Frontdoor, Inc. (FTDR) on Q1 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, welcome to Frontdoor's First Quarter 2021 Earnings Call. Today's call is being recorded and broadcast on the Internet. Beginning today's call is Matt Davis, Vice President of Investor Relations and Treasurer and he will introduce the other speakers on the call. At this time, we'll begin today's call. Please go ahead Mr. Davis. Matt Davis: Thank you, operator. Good afternoon, everyone and thank you for joining Frontdoor's First Quarter 2021 Earnings Conference Call. Joining me today are Frontdoor's Chief Executive Officer, Rex Tibbens; and Frontdoor's Chief Financial Officer, Brian Turcotte. The press release and slide presentation that will be used during today's call can be found on the Investor Relations section of Frontdoor's website, which is located at investors.frontdoorhome.com. Rex Tibbens: Thanks, Matt, and good afternoon everyone. We are off to a fast start in 2021, as we continue executing on our strategic plan for the year. In the first quarter, we achieved our highest quarterly revenue growth since the spin-off with year-over-year revenue growing from 8% in Q4 to 12% in Q1, a 50% increase in the revenue growth rate quarter-to-quarter. We expect to achieve sustained overall annual double-digit revenue growth going forward. Now turning to slide 4 where I'll provide a quick update on our 2021 objectives. Let me start with the drivers of our double-digit revenue growth. I am very pleased with our first year direct-to-consumer or DTC channel growth of 16% which validates the marketing investments and conversion funnel improvements we made over the last several quarters. We also successfully completed the nationwide rollout of our new B2C product redesign in April and have seen a strong response to our new premium product shield platinum. This new product line coupled with our ability to dynamically price should continue to provide revenue tailwinds for us in 2021 and beyond. As it relates to our first year real estate channel, the macroeconomic backdrop remains mixed. On one hand, the National Association of Realtors reported existing home sales increased 15% in the first quarter with median price increasing a record 17% in March. On the other hand, home inventory remains extremely tight. While we generally benefit from the higher number of real estate transactions, the lower inventory creates a seller's market where the seller is less inclined for about a home service plan as part of the transaction. Brian Turcotte: Thanks Rex and good afternoon everyone. Let's now turn to slide five and I'll review our first quarter 2021 financial results. Revenue increased 12% versus the prior year period to $329 million driven by approximately seven percentage points of volume growth and five points of higher pricing. I would also point out the volume component includes strong year-over-year growth off of a small base from both ProConnect and Streem. If we look at our home service plan channels, revenue derived from customer renewals was up 12% versus the prior year period due to improved price realization and growth in the number of renewed home service plans. First year real estate revenue was up 2% versus the prior year period primarily from improved price realization. Due to the annual nature of our home service plan agreements first year real estate revenue continues to be impacted by the steep decline and existing US home sales that occurred in the second quarter of 2020 as well as the strong sellers' market Rex mentioned earlier. Matt Davis: Thanks, Brian. As a reminder, during the question-and-answer session, we encourage you to ask any questions you may have, but please note that guidance is limited to the outlook we provided. Operator, let's open the line for questions. Operator: Thank you. We’ll now begin the question-and-answer session. Today's first question comes from Youssef Squali with Truist Securities. Please go ahead. Youssef Squali: Great, thank you very much. I have two questions please. First, Rex I want to go back to DTC segment, which is really impressive, up 16%. I want to talk a little bit, maybe the market inefficiency that you're seeing there the sustainability of that. How do you see that trending throughout the rest of the year? And then, on the retention, I think you guys talked about renewals seeing some pressure. Can you just unpack that a little bit for us? How do you see that also reversing throughout the rest of the year? Thank you. Rex Tibbens: Sure Youssef. I think that for -- in terms of direct-to-consumer, this is really the investments we made last year as well as the investments we made this year have really started to I think take hold. I'm expecting that we see sustained double-digit growth for the remainder of the year. We're still very focused on conversion as well as we make some tech improvements to the funnel. So I think this is a combination of investments we made last year as well as investments we're making this year. And I'm very proud of the team to deliver 16% growth and this is even pre-pandemic, so pretty positive there. In terms of retention we said this may happen in terms of rounding down. As Brian mentioned in his remarks, the industry-wide appliance issues coupled with early in the pandemic we had a pause with our -- some of our call center providers that create longer hold times. So those are all behind us at