Good morning everyone. Thank you for joining Frontdoor Inc's 2025 Investor Day. My name is Matt Davis and I'm the Vice President of Investor Relations and Treasurer for Frontdoor. We are about to get started, but before we begin I want to cover off on a few items. First, Frontdoor's Fourth Quarter and Full Y ear 2024 Earnings press release as well as our 10-K was released this morning before market opening. Additionally, the Investor Day slides that will be used during today's presentation can be found on the Investor Relations section of Frontdoor's website which is located at investors.frontdoorhome.com. As stated in the presentation and on the screens behind me, I'd like to remind you that this Investor Day presentation 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. All forward-looking statements are made as of today, February 27th, and except as required by law, the company undertakes no obligation to update any forward-looking statements whether a result of new information, future events or otherwise. We will also reference certain non-GAAP financial measures.
Throughout today's presentation. We have included definitions of these terms and reconciliations of these non-GAAP financial measures to their most comparable GAAP financial measures in the appendix to today's presentation in order to better assist you in understanding our financial performance.
Finally, I would like to remind all investors how to best reach Frontdoor if you have any questions or would like to set up a call with us. We ask that you reach out to the Investor Relations department. The best way to do that is through our email IR@frontdoorhome.com. You can also call us at 901-701-5199. Thank you again for joining us today. For those of you on the webcast, we will begin starting in approximately two minutes.
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Morning everybody. I'm Bill Cobb, and thank you for being here in person, and to those of you who are joining us on the webcast. My leadership team and I have been working hard on our strategy and plans for 2025 and beyond, and we'll be sharing a lot today. But before I get to the agenda and our presenters, I want to share a few key points up front. As you know, I became the CEO in June of 2022, some 33 months ago. Back then, the company was at an inflection point. We're in one of the most challenging macroeconomic environments in the company's history. High inflation, supply chain issues, softening real estate market and other headwinds. As a result, membership was in decline. Gross margins were at historic lows of 43%.
We had not yet fully implemented our pricing actions and most importantly, we needed to implement process improvement and business transformation initiatives. I saw these as imperatives. We needed to move the company to a more proactive mindset and approach. As such, we embarked on several decisive actions to transform our business. First and foremost, we focused on our number one strategic priority, member growth. We stabilized our core business American Home Shield by investing significant resources, especially in technology and marketing. This work positioned AHS for growth and the rebrand and marketing campaign we launched last year is doing exactly what we wanted. We're seeing positive momentum in our new member count and Kathy Collins will talk about this later. We enhanced our margins. In 2022, our gross margins were at an all-time low of 43%.
But now, through a lot of hard work and our process improvement and business transformation initiatives, we finished 2024 with a gross margin of 54%, an all-time high. By the way, you're going to hear that term all-time high a few more times today. We improved retention rates. For 2022, our retention rate was 75.7%. Today that's grown to 78.5%, another all-time high. We explored strategic M& A. We completed the acquisition of 2-10 Home Buyers Warranty in December. We will go into more details this morning. But in the simplest terms, the acquisition of 2-10 diversifies our business through their new Home Structural Warranty and through their home warranty business. 2-10 brings in more members, more revenue and more EBITDA. In fact, we are even more optimistic now about 2-10's impact than we originally estimated. We expanded our Non-Warranty business.
This is one of the things I am most proud of. 2024 revenue from our non-warranty services, also referred to as on-demand, was $107 million, and we know there is more we can do. And here's another point I am very proud of. We returned a lot of excess cash to shareholders through share buybacks. We exhausted the previous $400 million authorization in August of last year, and we are now operating under a new three-year $650 million authorization that began last September. Over the past three months, following the acquisition of 2-10, we have bought back approximately $80 million worth of shares. And when you add all of these actions up, we delivered. We did what we said we would do, and the investment community has reacted very favorably. Thank you.
By the way. When I became CEO in June of 2022, our share price was $24.15. We hit a low point in December of 2022 when the share price sank to $19.55, but we've been on a predominantly upward trend since then. At our Investor Day here two years ago, the share price was $29.46. We ended yesterday at $57.17 a share. That's a 137% increase in our stock price since I started. Now, with all these improvements and our shift to a more proactive mindset today, Frontdoor Inc is a fundamentally different company. We have dramatically improved execution which has stabilized our business. Our process improvement initiatives have us operating very efficiently, better than ever before. We are in a very strong financial position. Last year our gross margins were the highest they have ever been. Most importantly, we are laser- focused on our core business, home warranties.
So that's a look back at what happened since I came on board as CEO and where we are today. Let's now transition to the future and why we believe Frontdoor is positioned for long-term growth. Let's start with our vision for the future, a future in which Frontdoor is well positioned to grow in both the Warranty and Non-Warranty sides of our business. To be a leader not just in home warranties but in the entire home services industry. We are evolving the Frontdoor model from only repair or replace to a new vision, one of home protection, repair and care realized through home warranty. What this means in practice is that we are a full- service provider for both our members through home warranties as well as members and non-members through our non-warranty on-demand services.
Our vision reflects our commitment to delivering sustainable unit and revenue growth over the long haul with our home warranty members serving as the foundation to expand our business. Our vision also underscores Frontdoor's unique ability to provide homeowners with reliable, high-quality solutions for their repair and maintenance needs in a modern consumer-centric manner. So let's move to how we're bringing this vision to life through the topics our presenters will share this morning. For our new investors, much of today will serve as a primer on the fundamentals of our business. For those more familiar with Frontdoor, I think you'll find today to be a great refresher on many of the things we've shared over the preceding months. Our first presenter will be Ray Tong, our Vice President of Pricing and Analytics.
Ray will discuss what a home warranty is, how it works, and how we are optimizing our subscription-based business model using dynamic pricing. George Guastello, our Vice President of Strategy and Integration, will share how Frontdoor is uniquely positioned in the home services industry and prime for growth. George will discuss why we are even more excited about the 2-10 acquisition and what it will do for our business. Next up, Kathy Collins, our Chief Revenue Officer. The last time you heard from Kathy, she was the CMO, but her portfolio has significantly broadened. Kathy will discuss our business construct along with our go-to-market strategies. Then we'll hear from Evan Iverson, who has also been promoted since you last saw him from VP of Contractor Relations to Chief Operating Officer.
Evan will give you an in-depth look at our nationwide network of independent contractors, our enhancements to customer service and key technology investments. And finally, the part you've all been waiting for. Our Chief Financial Officer Jessica Ross will provide a full readout of our fourth quarter and full- year 2024 financial performance and our full- year 2025 and long-term outlook. So with that, I'll now turn the floor over to Ray Tong.
Thank you, Bill, and good morning everyone. I'm Ray Tong, Vice President of Pricing and Analytics. Invest in what you know, invest in what you understand. That's why we want you to know the fundamentals of our home warranty business model, what a home warranty is and how it works. Home warranty is a high engagement product with homeowners. It's a subscription- based model and that model has critical non- intuitive implications on our financials. We optimize this model to create value for our shareholders. We protect homeowners from unexpected breakdowns for up to 29 systems and appliances through a contract. We will repair or replace these covered items when breakdowns happen due to normal wear and tear. By systems I'm referring to electrical, plumbing, heating and cooling or HVAC. Appliances include refrigerator, washer, dryer, built- in microwave, garbage disposal and more.
A home warranty starts with the homeowner choosing the coverage that best fits their needs and then paying their fee monthly or annually. Needs differ by homeowner so our coverage is not one size fits all. After we welcome and onboard the member, the next most significant interaction is when a covered item breaks. At that point, the member will request service through automated channels such as our mobile app or online portal, or by talking to an agent. At the same time, they will also pay us a trade service fee or trip fee. We will assign a contractor who will go to the home to diagnose and resolve the issue. After the service request is completed, we will pay for cost covered by the warranty. A key difference between our category and insurance or other types of warranties is the likelihood that a homeowner uses our product.
Whether you're talking about title insurance, term life insurance, warranty on your car, car insurance, or homeowner's insurance, these are all products that cover what might happen. A home warranty covers what will inevitably happen. That's why our members on average place around two service requests each year. A high engagement product coupled with a subscription- based model drive the high renewal rate in our business. In our financials we describe two first- year channels where we sell home warranties direct to the consumer or through a real estate transaction. After members from our first- year channels renew, they flow into our third and largest channel, renewals. Once a member renews, they are much more likely to stay with us with a 79% renewal rate after that first year. Kathy Collins will cover our go- to- market strategy for each channel in greater depth.
Unlike mandatory insurance, a home warranty is a discretionary purchase. We assess the strength of our renewal rate not just against our historical performance, but also against other popular categories such as streaming services. If you were to compare the renewal rate equivalent, which is the inverse of monthly churn of well-known streaming services versus American Home Shield, our flagship home warranty brand, we are among the best. In addition to renewal rate, we also look at price where the price of a home warranty is up to 7x higher than streaming on a monthly basis. Lining up renewal rates and average monthly prices shows that a home warranty is a subscription with high engagement, driving a high renewal rate with a price that demonstrates homeowners value what we deliver.
As a recurring revenue business where our agreements are typically 12 months long, it's critical to understand the timing implications of pricing and trade service reactions on our financials. The key phrase is one- twelfth at a time. The table you're looking at represents our financial results by year across the top and the months in which sales or renewals are made down the side. If we sell a unit in January, we will recognize the revenue from that unit over the entire year one- twelfth at a time. If we sell a unit in July, we will recognize half of the revenue in that year and the remaining half of the revenue in the next year. We don't change price or trade service fees until a member buys a new contract or renews. So it takes a full year for these changes to flow through our entire portfolio.
If you couple that with the 12 months it takes for a contract to complete, the total amount of time for pricing and trade service fee impacts to show up in our financials is nearly 24 months. You can see that visually going corner to corner in the two boxes I'm highlighting. If we initiate a price change in January of this year, then we won't finish realizing the impact of that change until late 2026. For example, if we initiate a 5% price increase in January of 2025, we will only realize half of that or 2.5% in 2025 and the remaining 2.5% in 2026.
