Ladies and gentlemen, welcome to the frontdoor’s First Quarter 2020 Earnings Call. Today’s call is being recorded and broadcast on the Internet. Beginning today’s call is Matt Davis, Vice President of Investor Relations and Treasurer. He will introduce the other speakers on the call. At this time, we will begin today’s call. Please go ahead, Mr. Davis.

Thank you, operator. Good morning, everyone and thank you for participating in frontdoor’s first quarter 2020 earnings conference call. Joining me on today’s call are frontdoor’s Chief Executive Officer, Rex Tibbens and frontdoor’s Chief Financial Officer, Brian Turcotte. 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 investors.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, May 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 may 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 the 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. Finally, we are all working remotely during this call and apologize in advance for any audio issues that might occur. Please bear with us if this happens during our remarks or Q&A portion of the call. I will now turn the call over to Rex for opening comments. Rex?

Thanks, Matt and good morning everyone. Before I jump into our business results, on behalf of myself and the entire frontdoor team, I want to extend my deep appreciation to those serving in the health care field, first responders and those that provide essential services through grocery stores, pharmacies, home service contractors and so much more. They have helped keep our nation going during this unprecedented time and are the true frontline heroes in America today. We would like to thank them all for what they do and express our gratitude for their sacrifices. Turning to our business, frontdoor had a strong first quarter, both from a financial and operational perspective. I am especially proud of our team’s early and decisive actions in response to COVID-19. We moved mountains, and we did not miss a beat operationally. I’m certain that the increased focus in ingenuity we have developed from this crisis will result in us emerging as a stronger and more nimble organization. Earlier this year, I asked Raj Midha, our former CMO, to take on a new role of being the Senior Vice President and General Manager of our American Home Shield and HSA business. I’ve relied on Raj’s insightful counsel since I started and I am truly excited as he now focuses on the strategy and execution of our largest brands. In March, we hired Jason Marshall as our Chief Marketing Officer. Jason most recently served as CMO of Porch.com, and has held several leadership roles at other companies such as SolarWinds and Party City. We look forward to Jason driving growth and innovation across all facets and brands of our organization, especially as we re-imagine the company from a digital perspective. Jason has deep expertise in digital marketing and technology, and we are excited to have him…

Thank you, Rex and good morning. Let’s now turn to Slide 7 and I will review the key financial results for the first quarter of 2020 versus the prior year period. We had a strong first quarter as revenue increased 8% versus the prior year period to $294 million, driven by approximately 6 points of higher price and 2 points from increased volume. If we look at our three channels, revenue derived from customer renewals was up 10% versus the prior year period due to improved price realization and overall growth in the number of home service plans due in part to our customer retention improvement initiatives. First year real estate revenue was up 2% versus the prior year period, reflecting improved price realization, offset in part by a decline in the number of first year real estate home service plans. And first year direct-to-consumer revenue was up 7% versus the prior year period, reflecting growth in the number of first year direct-to-consumer home service plans, mostly driven by increased investments in marketing and improved price realization. I would like to remind everyone that we recognize revenue evenly over the course of our annual contracts. This blunts the impact of any missed first year real estate sales in the early quarters until they are worked into our base. Thus, our reported revenue and the related impact will somewhat lag any macroeconomic trends impacting our business in a particular quarter. Gross profit increased 15% in the first quarter versus the prior year period to $147 million, while gross profit margin increased 270 basis points to 50%. Bad debt remained relatively flat in the first quarter versus the prior year period as we did not experience a material year-over-year increase in amounts owed by our customers. Net income was relatively flat versus…

Thanks, Brian. As a reminder, during the question-and-answer session, we encourage you to ask any questions that you may have but please note that guidance is limited to the second quarter outlook we provided in our press release. Operator, let’s open the line for questions.

[Operator Instructions] Our first question is coming from Michael Ng of Goldman Sachs. Please go ahead.

Great. I hope everyone is doing well. Thank you, very much for the question. I just have two. The first one is on Candu. Rex, you talked about delaying trade expansion by a quarter or two. Could you talk a little bit about your decision there and whether or not geographic expansion is affected? And is the $15 million to $20 million of technology and Candu investments for 2020, still the appropriate way to think about it? And then secondly, given the current expectations for the U.S. real estate market, could you just talk about how we should think about when real estate first year sales will be most impacted from a revenue perspective, appreciating that those impacts will flow through over time? Thank you very much.