least the staffing and training pieces of the call center are behind us. We've been working a lot on seeing a delivery of appliances and parts. Brian's comments earlier really give a lot of kudos to the team in terms of just the level of precision we've gotten to in terms of expanding our parts suppliers, managing real-time inventory within the OEMs. And then from a technical perspective, the teams also delivered the appliance portal, making it easier for customers to pick out the replacements and making it more of a customer delighter rather than -- it's always tough that you have to replace an appliance. So all those things combined, I think that as we work on those from a retention perspective, I'm expecting retention to improve over the balance of this year. We're also early -- in early stages of implementing Streem into our business operations. So all those things I think these cross-functional efforts will provide a strong tailwind for retention. Youssef Squali : Thanks Rex. Rex Tibbens: Thank you. Operator: And our next question today comes from Ralph Schackart with William Blair. Please go ahead. Ralph Schackart: Good afternoon. Thanks for taking the question. First question just on pricing increases that as consumers come up for renewal, and I'm assuming the new renewals are at a higher price. Just curious, sort of, the receptiveness of the consumers to take the higher pricing? And then I think in the prepared remarks you talked about Streem perhaps also playing into that. And just a reminder if you're charging for Streem now and how those commercialization efforts are going? Thank you. Rex Tibbens: Yeah Ralph. So in terms of pricing -- from a dynamic pricing perspective as we discussed in the past really we're looking at our customers on a ZIPCO plus nine basis. So really a sub-division level and looking at the risk deciles across those sub-divisions. We're not seeing any change from an elasticity perspective. We're able to measure it pretty succinctly and we continue to kind of tweak along the way. But with the change in pricing, certainly, I think pandemic has a broader value proposition to bare. So we haven't seen any changes from an elasticity perspective. And then as it relates to Streem, we don't charge customers in terms of us asking them to utilize Streem to resolve their problems. But the Streem team is growing in terms of its SaaS business as well. So as we talked about in earlier calls, partnerships with Lowe's and CLEAResult and others. So we expect to grow both externally Streem from a revenue perspective and then have Streem deeper in our operations so that we can provide a very digital diagnosis if you will on behalf of our customers. Ralph Schackart: That’s helpful. Thanks Rex. Operator: And our next question today comes from Mike Ng with Goldman Sachs. Please go ahead. Mike Ng: Hey, thanks for the question. I just have two. First it seems like Proconnect is pacing well and you should be on your way to hit the full year target of I think it was $20 million. Could you just give us an update on your Proconnect expansion plans for the rest of the year and whether you see an opportunity to exceed your target? And then second, I was just wondering if you could talk a little bit about the visibility you have into this parts supply constraints. I know you mentioned that, it may improve later this year. Is that with -- because of demand coming off or are your manufacturers really ramping up supply and you expect that to release some of the pressure? Thank you. Rex Tibbens: I'll take the Proconnect piece and then ask Brian to comment on the supply chain piece. In terms of Proconnect, I do think we're off to a great start. We're laser focused on execution. We're in 35 markets and we're on track for both expanding those markets to add other trades as well as our job volume goals. So I'm not ready to declare that we're going to be ahead of plan, but I am comfortable in terms of where we are to plan. So we started with appliances. We're rolling out -- both plumbing and electrical is next. We're in some cities but not all 35 yet. But all systems are go and we're just -- much like the company, we're just focused on execution. Brian, do you want to take the supply chain piece? Brian Turcotte: Sure. Thanks Rex. And, hi, Mike. How are you doing? Yeah, we're seeing some light at the end of the tunnel on parts. And I think it's two-fold. One it's as Rex said the great job, our supply chain is doing, team is doing with leveraging our national supplier relationships. We're expanding our supplier base. We're doing all sorts of things. We're integrating with our suppliers to order parts. So I think we're doing a good job from that perspective. But as well as the OEMs and parts suppliers, I think, they're doing a better job catching up. It's just that demand continues to outstrip supply. But I think towards the end of the year we'll be doing a much better job getting that into balance. That’s helpful? Mike Ng: Yes. That’s really helpful. Thanks, Rex. Thanks, Brian. Brian Turcotte: Excellent. Thank you. Operator: And our next question today comes from Robert Coolbrith with Wells Fargo Securities. Please go ahead. Robert Coolbrith: Thanks for taking my questions. On retention, I think, you've noted in the past the opportunity to maybe utilize dynamic pricing to help with retention in cases where you may have had an adverse customer support demand or