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

Welcome, everybody. I'm Aaron Kessler, Senior Internet Analyst at Raymond James. For our next presentation, we have Frontdoor. Presenting for Frontdoor today will be Rex Tibbens, CEO; and Brian Turcotte, CFO. Welcome, guys. And maybe to just start off, just if you want to provide a brief overview of Frontdoor and some of the key brands and maybe how the business has evolved over the last few years.

Yes. Sure. And thanks for having us. We appreciate it. Frontdoor is a company that's obsessed with taking the hassle out of home ownership, with services powered by people and enabled by technology. So it's the parent company of a couple of different brands, 4 of which are Home Service Plans brands. Our largest is American Home Shield. We also have HSA, Landmark and OneGuard as well. And then we also -- I joined the company in late 2018, and we spun out of ServiceMaster to become Frontdoor because we really saw an opportunity to really expand beyond just Home Service Plans. And so we created ProConnect, which is our on-demand offering for both home repairs and maintenance. We also acquired a company called Stream. And Stream is a technology company that really enables businesses and [indiscernible] owners to serve customers remotely through enhanced augmented reality, computer vision type of platform. The value of Stream is that now we have the ability to kind of see what the customer is seeing rather than just rolling a truck to see what's going on, which, as you can imagine, is a great ESG benefit to it. Frontdoor serves a little over 2.2 million customers. We have an incredible network of contractors who've been with us for quite some time, and majority have been with us quite some time. We -- our network is about a little over 17,500 contractor firms. That's usually equals somewhere north of 60,000 technicians. And we only primarily focus on the skilled trade. So that's appliance, HVAC, plumbing, electric, pool, spa, et cetera. And our value proposition is really twofold. One is to -- one is budget protection for customers. And the second one is convenience or peace of mind. So first, I think, is somewhat self-explanatory. People are not -- when they're trying to shield themselves from any kind of unforeseen large repairs, this -- our products certainly help them with that. And then from a convenience peace of mind perspective, when you do have something that goes wrong, do you want to do all the Google searches and try to get someone to come out and service it or you have to go to one-stop shop like Frontdoor, where we can help kind of quarter back your repair or your maintenance service. We founded the industry in 1971 in California. So we've been around for about 50 years. And obviously, we handle a little over 4 million annual service requests. So quite a large company that's -- it's been growing nicely.

Thank you, Rex. And maybe just on the -- sorry, there is some tree cutting, I think, behind me, but I'll put it back on mute in a minute. The -- when you think about the unit growth for kind of the core home working business, that's been, I guess, flattish over the last year or so, seen nice pricing growth as you rolled out more dynamic pricing, et cetera. But how should investors think about, maybe some of the headwinds you've seen on the unit growth side? And then kind of what are the plans to maybe reaccelerate the core business as well over the next couple of years?

Yes. I think you kind of take a step back, I think, about the chronology of -- since we've become a public company. Certainly, 2019 was about a lot of kind of foundational things we need to do for the company to kind of get us ready for growth, certainly managing the company by the inputs. So we really understand our cost drivers, if you will. And then we need some other structural things like dynamic pricing. In the past, we've kind of priced all of our contracts on a statewide basis. And you can imagine that the deviation or even standard deviation between repairing something in San Francisco versus Stockton was demonstrably different, right? So a lot of the block and tackling for 2019. And then we really started to grow. We saw a big opportunity in direct-to-consumer, and that's where we focused our efforts. And then obviously, a great quarter, first quarter of 2020 and then the pandemic happened. And even in the pandemic, I argue we've grown very well with, I think, significant challenges from a supply chain perspective and other things. So we've continued to -- we really think our growth areas are in direct-to-consumer. And as we continue to make the experience better and better, we're looking forward to even higher retention rates as well. We think that real estate is still somewhat market-driven. That's why we're really focused on direct-to-consumer and certainly, I'm sure they'll be other questions around direct-to-consumer have to go into that now or later.

Yes. You want to go into direct-to-consumer, too. You saw a pretty nice growth throughout 2020. It sounds like advertising rates have gone up a bit in 2021. So you've got to pull back a little bit on that. How should we think about kind of D2C growth going forward?

Yes. We think that kind of going forward into next year, we were expecting double-digit growth as it relates to direct-to-consumer. So we've rebuilt our e-comm platform from a conversion perspective. We've launched a pretty -- we think it's pretty cool set of products around this kind of good, better, best strategy. So Shield Silver, Shield Gold and Shield Platinum with Platinum now actually having a little better take rate than we even thought it would because we think customers are looking for a nice blend of not just Home Service Plan protection but also services. So Shield Platinum is our most expensive product, but it also has higher levels of coverage as HVAC tune up. So as blended services within the protection plan, if you will. And we think that those are the type of services that will continue to propel us forward. So from a direct-to-consumer perspective, even though ad rates are kind of back to where we thought or certainly a little higher than last quarter, but we've kind of adjusted our portfolio. We're converting at the levels that we expect. So we think that some of our headwinds from last couple of quarters are behind us, and we're bullish on double-digit growth for next year. I think you'll see it in price in the beginning and then you'll see pricing mix -- or sorry, pricing units towards the back half of the year.

