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

Good afternoon, everyone. Before we get started, if you are a member of the press or media, please disconnect at this time. This is a restricted line. Any unauthorized party in this meeting or any unauthorized use of the information communicated in this meeting is subject to prosecution to the fullest.

Good afternoon. Welcome to Wells Fargo's TMT Summit. I'm Brian Fitzgerald from the Internet research team. We're very happy to have Frontdoor with the CEO, Rex Tibbens; and CFO, Brian Turcotte. Guys, thanks for being here.

Thanks for having us.

It's my pleasure.

So I want to start at a really high level with some kind of big picture questions about the market opportunity as you see it today. Rex, maybe going back to the spin-off, we remember some data about home services penetration and really showing strength across the South, Southwest, a little more limited penetration in Northeast and the Midwest. Wondering if you could walk us through some of the historical reasons for that and these penetration differences across the country and maybe the opportunity to bring those category penetration levels close to parity nationwide.

Yes. So we founded the business in 1971 in California and kind of grew across the, what we call the smile states, the warmer weather states, if you will. And that's where the business had traditionally had operated. As we spun the company has made broader investments in our direct-to-consumer, but prior it was mainly focused on first year real estate. But as we made those investments in direct-to-consumer, we are -- we have been growing across the country. We still think there's plenty of opportunity as it relates to both California and the Smile states. But we've seen good penetration in the Pacific Northwest, for example, in Ohio and Pennsylvania. So direct-to-consumer is really giving us the opportunity to continue to expand nationwide. And we continue to operate in, in all 50 states. So this has been a good opportunity for us, but we -- where we continue to grow not only in the smile states but nationwide as well.

Got it. And then you more recently talked about the core of the business today being in home repair, extending into home maintenance, but even touching upon home improvement over time, not to get ahead of ourselves, but could you share any preliminary thoughts in terms of how you might address this opportunity? Is lead gen a model that potentially interests you in terms of addressing that opportunity over time?

Yes. Well, if you look at the broader market, roughly $400 billion total addressable market, about half of that is home improvement and roughly a quarter for repair, a quarter for home maintenance. We think that roughly $200 billion TAM for home repair and home maintenance is really are sweet spot in the beginning. One of the things that I've noticed when I first joined the company was we -- the same skilled trades that are hard to get, whether that's HVAC, plumbing, electric, appliance, et cetera, are ubiquitous across all those categories. And so we have permission to play and repair. We're moving into maintenance. And then certainly, longer term, we'd want to look at home improvement as well. I think that for both ProConnect as well as our Streem acquisition, Streem really allows us, if you look at what we're doing for Lowe's -- for Pros, for example. We have a real opportunity to kind of help customers see their spaces in much different ways through that kind of augmented reality whether that's you're doing home improvement or home repair. So I think as that technology gets better and better and as we continue to grow, then that will be entree into home improvement. But for now, we're solely focused on repair and maintenance services.

The Streem acquisition I always saw was really compelling. And I'm going to do it yourself or myself, and I saw the value of, hey, if you can put an audio-visual device, it's always hand and they can holding up to the refrigerator and understand that, let the service man or let the -- do it yourself or understand, hey, it's a fan blade that's broken versus a compressor that meters out all kinds of efficiencies in truck rolls, in servicing and to your point, in home improvement and [DIY].

Yes, not to mention an incredible ESG benefit for the future as well.

Yes, yes. Thanks for bringing it up. Yes, true. Maybe a little back to what you're seeing in the business to say, starting with the real estate channel, you talked about ongoing challenges there, likely continuing for a bit. But you don't own have the offense from a marketing and [indiscernible] perspective there. The new campaigns in the D2C channel, specifically speaking to the new homebuyer. I know it's early days, but what are you seeing in terms of any green shoots there?

Certainly, early days, as you said. We are seeing those programs to be successful, albeit they're small, right? So it's going to take time -- time to grow it. But certainly in an environment where people are waiving inspections and all contingencies, I think there's a real opportunity to market to those folks once they -- the newness of winning the house, so to speak, wears off. So we think there's still a lot of opportunity there, and we now have much better data models to kind of go after that segment who just bought the home and didn't leverage a home service plan through a realtor. So again, early days, but I think you started to pay dividends. We're also are the core real estate brokers where we continue to reinforce the value proposition but by no means is the segment dead, so to speak. There's still a lot of opportunity there. And then as I talked about on the call, I do think that even though we're in -- all 10 of the top 10 realty firms when you see market conditions like this, it's pretty clear we need more distribution channels. And we think there's a great strategic partnership opportunity outside of just traditional brokerages and going deeper into mortgage title and then other adjacencies in the real estate space as well.

