Frontdoor, Inc. (FTDR) Earnings Call Transcript

Ladies and gentlemen, welcome to Frontdoor's Second Quarter 2026 Earnings Call. Today's call is being recorded and broadcast on the Internet. Beginning today's call is Mr. Matt Davis, Vice President of Investor Relations and Treasurer, and he will introduce the other speakers on the call. At this time, we'll begin today's call. Please go ahead, Mr. Davis.

Thank you, operator. Good morning, everyone, and thank you for joining Frontdoor's Second Quarter 2026 Earnings Conference Call. Joining me today are Bill Cobb, Chairman and CEO; and Jason Bailey, Senior Vice President and CFO. The press release and slide presentation that will be used during today's call can be found on the Investor Relations section of Frontdoor's website, which is located at www.frontdoorhome.com. As stated on Slide 3 of the presentation, I'd like to remind you that this call 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, August 6, and except as required by law, the company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. We will also reference certain non-GAAP financial measures throughout today's call. We have included definitions of these terms and reconciliations of these non-GAAP financial measures to their most comparable GAAP financial measures in our press release and the appendix to the presentation in order to better assist you in understanding our financial performance. I will now turn the call over to Bill Cobb for opening comments. Bill?

Thanks, Matthew, and good morning, everyone. Frontdoor delivered exceptional results in the second quarter across all key areas of the business. At the midyear mark, we are driving member growth with total ending member count up 1%, the first organic growth in 5 years. We are successfully scaling our non-warranty and other business, which is rapidly approaching $0.25 billion in annual revenue. We're delivering structurally higher margins, and we continue to maintain capital discipline. We expect to repurchase approximately $330 million of our stock in 2026, which will complete our latest authorization nearly a year ahead of schedule. Let's turn to Slide 5 to cover the Q2 highlights. Revenue grew 5% to $645 million. Gross profit margin expanded 100 basis points to 59%. Net income grew 13% to $125 million. Adjusted EBITDA increased 10% to $220 million, and we repurchased $181 million worth of shares through July 31. It was truly an outstanding quarter. Mid-single-digit revenue growth combined with continued gross margin strength and SG&A leverage drove a double-digit increase in net income, all resulting in adjusted EPS growth of nearly 20%, which also includes the impact of our share repurchases. This powerful combination shows that our model is working. Let's turn to Slide 6 to take a deeper look at our member count performance. Our direct-to-consumer channel grew 5%. Our real estate channel grew a resounding 7% and our renewal member count was stable due to strong retention rates and sustained growth in our first year channels, another major milestone for our business. Taken together, this translated to total ending member count growth of 1% for the quarter. I want to pause there for a moment because this inflection point is a big deal. Our #1 priority at Frontdoor is to grow and retain home warranty members. And for the first time since 2021, our total ending member count is growing again. This reflects the progress we've made across the business and the execution we're seeing in both our first year channels and our renewals. Let's take a deeper look at how we are driving direct-to-consumer growth on Slide 7. Ending member count in this channel grew 5%, marking our seventh consecutive quarter of year-over-year growth. This kind of consistency proves that our playbook is working. That playbook is built around 2 things: one, growing demands or brand leadership; and two, improving conversion. Starting at the top of the funnel. Our Warrantina campaign is reaching more of our audience than ever. More than 40% of homeowners recall seeing our ads. Our brand health metrics, likability, relevance, differentiation, effect on interest, all continue to improve and outperform the category. We also intentionally pulled forward the timing of our planned marketing spend to align with our selling season, and it is paying off. We continue to shift more of our marketing spend to performance channels where we can be more targeted, more flexible and reach consumers at the right moment. We are also expanding demand through our multi-brand strategy and proving we can accelerate growth by elevating acquired brands to our operating standards. 2-10 is a great example. When we acquired it, we talked to all of you about revenue synergies we believe we could unlock by bringing 2-10 onto our platform, and we're now starting to see those synergies come through. By applying the AHS toolkit, we are meaningfully growing the 2-10 brand. This is exactly the kind of value creation we can drive when we put our full weight behind a smaller brand. Turning to the second area of the playbook: improving conversion. How consumers find us is changing across traditional search engines such as Google and increasingly, AI. We're recreating our content and restructuring our sites to stay prominently positioned and it's already improving our search outcomes. With the assistance of AI tools, we are also reshaping how our inside sales team operates. Real-time enablement tools guide our agents during calls, pinpoint the best time