So why don't we get started here? Good afternoon, everyone. So my name is Jeff Schmitt. I cover financial services stocks here at William Blair. I'd like to introduce Frontdoor. They're the leading provider of home warranties in the U.S.. Market share is around 40%. You know, we have with us today Bill Cobb, the CEO. Jessica Ross, the CFO, is with us as well. But before we begin, I need to point you to just for a complete list of our research, disclosures, or potential conflicts of interest, please visit our website at williamblair.com. And with that, I will open it, turn it over to Bill.
Thank you, Jeff. Good afternoon, everybody. And Jeff, thanks for inviting us to the conference. Start off with what you've all been looking forward to, the forward-looking statements. I will read them completely. No, I'm not. They will be available on our website, so be sure and tune in later and read up on it. Now the general counsel is happy. All right, so key takeaways, I'll start right off with this. We've got a very strong core business, throws off a lot of cash. Our margins have recovered, our EBITDA has grown. I'll talk about that later. Our core—our major brand is the American Home Shield brand. We've relaunched that beginning in April. We, as of yesterday, announced a new exciting acquisition for us called 2-10. I'm gonna speak to that acquisition.
At the end, I'll wrap up with, I think, what is our compelling investment thesis, our overall strategy, and why I think this is such a good investment. So let me step back. Some of you are familiar with the story, some not. But we are in the home services broad category. We're in the home warranty category, specifically. We have about 2 million home members, as Jeff said, around a 40% share. We are nationwide. We do about 4 million service requests a year, a little under that, where our contractors go out and call on people.
We've been in this game for over 50 years, and we have about 16,000 contractors we are allied with, who go out across the various trades of plumbing, electrical, HVAC, and appliances to repair and, in some cases, replace anything that needs updating in a home. Now, our scale is what helps to drive us, and it's a virtuous cycle for us. More members in each market drive more service requests, which attracts the contractors, and we do a deal with the contractors every year. We sign up with them for the particular market, where we look to see how many jobs we can promise them or try to drive for, and they will come to us with what they'll drive for in terms of cost. So it's a real close relationship.
We're really proud of our contractor network, and I think it's really the backbone of our company. Now, just to give you an overview of where our revenue comes from in our core business, about 25% comes from new customers, from both real estate, where they become a member, through the closing process, through the title company. Then we have a direct-to-consumer business, which is larger than the real estate business aspect. Real estate used to be bigger, but you all know what's happened to the real estate business, so our business has fallen for new customers in that. The backbone of the business is our renewal business or our existing customers. It's over three-quarters of our business. We're very proud of our renewal percentages and our retention rates, which are well in excess of 76%.
So that is really what helps to drive our engine. And in terms of the total addressable market, we like to look at it in terms of households. So U.S. households are about 130 million, of which about 85 million or so are true homeowners, and we have the category for us is about 5 million, 5 million homes. That's the home warranty piece, about 4% of the total. But what we think is, you know, the most important piece for us, we've done a lot of work on trying to analyze and not try. You know, we can throw up a huge TAM, but it's really about what is a true addressable market. And we do think. And we had nice growth in, you know, from 2012 to 2018.
We did run into some trouble in around COVID times. We have stalled. We do think that there is a market there that could go as high as 15 million households, and that's what we're always gearing, gearing, gearing toward as we try to grow our business overall. Now, why is this a good thing for consumers, for homeowners? And there's really four steps to this. One, you sign up with the warranty. It's a repair and replace project around your 23 systems in your home and appliances. So it protects against the high cost of repairs when inevitably things start to deteriorate. So there's a budget protection piece to this. We primarily do our business on an auto-pay basis or a monthly fee.
This, you know, often, if especially if we have to replace something, that far outweighs even the cost of what the warranty costs. So budget protection is number one. Second, it's convenient. It's one phone call. We have that group of vetted contractors that are out there, that are bonded, trusted, et cetera. So it's with one call, or reaching out to us, you know that we're gonna be there to service the need. Now, the next thing is we guarantee our work. We'll keep coming back till we fix it, or if we ultimately can't fix it, we'll replace it. But that's what we stand behind that work. And then finally, and this is tied to the budget protection, it's really around peace of mind.
This gives you a chance to know that you have set up a warranty, you, you are there for the, the various appliances and systems in your home, and you can sleep at night knowing that, you know, it's really your monthly fee that's gonna cover everything. Now, we have, as I said, hit COVID, but our number one focus now is to grow our customer base. The first thing is, and this has been a negative, a headwind, is the real estate market. And a number of you, I'm sure, know about the real estate market. It has fallen in terms of the addressable market, quite substantially, and it has been primarily a seller market. So there have been a situation where in 2022, there were 6 million homes in the U.S. sold.
