Frontdoor, Inc. (FTDR) Earnings Call Transcript

Great. Good morning or afternoon, depending where you are. My name is Ralph Schackart. I'm the Internet analyst at William Blair that covers Frontdoor as well as a bunch of other Internet companies. If we were in person, I'm sure I'd recognize most of you. So thank you for your interest in attendance at our conference, in particular, for joining us today for Frontdoor. Today, we're really happy to have Rex Tibbens, President and CEO; as well as Brian Turcotte, CFO, here for our fireside chat. I have to quickly mention that before we get started, if you could just check our website for a full list of disclosures. With that, Rex and Brian. I'd like to thank you for joining us today.

It's a pleasure.

It's a pleasure.

And then maybe just kind of kick things off, since our conference is known as a generalist conference or at least it has been historically. Maybe Rex, we'll start with you. Perhaps you could provide an overview of Frontdoor for the broader audience, why were you brought on board to help Frontdoor become a more technology-focused company? I think that would be great jumping up point.

Sure, happy to. And thanks, Ralph, for hosting us today. Frontdoor spun out of ServiceMaster in October of 2018. I joined the company in May of '18. Formerly the Chief Operating Officer of Lyft and then Amazon before that. And one of the things that really drew me to Frontdoor is it's a company that I think it's very unique in that. We're the largest home service plan provider, we're about 4x larger than our closest competitor. But what I saw was really an opportunity to take a 50-year-old company and really transform it into something very different. And as I have kind of build marketplace businesses in the past, I really see an opportunity here in that. Frontdoor today, as we provide home service plans, we have 17,000 contractor firms, about 65,000 technicians. One of the things that are hard to get, and that's your core skill trades. So whether that's appliance repair, HVAC, electric, plumbing, those type of things. And so these same technicians instead of just servicing our home service plans, which is a great business. We want to really expand that beyond kind of the annual subscription and have the ability to do on-demand. And so we launched our on-demand business really in earnest this year in 35 cities. And then the company has -- or the industry really has kind of taken care of customers the same way. And that's -- if someone calls you, then you roll a truck to kind of understand what's the problem in the home, right? And so our grand vision is really to take the hassle out of owning a home. And we think we can do that through technology. So we acquired a company called Streem, which really allows us to almost like a Zoom meeting that we're having today, be able to see the customers issue, be able to annotate on the screen, be able to point and show them kind of areas to look. What that allows us to do is really do a virtual diagnosis. And so that as we continue to make the technology better and better, we should only be able to roll a truck once and solve the customer's issue. So when you think about kind of the company today, obviously, home service plan is our largest category. There are really 3 go-to-market channels within home service plans. The first is real estate. Second is our direct-to-consumer. So buying directly through us. Real estate, obviously, you buy -- it's either gifted to you from the realtor or it's added to the home sale by the seller. And then our third channel is renewals, which is about 2/3 of our revenue. So as people continue to kind of join Frontdoor or our brands, which our largest brand is American Home Shield. Then you're able to kind of renew that customer on an evergreen basis going forward. So the company, overall, you have home service plans, you have our on-demand business and then Streem in itself, although it's going to be great for us in terms of kind of leveraging how we change the industry. It also -- Streem also gives us the opportunity to sell Streem from a third-party perspective. And today, we offer Streem to companies like Lowe's, and British Gas and Traeger, the grill company. So very extensible beyond just home service plans.

Great. That's really good background, Rex. As you think about sort of your 3 business revenue segments between renewals, real estate, DTC and then, I guess, maybe the fourth is emerging, the on-demand, how do you think about each strategically just from I guess, a brand standpoint, acquiring customers? And then as you think about capital allocation, maybe give us a sense of kind of where you're focused between those?

Sure. So real estate is kind of where the industry was founded. Certainly a challenging market today, given it's a sellers market. We've been very focused on -- normally, we focus on the sellers of the home. We've been very focused on buyers of the home. So trying to develop even more technology around understanding who the buyer is kind of ahead of the close, if you will, so that we can market to that specific buyer. So the reality -- our real estate channel, generally, it's where the home service plan is kind of gifted to someone. So a much lower renewal rate versus our fastest-growing segment and that's direct-to-consumer, which we grew 16% last quarter. That's where the customer really understands the product, and it has a much higher renewal rate, about 76% for first year customers. The great thing is that for our largest channel, which is renewals, it's about -- it's about -- after the second -- the second year and beyond, they were new kind of the 80s. So there's no real difference between a real estate customer and a direct-to-consumer customer after the first year. So in terms of investment, we invested during the pandemic last year, we invested heavily in both digital and broadcast for our direct-to-consumer, obviously, real estate took a big pause in Q2 of last year and then started to come back in Q3 and Q4. We -- that investment has definitely been paying off for us this year, and we continue to kind of lean into direct-to-consumer as we focus on our new e-com site as well as very focused on conversion this year as well. So from an investment perspective, I think we'll continue to invest heavily in direct-to-consumer real estate. We're expecting to show gains this year as well, even though it's a tough -- kind of a tough seller's market. And then renewals is really about making sure that in this hot market, we have a quick signal on moving sol, which is our biggest use case for why people leave us. And then very much focused on our ongoing kind of customer experience journey, if you will, for things like Streem, us being able to change how customers really consume the product, we think, will drive retention and therefore, renewals in the forward years as well.