and channel to reach prospects and surface the behaviors that drive conversion. This is helping newer agents ramp faster and sell more efficiently. And finally, promotional pricing continues to be a strategic acquisition tool. Renewal performance of these cohorts continues to hold up as well as, if not better than, our nonpromotional cohorts. That means that the long-term unit economics remain very strong. Let's turn to Slide 8 and the real estate channel, which had a standout quarter as ending member count grew 7%. Let me set the context on the housing environment first. Inventory has improved to 4.5 months of supply from the 2.6 months in 2022. That gives buyers more leverage and is allowing home warranties to be a more frequent part of the home transaction again. But let me be clear, the broader market remains challenged. Existing home sales are still sluggish and are expected to finish around 4 million homes sold for the fourth year in a row as higher mortgage rates and affordability issues continue to limit transactions. Against that backdrop, we are engaging more directly with real estate agents. This means expanding our geographic coverage, running targeted promotions where the opportunity is the greatest, and bringing agents the strongest value proposition in the market. As a result, even though existing home sales remained flat, our attach rate improved 30 basis points versus the prior year period. Put another way, in the second quarter, we attached a home warranty to over 5% of existing homes sold in the United States. Now let's turn to renewals, the foundation of our business, on Slide 9. A decision to renew with us is made across multiple moments during the member journey, and we think about enhancing that journey in 4 stages. It starts with onboarding, the first impression, getting a new member set up quickly, helping them understand their coverage and making that first experience a good one. From there, it's about engagement, the day-to-day of being a member. Every claim we handle well, every contractor who does the job right, that's where trust is built. Then comes the renewal itself, where all the moments of the member journey come together to drive our high retention rates. And finally, post-renewal, because once a member renews, the next journey begins, and we want them with us for years to come. On the next slide, I'll walk through the results for renewals. The proof is in our retention rate. We continue to be near all-time highs in the quarter at 79.6%, a clear sign our strategy is working. Two things are driving it. First, the member experience and nothing is more paramount in this business. Our differentiated technology is designed to get members a faster answer, a faster fix and a better outcome, conveniently and sometimes virtually. Our app is a great example of that, and members are using it more than ever. Active users engaging with our app is up 65% year-over-year and usage of our video chat with an expert feature through the app more than doubled during the quarter. But technology is only part of it. Trust is really earned when something breaks, and that's where our service delivery comes through. We continue to drive strong volume to our preferred contractor network with 84% of our jobs, which delivers a more consistent and higher quality service experience. And our service ratings improved again this quarter, record high 5-star ratings and record low 1-star ratings, a trend we have seen now for 36 straight months. The second driver is operational, the blocking and tackling of the renewal itself. This is where discipline and focus matter, and we continue to raise our game. Our save program keeps getting sharper, reaching members who choose not to renew with the right offer at the right moment to win them back. Autopay is our most effective retention tool, and we are making it an easier choice for our members. Enrollment is now at 85% and near all-time highs. And we're seeing that same autopay benefit as we migrate 2-10 members onto our platform, where enrollment has increased meaningfully. Individually, these are small disciplined improvements. Together, they compound, and that's a large part of what returned us to total member growth this quarter. Now let me turn to non-warranty, which is anchored by our new HVAC upgrade program on Slide 11. This program is a prime example of our strategy to expand share of wallet and deepen our relationship with members. This business has scaled remarkably fast, growing from $13 million to an expected $170 million in just 4 years, and it comes with little to no customer acquisition cost, and we keep getting better at it. For example, contractor participation, quote rates and win rates are all improving. And we're now applying dynamic pricing to this business, the same approach we use across the rest of our model, weighing many variables to price each offer with precision. But what excites me most is the built-in demand funnel with our existing 2.1 million members, something that other companies would have to spend heavily to create. We have made excellent strides, and there's a lot of runway ahead. We've penetrated just 3% of our member base so far, and HVAC is only the beginning. It's the proof point for our model we can duplicate across other trades over time. In summary, we had a great second quarter. We are firing on all cylinders, and we are extremely optimistic about where this business is heading. With that, I will now turn the call over to Jason to cover the financials in more detail.

