Ladies and gentlemen, welcome to Frontdoor's First Quarter 2023 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. Go ahead, Mr. Davis.

Thank you, operator. Good morning, everyone, and thank you for joining Frontdoor's First Quarter 2023 Earnings Conference Call. Joining me today are Frontdoor's Chairman and Chief Executive Officer, Bill Cobb; and Frontdoor's Chief Financial Officer, Jessica Ross. Let me start by reminding you that we are coming off our Investor Day in early March, and there is a lot more detail about our company and our strategy in the Investor Day presentation, which we will be referring back to during today's call. 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. There's also additional detail about our new Frontdoor brand at frontdoor.com, and in our new mobile app that you can download in the App Store and on Google Play. 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 4, 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 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. I will now turn the call over to Bill Cobb for opening comments. Bill?

Thanks, Matt, and good morning, everyone. Before we get into the details of our first quarter earnings call, I wanted to address our full year 2023 outlook. Let me be clear, while we had a tremendous first quarter, we will not be raising our full year 2023 outlook at this time. It is not our practice to raise our outlook after just one quarter. It's too early to do that. We are heading into our peak summer season, which typically has much higher claims. Additionally, our first quarter financial results benefited from favorable timing around SG&A spend and weather. On the revenue side, our go-to-market channels remain challenged, and it is still too early to assess the revenue profile of our new Frontdoor brand. So with that, let's jump into Slide 4 of the web deck. I am pleased to report that we are making good progress on advancing our strategic initiatives that we laid out at our Investor Day in March. As I just mentioned, our first quarter financial results were significantly better than expected. We saw gross margins expand as our prior pricing actions are flowing through. Cost pressures continue to moderate, and our process improvement initiatives are beginning to take hold. For example, we drove a significant increase in preferred contractor utilization, which rose 270 basis points to a 10-year high of 84% in the first quarter. Additionally, we continue to make progress in sourcing more parts and replacement equipment for our contractors, where our larger size enables us to purchase at a substantial discount. We also increased our direct-to-consumer or DTC demand, which I will cover in more detail shortly. And in April, we launched Frontdoor, our one-stop app for all things home maintenance and repair. While it remains early in the year, we are delivering…

Thanks, Bill, and good morning, everyone. Please turn to Slide 11, and I'll take you through our first quarter 2023 financial results. Starting at the top of our income statement, where first quarter revenue increased 4% versus the prior year period to $367 million, driven by a 10% increase from price, which more than offset a 5% decline in volume. Now let's move to Slide 12, where I'll review our revenue by channel. First quarter revenue derived from customer renewals increased 13% versus the prior year period due to realization of pricing actions taken last year. First year real estate revenue decreased 28% versus the prior year period, reflecting a continued decline in the number of home service plans sold due to the strong sellers market. First year DTC revenue decreased 5% versus the prior year period due to the items Bill covered earlier. Now let's turn to Slide 13. Gross profit for the quarter increased $26 million to $170 million. This resulted in a 540-basis point increase in our gross profit margin to 46%. The gross profit improvement was primarily driven by higher realized price, a lower number of service requests driven by favorable weather as well as the moderation of inflationary cost pressures, as our cost per service request came in slightly better than expected at 7%. Our first quarter gross profit also reflects operational improvements we have made to the business such as increasing the percentage of jobs we assigned to our preferred contractors by 270 basis points to a 10-year high of 84%, as Bill mentioned earlier. Our management team continues to be focused on initiatives such as this to drive operational excellence and sustainable margin improvement for our shareholders. On Slide 14, you'll see that net income increased $20 million in the first quarter of…

Thanks, Jessica. 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 outlook we've provided. Operator, let's open the line for questions.

[Operator Instructions] Our first question for today comes from Cory Carpenter of JPMorgan.

I had one question on the new brand and one question on American Home Shield. For Frontdoor, could you just talk about how the consumers are engaging with the app, those who have downloaded it thus far, just what features you're seeing the most engagement with? And then on the service -- on the American Home Shield side, could you just give us an update on where you are with consolidating your 4 brands under American Home Shield, and what the next steps are?

All right. Thanks, Cory. Let me take both of those, and Jessica, please weigh in with anything else. So in terms of engagement, the goal right now is to get -- we're launching a new brand. So the goal here is to get people to access the brand, download it, register and then try our video chat. So I'm not going to go into the details about specific numbers and everything. But what we have found is that the user experience here is -- has played to rave reviews. The experts we have hired in all the key trades and even the handyman group that we've hired are excited. They're energized, they're on the side of the consumer and the feedback we're getting -- and a lot of us have done video chats ourselves. And it's really -- I mean I keep saying it's changing the culture of our company to have real experts in the company. So when you have something of interest that's like this product, I've done a bunch of media interviews with things that are consumer interest, the reporters, to a person, have been talking about how this is long overdue, and that a user experience like this, I'm very confident that we're on to something with this approach. So more to come in the second quarter. In terms of the AHS consolidation or the overall -- or with the brands, that's moving along. Nothing really to report. We're managing the OneGuard and Landmark consolidation. We are moving AHS into those markets. But it's something that's going to take a while to do, because we have renewal products. This is going to run out for a couple of years. So -- but it's on track. Nothing really to report. But at this point, I feel good about the way the team is executing on this.

