Frontdoor Q2 2026 Earnings Call Transcript

Quartr
Provided by Quartr
August 6, 2026

Key Takeaways

  • Member growth returned: Total ending members increased 1% year over year, marking the first organic growth since 2021. Direct-to-consumer members rose 5% and real estate members grew 7%, despite a difficult housing market.
  • Strong financial performance and raised guidance: Second-quarter revenue increased 5% to $645 million, adjusted EBITDA rose 10% to $220 million, and adjusted EPS grew nearly 20%. Frontdoor raised full-year revenue guidance to $2.19 billion–$2.21 billion and adjusted EBITDA guidance to $585 million–$600 million.
  • Margins and retention remain robust: Gross margin expanded 100 basis points to 59%, while adjusted EBITDA margin reached 34%. Renewal retention was near a record at 79.6%, supported by improved member service, greater app usage, and 85% AutoPay enrollment.
  • Non-warranty growth is scaling: Non-warranty and other revenue grew 19%, led by the HVAC upgrade program, which management expects to generate $170 million in annual revenue. The company is expanding into appliance sales and sees substantial runway given only 3% penetration of its member base so far.
  • Second-half comparisons include headwinds: Management expects the approximately $5 million second-quarter weather benefit to largely reverse in the third quarter, while increasing marketing investment by more than $10 million. Existing home sales remain sluggish, and full-year direct-to-consumer revenue is expected to decline by a low-single-digit percentage.
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Earnings Conference Call
Frontdoor Q2 2026
00:00 / 00:00

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Operator

Ladies and gentlemen, welcome to Frontdoor's Second Quarter 2026 Earnings Call. Today's call is being recorded and broadcast on the internet. Beginning today's call is Mr. Matt Davis, Vice President of Investor Relations and Treasurer, and he will introduce the other speakers on the call. We'll begin today's call. Please go ahead, Mr. Davis.

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

Thank you, operator. Good morning, everyone, thank you for joining Frontdoor's second quarter 2026 earnings conference call. Joining me today are Bill Cobb, Chairman and CEO, and Jason Bailey, Senior Vice President and CFO. 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 www.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. 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.

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

All forward-looking statements are made as of today, August 6th, 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. Bill?

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

Thanks, Matthew, good morning, everyone. Frontdoor delivered exceptional results in the second quarter across all key areas of the business. At the mid-year mark, we are driving member growth, with total ending member count up 1%, the first organic growth in five years. We are successfully scaling our non-warranty and other business, which is rapidly approaching a quarter of a billion dollars in annual revenue. We're delivering structurally higher margins, we continue to maintain capital discipline. We expect to repurchase approximately $330 million of our stock in 2026, which will complete our latest authorization nearly a year ahead of schedule. Let's turn to slide five to cover the Q2 highlights. Revenue grew 5% to $645 million. Gross profit margin expanded 100 basis points to 59%. Net income grew 13% to $125 million.

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

Adjusted EBITDA increased 10% to $220 million, and we repurchased $181 million worth of shares through July 31st. It was truly an outstanding quarter. Mid-single-digit revenue growth, combined with continued gross margin strength and SG&A leverage, drove a double-digit increase in net income, all resulting in adjusted EPS growth of nearly 20%, which also includes the impact of our share repurchases. This powerful combination shows that our model is working. Let's turn to slide six to take a deeper look at our member count performance. Our direct-to-consumer channel grew 5%. Our real estate channel grew a resounding 7%, and our renewal member count was stable due to strong retention rates and sustained growth in our first-year channels, another major milestone for our business. Taken together, this translated to total ending member count growth of 1% for the quarter.

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

I want to pause there for a moment because this inflection point is a big deal. Our number one priority at Frontdoor is to grow and retain home warranty members. For the first time since 2021, our total ending member count is growing again. This reflects the progress we've made across the business and the execution we're seeing in both our first-year channels and our renewals. Let's take a deeper look at how we're driving direct-to-consumer growth on Slide seven. Ending member count in this channel grew 5%, marking our seventh consecutive quarter of year-over-year growth. This kind of consistency proves that our playbook is working. That playbook is built around two things. One, growing demand through brand leadership, and two, improving conversion. Starting at the top of the funnel, our Warrantina campaign is reaching more of our audience than ever.

