Frontdoor Q1 2025 Earnings Call Transcript

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Provided by Quartr
May 1, 2025

Key Takeaways

  • First-quarter revenue increased 13% to $426 million, net income rose 9% to $37 million, and adjusted EBITDA jumped 41% to $100 million as membership grew 7% to 2.1 million and preferred contractor usage hit 85% of jobs.
  • Direct-to-consumer membership climbed 15% year-over-year (4% organically), thanks to a brand relaunch, more targeted digital marketing, and promotional pricing even as reported DTC revenue dipped 9%.
  • Organic first-year real estate channel membership declined 6% amid high mortgage rates, rising home prices, and an 8% inventory increase that kept buyers sidelined.
  • Non-warranty revenue is on the rise, with the HVAC program now expected to generate $105 million in 2025, Moen partnership expanded to 21 states, and the 2-10 structural warranty business forecast to add $44 million.
  • The company raised its full-year guidance to $2.03–2.05 billion in revenue (+$20 million), $500–520 million in adjusted EBITDA (+$50 million), and boosted its 2025 share repurchase plan to at least $200 million.
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Earnings Conference Call
Frontdoor Q1 2025
00:00 / 00:00

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Operator

and gentlemen, welcome to Frontdoor's First Quarter twenty twenty five 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. He will introduce the other speakers on the call. At this time, we will begin today's call. Please go ahead, Mr. Davis.

Matt Davis
Matt Davis
VP of Investor Relations & Treasurer at Frontdoor

Thank you, operator. Good morning, everyone, and thank you for joining Frontdoor's First Quarter twenty twenty five Earnings Conference call. Joining me today are Frontdoor's Chairman and CEO, Bill Cobb and Frontdoor's CFO, Jessica Ross. The press release and slide presentation that will be used during today's call can be found on Investor Relations section of Frontdoor's website, which is located at investors.frontdoorhome.com. As stated on Slide three of the presentation, I'd like to remind you that this call and webcast may contain forward looking statements.

Matt Davis
Matt Davis
VP of Investor Relations & Treasurer at Frontdoor

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. 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, May 1, 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.

Matt Davis
Matt Davis
VP of Investor Relations & Treasurer at Frontdoor

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. Bill?

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

Thanks, Matt Davis, and good morning, everyone. FronTor Inc. Continues to operate extremely well, and the first quarter was another example of outstanding financial and operational performance. In short, we are off to a terrific start in 2025. As you can see, revenue increased 13% to $426,000,000 Net income grew 9% to $37,000,000 Adjusted EBITDA grew 41% to $100,000,000 Very importantly, our member count grew 7% to 2,100,000 members.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

And finally, our use of preferred contractors has grown to 85% of services performed during the quarter. What makes this even more impressive is that it's being done against a still challenging macroeconomic environment, the down real estate market, high interest rates, the specter of trade wars, and the resulting decline in consumer confidence. But despite all of these challenges and more, Frontdoor continues to outperform and buy a lot, but we are not satisfied, not by a long shot, And our number one strategic priority remains growing our member base. Number two, we are focused on growing and scaling revenue from our non warranty business. And number three, we are optimizing the integration of two ten Homebuyers Warranty, which by the way remains on track.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

So let's get into the business details starting with the DTC channel on slide six. This continues to be a positive story that began in the middle of last year. As you can see, we ended the first quarter up 15% versus prior year to 310,000 DTC members. This is primarily due to 02/10, but our success here is also due to organic growth of 4%. And since the end of the second quarter of last year, we've now had three consecutive quarters of organic DTC unit growth.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

Now the key takeaway for DTC in the first quarter, our actions are working to drive organic unit growth. Demand is up, conversion is up, and as a result, our DTC member count is up. Let that sink in for a moment, especially when, again, you consider the macroeconomic headwinds. It's not a stretch to say we are breathing new life into this category. Our success is attributable to several factors.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

First, the marketing campaign and relaunch of the American Home Shield brand are working. We are targeting audiences better, especially millennials. Our digital advertising is more effective, particularly in the midpoint of the marketing funnel when homeowners are seriously considering a purchase, and we are deploying our media assets in the areas where we have the best potential ROI. We are able to do this because our data is better, we more deeply understand the segments of homebuyers, and our marketing approach is more targeted. Also, our discounting strategy continues to be a strong and proven lever for driving units.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