We're looking at 4 million this year. It is a market that is... You got some really odd dynamics. Days on market is around 26 now. It was lower than that. Prices keep rising, the sellers still hold the upper edge. For us, we need a market that's in balance, that has a good source of supply, a number of buyers, 'cause we're really the incentive, that we want sellers to take to attract people to their, to a better listing and, and put in the warranty for the, for the peace of mind and, and budget protection I talked about earlier. So this has been a tough one for us in terms of the real estate market.
We do trend pretty closely with how the real estate market goes, and I know a number of you are associated with real estate companies. You know what a tough market this has been. Now, we also have a direct-to-consumer business, and what we have done about two months ago, we relaunched the American Home Shield brand. Like I said, it's a 50-year-old brand. 50-year-old brands can be revitalized. You look at Domino's, you look at Old Spice, you look at Arby's. Brands like that, with the right relaunching, can come to life, and we're really proud of the work we've done here. We've come out with a new website. We have a new logo. We have new colors. We have a new ad campaign.
We have a new slogan called "Don't Worry, Be Warranty." We have Rachel Dratch, the former Debbie Downer of Saturday Night Live fame, who is our character, Warrantina, who, you know, has some. We have three spots that, hopefully some of you have seen, that really try to bring to life, you know, not to worry, be warranty, and that we are there for you. We're pleased with how all the elements have come together. We just relaunched this a couple of months ago, so we'll talk about at our Q2 earnings, how the performance is going. But this is a long-term run for us to revitalize the brand in this particular category. We call it a sea of sameness. A lot of the brands look alike. Their names are pretty similar.
We wanna break out from that, and that's what we think our direction is. Now, the campaign has gotten off to a roaring start. I remember when the team came to me and said, "We want to kick off the campaign with WrestleMania," and I said, "You've got to be kidding." But it is. I don't know how many wrestling fans are out there, but it's a real deal, and the wrestling customer overlaps with our customer extremely well. I got to meet The Rock. He's quite a nice guy, and the night that they had the tag team match, our logos were all over the place. We also were a major sponsor of the Eclipse.
Again, team came to me, and I said, "The Eclipse?" And we all know how that became a big deal, but it became a big deal. So we had record website traffic on that day with the Eclipse. So we're off to a really nice start with the work that we've done with the new campaign. But the backbone of the company is retention, is the renewal rate, is having existing customers who are, who have been with us for years and years. And we've had a nice run-up over the past few years in terms of retention rate. Every point's about $20 million, so this is real money of revenue, and we have spent a lot of time with our contractors, trying to have our better contractors serve at an increasing percentage.
We also have done a lot of work with the marketing group on the customer journeys and staying in touch better with the members. We also have a new team that's out to save customer when they show a propensity to not renew. So we've had a big overall company effort to continue to drive against this, 'cause this is a very important metric for us. And then we have, you know, our core business is a contract business. You sign a contract, it's on a monthly basis, primarily. We wanna also do on-demand or in-person business, and it is gaining traction. We have a Frontdoor app now, where you can get a number of home services, repair and maintenance.
The biggest part of our vision right of our business right now is new HVACs, where we go into. You know, we have partnered with our contractors, we have partnered with the OEMs, since we buy a lot of this equipment. We've come up with a value proposition for consumers that when they're starting to end of life their HVACs, they can get the equipment is so much better than what was generally in place 10, 12, or eight years ago. Much more efficient, much more in line with government regulations. This has been a big win for us. We did about $50 million in revenue last year. We're targeting $100 million for the whole on-demand business this year.
So we're really pleased with where this is going, and it adds another dimension to our overall revenue. Now, what that's done is it's helped to create some really strong financial performance, and that's what we did was when I came in about two years ago, the company was really having some difficulty with inflation and the like. We took aggressive actions on that. We took aggressive pricing to cover our costs. We wanted to get our margins back to where they were, around a 50% margin, to deliver close to a 20% EBITDA margin. We have delivered on that. I think it has tempered demand with the rise in pricing that we had to do, and a number of our competitors did also.
But it also has enabled us to have the financial flexibility to do what I'm about to talk about in a few minutes. We also didn't just raise prices and hope for the best. We worked really closely throughout the supply chain on getting that back in sync. We got a break from inflation being tempered. So we have made steps to improve our processes. We also worked very closely with our contractors on high repair costs. We have also worked with them on really trying to deliver, you know, not only a lower cost, but a increased service. Because and we've increased our retention rates, as I said. We have moved now to where our five-star ratings are now the highest they've been in our company's history, and the one-star ratings are the lowest.
So we're really proud of the work that the, that the customer service team has done. The performance in 2023 was terrific. We had really great balance there. We grew revenue 7% to $1.78 billion. Gross margins were restored to about 50%. We had adjusted EBITDA that wound up netted out at $346 million, which is a big increase of 62%. Excuse me. And as all that cash got freed up, we had our highest amount of share repurchases. We bought about 10 million shares since we spun out. Last year, we totaled $120 million of share repurchases. The other thing is, this is a great cash machine.
