Gross Profit Margin Expanded 760 bps to 51%;
Net Income Increased to $71 Million; Adjusted EBITDA
Increased $48 Million to $128 Million; Repurchased $75
Million of Stock in 2023; Raising Full-Year 2023 Revenue,
Adjusted EBITDA and Share Repurchase Outlook
Frontdoor, Inc. (NASDAQ: FTDR), the nation’s leading provider of
home service plans, today announced its third-quarter 2023
results.
Financial Results
Three Months Ended
September 30,
$ millions (except as noted)
2023
2022
Change
Revenue
$
524
$
484
8
%
Gross Profit
268
210
27
%
Net Income
71
28
154
%
Diluted Earnings per Share
0.89
0.34
158
%
Adjusted Net Income(1)
76
46
64
%
Adjusted Diluted Earnings per Share(1)
0.94
0.56
66
%
Adjusted EBITDA(1)
128
79
61
%
Home Service Plans (number in
millions)
2.04
2.16
(6
)
%
Third-Quarter 2023 Summary
- Revenue increased 8% to $524 million, comprised of 10% from
price that was partly offset by a 2% decline from lower
volume
- Gross profit margin expanded 760 basis points to 51% as a
result of higher realized price, continued process
improvement initiatives, favorable cost development, a transition
to higher service fees and a lower number of service requests per
customer that was partly offset by inflationary cost
pressure
- Net income more than doubled to $71 million
- Adjusted EBITDA(1) increased 61% to $128
million
Raising Full-Year 2023 Outlook
- Increasing revenue range to $1.765 billion to $1.775
billion
- Increasing gross profit margin range to 48.0% to
49.5%
- Increasing Adjusted EBITDA(2) range to $320 million
to $330 million
- Increasing 2023 share repurchase outlook to $125
million
“I am thrilled with the turnaround in our financial results,
which reinforces my belief in the power of this business and the
actions we have been taking,” said Chairman and Chief Executive
Officer Bill Cobb. “As we look forward to 2024, our main strategic
objectives are focused on increasing customer acquisitions across
our two brands and advancing our retention efforts. The American
Home Shield brand will be relaunched early next year and will
continue to concentrate on home warranties, while the Frontdoor
brand is being refocused to sell on-demand home services to a
larger addressable market. In short, we continue to take bold and
decisive steps that will lay a strong foundation for future
growth.”
“Frontdoor continues to deliver significantly better than
expected financial results, and we are increasing our 2023
financial outlook for the second time this year,” said Chief
Financial Officer Jessica Ross. “Third quarter gross margins came
in significantly better than expected as a result of the traction
we are seeing from our comprehensive process improvement
initiatives and higher revenue conversion. With this solid
performance, we are stepping up our share repurchase target for
2023 as we continue to generate strong cash flows and remain
focused on returning excess cash to investors.”
Third-Quarter 2023 Results
Revenue by Customer
Channel
Three Months Ended
September 30,
$ millions
2023
2022
Change
Renewals
$
406
$
356
14
%
Real estate (First-Year)
40
51
(23
)
%
Direct-to-consumer (First-Year)
54
64
(16
)
%
Other
24
13
85
%
Total
$
524
$
484
8
%
Third-quarter 2023 revenue increased 8% to $524 million.
- Renewal revenue increased 14% due to improved price
realization;
- Real estate revenue decreased 23% due to lower sales as a
result of the challenging real estate market;
- Direct-to-consumer revenue decreased 16% due to lower sales as
a result of a broad range of macroeconomic conditions impacting
demand for the home warranty category; and
- Other revenue increased $11 million due to higher on-demand
home services.
Third-quarter 2023 net income was $71 million, or diluted
earnings per share of $0.89.
