Frontdoor Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 4, 2024

There are 9 speakers on the call.

Operator

Ladies and gentlemen, welcome to Frontdoor's Third Quarter 2024 Earnings Call. Today's call is being recorded and broadcast on the Internet. Beginning today's call is Matt Davis, Vice President of Investor Relations and Treasurer, and he will introduce the other speakers on the call. At this time, we'll begin today's call. Please go ahead, Mr.

Operator

Davis.

Speaker 1

Thank you, operator. Good morning, everyone, and thank you for joining Frontdoor's Q3 2024 Earnings Conference Call. And a special thank you for joining the Monday before the election. Joining me today are Frontdoor's Chairman and Chief Executive Officer, Bill Cobb and Frontdoor's Chief Financial Officer, Jessica Ross. The press release and slide presentation that will be used during today's call can be found on the Investor Relations section of Frontdoor's website, which is located at investors.

Speaker 1

Frontdoorhome.com. There is also additional detail about our Frontdoor brand at frontdoor.com and in our new mobile app that you can download in the App Store and at Google Play. As stated on Slide 3 of the presentation, I'd like to remind you that this call and webcast may contain forward looking statements. These statements are subject to various risks and uncertainties, which could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the company's filings with the SEC.

Speaker 1

Please refer to the Risk Factors section in our filings for a more detailed discussion of our forward looking statements and the risks and uncertainties related to such statements. All forward looking statements are made as of today, November 4, and except as required by law, the company undertakes no obligation to update any forward looking statements whether as a result of new information, future events or otherwise. We will also reference certain non GAAP financial measures throughout today's call. We have included definitions of these terms and reconciliations of these non GAAP financial measures to their most comparable GAAP financial measures in our press release and the appendix to the presentation in order to better assist you in understanding our financial performance. I will now turn the call over to Bill Cobb for opening comments.

Speaker 1

Bill?

Speaker 2

Thanks, Matt Davis, and good morning, everyone. I want to start by highlighting our dramatic improvement over the last 2 plus years. When I came into the business in 2022, our gross margins were at an all time low of 43%. That has changed. Today, we are increasing our 2024 gross margin outlook to about 53%, an all time high.

Speaker 2

Not many companies can show an over 1,000 basis point margin improvement in such a short timeframe. Turning to Slide 5, we delivered record financial performance in the 3rd quarter. Revenue increased 3% to $540,000,000 Gross profit margin expanded 5.50 basis points to 57%. Net income grew 40% to $100,000,000 Adjusted EBITDA grew 29 percent to $165,000,000 and we have used $119,000,000 to repurchase 3,200,000 shares year to date through August. And probably the best news of all, as we will show you shortly, our marketing and discounting efforts are working.

Speaker 2

The DTC customer count actually grew in the Q3 versus the Q2, and we are now forecasting that our ending 20 24 DTC customer count will be in line with a year ago. This is the progress we have been working toward. While we are very pleased with the recent trajectory of the DTC business, growing our home warranty customer base continues to be our number one strategic priority. Our other key strategic priorities are to expand our on demand business and to close the acquisition of 210 Home Buyers Warranty. Speaking of the acquisition, our integration team continues to work with 210 to prepare for a smooth transition.

Speaker 2

The regulatory approval process is nearing completion and we are now just waiting for approval from California. Bottom line, the acquisition remains on track to close in the Q4. Okay. So here's how I'm going to lay out the next few minutes. First, I'm going to discuss what's happening with home warranties in both the real estate and DTC channels, followed by our momentum in on demand, then renewals, and finally a major milestone in our customer experience journey, the new AHS app.

Speaker 2

Starting with real estate, the market continues to flounder. According to the September report from the National Association of Realtors or NAR, the annual run rate of home sales decreased to 3,800,000 homes, the lowest in 14 years. Additionally, mortgage rates and home prices remain elevated. Simply put, with fewer homes being sold, there are fewer opportunities to attach a home warranty. For some context, our 1st year real estate customer count is down almost 14% in the Q3 versus the prior year and down more than half from 5 years ago.