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

More than 40% of homeowners recall seeing our ads. Our brand health metrics, likability, relevance, differentiation, effect on interest, all continue to improve and outperform the category. We also intentionally pulled forward the timing of our planned marketing spend to align with our selling season, and it is paying off. We continue to shift more of our marketing spend to performance channels, where we can be more targeted, more flexible, and reach consumers at the right moment. We are also expanding demand through our multi-brand strategy and proving we can accelerate growth by elevating acquired brands to our operating standards. 2-10 is a great example. When we acquired it, we talked to all of you about revenue synergies we believed we could unlock by bringing 2-10 onto our platform. We're now starting to see those synergies come through.

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

By applying the AHS toolkit, we are meaningfully growing the 2-10 brand. This is exactly the kind of value creation we can drive when we put our full weight behind a smaller brand. Turning to the second area of the playbook, improving conversion. How consumers find us is changing across traditional search engines such as Google and increasingly AI. We're recreating our content and restructuring our sites to stay prominently positioned, and it's already improving our search outcomes. With the assistance of AI tools, we are also reshaping how our inside sales team operates. Real-time enablement tools guide our agents during calls, pinpoint the best time and channel to reach prospects, and surface the behaviors that drive conversion. This is helping newer agents ramp faster and sell more efficiently. Finally, promotional pricing continues to be a strategic acquisition tool.

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

Renewal performance of these cohorts continues to hold up as well as, if not better than, our non-promotional cohorts. That means that the long-term unit economics remain very strong. Let's turn to slide eight and the real estate channel, which had a standout quarter as ending member count grew 7%. Let me set the context on the housing environment first. Inventory has improved to 4.5 months of supply from the 2.6 months in 2022. That gives buyers more leverage and is allowing home warranties to be a more frequent part of the home transaction again. Let me be clear, the broader market remains challenged. Existing home sales are still sluggish and are expected to finish around 4 million homes sold for the fourth year in a row as higher mortgage rates and affordability issues continue to limit transactions.

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

Against that backdrop, we are engaging more directly with real estate agents. That means expanding our geographic coverage, running targeted promotions where the opportunity is the greatest, and bringing agents the strongest value proposition in the market. As a result, even though existing home sales remain flat, our attach rate improved 30 basis points versus the prior year period. Put another way, in the second quarter, we attached a home warranty to over 5% of existing homes sold in the U.S. Let's turn to renewals, the foundation of our business on Slide nine. A decision to renew with us is made across multiple moments during the member journey, and we think about enhancing that journey in four stages. It starts with onboarding, the first impression. Getting a new member set up quickly, helping them understand their coverage, and making that first experience a good one.

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

From there, it's about engagement, the day-to-day of being a member. Every claim we handle well, every contractor who does the job right, that's where trust is built. Comes the renewal itself, where all the moments of the member journey come together to drive our high retention rates. Finally, post-renewal, because once a member renews, the next journey begins, and we want them with us for years to come. On the next slide, I'll walk through the results for renewals. The proof is in our retention rate. We continue to be near all-time highs in the quarter at 79.6%, a clear sign our strategy is working. Two things are driving it. First, the member experience, and nothing is more paramount in this business. Our differentiated technology is designed to get members a faster answer, a faster fix, and a better outcome conveniently and sometimes virtually.

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

Our app is a great example of that, and members are using it more than ever. Active users engaging with our app is up 65% year-over-year, and usage of our video chat with an expert feature through the app more than doubled during the quarter. Technology is only part of it. Trust is really earned when something breaks, and that's where our service delivery comes through. We continue to drive strong volume to our preferred contractor network with 84% of our jobs, which delivers a more consistent and higher-quality service experience. Our service ratings improved again this quarter. Record high five-star ratings and record low one-star ratings, a trend we have seen now for 36 straight months. The second driver is operational, the blocking and tackling of the renewal itself. This is where discipline and focus matter, and we continue to raise our game.

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

Our SAVE program keeps getting sharper, reaching members who choose not to renew with the right offer at the right moment to win them back. AutoPay is our most effective retention tool, we are making it an easier choice for our members. Enrollment is now at 85% and near all-time highs. We're seeing that same AutoPay benefit as we migrate 2-10 members onto our platform, where enrollment has increased meaningfully. Individually, these are small, disciplined improvements. Together, they compound, that's a large part of what returned us to total member growth this quarter. Let me turn to non-warranty, which is anchored by our new HVAC upgrade program on Slide 11.