There are three takeaways tied to the one-twelfth dynamic and the implications on our financial results. The first is what I just finished covering, that pricing and trade service fee actions take nearly 24 months to fully roll into the P&L. Second, it drives stability and predictability in our financial results. Third, the units we sold or renewed and pricing actions we took in 2024 will drive nearly half of our revenue in 2025. We drive value for shareholders by optimizing our home warranty model. We optimize for lifetime value, balancing three important business objectives, member count, revenue and gross profit. We use price elasticity as a key metric to drive the best outcomes for the business. We look at lifetime value by each of our first-year channels. In direct-to-consumer lifetime value is about $1,200 per member.
Even though this channel has a lower first- year margin, the high renewal rate more than makes up for that. Real estate, on the other hand, has a higher first- year margin but a lower renewal rate, yielding an approximate $650 lifetime value per member. We still consider this to be an attractive lifetime value. One of the important drivers of price elasticity is the service experience. The service experience is tied to how much a member values their home warranty. When members use the product, they receive tangible value, fixing a physical asset and an emotional benefit. Peace of mind, the combination of tangible and emotional benefit makes members more inelastic to price. Because the service experience plays an important role in transitioning members to being more inelastic, the reverse is true as well.
First year members are more elastic to price because they have not yet had an opportunity to place a service request. This is particularly true for direct- to- consumer and less so for real estate. Being more elastic to price is not necessarily a bad thing. Where we encounter more elastic demand, we can use price to grow members revenue and lifetime value, particularly in our strategic use of discounts. On the other end of the spectrum, where demand is more inelastic, we can use price to achieve more gross profit, more revenue and more lifetime value because renewal members value their home warranty the most.
Measuring price elasticity is only useful if you have a capability to deploy prices that match claims risk and therefore value to the member. Dynamic pricing is how we do that. This is a capability that we have built and enhanced since the spinoff, combining internal and external data, machine learning- based pricing models built by our in- house data science team and a sophisticated pricing platform to drive significant revenue and gross profit growth.
For dynamic pricing to be effective, we have to accomplish two: accurately predict risk and value and match prices accordingly. This graph shows how accurately we predict risk and value for renewal members. The horizontal axis represents predicted claims cost. The vertical axis represents actual claims cost. A highly accurate predictive model will look like a straight line up and to the right. That's the trend you're seeing. With accurate predictions, the next step is to align price to that prediction. This next graph shows two lines, predicted claims cost and the renewal price applied to the member's next contract. While we have three channels, we do not have three price points. It's a price spectrum. When the claims risk and the value the member receives is lower, we price lower and vice versa. When we build a capability, we build to drive a tangible result.
Dynamic pricing is no exception. Since 2018, price has increased 6% compounded annually. Flatline trends may look boring on a chart. In our case it's amazing. Despite the substantial increase in price, our renewal rate within each of our three channels has been very stable. The stability that you're seeing is even better than what we would expect according to pure price elasticity. At Frontdoor, we are one team. It took the combined efforts across the company to make this happen. Putting together what we just looked at, price and renewal rates, we are confident that dynamic pricing is driving revenue and gross profit growth while maintaining strong renewal rates. I mentioned earlier that when a member places a service request, they also pay a trade service fee. Trade service fees are another form of price we use to maintain our long-term home warranty gross margin expectations.
This shows up as an offset to gross claims cost embedded in the cost of services rendered in the income statement. We intentionally use trade service fees to mitigate the impact of inflation. In 2018, the vast majority of our portfolio was on $75 trade service fee or less. In 2024, the vast majority of our portfolio was split between $100 and $125 trade service fees. In summary, a home warranty is a high engagement product with recurring revenue that is stable and predictable. We deliver a quality service experience that works in harmony with our subscription- based model to drive greater retention from first year into renewals. Lastly, we make decisions to optimize for lifetime value balancing member count, revenue, and gross profit. With that, I'm happy to welcome George Guastello who will cover our industry strategic priorities and recent acquisition.
Thank you, Ray. Good morning, everyone. I'm George Guastello, Vice President of Strategy and Integration. I lead all strategic planning for the company. I'm also responsible for the integration of our 2-10 acquisition. 2024 was a record-setting year for Frontdoor, and we're going to build on that momentum, and it starts with the home services industry, which is large and attractive. Frontdoor is the only company positioned to truly capitalize on its immense opportunities. Our 2025 strategic priorities, and they provide the blueprint to deliver aggressive growth. And our 2-10 acquisition, it will turbocharge our progress now. Home Services, it is a massive and growing $500 billion industry. It includes both warranty and non-warranty services. Frontdoor aggressively competes in both categories.
There's a vast total addressable market of more than 130 million homes and the fuel that feeds this industry is that each of these homes require maintenance and repair and they rely on contractors and experts to deliver that service. Frontdoor is uniquely positioned to win in this space and continue to create value for homeowners and investors. Now within the Home Services, the home warranty category presents a big opportunity for growth. It's currently valued at about $4 billion and covers five million homes. That is only 6% of owner-occupied homes which is woefully underpenetrated. Frontdoor is the clear leader in this category. We deliver 46% category revenue share. We have more than 2 million members. Our network of 17,000 independent contractors manage about four million service requests annually, and our scaled subscription-based model delivers consistent, predictable recurring revenue.
We will accelerate our leadership position in this category. Now the non-warranty category, this is large and fast growing. Repairs, maintenance, replacements alone is valued at about $250 billion. And here's something you need to know. Non-warranty services are transactional. These are maintenance, repairs, replacements, improvements that do not require a membership or a subscription. The non-warranty category is highly fragmented. Players today face challenges like unreliable service, service quality issues and negative feedback from customers and the contractors. And here's what's critical. Non-warranty providers continue to operate unprofitably. The graph shows two of the biggest players in this space aren't making money. In fact, we believe nobody is making money at scale until now. Frontdoor has the solution to solve this puzzle. Frontdoor's unmatched size, scale, brand awareness provides advantages that others have not been able to replicate.
Our 2 million+ members minimize our acquisition costs. Our extensive contractor network, it allows us to avoid the cost to scale and our brand awareness makes sure that we stay top of mind with consumers. All of this enables us to profitably accelerate non- warranty revenue growth to our existing warranty members. And here's what the unlock is. As our member base grows, so does our ability to drive non- warranty revenue.
Now let's briefly turn to our growth priorities. The catalyst for our growth is built on three key strategic priorities. First, grow and retain new warranty members. Accelerating new warranty member growth in the near term is our top priority and it serves as a cornerstone of our long- term success. Second, scale non- warranty revenue. We will accelerate growth in non- warranty services and complementary revenue streams to our warranty members. And third, optimize the integration of 2-10. 2-10 is key to our plans and it provides growth and synergies. Now Kathy Collins will provide more insights on our first two priorities shortly. But first, let's talk about 2-10. I led the acquisition of 2-10 and we chose this company because it provides Frontdoor four key benefits: one, warranty member growth, two, distribution, three, revenue diversification, and significant synergies.
For those of you not familiar with 2-10, the company is a great fit for us. It directly aligns with our core warranty business. It's been in business for 40+ years and it provides home warranties in 43 states. The acquisition provides immediate home warranty growth. We get more than 170,000 home warranty members, complementary real estate, direct-to-consumers, and renewal channels, an attractive recurring revenue stream, and increased scale in the home warranty category. 2-10 is also the largest provider of new home structural warranties to builders. They cover about one in every five newly constructed homes. The product provides builders and homeowners up to 10 years of insurance-backed protection for structural defects on a home as well as workmanship and systems coverage, and they're sold to 19,000 home builders. These structural warranties are available nationally across 48 states. Now here's how the product works.
A homeowner gets one year workmanship protection for issues like flooring, cabinetry, finishings within a home. Two years protection for systems issues, anything like plumbing or electrical system issues. 2-10 will help the homeowner relay the issues to the builder who is the responsible party for resolution. For the builder, 2-10 handles all of the administrative responsibilities. The homeowner also receives up to 10 years of insurance- backed protection for potential structural issues with the home. In the event of a covered structural claim, 2-10 will manage the repair process, fixing the issue for the homeowner and significantly reducing the builder's post construction risk.
With 2-10's industry-leading new Home Structural Warranty, we now have expanded distribution with access to over a million new homeowners and 19,000 home builders. This opens up an exciting new sales channel for both our core home warranties and non-warranty services like our growing new HVAC program.
2-10's new home structural warranty also diversifies our revenue stream into an attractive adjacent category. The average cost for the product is about $500. About 88% of sales are to existing home builders.
2-10 sells the product through a combination of field and inside sales associates.
Lastly, the acquisition of 2-10 provides significant operational synergies. We will immediately operate 2-10 more effectively using Frontdoor's proven infrastructure and expertise. In 2025 we expect to unlock significant synergies delivering over $10 million this year and expect a $30 million+ run rate by 2028. This will enhance Frontdoor's profitability and deliver even more value to our members and shareholders and specifically for our shareholders. Applying our expected synergy run rate to 2024's Adjusted EBITDA results in a very attractive purchase price multiple of 8x or lower synergized Adjusted EBITDA. So bringing this all together, Frontdoor is primed for growth. The home warranty services industry is massive. It's a $500 billion opportunity. Frontdoor scale, brand awareness and powerful operating model positions us to grow members and expand non-warranty services profitably.
Our subscription-based model delivers predictable recurring revenue, and now with 2-10 we get more members, more distribution, revenue diversification, and powerful synergies. Bottom line, Frontdoor is in the perfect position to win now and in the future. Thank you for coming today, and I'll now turn it over to Kathy Collins who will share a deeper dive into our go-to-market strategy and exciting opportunities ahead.