Speaker 2

But there is some positive momentum, some positive movement. Existing home inventory is rising. Now at 4.3 months of supply, which is the highest it's been in the last 4 years. Further, mortgage rates are down from a year ago. Finally, American Home Shield has continued to maintain its category leading share of warranties attached to home purchases.

Speaker 2

Turning to Slide 11 and the direct to consumer channel. Let's start with the performance of the marketing campaign. In short, it is working. For starters, we have significantly grown AHS aided brand awareness. It's jumped from 39% in 2022 to over 54% today due to the brand relaunch and marketing campaign.

Speaker 2

Ad awareness is also up. Recent research shows that about 40% of homeowners now recognize at least 1 of the 3 warrantina TV spots. In a crowded media space, that's a very good number. Google searches for AHS are also up year over year, but I need to make a key point here. There has been some confusion that searches are down according to Google Trends.

Speaker 2

Let me provide some clarity. Google Trends is a snapshot of how popular your search term is relative to all search terms. It is not representative of a specific brand's performance over time. Even Google says, you should not use Google Trends for insights or predictive analytics. So the fact is, Google searches for AHS are actually up through September.

Speaker 2

How do we know that? We get our information directly from Google and we certainly do pay for that. This information represents true volume over time and is much more brand specific, accurate and comprehensive. So to be clear, the 1st year of the campaign has been successful. As we move forward into the 2nd phase of the AHS marketing campaign, we will continue to build brand awareness in 2025 through a more focused and targeted approach that builds consideration and grows leads.

Speaker 2

We will share these plans in much more detail at our Investor Day in New York on February 27. We are also optimizing our price discounting strategy. This is what smart brands do. In times of market softness, brands must adjust to changing consumer behavior. To be clear, we are not relying solely on aggressive discounting.

Speaker 2

We understand it's not a long term strategy, but it's where we are seeing strong demand and conversion. In summary, within the DTC channel, awareness is up, brand searches are up, demand and conversion are up, and our customer count is up. Again, this is what we have been working toward. Now let me step away from our traditional home warranty business and talk about our on demand business. We expect to generate over $100,000,000 in on demand revenue this year, primarily due to our new HVAC program, which continues to deliver great results.

Speaker 2

Regarding our new partnership with sorry, Moen, as announced in our press release last week, we are currently expanding that business to 7 additional states. In addition to California, Frontdoor will soon be the exclusive installer of Moen Smart Shutoff Valves in Idaho, Arizona, Utah, Oregon, Texas, Georgia and South Carolina. We are also making excellent progress on marketing DCC home warranties to different demographics and channels of distribution. AARP is a great example of an alternative way to go to market. By targeting different segments of their membership, we have been able to grow unit sales with AARP by 25% year over year.

Speaker 2

Now turning to renewals, this continues to be a great story for us. Retention rates in the Q3 improved 150 basis points to a record high of 77.7%. That is amazing. While channel mix shift is the primary driver, this improvement is also the result of a lot of tremendous work by our team, improving customer service, expanding use of preferred contractors, getting more members on autopay and increasing member engagement throughout the customer journey. Finally, one of the things I'm most excited about is the progress we're making on enhancing our customer experience.

Speaker 2

In a major milestone, we launched an AHS app a few days ago. This is a big deal and we will make our formal public announcement on Thursday. With easy convenience service right at their fingertips, our members can now quickly access their account and plan information, make and track their service requests, take advantage of special offers and manage their payment information, all through the convenience of their phone. We will have additional enhancements to the app over the coming months. We believe these enhancements will further differentiate American Home Shield from the competition.

Speaker 2

We are super excited about the app and I encourage everyone listening to download the app now through Google Play or the App Store. I think you'll be impressed. So with that, I'll now turn the call over to Jessica for more on our record Q3 financials. Jessica?

Speaker 3

Thanks, Bill, and good morning, everyone. I want to start with a clear message to all of our stakeholders. Frontdoor's financial position has never been stronger. We delivered another exceptional adjusted EBITDA beat. We increased our full year outlook for the 2nd time this year.