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

This program is a prime example of our strategy to expand share of wallet and deepen our relationship with members. This business has scaled remarkably fast, growing from $13 million to an expected $170 million in just four years. It comes with little to no customer acquisition cost. We keep getting better at it. For example, contractor participation, quote rates, and win rates are all improving. We're now applying dynamic pricing to this business, the same approach we use across the rest of our model, weighing many variables to price each offer with precision. What excites me most is the built-in demand funnel with our existing 2.1 million members, something that other companies would have to spend heavily to create. We have made excellent strides, and there's a lot of runway ahead.

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

We've penetrated just 3% of our member base so far, and HVAC is only the beginning. It's the proof point for a model we can duplicate across other trades over time. In summary, we had a great second quarter. We are firing on all cylinders, and we are extremely optimistic about where this business is heading. With that, I will now turn the call over to Jason to cover the financials in more detail.

Jason Bailey
Jason Bailey
SVP and CFO at Frontdoor

Thanks, Bill. We had an excellent quarter, and I want to start by focusing on how we keep delivering these strong results. It starts with a predictable, renewal-driven base that gives us a recurring revenue foundation. On top of that, operational excellence is driving structurally higher margins than just a few years ago. That combination generates a lot of cash, where we converted adjusted EBITDA to free cash flow at more than 60%. We're putting that cash to work, returning around $900 million to shareholders through share repurchases since 2021. This is a durable model that is turning consistent execution into real cash and real returns. Let me take you through the financial results on Slide 14, where you'll see those four pieces at work. I'll start briefly with the first half highlights before jumping into the details of the second quarter.

Jason Bailey
Jason Bailey
SVP and CFO at Frontdoor

The progression of these metrics from left to right tells you in one line that this business model is working. Revenue growth, an exceptionally strong margin profile, and operating leverage amplified by share repurchases. Through the first six months of the year, revenue grew 5% to $1.1 billion. Adjusted EBITDA increased 8% to $324 million. Net income grew 13% to $167 million. Lastly, adjusted diluted EPS grew 17% to $2.66 per share. You will see similar patterns in both our first half and second quarter results. Let's turn to slide 15 for a deeper look at our Q2 results, starting with revenue. Total revenue grew 5% to $645 million. This was driven by over 3% from higher realized price and over 1% from higher volume. From a channel perspective, renewal revenue grew 4%, driven by higher price from our dynamic pricing model.

Jason Bailey
Jason Bailey
SVP and CFO at Frontdoor

First year real estate revenue increased by 3%, driven by higher volume as balanced housing market conditions supported higher capture rates, partially offset by lower realized price. First year direct-to-consumer revenue decreased 2% due to lower price from our promotional pricing strategy, partially offset by higher volume from growth in new home warranty members. Lastly, non-warranty and other revenue increased 19% due to both higher volume and price driven by our new HVAC upgrade program. Moving to gross profit and gross margin on slide 16. Gross profit increased 5% versus the prior year period to $378 million, and gross margin improved approximately 100 basis points to 59%. Revenue conversion added about $16 million, reflecting the results of our dynamic pricing model. We also benefited from lower incidents across our member base.

Jason Bailey
Jason Bailey
SVP and CFO at Frontdoor

This included approximately $5 million of favorable weather in the quarter, as well as the impacts of long-term efforts across HVAC upgrades and tune-ups. Our operational excellence continues to deliver through our supply chain scale, tighter cost controls, and smarter job routing across our contractor network, all capabilities that we're now extending to 2-10. This helped offset the impacts from low single-digit cost inflation across labor, parts, and equipment and the ongoing revenue mix shift as non-warranty scales. To put it simply, our process improvements and favorable weather more than offset macro cost pressure in the quarter. Turning to slide 17, let's review our net income and adjusted EBITDA. For the second quarter, net income grew 13% to $125 million versus the prior year period. Adjusted EBITDA grew 10% to $220 million, with adjusted EBITDA margin expanding 200 basis points to 34%.