Thank you George. I am delighted to be here with all of you today to share a variety of important topics about our business. The areas I'm going to cover are our high- level framework for the Warranty and Non-W arranty sides of the business. Starting on the warranty side we'll kick off with American Home Shield, our leading brand, then AHS's value proposition and how we go- to- market. We will then shift to our four strategies for growth, brand health and campaign results. I will end with our Non-W arranty business scope overview and updates. So to kick us off I want to share a very simple construct that helps organize our strategic priorities. At the highest level we run two businesses, Warranty, our core recurring revenue business and Non-W arranty, which is more transactional in nature.
This Non-Warranty business primarily exists to grow share of wallet among our 2 million + Warranty members. I will get to the Warranty side in just a few minutes, but let's start with Warranty. When you look at our brands within this framework, we all know that American Home Shield is by far our largest. It's American Home Shield plus the other brands in our portfolio, OneGuard, Landmark, HSA, and our newest brand, 2-10 Home Buyers Warranty. All of these brands are being operated as one home warranty business and have their own go-to-market plans. But today I'm going to focus on American Home Shield. American Home Shield is the clear number one in the home warranty category. We have the strongest brand recognition by far. Our unaided brand awareness is 21%, meaning a customer can name us without being prompted.
That awareness is twice as high as our nearest competitor, and due to the success of our marketing campaign, is at an all-time high for American Home Shield. American Home Shield also has the largest nationwide network of over 17,000 independent contractors, a network that we have built with quality contractors over many decades. Evan will go into this area in greater detail. Our research is very clear. What matters most to homeowners when it comes to a home warranty is that they can trust the people we deploy to their homes, trust them to provide expertise to restore functionality of their systems and appliances and to keep their homes running. The term consumers use consistently unprompted is peace of mind. When asked the primary reason for purchasing a home warranty, virtually half say they bought it for that peace of mind.
Now as Ray pointed out, an American Home Shield warranty protects up to 29 home systems and appliances from breakdowns due to normal wear and tear. This is the best coverage in the home warranty category. The value of an AHS Home Warranty extends beyond peace of mind. However, in the words of one consumer, it's the not knowing that makes homeownership a challenge, and while peace of mind is the key motivator with our members, homeowners also stress over unplanned expenses. 62% of all homeowners say they aren't saving enough and about 20% say they don't have any savings. The opportunity is real. We can provide value to the people who need it the most. Think about the financial impact this way, consumers prioritize two key benefits of an AHS Home Warranty. First, it protects a homeowner from any significant failure which could be costly without coverage.
And a home warranty provides a breadth of coverage of up to 29 home systems and appliances. Without coverage, those repairs or replacements could cost thousands of dollars per year. So in summary, protection, peace of mind and cost savings are the core of our value prop and how we position the AHS brand to homeowners. Okay. Now let's get into how we go- to- market as the American Home Shield brand. And I want to be really clear. Our number one priority is new home warranty member acquisition. We have two main go- to- market channels, direct- to- consumer and real estate. So let's start with direct- to- consumer. But first, here's some background on D2C. American Home Shield pioneered the D2C channel about 20 years ago. As I shared earlier, a home warranty has a strong value proposition for existing homeowners.
We market home warranties directly to consumers through digital or performance marketing, broadcast, direct mail and other channels. D2C is an investment in the first year. It renews at about 72% at the end of year one and then becomes profitable in the second year and beyond. This channel surpassed the real estate channel in terms of unit volume in 2021 and today is responsible for a little more than 60% of our new members. Not surprisingly, the timing of this channel shift aligns with the crash of the real estate market. Macroeconomic factors have also challenged direct- to- consumer growth, including consumer confidence, inflation, interest rates and overall economic uncertainty. Despite those challenges, we are extremely pleased with our D2C business. The consumer is resilient and responding. We continue to deliver compelling product news, new reasons to believe, and strength in a myriad of marketing channels.
I am very happy to report through these efforts and more, we have been able to grow our D2C member count in the third and fourth quarters of last year. Since the end of Q2, we saw more than a 5% increase in member count and double- digit growth in units sold in the fourth quarter. We have started 2025 with great momentum. I am now going to share our plans for acquisition, growth and retention. We have identified four strategies to grow our member base. First, strategically offering deep discounts. Second, targeting new audiences with a higher propensity to buy a home warranty. Third, campaign and media optimization. And fourth, product differentiation. Starting with deep discounting. A couple years ago, we recognized that our high lifetime value and renewal rates gave us the ability to test and execute some new pricing strategies.
In light of the challenging real estate market, we needed to find more ways to bring more members to the AHS brand. So, in March of 2023 we first ran 50% off in D2C to better understand the impact of pricing in the home warranty category. Offering 50% off periodically greatly increases both demand and conversion. We know that price matters at the point of the initial purchase, but some may have had daunting concerns about what would happen one year later at the point of renewal. If we offered 50% off as a starting point and then in year two jumped them back to normal pricing, would they simply cancel?
So, to that end, we tested several pricing levels ranging from low to high. Year two increases, and what we now know is members are less resistant to price increases once they have been with us for a year or more. And the good news is that we are walking them back to full price and profitability within about two years. So this discounting strategy is working. It has given us a boost in membership contributing to that turnaround in Q4. We are at the highest retention rate we've ever seen, and we've been able to maintain our overall margin performance due to the timing and length of the promotional periods. Deep discounting continues to serve us nicely and will be a part of our plan going forward. Let's now talk about how we are targeting new audiences, those who are more likely to convert.
The campaign has been very effective in moving the needle on top-of-funnel metrics such as brand awareness for AHS. In fact, like the unaided awareness level I shared earlier, aided brand awareness is at an all-time high. We have always been significantly above the other players in the category, but in the past two years we have widened that gap 25% higher than our nearest competitor. So now is the right time for us to shift our focus to the midpoint of the marketing funnel. For those of you not familiar with this diagram, the funnel is a visual representation of the customer journey, depicting the different stages a potential customer goes through, from initially learning about a product or service to making that purchase. So now we are focusing on the midpoint of the funnel, which is all about consideration and trial.
Now that they know American Home Shield, we've gotten their attention. The next step is getting them closer to purchase. We have spent the last several months in deep quant analysis learning about specific audiences and that we can more readily target through media. And this work has led us to two audiences in 2025, Millennials and Hispanic Millennials. Millennials, who are 29-43 years old, are the fastest growing cohort of home buyers and they tend to be quite stressed with home ownership. Within the Millennial cohort, Hispanics are the fastest growing demographic population. So with a more targeted focus, we can more effectively connect with Hispanic homeowners through a personalized message and a customized approach. Now let's shift to how we are optimizing our marketing and getting the most out of our investment. Simply put, brand does matter.
We have worked diligently to build brand equity through a positive, consistent experience and strong marketing campaigns. Since our last Investor Day, we have done a great deal of work to enhance this already great brand. Last April we relaunched the AHS brand through updated iconography and imagery, a new website and the introduction of the Warrantina campaign. This was done after much research telling us the category was in dire need of something breakthrough. Now, I've spoken quite a bit about this category being virtually a sea of sameness with every brand touting the same benefits, having similar logos, iconography and value props. This was our time to stand out. Enter Warrentina.
We are seeing strong results to date. The campaign featuring comedian Rachel Dratch is memorable, funny, which isn't the norm in this category, and likable. More importantly, it's educational and informative, giving consumers a better understanding of an AHS Home Warranty and its benefits. The campaign has grown awareness in a relatively short amount of time. Our research shows that two out of five homeowners are familiar with the Warrantina campaign and the likability is over 80%, well above advertising norms. Is the marketing working? Yes, it is. We are up across the board in ad awareness, brand awareness, brand attributes, units and retention since the launch of the campaign in Q2. We are keeping the campaign going in 2025 with some fresh creative. Now I am happy to share with you one of our new TV spots.
Ladies and gentlemen, the world premiere of Dollhouse.
Momo, look, this is like our new house. Warrantina.
I hope you have an American Home Shield warranty.
Leaky toilet, fixed. Clogged AC coils, fixed.
Oven beyond repair? Ta-da.
If AHS can't fix your covered item, they'll replace it no matter its age.
A warranty is smart.
Oh happy family.
Is that us?
Too much. American Home Shield. Don't worry, be warranty.
All right, let's now transition to our fourth strategy which is product differentiation. American Home Shield continues to be the driver of innovation in the home warranty category. Our D2C and real estate tiered product offerings are the core of our Warranty business with a number of add-ons and supplemental services available. We have three tiers of products. On the D2C side, Platinum, Gold and Silver. For our real estate members, the three tiers are called Complete, Plus and Essential. But we think about product more broadly. It's all about the experience for our AHS members. To that end, in late October we launched the American Home Shield app, a modern solution focused on the member experience. The app serves as our catalyst for future innovation of the member experience.
It's available to all members, giving members an efficient, mobile- first service experience and the app will be foundational to unlocking innovative digital solutions of the future. Members can manage their account, submit service requests, renew their membership, or make changes to their plan, and they can access the new HVAC program and more. All of this through the convenience of their phone. And our communication with members will become more frequent and customized through push notifications. We have been blown away by the response to the app and the usage in just the first four months. To date, we have over 140,000 registered users. Over 44,000 service requests have been submitted through the app, saving time and other resources for our call centers. The app has a rating of 4.7 stars on Google Play and 4.9 in the Apple App Store.
We will continue to enhance the member experience through the app based on consumer needs, service enhancements and new brand innovation. So the app is a great example of our product innovation. But today I am beyond thrilled to share with you our latest product feature AHS Video Chat with an Expert. That's right. Members of our top two product tiers starting today have the opportunity to connect with one of our virtual experts through the AHS app. Check out this video.
Drum roll, please.
Video Chat is now available in the.
American Home Shield app for select plans.
AHS members can chat with repair experts for live help with home hassles for no additional cost. That's right. It's free. When a home system or appliance isn't.
Working right, the expert can provide real-time.
Guidance to assess or fix the problem on the spot.
Troubleshoot with confidence.
All from the AHS app. The expert will see you now. Sign up at ahs.com today.
