All right. Good afternoon, everyone. Corey Carpenter, Internet Analyst, JPMorgan. Happy to have Frontdoor Chairman, CEO Bill Cobb, and CFO Jessica Ross with me today. Bill has been CEO since 2022, Chairman since before the ServiceMaster spin, and Jessica joined in 2022 from Salesforce. So thank you both for joining.
Hi, Corey.
I got plenty of questions to go through. We'll open it up to take time though at the end for Q&A. I think everybody knows by now you can submit a question electronically. I have the iPad, or we can do a microphone around the room. Starting off higher level, I think for you, Bill, just for those newer to the story, to kick off, I thought it'd be helpful to give a brief overview of the Frontdoor business model and also the industry you operate in.
Okay. Good afternoon, everybody. We are the only publicly traded home warranty company. It's a subscription-based model that protects homeowners from what inevitably is going to happen. Things are going to break down in the home. It's different from home insurance, which is if something might happen; with us, something will happen. And we cover 29 systems and appliances in the home, everything from washers and dryers, appliances, HVAC equipment, etc. We have three different types of services you can sign up for, a good, better, best, if you will, and depending upon the coverages that you get. But we're really there to get service calls, answer the calls to repair or replace whatever system is brought up. We average about two calls a year per member. We actually like when our members call because that leads to a higher renewal rate.
Ultimately, we have a terrific core business, the home warranty business, but we have a bigger vision, which is to utilize our 2.1 million member base to look at what we call non-warranty initiatives, either partnerships that we do with other suppliers, such as our partnership with Moen, or what we call our HVAC, our new HVAC program, which is we built to a $100 million business, which replaces existing HVACs with new equipment. We can get into why we think that's such a good deal. Finally, we just expanded our business a few months ago. We purchased 2-10 Home Buyers Warranty, which brought a home warranty business, a skill play for us that we could fit right into our infrastructure, and a new business called new home structural warranties that brings us into the housing starts business with builders.
We now have about 20% share in that, and that's the largest provider of home structural warranty. That's a pretty good overview. Jessica, I don't know if you have anything to add.
No, I think this transition is still referenced to continue to expand into non-warranty and on-demand services. The new HVAC program that you referenced was our first play to that point. We've got the Moen partnership, which is kind of our real first partnership where we're leveraging our plumbers, and we'll get some more into that as well. Yeah, really excited about those opportunities.
Okay. So you just finished a record year of profitability last year. You've added to another one in 2025. The company was struggling three years ago when you guys joined. What's changed, and how have you evolved the company in recent years?
Yeah, I think when I came in, and I was chair before, but the previous CEO decided to leave. When I came in, I thought, "We've got to really zero in on our core business." I think a lot of good companies get away from that. We needed to get back to our core home warranty business and really operate that well. What that has done, it's enabled us to really get on solid footing. Let's build up our member count. Let's take care of our current customers, our renewal book. Let's operate the company better. Let's get back together with our contractors and get in a better pace with them because that was a conflict, a friction point for us during COVID. We just decided to operate the company better, and let's really run a good home warranty business.
As we got that stabilized is when we started to look at other opportunities with that member base, which is similar to what I talked to you about earlier with the non-warranty options that we have. We now have a more diversified revenue base than we did three years ago. We are now back on our front foot in terms of growing customers again. We continue to retain customers at record levels. The mix is coming together really nicely. In the end, this is a cash machine. We have one CapEx. We turn up a lot of cash. We had $117 million of free cash in Q1 on a company that's biting right now. It's a little over $2 billion in revenue.
I would say I think that Bill often undersells his leadership. When Bill came in, he really lit the fire in this company, the business. I think prior to, it was more of a view of kind of a reactive versus proactive in terms of the mindset of how we manage costs, etc., etc. We really embodied an operational excellence culture across the business that has just continued to keep this flywheel of optimization under Bill's leadership.
Questions on the industry. You did mention you're the only publicly traded company, so I feel like there's not a ton of voice, a ton of understanding. Bill, you've spoken to a TAM of 15 million home service plans in the US before. Industry's been around 5 million for a number of years. I think kind of two questions here. What's kept this number from moving higher would be one. And then two, what do you think needs to happen to increase penetration?