Thanks, Bill. We had an excellent quarter, and I want to start by focusing on how we keep delivering these strong results. It starts with a predictable renewal-driven base that gives us a recurring revenue foundation. On top of that, operational excellence is driving structurally higher margins than just a few years ago. That combination generates a lot of cash where we converted adjusted EBITDA to free cash flow at more than 60%. And we're putting that cash to work, returning around $900 million to shareholders through share repurchases since 2021. This is a durable model that is turning consistent execution into real cash and real returns. So let me take you through the financial results on Slide 14, where you'll see those 4 pieces at work. I'll start briefly with the first half highlights before jumping into the details of the second quarter. The progression of these metrics from left to right tells you in one line that this business model is working: revenue growth, an exceptionally strong margin profile and operating leverage amplified by share repurchases. Through the first 6 months of the year, revenue grew 5% to $1.1 billion. Adjusted EBITDA increased 8% to $324 million. Net income grew 13% to $167 million. And lastly, adjusted diluted EPS grew 17% to $2.66 per share. You will see similar patterns in both our first half and second quarter results. Let's turn to Slide 15 for a deeper look at our Q2 results, starting with revenue. Total revenue grew 5% to $645 million. This was driven by over 3% from higher realized price and over 1% from higher volume. From a channel perspective, renewal revenue grew 4%, driven by higher price from our dynamic pricing model. First year real estate revenue increased by 3%, driven by higher volume as balanced housing market conditions supported higher capture rates, partially offset by lower realized price. First year direct-to-consumer revenue decreased 2% due to lower price from our promotional pricing strategy, partially offset by higher volume from growth in new home warranty members. Lastly, non-warranty and other revenue increased 19% due to both higher volume and price driven by our new HVAC upgrade program. Now moving to gross profit and gross margin on Slide 16. Gross profit increased 5% versus the prior year period to $378 million and gross margin improved approximately 100 basis points to 59%. Revenue conversion added about $16 million, reflecting the results of our dynamic pricing model. We also benefited from lower incidents across our member base. This included approximately $5 million of favorable weather in the quarter as well as the impacts of long-term efforts across HVAC upgrades and tune-ups. Our operational excellence continues to deliver through our supply chain scale, tighter cost controls and smarter job routing across our contractor network, all capabilities that we're now extending to 2-10. This helped offset the impacts from low single-digit cost inflation across labor, parts and equipment and the ongoing revenue mix shift as non-warranty scales. To put it simply, our process improvements and favorable weather more than offset macro cost pressure in the quarter. Turning to Slide 17. Let's review our net income and adjusted EBITDA. For the second quarter, net income grew 13% to $125 million versus the prior year period. Adjusted EBITDA grew 10% to $220 million with adjusted EBITDA margin expanding 200 basis points to 34%. Strong margins have become our expectation, but because any single quarter can move around with weather, seasonality and timing, the trend is best viewed on a full year basis. Let's turn to Slide 18 to look at that margin evolution. The takeaway is clear. This is a fundamentally more profitable business than it was just a few years ago. This improvement has come from 3 things working together. First, pricing. Our dynamic pricing model lets us price to each member's individual risk and usage, catching up on price where we've fallen behind and better aligning price with cost to serve across the book. Alongside that, we've been steadily raising our trade service fees, which further strengthens the underlying economics at the point of service. Second, operational excellence. Preferred contractors are one of our best levers on cost and service, and we now route about 84% of jobs to them, up from about 82% just 3 years ago. On the supply side, our purchasing power lets us source parts and equipment more efficiently than anyone else in the category. And third, operating leverage. We're growing revenue while continuing to be disciplined with how we invest behind it, particularly in marketing, where smarter targeting and better conversion mean each dollar works harder and more of our growth reaches the bottom line. Together, these efforts, combined with our strong retention rates have helped expand our full year adjusted EBITDA margin by roughly 1,400 basis points over a 4-year period from 13% in 2022 to a forecasted 27% this year based on the increased guidance I will cover shortly. It's also why we raised our long-term margin target to the mid-20% range earlier this year. We're currently operating at the high end of that range, helped in part by favorable conditions, but the more important point is that the entire range now sits well above where this business used to operate. That profitability, combined with our capital-light model, generates significant free cash flow. Let's turn to