So let me share with you how this feature and functionality came to be. Two years ago, we launched the Frontdoor app. It included a home warranty product and other features including Video Chat with an Expert. What we have learned in those two years has been invaluable. Homeowners love our video chat experience and they love our experts. It is an understatement to say this has been a positive experience for Frontdoor users. So we decided to bring this to the AHS brand. Our experts are highly experienced former contractors who now work for us. They are men and women who are ready to get off the road and take on a new adventure of helping homeowners either fix what's broken or guide them to the right solution. They are experts in the fields of plumbing, electrical, HVAC, appliance repair, and even a generalist category.
This has been an amazingly positive experience. The AHS app with video chat means that our Gold and Platinum level members, which is about 87% of our members, can get help even faster and easier. It means they can potentially walk through a fix over the video chat, possibly making it less costly for the homeowner. And importantly, the app with video chat is giving our members a new way to work through an issue. And we expect this channel to increase overall member satisfaction as we've seen with the Frontdoor brand. And it comes at no additional charge for the member. We love the fact that not only is this a game changer, but it's something we believe is truly a differentiator in this category. Again, the AHS video chat feature is launching today. We are notifying AHS members of the new feature.
This week. You will also be seeing Video Chat with an Expert built into our acquisition marketing channels. Now I'd like to share with you one of our other new spots that will be used both on television and digital platforms. This is Ancient Manual.
Hey, did you find the manual?
Yes, of course I found it.
Warrantina.
No, I need that.
Summon Dale.
Who's Dale?
A real human.
I'm Dale. American Home Shield now provides video chat with live repair experts for home fixes over the phone.
Let's go fix that oven.
Okay, Dale.
I need my phone back.
Fix it over video chat on the AHS app. Sign up today.
At ahs.com.
All right. So moving on from D 2 C, let's now talk about the real estate channel. To begin, here's a little background. American Home Shield founded the home warranty category in 1971 specifically through the real estate channel. We market home warranties through our nationwide field sales team, many of whom have long standing relationships with real estate agents. Sales through this channel are profitable in the first year and these renew at about 30% after the first year, much lower than the D2C channel. Prior to 2021, when real estate was the key channel for attaching home warranties, it was a fairly common practice for the real estate agent to throw in the warranty to close the deal. However, since the real estate market boom and then crash, the world has changed.
As you can see, in 2024, home sales cratered to one of the lowest levels we've seen in 40 years. The good news is that despite this greatly reduced inventory, we have managed to maintain our category share. The chart on the left here shows how real estate home warranty sales and home warranty capture or attach rate have declined in tandem from 2018 through 2023. On the right side, you can see that we have maintained our share in spite of those declining sales. While there are some positive signs, real estate continues to be a tough market. NAR, or the National Association of Realtors, reported existing home sales for 2024 at 4.06 million, which was the lowest number since 1995. Further, inventory continues to remain around three and a half months and home prices up 6% year- over- year to an average of $407,000.
Although we don't know what our new normal will be, this channel remains important and we have been able to maintain our share and our relationships with the largest brokerages are quite strong. So until then, here is what we are doing to drive units and maintain our leadership position in real estate. We're using data, technology and automation to build a better way to capture new members. For instance, we are analyzing growth markets and optimizing our marketing investment accordingly. We are placing our best sales talent in high propensity markets and we are identifying those top performing real estate agents and working to customize communication journeys with those agents. Bottom line, the brand and my team are poised for success and we will be ready when the real estate market inevitably comes back. Now let's move to the heart of our business renewals, specifically our retention strategies.
Clearly, the new app and Video Chat with an Expert are big renewal plays for us, but there is more. First, let me start with where we are in retention. This slide shows our retention rate for American Home Shield from 2022 through 2024. We finished 2024 at an amazing retention rate of 78.5%. This is an all-time high for us, but we're not done. We work cross-functionally to ensure that the member experience is not something just one team focuses on. We all own that one and we have done extensive research to understand why members don't renew and those have become our areas of focus. So our three initiatives to grow loyalty and engagement are usage, onboarding and autopay sign-ups. So members most likely to renew are members who have used our services.
In our real estate segment, for example, users renew at twice the rate of non-users. Across all of our first-year members, we have identified ways for them to engage with the brand, maybe through a discounted HVAC tune-up or a free carpet cleaning service. Further, we create enhanced member journeys to deliver compelling offers, and we often highlight maintenance services, giving them a chance to try us out if they don't have a repair need. On the real estate side, where renewal rates are significantly lower than D2C, we have come to understand the importance of onboarding. In many cases, homeowners don't even know they have a home warranty and have not used it. So we continue to take steps to welcome them to the AHS brand through consistent emails and other communications.
This is a complete member journey, including the education of benefits and follow-ups with relevant offers. And finally, monthly autopay is our last area of renewal focus. If we can get a member on autopay, excuse me, our chances of keeping them are significantly higher than if they are not. And although 84% of our members today are on autopay, we continue to test offers to get that other 16% signed up. All right, now let's switch to the Non-Warranty side of the business where we are currently offering non-warranty products and services in two distinct ways. First, to our 2 million + members through programs such as our new HVAC initiative and second, B2B2C or business partnerships such as our Moen initiative. So let me say a little bit about each of those.
We have built our new HVAC program from scratch to a nearly $87 million business in 2024 and as we've expanded and marketed the program we continue to see significant growth. What a differentiator this has been. This program is all about membership benefits. By being an AHS member, you have access to the best deals because of the partnerships that we have built over the years, both in terms of suppliers and contractors. We are very optimistic about this offering and expect 2025 revenue to come in at an even stronger level. The life of an HVAC system is around 15 years and we can help guide our members when the opportunity and timing are right. The prices are greatly reduced because of the large unit quantities and brands that flow through our business today.
Environmental efficiencies and new regulatory standards on refrigerants also come into play with newer systems. Expansion of this program could be a material strategic opportunity for Frontdoor. Some investors asked how big could this be? So we have sized the opportunity based on a number of different categories: appliances, hot water heaters, and roof replacements. We believe this can and will be a major growth engine for Frontdoor. We believe programs across these four categories provide a nearly $2 billion opportunity, creating even more value for our members over time. This chart shows how we get to that $2 billion in a non-warranty total addressable market within our member base a cross those categories of HVAC, roof replacement, appliances, and hot water heaters. On line one, you see the rate.
We believe members could proactively replace these items. On line 2, the average price of each service, and from that we are able to derive the opportunity size on line three. So the total across those four categories comes to about $2 billion in TAM within our member base. Now let's talk about business partnerships that leverage our network of around 17,000 independent contractors. Our partnership with Moen is a fantastic example of where this opportunity can take us. As you may know, in some states, insurance companies are beginning to require an accessible water shut-off valve, complete with smartphone alerts to mitigate any flooding issues. We started this partnership in the state of California and made it very easy for homeowners. Basically, Moen drop ships the valve and necessary parts to the home.
However, as we've seen so many times before, homeowners aren't sure how to install these nor do they want to learn. Enter our plumbing contractors. They are able to install the device in a short amount of time, completing the job for Moen, the insurance provider and the homeowner. This is a perfect example of our size and scale, providing an opportunity that many of our competitors could not execute. Our network provides virtually national coverage and in the spirit of successful partnerships, we have figured out yet another new revenue stream as well as introduce the Frontdoor business to more homeowners. Since the California launch in June, we have extended to 13 more states for a current total of 14 with another six states expected by the end of this quarter.
So summarizing the Non-Warranty side of the business, we have built a $100 million + business by accessing just a small portion of our 2 million + members. We will continue to tap into this loyal base and will let their input guide us to what's next. Continuing to build HVAC appliances, water heaters, roof replacements and we will continue to leverage B2B2C partnerships and are currently in active conversations with other potential partners.
I'm sure you can tell that we are bullish about our growth trajectory for both the Warranty and Non-Warranty sides of our business. What I hope you take away is this: American Home Shield is the category leader by far. Our core business is our Warranty business led by the American Home Shield brand. This year we are laser- focused on those four growth strategies: deep discounting, precise targeting, conversion marketing, and product innovation led by the app and video chat. Our Non-Warranty business is a growth engine with a focus on growing share of wallet among our 2 million + members and establishing strong corporate partnerships. Our brand name recognition combined with our national network of contractors are strong reasons for homeowners to turn to Frontdoor for all of their home protection, repair, and care needs.
Thank you so much for your engagement this morning. At this time I would like to introduce my friend Evan Iverson.
Thank you, Kathy. Excuse me. Thank you, Kathy, and good morning, everyone. I'm Evan Iverson, the Chief Operating Officer of Frontdoor. My job is focused on how our contractor network, service operations and technology come together to better serve our members and grow our business. Operations plays a major role in our strategic focus, and we are operating better than ever. Leveraging our unmatched nationwide network of independent contractors, driving efficiency and experience through disciplined service operations and delivering business value through pragmatic, reliable technology investments. But before I detail our strategy, let's reset to when I spoke to you in 2023. CPI was at 8%, the highest in 40 years, which was especially pronounced in Home Services with appliance up 12% and HVAC up 22% and net, this was a 16% increase in our cost per service request.
At the time I explained the aggressive actions we were taking to help us get out of the inflation trap and those remain core elements of our approach today. Coverage optimization, supply management, geographic optimization and cost control and planning improvements. When I spoke to you in 2023, I told you how we were working through coverage optimization, specifically how we were managing our exposure across our marketing strategy, pricing and products. A great example is what Ray explained to you earlier on how we think about trade service fees and what we price in the cost of product. It helped us fight inflation and remains a key focus today.
Supplier strategy is a foundational element of our business and we continue to work tirelessly to ensure we are buying the right parts, systems and appliances and aggregating volume across both suppliers and contractors to ensure we get the greatest value possible from our scale. This helped us escape the inflation trap and remains as critical today. And at the heart of dynamic pricing is a wealth of data on costs and performance of not just markets, but individual homes. As Ray explained, this is critical to matching price with cost. And finally, we implemented reviews for high- cost jobs, changed incentives for field managers and changed our budgeting approach.
Our results speak for themselves. We have seen significant reductions in the impact of inflation on our net cost per claim with slightly deflationary results in 2024.