Yeah, I think we've been a stagnant industry, and I included us in that. Our Chief Revenue Officer calls it the sea of sameness that was created in the industry. Everybody had a similar name and similar look and feel. We started to break out from that in the last couple of years. We have a we've redone the brand in terms of its look and feel. We have a new advertising campaign. We have brought out an app. We now use that app to bring out a video chat with an expert where our members can call up before they need a service request to see if they can fix it themselves or get advice on what the service request should do, have them be smarter when the contractor comes by.
We actually disclosed last week that on those video chats with an expert calls, that 17% the homeowner is being able to fix it themselves, which they love because they do not have to sit around and wait for a contractor or pay a trade service fee. I think the industry has lacked innovation, and we are trying to take the lead in that. I think we have not been, as an industry, aggressive in marketing. We certainly are doing that across the marketing mix today. I think that it really comes down to we have not sold the value proposition. The value proposition for a home warranty is great. We have those 29 systems and appliances I talked about earlier, and for $60-$70 a month, plus or minus, we are going to cover those for a year.
In the end, repairs can, between the contractor trip fee and the actual repair, really run you a lot more than that. We take care of that once you pay your trade service fee. Just the basic value proposition has got to be sold better, and that's what we intend to do.
You touched on this earlier with HVAC and non-warranty services. Maybe if we can go a little deeper there, if you could just talk about your different various initiatives within non-warranty services, and then also why you're making it, why now in terms of making a push there?
Yeah, I think what we did was we sat back a couple of years ago and said, "There's this two, at the time, a little under 2 million. Now it's over 2 million member base. Let's take advantage of the opportunities that that would present itself with." We know that from our business, we have to go and repair and replace. Sometimes people have aging equipment, but it's not quite ready to be replaced, or they want to get more efficiency from, let's say, their HVAC. We now have a program. We started with HVAC. We're looking to expand it to water heaters and appliances. There's another one with roof repair that I can talk about. We are able to go to our homeowners before it's ready to be replaced and say, "Would you like to upgrade your equipment now?
Get the efficiency of energy savings. We have constructed this in a way that we have a deal with our contractors of what the margin they'll accept. We buy very well from our OEMs. We are able to offer our members a 20%-40% discount, depending upon the location, over what a new system would be if they just called somebody up. It has proven to be very successful. It is a great program for our contractors. Our members win downstream for us. We have less cut roles because it is new equipment, so you do not have to repair it as much. In addition, for the member, their electric bills are better, heating and electric. There is a lot of win-win-win to this, and it has proven to be very successful.
We now are guiding to over a $100 million business in 2025, and we're really pleased with the impact that that's had.
Okay. So before we get kind of more into the core business, I want to maybe get tariffs and macro out of the way on everyone's mind. First on macro.
Is it required for JPMorgan to ask about tariffs?
I think it's a requirement.
It's a requirement.
Corporate registration process for the conference. What are you seeing in the current macro environment, and how do you think about just the broader resilience of Frontdoor should we enter a recession, which I know is a moving target? Maybe, Jessica, for you, could you just talk about how macro impacted your approach to the outlook you gave a few weeks ago?
For us, Q1, and Jessica can talk about this in a little more detail, we saw zero inflation. We had no inflation. We had no impact from tariffs. We have guided our Q2 to anticipate that we can look out enough in a few months. We do not see any impact from tariffs there. I think it will come. Where tariffs hit us is through primarily parts and equipment. For our costs, about half our contractor costs, labor, and all the things associated with the contractor. The other is parts and equipment. For us, equipment for HVACs, water heaters, appliances, a lot of that is domestically produced, so we are insulated from the tariffs. Parts come primarily from China, and there are things like circuit boards that go into smart appliances, which are increasingly a part of our mix.
Right now, and I'll let Jessica talk about the guide, what we've built in. Right now, we haven't seen an impact from tariffs. We anticipate it. We are seeing some of our OEMs are starting to raise prices, so we do anticipate that coming. Right now, we're bought in a way where we can cover up the next couple of months. We've built into the guide, I think, some protections around what we anticipate will be some impact.