While reported DTC revenue is down 9% for the quarter due to our promotional pricing strategy, our focus is on driving organic unit growth. For Q1, we are pleased that number was 4%. We accept this revenue trade off due to new member growth being our number one strategic priority and our subsequent ability to renew members at a high rate. Here's the key takeaway. The result of first quarter DTC performance is that we now expect our annual DTC member count to be up from last year.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

Now let's take a look at the real estate channel. As you know, this channel continues to be a headwind for our business, although there are some signs of improving conditions. According to the latest information from the National Association of Realtors or NAR from March 2025, existing home sales slipped 5.9% to a seasonally adjusted annual rate of 4,020,000. The median sales price for existing homes climbed to $403,700 That's the twenty first consecutive month of price increases. The thirty year mortgage rate averaged nearly 7% as of April 17, and the inventory of unsold existing homes jumped 8.1% to 1,330,000 homes or the equivalent of four months of supply.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

While growing inventory is a positive sign, the combination of high home prices and elevated mortgage rates continues to keep consumers out of the market. As a result, our first year organic real estate member count is down 6% in the first quarter compared to the same period last year. Now turning to slide eight and retention. For the first quarter of twenty twenty five, retention was at 79.9, which includes two ten. While this does include a lower mix of real estate members, retention continues to perform well due to better engaging members during onboarding and throughout the member journey.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

This includes an expanded calling program that is reducing the number of cancellations. We are also continuing to enhance our member service, especially through increased use of our preferred contractors. And finally, 84% of our members are on monthly autopay. Product differentiation is another reason for our retention success. No one in this industry innovates better than Frontdoor.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

The release of the AHS app last October and the launch in late February of a true industry differentiator, video chat with an expert, are just the latest examples of our innovation in giving members what they want. These innovations are a plus for retentions. Members love a better and faster experience, and they've responded very well to the app and video chat. Since the launch in late October, the AHS app has been downloaded almost 200,000 times and members have submitted 80,000 service requests. Video chat with an expert is also a hit, and here's an interesting tidbit.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

About 17% of the AHS video chats so far have resulted in the expert being able to resolve the problem right over the phone, or the expert gave the member the information they needed to fix it themselves. That is a great member experience, not to mention in saving us and our members time and money by not having to send the contractor out to the home. Moving to slide 10, non warranty and other revenue. This continues to be a growing part of Frontdoor. We are very proud of our new HVAC program.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

Demand for it is growing and the number of contractors who want to participate is also growing. As such, we are increasing our revenue outlook for 2025 to $105,000,000 To refresh, this program benefits our members who want to take advantage of our scaled pricing to replace their HVAC, upgrading to a system that is new, more efficient, and compliant with the latest refrigerant standards. Moving to the Moen partnership. As a reminder, we partnered with Moen, starting in California, to provide homeowners access to our plumbing contractors to install a smart water shutoff valve to prevent potential flooding. In late March, we expanded this partnership and we are now in 21 states with more states expected later this year.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

Another great addition to other revenue is the new home structural warranty business that came with the two ten acquisition. As we've dug into this business, we've been very pleased with the relationship our team has with new home builders. We expect the new home structural warranty business to generate $44,000,000 in revenue in 2025. So on that high note, I'll summarize our first quarter by simply saying Frontdoor's performance continues to be truly outstanding, both from a financial and operational standpoint. This is a continuation of the tremendous winning streak we've been on now for 12 quarters in a row.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

With that, I'll now turn the call over to Jessica for the specifics of our financial performance. Jessica?

Jessica Ross
Jessica Ross
Senior VP & CFO at Frontdoor

Thanks, Bill, and good morning, everyone. Before I get into the details, there are three items I want to highlight. First, Frontdoor delivered another outstanding quarter as we exceeded expectations for both revenue and adjusted EBITDA. Second, we are expecting to generate a record amount of cash this year, and we have a strong financial position that allows us to invest for growth and return excess cash to shareholders. And third, we are raising our full year outlook for revenue by $20,000,000 and adjusted EBITDA by nearly $50,000,000 Now let's get into the numbers on slide 12, where you can see revenue increased 13% versus the prior year period to $426,000,000 This was comprised of 2% organic growth and 11% from the 02/10 acquisition.