Jason Bailey
Jason Bailey
SVP and CFO at Frontdoor

Strong margins have become our expectation, because any single quarter can move around with weather, seasonality, and timing, the trend is best viewed on a full-year basis. Let's turn to slide 18 to look at that margin evolution. The takeaway is clear. This is a fundamentally more profitable business than it was just a few years ago. This improvement has come from three things working together. First, pricing. Our dynamic pricing model lets us price to each member's individual risk and usage, catching up on price where we've fallen behind, and better aligning price with cost to serve across the book. Alongside that, we've been steadily raising our trade service fees, which further strengthens the underlying economics at the point of service. Second, operational excellence.

Jason Bailey
Jason Bailey
SVP and CFO at Frontdoor

Preferred contractors are one of our best levers on cost and service, we now route about 84% of jobs to them, up from about 82% just three years ago. On the supply side, our purchasing power lets us source parts and equipment more efficiently than anyone else in the category. Third, operating leverage. We're growing revenue while continuing to be disciplined with how we invest behind it, particularly in marketing, where smarter targeting and better conversion mean each dollar works harder and more of our growth reaches the bottom line. Together, these efforts, combined with our strong retention rates, have helped expand our full year adjusted EBITDA margin by roughly 1,400 basis points over a four-year period, from 13% in 2022 to a forecasted 27% this year, based on the increased guidance I will cover shortly.

Jason Bailey
Jason Bailey
SVP and CFO at Frontdoor

It's also why we raised our long-term margin target to the mid 20% range earlier this year. We're currently operating at the high end of that range, helped in part by favorable conditions. The more important point is that the entire range now sits well above where this business used to operate. That profitability, combined with our capital-light model, generates significant free cash flow. Let's turn to slide 19 to review our free cash flow and financial position as of quarter ends. Through the first half of the year, we generated $233 million of free cash flow, we continue to expect to convert more than 60% of adjusted EBITDA into free cash flow for the year. We are operating our balance sheet from a position of strength. At the end of the second quarter, we had $472 million of unrestricted cash and total liquidity of $722 million.

Jason Bailey
Jason Bailey
SVP and CFO at Frontdoor

Taken together with our low leverage, we have ample flexibility to create value through our capital allocation strategy, which we will now turn to on slide 20. Our capital allocation framework remains anchored in a disciplined approach designed to drive long-term value creation. We are focused on three core priorities. First, investing for growth. We start by investing in the business both organically and through disciplined M&A. Second, maintaining a strong financial profile. We remain committed to maintaining ample liquidity and low leverage, ensuring we can invest in the business while preserving strategic optionality. Third, returning excess cash to shareholders. This business is a strong cash generator, and repurchasing shares amplifies how we create value. Let's now turn to the next slide for a deeper look at share repurchases. Given our cash generation and conviction in the returns, we plan to accelerate our share repurchases in the second half.

Jason Bailey
Jason Bailey
SVP and CFO at Frontdoor

We now expect to buy back approximately $330 million of shares this year, which puts us on track to complete the current authorization in 2026, well ahead of our original timeline. Our conviction here isn't new. Repurchasing our shares remains one of the highest return uses of our capital, and we've leaned into it consistently. The effect compounds. Since 2021, we've deployed approximately $900 million to repurchases, buying back nearly a quarter of the company and driving more than a 20% benefit to our earnings per share, all while building our cash balance, reducing our net leverage ratio, and allocating cash to strategic M&A like 2-10. From here, we will stay disciplined about where every dollar goes, given the cash this business generates, we are not done returning capital to shareholders, and we'll step up our pace in the second half.

Jason Bailey
Jason Bailey
SVP and CFO at Frontdoor

Let's now pivot to a discussion on our updated financial outlook on slide 22, starting with the full year. We are pleased to announce that we are raising our full year financial guidance. We are raising our revenue expectations by $25 million at the midpoint to a range of $2.19 billion-$2.21 billion. This is underpinned by a 3%-4% increase in realized price and a 1%-2% increase in volume. By channel, we expect low to mid single digit increases in renewal channel revenue, a low single digit increase in real estate revenue, a low single digit decrease in direct-to-consumer revenue, and $230 million-$240 million in non-warranty and other revenue. We expect our gross margins to be approximately 55%, and we now expect SG&A of $685 million-$695 million, which reflects a second half step-up in investment that I'll come back to in a moment.