Yeah. I guess that's also the broader macro. We continue to see consumer sentiment as remaining challenged. Real estate continues to be something that we're evaluating. I think for this year, we've been pretty much wait and see, not really making anything on a return into the outlooks that we've provided. I think in terms of setting the stage for our overall outlook for 2025, we were considering all of those things. That being said, I think we were very fortunate that for Q1, we had exceptionally strong results as Bill said from an inflation perspective. We reported much on a net cost per service request basis, and it was essentially flat for us. That's just really a result of the cost improvements and things that we talked about from a cost structure perspective and how we've been managing that as well.
I think we had positive momentum on the top line. We had some benefits on renewals coming in better than we expected, as well as our non-warranty program continued to deliver more revenue, especially on the new HVAC side. All that being said, as Bill said, Q1, we could have favorability. We were able to, we've got good line of sight into Q2. Essentially, in terms of 2025, it really was this balance of, let's take the Q1 favorability and balance that with some uncertainty on the tariff side. For us, we've been able to really kind of measure impacts of inflation in about every 1% change to about $10 million into our business. For the back half, we said, "Okay, we've got mid-single digit inflation," and then add on some additional uncertainty for tariffs. We baked in about $30 million.
The additional, for us, uncertainty, we can't control the weather. We also put in some conservativeness on the weather side as well, about $50 million, which, again, essentially just assumed some hedges in the back half, but also taking into account the good favorability we saw in the front half that we're seeing in the front half of the year.
Yeah, Corey, I think we were talking about this before the meeting or before the session here. We've been able to meet our guidance. One of the reasons is because every year we build in what we think is "normalized weather." Weather has a big impact on our business, especially in the HVAC area when it's super hot, especially in the southern states. It has a big impact. We've had relatively good weather from a Frontdoor perspective. Every year, we have to build that into our guidance, assuming that weather is normalized. That's what Jessica's speaking to.
All right. I think you addressed both tariffs and macro in one question, so I'll allow us to move on. Kind of zooming in on the core home service business, which you really started to refocus on when you joined. You have two primary customer acquisition channels: your real estate and your direct consumer. How would you characterize the health and the trends impacting each of those channels?
Yeah. So let's start with real estate, which many of you know has really had a tough few years. The latest information is the National Association of Realtors is saying in 2025, we'll see about 4 million homes sold. The high point, I think, in 2021 or 2022 was 6 million. So it's been a big hit to the real estate industry. Prices continue to rise. It's like 21 straight months of price increases for the average home. So real estate continues to be struggling, pretty stagnant. A couple of blips showing up are inventory has improved. There's about four months of inventory out there now, which is starting to get to a real estate market that's in balance between buyers and sellers is generally four to six months.
What that means for us is that's usually a good thing because sellers are now incented to offer a home warranty as part of their offering to attract buyers. That's a good thing because during the seller-dominated time, tax rates for real estate for the industry have gone down. They've gone down for us as well. That's a good thing if we can get the tax rates up. Overall, until interest rates show some sign of ameliorating, we are going to be, I think, stuck in terms of we had 6% decline in real estate in Q1. It's about what we're forecasting now, maybe a little worse for the balance of the year. It's just a tough market right now. Conversely, DCC1, we've now had three straight quarters of organic customer growth. We feel very good about that.
We feel very good about our marketing messaging, not only from the awareness side but in terms of what we call the middle of the marketing funnel, which is where you really drive your leads and converting those leads. That is really what our business comes down to, where we can drive leads. We have 4% organic growth in Q1. Overall, in DCC1, we had 15% growth with the addition of Q10. What we are really focused on is that organic number. I think the DCC1 area is very healthy. We can talk about renewals later, that continues to be a strong point for the company. We feel really good about our renewal book that we have a lot of control over in terms of how we treat our members.
We really think DCC1 is looking very favorable, very healthy, and we're going to continue to drive against it.
Again, I was just reiterating, like real estate, there's an element of there is what it is, and we've been very focused on what we can control. With D2C, I think really continuing to drive that. We've had three sequential quarters of unit growth on the D2C side, which is really just a sign that the work we're doing is working.