Michael, I hope you’re doing well as well. In terms of Candu, I said a quarter or two, but probably more like 1 quarter. It’s just simply – you can imagine that during these times, we’ve pulled our technology teams to help virtualize the company. We did it in a little over a week. So that certainly took away from some of our mainstream opportunities but it’s a slight delay. I don’t want to – I want to make sure that everyone understands it’s not – we are talking about 6 months here, we are talking about maybe a month or two. So maybe a quarter or two is a little strong. The team continues to execute, and we haven’t seen any real change demand. Actually, we’re seeing great demand with Candu. So it’s just a matter of getting the technology folks kind of back in line with expanding the trade, which again, I think it’s a slight delay. In terms of geographic expansion, we’re in 5 cities now. We think that’s kind of the right level at the moment. Every week, we’re seeing kind of increased demand like we had planned. So I think all systems are go for Candu. In terms of the investment, I think we’re still on track for the $20 million to $30 million total for the year. I don’t see that changing as well. Again, it’s just a slight delay from a technology perspective, but not a delay from an operational or our strategic plans around Candu. And then in terms of your question about real estate, one thing to consider, I believe Brian covered this in his comments as well, as we kind of go from listings when you buy a home, obviously, there’s a lag between when you buy it, when you close. That will certainly – we will be watching that closely. That will be, as existing home sales begin to pick up, we will see a lag before we see revenue as well. And then keep in mind, as Brian mentioned as well, because we have recognized revenue 1/12 at a time, you will see that slowly increase kind of quarter-on-quarter. Right now, it’s hard to tell you, it’s going to be this much in Q2, and then you can see it flow out for the rest of the year because we just simply don’t know the total impact of COVID-19 just yet. But safe to say that there’s going to be some definitely slowing in real estate. That’s why we’re really leaning into direct-to-consumer. We’re really seeing some great good opportunities from a marketing perspective and then really happy that our renewal rates have remained steady at 75%.

Great. Thank you very much for the color. Rex much appreciated.

Thank you. Our next question is coming from Cory Carpenter of JPMorgan. Please go ahead.

Thanks for the questions. Hope everyone is well. Two for me as well. Just Rex, maybe as you reallocate marketing dollars to direct-to-consumer, and now with Jason on as CMO, could you talk a bit more about your marketing strategy this year? And maybe what you’re seeing in April around new customer additions in that channel, in particular? And then maybe secondly, on Streem, while it’s still early, curious to hear early adoption reception you’re seeing from your service providers and real estate partners? And what type of role that could play longer term? Thank you.

Okay, great. Good to hear from you, Cory. Yes. So from a Streem perspective, we’ve accelerated the rollout of Streem, both for contractors as well as real estate agents. Both have been well received allows our realtors to really provide virtual showings in this environment. For our contractors, they’ve really leaned into the technology and that this really allows them to see what the issue is without having to be inside the home and help that homeowner. So both of those have been, I think, very well received. We continue to be very bullish about Streem and the Streem team, still working on partnerships and that type of thing. But – I think this is probably one of our – certainly, one of our better acquisitions and really loving what the Streem team has been putting together during this financial crisis. And I apologize. I think I’m having a senior moment here. What was your first question?

Oh, yes, just on direct consumer marketing, more – maybe more in your strategy there this year?

Yes, yes, sorry. So from a direct-to-consumer perspective, as other companies have pulled back, we’re actively leaning in. So we’re seeing an incredible amount of marketing efficiency, especially in the broadcast segments. I mean, you can imagine some of the segments that pulled out of broadcast ads. That really brings down the cost to make it more affordable for us. This – serendipitously, we had a new ad campaign rolling out at the same time. So taking advantage of much less expensive television ads – from a digital perspective, we’re seeing less pressure from a digital marketing perspective. So we’ve really leaned in from that, and we’re seeing great traction, especially in April. And so I’m not – we’re pretty bullish on direct consumer.

Sir, does that cover all your questions?

Yes. Thank you.

Okay, thank you. Our next question is coming from Chris Gamaitoni of Compass Point. Please go ahead.

Good morning, everyone. I wanted to follow-up on that last question. For direct-to-consumer marketing, strategically, are you focusing – is it in markets that you’re historically very strong? Or are you working – or is it more focused on markets that maybe your penetration has been less, if I think back to the spin-off and the smile state graph? Just wondering kind of where you’re targeting, where you’re trying to fill capacity and strategically, how you’re thinking about direct-to-consumer marketing?