even cases where there may have been a lot of utilization. So just wondering if you might be able to comment on the opportunity to address the retention issues with maybe some support from dynamic pricing? And then on the supply side I know you noted some of the issues around the supply chain. I was just wondering if you still have plenty of runway with your preferred provider networks? Any issues around hourly inflation or just availability in those networks as demand continues to be pretty robust? Thanks. Rex Tibbens: Yes, absolutely. In terms of dynamic pricing as it relates to retention, the great thing about dynamic pricing is just that dynamic. So we can focus on unit growth or we can focus on gross margin expansion. And so I think the team has done a nice job of kind of balancing those two things. As it relates to, kind of, pure retention we do have retention teams in place. So if someone has an issue with price or has had a service experience that may then go as well the team has playbooks in terms of how to address that. So I think both those things are going well and that's why I'm kind of bullish on the -- my comments around the kind of strong tailwind as it relates to retention in the back half of the year. As it relates to labor for our contractors, we continue to push our algorithms so that we're getting the most from our preferred contractors. Happy to say, we continue to be in kind of the low to mid-80s across the country. That's a no small feat with some of the -- certainly some of the appliance issues. But the team has done an incredible job there of really managing this on a very macro level and a retail level. As it relates to, kind of, making sure we have enough contractors we haven't seen any issues. Again our preferred contractors we're about 40% of their business. So it's a very like symbiotic relationship between the companies. I think they are having some troubles when it comes to like office staff and things like that dispatchers. It's a very high labor market right now. But at least it relates to the skilled core trades we're not seeing any indications yet of trouble ahead. Robert Coolbrith: Great. Thank you. Rex Tibbens: You bet. Operator: And our next question today comes from Kevin McVeigh of Crédit Suisse. Please go ahead. Kevin, your line is muted for us. Mr. McVeigh, we are unable to hear you live. All right, while we'll sort that out. I'm going to go to our next question which comes from Ian Zaffino with Oppenheimer. Please go ahead. Ian Zaffino: Hi. Great. A couple of questions here. I wanted to hone in on the real estate channel. I mean obviously it's doing pretty well. And I guess a little while ago we weren't so sure and maybe you were, sort of, shifting over more to DTC, but now real estate seems to be doing pretty well. How exactly are you guys, sort of, managing this? How are you thinking about your approach? And then also on the real estate state side again, you had a bunch of initiatives you were lining up whether it was establishing relationships directly with the broker themselves where -- you can maybe follow them as they move around. And that might be an issue particularly now that the labor market is hot. Maybe touch on some of those initiatives on the real estate side. And then I have a follow-up. Thanks. Rex Tibbens: Yes. Hi, Ian, it's Rex. Yes as it relates to kind of our overall marketing mix I think we're in a good position for both direct-to-consumer as well as real estate. As Brian mentioned in his comments Q2 was kind of the big dip last year as it relates to the real estate market. So we're expecting a very different view in 2021. But this is -- because of record low inventory this is a seller's market. So we've been very focused through our brokerage partners to focus on buyers instead of normally we focus on sellers to make sure that we're reaching those folks who want to add a home service plan to their house or even after the fact they want to add a home service plan to their house. So that's been going well. I think the team has been executing well on that. So it's been a big shift from, kind of, focused more on buyers and sellers. We're also expanding into new verticals. So we signed a deal I think we announced last quarter with Mr. Cooper, I think, the third largest mortgage provider. We see opportunity there as well from a verticals perspective. And then to your point about kind of technology we do -- we're working very closely to make sure we have kind of that digital footprint if you will with our best realtors who understand our product and who market our products. So we have the ability to kind of follow them wherever they may go. Ian Zaffino: Okay. Thanks, Rex. And Brian, can you just touch on capital allocation? How are you thinking about that and what we should expect on that front? Brian Turcotte: Yes. Thanks, Ian. How are you doing? I think first and foremost we're going to continue to invest in growth in our business the HSP business as well as Streem and ProConnect. And that's first and foremost drive the top-line for the business. And we'll look at debt repayment as well as an opportunity for us an acquisition. As I mentioned in my prepared remarks, we're still very acquisitive both in the home services front and technology. So those are really the three things we're looking at today, again investing in the business being acquisitive and repaying debt opportunistically. Ian