Yeah. So maybe sticking with direct consumer, you've placed a big emphasis on driving new member growth that you just mentioned. Could you talk about the strategies you're implementing there and just maybe elaborate a bit more on the early results you're seeing?
Yeah. What we've done is we've tried to surround the consumer with a series of messages. One, like I said, was to reestablish the brand. We got this new character, Warrentina, who is our spokesperson. We're really trying to drive that top of the funnel awareness piece. Those numbers are up. Likability is up in all of those consumer measures. Translating that now into leads. Our demand number or leads are up. Our conversion is up. We're starting to see that come into play also. We've also taken on some deep discounting. We are now pulsing our discounting. We're not doing month-on discounts. The idea behind this is to get people in the door. We're accepting a lower revenue on our first-year clients in DTC.
Real estate pricing has remained pretty constant, and that's really not a factor because that's within the it comes to us from the title company through the closing process. So DTC pricing, we've decided to get much more aggressive with discounting, try to get people in the door because we've found, and we've been in this a little over two years, we're able to renew people and get them back to the level of margin that we had hoped for within 18-24 months. That's been really successful. Again, it goes to what Jessica said, where we have those service calls. People like the service. We're kind of giving up some revenue on DTC. We're making it up on renewals, and the whole thing comes together pretty nicely. That's kind of our pricing strategy on DTC, plus the innovation I talked about.
People want to have an app. They use their app. The video chat with an expert where you can call up, and these are our associates now. These are plumbers, electricians, HVAC folks. They've come off the road. They were climbing on their houses, and now they're sitting at their desks helping people, and they're all service-oriented. It's been a wildly successful user experience for us. It is all of those elements that really lend us to a really healthy, what we believe, DTC1 business is.
I think the product differentiation, like we've often talked about home warranty as famous. That was really the impetus for the marketing strategy and how do we top out. Introducing the app last year and the virtual experts, I think we are really the only company that's doing that. As we shared on our call, 17% of the virtual expert calls have resulted in a resolution for the member, which just means we don't have to have a truck roll. They don't have to have someone to talk them through their house. They're feeling empowered that they've done it on their own. It's been a really nice sell point user experience.
Okay. I want to talk a bit more on the 2-10 acquisition. Maybe Bill, to start, just if you could discuss the strategic rationale, where you're at on the integration process, and Jessica, for you, just the expectation on the impact it could have on financials this year.
Yeah. For 2-10, we knew them from the industry. They were a good competitor. They ran a good business. They dealt with their members well. We realized that from a scale perspective, if we could procure this asset, we could load, which about three-quarters of their business is home warranty. We could bring that right into our infrastructure and get a lot of efficiencies and people redoing contracts, just pull them in like any other. We do have a couple of brands in home warranty, and this fits in beautifully. We also were able to acquire their new home structural business, which is where the main 2-10 comes from, which essentially gives you, in simple terms, home warranty coverage for the first two years and structural coverage for 10 years against things like soil erosion and termites. No, it's not termites, right? Not termites.
Any structural impediment that we have to go. It's a high severity business, but it's a low incidence business. Really good business. We're just this into the housing starts business. It gives us access to about 19,000 homebuilders. And there's a total of 1 million members who are now in their system who have taken a new home structural warranty over the last 10 years. It brought us a lot of access to a new market, a lot more members, a lot more clients. As the synergies, we felt were very strong. Even in the first year, we've guided through $10 million in synergies. We're well on our way on there.
We think in the next few years, we'll enable us to get about $30 million as we bring the back end together so that we have one platform, have one contract relations team, one service ops team. There is a lot of efficiencies there. We really like this asset. It fit with us. We were able to keep our leverage ratio in the range that we like, which is 2-2.5. We're now at 1.9. We have absorbed it well, and we're really pleased with how the integration's going.
Final channel, your biggest channel renewals is, and you have retention rate within renewals at an all-time high. What's been driving the better retention in this channel, and where do you still see runway for improvement?