On the partner side there, you're leaning in the partnerships on the brokerage side and then also a channel campaign aimed at highlighting the value proposition. But there are some limits in terms of how much you can do at the individual agent level. Is there anything you can highlight for them on how the home service plan can get a buyer across the finish line in terms of making a bid or how a home service plan increases post sales satisfaction among buying customers?

Yes. Well, you're right. From a RESPA perspective, we can't directly incent a realtor as it relates to selling our product. We partner with the brokerage firms. But also it's about really focusing on the value proposition for both buyers and sellers. So we work a lot with our realty firms around from a seller's perspective. The home service plan really helps enhance the listing. So for those who are budget conscious, this is their first home and especially in this market where they'll probably be paying more than they thought they'd be paying, that's really, I think, will enhance the listing. If you're a buyer kind of the same thing, kind of post closing, any concerns you have around unexpected costs that might be heightened in that first year or 2 when you first buy your home. So it's really making sure they understand the value propositions of budget protection and convenience or peace of mind is one of the things that we really focus on. And then we think we -- or if we continue -- we think we continue to work with realty firms to understand any product gaps, anything that can help sell the product more. And that's really led to moving into our kind of good, better, best strategy for a direct consumer, which will also be translating to real estate. And so some of our higher-end products like Shield Platinum provides additional value for customers around things like maintenance services of an HVAC tune-up, for example. So I think as we focus more on the value proposition, we focus more on making sure the breadth of our products really speak to those customers that will certainly help us in the future.

Got it, got it. From a competitive perspective, how do you help build preference for your products versus competitors when you're up against the title insurer that, that agent might have as a preexisting relationship with?

Yes. As I mentioned before, it's really about education for the brokerage firms. We also -- we're 4x larger than our closest competitor. So it's about breadth of coverage. It's about scale. It's about the surety of kind of the claims that we do pay, all those things kind of go back to the reputation of the firm who's selling it, right? So we think that we have a strong position with our realty partnerships for that value proposition and sheer ability to take care of their customers. So I think in the competitive market, we feel like we're best positioned to win, but we're not resting on laurels. So that's why we're excited about kind of the mixing both home service plans and services together and things like our Shield Platinum, where we're covering more things for customers. We have higher levels of coverage, those type of things. Those are all comes from feedback from not only our customers but from our realty partners as well.

So you mentioned going beyond the traditional brokers. You've had success with Mr. Cooper. Any other potential touch points you could tap into? How significant do you think that alternative channel could become for you guys?

Well, certainly, to grow, you need new distribution channels. And so we are very focused on growing in kind of the areas I laid out earlier. We think that this provides kind of protection from any -- the market uncertainty that we've seen over the last year or so. But also these additional partnerships should just give you access to larger groups of your customers or certainly distribution channels. So we continue to be focused in this area, and we think this is certainly a growth lever for us. But any time you're doing partnerships, these things take time and would expect us to be our key growth area for next year. But certainly, over time, it should add to our portfolio.

We're wondering if there might be a silver lining in terms of improved retention when it's the home buyer making the home service plan purchase. As you go for that first renewal, are you seeing some kind of mixed benefits on retention rates? But just given that it's more likely to have been the home buyer purchasing the product. You have a loyalship already there. And it was more likely that it was a conscious decision of that homeowners part.

Yes. I think you're right there, Brian. Certainly, when you look at first year retention, from a first-year real estate perspective, it's roughly 27%. It's roughly 76% for first year direct-to-consumer. So as you see kind of this dramatic shift from a mix perspective, that should give us tailwinds by having that direct relationship with the customer. Keep in mind that retention is on a trailing 12-month basis, so it's not overnight. But certainly, we're expecting that to take dividends going into 2022. It's also -- these are the customers who use our product the most. And as we've said before, when people use our product, it becomes stickier. And so we think that these are higher LTV customers, and we expect tailwinds from that. As it relates to retention overall, we also expect supply-chain to continue to get better. And all the things that we've been working on for the last 12 to 18 months should help pay dividends into 2022.

Got it. To the direct-to-consumer business, you've highlighted some challenges there on. Can you give us an update on what we're seeing there? And then I want to get a sense for -- there's reasons why there's comp issues there. Consumers have a lot of buying -- a lot of people buying for their attention. So maybe that's part of it, maybe it's part of the reopening. Could you unpack some of that for us what's going on in the direct-to-consumer business?