Slide 19 to review our free cash flow and financial position as of quarter end. Through the first half of the year, we generated $233 million of free cash flow, and we continue to expect to convert more than 60% of adjusted EBITDA into free cash flow for the year. We are operating our balance sheet from a position of strength. At the end of the second quarter, we had $472 million of unrestricted cash and total liquidity of $722 million. Taken together with our low leverage, we have ample flexibility to create value through our capital allocation strategy, which we will now turn to on Slide 20. Our capital allocation framework remains anchored in a disciplined approach designed to drive long-term value creation. We are focused on 3 core priorities. First, investing for growth. We start by investing in the business, both organically and through disciplined M&A. Second, maintaining a strong financial profile. We remain committed to maintaining ample liquidity and low leverage, ensuring we can invest in the business while preserving strategic optionality. And third, returning excess cash to shareholders. This business is a strong cash generator and repurchasing shares amplifies how we create value. Let's now turn to the next slide for a deeper look at share repurchases. Given our cash generation and conviction in the returns, we plan to accelerate our share repurchases in the second half. We now expect to buy back approximately $330 million of shares this year, which puts us on track to complete the current authorization in 2026, well ahead of our original time line. Our conviction here isn't new. Repurchasing our shares remains one of the highest return uses of our capital, and we've leaned into it consistently. And the effect compounds. Since 2021, we've deployed approximately $900 million to repurchases, buying back nearly 1/4 of the company and driving more than a 20% benefit to our earnings per share, all while building our cash balance, reducing our net leverage ratio and allocating cash to strategic M&A like 2-10. From here, we will stay disciplined about where every dollar goes. But given the cash this business generates, we are not done returning capital to shareholders, and we'll step up our pace in the second half. Let's now pivot to a discussion on our updated financial outlook on Slide 22, starting with the full year. We are pleased to announce that we are raising our full year financial guidance. We are raising our revenue expectations by $25 million at the midpoint to a range of $2.19 billion to $2.21 billion. This is underpinned by a 3% to 4% increase in realized price and a 1% to 2% increase in volume. By channel, we expect low to mid-single-digit increases in renewal channel revenue, a low single-digit increase in real estate revenue, a low single-digit decrease in direct-to-consumer revenue, and $230 million to $240 million in non-warranty and other revenue. We expect our gross margins to be approximately 55%, and we now expect SG&A of $685 million to $695 million, which reflects a second half step-up in investment that I'll come back to in a moment. We are increasing our adjusted EBITDA expectations by $20 million at the midpoint to a range of $585 million to $600 million. This translates to an adjusted EBITDA margin of approximately 27% at the midpoint. Our adjusted EBITDA outlook considers about $45 million of stock compensation and integration costs and about $20 million of interest income. We also expect capital expenditures of approximately $30 million. Our effective tax rate remains unchanged at approximately 25%. Before I get to the third quarter, let me give you some context on the shape of the second half. At the midpoint, the change to our updated full year guidance compared to our prior outlook implies a $3 million increase to our second half adjusted EBITDA, which is after the impact of the following items. First, we're increasing our marketing spend by more than $10 million weighted towards the third quarter to build on our current momentum. And even after that spend, we still expect to deliver SG&A leverage for the year. Second, we are anticipating the weather benefit from the second quarter to largely reverse in the third quarter, and we saw that start to play out in July. One final point. With the first half complete, roughly 55% of our expected full year adjusted EBITDA is now behind us, in line with the pacing of 2025. This timing is a normal feature of our business, and it's why we point investors to full year performance as the best measure of how we're delivering. Please turn to Slide 23, and we'll review the third quarter outlook. For the third quarter specifically, we expect revenue of $642 million to $652 million. By channel, we expect a low to mid-single-digit increase in renewal revenue, a low single-digit increase in real estate revenue, a low single-digit decrease in direct-to-consumer revenue and an over 20% increase in non-warranty and other revenue. For adjusted EBITDA, we expect to be in the range of $197 million to $207 million. This reflects higher revenue conversion, partially offset by the timing of the weather benefit from Q2 and incremental second half SG&A investment. And while the external environment has grown more complex, our execution, combined with the multiple levers we have to offset inflation, gives us confidence in our ability to deliver another record year in 2026. With that, back to you, Bill.