Yeah. There's not one thing that we've done well, except that it is a large part of the company spends their time in this area. What I mean by that is we have driven up our preferred contractor percentage, which we have a series of, we have about 16,000 contractors overall. About 4,000 are preferred. We've driven that rate of their service, which are our best contractors, best service contractors. They get the highest 5-star ratings, the lowest 1-star ratings, to about 85%. In addition to that, our marketing team does a very good job managing, if you will, a member through their contract term, which is one year. We are very knowledgeable now about what each member is looking for. We have taken this dynamic pricing approach, which we can speak to, and we really are able to price almost to the person and their situation.
We also have built a really vital team that "saves" customers. If they're looking to cancel or they don't want to renew, we're very aggressive on trying to get them to stay with us, offering incentives to keep us because this is really where we—I call it the backbone of the company—the renewals book. Overall, it's been a series of things. We have a high amount of folks, 84% on monthly autopay, which we find is conducive to renewals. There's just a variety of efforts that we take to really keep this important metric and continue to grow it. Do you have anything else?
Yeah. I was going to say, I think the theme that we've seen over the past couple of years is it's not just any one shiny object, silver bullet, right? The key to this business, whether it's managing costs or really driving a better member experience, is a series of a lot of things. We've really been pushing the business to do that well over the past couple of years.
Moving to some financial questions before we close. The average price of a Frontdoor Home Service Plan has gone from over $700 to nearly $900 over the past three years. You talked about a 4% price increase this year. Could you just talk about your pricing power and how you think about pricing as a growth lever over time?
Yeah. No, absolutely. We've talked many times as a member-on-one strategic priority. It's all about driving new home warranty membership growth. I think we've demonstrated that this is a very inelastic category because once a member uses our product, our renewal rates have been exceptionally strong and consistent over the past couple of years. I think the price element is just such an important piece if we think about our overall strategy. I think Bill talked about it. We've got this nice flywheel now. We can discount to bring new members in. Then because of our retention rates, we can really leverage our scale and our pricing capabilities across dynamic pricing to drive prices up from a retention perspective. We've got a best-in-class dynamic pricing tool. This is something we are very, very proud of. We've built it over the past four to five years.
It's something that we really view as a true competitive advantage for us. We talked about the cost discounting. Dynamic pricing really works at the renewal on a very individual customer level. We are looking at each individual customer. We're able to look at their geography, the availability of contractors, their usage of the product, and basically assess their inelasticity or elasticity and set pricing at that level. I think that there was some confusion evidenced yesterday that we have this one price lever and we pull it, and then we don't pull it anymore. We are actively taking price at every single renewal point with this tool, which has allowed us to position. I think we're at about 4% average with the current member base and a 2%-4% realized price is what we're driving to this year.
Yeah. I would just, Mark, just so you understand. So when Jessica's talking about inelastic, we've picked out of our three channels. Real estate pricing really comes to the—has been pretty similar over the years because the agent and the seller are providing that for the buyer. They're really doing that as an incentive to get you to buy a multiple hundreds of thousands of dollar home. We're inelastic on the renewal book, which we think we've proven that was a retention. What we've changed is we've always said we're inelastic, but we see the elasticity on our DTC1 business, which is why we've become so aggressive on the pricing there. That is how we beat competition and make sure that we are the best value at that level. So that we have this nice blend of inelastic channels.
The one that has more elasticity is the one that we really focus a lot of our time and attention on.
Shifting to the volume part of the equation, I think if there's one takeaway, it's that you've been clear that your top priority is to return to organic unit growth. What needs to happen to get you there? How are you thinking about the potential timeline?
Yeah. I mean, I think real estate, I don't know. I don't know what the timeline is. We're very active. We've got a great real estate sales force. It's working every day. It's calling on agents and the like and trying to drive that effort. In terms of DTC, we're right in the middle of it. We feel that all the things I talked about earlier, the innovation piece, what we're doing with discounting, what we're doing with our mid-funnel marketing, we're targeting Hispanic millennials as a special group that we're going after because they have a high propensity to look at buying a new home. I think that our efforts in paid social, in direct marketing, in online marketing has really been paying dividends with our demand up and our conversion up. We feel really good about how this is going right now.
I think we're in a prime position. Like I said, we've had three consecutive quarters where we have grown that organic growth.