This tremendous performance all starts with our contractors. Our approach to contractors is different. Our model is built on partnership, not just working with them. Our recipe is simple. We offer real value. We coach them, we are transparent in our feedback and we show we care. Which results in engaged contractors who want and value our work. If there's any secret sauce to recruiting a new contractor, it's this. We're not trying to sell them leads. We bring them real work, real member problems for them to solve and we pay them quickly. And once contractors are in our system, we have a dedicated team of roughly 100 field managers that coach contractors on how to work with our systems and grow contractors' businesses through the multiple channels of revenue that our value proposition creates and leverage proven best practices.
And we coach them on how they are performing for members in Frontdoor. The screenshot you see is a new self- service scorecard we are rolling out within our network. This is the actual screen a contractor will see. It allows our contractors to see their performance both against their targets and peers in the markets and understand exactly how they need to improve to be more competitive. And we get their input through our Pro Council. It helps us understand what is working, what isn't and helps us shape our strategic focus.
That is the magic of our model. We work hard to create jobs contractors want and in turn they provide better customer service and they deliver better costs for Frontdoor. Everyone wins.
And the contractors that consistently perform the best on cost and quality and leveraging best practices are designated as preferred contractors. Representing about 4,000 of our 17,000 strong contractor network. These 4,000 preferred contractors performed 85% of our service requests in 2024. We see savings in excess of 50% from our preferred contractors, driven in part by volume aggregation, best practice impact of tools and systems, for example procurement or self- service tools, and that contractors value the full range of revenue opportunities of our work that I previously explained. And we are finding that members serviced by our preferred contractors are more likely to renew, seeing a 180 basis points improvement in our renewal rates.
Increasing the percentage of jobs that go to preferred contractors has been key to our improvement since I last presented to this group in March 2023, and most importantly, members like this approach as evidenced by their rating of our contractors at 4.5 stars, another all-time high.
And contractors aren't just working with us on our home warranty work, they are the engine that allows us to grow our non- warranty. They are willing to help us grow revenue faster to take a leap of faith to try new offerings and that willingness allows us to grow quickly. They were critical in building our new HVAC program to an $87 million business and our plumbers supported us in getting our Moen Flo offering in the market, delivering about $5 million of revenue in 2024. As I said, it all starts with our contractors. They deliver for both members and Frontdoor.
Now let's turn to how we're optimizing our service operations. Going back to the pandemic, it forced us to go remote and it was a significant challenge for us to solve, and we saw this as hold times or speed to answer exceeded 40 minutes in our peak summer season. But by the time we got to our second peak of the pandemic we'd gotten our bearings and we have gotten better every year since. And this isn't just a function of throwing headcount at problems. We are getting better in our most complex and important processes like authorizations and appliance replacement where we have to review and approve work for members, ensuring they get the coverage and value of their American Home Shield warranty.
We are delivering real productivity gains by handling more calls per hour and we have made these improvements with equal or better member experiences as shown by our members' ratings of our authorizations and appliance agents.
Taken in conjunction with the improvements in the contractor network. The net result is a continued upward trend and all-time high of overall AHS 5-star member ratings.
That is service operations performing better than ever for our members.
Finally, it's been about six months since I took over technology and my focus has been on ensuring we are delivering business value with our technology investments. We shifted our approach from a focus heavy on transformation and prioritizing pie in the sky initiatives and technology tech debt to focusing on reliability, supporting the business and capitalizing on our existing strengths. We are now tracking and holding ourselves accountable by focusing on prioritizing reliability across all teams, measuring and monitoring progress to know when and where things are breaking so we can address them, and making continuous improvement rooted in all we do. While we are not yet at our goal, we are steadily improving. I am tremendously proud of the team's work on this.
The progress we are making is now reflected in our 2024 uptime of 99.887%, and now let's discuss some examples of how tech is supporting the business.
We built our new HVAC program on a technology stack that works rather than waiting for a perfect approach.
We built our Moen on our existing Non-Warranty platform, which allowed us to get to market quickly. We have used the same approach to improve member experience. We've reduced transfers and contractor assignments by 40%, ensuring the right contractor shows up the first time to get the member problems solved with both great customer service and low cost. We have gone from issuing paper checks to digital payments, which has shortened the time members wait for payments by 90%, a significant member benefit. And a portion of our service operations are driven by self-service experiences that we built for members such as the shopping portal where they can now select a new appliance, which in turn has reduced inbound call volume for appliance replacements by 45% and self-service orders have gone up.
In short, our technology is stable and dependable, is supporting the growth in our Warranty and Non-W arranty businesses, and is making us more efficient and productive for our contractors, members and associates. And this doesn't mean we're resigned to incremental improvements. Everyone asks me about AI. We are testing AI in a number of environments in our service operations focused on assisting service agents and inside sales. Our authorizations process is a great example where our AI model navigates permutations of 4 million + job items across five major trades and more than 25 contract types and it is now approaching 90% accuracy. While we are value- focused in our technology, we are still looking for ways tech can transform our business.
And as Kathy mentioned, the launch of American Home Shield app with virtual expert support is another great example that our technology portfolio is a great mix of value- leading innovation with tactical pragmatic improvement. Frontdoor represents a unique opportunity to invest in a strong growing business in the home services industry with an unrivaled contractor network and approach, disciplined and results- driven operations and tech that focuses on driving our business value every day. Frontdoor stands out from the rest. And now I would like to introduce Jessica Ross, our Chief Financial Officer.
Thank you, Evan, and good morning, everyone. Last year was an exceptional year for our company. We acquired 2-10 to drive growth and we completed our new $1.47 billion credit facility, creating a solid financial foundation for years to come. With that, let's jump into our record fourth quarter results, which demonstrated a continuation of our outstanding financial performance. Q4 revenue increased 5% to $383 million, primarily driven by the addition of 2-10 as well as better-than-expected revenue from non-warranty services. Net income was flat at $9 million, which is a great outcome considering it includes transaction costs associated with the 2-10 acquisition and our related debt financing in December. Adjusted EBITDA increased 10% to $49 million.
We also beat our fourth quarter guidance by approximately $13 million, which was driven by better than expected revenue conversion and gross profit, partially offset by about $7 million of intentional marketing investments. Now turning to gross profit, which increased 5% to $186 million and gross profit margin improved to a fourth quarter record of 49%.
As you can see, we delivered another quarter of strong financial performance and we could not be more proud. Now moving to our 2024 full year financial results. Full year 2024 revenue increased 4% to $1.84 billion, net income increased 37% to $235 million and Adjusted EBITDA increased 28% to an all-time high of $443 million. This was undeniably an exceptional year for Frontdoor. Full- year gross profit increased 12% to $991 million and gross profit margin improved 410 basis points to a record 54%. This was driven by the progress Evan mentioned, our dynamic pricing capabilities and our trade service fee initiatives. Now let's dive into the 2024 Adjusted EBITDA bridge. Starting at the top, we had $60 million of favorable revenue conversion. Contract claims costs decreased $44 million.
Sales and marketing increased $8 million driven by intentional investments made in the fourth quarter to drive member growth in 2025. General and administrative costs increased $7 million, primarily driven by increased professional fees and personnel costs. These spending increases were partially offset by $6 million of favorable interest income and other items. In summary, Adjusted EBITDA increased to a record $443 million, which is nearly $100 million increase. This is a 28% increase year- over- year. Now let's review our statement of cash flows. With record earnings come record cash flows. Net cash provided from operating activities was $270 million for the 12 months ended December 31st as a result of our exceptionally strong earnings. Net cash used for investing activities was $622 million and was primarily comprised of funds used to acquire 2-10.
Net cash flows from financing activities were $447 million and was primarily driven by our new debt issuance, which was a great success. As a result of our strong performance, free cash flow increased 36% to $231 million for the 12 months ended 2024. We also used $160 million to repurchase nearly four million shares last year. We ended the year with $474 million in cash and marketable securities. This was comprised of $184 million of restricted assets and $291 million of unrestricted assets. Now let me spend a few minutes talking about the way we deploy our capital. We have an exceptional business model that generates a lot of cash and has low CapEx requirements. This unique combination gives us significant flexibility when it comes to capital allocation. It is important to note that we have maintained a very consistent capital allocation strategy over time.
Our first priority has always been growth. After that we want to maintain a strong financial profile and finally, we want to return all excess cash to you, our shareholders. Let's dive into each of these in a bit more detail. We are a growth company and we will continue to prioritize growth. That can come in the form of investments to fund organic growth across marketing, non- warranty services as well as process improvements and technology investments to scale our business. Our M&A strategy remains focused on opportunities to grow our core business, as evidenced by the recent acquisition of 2-10. Our second priority is to maintain a strong financial profile. Our goals here are simple. Ensure we have enough cash and liquidity to run the business and maintain a prudent leverage ratio.
We continue to target a net leverage ratio of 2x-2.5x Adjusted EBITDA. We successfully completed our $1.47 billion credit facility in December, which funded the 2-10 acquisition and refinanced all of our existing debt while extending our debt maturities to 2029. The result is a very attractive debt tower. We don't have to worry about refinancing anytime soon and can remain laser-focused on driving the business forward. Finally, our third objective is to return excess cash to shareholders. We completed our prior three-year $400 million share repurchase authorization in 2024 and our board approved a new three-year $650 million program that started in September. I am very proud that we have a history of buying back shares. Since 2021, we have returned approximately $480 million to shareholders by buying back 12.7 million shares at an average price of $38 per share.
To put this in perspective, this represents approximately 15% of total shares outstanding over the last four years. This includes approximately $80 million under our current program in just the last three months. Now, for those of you that might be newer to our story, let me take a moment to share a few historical financial highlights with you. First, I'd like to call out our consistent revenue growth over time. Looking back to 2008, we have delivered a revenue CAGR of over 7%. I want to highlight the durability of our revenue model here. Even through all of the challenges and uncertainties over the last two decades, including the global financial crisis in 2008, COVID, high inflation, and significant volatility in the housing market, we have continued to deliver consistent revenue growth over time.
