know you're turning more into a growth story, so maybe dividend may not be something you're thinking about. But just help us understand your thinking around that. And then I have one last question for Rex.

Okay. Great. No, it's a good question. And we're a growth company, as you mentioned. And we're going to keep investing in the -- organically into the business, whether it's OpEx or CapEx, to grow it. And then as you mentioned, as Rex mentioned, we're being acquisitive and looking for opportunities, both in home services and technology platforms to invest in the business. After that, debt repayment is next on our list. And as you know, right before earnings, we paid down our term loan B by about $100 million. And we'll continue to look for opportunities to reduce our leverage. We started as a public company 4x net lever, and now we're down to 2.1x. So very pleased with the progress we've made there. So when we get beyond reducing our leverage, then we can start looking at stock buybacks or maybe even at some point doing a dividend. But right now, in our growth mode, it's sort of down the list a bit, Youssef.

Okay. All right. So Rex, anybody looking at your resume will know that or we'll see that you were at Amazon, right? You were at Lyft. You were at all companies where growth is basically the priority. You decided to step back, come here and take a leadership role. Maybe just speak to us about what really excited you most to give up the -- and you left -- I think you left Lyft maybe 1.5 years before the IPO. So that tells you something about your excitement about this platform. So maybe speak to what you saw how 3 -- almost 3 years into it, is that still exciting to you? And kind of what really excites you over the next, say, 2 to 3 years, kind of big picture?

Yes. I'm a builder at heart. If you ask me to take over something that's running well and just kind of status quo, I'd be bored to tears. I joined Amazon. That's a place you go where -- smart people go to feel bad about themselves and to -- yes, to some degree, I think that's true. You get to be a builder, right? You get to create things and build things very quickly and had a ton of fun while I was there. What attracted me to leave to go Lyft was just few times in your career when you can really be involved with transforming the industry. And I think that's what Lyft and those other guys, I'm not sure what their names are, that's what they really achieved. And I saw the same thing here, $400 billion TAM that no one's really cracked the code on. And it's -- everyone talks about, "Gosh, you wish you could have something like this." And it's where physical meets digital. Same thing in Lyft and some of the things I was doing in Amazon. So it's a hard problem, and I love hard problems, and I love the team we've built. And I think we have a real shot at really helping transform a very old industry and is something that really could be a delighter for customers.

All right. And so when you look out, is there 1 or 2 products that just you feel underappreciated and are going to basically put frontdoor on the map?

Yes. I always joke to investors, I think we make too much money to have the multiple of other people, and am I jealous? Of course, I'm jealous. But I think when you look at the sum of the parts, you look at what we're building for ProConnect, you look at the value of Streem, when you put all that together, I think we're a hell of an opportunity. And it's our job as leaders to prove that out to the public, and that's what we intend to do. I mean we're faster becoming a sustainable double-digit company. We've managed through the pandemic really well. We have a lot of cash to reinvest back in the business. And I'm very excited about what we're building and the opportunity that's ahead of us the next couple of years.

Awesome. Okay. All right. Well, unfortunately, we're out of time. So I want to thank you, Rex. I want to thank you, Brian. Thank you, Matt.

Thank you. Thanks for having us. We appreciate it.

Thank you. Take care.

Have a great day. Bye.

Bye-bye.