Jason Bailey
Jason Bailey
SVP and CFO at Frontdoor

We are increasing our adjusted EBITDA expectations by $20 million at the midpoint to a range of $585 million-$600 million. This translates to an adjusted EBITDA margin of approximately 27% at the midpoint. Our adjusted EBITDA outlook considers about $45 million of stock compensation and integration cost and about $20 million of interest income. We also expect capital expenditures of approximately $30 million. Our effective tax rate remains unchanged at approximately 25%. Before I get to the third quarter, let me give you some context on the shape of the second half. At the midpoint, the change to our updated full-year guidance compared to our prior outlook implies a $3 million increase to our second half adjusted EBITDA, which is after the impact of the following items. First, we're increasing our marketing spend by more than $10 million, weighted towards the third quarter, to build on our current momentum.

Jason Bailey
Jason Bailey
SVP and CFO at Frontdoor

Even after that spend, we still expect to deliver SG&A leverage for the year. Second, we are anticipating the weather benefit from the second quarter to largely reverse in the third quarter, and we saw that start to play out in July. One final point. With the first half complete, roughly 55% of our expected full-year adjusted EBITDA is now behind us, in line with the pacing of 2025. This timing is a normal feature of our business, and it's why we point investors to full-year performance as the best measure of how we're delivering. Please turn to slide 23, and we'll review the third quarter outlook. For the third quarter specifically, we expect revenue of $642 million-$652 million.

Jason Bailey
Jason Bailey
SVP and CFO at Frontdoor

By channel, we expect a low to mid-single digit increase in renewal revenue, a low single digit increase in real estate revenue, a low single digit decrease in direct consumer revenue, and an over 20% increase in non-warranty and other revenue. For adjusted EBITDA, we expect to be in the range of $197 million-$207 million. This reflects higher revenue conversion, partially offset by the timing of the weather benefit from Q2 and incremental second half SG&A investment. While the external environment has grown more complex, our execution, combined with the multiple levers we have to offset inflation, gives us confidence in our ability to deliver another record year in 2026. With that, back to you, Bill.

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

Thank you, Jason. Before we open it up to questions, I want to emphasize three key takeaways. First, our total member count is past the inflection point. Even with one of the most challenging housing markets we've seen in a generation, we're growing total member count again. Second, our operating model is doing what we built it to do quarter after quarter. We are delivering structurally higher margins in line with our long-term targets. Third, we expect to finish our latest share repurchase authorization by the end of this year, almost a full year early. None of these results happen on their own. They happen because 2,000-plus associates and thousands of contractors show up for our members every single day. To all of you, well done. You are the driving force behind this performance. Operator, please open the line for questions.

Operator

Thank you. Ladies and gentlemen, at this time, we will be conducting our question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question is coming from Mark Hughes with Truist. Your line is live.

Mark Hughes
Mark Hughes
Analyst at Truist

Thank you. Good morning.

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

Hey, Mark.

Mark Hughes
Mark Hughes
Analyst at Truist

In the real estate channel, that 7% growth in member count seems pretty strong in this environment. How much price sensitivity or elasticity do you see there? Is the price useful in terms of trying to improve attachment rates?

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

Yeah. We're using, not at the level of the DTC area, but we do use some discounting in real estate on a selective basis. Really, I think that it is a tough backdrop. We're very pleased with the work that our real estate team did this quarter. I think it just shows that as we focus more locally and combine it with a lot of education about, I talked about our app and all the improvements we've made there. I think it's a combination of things. It's a grind, but I think 7% was a good showing for Q2.

Mark Hughes
Mark Hughes
Analyst at Truist

Yeah. You talked about kind of refining some of the strategy around 2-10. How do you position 2-10 differently than the American Home Shield brand? What's the dynamic there that differentiates in the mind of potential customers?

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

Yeah. It's not really that different. We call it our multi-brand strategy. We think that the basic value proposition for home warranty is the same. We're obviously focused on the, excuse me, the renewal book of 2-10, which has been very strong, especially as it's come up on the platform. We've gone after it, and it has its strength in certain markets. But we come at it with what we call our multi-brand strategy, which is a consistent strategy driving the value proposition for home warranty.

Mark Hughes
Mark Hughes
Analyst at Truist

Very good. I think, Jason, you had alluded to Maybe July weather. Could you expand on that? It seems like there was a lot of hot weather out there. How meaningful was that in terms of the start of the Q3 here?

