Ladies and gentlemen, welcome to Frontdoor's Fourth Quarter and Full Year 2021 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 afternoon, everyone, and thank you for joining Frontdoor's Fourth Quarter and Full Year 2021 Earnings Conference Call. Joining me today 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 in the Investor Relations section of Frontdoor's website, which is located at investors.frontdoorhome.com. As stated on Slide 2 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 24 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'll now turn the call over to Rex for opening comments. Rex?

Thanks, Matt, and good afternoon, everyone. Turning to Slide 4. Our team delivered another strong year as we continue to build a solid foundation for success, and we remain extremely optimistic about Frontdoor's long-term vision. Before I review our near-term objectives, I would like to take a moment to ground us all on why we believe there's incredible opportunity ahead of us at Frontdoor. The broader home services industry is roughly $500 billion, with repair and maintenance comprising roughly half of the market opportunity. Our core home service plan business is primarily focused on home repair, but we're also growing into home maintenance services through our Shield Platinum offering and our ProConnect business more broadly. The home service plan category remains significantly underpenetrated. There are an estimated 6 million home service planning customers in the U.S. compared to roughly 130 million single-family homes for a penetration rate of approximately 4%. This is a substantial opportunity in the home repair category alone and creates two distinct opportunities for Frontdoor. First, we are reimagining how homeowners consume home services and believe there is a real opportunity to create a digital-first service experience, whether that be for home repair or home maintenance. We need to eclipse the days of sending out someone to understand the problem and move to the days where we can diagnose and troubleshoot remotely, providing a digital experience that is good for the customer, cost effective for our company and better for our environment. Second, beyond our core home service plan business, ProConnect and Streem are pivotal to providing deeper category penetration of the home services industry. ProConnect is the emerging on-demand business that straddles both home repair and maintenance services while our Streem technology is the enabler for the entire home service industry. Used outside of our traditional…

Thanks, Rex, and good afternoon, everyone. In 2021, the entire Frontdoor organization did a tremendous job of dealing with significant external volatility. Despite ongoing customer acquisition, service and supply chain challenges presented by the pandemic, our team delivered strong year-over-year improvements to our financial results. I'd like to start with a high-level review of our fourth quarter financial results shown on Slide 11 and then focus on the recent steep rise in inflationary cost pressures and our response to mitigate those costs as we enter 2022. Fourth quarter 2021 revenue increased 5% versus the prior year period to $340 million as a result of higher pricing and a mix shift to higher priced products in our home service plan business and strong growth from both ProConnect and Streem, offset in part by lower volume in first year real estate. ProConnect and Streem revenue, which are included in our other channel were $9 million and $3 million, respectively. Gross profit increased 2% in the fourth quarter versus the prior year period to $141 million, and our gross profit margin was 41%. Net income was $7 million for fourth quarter 2021 versus $2 million in the prior year period as higher gross profit and lower interest expense were partially offset by increased investments in sales and marketing and technology and higher personnel costs. Adjusted net income increased $2 million over the prior year period to $9 million. Adjusted EBITDA was $28 million in the fourth quarter or $4 million lower than the prior year period. And I'll now provide context for the year-over-year decline. Let's turn to Slide 12 and I'll discuss the recent acceleration of inflationary cost pressures in the second half of the year that impacted our financial results in the fourth quarter. In short, claims costs came in significantly…

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 our guidance is limited to the outlook we've provided. Operator, let's open the line for questions.

[Operator Instructions] The first question is from the line of Eric Sheridan with Goldman Sachs.

I know we'll talk a lot about inflation today, but maybe if I could start with a bigger picture one. When you think about those strategic priorities for capital and the way you take the business is aligned for the medium to long term. Can you help frame up for investors what you see as some of the big picture items where you're making decisions to build internally on the product side and position the Company against dollars invested in the business versus opportunities where you might be able to accelerate some of the opportunity by going on strategically allocating capital towards buying assets and integrating assets against the sort of large-scaled opportunity over the longer term?