Period-over-Period Adjusted
EBITDA(1) Bridge
$ millions
Three Months Ended September 30,
2022
$
79
Impact of change in revenue(3)
37
Contract claims costs(4)
22
Sales and marketing costs
(10
)
Customer service costs
1
General and administrative costs
(4
)
Interest and net investment income
4
Other
(2
)
Three Months Ended September 30,
2023
$
128
Third-quarter 2023 Adjusted EBITDA(1) increased 61% to $128
million, and included the impact of the following factors:
- $37 million from higher revenue conversion(3), as price
increases were partly offset by lower volume;
- $22 million of lower contract claims costs(4), excluding the
impact of claims costs related to the change in revenue. The
decrease in contract claims costs reflects:
- Continued process improvement initiatives, specifically better
cost management efforts across our contractor network;
- Favorable cost development of $9 million, compared to a $2
million favorable adjustment in the third quarter of 2022; and
- Ongoing inflationary cost pressure that was partly offset by a
transition to higher service fees and a lower number of service
requests per customer.
- $10 million of higher sales and marketing costs primarily
related to the Frontdoor brand;
- $4 million of higher G&A costs primarily due to increased
personnel costs; and
- $4 million of higher interest income as a result of rising
interest rates on cash deposits.
Cash Flow
Nine Months Ended
September 30,
$ millions
2023
2022
Net cash provided from (used
for):
Operating activities
$
139
$
80
Investing activities
(23
)
(25
)
Financing activities
(88
)
(74
)
Cash increase/(decrease) during the
period
$
28
$
(19
)
Net cash provided from operating activities was $139 million for
the nine months ended September 30, 2023 and was comprised of $207
million in earnings adjusted for non-cash charges offset, in part,
by $68 million in cash used for working capital. Cash used for
working capital was primarily driven by a decline in the number of
first-year real estate home service plans, which are typically paid
for upfront at the time of closing on the home sale, offset, in
part, by seasonality.
Net cash used for investing activities was $23 million for the
nine months ended September 30, 2023 and was primarily comprised of
capital expenditures related to technology projects.
Net cash used for financing activities was $88 million for the
nine months ended September 30, 2023 and was comprised of shares
repurchases as well as scheduled debt payments.
Free Cash Flow(1) was $116 million for the nine months ended
September 30, 2023.
Cash as of September 30, 2023 was $320 million, and was
comprised of $152 million of restricted net assets and $167 million
of Unrestricted Cash.
Fourth-Quarter 2023 Outlook
- Revenue of $350 million to $360 million;
- Adjusted EBITDA(2) of approximately $20 million to $30
million.
Updated Full-Year 2023 Outlook
- Raised revenue outlook to $1.765 billion to $1.775 billion, or
approximately 6% higher than prior year.
- Renewals channel revenue growth of nearly 15%;
- Direct-to-Consumer channel revenue decline in the low
double-digit range;
- Real Estate channel revenue decline in the mid-20% range;
- Other revenue of approximately $70 million, driven by growth in
on-demand services, primarily HVAC upgrade services sold through
Frontdoor Pro that is partly offset by lower Streem revenue;
and
- Number of home service plans is expected to decline in the
mid-to-upper single digits.
- Increased gross profit margin to 48.0% to 49.5%.
- SG&A outlook of $580 million to $590 million.
- Increased Adjusted EBITDA(2) outlook to $320 million to $330
million.
- Narrowed capital expenditures to approximately $35
million.
- Annual effective tax rate remains at approximately 25%.
Updated 2023 Share Repurchase Outlook
- The company is increasing its full year share repurchase target
to approximately $125 million.
Third-Quarter 2023 Earnings Conference Call
Frontdoor has scheduled a conference call today, November 1,
2023, at 7:30 a.m. Central time (8:30 a.m. Eastern time). During
the call, Bill Cobb, Chairman and Chief Executive Officer, and
Jessica Ross, Chief Financial Officer, will discuss the company’s
operational performance and financial results for third-quarter
2023 and respond to questions from the investment community. To
participate on the conference call, interested parties should call
1-833-470-1428 (or international participants, 1-929-526-1599) and
enter conference ID 031367. Additionally, the conference call will
be available via webcast which will include a slide presentation
highlighting the company’s results. To participate via webcast and
view the slide presentation, visit Frontdoor’s investor relations
home page. The call will be available for replay for approximately
60 days. To access the replay of this call, please call
1-866-813-9403 and enter conference ID 614704 (international
participants: +44-204-525-0658, conference ID 398285).
About Frontdoor, Inc.