Good morning. Yes and yes. So we have both a national strategy as well as a local strategy. So certainly, moving into kind of – have more and geo-targeted advertising from a digital perspective, from a broadcast perspective, they’ll tend to be more national. But Jason and the team have been digging in on really be able to target our marketing to the areas that we want to focus on. But it’s not just smile states. We’re seeing good traction in other places in the U.S. early – prior to COVID-19. So really with the growth the team has been able to drive kind of outside the smile states. And then obviously, we want to lean in even more where we have a strong position. So both nationally and locally, we’re focused from a DTC perspective.

And what’s the decision-making process to identify who you target, geo target? Not asking a specific market, asking if – how do you find markets to look at versus one or to focus on versus ones you don’t?

Well, first thing I want to do is look at our supply position, right? So obviously, you don’t want to target areas where we might be behind from a contractor perspective. Kudos to our contract relations team, they do a great job in terms of ensuring that we have a really good supply position. So we work together, looking at where do we have supply and where can we drive more than anything. So that’s – from a geo or local perspective, that’s just 1 strategy. And then from a broadcast perspective, obviously, you want to track target areas where you think there, you’ll have more efficiency as well. So there’s some data science behind kind of where we target.

Okay. And then regarding Streem, how have you thought about the monetization opportunity from kind of rolling out both I think is there differences in contractors or realtors? What do you think that opportunity is? Where are we in the process? Any additional color on how to conceptualize the potential benefits, whether it’s synergistics just through additional marketing channels, better loyalty? What is the current situation and your expansion of that doing for your future business? How do you think about it?

During the crisis, we provided free of charge to both contractors and realtors as we come out of this. Then certainly, there is a potential for either deeper relationships with our realty brokers. So this could be something we provide as a service to some of our top peers. There’s a potential revenue model behind that. There is a lot of different ways we are looking at it from a realty perspective. From a contractor perspective, they have already asked, can they maybe for all their business, so certainly, there is an opportunity there to monetize what we’re thinking through for preferred contractors. This is something that we offer them for free. Again, that’s all the things we’re working through. And the other real value of Streem beyond those two channels is that I see a big opportunity for third-party expansion as well. I mean the level of outreach during this crisis from people who wanted to use Streem was pretty phenomenal. So that’s making sure that we think about how to monetize those opportunities as well. The team very much focused in that area.

Alright. Perfect. Thank you so much.

Yes.

Thank you. Our next question is coming from Ralph Schackart of William Blair. Please go ahead.

Hi, good morning. Two, if I could, please. Rex, you touched on this a bit in the prepared remarks. Just in terms of – I think you said that frontdoor will emerge stronger outside the crisis. Just curious if you could maybe give us a couple of points on how you’re thinking about that. A little bit more color on that would be great. And then you also – Brian shared some metrics, how the business performed and the financial crisis in ‘08. Just curious how COVID compares to ‘08 at this point, both from customer behavior and then the claims that you are observing now versus then? Thank you.

Yes. So I think that since we launched or spun the company out in October of ‘18, you certainly have seen kind of the journey with us and that we’ve definitely – are running the company on the inputs and make sound decisions on both data and really applying technology to problems. This pandemic, with 33 million people unemployed, I think will be far – have a far greater impact than ‘08 and ‘09. And I think we have opportunity to kind of outpace that growth that we saw in ‘08 and ‘09. So that really speaks to the resilience of the business model. One of the things that we have always said is that if one channel has softness, clearly, we are not thinking the level of softness from COVID-19, but you do have the opportunity to lean into other channels. So, the marketing efficiency we are seeing in the direct-to-consumer channel, while it may not offset completely the pressure we are seeing in real estate, we are seeing growth in that channel. We are seeing more opportunity and we are taking advantage of that opportunity. I also think the two reasons someone purchases a full service plan and the value proposition is really around budget protection and convenience and now that our – we are seeing stable renewal rates, I think that speaks to how customers value that product. They are not considering it a discretionary spend if you will. And then we are well positioned with a pretty strong balance sheet. So we see there is opportunities – there could be opportunities in the market to potentially new tuck-in acquisitions to have us come out even stronger. So just as Brian mentioned in his prepared remarks, I’m just as bullish on this business as I was in October of 2018. And I think we are just getting started.

Thank you. Our next question is coming from Kevin McVeigh of Credit Suisse. Please go ahead.

Great. Thank you. And I hope you all stay safe. Rex and Brian, can you give us a sense – it sounds like the business transitions better this cycle than it did in the GSC, recognizing that GSC was obviously housing-led. Any puts and takes as you think about just the trajectory of the business? And then is it kind of the ability to leverage Streem and things like that that allow you to kind of navigate this more efficiently or just any thoughts on the two cycles as we think about the business, near and medium term?