Got it. Great. And then maybe I know one of your kind of 2021 objective was kind of increasing automation. Can you just give us an update on some of the automation initiatives such as kind of your web-based appliance, purchasing portal, your mobile first contractor portal, integrating system with vendors as well as expanded use of Stream as well.

Yes. We -- so we still think there's a lot of opportunity from an automation perspective. Last year, it was about kind of focusing on some of the foundational places where we can automate. So you mentioned some, certainly, the -- it was a major pain point for customers when you're going to replace their appliance. You think, oh, that's a great -- certainly a great value proposition, but the process of going through was a little painful. So we've created like almost an online shopping, if you will, where we let them know here's what's covered under the plan. But for some people, there's a great opportunity to upgrade. So maybe you have a stainless steel stove, but your refrigerator was still 1960s avocado green, right? So this gives you an opportunity, if you want to upgrade to stainless to match your other appliances, you have an opportunity. And the customers seem to really enjoy the simplicity of that as well as having the choice. And then for our contractors, certainly, a big part of what we do, we wanted to build a portal where it was a lot easier for them to provide information back to us in a more automated way through our contractor portal. And then from a further automation perspective, I think there's still a lot of opportunity, obviously, from a self-service perspective, we're going much deeper for Stream. We've pushed hard this year for Stream for appliances. I think you'll see us go even deeper next year. And then you can do everything you want online today through my account, but we think there's an opportunity to create an application where it's even easier for our members to interact with us, whether that's through Stream or other mechanisms from a self-service perspective. So I think you'll see more self-service options into next year as well. And then as it relates to contractors, I still think there's an opportunity to further automate things like how we do authorizations for our contractors to the faster we kind of get through those series of questions and understanding kind of what's truly wrong. It gives us an opportunity to leverage our scale from a parts perspective but also show lower cycle time for customers because it's getting those signals much faster and we're able to process things much faster.

Got it. Great. And then maybe if we could spend a few minutes on just ProConnect, give us an overview of kind of where you're at now with ProConnect kind of the growth initiatives over the next year and how we should be thinking about this business over the next maybe 5 years?

Yes. So ProConnect continues to scale. I've been very pleased in the last couple of months. We're still seeing growth. We're committed to our revenue target for this year of $20 million. Still we have reaffirmed guidance last -- during our last earnings call. We don't see it's going to certainly change that. And then I think in terms of expectation, the year before is really about landing on the model. This year is really about beginning to see scale from the model. And then for next year, it's really a land and expand, if you will. I want to make sure we get all of our core skill trades into our 35 markets. We're looking to see good repeat business from our current customers who use ProConnect, certainly as you begin to see that, and that lowers your customer acquisition costs, which allows you to turn the flywheel faster, if you will. I think that we need to create more leads. I think from a supply-demand perspective, we're starting to kind of see the balance within the markets. Certainly, as you start markets, it takes a little while to ramp up from a -- if you put too much money into rate leads and you don't have the supply, then you're just spending money for lead, right? So I think there's a great opportunity to continue to expand in those areas. And then we're excited about the cross-sell opportunities that we have for our existing AHS customers. HVAC tuneups, for example, has been a big win for us this year. I think you'll see us go further in maintenance services for next year for knowing ProConnect customers, but offering ProConnect to our existing customers for things that may not be covered in their Home Service Plan. So all systems go, I think next year is really a telling year for us in terms of making sure that we can begin to really see the scale of the business.

Yes. And what would you -- I think you kind of shifted some of the marketing to more of your internal platforms over the last year. When should we expect kind of the ProConnect maybe a little more aggressive on the marketing side? Would that be in 2022? Is that you think '23 initiative as well?

Yes. I mean, certainly, our growth plans, we plan to double the business next year, so that will definitely require marketing to do that. The thing for us is to make sure that we're growing responsibly. And what I mean by that is if we were a peer start-up, it would just be about the top line number and certainly not worried about the bottom line number. I think we have an opportunity to grow in the right way, if you will. And so certainly, next year requires more marketing investment for ProConnect and frankly, more marketing investment for our overall business. That's the kind of the business that we're in. So you should definitely expect growth from an advertising perspective for sure.

Yes. And just can you maybe talk a little bit from a competitive standpoint with ProConnect. And who else are you seeing or are you seeing a lot of other players start to shift to more of a fixed price model as well?