Frontdoor is reimagining how homeowners maintain and repair
their most valuable asset – their home. As the parent company of
two leading brands, we bring over 50 years of experience in
providing our members with comprehensive options to protect their
homes from costly and unexpected breakdowns through our extensive
network of pre-qualified professional contractors. American Home
Shield, the category leader in home service plans with
approximately two million members, gives homeowners budget
protection and convenience, covering up to 23 essential home
systems and appliances. Frontdoor is a cutting edge, one-stop app
for home repair and maintenance. Enabled by our Streem technology,
the app empowers homeowners by connecting them in real time through
video chat with pre-qualified experts to diagnose and solve their
problems. The Frontdoor app also offers homeowners a range of other
benefits including DIY tips, discounts and more. For more
information about American Home Shield and Frontdoor, please visit
frontdoorhome.com.
Forward-Looking Statements
This news release contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended,
including, in particular, projected future performance and any
statements about Frontdoor’s plans, strategies and prospects.
Forward-looking statements can be identified by the use of
forward-looking terms such as “believe,” “expect,” “estimate,”
“could,” “should,” “intend,” “may,” “plan,” “seek,” “anticipate,”
“project,” “will,” “shall,” “would,” “aim,” or other comparable
terms. These forward-looking statements are subject to known and
unknown risks and uncertainties, many of which may be beyond our
control. Such risks and uncertainties include, but are not limited
to: changes in macroeconomic conditions, including inflation and
global supply chain challenges, especially as they may affect
existing home sales, interest rates, consumer confidence or labor
availability; increases in parts, appliance and home system prices,
and other operating costs; changes in the source and intensity of
competition in our market; the success of our business strategies;
the ability of our marketing efforts to be successful or
cost-effective; our ability to attract, retain and maintain
positive relations with third-party contractors and vendors; our
dependence on our real estate and direct-to-consumer customer
acquisition channels and our renewals channel; our ability to
attract and retain qualified key employees and labor availability
in our customer service operations; our dependence on third-party
vendors, including business process outsourcers, and third-party
component suppliers; cybersecurity breaches, disruptions or
failures in our technology systems; our ability to protect the
security of personal information about our customers; evolving
corporate governance and disclosure regulations and expectations
related to environmental, social and governance matters; risks
related to the COVID-19 pandemic; risks related to geopolitical
instability; lawsuits, enforcement actions and other claims by
third parties or governmental authorities; increases in tariffs or
changes to import/export regulations; physical effects of climate
change, adverse weather conditions and Acts of God, along with the
increased focus on sustainability; our ability to protect our
intellectual property and other material proprietary rights;
negative reputational and financial impacts resulting from
acquisitions or strategic transactions; requirement to recognize
impairment charges; third-party use of our trademarks as search
engine keywords to direct our potential customers to their own
websites; inappropriate use of social media by us or other parties
to harm our reputation; special risks applicable to operations
outside the United States by us or our business process outsource
providers; a return on investment in our common stock is dependent
on appreciation in the price; restrictions in our certificate of
incorporation related to an acquisition of us or to our lawsuits
against us or our directors or officers; the effects of our
significant indebtedness; increases in interest rates increasing
the cost of servicing our indebtedness; and increased borrowing
costs due to lowering or withdrawal of the credit ratings, outlook
or watch assigned to us, our debt securities or our credit
facilities; and our ability to generate significant cash needed to
fund our operations and service our debt. We caution you that
forward-looking statements are not guarantees of future performance
or outcomes and that actual performance and outcomes, including,
without limitation, our actual results of operations, financial
condition and liquidity, and the development of new markets or
market segments in which we operate, may differ materially from
those made in or suggested by the forward-looking statements
contained in this news release. For a discussion of other important
factors that could cause Frontdoor’s results to differ materially
from those expressed in, or implied by, the forward-looking
statements included in this document, refer to the risks and
uncertainties detailed from time to time in Frontdoor’s periodic
reports filed with the SEC, including the disclosure contained in
Item 1A. Risk Factors in our 2022 Annual Report on Form 10-K filed
with the SEC, as such factors may be updated from time to time in
Frontdoor’s periodic filings with the SEC. Except as required by
law, Frontdoor does not undertake any obligation to update or
revise the forward-looking statements to reflect new information or
events or circumstances that occur after the date of this news
release or to reflect the occurrence of unanticipated events or
otherwise. Readers are advised to review Frontdoor’s filings with
the SEC, which are available from the SEC’s EDGAR database at
sec.gov, and via Frontdoor’s website
at frontdoorhome.com.