Our next question comes from Maxwell [Fresher] from Truist.

I'm calling in for [Mark] today. And I was wondering if you could provide some more color around the front or prime and more specifically, if we head into some sort of mild recession, what are your expectations for consumers' appetite for a subscription service?

Yes, I think that the flavor around it is what I talked about. When you upgrade from basic, you get three video chats. There are also discounts on HVAC systems. It has available financing. We have special member pricing in addition to the video chats. So I think that this is actually something that could play very well in a recessionary environment because the -- for $99, you're going to get someone who knows what they're doing and whatever the various repair issues you might have in your home to help you and be on your side, too. We've had some calls where people have called in that they've gotten an estimate on a new system. And we've had our experts go through and tell them whether that's a good deal or not. We've had other situations where -- what the experts really pride themselves on, they want to solve the problem on the spot versus having to do service calls. So I think there are a lot of elements here as people engage with the app more and more and with the brand, where people are going to see the value that they get for this is really quite high. So I don't think -- obviously, we're all trying to figure out the recessionary impacts. That's part of the reason why we're being very cautious on our outlook. But I do think that this product is going to play very well in the future.

I think one of the other things I'd add there, though, one of the additional features is the discount on home services and products. And I think heading into a recession, consumers are looking for the best deal, which is another benefit of the prime offering.

Also staying on the recession topic, if the Fed starts cutting rates in a lower rate environment, do you think that we'll see like a boost in the real estate channel?

I would think so. I'm not going to -- because as mortgage rates would come down, I mean, mortgage rates are having an impact on the real estate channel. It's pretty clear that that's happened. So I do think that, that will give the macro environment of real estate, which is really suffering right now, a boost. So I think your premise is correct.

Our next question comes from Ian Zaffino from Oppenheimer.

I guess the question would really be, again, on the DTC side. Just I don't know if you gave us actually price versus volume in DTC, what you're expecting going forward. And I guess really the question is, is that I know DTC was taking a lot of price last year. Like, when do you think you hit that or bumped up against that elasticity? And given the elasticity, how are you actually thinking about your focus on, let's just say, price versus retention and what we should expect from there?

So I'll take the first part, Ian. I think that this is something, as I said in our -- in my commentary, we've looked hard at it. I think there has been -- it's been a tough situation. We had to raise prices given the rapid increase in costs that we've certainly faced last year. So we're up against that. which is why we pivoted on our discounting strategy and been more aggressive on that. And we're six weeks or so into that. But I think that we're feeling good about the early sales trends, and we'll talk more about that in Q2. So I think it's something we continue to test and refine. Ultimately, this company is driven by the renewal side. That's really where we do our best efforts. And obviously, we have to keep feeding that funnel. So we will continue to work hard on trying to bring as many members in as we can, but I'm really pleased with what we've been able to do, notwithstanding the price increases with our renewals effort, I think the thing that's not seen in the numbers, if you will, is a tremendous work being done by our technology, our digital teams, our marketing teams, our product teams in terms of on the margin, getting people to renew at higher rates. So I'm really pleased with the executional efforts and the process improvement situation that has happened within the company. So renewals are always going to be most important, but we're only as good as how we can continue to feed that funnel.

And Ian, just on the details, directionally, we've given that the increase in revenue is going to be largely priced overall and the B2C channel, a low double-digit decline for the year.

But basically, I would imagine DTC would track similarly to kind of the overall numbers you were giving. Or would you basically maybe take less price and then have better volume?

Yes, that's…

Yes, I think that's part of what we're saying when we say we're pivoting our discounting strategy.

Yes.

And then the other question would be on inflation. I guess you're still saying 9%. Is there a potential for you to come in better than that? Are you just trying to be conservative when you think about your cost pressures?

I think that -- since I took over nearly a year ago, we've been conservative in general. The 9%, we think, is the right number given the situation. We had some favorable situations like Jessica talked about with weather and the like. And during Q1 where it came in at 7%, but we're comfortable with the 9% as the right guidance to give you.

Our next question comes from Justin Patterson of KeyBanc.