We throw off free cash flow of about 50% of our EBITDA. Last year, it was $170 million. We also have to hold restricted cash for some of the states. The regulatory rules require us to keep some reserves, which we didn't have to, but we do. So our total cash is about $325 million. But this is a really good cash generation business. And that good performance continued into Q1, where we were able to overlap revenue and have a 3% increase, but we—our net income went way up, and we over-delivered on adjusted EBITDA, so our performance continued into Q1.
All of that performance got us to where our leverage ratio was down around 1.1 times, because our on a net basis. We realized from a number of investors that it's too low. That gave us financial flexibility, and we had a lot of options, and what we decided to do, this is my summary, we'll go past that. What we decided to do was acquire 2-10 Home Buyers Warranty, company that we had been eyeing for a while, that was in Denver. We're very excited about this. We announced it yesterday. Here are some of the facts around this. It was valued at $585 million. Most of that, we're gonna finance through debt. It's an all-cash transaction.
We will not be responsible for any of the debt on their books. We anticipate to close. We will have to go through Hart-Scott-Rodino in the Department of Justice. We'll have to deal with some state regulatory issues. We're confident we can get through those and that we anticipate to close in the fourth quarter of 2024. Now, a little bit about 2-10 . It was founded over 40 years ago in the Denver area. They're a nationwide business. They sell both traditional home warranties and something called the new home structural warranty, which I'll explain in a little bit. They deal with about 19,000 builders, and 45 of those are in the top 200.
So they deal with a high-quality builder, and they do a really good job of screening for these builders and figuring out who are the ones they want to do business with. Now, it's a, we believe, a very strong deal thesis. They are the leading provider of new home structural warranties. They have a number of customers. I'll give you the facts in a second. And I think it's, overall, really about the synergies we're gonna be able to develop and the diversification we're gonna have. And I think in the long run, this is gonna be a real shareholder value increase for our company. Now, if you look at, you know, I keep coming back to, this is all about expanding our customer base, and it really helps us in a couple of ways.
It adds this new line of business that we don't have now around new home. New homes, new home structural warranties, but we're now in the new home business. It adds a complementary home warranty business. It also gives us a chance to cross-sell against new homes for a home warranty business, and it gives us a chance with the on-demand stuff I talked about earlier, our HVAC upgrades and the like, to sell into what is now an increased customer base. The numbers, almost 300,000 customers, almost $200 million in revenue, and adjusted EBITDA in 2023 of $43 million for an adjusted EBITDA margin of 21.7%, which is actually higher than the current adjusted EBITDA margin that we had. So when I talked about, before we announced this, we would talk about: would you buy something?
And I said: I want to buy, if you will, a real business with real revenue, real customers. And I would say EBITDA, this was fortunate. This has EBITDA margins above where we are now. So that's why I became so enamored with this asset. It gives us some diversification needs, and again, the synergy piece, which we are confident there are both revenue and cost synergies that will be significant, that we will be announcing as we build out the operating plan over the coming months while we're going through regulatory review. So what exactly is a new home structural warranty? Well, it. We're in the B2B business, or we will be in the B2B business. The builder is the customer, and 90% of their revenue comes from repeat business.
What it does is it provides the builder coverage for, you know, when it happens that there's a major defect in the home. So it appeals to a broad range of builders. Now, the features, here's what the features of the new home structural warranty is. One year is traditional warranty that your builder gives you that really warrants all workmanship, cabinets, countertops, et cetera. There's a two-year aspect to this that covers systems, septic systems, things like that. And then the 10-year is an insurance-backed product that transfers the builder's obligation if there's a defect in the foundation, the roof, et cetera, to 2-10. Now, they've had 40 years of experience with this. They have terrific underwriting team.
They have been. They do a really good job of knowing the customer, knowing soil conditions and the like, to think about, you know, when there's, when there is a, when there is a claim. It is a low-incidence, high-severity situation, but again, it's very well managed and very well underwritten. So that's those are the key features there. We know the home warranty business. There's a part of this business that, you know, in terms of size, around the $200 million, we'll get to announcing what the differences are. But it's, you know, both businesses have substance to them, and we know how to deal with DTC real estate renewals and with the contractor base. So 2-10 Home Buyers Warranty has a customer that are builders.
They have a sales team that calls on builders, and they have a sales team that calls on real estate agents, too, in addition to their DTC business and then what we all do, which is take care of our customers and the renewal piece. So we think this is a benefit to all stakeholders. We think it diversifies our portfolio, it grows our customer base, it opens up new sales opportunities. So as we start to get more better with our on-demand business, we now are able to cross-sell, and we're very excited about the opportunity there. And I think the synergy opportunities here on both revenue and cost is pretty high. So I said in the beginning, I'd end with what I feel is our compelling investment thesis. This is the company strategy.