Non-GAAP Financial Measures
To supplement Frontdoor’s results presented in accordance with
accounting principles generally accepted in the United States
(“U.S. GAAP”), Frontdoor has disclosed the non-GAAP financial
measures of Adjusted EBITDA, Free Cash Flow, Adjusted Net Income,
Adjusted Diluted Earnings Per Share, and Unrestricted Cash.
We define "Adjusted EBITDA" as net income before depreciation
and amortization expense; goodwill and intangibles impairment;
restructuring charges; provision for income taxes; non-cash
stock-based compensation expense; interest expense; loss on
extinguishment of debt; and other non-operating expenses. We
believe Adjusted EBITDA is useful for investors, analysts and other
interested parties as it facilitates company-to-company operating
performance comparisons by excluding potential differences caused
by variations in capital structures, taxation, the age and book
depreciation of facilities and equipment, restructuring initiatives
and equity-based, long-term incentive plans.
We define “Free Cash Flow” as net cash provided from operating
activities less property additions. Free Cash Flow is not a
measurement of our financial performance or liquidity under U.S.
GAAP and does not purport to be an alternative to net cash provided
from operating activities or any other performance or liquidity
measures derived in accordance with U.S. GAAP. Free Cash Flow is
useful as a supplemental measure of our liquidity. Management uses
Free Cash Flow to facilitate company-to-company cash flow
comparisons, which may vary from company-to-company for reasons
unrelated to operating performance.
We define “Adjusted Net Income” as net income before:
amortization expense; restructuring charges; loss on extinguishment
of debt; other non-operating expenses; and the tax impact of the
aforementioned adjustments. We believe Adjusted Net Income is
useful for investors, analysts and other interested parties as it
facilitates company-to-company operating performance comparisons by
excluding potential differences caused by items listed in this
definition.
We define “Adjusted Diluted Earnings per Share” as Adjusted Net
Income divided by the weighted-average diluted common shares
outstanding.
We define “Unrestricted Cash” as cash not subject to third-party
restrictions. For additional information related to our third-party
restrictions, see “Liquidity and Capital Resources — Liquidity”
under the heading “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in our 2022 Annual
Report on Form 10-K filed with the SEC.
See the schedules attached hereto for additional information and
reconciliations of such non-GAAP financial measures. Management
believes these non-GAAP financial measures provide useful
supplemental information for its and investors’ evaluation of
Frontdoor’s business performance and are useful for
period-over-period comparisons of the performance of Frontdoor’s
business. While we believe that these non-GAAP financial measures
are useful in evaluating our business, this information should be
considered as supplemental in nature and is not meant to be
considered in isolation or as a substitute for the related
financial information prepared in accordance with U.S. GAAP. In
addition, these non-GAAP financial measures may not be the same as
similarly entitled measures reported by other companies.
© 2023 Frontdoor, Inc. All rights reserved. The following terms,
which may be used in this press release, are trademarks of
Frontdoor, Inc. and its subsidiaries: Frontdoor®, American Home
Shield®, HSA™, OneGuard®, Landmark Home Warranty®, Streem®, the
Streem logo and the Frontdoor logo. All other trademarks used
herein are the property of their respective owners.
(1)
See “Reconciliations of Non-GAAP
Financial Measures” accompanying this release for a reconciliation
of Adjusted EBITDA, Free Cash Flow, Adjusted Net Income and
Adjusted Diluted Earnings per Share, each a non-GAAP measure, to
the nearest GAAP measure. See “Non-GAAP Financial Measures”
included in this release for descriptions of calculations of these
measures. Amounts presented in the reconciliations and other tables
presented herein may not sum due to rounding.