Well, maybe just kind of dig into these topics a little bit more. You've obviously seen some pretty strong momentum, I guess, initially building and then now kind of rolling out the direct-to-consumer channel as well as sort of the on-demand. Maybe talk about the conversion funnel as you see it, the improvements that you've made, I guess, within both of these or if you view them sort of independent or nonindependent? And maybe just kind of the sustainability of growth within these 2 channels?

Yes. Our goal has been, as we spun the company, to get us to the point where we're growing at sustainable double-digit rates. We're there this year, and we think we can continue that moving forward. A big catalyst of that is going to be our ability to continue to scale direct-to-consumer, where we don't publish our LTV-to-CAC ratios, but I'll say they're very healthy. And I think we have a lot of room still left there before we kind of reach the efficient frontier. So we're going to continue to focus there on both expanding the channel as well as conversion. We're still converting at a very attractive rate, even though both digital and broadcast media has kind of gone back to "normal rates". And then I think there's still a lot of opportunity from a renewals perspective as it relates to our ability to retain customers. And so you'll see continued investment there, as we focus on continuing to kind of evolve the customer experience, if you will. As it relates to real estate, I think one of the interesting things for us this year is really, as we focus more on buyers than traditionally on sellers, I'm very hopeful and looking forward to seeing the data that we should be able to retain customers at a higher first year rate because obviously, someone who's going to buy the product will be far more informed about it. So we're hoping that there'll be some tailwinds from that going into next year as well.

Great. And I think one of the ideas or sort of technology enablement factors you brought to the company with, of course, with the team as well is your ability to price dynamically as well as sort of by the ZIP Code level. Maybe if you could kind of drill into that a little bit and provide some perspective and how much that's been adding to growth?

Yes. Absolutely. So it was kind of a shocker to me when I joined. When we founded the industry 50 years ago, we priced on a statewide level. So I'd give you a California example of we were pricing contracts that whether you lived in San Francisco, which had very different labor rates than, say, a stocked and we priced the contract the same, right? So obviously, from a margin perspective, it was wildly different. We built a program called dynamic pricing, which really allows us to get down to the ZIP Code plus 9 level. So that's really a subdivision level and really look at kind of on a decile basis within that ZIP Code, kind of the inherent risk that would be there. That allowed us to really kind of pivot the company around gross margin. So if costs are a little more than forecasted, obviously, we can adjust more quickly and it conversely, for example, as appliances begin to wane, and the supply chain comes back from a post-pandemic perspective, this should really gives us the opportunity also to kind of pivot more towards growth, right? So that's the beauty of dynamic pricing. In terms of what is delivered in 2019, you got us about 100 points of -- sorry, 100 basis points of gross margin improvement and also allowed us kind of during the height of the pandemic last year to quickly pivot from both -- from a rules perspective, which, again, is about 2/3 of our revenue as well as first year direct-to-consumer to change our pricing as we saw the inflation from appliances. So very, very useful tool for us, and we're only scratching the surface as we add more things like usage and the ability to adjust more data into the models, and we see dynamic pricing getting better and better.

You touched on inflation for some of the products, maybe kind of go back to where we start with COVID. And now as we're sort of, I guess, seeing states reopen. Maybe give some perspective on how it impacted the business. On one side, if you're a consumer and had the warranty plan, I'm guessing you really enjoyed it. It was really helpful and appreciated it. On the flip side, you probably had a lot more claims. You're probably dealing with some supply constraints now given what's going on. So maybe just kind of give some perspective where you start and kind of where we are right now and sort of that evolution?

Yes. I think the amazing thing that speaks to just how far the company has come since we spun the company in less than 3 years ago. We still grew -- we almost equaled our 2019 growth rate in 2020 during the peak of the pandemic. Certainly, in the beginning, we were able to virtualize our company in 8 days. So we went completely virtual in a short period of time. And the team didn't really miss a beat, so to speak. And we continue to work with our contractors and others so that customers felt like they were kind of -- we're harboring a really safe environment for them. Certainly, the -- our value proposition, I think, was strengthened during the pandemic because everyone was home, everyone realized that the value of kind of maintaining and repairing your home. It did cause some short-term pressures for us as it relates to early on plumbing, which is less of an issue now. And then the ongoing issue has been appliances. So certainly, things like refrigerators, we saw whole industry, not just us saw an incredible spike because everyone is on, they're going to -- they're opening their refrigerator multiple times per day. And so the failure rates on refrigerator certainly went up. The appliance supply chain continues to get better and better every day. We did see some short-term cost pressures, which I invite Brian to elaborate on. But the kind of the overall impact is now just appliances and then kind of quarter-on-quarter, it's getting better and better as we see both repair parts come back as well as in stock from a replacements perspective. But certainly, early on, it caused pressure both from a higher level of incidences as well as a higher number of replacements because we had shortages. So I fully expect and again, Brian is more the expert than I am here that as we get closer towards the end of the year, our OEM partners should be pretty much close going back to kind of normal. The only thing, I think we have to worry about now is just inflation as it relates to raw material goods, which has certainly been the press as it relates to whether it's steel prices or other consumables. Brian, anything else you'd add to that?

Well, that was a great summary, Rex. The only thing I would add, Ralph, is that shortly after spin Rex challenged me to really improve the performance in the processes in our supply chain area, which we did. We hired a new leader for supply chain, and he formed a great team. So I think we are pretty well prepared for what happened in -- starting in May of last year. So -- and as Rex said, we think the parts supply situation is getting better. The equipment side is getting better. Some OEMs are doing better than others. But again, given our strategic approach that we take to supply chain, I think we were ahead of the curve better than most when this hit. So it's getting better. And towards the end of the year, we should see a lot more daylight than we see today.