One more on capital allocation. Then we'll end on a bigger picture question. We might have time for one question if anybody wants to submit one online or raise your hand in the room. On capital allocation, you just closed a fairly sizable acquisition. You're actively buying back your stock. Your leverage is still below your long-term target. Kind of given those dynamics, Jessica, how are you thinking about your capital allocation priorities this year?
Our capital allocation strategy has been very consistent. First, focus on growth, which is really maintaining a strong financial profile, and then returning capital to shareholders. I think you hit on a couple of things. From a growth perspective, we talked about the 2-10 acquisition. We're very focused on our organic growth strategy. We just increased our SG&A spend in our guide because it's still fed. The mid-funnel strategy is working, and we're putting some more dollars there. You already hit it. I think we're just in probably the strongest financial position that we've been in, which is especially in uncertain times like this. We've got a leverage ratio of 1.9x , which is great. That is in line with our target of 2x-2.5x . We've got a lot of liquidity on the balance sheet.
With that, we were also able to raise our share repurchase price this year from $180 million to over $200 million. We've already purchased $100 million year to date. I think we're going to continue to be consistent with the way that we've been deploying capital. Again, we've got a lot of flexibility, which, in these uncertain times, puts us in a really strong position.
Yeah. I mean, we're a cash machine. We ended Q1 with over $500 million in total cash. The majority of that is unrestricted, which is why we've been able to be so aggressive on our share repurchases. We feel really good, like Jessica said, about our liquidity, about our return on invested capital. We have CapEx relatively about 2% of revenue. We are able to really look at this as a real gold mine for us that we can figure out how to deploy. Right now, we're being aggressive on share repurchase because we think likely we're undervalued in terms of any kind of measure that you would look at. That's what we will continue to be doing.
Any questions in the audience? I think a microphone's coming.
If you're confident on—
Go on.
If you're confident on the inelasticity of DTC pricing, it seems like you get the other 10 million possible TAM. It would just be a matter of LTV and CAC. What's the formula there? Why can't you just take some money, spend it on marketing, and get a bunch of those?
Yeah. So our.
Why is it not that easy?
Yeah. I assume nothing's ever that easy.
Why is it not?
No, but our LTV, even with our discounting approach, is well over $1,200, which we're happy with. Our CAC is around $500, so it's a great equation for us. Real estate LTV is about $700. That's a pretty efficient channel for us because that really comes on the heels of trying to go after DTC1. I think in terms of additional marketing, I think we feel that we continue to spend at healthy enough levels. I think we've been aggressive on discounting. We continue to ratchet it up. I think we're going to continue along the lines of what you're saying. We're in agreement on that.
I mean, again, there's a lot of intention with the start with the top of funnel investment in the marketing campaign that we launched last year. We're in the heart of really working that mid-funnel because I think that's really where the conversion happens. Again, we've seen results, which is why we're going to continue to get up there.
All right. Last question before we close. Bigger picture question. What are you guys most excited about over the next couple of years? What do you think is the most underappreciated part of the story?
I don't know. Underappreciated, I'd say, is the resilience of our model and how well we operate the business. I mean, we really have to. It's a large system. We manage 16,000 contractors. We have 2,500 or so service ops personnel who support our customers. We have a large technology organization. It's a big operation. I think we manage it extremely well. We manage our costs well. We are active on trying to drive the top line. I think that whole way we operate the business, I think that's the underappreciated part. In terms of what am I most excited about? I'm most excited about the way we can continue to drive our core business and this non-warranty going to our members, more partnerships that we can build, like the Moen partnership and others, to leverage our contractor base to go to this $2.1 million member base.
How that whole thing comes together, I think we'll have a more diversified revenue stream and yet continue to operate the company really well.
No, I would just—I mean, that is, I think, the piece people miss. Core business, that is a cash cow. We're in a very strong financial position. That is what allows us to invest in this option value of non-warranty. I think there's a lot of opportunity there that we are very excited about, which is going to not only create better experiences for our members, but also tap into home services more broadly.
Great. Thank you, Linda. Thank you.
Thanks, Corey.
Thank you for having us.
Thank you, everybody.