Ladies and gentlemen, welcome to Frontdoor's Fourth Quarter and Full-Year 2025 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, 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 Fourth Quarter and Full Year 2025 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.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, February 26, 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 this 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, Matt Davis. We had a great 2025. But before I get into the financial highlights, here are 3 key takeaways for today's call. First, we expect ending member count to grow in 2026. Second, we are raising our long-term adjusted EBITDA margin target. And third, this business generates significant cash, and we are on track to complete our current share repurchase authorization by this time next year, well ahead of schedule. With that, let's get to the financial highlights for the year. Revenue increased 14% year over year to nearly $2.1 billion. Gross profit margin increased 150 basis points to a record of 55%. Net income grew 9% to $255 million. Adjusted EBITDA grew 25% to $553 million, and we bought back a record $280 million worth of shares. Now before we step into 2026, I want to connect our results back to our priorities for 2025 laid out on Slide 5. Our first and most important focus is to grow and retain home warranty members. And in 2025, we achieved an important milestone. We stabilized our member count. This was supported by traction across the business with growing demand and improving conversion in DTC, strong second half momentum in the first-year real estate channel and higher renewal rates. Our second strategic priority, scaling non-warranty revenue is playing an important role as we expand the way we serve our members and create value. The new HVAC program grew an impressive 48% to $128 million, and we still have a massive opportunity ahead. We also took the next step in broadening our portfolio by launching our appliance upgrade program in select markets. And we're complementing that momentum with outside partnership opportunities with our contractor network, such as our Moen program that delivered $15 million in its first full year. Finally,…

Thanks, Bill, and good morning, everyone. With a record 2025 and a strong fourth quarter, our results reflect solid revenue growth, expanding profitability and excellent cash conversion that led to record amounts of share repurchases. Let's start on Slide 17. Here, I will quickly cover the financial highlights for the fourth quarter. Revenue grew 13% versus the prior year period to $433 million, reflecting higher volume from 2-10 as well as higher price. Gross margin grew 70 basis points to 49%, reflecting low single-digit inflation and a continuation of our strong operating performance. Adjusted EBITDA grew 21% to $59 million. Fourth quarter adjusted diluted earnings per share was $0.23. And lastly, during the fourth quarter, we returned $87 million to shareholders via share repurchases. Now let's pivot to full year 2025 results, starting with revenue on Slide 18. Revenue increased 14% year over year, surpassing the $2 billion mark. This was driven by 2-10 volume, expansion in non-warranty and other and approximately 3% from higher price. On an organic basis, revenue grew 3.7%. From a channel perspective, renewal revenue grew 10%, driven by higher 2-10 volume and price. First year real estate revenue grew 13% from the addition of 2-10. First year direct-to-consumer revenue grew 4% with higher volume, partially offset by lower price and non-warranty and other revenue grew 66%, driven by the success of our new HVAC and Moen programs as well as the addition of new homebuilder revenue from the 2-10 acquisition. Now moving to Slide 19 to discuss our gross profit and margin. Gross profit dollars grew 17% versus the prior year, exceeding $1 billion. Gross margin expanded 150 basis points to a record 55%, driven by higher realized price, low single-digit cost inflation as operational execution helped offset macro pressures and favorable weather impacts of…

Thank you, Jason. Once again, Frontdoor has delivered. We have had 3 great years. As you know, one of the hardest things about positive business trend -- business trends like ours is now we have to overlap last year's results, let alone the last 3 years of outsized performance. But I am confident in our strategy and our team, and we've got momentum. Now I want to close with the 3 things I told you upfront. First, we are growing member count. This has been a key focus as we've kept home warranty membership at the core of all our business objectives and growth initiatives. Second, I'm proud to be raising our long-term adjusted EBITDA margin target. This comes with continued efficiencies, effective cost management as well as technology and AI enhancements. And finally, we generate a lot of cash. We bought back a lot of shares, and we're not done yet. We will continue this trend into 2026, returning capital to our shareholders at an impressive rate. With that, I want to thank everybody for joining us today, and we'll now turn it over to the operator for Q&A.

[Operator Instructions] Our first question is coming from Sergio Segura with KeyBanc.

I have a few. So I guess first one on just pricing growth, just how we should think about it with the promotional pricing strategies, specifically in the DTC and real estate channels, how we should think about pricing growth for 2026? And then as those customers graduate to renewal customers, does that create any initial drag on the renewal channel growth for pricing? That's question number one.