Thank you, Jason. Before we open it up to questions, I want to emphasize 3 key takeaways. First, our total member count is past the inflection point. Even with one of the most challenging housing markets we've seen in a generation, we're growing total member count again. Second, our operating model is doing what we built it to do quarter after quarter, and we are delivering structurally higher margins in line with our long-term targets. And third, we expect to finish our latest share repurchase authorization by the end of this year, almost a full year early. None of these results happen on their own. They happen because 2,000-plus associates and thousands of contractors show up for our members every single day. To all of you, well done. You are the driving force behind this performance. Operator, please open the line for questions.

[Operator Instructions] Our first question is coming from Mark Hughes with Truist.

In the real estate channel, that 7% growth in member count seems pretty strong in this environment. How much price sensitivity or elasticity do you see there? Is the price useful in terms of trying to improve attachment rates?

Yes. We're using -- not at the level of the DTC area, but we do use some discounting in real estate on a selective basis. But really, I think that it is a tough backdrop. We're very pleased with the work that our real estate team did this quarter. And I think it just shows that as we focused more locally and combined it with a lot of education about -- I talked about our app and all the improvements we've made there. I think it's a combination of things. It's a grind, but I think 7% was a good showing for Q2.

Yes. You talked about kind of refining some of the strategy around 2-10. How do you position 2-10 differently than the American Home Shield brand? What's the dynamic there that differentiates in the mind of potential customers?

Yes. It's not really that different. It's just -- we call it our multi-brand strategy. We think that the basic value proposition for home warranty is the same. We're obviously focused on the renewal book of 2-10, which has been very strong, especially as it's come on to the platform. But we've gone after it and it has its strength in certain markets. But we come at it with what we call our multi-brand strategy, which is a consistent strategy driving the value proposition for home warranty.

Very good. And then I think, Jason, you had alluded to maybe July or July weather. Could you expand on that? Was that -- it seems like there's a lot of hot weather out there. How meaningful was that in terms of the start of the 3Q here?

Yes, Mark, it was -- what I was really trying to highlight is June was a little milder than we expected, and then we saw some of that come back in July. So we viewed it as a bit of a timing item, and we just wanted everybody to be aware of that as we think about kind of the Q2 and Q3 results combined, if you think about that summer season and when the weather really hits. So that's really what I'm trying to highlight.

And it's where the weather hits, too, Mark, because depending on -- as you know, the home warranty business is kind of the smile states. And so depending upon how weather is in California, Texas, Florida, et cetera, it has an impact. But I think we're just trying to show that, in Q3, we had a weather benefit, we estimated about $5 million, and we anticipate, especially the way July started with all the heat, that will reverse in Q3.

Yes. And then just quickly, were there any reserve gains in the quarter, you didn't call any out?

Yes. It was about $4 million of favorable cost development. That's part of the beat there, too, Mark. We saw claims costs come in a little better. And so it's $4 million, and I think that compares to about $4 million in the same period a year ago.

Our next question is coming from Sergio Segura with KeyBanc.

I'll keep it to a few questions here. Maybe first, just talking about and building on Mark's question about weather. Just if you could talk about the EBITDA margin outperformance. I mean you're coming off a record year last year, and we saw some expansion in the first half, and I think you're guiding to expansion for the full year. So could you just talk about the key factors driving the expansion even versus last year's record performance? How much of that is weather and how much of that is just other things within the business driving that performance?

Yes. And thinking about year-over-year, Sergio, for the quarter, we estimated weather at about a $5 million better impact this year. That helped offset what we're calling low single-digit inflation -- kind of cost inflation at the contract cost level. We had a little bit of other favorable incidents. And then we did have some small benefit as we brought 2-10 onto our platform and kind of normalize -- started to normalize their cost structure towards ours. I'd give a lot of credit to our contractor relations team. They're doing a great job managing costs against -- we were -- I think we were a little conservative coming into the quarter just with uncertain macro, if you think about the news changing daily with world events. But the team is doing a really, really good job there keeping that inflation number down. So I think percent of preferred remains near all-time highs. So both cost and service are doing really, really well there.

Yes. The other thing, Sergio, is, and I'm really proud of the company, we make -- and I talked about it in the script that we make these small improvements that compound over time. And it's almost every facet of the business. I went through the renewal journey, and Jason just referenced the contractor relations team and our service ops team. We continue to get better at just operating the company. And I think that, on the margin, it helps us year-over-year.

Sergio, I'd probably add, too, as we thought about our margin targets, our long-term targets, this was a big part of how we had the confidence to raise that to the mid-20s.

Yes. Yes, that makes sense. And maybe just one on the raised outlook on both the renewals channel and the realized pricing. Is there any broad-based pricing increase in there? Or is it more just kind of dynamically pricing and you guys are seeing the benefit from that?

We'd attribute that mostly to the optimization around dynamic pricing, Sergio. We are also seeing continued strong performance in our renewal rates. So I'd say it's a combination of both. But we just get better. As Bill said, it's that incremental investment even in our tools like dynamic pricing where we get better and better each day.

[Operator Instructions] Our next question is coming from Ian Zaffino with Oppenheimer.