Zaffino: All right, guys. Thank you very much. I'll take the rest offline. Rex Tibbens: Thank you. Operator: And our next question comes from Kevin McVeigh with Credit Suisse. Please go ahead. Mr. McVeigh we're still not able to hear your line, sir. Kevin McVeigh: Okay. Is that better? Operator: Yes. That's better now. Yes sir. Please proceed. Kevin McVeigh: So, sorry about that. Hey Rex or Brian, I wonder could you compare and contrast kind of some of the equipment shortages, you're seeing in this cycle versus the last one. It's probably about 24 months ago, because it seems like you're managing through it a lot more effectively this time as opposed to the last one and probably what's an even more challenging environment. So maybe just some puts and takes, if you like operationally you're a lot further along. Is that the right way to think about it? But just if you could maybe compare and contrast both experiences a little bit? Rex Tibbens: Yes. I can talk about some of the technology and then would ask Brian. He's far closer to it. I think Brian would probably tell you because Brian owns that team and they're doing so well. But I'll take some of the... Kevin McVeigh: Yes. I figure that Rex. That's why I asked a question. Rex Tibbens: Yes. Certainly from a technology perspective, I give the team a lot of props in terms of we're looking for the right APIs to connect into. So we have a lot more inventory visibility. The team has gotten I think a lot more educated over the last couple of years in terms of our ability to kind of dynamically do authorizations. So I think it's a whole confluence of what I'd say good technical hygiene in terms of digitally connecting with our key suppliers, as well as expanding our key suppliers. And then as it relates to some of the more strategic sourcing and things that have been going on in the last 24 hours, I'll turn that over to Brian. Brian Turcotte: Yes. Rex I think you hit a lot of them. We had a very strong supply chain team that I inherited and we brought in a great leader about a year ago, that just raised the level of the team. And we've built really close relationships with our partners our OEMs and parts suppliers. And I think that's paying off when times are tough and I think we can go to them. And we have leverage with them to get parts maybe a little quicker than we could have previously. And again, expanding the supplier base is key. And then just as Rex said, using technology integrating with our suppliers to order parts and be able to track them more quickly in the system and getting them delivered to the contractors. It all comes together. And I think we're doing a much better job today than we did two years ago. Kevin McVeigh: That's helpful. And then any thoughts as to pricing. I mean it seems like just given some of the shortages some of the labor pressure things like that you're probably able to have more fulsome conversations, as it relates to pricing. But just any thoughts on that within the context of the dynamic lens if you could? Rex Tibbens: Sorry pricing in terms of how we price our home service plan contracts or pricing in terms of the supply chain issues? Kevin McVeigh: No. More on the home service plan contracts I apologize. Rex Tibbens: Yes. So this is where dynamic pricing just keeps paying dividends for us. Certainly being able to quickly pivot as it relates to price has been key for us. As renewals continue to lap our last pricing increase we expect that to help us moving forward throughout the course of this year. So we made some pricing adjustments late last year and early this year and I expect those to help offset any – help offset some of the gross margin pressure that Brian talked about. And obviously, as the country opens up more this will give us an opportunity depending how quickly we'll kind of move away from their home so to speak or not at their home every day. This may give us some opportunity to focus more on unit growth rather than gross margin. So that's the great thing about dynamic pricing is it's just that dynamic. Kevin McVeigh: That’s helpful. Thank you so much. Brian Turcotte: Thank you. Hey, Kevin one thing I'm remiss not saying that the supply chain team works very well with both our service organizations and our operations teams to make it really work. So I apologize for leaving them out at all. We all work together as a team to deliver the experience. Operator: Thank you, sir. Ladies and gentlemen, thank you all again for joining Frontdoor's First Quarter 2021 Earnings Call. Today's call is now concluded. You may disconnect your lines and have a wonderful day.FTDR Ratings Summary
FTDR Quant Ranking
Related Analysis
Frontdoor Shares Surge 4% on Upgrade
Frontdoor (NASDAQ:FTDR) shares surged more than 4% intra-day today after Truist Securities analysts upgraded the stock from Hold to Buy, setting a price target of $42.00, up from $40.00.
The analysts explained the upgrade by citing a more positive outlook for the company's earnings. They raised the 2023 earnings per share (EPS) estimate to $1.70 from $1.60 and increased the 2024 forecast to $1.92 from $1.80. This optimism is driven by their analysis of Frontdoor-specific Truist Card Data, which supports a more favorable revenue outlook. Additionally, the analysts pointed out a positive claims environment in the third quarter and the potential for improvement in the Real Estate channel in the upcoming quarters.