Jessica Ross
Jessica Ross
Senior VP & CFO at Frontdoor

Net income increased 9% to $37,000,000 and adjusted EBITDA increased 41% to $100,000,000 Turning to slide 13 and our earnings per share. Earnings per share increased 13% to $0.49 per share on a GAAP basis. Adjusted earnings per share increased 46% to $0.64 per share. This is slightly above the increase in adjusted net income due to the impact of our share repurchase program. Last year, we repurchased approximately 4,000,000 shares or about 5% of our total share count.

Jessica Ross
Jessica Ross
Senior VP & CFO at Frontdoor

We remain confident in our ability to drive sustained EPS growth over time, supported by strong operational execution and elevated buyback activity. Turning to slide 14, you will see gross profit increased 21% versus the prior year period to $235,000,000 and gross profit margin improved three eighty basis points to a first quarter record of 55%. Continuing on the topic of margins, let's turn to slide 15. I wanted to take a moment to dig into how Frontdoor proactively addresses cost inflation, including the potential impact of tariffs. Frontdoor's current margin enhancement efforts were bolstered from the learnings coming out of the pandemic.

Jessica Ross
Jessica Ross
Senior VP & CFO at Frontdoor

Since then, we've established a heightened focus on tracking current events, economic indicators and monitoring cost trends across the business. As a result, we believe we have much better visibility on our cost drivers. At the same time, we are evaluating these drivers. We are also constantly focused on leveraging our scale to manage inflation. We work very hard to keep our costs down internally before passing along higher costs to our members.

Jessica Ross
Jessica Ross
Senior VP & CFO at Frontdoor

First, we continuously discuss cost and equipment availability with our manufacturing partners. Our supply chain team does an excellent job keeping costs down while ensuring we have the parts and equipment to service our members. Especially in these fluid times, they are focused on leveraging our purchasing power to find new sources of supply to manage prices. Second, our contractor relations team is dedicated to improving cost per service request and strengthening service levels across our contractor network. They continuously work to increase the percentage of our jobs that go to our preferred contractors and at the same time work to manage each individual contractor to the best cost and service profile in their geography to optimize results.

Jessica Ross
Jessica Ross
Senior VP & CFO at Frontdoor

The next step in our process is to leverage our dynamic pricing capability, which is always balancing member count and gross margin. We are actively optimizing price across our renewal base, and we customize our pricing strategy to serve each individual member's needs. In 2025, we forecast that we will net to an average overall price increase of about 4%, and we have the ability to amend that trajectory later this year if needed, depending on where inflation lands. Additionally, we have the ability to raise our trade service fee. While this is a less frequently used lever, it does help us manage margins and share higher costs with our members.

Jessica Ross
Jessica Ross
Senior VP & CFO at Frontdoor

In summary, we are confident in our strategy to manage cost inflation, and we have multiple levers that we are prepared to pull to protect our margins in this dynamic environment. Now let's turn to the first quarter adjusted EBITDA bridge on slide 18. First, we had $32,000,000 of favorable revenue conversion, driven by a 3% increase from price and a 10% increase from volume, primarily from the acquisition of Tutem. Second, we had an $8,000,000 decline in contract claims costs. The largest driver of the improvement was favorable claims cost development of 7,000,000 compared to only 1,000,000 in favorable claims cost development in the first quarter of twenty twenty four.

Jessica Ross
Jessica Ross
Senior VP & CFO at Frontdoor

We also experienced favorable cost trends, which included the benefits of continued process improvements that more than offset normal inflation. As a result, our cost inflation in the first quarter was essentially flat on a net basis. This was offset by a slightly higher number of service requests per customer. This quarter we had a $5,000,000 unfavorable weather impact in the HVAC trade, which was offset by a $4,000,000 benefit from lower incidents across our other trades. Moving down to customer service costs and G and A, which increased $4,000,000 and $10,000,000 respectively.

Jessica Ross
Jessica Ross
Senior VP & CFO at Frontdoor

Both increased primarily due to the addition of two ten. In summary, adjusted EBITDA increased to $100,000,000 which exceeded the midpoint of our outlook by $25,000,000 Now let me take a moment to unpack the beat, which is obviously different than the comparison to prior year. In short, it was a great quarter with more than half of the beat driven by better than expected contract claims costs, with the remainder driven by better than expected revenue conversion. Let's now turn to Slide 19 and our statement of cash flows. Net cash provided from operating activities was a record $124,000,000 for the first quarter due to exceptionally strong earnings, primarily comprised of $68,000,000 in earnings adjusted for non cash charges and $61,000,000 of cash provided from working capital and long term insurance related accounts.