Speaker 3

We are generating a record amount of cash, and we remain focused on returning that cash to investors through share repurchases. Specific to our Q3 financial summary on Slide 15, you will see that revenue increased 3% versus the prior year period to $540,000,000 Net income increased 40% to $100,000,000 and adjusted EBITDA increased 29 percent to $165,000,000 Let's take a moment to review our 3rd quarter revenue, which landed at $540,000,000 versus our guided midpoint of about $537,000,000 This is a beat of almost $3,000,000 Now on Slide 16, you will see gross profit increased 14% versus the prior year period to $306,000,000 and gross profit margin improved 5.50 basis points to a record 57%. Let's now move to the adjusted EBITDA bridge on Slide 17. Starting at the top, we had $17,000,000 of favorable revenue conversion, driven by a 4% increase in price over the prior year period. This was partially offset by a 1% decline in volume.

Speaker 3

As a reminder, this includes the impact of lower home warranty volume, which was partially offset by an $11,000,000 increase in non warranty sales. Turning to contract claims costs, which decreased $21,000,000 This was primarily driven by a lower number of service requests per customer, a transition to higher trade service fees and continued process improvement initiatives. Let's now take a moment to unpack each of those. 3rd quarter customer incidence rates were some of the lowest that we have ever seen, primarily due to three reasons. First, we had $14,000,000 of favorable weather as cooling degree days were down 16% versus the prior year period.

Speaker 3

2nd, we have made significant process improvements over the last 2 years and we are now executing better than ever. We are doing a better job of getting the right contractor to the right customer at the right time, which results in a better customer experience and reduces costs and noise in our system. Some of the process improvements include: A, moving more of our service requests to preferred contractors. We had a record 3rd quarter high with 85% of our jobs going to preferred contractors. This is an outstanding result, especially given that this was in the middle of our peak summer season B, our high cost claims review program and C, leveraging our bulk purchasing power with our suppliers to optimize availability and achieve better prices.

Speaker 3

And the third reason our incidence rate is down is the transition to higher trade service fees, which has resulted in a temporary and expected decline in the number of service requests per customer. As we typically see a short term change in customer behavior until they become accustomed to the new amounts. The increase in trade service fees is also driving a lower net cost per service request in 2024. As you may recall, our service fees are a contra cost to claims expense on our income statement. When combined with a normalized inflationary environment, Frontdoor's 3rd quarter inflation rate was essentially flat.

Speaker 3

Again, this is on a net cost per service request basis as the increase in trade service fee dollars mostly offset external inflation. In summary, adjusted EBITDA increased to $165,000,000 which exceeded the midpoint of our outlook by $30,000,000 The difference is primarily driven by over $10,000,000 of favorable weather, approximately $10,000,000 of lower SG and A due to timing, $3,000,000 of favorable claims cost development and better than expected benefits from process improvements. Let's now turn to Slide 18 for a review of our statement of cash flows. With strong earnings comes strong cash flows. Net cash provided from operating activities was a record $212,000,000 for the 9 months ended September 30 as a result of our exceptionally strong earnings and was primarily comprised of $281,000,000 in earnings adjusted for non cash charges and $66,000,000 in cash used for working capital.

Speaker 3

Net cash used for investing activities was $31,000,000 and was primarily comprised of capital expenditures related to investments in technology. Net cash used for financing activities was $131,000,000 and was comprised of $119,000,000 of share repurchases as well as $13,000,000 of scheduled debt payments. Free cash flow increased 56 percent to a record $181,000,000 for the 9 months ended September 30. We ended the quarter with $375,000,000 in cash. This was comprised of $161,000,000 of restricted cash and $214,000,000 of unrestricted cash.

Speaker 3

And we remain focused on using our cash to buy back shares. For example, we are extremely pleased that we were able to complete the 3 year $400,000,000 share repurchase program before it expired in early September. This is especially impressive since we paused share repurchases for almost a year in 2022. As a reminder, last quarter we announced our new 3 year $650,000,000 share repurchase authorization that started on September 4. This amount is 63% higher than our previous 3 year authorization.