Sure. Thanks for question. This is Rex. We're -- we continue to focus on growing demand in our core home service plan business that requires additional marketing spend as we grow. And then we'll continue to also advance our technology platforms to make it easier for customers to consume our services. And then we talked a lot about being digital first so that we start to change how the industry provides services to customers. So along those lines, and as it relates to both customer experience and even retention, we'll continue to make the investments needed in the business. And if we see opportunities inorganically, certainly, we continue to look at those things. So with the, primarily, game changers such as we acquired Streem back in 2019, we continue to look for technology that will help us kind of in that build versus buy decision.

The next question is from the line of Brian Fitzgerald with Wells Fargo.

On inflation, it's been a background factor for a while now, and thanks for the color on Omicron and shelter-in-place and prior period claims coming in and so some delayed visibility unique now. Is there anything else to call out in terms of the pace of change there in terms of causing it to inflect up as you're coming through the fourth quarter? In the deck, you talked about new products and services that you introduced and that had an impact. Maybe some more color there? And then at an addendum there, as Omicron, as that wave is hopefully crest at this point, are you seeing any relief on labor rates or ability to source more from your preferred network?

It's Rex. I'll start and hand over to Brian as well. In terms of our product mix, we -- last year, we launched our kind of Good, Better, Best strategy, Shield Platinum being our highest service product in terms of offering both more coverages as well as maintenance services as well. And it's really taken off. Customers seem to really enjoy the product. So that's what Brian talks about, the kind of that mix shift, shifting more to our Platinum product, which we think helps us from a longer-term retention perspective. As it relates to kind of labor, one of the things that we have focused on this year is really strengthening the core of our contractor base as it relates to our preferred contractors, so we increased our percent of preferred contractors this year as well. We continue to focus in that area. We are seeing, I think -- we saw a tightness in terms of more of the fringe, our network contractors that we kind of used sparingly. Obviously, I think they were having a hard time gaining labor as well. But I think one of the great things about Frontdoor and kind of the moat that we've built is this symbiotic relationship with our preferred contractors that seemed to really help us this year as well. Brian, anything else you'd add from an inflationary perspective?

Yes. Thanks, Rex, and thanks for the question, Brian. And hopefully, the context that provided, there was a lot of a lot of context. Hopefully it was helpful to you. The -- I think we've got a pretty good handle on the cost once we got visibility in November and December, what transpired in the third quarter and then into the fourth quarter. So I feel fairly confident we know what's going on as far as our costs. The only exception to that could be what's going on in the Ukraine and with Russia, and I'm sure the oil company is going to take this opportunity to raise -- the cost of oil and gas will go up as a result. So the fuel impact on our contractors will probably be something we have to take into account. But I think overall, we have a pretty good feel for our cost at this point.

The next question is from the line of Cory Carpenter with JPMorgan.

I'm going to stick with inflation. Just curious, how do you think about how much of elevated costs you're seeing are temporary versus perhaps some structurally higher costs going forward? And then relatedly, last quarter, you mentioned taking price and some situations is leading to slightly more cancels than expected. So I guess my question is how much more room do you feel like you have on taking price going forward, especially if some of the inflation proves to be stickier?

Yes. Thanks, Cory. I'll start and hand over to Brian. Certainly, one of the, I think, the great thing that we've built around dynamic pricing is really being able to look at our customer base within deciles of how they use the product and be able to kind of measure our elasticity along those deciles. And our model hasn't changed, so I think our customer base still remains fairly inelastic, especially as we increase the level of products and the assortment, if you will, the selection of products, we think that only helps us going forward. So we think we can continue to leverage dynamic pricing. Our models continue to I think get better and better over time, especially as we look at things in terms of is this plus-non basis as well, as usage models, those seem to be paying off well for us. And then I think we can continue to -- just to remind the audience, we recognize revenue 12 at a time. So as we make these changes, we've certainly have already made changes within the kind of direct-to-consumer and renewals channel. We'll be making changes in the real estate channel and in the Q2 time frame as well. So as those play out, I think we have -- as Brian mentioned in his comments, we have an ability to really kind of get back to our kind of -- our goal of 50% for gross margins. Brian, anything else you'd add?