Jessica Ross
Jessica Ross
Senior VP & CFO at Frontdoor

Net cash provided from investing activities was $47,000,000 and was primarily comprised of the disposal of marketable securities partially offset by capital expenditures related to technology projects. Net cash used for financing activities was $85,000,000 and was primarily comprised of $70,000,000 of share repurchases as well as $7,000,000 of scheduled debt payments. Free cash flow increased 60% to a record $117,000,000 for the first quarter of twenty twenty five. Our free cash flow yield is currently at 9%, which is an outstanding value indicator for our share price. We ended the quarter with a total of $5.00 $6,000,000 in cash.

Jessica Ross
Jessica Ross
Senior VP & CFO at Frontdoor

This was comprised of $185,000,000 of restricted cash and $322,000,000 of unrestricted cash. We remain focused on using excess cash to buy back shares. In fact, our $322,000,000 of unrestricted cash is after returning $70,000,000 to shareholders in the first three months of the year. While The U. S.

Jessica Ross
Jessica Ross
Senior VP & CFO at Frontdoor

Economy faces growing uncertainty, we are confident we are well positioned to weather any storm as a result of our strong financial position, as shown on slide 20. Frontdoor has ample liquidity to run the business, with $570,000,000 available to us. Our net leverage ratio is about 1.9 times based on Frontdoor's reported financial results. We continue to be in a strong financial position and our net leverage ratio is below our long term target of two to 2.5 times. As part of the two ten acquisition, we completed our debt financing in December of last year.

Jessica Ross
Jessica Ross
Senior VP & CFO at Frontdoor

And as a result, our next debt maturity is nearly five years away. We have a capital light business model with capital expenditures at less than 2% of our total revenues. And finally, our strong cash flows and balance sheet provide us with significant flexibility when it comes to capital allocation. Now that is a great transition to slide 21 and our commitment to share repurchases. We have returned over $100,000,000 in cash to shareholders, repurchasing over 2,000,000 shares in the first four months of the year.

Jessica Ross
Jessica Ross
Senior VP & CFO at Frontdoor

Given our strong cash flows, we are now increasing our 2025 share repurchase target to at least $200,000,000 We are very aware of our current share price and multiple, and we are deploying a substantial amount of cash into repurchasing shares this year as we believe our share price remains significantly below our intrinsic value. This would mark the fourth consecutive year of increasing share repurchases and puts us well on the way to achieving our $650,000,000 authorization within the three year timeframe. Now turning to Slide 22 and our second quarter and full year outlook. For second quarter revenue, we expect a high single digit increase in our renewals channel, a roughly 15% increase in our real estate channel, a 10% increase in our D2C channel, and a 10,000,000 to $15,000,000 increase in other revenue. Taken together, we anticipate second quarter revenue to be between $600,000,000 and $6.00 $5,000,000 We also expect adjusted EBITDA to come in between 185,000,000 and $190,000,000 Let's now move to our full year outlook, starting with revenue.

Jessica Ross
Jessica Ross
Senior VP & CFO at Frontdoor

We are increasing our revenue outlook to be between $2,030,000,000 and $2,050,000,000 Our revenue guide includes a 2% to 4% increase in realized price, as well as a 7% to 8% increase in realized volume. This nets to a $20,000,000 increase from our prior guide, which is split between warranty and other revenue. We assume a high single digit increase in the renewals channel, a low to mid single digit increase in the D2C channel, a high single digit increase in the real estate channel, and 165,000,000 to $175,000,000 in other revenue. Other revenue now includes $105,000,000 from HVAC sales, dollars 15,000,000 from Moen, approximately $44,000,000 in new home structural warranty revenue, and slightly under $10,000,000 of other non warranty services such as HVAC tune ups. From a member count perspective, we are raising our outlook.

Jessica Ross
Jessica Ross
Senior VP & CFO at Frontdoor

We now expect the number of home warranties to decline 1% to 3% versus the prior 2% to 4% due to the improvements we are seeing in our renewal rates. Moving on to gross profit, where we are raising our full year margin outlook to be between 5455%. This is over a 200 basis point increase versus our prior outlook, which incorporates our favorable first quarter financial results and the continued strong performance of the business. Our margin guide also assumes mid single digit cost inflation, which is comprised of low single digit normal cost inflation and the remainder from tariff and macroeconomic uncertainty. An unfavorable weather impact of approximately 15,000,000 compared to the prior year, as we expect to return to normal weather patterns, specifically as we head into our peak summer season An increase in customer incidence rate as we have lapped the prior increases in trade service fees.