(2)
A reconciliation of the
forward-looking fourth-quarter and full-year 2023 Adjusted EBITDA
outlook to net income, and of full-year 2023 Free Cash Flow to net
cash provided from operating activities, cannot be provided without
unreasonable effort because of the inherent difficulty of
accurately forecasting the occurrence and financial impact of the
various adjusting items necessary for such reconciliation that have
not yet occurred, are out of our control, or cannot be reasonably
predicted. For the same reasons, the company is unable to assess
the probable significance of the unavailable information, which
could have a material impact on its future GAAP financial
results.
(3)
Revenue conversion includes the
impact of the change in the number of home service plans as well as
the impact of year-over-year price changes. The impact of the
change in the number of home service plans considers the associated
revenue on those plans less an estimate of contract claims costs
based on margin experience in the prior year period.
(4)
Contract claims costs includes
the impact of changes in service request incidence, inflation and
other drivers associated with the number of home service plans in
the prior year period. The impact on contract claims costs
resulting from year-over-year changes in the number of home service
plans is included in revenue conversion above.
Frontdoor, Inc.
Consolidated Statements of
Operations and Comprehensive Income (Unaudited)
(In millions, except per share
data)
Three Months Ended
Nine Months Ended
September 30,
September 30,
2023
2022
2023
2022
Revenue
$
524
$
484
$
1,414
$
1,322
Cost of services rendered
256
274
706
757
Gross Profit
268
210
708
565
Selling and administrative expenses
152
137
439
403
Depreciation and amortization expense
9
8
28
25
Goodwill and intangibles impairment
—
14
—
14
Restructuring charges
5
5
6
18
Interest expense
10
8
30
22
Interest and net investment income
(4
)
(1
)
(12
)
(1
)
Income before Income Taxes
96
39
217
85
Provision for income taxes
24
11
54
23
Net Income
$
71
$
28
$
163
$
63
Other Comprehensive Income, Net of
Income Taxes:
Unrealized gain on derivative instruments,
net of income taxes
—
9
2
26
Total Other Comprehensive Income, Net
of Income Taxes
—
9
2
26
Comprehensive Income
$
72
$
37
$
164
$
89
Earnings per Share:
Basic
$
0.89
$
0.34
$
2.01
$
0.77
Diluted
$
0.89
$
0.34
$
2.00
$
0.77
Weighted-average Common Shares
Outstanding:
Basic
80.1
81.5
81.0
82.0
Diluted
80.6
81.6
81.3
82.1
Frontdoor, Inc.
Condensed Consolidated
Statements of Financial Position (Unaudited)
(In millions, except share
data)
As of
September 30,
December 31,
2023
2022
Assets:
Current Assets:
Cash and cash equivalents
$
320
$
292
Receivables, less allowance of $5 and $4,
respectively
7
5
Prepaid expenses and other current
assets
31
33
Contract assets
72
—
Total Current Assets
429
330
Other Assets:
Property and equipment, net
64
66
Goodwill
503
503
Intangible assets, net
144
148
Operating lease right-of-use assets
8
11
Deferred customer acquisition costs
12
16
Other assets
8
8
Total Assets
$
1,168
$
1,082
Liabilities and Shareholders'
Equity:
Current Liabilities:
Accounts payable
$
87
$
80
Accrued liabilities:
Payroll and related expenses
29
22
Home service plan claims
93
103
Other
40
21
Deferred revenue
98
121
Current portion of long-term debt
17
17
Total Current Liabilities
364
364
Long-Term Debt
580
592
Other Long-Term Liabilities:
Deferred tax liabilities, net
28
39
Operating lease liabilities
16
18
Other long-term liabilities
8
8
Total Other Long-Term Liabilities
52
65
Commitments and Contingencies
Shareholders' Equity:
Common stock, $0.01 par value;
2,000,000,000 shares authorized; 86,502,847 shares issued and
79,617,524 shares outstanding as of September 30, 2023 and
86,079,773 shares issued and 81,517,243 shares outstanding as of
December 31, 2022
1
1
Additional paid-in capital
110
90
Retained earnings
287
124
Accumulated other comprehensive income
10
8
Less treasury stock, at cost; 6,885,323
shares as of September 30, 2023 and 4,562,530 shares as of December
31, 2022
(238
)
(162
)
Total Shareholders' Equity
171
61
Total Liabilities and Shareholders'
Equity
$
1,168
$
1,082
Frontdoor, Inc.
