Frontdoor, Inc. Q4 FY2025 earnings call

• Operational excellence is core, with 3 years of disciplined execution building a strong foundation. - DTC continues to perform with five straight quarters of organic member growth. - Real estate channel is turning the corner supported by a buyer's market return. - Retention rates are strong near all-time highs. - Non-warranty growth is a game-changer, with new HVAC program scaling fast and plans to expand to other trades.

Revenue increased 14% period over period to $618 million. Gross profit margin increased 60 basis points to 57%. Net income grew 5% to $106 million, and adjusted EBITDA grew 18% to $195 million. First-year organic DTC ending member count grew 8%. Real estate member count grew sequentially in Q3. New HVAC revenue is strong. Synergies from the 210 acquisition are ahead of schedule. $215 million worth of shares have been repurchased through October 31st.

• Fourth quarter revenue expected in the range of $415 to $425 million. - Fourth quarter adjusted EBITDA expected in the range of $50 to $55 million. - Full-year 2025 revenue outlook increased to $2.075 to $2.085 billion, up ~$15 million from prior outlook. - Total revenue expected up 13% in 2025, driven by ~10% from 210 acquisition and 3% from organic growth. - Full-year adjusted EBITDA outlook raised to $545 to $550 million.

• This call and webcast may contain forward-looking statements subject to various risks and uncertainties which could cause actual results to differ materially from those discussed. - Risk factors are explained in detail in the company's filings with the SEC.

Q: On the cost inflation, it sounds like it increased to maybe 4% or even 5% in the quarter. It had been trending in the low single digits. Could you talk about What drove that? Was it mainly tariff impacts just on parts and equipment, and it could be temporary?

A: Jeff, it was not 5%. It was closer to 4%, just about ticking toward 4%, which means we have to call it low to mid. Obviously, for the year, we're still projecting low single-digit inflation. But essentially, it was a tick up in appliance costs. Most of our equipment is domestically produced, so we have not been hit anywhere near as much by tariffs as some other areas. But appliance has ticked up. But, with our dynamic pricing model, with our trade service fee approaches, with the operational execution we have, we feel strongly that we're able to manage through that.

Q: Could you talk about the promotional strategy that you implemented in the real estate channel? What all is going on there? And did that drive an increase in the attachment rate in the quarter?

A: The good news for us is, as I talked about, the macro environment is improving for us. which enables the initiatives we've undertaken to gain more fuel. Now, specific to promotions, generally we've never run price-off promotions. We did do $100 off for the month of July and August, and we also did a couple of partner-specific promotions that helped us from our analysis to outpace the real estate market overall. So we're very pleased with certainly the direction and the trajectory of where real estate's going.

Q: In the non-warranty section or segment, the pilot program, what are your early observations there? What sort of timing and pace are you anticipating for that expansion?

A: We're shooting, we're not giving a specific, we'll talk more about this in February, but we're shooting for it to expand nationwide in 2026. It's a little more complicated than HVAC in the sense of the number of appliances. We have to work through that in our platform and the like. But that's also part of the excitement of it is that we have many opportunities to interact with our members. across the variety of appliances. So the plan is to go nationwide at some point in 2026. We're still working through that, and we're still working through the specifics of appliance ordering and the like. But we think it's a real opportunity, and our initial impression is this is being well received by our members.

Q: The DTC guide of up 3% for the full year, If my math's correct, it implies around a mid-single-digit decline there. So what's driving your thoughts around that segment in 4Q?

A: Pricing is, you know, with our unit strength, which is what we feel is the number one priority, because obviously that feeds over time into our renewal book, which is the backbone of the company. So the price reduction that we've done, the promotional pricing strategy, has taken that revenue down. But we're able to offset it and maintain healthy margins and healthy pricing because of the strength of our retention rates. So we do give up some revenue up front with our first-year customers, but we made the strategic decision that that's worth it in order to get our renewal, you know, get that into the renewal book over time. Bill also added that Q4 has impacted our seasonal adjustment. It's our lowest quarter.

Q: How much of that success there would you attribute to the market shifting to a buyer's market versus some of your strategic initiatives and the promotional strategy and increased agent engagement that you called out in the presentation? And then on the second question, just for the SG&A for the year, the increase in the outlook, just provide any more color on where you're investing those incremental dollars.

A: On the first one on real estate, I think to your question, which is an insightful one, I think the macro environment improving helps our actions. So it's not that we suddenly discovered some of these actions of meeting with agents, but the new thing is the promotional program that we talked about earlier. So I think that this has enabled us to, the macro environment has enabled us to fuel some of these actions. So I'm not sure I can differentiate exactly what's macro and what's our promotional pricing, but it is all working together to help us start to turn the corner in real estate. Now, as far as SG&A, where are we spending money? As we said in the call, we're pretty pleased with the Warrantina campaign, especially how it's doing relative to potential homebuyers. under the age of 45, which is where our marketing team is targeting their efforts. So where we're looking to deploy the extra money is around not only the Warrantina campaign, but what we call the middle of the funnel, which is where consideration is higher. So you go from the top of the funnel, which is trying to build awareness and the like, to the middle of the funnel where you're building consideration. And then we're pretty excited about some of the things we're doing in digital marketing, as I talked about, where we're enhancing our our traditional search engine marketing with the work we're doing with large language models, the CHEP GPTs of the world. And then we think we're getting more sophisticated in that and getting higher demand and eventually higher conversion.

Q: You mentioned in your prepared remarks the potential re-evaluation of your long-term margin target. That's certainly been a big topic of debate given you're punching above what you said earlier this year. Maybe could you just help us with What's changed since the investor day that's giving you the confidence to potentially do this when you're doing the exercise this year? And Jason, just a very quick question for you. You told us organic revenue. I think you expect to be 3% for the full year. Are you able to comment on what organic revenue growth was in the quarter?

A: I'll take the first one. Corey, I think what's giving us conviction, and as I said, we'll talk about this more in February, but with the strength of our margins, the execution we've done, all the things I talked about in the call, our ability to price and use trade service fees to you know, potentially combat inflation. All those things together have given us a pause to say, look, I think that we have moved to a new level. We're going to work through what that level is. But I think that the targets we gave you, which were, you know, during a timeframe when, you know, well, there was a lot of uncertainty, not that, you know, well, as we go into the year, there's always uncertainty, but We feel pretty confident in our model, and so we'll be looking to come forward with a reassessment of what we said at Investor Day. So I won't comment specifically on what that will be, but that's what we're working through. We're working through getting our final plans approved by the board, et cetera. But we'll have lots to tell you in February. Jason, as far as the organic revenue question? Yeah, Corey. For Q3, we'd say it was mid-single digit. Probably three key drivers there. One, the thing about our non-warranty. pricing, and then there's still some seasonal adjustment. So when you're comparing that, that's why I'd probably pull you back to the full year at 3%