Jessica Ross
Jessica Ross
Senior VP & CFO at Frontdoor

Now let's turn to our full year SG and A outlook, which we are increasing to $650,000,000 to $670,000,000 This is a $10,000,000 increase from our prior outlook as we are increasing our marketing investments to drive member growth. Based on all of these inputs, we are increasing our full year adjusted EBITDA guide to be between $500,000,000 to $520,000,000 Our full year outlook also includes $15,000,000 of interest income, 8,000,000 from two ten integration costs and reflects stock compensation expense of approximately $31,000,000 And finally, our full year expectations for capital expenditures and the effective tax rate remain unchanged. With that, I will now turn it back to Bill before opening it up to Q and A.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

Thanks, Jessica. I want to close with some quick final thoughts before we take your questions. Let's start with valuation. At our high point in early twenty twenty one, Frontdoor was valued at about 18 times adjusted EBITDA. Now I understand that the valuation of many companies has been reduced due to the recent market volatility, but we now sit at a multiple of eight on our current midpoint guide of five ten million dollars in adjusted EBITDA.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

That's more than 50% below our high point. The math here is screaming that Frontdoor is undervalued. We are clearly not an eight times multiple company with the great results we continue to post. But here's why I feel confident in my assertion that we are undervalued. Number one, as I said, Frontdoor has delivered.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

As you saw from our results, we continue to operate extremely well from both the financial and operational perspectives. Again, this makes 12 consecutive quarters that we've beaten consensus. Number two, we are extremely well positioned. To reiterate, we've raised guidance nearly across the board. Full year revenue and warranty and non warranty, member count, gross profit margin, share repurchases, and importantly, we are raising our adjusted EBITDA guidance by nearly $50,000,000 And don't forget, we generate an amazing amount of free cash flow.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

In short, we have a very strong financial position. And number three, we are ready for tomorrow. We now have three months of hard data on 2025. We feel very good about Q2 and we are well prepared. While no business is recession proof, we have weathered tough times before.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

For example, we learned a lot during COVID. These learnings are serving us well as we navigate the macroeconomic uncertainty that continues to persist. The point is we know how to work through these issues. We have planned accordingly and we are executing. These are the reasons why we continue to be successful and why I believe we will remain so for the foreseeable future.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

With that, we are now ready to take your questions. Operator, please open the line.

Operator

Thank you very much. At this time, we will be conducting a question and answer Thank Our first question is coming from Mark Hughes of Truist Securities. Mark, your line is live.

Mark Hughes
Mark Hughes
Analyst at Truist Securities

Yes, thank you very much. Congratulations on the quarter. Bill, what about the tariffs? Any impact on, say, HVAC equipment or anything else that's important for your home warranty business?

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

Yeah, as we said, we've had virtually no inflation in Q1 and that was an actually HVAC was a contributor to that in a big way, it was actually down. Now, having said that, do see a couple of suppliers who are raising their prices. We move our supply around. So I think that, as Jessica laid out in the guidance, I think we've covered it really well, but we're staying nimble on this and staying very close to our contractors, etcetera. You know, who knows where tariffs are going, but we think we've built sufficient conservatism in the second half that we think we have amply covered the tariff issue.

Mark Hughes
Mark Hughes
Analyst at Truist Securities

Understood. How about the latest thinking on the new refrigerant, the impact perhaps on repairs if you have to do a more thorough repair based on the new refrigerant? On the other hand, maybe you sell more units in the on demand business. How are you thinking about that?

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

Yeah, so a couple of things, Mark. So we're working through the old equipment right now. There's still some available. We've done a good job of securing that equipment. So we continue to generate that.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

We're also obviously onto the new equipment with the better standards that we referred to in the script. So at this point, it has been a benefit to us. We may have, you know, with the new equipment, we may have to replace whole systems, but so far we've worked through that. We do feel really good about where we're at right now. We have raised our guidance for the year, but we're managing this very closely.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

It's a year where we're in transition, but I really give our contractor relations team and our supply chain team and the marketing team and everybody, they've done a really nice job of managing through this.

Mark Hughes
Mark Hughes
Analyst at Truist Securities

And then one final, if I might, the reserve gains in the quarter, how much of that was your home warranty as opposed to the two ten?