Yes. I'll take the first part, and I'll let Jason handle the second part. Our pricing strategy remains the same. We will not be increasing the number of discounting days on the 50% off program we've been running. But we're very pleased with the urgency that, that brings to prospective members, and we'll continue to employ that, but not at an increased level. We are going to move into the real estate channel with some promotional pricing directly with agents. It will not be anywhere near the level of 50% off, but we've tested it, and we've seen it's been effective at spurring action to drive attach rate. So we'll pulse that into the into the program. And like I said, it's proven to be a strong benefit to us in DTC, and we think it can be like that in real estate. Jason, I'll let you take the second half question.

Yes, Sergio. As Bill mentioned, I think we're real happy with the results from the pricing. And maybe what I'd do is highlight some of our comments from the call on the renewal rates. As we -- this year was our first full year in thinking about promotional pricing. So you'll see that kind of flow over into 2026. But our renewal rates have been extremely strong in that channel as we've transitioned them to the renewal book. So we're pretty pleased with the balance there on how we're able to add the member count and looking at total overall revenue.

Got it. That's helpful color. And then a second one, if I could, on the real estate channel. Could you guys just speak to where attach rates and your market share within real estate is now? And then for your 2026 outlook, what are your expectations for existing home sales and attach rates for 2026?

Yes. In terms of existing home sales, there's various estimates. NAR is always very rosy in their predictions. We anticipate slight growth, substantially the same, but there may be -- we've seen a lot of reports around 3% or 4%. So that's what we modeled. In terms of attach rates, we don't -- we're not going to disclose exactly what our attach rate is. In terms of our share, it continues to be about one-third of the real estate side of the business. And -- but that is clearly the focus of our real estate team is to drive those attach rates. And like I said, with some of the work we're doing on increasing localized investment, dealing directly with real estate agents and the promotional pricing I just spoke of, we anticipate -- we're forecasting 5%-member count -- sales unit growth in 2026.

Our next question is coming from Jeff Schmitt with William Blair.

You're assuming SG&A expenses stay kind of roughly flat in '26. And I know a good portion of that is marketing costs. Could you speak to how you'll keep costs flat there? And do you see that having any impact on growth?

Yes. I think from an overall perspective, we expect sales and marketing to also be relatively flat year-over-year. With the team -- working closely with the team, we've gained a lot of efficiencies in how we go to market, in particular, some of the tools Bill mentioned earlier on the call, as we think about our Warrantina campaign really taking hold, kind of now in its second edition, use of AI tools and a couple of other things. We look to be much better from a sales and marketing conversion standpoint.

Yes, I think that's true. I think there's always a tendency or an urge to spend more, but I'm proud of the marketing team and the efforts that Kathy Collins and her team have done, just driving much more efficiency, much more effectiveness and I think that we feel good about how the plan is laying out. Jason, I don't know if you mentioned, we may shift a little bit quarter-by-quarter in terms of the spending to go between -- depending on the drive period we have and look for new Warrantina commercials during March Madness, by the way. So just a little commercial for that.

Good. All right. And then you mentioned that you launched the appliance upgrade pilot recently. How long do you plan on staying in that pilot stage? And then maybe just more broadly, how do you view that revenue opportunity compared to HVAC?

Yes. A couple of things on that. So we are hoping to launch that post peak later on in the year, around Q4 is our current plan. We're still working through in the markets exactly the model that we have. Obviously, we're modeling it, if you will, on the way we've approached HVAC. What was the second part of the question?

Just that how do you view the revenue opportunity? Yes.

So it's going to be a different revenue opportunity. I apologize, Jeff. It's going to -- because obviously, the price point between HVAC and appliances is quite different. There are many more appliances. So we do think that there's a real opportunity here. But that's what we're working through. And the replacement rates on appliances are also less than they are in HVAC. So that combination gives us a lot of confidence that this can be a business of some scale. But more to come, but we're still trying to work through, and I want to make sure we get this right before we just launch this out there. But we're targeting towards the end of the year. Jason, do you want to add some?

Yes, just a minor impact on 2026 growing into -- yes.

Our next question is coming from Mark Hughes with Truist.

The -- what's your assumption in terms of the kind of the real estate market for this year, talking about steady real estate revenue, some discounting. What do you think is going to happen? What's your baseline case?