Yes. So as I talked about on earnings call, the choppiness really was a little higher than normal. We saw a search demand was lower than we expected, and our advising costs were a little higher than we expected. Certainly, we've -- as we diversified our portfolio to make sure that we're aware of those issues and so we think that's behind us. And the other 2 things were totally internal. One was we transitioned to kind of this good, better, best strategy as it relates to our products and our first year direct-to-consumer. And any time you have a major product launch, it takes some time to kind of get off the ground. And we didn't see the level of conversion that we expected to see. And so we retrained some of our -- our both inbound, outbound sales teams. And then we saw that conversion come back. And so we think that's certainly behind us. And the other thing is we've been on a journey here at Frontdoor of a technical journey and operational journey and a cultural journey as it relates to transformation. And as we rebuild some of our systems, one of the areas that we really felt the need to rebuild for the future was our e-commerce platform. And frankly, it didn't perform the way that we expected it to. And so it took a little more tweaking over last quarter to get back to the conversion levels that we expected. We continue to operate at those conversion levels. So again, we think all these kind of both macro as well as micro things that hit us last quarter are behind us. And we're very much committed to delivering double-digit growth for the direct consumer channel in 2022.

And Rex and maybe Brian, to the point that the D2C challenges are largely behind you. What's the line of sight to D2C helping to drive the overall high single-digit revenue growth in '22 and beyond as kind of you're dipping down into mid-single digits for the fourth quarter, we're kind of troughed out. That's what I'm trying to get a sense for.

Yes. Well, as it relates to next year, certainly, we can't go into too much detail. But I think how I would think about it is if direct consumer continues to deliver sustained double-digit growth, we continue to look for ways to grow the real estate channel, whether it be naturally or through other partnerships, we need to see higher growth rates there to get closer to direct consumer. And then 2/3 of our revenue is renewals. And so from a real perspective, as we make -- continue to make changes from a service experience perspective, we see supply chain gets better, we expect that will help us from a renewal perspective as well. All those factors played into the kind of high single-digit guidance for next year. And it was early, so we wanted to give that guidance, and we continue to -- we'll continue to look at that and provide more feedback on our next earnings call.

Got it, got it. Very good. Wanted to shift over to ProConnect. It sounds like you're performing largely plan in '21, but you did note some challenges, scaling, your plumbing and electrical expansions. Anything more you could tell us about what's going on with ProConnect? What's going on with the category expansions? And we assume you mean scaling the supply side of the equation, but correct us if we're wrong there? Rex, do we reach you? Brian, we might have lost Rex?

Yes, He'll log back in. You want to shift to supply chain while we're waiting and -- or something I can answer for you?

Yes, yes. Going back to the environment we're in right now, inflation is certainly a factor. You called out some of the pressures around inputs. I think there was an example of a water heater where the price had increased 6x over the course of '21. I had 2 of my water heaters go and it was astounding. There was no supply and the price I had the pay. So yes, anything you could share with us a big picture on the rates of increases you're seeing on appliances, parts, labor, yes, for sure?

Sure. And I'm sure, Rex is logging back in. If not I can try to answer some of the other questions as well, if you like. But yes, you look at the global economy, inflation in raw materials, whether it be metals, I've mentioned steel and copper, some resins, transportation, labor is really unprecedented in the last few decades, something I don't think I've ever seen in my career. And we've done a better job than most in our industry of mitigating these inflationary impacts. But if the pressure continues for our suppliers, they'll continue to pass -- try to pass costs on to us. And we'll continue to try to do our best to mitigate them. And the hot water heater example is a great example. They've had raw material increases and labor increases and transportation cost increases. And they raised prices 6x in '21, which is again something we've never seen. But again, they're trying to pass along their inflationary costs. Appliance is a little different. We've done a much better job there, I think, of mitigating costs. But if commodities stay where they are, I think the appliance, OEMs will continue to try to push cost pressures or cost price increases through cost pressure for us. So that probably will continue until I don't have a good line of sight. But hopefully, as we get into the mid-part of next year, things begin to come down a bit.

And then you've done a really good job offsetting some of those increases with strategic -- the strategic sourcing team and improved pricing realization. Any thoughts on how much runway you have there in terms of offsetting the inflation?

Yes, we're going to continue to do what we've been doing. We're going to -- the same things as '21 for '22. We're going to keep expanding our supply base. So we're not dependent on a few large suppliers. We're going to negotiate price very aggressively with them and shift our volume around as we need to, to the lowest-priced vendor like we did this year. So that will be -- thematically that will continue into next year. And we're pretty good at it. And again, we're going to monitor this global economy regarding inflation and just keep doing the best we can to push the cost aside as much as we can.

Got it, got it. And remind us, you have done -- as I recall, you have done some price increases in the past, they were and they were sticky. To what extent is the consumer also making more? And how elastic is the consumer to these pricing shocks?

Yes. We -- our pricing team is very good at what they do, and they're able to really measure and test into the elasticities. And through dynamic pricing, we have found that we've been able to increase prices without affecting units to a significant degree. Now you want to bump up against that point where you begin to lose customers. And I think we've done a really good job of that. We'll continue to do that with dynamic pricing.