Yes. So I think that certainly, when it comes to where we are today versus ‘08 and ‘09, as I mentioned before, we’re a lot different company in terms of how we operate. Certainly, the level of data and how we drive to the decisions is very different, just to explain the resiliency of both direct-to-consumer and our renewal channels – our renewals obviously two-thirds of our revenue. And then in times of crisis, you’re reaching out to your partners in both real estate and your contractor force, and you’re offering them tools to make their life better. One of the things we’ve also done for our contractors has been to send out – or a process of sending out 200,000 and PPE masks so that they can do their job. That – those things pay dividends longer term. I think we’re building incremental revenue streams like – not only Streem, but Candu will absolutely become a meaningful revenue stream for us in the future. All those things allow us to be even more resilient than we were in ‘08 and ‘09. And like I said before, I think this pandemic will certainly overshadow what we saw in ‘08 and ‘09.

Would that be on kind of the prime and the non-prime contractors the ability to kind of leverage Streem or is that primarily the core contractors?

Kevin, it’s hard to hear you. Can you repeat one more time?

Sorry about that. For Streem, would that be across the entire contractor spectrum? Or would it be more kind of your focused, new prime contractors as opposed to non?

Well, it’s certainly – we always start with our preferred contractors because we have the deepest relationship with them. But certainly, I think Streem, longer-term, could be leveraged by any contractor. The – it’s a game changer in terms of how you virtualize support, and a game changer in terms of how you virtualize not having to immediately go – or roll a truck and immediately go into someone’s home to see what’s wrong. You can start a video chat with that person and begin to really explore and understand, capture that data so that when you show up, you have the right part, the right place and the right tech. So we’re just getting started with Streem.

That’s helpful. And then just one quick one, I appreciate the Q2 guidance and then it sounds like you could potentially reengage full year in the next quarter or so. What would you need to see to kind of reengage on the full year guidance? Are there any kind of particular areas that you would want to see a little bit more visibility on before you kind of reengage in the full year outlook?

Yes. I mean, certainly, with 33 million people employed, we want to make sure that this doesn’t get worse. Two, as America kind of goes back to work, when that will be, it will be a light switch moment. So I think certain cities and regions will unlock sooner than others. And those are all, like tons of uncertainty that we just need to look at. Clearly, from a real estate perspective, it just depends on how fast that comes back. I mean, obviously, the summer months are better than other months because a lot of times, families are moving in between the school cycles, which schools have definitely been disrupted as well. So there’s a lot of unknowns. And if those unknowns become known as we move into the August time frame, I think we’ll be more ready to provide guidance for the year.

Super. Thank you.

Yes thank you.

Our next question is coming from Brian Fitzgerald of Wells Fargo. Please go ahead.

Thanks guys. One quick clarification and a couple other ones, with Streem, did you say you’re extending it for free to all contracts? Is that just for now during COVID and for how long? And then, does it roll into a licensing type of situation? That’s just a clarification. And then a follow-up to the previous conversation, are you able to shift more volumes into your preferred contract networks, with work being potentially a bit slower than normal? Or do you want to prioritize spreading around the service calls around a bit to kind of continue to develop the contractor network? And then one last one, sorry, I’m just curious about your view of the level of fragmentation in the space? And are there roll up opportunities in geographies or tool sets that are more apparent now than ever before as we’re kind of in this macro dislocation?

Sure. So in terms of Streem, we’re offering free for 90 days. We’ll figure out how to monetize it after that point, the teams, whether your brokerage firms or contractor teams, kind of working both those angles. But during the crisis, we don’t want to profit from that. We want to be helpful to our real estate and contractor partners. In terms of the preferred contractors, definitely, we take a very algorithmic approach to how we dispatch our contractor network. We’re seeing, obviously, a higher number of preferred contractors. We want to make sure that we keep them busy. Obviously, it can’t be 100% over the network. So we have a very, I think, good algorithm of how to dispatch the jobs, and we will continue to look at that, but I think it’s been working very well through this crisis. One thing I will say is that although a little lighter in April, we’re still very busy. We’re an essential service. And right now, there’s a key wave in – across Arizona, California, we’ve certainly been very busy. So not having work hasn’t really been a big issue for us. And then last, in terms of roll up opportunities. Certainly, we’re coming from a position of strength and as both a company and our strong balance sheet. We’ll continue to look at opportunities. And I assume multiples will come down from this and whether that’s tuck-in opportunities for core home service plan business or technology tuck-ins that will allow us to propel our Candu strategy faster. We will continue to look at those things. So we are – we assume that there will be companies out there who don’t have a stronger balance sheet and there may be an opportunity there. So hopefully, that answers your three questions.