Speaker 3

Now let's turn to our outlook on Slide 19. Given that there is less than 2 months remaining in the year and that the 4th quarter is typically our lowest volume quarter, we are moving our outlook to point estimates versus providing ranges. While this is a departure from our standard practice for this quarter, we felt that this would help our investors better understand our estimates for the remainder of the year. Now for the Q4, we expect our revenue to be approximately $367,000,000 which reflects a low single digit increase in our renewals channel, a decline of approximately 10% in our real estate channel driven by volume, a decline of approximately 20% in our D2C channel, primarily due to our discounting strategy and an approximately $5,000,000 increase in other revenue. For the Q4, adjusted EBITDA is expected to come in at approximately $36,000,000 Let's now move to our full year outlook, starting with revenue.

Speaker 3

We are increasing our revenue outlook to approximately $1,830,000,000 or a 3% increase, which includes a mid single digit increase in realized price, partially offset by a mid single digit decline in realized volume. This assumes a mid single digit increase in the renewals channel, a roughly 15% decline in the real estate and B2C channels. It also assumes other revenue, which includes on demand, will increase 40% to approximately $110,000,000 The growth over the prior year is almost entirely driven by higher new HVAC sales, which is trending towards $85,000,000 in 2024. One brief note of caution here. Our guide includes only a minor amount of revenue from Moen in 2024.

Speaker 3

It's still early. And while we are very excited about where this relationship can go, we will provide more details at our Investor Day. From a customer count perspective, we still expect the number of total home warranties to decline approximately 4% in 2024. As I close my comments on the revenue outlook and bridge to our gross margin guide, I want to provide some additional context on our pricing strategy. We significantly raised prices in 2022 in response to the highly inflationary environment and the dramatic increase in external costs to service our customers.

Speaker 3

We were not only pricing for inflation experienced in 2022, but also for expected inflation in 2023. Since then, inflation has come in much lower than expected. But because of our model, it has taken nearly 2 years for those price increases to run their course. Because of that, we have now initiated a new mid single digit price increase that will slightly benefit the Q4 and carry over into 2025. Now moving to gross profit, where we are raising our full year margin outlook to be approximately 53%, which would be a new record for our business.

Speaker 3

However, it does incorporate several favorable items. We have taken a lot of price. We have had a lot of favorable weather and our system has not been stressed with high levels of claims. Now let's turn to our full year SG and A outlook, which we expect to be about $605,000,000 Based on all of these inputs, we are increasing our full year adjusted EBITDA guide to be approximately $430,000,000 Our full year outlook also includes $19,000,000 of interest income and reflects stock compensation expense of approximately $27,000,000 And finally, we expect our full year capital expenditures to be approximately $40,000,000 and the annual effective tax rate to be approximately 25%. In summary, Frontdoor's financial position has never been stronger.

Speaker 3

We are generating record earnings, record cash flows and we are on target to buy back a record amount of shares. We are making the investments to grow this business and we are doing so from a position of strength and I am extremely excited to see how those investments will drive future growth. Finally, before we take your questions, I'm sure our plan for 2025 is top of mind for you, But we're not quite ready to discuss that plan today. The acquisition of 210 is still pending, and we want to make sure we account for that before we finalize our plan for 2025 and beyond. We will be ready to present all of those details to you at Investor Day.

Speaker 3

With that, I will now turn it over to the operator to start Q and A.

Operator

Thank you. At this time, we will be conducting our question and answer Our first question is coming from Cory Carpenter with JPMorgan. Your line is live.

Speaker 4

Thanks and good morning. Bill, I wanted to ask you about the AHS app launch. Just how do you plan on marketing and rolling that out? Any details you could provide? And then bigger picture, how do you see this impacting your business over time?

Speaker 4

And then I have a follow-up last for Jeff. Thank you.