Jason Bailey
Jason Bailey
SVP and CFO at Frontdoor

Yeah, Mark. What I was really trying to highlight is June was a little milder than we expected, and then we saw some of that come back in July. We viewed it as a bit of a timing item, and we just wanted everybody to be aware of that as we think about the Q2 and Q3 results combined. If you think about that summer season and when the weather really hits. That's really what I'm trying to highlight.

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

It's where the weather hits too, Mark, because as you know, the home warranty business is kind of the smile states. Depending upon how weather is in California, Texas, Florida, et cetera, has an impact. I think we're just trying to show that in Q2, we had a weather benefit. We estimated about $5 million, and we anticipate, especially the way July started with all the heat, that'll reverse in Q3.

Mark Hughes
Mark Hughes
Analyst at Truist

Yeah. Just quickly, were there any reserve gains in the quarter? You didn't call any out.

Jason Bailey
Jason Bailey
SVP and CFO at Frontdoor

Yeah. It was about $4 million of favorable cost development. That's part of the beat there too, Mark. We saw claims costs come in a little better. It's $4 million. I think that compares to about $4 million in the same period a year ago.

Mark Hughes
Mark Hughes
Analyst at Truist

Very good. Thank you.

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

Thanks, Mark.

Operator

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

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

Hey, Sergio.

Sergio Segura
Sergio Segura
Analyst at KeyBanc

Hey, Bill. Hey, Jason. Good morning. I'll keep it to a few questions here. Maybe first just talking about and building on Mark's question about weather. Just if you could talk about the EBITDA margin outperformance. You're coming off a record year last year, and we saw some expansion in the first half, and I think you're guiding to expansion for the full year. Could you just talk about the key factors driving the expansion even versus last year's record performance? How much of that is weather and how much of that is just other things within the business driving that performance?

Jason Bailey
Jason Bailey
SVP and CFO at Frontdoor

Yeah. In thinking about year-over-year, Sergio, for the quarter, we estimated weather at about a $5 million better impact this year. That helped offset what we're calling low single digit inflation, kind of cost inflation at the contract cost level. We had a little bit of other favorable incidents. Then we did have some small benefit as we brought 2-10 onto our platform and started to normalize their cost structure towards ours. I'd give a lot of credit to our contractor relations team.

Jason Bailey
Jason Bailey
SVP and CFO at Frontdoor

They're doing a great job managing cost against-- I think we were a little conservative coming into the quarter just with uncertain macro, if you think about the news changing daily with world events. The team's doing a really good job there keeping that inflation number down. I think percent of preferred remains near all-time highs. Both cost and service are doing really well there.

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

The other thing, Sergio, is, and I'm really proud of the company, and I talked about it in the script, that we make these small improvements that compound over time, and it's almost every facet of the business. I went through the renewal journey, and Jason just referenced the contractor relations team and our service ops teams. We continue to get better at just operating the company, and I think that on the margin, it helps us year-over-year.

Jason Bailey
Jason Bailey
SVP and CFO at Frontdoor

Sergio, I'd probably add too, as we thought about our margin targets, our long-term targets, this was a big part of how we had the confidence to raise that to the mid-20s.

Sergio Segura
Sergio Segura
Analyst at KeyBanc

Yeah. That makes sense. Maybe just one on the raised outlook on both the renewals channel and the realized pricing. Is there any broad-based pricing increase in there, or is it more just kind of dynamically pricing and you guys are seeing the benefit from that?

Jason Bailey
Jason Bailey
SVP and CFO at Frontdoor

I think we'd attribute that mostly to the optimization around dynamic pricing, Sergio. We are also seeing continued strong performance in our renewal rates.

Sergio Segura
Sergio Segura
Analyst at KeyBanc

Right.

Jason Bailey
Jason Bailey
SVP and CFO at Frontdoor

I'd say it's a combination of both, but we just get better. As Bill said, it's that incremental investment, even in our tools like dynamic pricing, where we get better and better each day.

Sergio Segura
Sergio Segura
Analyst at KeyBanc

Understood. Thanks, guys.

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

Thanks, Sergio.

Operator

Thank you. As a reminder, ladies and gentlemen, if you do have any questions or comments, please press star one on your telephone keypad. Our next question is coming from Ian Zaffino with Oppenheimer. Your line is live.