Yes. Thanks, Rex. I appreciate it.

Yes, thank you.

Our next question is coming from Youssef Squali of SunTrust. Please go ahead.

Great. Thank you, guys. And I hope you are all well. Two questions. I guess for me as well. The first is around something, Rex, you said in your prepared remarks about April claims incidents were below prior year, which, obviously, had a very nice effect on your gross margin. I wanted you to maybe speak to weather versus maybe sheltering at home type of impact, obviously, because the two would have kind of quite different outcomes, particularly if the risk of seeing a spike in claim incidents post-COVID, if it’s just a shelter in at home situation? And second, a follow-up to Brian’s question about the balance sheet. And by the way, congrats on, obviously, being in a really, really strong position in this kind of environment from a financial standpoint, balance sheet standpoint. But as you look at potential M&A, can you speak to maybe tech versus – or tuck-in technology kind of enablement acquisitions versus geographic expansion? You have a very strong presence in certain areas of the country, not in others if you can maybe just speak to availability of basically, assets to buy throughout the country? And then, I guess, related, just in terms of your debt leverage, I think you’re at 2.2, Brian said earlier. How high would you let that spike in pursuing the right acquisition?

Yes, good to hear your voice, Youssef. I think from a – I will take the last one first and I might have to – you might have to remind me of the other questions. But certainly, we are – we take a very, I think calculated approach to M&A. There is obviously a lot of things out in the market. But we want to make sure that one it would pass from a culture perspective. Two, we are not giving away all the synergy value just to get the asset. So when it comes to either a regional tuck-in from home service plan or technology, we really look at both. Certainly, there is not a lot of regional players out there that are our scale. I think there might be some smaller ones that may provide some value. But from a technology perspective, we do think that there is – there is technology out there that can help propel our vision and we are not prepared to kind of focus on the call, kind of what areas, obviously, that makes the price go up. So we do see opportunities in the technology space. We’re being opportunistic where there’s opportunity in the home service plan space. In terms of how high we’ll let the leverage go, that’s really – we haven’t had those conversations. Certainly, we came out almost 4x and we’re now down – I think we stand to be down close to two, our goal of two this year, for sure. So we can de-leverage very quickly. I don’t know what the right number is, if it’s four or higher, but we haven’t found an acquisition that would challenge those assumptions. So all those things, we have to really think through, but obviously, going above four would, I think, raise some eyebrows and we just have to – we have to think through it. We can de-lever very quickly. And then I am sorry, your other two questions were what?

Yes. My other question was just around something you said in your prepared remarks, around April claims incident coming in below – just trying to figure out what’s weather impact with sheltering at home and how to look at it maybe in future quarters, particularly, if there is a spike in claim incidents post-COVID?

Yes. April is kind of a shoulder month for us. So it was down slightly. It wasn’t like a major decline. Certainly, probably needs a little more analysis on kind of what was weather and what was the other impacts? I think there is some concern out there of, while people are just kind of holding back and they don’t want you in your house. I think if it’s certainly something that you need to sustain life, like hot water and air conditioning and heating then certainly you are willing to have someone come in wearing the proper protective equipment to provide that essential service, maybe if it’s a leaky faucet or something you are willing to put off for a little while. So I suspect that it’s a mix of the two, but I’m not expecting a tidal wave of claims from folks who have been sheltering in place. I think there – certainly we will have our normal peak demand coming up in the hotter months, but I am not expecting a big wave. I think it was down slightly, probably due to weather and maybe a small impact to people who are sheltering in place. But April is a shoulder month. So a lot of times, you will have favorable weather in April and it pushes into May. So I think nothing material I would point out.

Okay. Thanks Rex.

Yes thank you.

Thank you. At this time, I would like to turn the floor back over to Rex Tibbens for closing comments.

Thank you, operator and thank you to all our analysts who participated on our call today. We are making adjustments as a result of COVID-19, and I would like to thank our team again for working incredibly hard to transition our entire company to a work from home environment while seamlessly maintaining our service levels. It was truly an amazing feat. frontdoor remains well positioned during this period of uncertainty. We have a strong business model, a substantial liquidity and a resilient workforce that will all allow us to become more nimble and stronger as a result of this unprecedented crunch. I hope that all of you and your families stay safe during this time, and look forward to seeing you in person again soon. Thank you.

Ladies and gentlemen, thank you for your participation. You may disconnect your lines and log off the webcast at this time and have a wonderful day.