Speaker 2

Okay. Yes, we just rolled it out. Hope you download it, Cory. It's a member focused app. So this is really designed to appeal to our members.

Speaker 2

It's all about our user experience. It's enhancing our user experience. Mean, there's some downstream benefits that it makes our service request process more efficient. People can deal directly through the app as opposed to always having to pick up the phone. So there's a lot of benefits that come from the user experience.

Speaker 2

And I think it's a modern brand move. It also can be the catalyst for further enhancements that we will have down the road. So in terms of marketing, we will be starting by, if you will, marketing it to our existing members. And then as far as broader communications, mean, I think you'll see it in action. I don't think we'll just necessarily announce we have a new app, but it's going to be part of our overall brand character or brand image.

Speaker 2

So we're excited about what it can do for our members. And I think the modernity look it will give us broadly will help us to drive hopefully additional members.

Speaker 4

Thank you. And then Jessica, just on the you mentioned in your prepared remarks that you're initiating a mid single digit percent price increase, I believe. Could you just expand a bit? Is that across all your channels or certain channels that you're targeting? And kind of how you expect that to roll through the P and L in 4Q next year?

Speaker 4

Thank you.

Speaker 3

Well, Cory with no, thanks, Cory. With our price increases, those are really focused through the renewal channel. So, hopefully that answers your question. We roll those out through the renewals book.

Speaker 5

Yes,

Speaker 2

because real estate we hold pretty constant and obviously the way the market's been we aren't looking at any pricing action there. And then DTC1 is part of all the discounting stuff we talked about earlier. So, as Jessica said, think of it as through the renewals channel.

Speaker 4

Great. Thank you.

Speaker 3

Thanks, Cory.

Operator

Thank you. Our next question is coming from Ian Zaffino with Oppenheimer. Your line is live.

Speaker 3

Hi, great. Thank you very much.

Speaker 6

I wanted to also ask on the pricing side and kind of how are you arriving at your price increases? I guess we're kind of facing some down demand and just kind of trying to understand your decision balancing between price and volume? Thanks.

Speaker 3

Yes. No, I think as I shared in my prepared remarks, we obviously priced for the high inflationary environment in 2022. As we're going forward, I mean, we definitely think that pricing should be more in line with what we're seeing from an inflation perspective. And I think, Ian, you know we've also got our dynamic pricing strategy and capability that will be used as we roll that those pricing increases out amongst our renewal channel.

Speaker 2

So, Ian, one of the things we do is we obviously monitor our elasticities all the time and we're fortunate as you heard, our retention rate continues to be quite strong in the renewal channel, which is as Jessica said is primarily where the price increases are happening. In the DTC channel, we're being very aggressive on bringing in 1st year members, which is really the feeder into the backbone of our business renewal book.

Speaker 6

Okay, thanks. And then maybe talk about the launch of the ASF sorry, ASF, sorry. Talk about the difference between that launch and maybe this front door launch, what are the differences there?

Speaker 3

And then is there any kind

Speaker 6

of concern of cannibalization in the Frontdoor product at all? Thanks.

Speaker 2

Yes. No, it's an important point to note. The AHS app is designed for our existing members and is focused on the home warranty business. The Frontdoor app is open to anyone, and it also is the catalyst for our overall on demand business. So that is so we don't see we see them working in tandem because they are serving different markets.

Speaker 2

So we're excited to have both as a part of the overall Frontdoor Inc. Business and I think they serve 2 different purposes that can work in tandem.

Speaker 6

Okay. Thank you very much.

Speaker 3

Thanks, Ian.

Operator

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

Speaker 4

Hey, good morning. Thanks for taking the questions. I wanted to start, I guess, with the real estate channel. So it looked like the customer count there was stable and I think revenue came in slightly above where you guys previously guided despite existing home sales actually declining this quarter. So I was wondering if that implies any improvements you're seeing in attach rates?

Speaker 4

And maybe just more broadly, we've been stuck in a sellers market, strong sellers market for some time now. Are there any signs that you're seeing that we're returning to a more balanced market in real estate?