But what I'm proud of is we have been very direct with, with investors and analysts over the last two years. I've taken a conservative posture. I didn't try to get ahead of ourselves, but we have executed on what we said we would do. We said we'd explore you know, acquisitions or a strategic acquisition. We've delivered on that. And this particular acquisition, as I mentioned earlier, has really come at, at the right time with the right size. And we'll talk about why that's important at the end. Customer growth, I talked about relaunching the American Home Shield brand. That's our number one focus. Real estate. Real estate, we are confident, and I think the industry is, it will come back, whether it's going to be in the second half of this year into 2025.
The real estate market goes in cycles, and it will come back, and we'll be well-positioned to take advantage of that, especially as we will have essentially two real estate businesses to go after that. The retention rates, I harp on that because it is such a backbone of our company. It's so important to us that we continue to improve on that. On-demand is something I mentioned as we expand that, that is a really important element and opportunity for us to continue to grow the top line. And yet, as we're growing the top line, we really have a really good team working the middle of the P&L, working through our margins, our claims costs, working through our SG&A, keeping that in check, keeping our headcount in check. I think we're really operating at a terrific level...
Then finally, and I said this yesterday, let me be clear, we are still committed to continuing share repurchase. And that's why the size of 2-10, the acquisition, enables us. It was of the right size that we could both buy 2-10 and give us ability to continue our share repurchase program. We looked at some things that were bigger, which would have taken us out of that, but I wanted to be very balanced in this. I didn't want to just do share repurchases. I didn't just want to buy an acquisition. I wanted to do both, and I think we're going to be able to pull that off with this. So that's really what we have said we're going to do.
I think we've delivered on it, and I'm really proud of the company that we have built capability with the management team and you know throughout the organization, our directors, managers, vice presidents, that we are executing on a number of levels, and I think it's showing up in our financial performance. So with that, Jeff, we have five minutes left. I can take a few questions from the audience if... Yes?
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The question is about discounts with our contractor base. We go through a process called the addendum process, which is not legally binding, but it's a long-standing agreement that we make. We go through that in November. What it is, is we sit down with the contractors, and we try to trade by trade, plumbing, electrical, HVAC, give them a target number of jobs, and they give us a target cost that they'll try to bring that in on. So it's really for the contractor. Warranty business for them is one aspect of their business. Some contractors, it's 30, 40%. Some, it's 60 or 70%. We want contractors to have what we call retail business. That's a higher margin business.
So we get better-- To your question about discounts, we get better pricing from the contractors because we can sit there and, in effect, guarantee a book of business. So it works out. It actually works out, and we've gotten really good at it. The Contractor Relations team has a really good method for figuring out which preferred contractors to do this. We do it with our preferred contractors. I just talked a little while ago to our Head of Contractor Relations. We have 4,300 preferred contractors. It's about 27% of the total. And the, excuse me, they're the ones who have the best service and the best cost. And last quarter, I think we're at 84% of our service requests were done through preferred contractors. So it, it works out really well.
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Well, I don't know because we know the business, but we don't want to know. What-- You go charge whatever you want. That's not our job to... Our job, we know the cost of what a plumbing contractor should do, so we don't want to influence what they do outside of the warranty business. Others? Yes.
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So the question was about milestones around the efficacy of the marketing campaign. Well, I mean, there's a series of them. There's the one obvious one, units, revenue. There are a series of marketing awareness, you know, intent to purchase, repeat, you know, there's all of those numbers. But essentially, and then there's obviously the cost of what the marketing is. So it's going to be something that we not only look back on, but we're managing all the time in terms of what our spend is, and we try to move. You know, in today's marketing world, you are looking at both, you know, all levels of marketing. You know, you have to cover the gamut because people's media habits are in a lot of different areas. So we look at that.
Obviously, you miss on some, but we keep studying that, and we got a pretty good, you know, group of agencies, group of marketing folks who track that all the time. So we'll... You know, right now, I'm less worried because of the margin improvements we've had with what the particular CAC is. I'm more not worried. I'm more focused on how do we, how do we grow units, and then we'll figure out how to get more efficient as we go. Others? Yes, in the back.
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Why would they not renew? What ironically is they don't, they didn't use the product. You know, you might think we don't want you to, "Don't call us. We'll save money there." It's actually better for us if you, if you do an average of two service calls a year. It's, it's almost startling that, to look at when you don't use the service. The other reason would be the usual ones: "I can't afford it anymore, lost my job," or, "I had a bad service request." And, you know, that's something, you know, we try to pride ourselves on never missing on, but that would be the reason. Got 57 seconds left. All right, I'll turn it back over to Jeff.
Thank you, everyone. The breakout session is in Jenner A in 10 minutes. Thank you, everyone.