Jessica Ross
Jessica Ross
Senior VP & CFO at Frontdoor

Could you repeat Or

Mark Hughes
Mark Hughes
Analyst at Truist Securities

she said favorable development.

Jessica Ross
Jessica Ross
Senior VP & CFO at Frontdoor

Oh, in terms of favorable development? Is that what she said? It was about 7,000,000 We didn't break that out between 02/10 and the remainder of the company.

Mark Hughes
Mark Hughes
Analyst at Truist Securities

Would you like to break that out now?

Jessica Ross
Jessica Ross
Senior VP & CFO at Frontdoor

Rent or mostly.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

Yeah.

Mark Hughes
Mark Hughes
Analyst at Truist Securities

Okay. Very good. Thank you.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

Thanks, Mark.

Operator

Thanks, Mark. Thank you very much. Okay. Our next question is coming from Jeff Schmitt of William Blair. Jeff, your line is live.

Jeff Schmitt
Research Analyst - Financial Services and Technology at William Blair & Company, L.L.C

Hi, good morning. On the number of service requests, they were higher in the quarter due to unfavorable weather. But I guess when you back that out, what was the trend? And do you still expect them to normalize to 4,000,000 for the year? Or is it just a little too early to tell?

Jessica Ross
Jessica Ross
Senior VP & CFO at Frontdoor

Yes, Jeff. I would say the number of incidents increase was really driven by addition of two ten. But we're still anticipating, as I said at Investor Day, about 4,000,000 for the year.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

Yes. Because you remember, Jeff, we had dipped below 4,000,000, but then as we've added two ten, it's

Jessica Ross
Jessica Ross
Senior VP & CFO at Frontdoor

back up.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

Right.

Jeff Schmitt
Research Analyst - Financial Services and Technology at William Blair & Company, L.L.C

Okay. That makes sense. And then unit growth in the direct channel continues to be good. How often did you run promotions during the quarter? And how sustainable do you think that is?

Jeff Schmitt
Research Analyst - Financial Services and Technology at William Blair & Company, L.L.C

I mean, can you continue to run promotions at this level? Or do you think you're going to have to sort of spread them out?

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

So interestingly, this year, we've taken a little bit different approach to our promotional pricing. We had been running month long events last year primarily. We changed our strategy this year where we're pulsing events shorter duration, and I So we actually feel good about continuing on with the pulsing strategy that we have now. We think we can sustain this.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

As I said in my remarks, we're gonna accept a revenue offset because our number one priority is to drive member count, and that's driven by the way we are running our renewal book where we continue to have high retention. So this is going to pay out, and we think it's paying out now, We're covering up some of the revenue shortfall with other revenue and the strength with renewals. So the whole thing is, the whole mix is working well together, I feel. So we're gonna continue this for the foreseeable future.

Mark Hughes
Mark Hughes
Analyst at Truist Securities

Okay. Thank you.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

Thank you

Operator

next question is coming from Sergio Segura of KeyBanc. Sergio, your line is live.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

Hey, Sergio.

Jessica Ross
Jessica Ross
Senior VP & CFO at Frontdoor

Good morning, Sergio.

Sergio Segura
Sergio Segura
Vice President at KeyBanc Capital Markets

Hey, Bill. Hey, Jessica. Good morning. Thanks for taking the question. I have a few. I guess the first one is just on the outperformance you guys saw in the quarter. It looks like that was primarily driven by renewals revenue above the outlook you provided last quarter. So curious if you could provide any color on what drove the outperformance relative to your expectations. Was that more price or volume driven?

Jessica Ross
Jessica Ross
Senior VP & CFO at Frontdoor

Well, so I think a couple of things. It was probably more of the non warranty. So it was split between non warranty and warranty and renewals as you said. On the non warranty side, that's a split between HVAC and Moen. And then renewals, again, was really just stronger renewals and which is continued strength in how we're improving the member experience, so mostly from a volume perspective there.

Jessica Ross
Jessica Ross
Senior VP & CFO at Frontdoor

And then just on the margin side, more than half the beat was really due to contract claims costs with the remainder driven by revenue conversion dropping down. As I just said, we had about $7,000,000 in favorable development. We also had better than expected costs. As Bill said, we had normal inflation, but when you offset that with process improvements and trade service fees, we landed about flat and then also better than expected incidence rate, which was driven by some weather and favorability across all the other trades.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

Sure, I think one of the key points here is we're building a portfolio now, which enables us, if you think about what I just said about DTC pricing, so we're accepting a revenue shortfall on these because our other revenue is performing so well, our renewal revenue is performing so well, so the mix is coming together in a really nice way that we can balance our top line and then deliver outstanding results on the bottom line.