Consolidated Statements of
Cash Flows (Unaudited)
(In millions)
Nine Months Ended
September 30,
2023
2022
Cash and Cash Equivalents at Beginning
of Period
$
292
$
262
Cash Flows from Operating
Activities:
Net Income
163
63
Adjustments to reconcile net income to net
cash provided from operating activities:
Depreciation and amortization expense
28
25
Deferred income tax benefit
(12
)
(12
)
Stock-based compensation expense
21
17
Goodwill and intangibles impairment
—
14
Restructuring charges
6
18
Payments for restructuring charges
(3
)
(2
)
Other
5
(1
)
Changes in working capital:
Receivables
(1
)
3
Prepaid expenses and other current
assets
(70
)
(68
)
Accounts payable
7
23
Deferred revenue
(22
)
(42
)
Accrued liabilities
(2
)
29
Current income taxes
22
15
Net Cash Provided from Operating
Activities
139
80
Cash Flows from Investing
Activities:
Purchases of property and equipment
(23
)
(30
)
Other investing activities
—
5
Net Cash Used for Investing
Activities
(23
)
(25
)
Cash Flows from Financing
Activities:
Repayments of debt
(13
)
(13
)
Repurchase of common stock
(76
)
(59
)
Other financing activities
—
(2
)
Net Cash Used for Financing
Activities
(88
)
(74
)
Cash Increase (Decrease) During the
Period
28
(19
)
Cash and Cash Equivalents at End of
Period
$
320
$
244
Reconciliations of Non-GAAP
Financial Measures
The following table presents
reconciliations of net income to Adjusted Net Income.
Three Months Ended
Nine Months Ended
September 30,
September 30,
(In millions, except per share
amounts)
2023
2022
2023
2022
Net Income
$
71
$
28
$
163
$
63
Amortization expense
1
2
3
6
Goodwill and intangibles impairment
—
14
—
14
Restructuring charges
5
5
6
18
Tax impact of adjustments
(2
)
(3
)
(3
)
(7
)
Adjusted Net Income
$
76
$
46
$
170
$
93
Adjusted Earnings per Share:
Basic
$
0.95
$
0.57
$
2.10
$
1.14
Diluted
$
0.94
$
0.56
$
2.09
$
1.13
Weighted-average common shares
outstanding:
Basic
80.1
81.5
81.0
82.0
Diluted
80.6
81.6
81.3
82.1
The following table presents
reconciliations of net cash provided from operating activities to
Free Cash Flow.
Three Months Ended
Nine Months Ended
September 30,
September 30,
(In millions)
2023
2022
2023
2022
Net Cash Provided from Operating
Activities
$
28
$
(14
)
$
139
$
80
Property Additions
(8
)
(10
)
(23
)
(30
)
Free Cash Flow
$
20
$
(24
)
$
116
$
50
The following table presents
reconciliations of net income to Adjusted EBITDA.
Three Months Ended
Nine Months Ended
September 30,
September 30,
(In millions)
2023
2022
2023
2022
Net Income
$
71
$
28
$
163
$
63
Depreciation and amortization expense
9
8
28
25
Goodwill and intangibles impairment
—
14
—
14
Restructuring charges
5
5
6
18
Provision for income taxes
24
11
54
23
Non-cash stock-based compensation
expense
8
5
21
17
Interest Expense
10
8
30
22
Adjusted EBITDA
$
128
$
79
$
302
$
181
Key Business Metrics
As of September 30,
2023
2022
Number of home service plans (in
millions)
2.04
2.16
Renewals
1.55
1.55
First-Year Direct-To-Consumer
0.28
0.33
First-Year Real Estate
0.20
0.28
Reduction in number of home service
plans
(6
)
%
(3
)
%
Customer retention rate(1)
76.2
%
75.3
%
(1) Customer retention rate is presented
on a rolling 12-month basis in order to avoid seasonal
anomalies.
FTDR-Financial
View source
version on businesswire.com: https://www.businesswire.com/news/home/20231101613354/en/
Investor Relations: Matt Davis 901.701.5199
ir@frontdoorhome.com
Media: Tom Collins 901.701.5198
mediacenter@frontdoorhome.com
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