Moving on to our historical member count, which is a bit more nuanced. We went public in 2018 and grew members over the next two years, primarily through D2C. However, in the years that followed, the housing market dramatically changed. It became a seller's market, inventory reached an all-time low and existing home sales have become more volatile, declining to the lowest level in 30 years. As a result, our sales of home warranties in the real estate channel are less than half of what they were in 2018. In 2024, our acquisition of 2-10 drove our member count up and we are very excited about the value the 2-10 acquisition adds to our business as well as the growth strategies Kathy outlined earlier.
Now turning to our gross margin history, which has averaged 48% over the past seven years. As you can see here, we went from the worst of times in 2022 to now record gross margins in 2024 as a result of the work driven by this executive leadership team to turn the business around over the past two years. As I shared earlier, we have a business model that doesn't require significant capital investment. Our capital spending runs at around 2% of revenue, related primarily to technology investments to drive growth and scale. In addition to our consistent revenue growth, we have also delivered strong levels of Adjusted EBITDA growing from $238 million in 2018 to a record $443 million in 2024. Not only have we grown Adjusted EBITDA by nearly 11% annually over the last seven years, we've averaged a 19% margin during the same period.
I'd like to call out that since Bill took the CEO position in 2022, Adjusted EBITDA has more than doubled. And finally, as I've said before, this business generates a lot of cash. This is a core strength of our business. One of the metrics we look at is the percentage of free cash flow to Adjusted EBITDA, which averaged 56% over this period. To summarize, we have demonstrated a consistent history of strong financial performance over time, which leads me to what I know you all have been waiting for, our full year and first quarter 2025 outlook. Before I get into the details of our outlook, I want to provide some context on the main drivers impacting our estimates, starting with our revenue assumptions. I mentioned this earlier.
Our home warranty member count has recently been in decline due to the challenging real estate environment, and the decline in first-year channels is negatively impacting our renewal base. Additionally, we are lapping double-digit price increases which has been a major contributor to our revenue growth over the last few years. As a result, 2025 will be a transition year for member count and organic revenue growth.
Now for the good news. Despite these headwinds, we still expect to see revenue growth of approximately 10% in 2025 driven by 2-10 and non- warranty services. Additionally, we expect gross margin of approximately 52% and Adjusted EBITDA margin of approximately 23%, both of which remain significantly above our historical averages. We have done a lot of work over the past few years to ensure that our margins and profitability metrics remain strong and we will continue to benefit from these efforts in 2025. There is clearly a lot to celebrate here. So now let's move to the outlook details which includes the addition of 2-10. Starting with revenue, we expect an increase of about 10% for a range of $2 billion-$2.04 billion. This includes a 2%-4% increase in realized price.
We initiated a mid- single digit price increase late last year and I would like to reiterate what Ray shared earlier. It takes up to 24 months for our price increases to fully roll through realized revenue. So our realized price increase in 2025 is a reflection of our prior pricing actions which have been intentionally lower as we have been focused on driving higher member count. The remaining 6%-8% increase is driven by volume primarily from the 2-10 acquisition and other revenue partially offset by lower organic growth in home warranty. Other revenue includes approximately $100 million of new HVAC sales, about $15 million related to Moen and about $40 million related to 2-10's new Home Structural Warranty business. Moving on to gross profit where we are estimating a full- year margin of 51.5%-53%. This is 400 basis points above our historical average.
This includes the impact of lapping prior price and trade service fee increases, mid- single digit inflation which includes some uncertainty around tariffs and an increase in the number of service requests per member and normal weather. Now let's turn to our full year SG&A outlook which we expect to be in the range of $640 million-$660 million. This is an increase over 2024 due to the addition of 2-10, normal inflation and includes approximately $30 million of stock- based compensation and $8 million of one-time costs associated with the 2-10 integration. Based on all of these inputs we are setting our full year 2025 Adjusted EBITDA range to be between $450 million and $475 million. For those of you trying to bridge down to this range you would have to include interest income of approximately $15 million.
This results in a strong Adjusted EBITDA margin of approximately 23%, provides substantial cash flows and just like many other companies, we have factored in some additional macroeconomic uncertainty for this year. As a result of our strong Adjusted EBITDA we expect our free cash flow to be over $220 million in 2025 and I will continue to point out that this business generates a significant amount of cash. This means that we can buy back a lot of stock. In fact, we are currently targeting using over $180 million to repurchase shares this year and we all know that can be a powerful lever for driving our share price. And finally, we expect our full- year capital expenditures to be approximately $40 million and the annual effective tax rate to be approximately 25%.
I want to end our 2025 outlook discussion with our first quarter outlook. First quarter revenue is expected to be between $410 million and $420 million or about a 10% increase over the prior year period. Adjusted EBITDA is expected to come in between $70 million and $80 million. This is slightly above the prior year period.
I would like to conclude by turning to our long term financial outlook. These are my favorite slides in the deck and probably will be for investors as well. We are a growth company and we expect to grow revenue to at least $2.5 billion in the three- year period from 2026 through 2028. This is nearly a 25% increase in revenue in that timeframe which includes a turnaround in the real estate market, expansion of our non- warranty services and growth across the 2-10 platform. After that, our long term revenue growth expectations are in the mid- to high- single digit growth range which will be driven by an improvement in member count, pricing increases to offset normal inflation and continued growth in non- warranty services.
As we look forward to more normalized market conditions for home warranty sales and growth in non- warranty services, we would expect gross margins to stabilize around our target of about 50% in 2028 and beyond as we continue to gain leverage and optimize our SGA spend over time. We would expect Adjusted EBITDA to grow to at least $550 million in 2028 and then continue to be in that low 20% range after that. Our 2025 Adjusted EBITDA outlook range of $450 million-$475 million is amazing progress considering we were targeting only $300 million for 2025 when I first stood before you two years ago at Investor Day. With that, I will now return the stage to Bill.
Thanks Jessica. Okay, we're near the end of the formal presentation, but before we open it up for your questions, I do want to close with a few final thoughts. First, I am incredibly proud of this world-class team you saw on display today and all the people on their teams. All of these all-time highs and records are attributable or whatever that word is to their excellence, so let me review the highlights from today's presentation. You've heard a lot about process improvements, about how we improved execution, and today Frontdoor is operating better and more efficiently than ever before. As a result, we delivered record financial results last year. Going forward this year, we are entirely focused on growing our home warranty member account and maximizing the value of 2-10 as we fully integrate that business.
These efforts and more have positioned the company for long term growth through the Warranty and Non-W arranty sides of our business and it is great to see that all of our effort is paying off. Frontdoor's stock price has more than doubled since the middle of 2022 when I became CEO. We went from about $24 a share to yesterday's ending price of $57.17 per share. That's a 137% increase over that time frame. And trust me, it feels very good to stand here in front of you today and show just how much we have grown shareholder value since our last Investor Day. And yet Frontdoor stock still remains undervalued from a historic perspective. We are only trading at about 11x Adjusted EBITDA. Our goal is to not only grow our earnings but also get back to mid- teens multiple.
So to reiterate and bring home all that you've heard this morning, we have a very compelling investment thesis. There are six primary reasons we believe Frontdoor is the stock to own in the home services industry. First, as George laid out, the home services industry presents a massive opportunity. This is a $500 billion total addressable market with significant growth opportunities. Second, we're the largest provider of home warranties. We have a cultivated network of around 17,000 contractors and a strong record of innovation over our 54-year history. The latest being AHS Video Chat with an Expert as we announced today. Third, Frontdoor's core subscription-based home warranty business model is extremely attractive. With our 2.1 million members, not only does it deliver consistent predictable recurring revenue, but it does so with very high margins and cash flows.
Fourth, we believe we have cracked the code on delivering non- warranty services. You heard from Kathy just how big we think the non- warranty revenue opportunity could be. Fifth, we are executing better than we ever have and our financial results show it, and the sixth reason to believe we have a consistent capital allocation strategy. We are investing to grow the business both organically and through M& A, and we are returning excess cash to shareholders through aggressive share buybacks while maintaining a strong financial position. So that's the core of our investment thesis, but let me leave you with one final thought. We run a very straightforward, simple capital- light business model. Lots of members, lots of cash, operated very well, consistently and predictably. We are a great bet for your portfolio allocation to home services, and on that high note, that concludes our formal presentation.
We need just a minute to bring the team up on stage and then we'll be ready to take your questions.
If I may, Matt, let me start.
With the big news of the day. We just got a text on our first AHS Video Chat with an Expert has occurred this morning. So.
Way to go Kathy.
So for our questions we are going to do a heavy mix of in the room but we also have Jason Bailey reading some online questions as well from the Internet. So we're going to go ahead and get started with the room. Sergio, if Allison, if you could walk a microphone up to Sergio for the first question and then we can go ahead and get started.
Great. Thanks, guys, for the presentation. It is very helpful today. I guess the first question I had was on conversion. It was great to see, I guess, the American Home Shield marketing campaign. It looks like you're seeing a lot of success there with the brand awareness up. And you highlighted conversion as a key priority for 2025. So what does that look like this year where you're focused on? Where's the investments needed for 2025 to improve conversion, get that customer count up would be number one? And then the second question would be on the long-term outlook. Jessica, that's my favorite slide too. So thanks for providing that. I guess historically the margin profile of this business has varied pretty significantly. I think you've done a pretty good job of narrowing down that variability with some of the process improvements that you've made.
But as we look over the long term, where do you see that variability? I think there's still things that you can't control like weather. So just any thoughts on how that variability is maybe narrowed and where you see that over the long term? Thanks.
So Sergio, when you say conversion, are you talking about retention or what?
Customer conversion. So customers coming into the funnel and then turning or potential customers coming to the funnel and then customers.
Okay.
Do you want me to take that first? Okay. Speaking to conversion, one of the things that I mentioned in my presentation was kind of moving down funnel, which we expect will improve our conversion. We have seen there are certain levers we can pull, such as the discounting, where we have seen conversion increase significantly. Some of our channels are stronger than others. So we believe that kind of going after those mid- funnel channels will help boost that number.