Yes. Certainly, for some items like appliance repair, fixed prices is something that I think is -- we kind of launched with. But for other things, HVAC, for example, it's probably still going to be more kind of an upfront diagnostic fee because you just don't really know, right? So it still requires -- that's why we're in the skilled trades or require some skill and some experience to understand what's truly going on. That said, I think there is opportunity for more skewed services with our small acquisitions that we made early on, we have carpet cleaning, and that's certainly an area that's easy to skew, especially with leverage stream to measure rooms, for example. And so I think that's an area where we can continue to skew. So kind of those pinpoint maintenance services, I think our opportunity. But when it comes to true repair, it's probably going to be a blend of upfront versus diagnostic.

Yes. And so to that point, when investors think about coming to the value proposition of ProConnect for consumers, I think the original view is maybe it's about being fixed price, but it's kind of fixed price, but it's also being able to not have to search and contact various service professionals and interview them, which could be very time consuming.

Right. The whole model is we want to be the quarterback of the problem, right? So back to our vision of taking the hassle out of homeownership. We want to be the one-stop shop, where we are able to assess things, hopefully remotely via Stream and then provide you with feedback on here is what we think it's going to take to solve the hassle in your home.

Great. Got it. And then obviously, another key topic. I think you addressed this on the last call, but just maybe provide an update on kind of parts or appliance or parts shortages, labor challenges. Just any updates there on what you're seeing in the market?

Yes. Well, Brian and team have done an acceptable job around parts. I'll let him cover that aspect. But as it relates to labor, certainly, it's a tight labor market and one of the advantages that I think we have over our competitors is we're 4x larger than our closest competitor. I think we truly have scale. And one of the things we've really focused on in the last 2 years is our preferred contractors. We've actually grown our percent to preferred year-over-year from the last 2 years and pandemic has been hard from a labor perspective. So certainly, on the fringes for some of our network contractors, we don't use them that much. The labor market is tight. We've seen from an office perspective for office health, that type of thing for our contractors, it's hard for them. And for some, it's hard getting kind of the entry journey mid-level contractors. But we, again, focused very much on the preferred, and I think we've been able to nicely shield ourselves from that. But certainly, it's a problem, but I think we've addressed it pretty well. As it relates to parts, I'll turn it over to Brian to provide some additional color around that.

Thanks, Rex, and thanks, Aaron, for the question. Yes, you can't open the Wall Street Journal today or turn on CNBC without hearing about the global supply chain issue and the impact on inflation across the globe. So as Rex said, our strategic sourcing team has done a masterful job in 2021 on mitigating a significant portion of the market increases, whether through negotiating with vendors, diversification of our vendors and process improvements. So I think we've done better than most in our industry in that area, whether it relates to finding parts and equipment and prices for parts and equipment. But we know this is going to continue into 2022 and our efforts will continue around the same themes of expanding our supply base aggressively, negotiating pricing and also opportunistically moving volume around between our vendors to get the best price and service. So we'll continue to monitor the global economy as we get into 2022, but it looks like inflation is going to be here for a while.

Yes. Great. Thanks for that. And maybe another question for Brian. Maybe on capital allocation. Investors have been asking me with the stock down, how should we think about potential for increased buybacks as well as how you're thinking about potential M&A? Obviously, you guys have a nice cash flow business.

Yes, great question. I think we've been very fairly consistent since our Investor Day in September of 2018, where Rex and I talked about our priorities for capital allocation being investing for growth, whether organically or inorganically. And we've been looking for acquisition opportunities and at the right price and make strategic sense and that will continue. We've talked about putting in a more prudent debt structure for the long term. We did that. Matt, David and team did a great job on refinancing our debt and paying down $350 million of the debt that we had at spin. So check the box there. And after we got that done, we moved on to returning cash to shareholders in the term of share buybacks, and we announced that 3-year $400 million share buyback program, which we started, I believe, in September continued through the end of the year, then in the next couple of years, we'll finish that off. So I think we're doing a pretty good job of capital allocation at this point and we continue to buy back shares as we go forward.

Great. Great. Any other things we may think are misunderstood by investors and maybe underappreciated at this point?

From my perspective, and Brian feel free to chime in as well, I think you got to remember, this is a very -- you mentioned it, Aaron, it's a very strong cash flow business. Even in, I think, some pretty amazing times of the pandemic, we've had strong single-digit growth. I think that, certainly, as Brian mentioned, inflation is real, but it's real this year as well. And I think to uses terms, the team's done a masterful job of kind of working through that. We've got some of our best margins, EBITDA margins as a company. So we had record net income, record EBITDA and some pretty challenging times, right? That said, we still even working through that. We delivered on our revenue target of $20 million for ProConnect. We still see that. That's a very viable business going forward. And then we've been very focused on -- as we work through some of the supply chain challenges, really reigniting the customer experience from a digital perspective. So we've made some incredible adds to our team to help us from that perspective as well as ProConnect. And so I think that given all those things, we remain very confident in our business. We think our vision is as strong as ever, and we think that this is a great asset.

Great. I think that is all my questions. I appreciate the time today, Brian and Rex, and everyone, have a good rest of your day, and we'll talk to you soon. Thank you so much.

Thanks for having us. Take care.

Thank you.