Well, I've really become a student of this market over the past few years. But I think NAR is very bullish on where existing home sales are going to go. I don't think we share that enthusiasm. We think it's going to be more a modest increase of 3% or 4%. A lot of it depends on interest rates, but we are encouraged by the increase in inventory. We're encouraged by some of the things we've been doing with our real estate team and the like and their direct engagement with real estate agents where we've got a lot of hopes for how our promotional pricing will impact our units. So I think we feel pretty good about that, but we don't anticipate a large increase in existing home sales. If it comes, that would be great because that will -- this all becomes an attach rate game.

Yes, yes. How about Assurant has launched a home warranty product. They've got some relationship with Compass. Does that -- how does that impact you all, do you think? What's your assessment of that initiative?

Yes. Assurant is a terrific company. I've known a couple of the Board members there, and they've always spoken highly of the business around the work they do in auto warranties and cell phone warranties. And in reading about what they stated about coming into home warranty, I'm encouraged by them talking about looking to expand the category, which is certainly something that I think will benefit all of us as they enter. Having said that, there are a couple of things I do want to point out. We've had a long-standing marketing services agreement with Anywhere. We've moved on from that. They signed up with Assurant. But it's not an exclusive arrangement. It's really a marketing agreement. Agents continue to have the freedom to discuss and select whatever home warranty product they feel best meets their needs. So that's why we're -- we've got a lot of agents we've worked with for a lot of years who choose AHS. So we are confident that we will do just fine. The other thing is that I think they'll find is we cover 27 systems and appliances throughout the home, not just appliances. We have a contractor network. That's the advantage of being in this business for 50-plus years. We have contractors that have been with us for a long time. And I think notwithstanding that, we bring new contractors on all the time. They are vetted, they're trusted. They're on our schedules. You can see from our retention and renewal rates, how strong that's been, especially as we increase our preferred contractors. So we have the full array of service trades, not just appliances. So I think we're still in good shape, and we're just going to execute our plan and our model.

Very good. I'm not sure if you've elaborated on this. I missed the first question or 2, but the B2B sales channel development with builders, how meaningful could that be? And could you maybe elaborate a little bit on what you're looking at?

Not meaningful in 2026, and that's in development. We've been talking to the builders about various ways that with our supply chain, we could help them. We have a number of small and midsized builders. And with our purchasing power, they might be able to put together a system where we can help procure -- help them with procurement. But early days with that, but I think it's just another way that we're thinking about how we leverage our system to find new revenue streams.

Yes. And then promotional or marketing spend in 2026 versus 2025, how are you thinking about that?

In line with 2025, around the same level of dollars. And part of that is we feel really good about the efficiencies we've gained both in search marketing. We're obviously jumping on AI with the way that is advanced as a search tool. So we've had to adjust our algorithms to basically make sure that we can appeal -- we can drive efficiencies through that, if you will, channel. So we think that we've kept it the same. We've been -- we've also done a lot of work on our website and SEO conversion. So I think a good marketing plan these days covers a lot of areas. And I think that we feel good about where the total marketing spend will be at.

Yes. I would probably add, Mark, the one thing you will see this year, we'll probably pace a little differently through the year. Bill and I talked about kind of coming out of Q4 and some of the momentum we have to stay really balanced. So we'll probably -- you'll probably see us load a little more sales and marketing in the first half of the year than prior year. But overall, as Bill said, consistent with prior year spend right now.

Our next question is coming from Cory Carpenter with JPMorgan.

I had 2 questions. Maybe Bill, I want to start with the revenue. Good to see you reiterate your 2028 target. I know that in the acceleration that you expect in '27, '28. When I look at Street numbers, I think people are generally a little bit below that today. So that may be helpful. Could you just bridge us on kind of how you're getting to that number and that accelerating growth and what you're seeing today giving you confidence in reiterating that framework?

Yes. And -- Jason can certainly jump in. What we're trying to do, and I mentioned that in the script, the durable growth engine, what gives us confidence that we look for an increase in the revenue line in '27 and further in '28 is as we've had success and continue to drive success with first year units, that's going to fold into the renewal book, assuming as we do that we've put together a strong program of keeping our members retained. We have reduced the number of cancels we have. So I think it's just really a mathematical exercise that as we fill the top funnel and it feeds through into the renewal book, with our dynamic pricing model, we can be very consistent with what we realize in pricing. So as we model it out, we think that based on the guidance we gave for '26, we still think the $2.5 billion is the right target. But Jason, do you want to add anything to that?

Yes. The only thing I'd add is we also see a lot of opportunity with non-warranty and lots of different ways to attack that part of the business. I think you're spot on to that...