Ian Zaffino
Ian Zaffino
Analyst at Oppenheimer

Hi. I just wanted to drill down a little bit more on the real estate business and member care. Nice growth there, but can you tell us maybe, because if we look at it, existing home sales were kind of flat, but yet your customer count grew. How much of that was driven by, let's just say, attachment rate or maybe just market share gains, and maybe specifically, you could tell us what this local strategy is and what people are doing on your side to sign more real estate customers up. Thanks.

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

Yeah. The local strategy. We had been investing a lot of money in MSAs, and kind of changed our strategy on that. We still have a couple, but we wanted to take that money and effectively invest it at the local level with the local franchisees and brokers. Really, as opposed to trying to write the big check to the corporate area, we really wanted to put that money into the field. That has really helped, and it's a number of issues. We've had an increase in the number of sessions we've had with agents, and really the catalyst for that is also showcasing our technology, both the app and the video chat with an expert. We did introduce discounting about nine months ago or so, which is having an effect because it gives people something to sell against.

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

Because I think a lot of the times with the real estate agent, it's a more of matter of giving them something to sell. Finally, we touched on the inventory levels increasing. What that does is it has an ability for sellers to begin to attach a home warranty more than they did a few years back. That combination of things. It's a grinding business. It's one that our agents are out grinding against, calling on agents and brokers every day. That's why I said in the call, I'm really proud of our real estate leadership, our market managers, et cetera, who are doing this every day for us. Being able to drive against that attach rate, how many more home warranties can you generate is really, I think, what combined to drive it up 7%.

Ian Zaffino
Ian Zaffino
Analyst at Oppenheimer

Okay, thanks. On the HVAC upgrade side, that's actually going very well. How do you feel about future growth in that business and what you're seeing? Maybe to touch upon margins a little bit, and then any kind of comments on how the business performs with refrigerant changes. There's the 410-A changes or at least implementations of that. Maybe any color there, too. Thank you.

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

Yeah, I'll start. Then Jason, you can kick in on the margin stuff. I think we're onto something here in we think we've refined the model. As we said, we're applying our pricing tools now. We're getting more targeted geographically. When we first started this, we just would go anywhere to do it. Now we're engaging contractors all across the country. We've continued to increase the number of contractors participating. I think we mentioned in one of the slides, we've penetrated about 3% of the business over time. That's if we start back and you add up all the revenue, and I think it's Jason, you did this the other day, it's like $450 million worth-

Jason Bailey
Jason Bailey
SVP and CFO at Frontdoor

Yeah

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

historic revenue is done here, which is up against about 60,000 or 65,000 of our customers. We think the penetration rates can go very high here because HVAC equipment wears out, and it wears out at different times. We think we're getting to a point where we continue to drive that. The downstream effect is really positive because with newer equipment there, we reduce claims. With that, I'll let Jason talk about the margin profile.

Jason Bailey
Jason Bailey
SVP and CFO at Frontdoor

Yeah. We're pretty excited about this business opportunity. As Bill mentioned, it started with our scale and purchasing power around equipment, and we found a way to monetize that and increase share of wallet. I think we've said before, the margins are lower than our home warranty product. They're probably low 20%, I'd say is where we are right now. As we've implemented dynamic pricing, we look to move that up over time. As Bill mentioned, we get the ancillary benefit kind of as that new equipment rolls into the system. One other part of your question, you asked about the impact of refrigerant. We're constantly monitoring that. I wouldn't say it's had a big impact one way or the other on our ability to sell and implement the upgrade program. We're constantly aware of that as a normal part of our business, even on the home warranty side.

Ian Zaffino
Ian Zaffino
Analyst at Oppenheimer

All right, great. Thank you very much.

Operator

Thank you. Our next question is coming from Michael Rindos with The Benchmark Company. Your line is live.

Michael Rindos
Michael Rindos
Analyst at The Benchmark Company

Good morning, everybody. Thanks for taking the question.

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

Hi, Michael.

Michael Rindos
Michael Rindos
Analyst at The Benchmark Company

Can you comment more on the real estate side? Are there any particular brokers that you are more or less aligned with given that industry continues to consolidate?