Speaker 2

Yes. I think overall, I think I credit, as you said, the trend being better, notwithstanding it's still a very tough market. Some of the execution that we've done, our sales team has done an excellent job grinding really for every unit they can. So I don't want to get ahead of ourselves on real estate. As we said, the market continues to flounder.

Speaker 2

But there are a few elements as we talked about. The listings is now over 4 months worth of supply. Mortgage rates should continue to fall. I heard today there may be a rate cut coming very soon. We have done a good job of keeping our attach rate up relative to our competition.

Speaker 2

So to your point, there are some elements that seem to be on the macro side coming our way, but we don't want to get ahead of ourselves on that. We've been kind of calling for this all along. We still believe the market is going to rebound, all the real estate professional experts, worst market in 14 years and the like. So I think this is going to be a I don't want to go all the way to we'll talk about this more at Investor Day in February. I don't want to call it a tailwind at this point, but I think things are stabilizing and we certainly hope they're going to turn up very soon.

Speaker 4

Got it. That's helpful. And maybe a second one on the DTC channel. You saw that the customer count reaccelerated there, so congrats on that. Hoping, can you just talk about maybe the drivers behind that?

Speaker 4

Was that more of the marketing strategy? I think you guys talked about a more targeted marketing strategy last quarter, if that was driving the results? Or is that more of the discounting strategy? And then related to that, we saw you guys did lower the SG and A outlook. Was any of that marketing spend that you're lowering there?

Speaker 4

And just given the success, if that is so, like why pull back when you're seeing some success in that channel? Thank you.

Speaker 2

Sergio, I love your questions. It's kind of yes, yes and yes. But let me go, let me unpack that. So and we certainly wanted to talk about our Google information since you have been very keen to point out Google trends. But look, the information we got from Google is our searches are up.

Speaker 2

Discounting has been a good thing for us. Demand and conversion are up. The campaign, we believe, has worked very well with the awareness numbers I cited earlier. So I think there's not one element. I think the discounting is a bit of a blunt instrument, but we feel it's been effective and especially effective in terms of the long term value of the customer.

Speaker 2

So that's really what we're doing. We're taking advantage of this ability for us to generate the EBITDA growth that we have to reinvest in the brand. And that is part of what you see in Q4 that we did. We are looking to use some of the SG and A to do some incremental marketing, which is really going to impact 2025. So, yes, I think your instincts are right.

Speaker 2

It is across the board and we love the trend and hopefully it will

Speaker 4

continue. Great. Thank you.

Operator

Thank you. Our next question is coming from Jeff Schmitt with William Blair. Your line is live.

Speaker 5

Hi, good morning. Question on the direct channel. How much of an impact do you think your promotional strategy will have on retention rates there when prices step up for those customers? I think you mentioned last quarter that you think they'll hold up well, but is there anything new you learned there or any more that you could add on how much of an impact that will have?

Speaker 2

Yes. So we started the deep discounting in March of last year. So we have been tracking very closely that cohort as we go forward. Fortunately, we have seen that as we start to renew 1 year out, etcetera, that the retention that renewals are holding, that the cancel rate is not outsized relative to anybody else. I think we'll touch on this more at Investor Day, but it's the right question to ask that how does it impact 1 year later and so far we've been pleased with the effort on the 1st year renewal after the 50% off.

Speaker 5

Okay. And then how is the attachment rate in the real estate channel trending? Like where is it at today versus last few quarters or even last few years? And

Speaker 7

do you

Speaker 5

have any concerns, I guess, with mortgage rates sort of moving back up? They were heading towards 6%. Now they're going north. So any thoughts on if that will have an impact here?

Speaker 2

Yes. Let me take the first part and then separate that from the second part. The attach rate has fallen for the industry. Home warranties where it used to be pretty steady at around 30% or high 20s, it's now in the teens. The point we're making earlier was as that has happened, we have maintained our share of our fair share in terms of attachment rate.