And then -- sorry, second one, just claims cost inflation was a big topic. I think it ticked down actually this quarter. I think it was 4% last quarter. You're saying low single digit in 4Q, and you guided to low single digit next year. One question we get a lot is just around tariffs. Of course, there's been a little bit of a recent reflaring of uncertainty there, if you will. So maybe could you just remind us how tariffs are or not impacting you and kind of what you're assuming in your outlook for that?

Yes. I think just to comment on '25 and how we close out the year. The teams have done an excellent job all year long, managing through both the contractor network. So a big shout out to the contractor relations team as well as our supply chain team. I think we've managed through that. Historically, we talked about the way we would manage through that is around price, trade service fee and operational execution, and we've certainly done that. For our outlook, Bill and I, we are constantly talking about tariffs on, tariffs off, tariffs on, tariffs off. But we think we are in a good position for low single digit again this year where the team can manage through that with those same tools. Preferred contractor network usage is at a high point in the mid-80s. Supply chain keeps doing well, has lots of options between our suppliers for parts and equipment. Our biggest exposure is probably in appliance trade when we think about circuit boards and a couple of other products from there. In HVAC, we're less exposed, a lot more domestic manufacturing. So I think we'll handle it pretty well.

Yes. That's why what's been a benefit to us is that beyond appliance, we're pretty much domestically sourced. So that is certainly why we've been able to maintain a low single-digit approach. And certainly, we're guiding to that.

Our next question is coming from Ian Zaffino with Oppenheimer.

This is actually Isaac Sellhausen on for Ian. On the home warranty count up this year, I know you touched a bit on the drivers in the prepared remarks and the higher growth in the first-year real estate, but maybe you could just provide more color on mix expectations for first year real estate and DTC, that would be great.

Yes. We're looking at 5% growth -- unit sales unit growth for 2026. We think of each channel, we're anticipating doing about the same. Obviously, there is a -- it's about the 3:2 ratio of DTC to real estate in terms of size. So I think that we anticipate continuing. And like we said, we look at it all as first year growth. There are different retention rates and renewal rates as we go forward, but we look for 5% each for each of the channels.

Okay. Understood. And then as far as first quarter guide, just curious if you guys anticipate any weather headwinds or anything baked into that outlook?

I think our guide for Q1 kind of factors in the weather we've seen year-to-date. And I'd say we're probably expecting what I'd call normal weather for the balance of the quarter.

Yes. I think the other thing, Isaac, is especially with some of the Snowmageddon and bomb cyclones, these become insurance claims as opposed to warranty claims. So notwithstanding the fact that we want to certainly serve our members in whatever way we need to. But I think Jason and team have done a good job of taking that into account as we look at the guide.

Our next question is coming from Eric Sheridan with Goldman Sachs.

Maybe just put a finer point on a lot of the topics we've talked about, especially in the prepared remarks. When you think about the next 12 to 18 months, what are your must do in terms of investing in the business that align with your strategic priorities? Because I guess we're trying to think through some elements of upside or torque on the margin side of the equation as some of those investments come more to the good as you think over the next sort of 1 to 2 years.

Yes. I think that we're trying to be very balanced. We're excited about the growth engine that non-warranty can provide. So as we continue to bring -- put together the platform and the process to make that more efficient for our contractors, we like the fact that we -- it's a low cost of acquisition channel as we use our contractors and there's great benefit for the contractors in having larger jobs to handle. I think in addition to that, it's always the sales and marketing investment, as we talk about our #1 priority. We are holding steady on the actual dollar amount, but I think the team, we've gotten more efficient in the field. We're working very hard with what we call our integrated sales or inside sales group. We're using AI tools to help the sales agents with various prompts and objections that they get. It's really big. It's early days, but we're really pleased with how that is helping us. And then like we said a few times, with the creative horsepower we're showing with the enhancements we've made to the website and SEO, our work in the whole AI area of search. We think we can do that in an efficient way. But really, we're trying to stay balanced on our investments while having a real eye toward our #1 priority of growing ending member count. The other thing I would say is the great thing about our model, and I talked about it, Jason, I talked about it throughout, we turn up a lot of cash. We have very low CapEx relatively. I think we're guiding, Jason, to $30 million to $35 million. So with the cash generation we have, we're fortunate that this is a model that requires relatively low CapEx.

Thank you. Ladies and gentlemen, this will conclude today's question-and-answer session and also today's conference. You may disconnect your lines at this time, and we thank you for your participation.