Yes. Yes. Thanks, Rex. Yes. I think when it comes to our contractors' wage inflation, Cory, I'm not sure that's transitory. That feels like something could be sticky for quite a while. So I'm assuming that's going to keep going. But I think when it comes to parts and equipment, as I mentioned, we have an opportunity there. As supply chains improve, which we think they're starting to and especially in the back half of the year, and then these commodity prices come down, the parts and inventory availability will improve. And given our scale leverage, we will renegotiate with our vendors for parts and equipment. And I think there, we have leverage and we can reduce those costs. And again, the more we source versus our contractors sourcing parts and equipment, the better off we'll be from a cost perspective.

The next question is from the line of Justin Patterson with KeyBanc Capital Markets.

Two if I can. First, how are you thinking about scaling ProConnect over the year? Is it staying largely in existing markets and building debt or there are factors that don't cause you to expand in new markets? And then secondly, just how are you thinking about some of the learnings you've made around marketing over the years? You've got really kind of three channels here, direct-to-consumer, the broader real estate piece, and then ProConnect. So just any kind of learnings you have around customer acquisition and how you're rethinking LTV would be helpful.

Yes, sure. Let's take the ProConnect first, and then we'll dive into the marketing piece. We still are operating across the 35 cities. Our goal is to go even deeper into our top 20 markets. We think building out the depth of service offerings is -- continues to be the right strategy for us to reach our $40 million revenue target. We also have been pleasantly surprised by the maintenance services that we've built. And we also think that as we continue to offer our existing customers, things like HVAC upgrades, this gives them more reasons to come back to our platform on a more frequent basis. And certainly, the more people kind of come back and use the platform, that's certainly a repeat rate, if you will, as it will help drive or help lower rather our overall customer acquisition costs. So our strategy hasn't changed. We still think this is a great opportunity for us to take the hassle out of owning a home, give customers the transparency of upfront pricing and then that kind of peace of mind of not having to go find a vetted and skilled contractor on their own. So we still think the long-term thesis is absolutely there. Before 2022, it's really about continuing to build out those depth of service offerings, especially in the top 20 markets, continue to drive the experience, continue to drive repeat business to lower the CAC. As it relates to marketing, we've definitely learned a lot just like, as I was talking about, dynamic pricing. There's been a lot of work around marketing in general. Certainly, from a direct-to-consumer perspective, we've really been growing our audience and expanding into new media partners. We've been able to optimize our acquisition cost by focusing on conversion and effectiveness of our advertising. And then last year, we rebuilt our e-commerce platform to even further allow us to continue to focus on conversion through A/B testing and through machine learning. So a lot of work has been done around that. I think about the now almost four years, there's been kind of an incredible groundswell difference in terms of how we go to the market. And so I think that's why we're kind of bullish on at least direct-to-consumer as it relates to getting back to double-digit growth. I think a lot of the work we've been doing from a retention perspective will help as well. From a real estate perspective, we are going to launch this year the same kind of product lineup that we did in direct-to-consumer last year, that kind of Good, Better, Best strategy, we think, from a marketing perspective, that helped us as well.

[Operator Instructions] There are no additional questions at this time. I will now pass it back to Rex Tibbens for any closing remarks.

Thank you, operator. As I mentioned at the end of my prepared remarks, our mission has not changed. Our north star continues to focus on reimaging home repair and maintenance and being the enabler to remove the hassle for home ownership. We strongly believe that we have a robust long-term opportunity to deepen our reach into the larger $500 billion home services industry as we pursue on-demand home services and increased penetration in the home repair category. We are taking the right actions to build a strong foundation and deliver sustainable long-term growth that will drive improved financial performance in the future. Thanks again for your time today, and we look forward to updating you again soon.

That concludes today's conference call. Thank you and have a great day.