Sergio Segura
Sergio Segura
Vice President at KeyBanc Capital Markets

Got it, that's helpful. Thanks. I guess, you know, the second question I had was in response to Mark's question. Bill, I think you said that some suppliers are raising prices and you're moving around where you're purchasing some parts. I just know and I take a step back thinking historically when suppliers do this, I guess when do other suppliers respond to that or just either competitors raising prices or just rising input costs in the past?

Sergio Segura
Sergio Segura
Vice President at KeyBanc Capital Markets

And is there any reason to think that this would be different this time around given the current macroeconomic environment?

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

Yeah, so let me take it first and Jessica, if you want to add anything. So let me break it down, Sergio, that, you know, we're looking at water heaters, we're looking at HVAC equipment, we're looking at appliances, and then there's a whole parts component. We have not seen inflation in parts to date. We get a lot of our parts from China, so we're waiting to see what impact that will have, and we've built in what we think is enough in the second half in the guide to account for that. With regard to the other areas, suppliers are kind of eyeing each other as they go forward and as we work with them.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

Some of the contracts we already have locked in through dates in 2025. So I think on balance, we feel good about the way our supply chain team has been able to manage that through. But, you know, we'll see where it nets out. But, you know, as Jessica pointed out with our pricing and the way we're monitoring all this, we think we've got things covered, knowing that like with every company that's facing the uncertainty that's existing today, We have to be nimble in our responses.

Jessica Ross
Jessica Ross
Senior VP & CFO at Frontdoor

Yeah. And I would just add, I said in my prepared remarks, this is not new behavior for us now coming out of the pandemic. We've really built a strength, I'd say, in our supply chain team. And so these relationships that we've built historically are what really are putting us in a good position to be able to leverage our purchasing power and make sure that we are protecting supply and pricing heading into these times.

Sergio Segura
Sergio Segura
Vice President at KeyBanc Capital Markets

Got it. Thank you. Very helpful in the thoughts.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

Thanks, Sergio.

Operator

Thank you very much. Our next question is coming from Danny Pfeiffer of JPMorgan. Danny, your line is live.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

Hey, Danny.

Danny Pfeiffer
Danny Pfeiffer
Equity Research Associate at JP Morgan

Hey, how's it going?

Danny Pfeiffer
Danny Pfeiffer
Equity Research Associate at JP Morgan

Thanks for the questions. For the first, Jessica, in your prepared remarks, I think you guided to 10% growth in D2C in 2Q. Can you maybe just parse out what drives that implied sequential growth in the quarter? And then I have a follow-up.

Jessica Ross
Jessica Ross
Senior VP & CFO at Frontdoor

I mean, I think as Bill said, we are going, I'd say, going hard actively using the discounting strategy, which has been working. And so that momentum is flowing through, and we're expecting to see that business in Q2.

Danny Pfeiffer
Danny Pfeiffer
Equity Research Associate at JP Morgan

Got you. And then on the second, can you maybe expand on what gives you the confidence to raise the 2025 gross margin guide this early in the year and whether you're assuming the current tariff rates implemented today remain especially on China? Thanks.

Jessica Ross
Jessica Ross
Senior VP & CFO at Frontdoor

Yes. No, I mean, essentially what we're doing is we're taking the goodness we saw in Q1 and flowing that through to the full year. We talked about we have flat inflation. And as you can tell by our Q2 guide, we're expecting that goodness to flow through to Q2 as well. However, with the uncertainty on the tariffs, we've guided to mid single digit inflation for the full year.

Jessica Ross
Jessica Ross
Senior VP & CFO at Frontdoor

And so that really implies that we've got low on the front half, mid to high on the back half. So what I said was we would probably have low single digit inflation absent tariffs. You add a couple points on there. We've said publicly 1% translates to about $10,000,000 in costs. So you can anticipate about 20,000,000 to $30,000,000 in the back half, again, is essentially the impact of the tariff uncertainty.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

And then we also added, Danny, about $15,000,000 of normalized weather. We've had weather favorability the last couple of years, so we can't just count on that every year. Plus, as Jessica pointed out in her remarks, the amount of incidents we feel will go up to more normalized levels. So it's circa $50,000,000 or so that we've built into the guide, and it still nets out to a gross margin guidance between 5455%.