Speaker 2

But the attachment rate has fallen and that is a concern for the industry. In terms of mortgage rates and the like, I don't think it will have any different effect than just hopefully it will start to raise the overall market. But people will see that as mortgage rates are falling, I mean people are going to want to buy a new house, they're going to want to sell their old house, they want to take the equity that they have in there. So we see a lot of the natural reasons why the market will improve. But I don't think the interest rates are going to have much of an impact on attachment rate.

Speaker 2

I don't know, Jessica, if you have a different take on that.

Speaker 3

No, I think I agree. I think the one thing with the mortgage rates right now just as we're seeing kind of interest rates, we see them slowing, but just in recent times, they're popping back up a little bit. So it will be we're being cautiously optimistic on that front.

Speaker 5

Okay, great. Thank you.

Speaker 2

Thanks Jeff.

Speaker 3

Thanks Jeff.

Operator

Thank you. Our next question is coming from Eric Sheridan with Goldman Sachs. Your line is live.

Speaker 8

Thanks so much for taking the question. Maybe 2 if I could. Just first broadly on the competitive landscape. I think we talked a lot so far on the call on the demand landscape you find yourself in, in both sides of the business. But how are you finding the competitive landscape?

Speaker 8

And where are there pockets where maybe competition is either more elevated or less elevated than maybe you anticipated when you think about the beginning of this year and how sort of 2024 played out? And then I know we're going to get an update more broadly on the 210 acquisition at the Analyst Day, but any key learnings about the that maybe that maybe are some of the key takeaways from 2024 that might involve inform elements of strategy into 2025 and beyond? Thanks so much.

Speaker 2

Yes. I'll take the first one and you want to take the second one, Jessica. In terms of competition, there are a number of our direct competitors are private companies, so we don't have a lot of information except what we can hear in the marketplace. There are a couple of public generally it's a division of a public company. They have obviously seen our aggressive discounting and they have responded in that.

Speaker 2

I think we've been effective in that regard. So there isn't any product enhancements or anything of note. I think a number of competitors are focused on the real estate business. Our DTC business is a higher share for us than it is in real estate even though we're number 1 in both. So I think competitively, we feel like we're in good shape on that.

Speaker 2

Do you want to take a second?

Speaker 3

Yes. Just from an M and A landscape, you hit it, Eric. We are still very, very focused on 210 and what we can learn from that. I think going forward, as we think about capital allocation, I always want to think about healthy inorganic growth and how that balances with our focus on organic growth. And we're going to continue to evaluate that going forward.

Speaker 3

I think the one thing in terms of our deal strategy, we're still looking at what's out there in the market and we'd be very focused on things that are going to grow revenue, grow customers and grow EBITDA.

Speaker 2

Yes. Just to be clear, Eric, we have a lot to absorb with the integration of 2 10. So there's nothing on the horizon that I would say from an acquisition perspective. I mean, we can always keep that open. We are very committed to buying back shares with our excess cash.

Speaker 2

So it's not that we won't look at that at some point down the road, but right now absorbing 210 is going to take a lot. It's a heavy lift for us. We're excited about what it can do. We'll talk more about it in February. But in terms of where we're going, that's going to be our focus for the immediate future.

Speaker 8

Thanks so much.

Speaker 3

Thanks, Eric.

Operator

Thank you. Our final question today is coming from Mark Hughes with Truist Securities. Your line is live.

Speaker 7

Yes, thank you. Good morning. Hi, Mark. Good morning. On the HVAC sales, you've done really well ramping that up.

Speaker 7

Is there still potential for that to be a kind of outsized contributor to growth, rolling it out to different regions, different contractors? What are the dynamics there?

Speaker 2

Yes. I think you nailed it. What we're doing with our contractor relations team, they're rolling out market by market. It is a sale that you have to get the contractors on board. And the contractors want to be on board because the economics that they can get from this.

Speaker 2

And it's we've talked about this in the past, it's a great value proposition. We give a consumer a break. I'm a new customer of HVAC, just installed my new HVAC last week. So I can't talk about Q4, I guess, Matt, but that will be part of the numbers. But no, what we're doing is we were in Kansas City a couple of weeks ago.