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

I probably wouldn't comment directly on which. With the size of our business, we have to deal across all brokers. I think there's been a lot of talk about the fact that we no longer have an MSA with Compass. We still continue to do a lot of business with Compass. As you know, that's not an exclusive arrangement. We had it for years, so we have a great history with a lot of their agents and brokers. We're dealing with virtually all of the companies, because I think we have to run a national business like that.

Michael Rindos
Michael Rindos
Analyst at The Benchmark Company

Okay. When you talk about your service providers and your preferred contractors, can you comment a little bit on how you feel about your coverage there over major MSAs? Is this something that the company might consider improving, or is it comfortable with its level of coverage of preferred contractors? What's the direction there and the impact on the cost side?

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

We have about 17,000 contractors in our network, of which about 4,000 are what we call preferred contractors. It's national coverage. We don't limit where we service clients. We feel that we're constantly refreshing that amount because we do rate our contractors on both cost and quality. We want to make sure the service experience is the most important part. I think we have national coverage and like Jason said, Jacob's our guy who runs contractor relations, that they do a nice job of bringing on new contractors, bringing some up to preferred. With retirements and such, we have to keep feeding that group. I think, I don't know, Jason, if you want to add anything.

Jason Bailey
Jason Bailey
SVP and CFO at Frontdoor

Yeah, I think I'd just echo your comments, Bill. I'd say we have very directly, Michael, we have very good coverage in major MSAs, as you would expect. As Bill said, that mid-80s is near all-time company highs. We like that percentage. It's both a combination of cost and quality. I'd highlight our preferreds deliver our best service experience on average, so we like that. The last piece I'd say, you asked about the impact. We estimate a 1% change in the preferred rate is somewhere between $8 million and $10 million worth of gross profit. We stay focused on that, and the execution there has been terrific by the team.

Michael Rindos
Michael Rindos
Analyst at The Benchmark Company

Got it. I didn't hear any comments on appliance sales. I thought that was part of the strategy somewhat along with the HVAC. Is that still ongoing?

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

Yeah. That's our next trade that we're moving into. It's moving out of pilot now. We're expanding it more in Q4. Yeah. We're on pace to what we had said. We feel good about the pilot, how it's going. We think we've established the essence of the model with HVAC. It's different because it's a lower price point, but there are a lot more appliances, obviously, in the home. We think it'll be a good business, but we're in motion on that. It's going to be the second trade that we start to expand nationally.

Michael Rindos
Michael Rindos
Analyst at The Benchmark Company

Got you. Just lastly, when you talked about dynamic pricing, can you expand a little bit on that? What are the dynamics that contribute to dynamic pricing?

Jason Bailey
Jason Bailey
SVP and CFO at Frontdoor

Yeah. We've refined our dynamic pricing models over the last four to five years, and I'd say our primary focus there is in the renewal book, as you would expect. There are multiple, I think we're now up to over 60 factors.

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

I was going to say, isn't it 65 factors?

Jason Bailey
Jason Bailey
SVP and CFO at Frontdoor

Over 60 factors that go into the model. The easiest way I'd say it is you could think about things like geography, where the home is based, size of the home, past experience with us, and then things we learn about the home over time. We take all those factors, and that allows us to get much more precise on the amount of price we can charge a customer and any related impact on retention. We think there's a really nice balance there, and that's something we think we are very differentiated on against our competitors.

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

Like with all machine learning tools, it gets better over time as it gets more information, et cetera. It's constantly evolving, and we think we're getting better and better at it. Obviously, I think the proof point is that our retention rates continue to be so strong.

Michael Rindos
Michael Rindos
Analyst at The Benchmark Company

Great. That's it for me. Thank you.

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

Thanks, Michael.

Operator

Thank you. If there will be any final questions, please indicate so now by pressing star one. Okay. As we have no further questions at this time, this will conclude our question and answer session and today's call. You may disconnect your line at this time.

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

Thanks, everybody.

Operator

Sorry, sir. Continue.

Bill Cobb
Bill Cobb
Chairman and CEO at Frontdoor

Oh, I just said thanks, everybody.

Operator

Oh, thank you. You may disconnect your lines at this time, and we thank you for your participation, and have a great day.

Executives
    • Matt Davis
      Matt Davis
      VP of Investor Relations and Treasurer
    • Bill Cobb
      Bill Cobb
      Chairman and CEO
    • Jason Bailey
      Jason Bailey
      SVP and CFO
Analysts
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