Okay.
And then, just on margin, I think it is. You know, I remember when we were here two years ago. It was the number one question in the room because, as Bill pointed out, we were at 43%. And I think that at that point, right, the investor community was much more accustomed to the 50%. So I do think that long term, as I pointed out, that is really the model that we are driving towards. And I think the variability has historically been around inflation, I mean, which we can never control. And then obviously there's also just in terms of number of service requests, right? We've been down over the past couple of years, which has also given us some favorability on the incident side, which has also been a boost to margin, but kind of back to that, we will control what we can control.
I think we've gotten a lot better around inflation. You know, we've especially heading into this year, we've been monitoring that very, very closely. I think we learned a lot of lessons in 2022, where we kind of pulled all the levers which inflation didn't kind of show up the way that we expected to, which has been driven a lot of the favorability in the results over the past couple of years. But I think heading into you know this macro environment that we're in right now, we are very clear on what the levers are to pull and when and how we pay attention to that so we can reduce the variability there.
So I think heading into kind of the future in terms of variability, it's, you know, again, we can't predict the weather, but I do think we're in a very much stronger position in the business in terms of controlling what we can control so that we can keep them around that long term target of 50%.
I think you pointed out, Sergio, the work that Evan and his team have done on process improvements, whether that's with the contractors, with their service operations, with improving the user experience through some of the tech initiatives. He just cited a couple of those. I think that is enabling us to withstand some of the shocks to the system.
Great, thank you.
And then our next question is from Cory Carpenter with JP Morgan.
Hey everyone, thanks for having the event. I wanted to ask a few questions on 2-10.
Bill, you kind of kicked it off.
Saying you're even more optimistic about 2-10 than you originally estimated. Why is that? What are you seeing that makes you feel that way? And then, Jessica, maybe for you, just a little more color on where you expect those synergies to come from. I think you said $10 million this year, $30 million in three years. Where are you seeing those synergies? And then how are you thinking about growth from a revenue perspective as well for 2-10? Thank you.
So in terms of why I'm even more optimistic, you know, when you bring on a team, you know, you've done all this due diligence and done, and then you just don't completely know. I've been blown away by the way the team has been absorbed into our company. I think culturally, I think fitting into the organizations, we're going to run this as one home warranty business under Kathy, that has worked out very well. I think the talent, the quality, the level of talent that we were able to bring over has been quite impressive. So I think that. And then I think as George pointed out, the synergy work we've done, which I think we have, you know, great opportunities for that. I mean, we talked about $30 million + over the next few years.
So I think all of those things have come together and it's really, really feeling in two months like one company, which is, you know, sometimes with integrations and acquisitions it takes a while, but this one is really going well. And so that's why I feel so good about it. You feel good about the people, I feel good about the business. And you know, and I think the synergy opportunity is real.
Yeah. And then just I guess adding on that, I mean, we acquired, as Bill said, a great business. But I think the opportunity is really with our size and scale across the board, you know, we operate a very efficient company and I think bringing them on and bringing them onto our processes, our systems is going to be a huge synergy opportunity for us that we see. And then as George has said many times right there brings in cross- selling opportunities. It's a new distribution channel. I think there's a lot of the additional million homeowners that we're going to have access to, the 19,000 home builders that we'll have access to. I just think brings a real flywheel of opportunity for synergies for us.
Okay. I know Jason has a couple of questions. Jason, you want to ask one?
Yeah, and I could probably link to that comment. One of the questions was how many structural warranties were in the customer counts earlier? Home warranty only, or are there additional structural warranty counts related to the acquisition? And how do we think about that mix?
Do you want to take that one, George?
Yeah, why don't I take that one? When we talk about the structural warranties, I'll use two terms. One, sales within a particular year and then in the prepared materials, you probably heard me reference a million members. So sales within a particular year. We saw about 120,00-125,000 new sales. The structural warranty is a 10-year product. So those homeowners and homes are under warranty for a 10-year period. So when you hear me reference a million, that is the warranties that were sold from 2015 through 2025. And every 10 years there's another, you know, it rolls off each year. So there's always a million plus, assuming a consistent level of sales volume each year.
Back to Cory, or the question you asked earlier about being optimistic. We think we have a real opportunity with these 19,000 builders and these million people who have access to 2-10 Structural Home Warranty to see how we can connect with those groups, especially in the non- warranty area, but potentially with some warranty areas. So we think that the synergy opportunity there.
Could be quite exceptional.
I know Eric's in the audience. I don't need to call you up, but did you have a question from Goldman Sachs?
Sure.
I wanted to talk a little bit about long- term mix in the business, so you laid out sort of the warranty case and the non- warranty case.
For the market opportunity.
I know you're positioning for growth in both sides, but how do you think the broader landscape evolves over the long term as to what homeowners actually would prefer and how that might inform.
Strategic investments against mix?
Thanks.
You know, one thing and then Jessica, if you want to approach it, you know, one thing that, and again we, every time a bad piece of real estate news comes out, which there has been no good news, you know, we kind of get hit. Real estate is about 6% or 7% of our revenue. So in turn, and that has gone down and as Kathy pointed out, but it is, yeah, it's part of, that's a real part of the business. But it's becoming such a smaller part with all the advances we've made with non-warranty with the acquisition here. So I think from a mix perspective, I think we'll see a mix that again will be driving through against the whole home warranty business as we're going to run it as one unit.
But you know, this business really is on the back of renewals, non-warranty and other.
Businesses.
And really continuing to grow D2C, and I think what you heard here is we are very bullish on home warranty, and I think that continues to be our growth engine. It's our consistent revenue model. It is the bread and butter that's generating cash. And then non-warranty is really the plus. Right. Like that is, that's, I don't know, call it the cherry on top, but that is where the additional growth opportunities are. We can get more share of wallet. Like there's really a lot there. But we are very, very bullish on home warranty. And that is going to continue to be our core.
That's why, you know, you all have asked us about this but that the second half performance in DTC and you know, continuing that momentum is going to be key to us.
Okay. Back over to Jason.
Yeah, two questions related is do you have a target for percentage preferred and can you give us a service request from 2024 and an outlook for 2025?
Evan, you want to take the percentage preferred?
Sure.
From a targeted percent preferred, we're very proud of the 85% that was in the presentation. I think targeting within the mid-80s is where we're likely to be. That is driven by two factors. One, I want to make sure we're always bringing in new contractors to test, develop, keep some competition within the ranks, very simple. The other key piece, as I'd mentioned, our model is built on aggregation. Simply adding more contractors does dilute a bit of my ability to aggregate volume and benefit from our scale. We've found that balance point, if you will, of how do we keep enough in and keep enough volume, that material to our best contractors. It is an area of continual focus with the mid-80s being where we think we're best served.
Just on service requests for 2024, we were at $3.6 million and targeting closer to $4.0 million for 2025.
Which is where we were in 2023.
I know Sergio has another question, but we're going to go to Jason first.
Can you give us your outlook for full- year interest expense?
Total debt service is about $110 million and interest expenses $80 million. Again, we're very pleased with our new debt deal. Then the remainder is just normal amortization.
I guess. Jessica, going back to my favorite slide. For the revenue outlook, what kind of macro environment does that assume? Is that stable from here or is that getting better? And then.
Maybe on the inelasticity, I think you guys had a slide on that with renewals customers being the most inelastic. Does that change at all as the customer I guess is longer tenured?
So why don't you take the first part? And then Ray, you take the second part.
Sounds good. So I think it absolutely anticipates a return to real estate and you know, more normal inflation, etc. I mean it is, it's, it's anticipating.
And growth in non-warranty.
And growth in non-warranty.
But yes, overall macro environment it does. I mean the big one there is that it anticipates a return to real estate. But in terms of is that coming through, you know, the real estate channel traditionally or in D2C, that's the work we're doing to make sure we're capturing all of that when it comes back.
As we rebuild the renewal book, that's certainly a lift also, which is why Jessica called it a transition year this year. Ray, do you want to take the second part?
On the inelasticity question, yes. And so what I mean by that is, does customer tenure matter when it comes to inelasticity? It does. Just because the longer somebody has been with us is a demonstration that they value the home warranty. And at the same time, when I mentioned it's about how much value are we creating for the member, which is really more of a prediction of their usage and therefore how much it's going to cost us and therefore value we deliver to the member, that also matters a lot. So I wouldn't say it's just tenure. Although, yes, that's a factor. That's usually a sign that they do value their home warranty a lot.
I would be remiss if I didn't take an opportunity to brag on my team a bit. At the core of what Ray spoke of, the more a member experiences our product, the more likely they are to stay. The more they interact, the longer they're with us, the happier they are, and that, that speaks to the heart of our model.
Okay. Cory is up next.
All right, just one more for me. I wanted to ask about tariffs. Jessica, you mentioned that there is some anticipated tariff, potential tariff impact in your guide, which I think calls for cost per claims. Inflation is going from 0% this year or last year to mid- single digits this year. But bigger picture on tariffs, could you?
Just remind us, where do you have?
What are you most sensitive to?
There's new headlines every day. What matters for you guys on the tariff side and how we should think about that more broadly?
Certainly. So it is reflected in our current estimate of mid-single digits, but if you think of the things we buy, parts and equipment, parts, printed circuit boards, any number of miscellaneous parts that may come from overseas. And so tariffs that target specific economies, China, can be problematic. And then across our three largest trades, appliance, plumbing, HVAC.
Hot water heaters are made of steel. Cases of air conditioners are made of aluminum so when we call out raw material tariffs, those are, those are very real costs in our world. Long term, we have no, I would say, magic weapon against tariffs. Ultimately, the costs will flow through our system. Our approach though is to ensure that our sourcing agreements give us enough time to manage and mitigate the cost of the tariffs, and then within my teams, we manage , not to the line item, if you will, but the overall claim cost. And so ultimately, I suspect for all of you and for me, if our costs are over by a dollar per claim, I really don't care if that.