Jessica Ross
Jessica Ross
Senior VP & CFO at Frontdoor

It's a 200 bps increase, so we're feeling really good about the balance of taking the performance on the front half, that we're in a position that we can put some caution in there and still feel good about our margin rate.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

Feel great about it.

Danny Pfeiffer
Danny Pfeiffer
Equity Research Associate at JP Morgan

That's super helpful. Thanks.

Jessica Ross
Jessica Ross
Senior VP & CFO at Frontdoor

Thanks, Dani. Thank you, Dani.

Operator

Thank you very much. And your next question is coming from Ian Zaffino of Oppenheimer. Ian, your line is live.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

Hey, Ian.

Jessica Ross
Jessica Ross
Senior VP & CFO at Frontdoor

Hi, Ian.

Isaac Sellhausen
Director - Equity Research at Oppenheimer & Co. Inc.

Hey, good morning. This is actually Isaac Sauson on for Ian. Thanks for taking all the questions. Congrats on the strong quarter. Hi.

Isaac Sellhausen
Director - Equity Research at Oppenheimer & Co. Inc.

Thanks, Alex. Yes, my first question is on the real estate side. Know, calls for the high single digit increase this year. I believe you mentioned you expect 15% growth in the second quarter. So maybe help us understand what drives that growth given how existing home sales have trended through the start of the year?

Isaac Sellhausen
Director - Equity Research at Oppenheimer & Co. Inc.

And do you assume a rebound? Or is promotional activity in the AHS relaunch helping drive some of that growth? Thanks.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

Well, I think, you know, we it's the addition of two ten, which has a very strong real estate portfolio. So that's, I think, contributing greatly. We did have improved unit performance, but it was, you know, down 6% versus, you know, last year we're down close to 10%. So the combination of the addition of two tenants slightly improved performance in real estate in organic real estate leads to that. So I think it all nets out too, but the answer to your question is more specifically primarily two ten.

Isaac Sellhausen
Director - Equity Research at Oppenheimer & Co. Inc.

Okay, understood. And then just a follow-up on the retention rate, it was super strong this quarter at around 80%. I think you went through a couple of the main drivers of that. I think part of it is the mix shift. Maybe help us understand how you expect that to trend through the year.

Isaac Sellhausen
Director - Equity Research at Oppenheimer & Co. Inc.

And then anything else you could highlight on some of the drivers of retention? Thanks.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

Yeah. We this is a grinding initiative for the entire company. We have a lot of people lined up against this because this is the backbone of our company. We pointed out in this time that we've introduced this expanded calling program that has reduced the number of people who cancel, which counts as a saved unit. We've got the preferred contractor, which our contractor relations team, the increase in preferred contractors, as they've done a nice job on that.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

The marketing folks are working really hard on staying close to our members through the journey. So it's a series of initiatives that, excuse me, we take in order to drive that number. And we think that will sustain. I'm not going to project any specific numbers because we're just learning the two ten part of the business now, but they have strong retention also, which is one of the things we're attracted to that asset as we pursued it. So it's all coming together quite nicely, but this is something we work at day after day after day.

Isaac Sellhausen
Director - Equity Research at Oppenheimer & Co. Inc.

Okay, understood, thank you very much.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

The other thing I would point out Isaac is, you know, this edition, and I talked about it, video chat with an expert, this is really sparking some interest. We did a nice job with one of our Warren Tina ads introducing video chat with an expert. I gave you some of the stats earlier about how we are helping people to fix it themselves, which is a downstream benefit for us from a cost perspective. But we have a lot of interest from our members on video chat. It's a great user experience, and I think that is another thing that is contributing to our retention.

Bill Cobb
Bill Cobb
Chairman & CEO at Frontdoor

So all of these things are coming together to net to that retention number.

Isaac Sellhausen
Director - Equity Research at Oppenheimer & Co. Inc.

Okay. Very helpful. Thank you.

Operator

You we have reached the end of our question and answer session and indeed the end of the conference. You may now disconnect your lines at this time and have a wonderful day. We thank you for your participation.

Executives
    • Matt Davis
      Matt Davis
      VP of Investor Relations & Treasurer
    • Bill Cobb
      Bill Cobb
      Chairman & CEO
    • Jessica Ross
      Jessica Ross
      Senior VP & CFO
Analysts
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