Speaker 2

Are going market by market enhancing the overall piece. We have stronger markets. And I think what we can talk about is kind of a full potential analysis when we get to February. But we think that there is a lot of blue sky out there for HVAC. And then with regard to Moen, we haven't said, Jessica put the note of caution out there.

Speaker 2

You heard me say that we're expanding 7 more states. We'll have more to say about it in February, but we think that's on a nice build and they're a great partner and we love working with them.

Speaker 7

Do you think the Moen, can that be material in 2025, if materiality is a few points at least?

Speaker 2

Well, that's a great tee up with our Investor Day, February 27 in New York City. We'll talk about it more there. I don't want to jump ahead just now.

Speaker 6

I think

Speaker 2

Because we're still in the middle. We haven't even rolled out to those additional states yet.

Speaker 3

I think the point is though, Mark, you hit it, right? Like new HVAC, we've learned a lot from it. It's been a great growth opportunity for us. And I think that's going to give us a lot of good learnings as we think about expanding into other capabilities as well.

Speaker 7

If I might ask one more. Jessica, you talked about the trade service fees sort of dampen claims frequency until the consumer gets used to it. Yes. Is the usual timing of that process? I think you had mentioned that was maybe something that would impact the Q4 as well.

Speaker 7

Is that fair? How long does that take?

Speaker 3

I think the way I think about it, you have to think about it as we roll those out very similar to a pricing increase. So it's a contra item on our claims costs, but we launched that on the back half of twenty twenty two and the process takes 12 to 24 months to roll out, very exactly like pricing. So as we think about pricing kind of reaching its run-in Q4, TSFs are doing the same thing. And then just from a behavior perspective, typically we look at maybe a year or so for people to just get hired to that trade service fee and start calling in for repairs again.

Speaker 7

So is that fair to say that you've kind of that is probably run its course?

Speaker 3

Yes, it's run its course. That's exactly what I'm saying.

Speaker 7

Yes. Okay. All right. Thank you.

Speaker 3

Thanks, Barbara.

Operator

Thank you so much. We have reached the end of our question and answer session. So I will now turn the call over to Mr. Bill Cobb for his closing remarks.

Speaker 2

Thank you very much. Before we sign off, I want to reiterate some final points. As you heard me say last quarter, and it's worth repeating here, our strategy and plan is about near term realism and long term optimism. While macroeconomic factors continue to challenge member growth for all home warranty providers, we remain very bullish about this category and especially our strategy to continue driving awareness and consideration. There are millions of untapped homeowners who could benefit from a home warranty as well as our on demand offerings like the new HVAC program.

Speaker 2

That said, I'd like you to reflect on what's been accomplished over the past 2 years. We have focused on customer growth and we're seeing positive momentum on our campaign and the relaunch of the American Home Shield brand. These efforts are working and as I mentioned earlier, we now expect our annual DTC customer count to be in line with last year. We've also explored strategic M and A to accelerate our growth and the acquisition of 210 is proceeding on track to close in Q4. We have enhanced our margins.

Speaker 2

We continue to drive high customer retention rates with the 3rd quarter, setting a record at 77.7%. We've expanded our on demand business. It's doing very well through HVAC sales as well as our growing partnerships with Moen and others. And finally, we continue to return excess cash to shareholders through share buybacks. And with our new $650,000,000 share repurchase authorization, we remain committed to continuing share repurchases.

Speaker 2

So you can see a lot has been accomplished. We've done what we said we would do. On that note, I hope these facts and the results of another absolutely amazing quarter of financial performance are giving you good reason to believe in Frontdoor for the long term. Thank you and I look forward to seeing all of you in New York on February 27 for our Investor Day. Thanks again.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference and you may disconnect at this time. And we thank you for your participation.

Powered by Quartr
Earnings Conference Call
Frontdoor Q3 2024
00:00 / 00:00