Came from labor or materials.
I want to figure out how to get that back down and anywhere I can drive efficiency in the systems offset it.
I think. Cory, the other piece is building on what Evan said. Inflation has a big impact. That is part of the tariff situation, fuel and the like, which, which you know, will impact our contractors and their labor rates, et cetera. Ray and team really closely monitor all of these inputs because for us the biggest macros are interest rates affecting the real estate business, inflation which affects all of our business, especially DTC and then tariffs. So there are real macro conditions that. And that's why I think, you know, Jessica and I have talked about this at length and that's why we have built this in to have what might be a more conservative guide. But I think it's appropriate given that, you know, I mean, today we just learned tariffs are moving up to March 4th and China is going to get another 10%.
I think it was prudent for us to put together the numbers that we did put together.
Bill, I might add just one other comment to Bill on the core warranty. We're also looking at the implications around the new home construction, lumber, steel, et cetera, and the impacts that macro may have on new builds.
Just a follow- up.
In terms of your own sourcing versus.
Getting the parts and appliances from.
Service pros, any rough split on how?
Much are you guys sourcing yourselves versus getting externally?
It varies by trade. So for example, within appliances we buy 100% of the appliances we replace. We estimate within HVAC and plumbing would be somewhere between 50%-65% again, depending on the trade and part of things we produce. I think I'll remind you back to our approach of partnership though. I'm most concerned that our contractors hit their total cost in terms of total quality targets and if they can do that, supplying their own parts, I'm ecstatic. We'll certainly offer our parts programs available to them, but they have to deliver and if we start to struggle with delivery, then that team of field managers offers our parts programs or suggests them, say, here's a way we can get you back in line which is required to keep you competitive.
Vijay?
Thank you. I actually use the program and love it, AHS. So on the, you know, continuing the discussion on the appliances side, do you have any?
Relationships with the suppliers or vendors because the HVAC is.
Just generally, you know, have a replacement program right now, things like that. Do you have any of that, you know?
To mitigate the costs?
Oh, no, we have. I mean, that's again the benefit of our scale. We've got very, very strong relationships with all of the major suppliers, which is how we're able to pass those costs onto our members, onto the contractors. And even as we talk about synergies with 2-10, there's a lot of opportunity there.
Within the screenshot of the app that was in Kathy's materials, it showed the HVAC page, but if you swipe once to the left, the next thing that comes up is the appliance purchase program. My wife and I are currently replacing our washer and dryer through that within AHS. So you can leverage our scale to replace your washer and dryer or any other appliance for that matter.
I think one question on the, like the DTC kind of how you.
Initially moved away from real estate, you know.
Heavy to DTC and within DTC.
Do you have, with the changing kind of the rental market and everything going on?
In the real estate, do you have?
Any strategy on that side going to property managers and things like that?
Yeah, I can take that one. So property management is something that we are actively looking at. We have in the past as well.
Yeah.
Right now we kind of think about it as yet the real estate market is down here. So we're focusing greatly on the D2C market, knowing that we are ready when it comes back. So that's where we are implementing a number of new strategies, looking for new channels. So property management is one title company. We're always looking for new ideas of ways to partner and find those new streams of revenue in new channels.
So.
Absolutely.
Thank you.
Okay. Back over to Jason.
Yeah. This one says you mentioned five million home warranties. Where, where do you think that can grow to?
Do you want me to take that one?
Sure.
You know, we threw a few numbers at you today as far as size of the home services industry, size of the home warranty business. So we're talking five million. That's how many homes, owner-occupied homes have a home warranty today. When we look at the consumer understanding and awareness of the home warranties and where that stands, we're sizing it really between 15 million and 20 million additional homes in the near term. Ultimately we see that full 87 million owner-occupied homes as our addressable market. But over the horizon, we're operating right now 15 to 20 additional homes is what we're targeting to get.
I'm glad we only threw two numbers at you also. Beneficial.
Jason, another one from online?
Yeah. Kind of a related question. What does the runway for D2C look like?
I think there's a huge runway exactly to what George just spoke to. When you've only got five million out of 87 million homes, it is on us to figure out how to explain the home warranty values, benefits to the homeowners because that I think has been an area of confusion for years. You know, people are very confused between homeowners insurance and a home warranty. Like I said, that's, we're taking that on as the leaders in the category to say we need to educate people on, on what a home warranty is, what the benefits are. We're starting to see, I mean, we were very excited obviously that we saw some growth in the D2C channel in Q4. We're going to see that continue. I think, like I said, there's a very long runway.
To George's point, our goal is to see that expand from five million to 15 million-20 million.
And I also think that the work you've done, targeting, you talked about Millennials and Hispanic Millennials, the research you've done. It's about peace of mind, protection, and expense savings, especially for that younger.
Homebuyer, I think that's going to pay off for us as we focus our message. I think it was part of your funnel discussion.
Exactly.
Any more questions in the room? I don't want to keep Jason busy. Yes, go ahead.
Yeah.
In your last Investor Day, there was a slide on home warranty attach rates. You know, I think historically in the category there are one in.
Three and now they've bottomed out closer to one in four.
I want to understand, you know, in that glide path and your long- term.
Targets, you know, the current home environment where you have, you know, all-time low transaction volumes as well as all.
All-time low attachment rates.
Can you, within that context, talk about the mid- to high-single-digit organic?
CAGR and how much have you embedded?
This abnormally difficult environment where you may have some upside drivers if things like attach rates or volumes start to pick up again?
You're talking about real estate attach rates?
Yes.
Real estate attach rates historically were close to 30%. They are now, our best guess is about 15%. They have dropped dramatically. As I said in my presentation, the best news is we've held our share.
We're still the leader in that category, but it is obviously not top of mind for the real estate agents today. We've seen a lot of turnover in the agents too. So it's a process of re- educating every real estate agent on the benefits and hoping that the market will come back into balance so they will again start to attach. In the meantime, which I think is what you were really getting at, that's where we're focusing more on the D2C but we're also finding ways to get directly to new home buyers.
So, not just going through the real estate agent, we would like to continue doing that, but we think that there is supplemental volume to be had by marketing directly to new home buyers and through retargeting, finding people who are starting to look for new homes so we can get to them early in their process.
I think, kind of, just getting back to another question that relates to the question you had, Sergio, and just how does this relate to our overall outlook and our guide, so when I say a return to the real estate market, we are that the real estate channel may not look the way that it did, you know, when we launched into real estate. It may not look the way that it did five years ago. I think that the work Kathy's doing to be more focused on getting directly to the home buyer through D2C is where our assumptions around a real estate where the real estate market will contribute when it comes back as in terms of our long- term outlook and guide.
Anything else from the room? Okay. Jason?
Yeah. Does your one-twelfth pricing model leave you vulnerable to immediate inflation? That's right for Ray.
I could take that.
Yeah, you take it.
Yeah. If you look at what happened in 2022, it is possible for cost to rise faster than price can flow through into our earned revenue. That is possible and it did happen. That said, as Bill mentioned, we take a much more proactive posture learning all that we can from 2022. So that way we understand the signposts, whether those are headlines, whether those are core categories within PCE, PPI and then having our battery of tactics initiatives ready to go so we understand which levers to pull and when as soon as possible.
Yeah. And I mean I think from Ray's presentation you saw that predictable and recurring is a good thing. But costs hit us today and we get to offset it with 1/12 of the revenue. So it is why I think it hurt us very much in the second half of 2021 and into 2022.
We don't want to be caught behind this year, which is why we're going to have to be, especially with everything moving so quickly what steps we choose to take. This year or last year, we chose to take a mid-single-digit price increase because we felt like we wanted to get into a more normalized range that may, you know, we'll see where that carries forward.
And we have both pricing as a lever. We have trade service fees as a lever, and then we've got again the internal initiatives that we've got to manage costs in terms of supply chain. So I think like everyone else, we are very eyes wide open on what's ahead. We've built, you know, the risk into our plan, but we've also got a series of tactics that we are ready to fire off and deploy as we deem fit.
Yep.
Okay. Our last question from online will be read from Jason.
How are you thinking about additional partnerships beyond Moen?
Ah, okay.
Yeah.
So Moen, we love, we love our Moen partnership. We still have, yes, we have a ways to go there. We are actively in conversations with other potential partners. But I think the thing that people need to realize is these things take time. So the Moen partnership we just started in June in the state of California and what we've seen has been pretty remarkable. You saw the state expansion, we will continue to expand but you know, we have to then deal with all of the insurance agents they're working with and of course all of our plumbing contractors and all the state regulators. So it does take time. So we know that there's still a long runway doing just with Moen, but we are actively looking for other partners that can be just as valuable.
I think one of the things that are, and it reports into Kathy, this partnership team with people seeing, you know, us being able to explain what we've done with HVAC and now we have a real partner in Moen. They see the value that the backbone to some extent of this company is what Evan laid out, which is contractors. And so our ability, I mean we got the Moen deal because we have a national network of plumbers that can go in. It's great for our plumbers because the products drop- shipped and they go to the house.
You know, put the valve on and you know, they're done. And they, our plumbers love a business like that. So I think our ability, you know, the fact that we can now showcase real, real tangible businesses that in potentially other categories is why we're so bullish on this area.
Bill, we have no more questions, so we're going to close the Q & A session. If you wanted to say any final words?
Yeah. I mean, you know, the stock's getting hammered today on the Investor Day. You know, never a good look. But, you know, the macro situation is such that, you know, we all have to deal with it. We're not the only company affected by that. But we think we've got a terrific plan. I think we've had a great track record of performance. I think we've got the appropriate caveats in our plan. I think we feel good about how Q1's going to net out that Jessica laid out for you. And this is going to be a year where we got to stay on every day and see what the latest going on from a macro situation. But I think we're well positioned. I think we can deliver on our numbers and we feel very good about the state of the company and where we're going.
So, anyway, got a buying opportunity for a lot of you. So thanks very much. Thanks for coming. Thanks for the webcast, folks.
Thank you.
Thank you very much.