Got it, got it. Maybe I wanted to drill down on a couple of broader facets of the business. Could you give us an update of where you are today in terms of digital commerce and service delivery? Any key milestones or targets there in terms of how the business is shifting more digital?

I would love to answer, but I think Rex would do a better job than I would with that one.

Sorry, I lost power and never fails as you lose power at the terrible time. Sorry, Brian, can you repeat the question?

Yes, yes. I want to get an update on where you are today in terms of digital commerce and service delivery, key milestones and targets? And then any thoughts you could share on how digital services delivery could ultimately will improve the economics of the business with respect to ProConnect?

Yes. Well -- sorry, how ProConnect can help the business or how moving to be more digital first can help the overall business?

Let's talk digital first, then ProConnect.

Sure. So from a digital perspective, if you think about trying to move the company into really being truly digital first, one thing to point out, I think, in the last call, we talked about, this coming year we want to create an app. That doesn't mean that we -- you can't today fully digitally self-serve on like American Home Shield, for example, our MyAccount allows you to do that. You can kind of go over the entire service delivery process virtually. So we -- as we move into that kind of digitization, we've made some significant both improvements as well as enhancements to things like my accounts, so you can request service. For our contractors, we've built a whole new contractor portal to make their lives easier as it relates to working with us. And hopefully, the byproduct of that is a faster cycle time for customers. As it relates to replacements, we're giving the customer shopping experience, if you will, for replacement, so they understand the value of what they get for their home service plan. So the next really evolution of all that is one thing we're going to focus on for next year is continuing to automate some of our authorizations processes, which, again, helps contractors allows us to, to really kind of machine learn, if you will, on some of our highest cost areas. And again, it should be a better experience for customers. So as we move closer and closer to being digital first, those are all things that allow you to, one, get a lot more data from the business, a lot more machine learning and automation, all things that as we started the company, we really didn't have. And then as it relates to ProConnect, the value of having this kind of ecosystem where -- now we understand who our customer is and kind of the services they need. Now ProConnect allows you to provide a lot of those services, whether they're -- to a customer who has a home service plan or not. And so we think that, again, as we focus on both maintenance and repair, there's a big opportunity to continue to digitize the business that flows into our ability to kind of turn the flywheel, if you will, for ProConnect.

On ProConnect, the plan to go a little bit slower in '22 there, a little slower than original expectation. Is that primarily a supply side issue , conversion optimization issue, a consumer repeat issue? What prevents that from going faster without investing more than you had originally planned through?

I think we still have the opportunity to go faster. What I want to do is to take a step back. And there's some things that we want to really see for this year as we get into higher scale. And one of the things that I was really pleased to see with our appliance business, for example, which is where we started is kind of this mid-single-digit repeat rate. So -- and what I mean by that is the customer uses you once for an appliance repair, they come back a second time. So as you add to the breadth of your portfolio, so adding plumbing and electric appliances, HVAC in some areas as well, now you have an opportunity for the customer using multiple times, that lowers your overall customer acquisition costs, which allows us to continue to invest more from a demand generation perspective. It's a little slower start as it relates to launching plumbing, electric. We've added a new member to the team, a new general manager to continue to drive growth. He comes from Uber -- Uber Eats. So very familiar with marketplace businesses and kind of launching markets, if you will. So all these things, I think, will help us continue to propel the business. So it's more about rather than trying to overspend to hit a number, so taking a truly a startup approach. I thought we could be a little more -- a little less aggressive on the capital spend, a little more aggressive on making sure that all the operational elements were in place to continue to turn the flywheel faster. Because the ultimate goal here is to expand into further cities and to make it a really viable business. So that was really the strategy for next year.

Got it. And last quick one, we're out of time, but a quick one on ProConnect home maintenance cross-sell opportunity through the app. How do you think about that today?

Well, irrespective of an app, the cross-sell opportunity is we have over 2.2 million customers. And so as we continue to expand into services, even things like carpet clean, those are all things tha are included in your home service plan. So it's a great opportunity, again, as we think about kind of lowering our costs, to market to a base that we already have, right? So carpet cleaning and then other maintenance services, we have HVAC tuneups, for example, was a winner this year, all that kind of things around the home that you know you should -- you need to do, but you'll have time to do. We think there's a real opportunity for our customers. And then from an additional cross-sell opportunity, as we continue to attract ProConnect customers, once they use the product a couple of times, that's another great cross-sell opportunity to then let them know that we have a subscription service and a home service plan that could fit their needs where we could take away that hassle, if you will, from a convenience perspective.

Got it, got it. Rex and Brian, we're past the stop time. So I really appreciate you guys joining us today. Thank you for the very insightful thoughts and comments.

Yes. Apologies for the power outage in the middle of that.

No worries at all.

Thanks, Brian.

Thank you, guys.

My pleasure.

Bye.