Two, if I can. First, I just wanted to go back to the video call commentary. It sounds like you're seeing some nice early results in terms of cutting down service calls, doing more solving from a distance. How much more room do you have -- do you think you have there in terms of just improving that level of adoption and seeing the cost-to-benefit? And then the second question is just around the preferred contractors. Great progress with a [10-year] high there. How much more room do you think we have to go there, or is that just more of, say, a byproduct of the period, less service requests just inflated that number?

So first of all, on the video calls, we're three weeks in -- three weeks and a couple of days. The early indications are really, really very positive. So that's something that we're going to continue to work on. The other piece that I want to point out is this is a new concept. I mean, we have gotten some people. It's free. What's the catch? How much does it -- and there is no catch. So it's going to take some time for this to settle in. I think with the awareness we've built as I talked about, I talked about marketing campaign, people singing the song. This is all great stuff. But what it comes down to is the user experience, and that's where the strength of this video chat with an expert comes in. And that's why I'm confident that as this becomes more well known, as people understand the proposition, this is a very, very complete and thorough -- we're calling it revolutionizing home and repair. This is going to take some time to get there, but we're really pleased by the interest from people, and I'm really pleased ultimately with the job these experts are doing and the user experience they have. And now Jessica, do you want to take the preferred contractor piece, or do you want me to do it?

Yes, I think just not preferred contractors. We're continuing just to be focused on executing on that initiative. Evan and team are doing an excellent job there, and we're going to continue to watch it that we're pleased with the results so far.

I do think though, Justin -- though, yes, the lower service request did help us with that. But some of the process improvement priorities we put together I think we're really enhancing the contractor relations team to drive that number. So I think there's a lot of things working in the right direction on that.

Our next question comes from Brian Fitzgerald of Wells Fargo.

I wanted to just follow up on Justin's questions maybe a little bit on the preferred contract network. Anything you could tell us about the favorability to gross margin from that? And then also the runway to continue growing at maybe specifically as you get into the busier part of the year. And then last piece on the preferred contract network. I think you've said in the past, it's a bit of a balancing act there as you continue to feed other contractors to grow the preferred network but also maintain some flexibilities. Are you pushing up against any limits there in terms of that balancing act?

So I think just on your question on gross margin, we've given kind of a 1% change in our preferred contractor rate translates to about $5 million of profit. So that obviously, there is by contractor trade and geography.

I think with regard to the contractor piece, one of the things that we have found is with the awareness building that we're doing on Frontdoor, the contract relations team is getting calls about I want to be a contractor. So I think that we're going to get to a point where an unintended consequence of our efforts is that we may be getting more and better contractors wanting to come into the fold here. So I don't think that there's a limitation in terms of running out of, if you will, contractor supply. So that's been a nice add on. Like I said, it's very early days but we've been pleased with that. So I want to make sure, does that -- have we answered your questions, Brian?

Yes, that's right.

Our next question comes from Eric Sheridan of Goldman Sachs.

Maybe a two parter, if I could, on marketing. I know we've talked a little bit about it on the call already. But is there any sort of visibility you've got now in terms of which partnerships or which channels around the new marketing efforts you're the most excited about or where we might see that you want to sort of amplify or push into certain channels or partnerships as you go through the year because the early reaction is maybe exceeding your expectations? And then second, can you just remind us a little bit how to think about marketing as we move through the year? Obviously, you're in this sort of brand building environment right now in the front half of the year. But how should we think about the cadence of marketing as we move through the year once you're beyond this initial push around the brand?

So your first question, with the NFL Draft weekend was phenomenal in terms of downloads. And it was really -- I give Kathy Collins and her team a lot of credit, because you got a lot of people sitting around, a lot of time in between [draft ticks] and it really was a good weekend for us, if you will. We're very excited about this Amazon initiative, which is dropping in midsummer, which essentially, we've done a tie-in with Amazon where the boxes will be branded. You'll still have their logo, obviously and their brand, but we'll have a wrapper around it all about Frontdoor. And we think that the irony of right at your front door of the box, the whole thing works together. And the whole line, which is really resonating that people have to open the front door has worked that well. In terms of the cadence and marketing, we will begin to shift more marketing effort to premium in about a month. So that will continue to drive people to -- we think that the interest level is driven by the video chat with an expert. But we will drive more and more people to premium as we move into the summer month. So that will become a bigger part of our initiative. At the same time, as Jessica pointed out, AHS spend will be on the increase. We might have cut it down a little bit too much. So we're getting pretty good efficiencies. We're pivoting our discounting strategy. We're going to support that with additional marketing. So I feel good about where we're headed on that regard, too.

Our next question comes from Jeff Schmitt of William Blair.

What percentage of parts and equipment is front door sourcing now versus before the pandemic? And how much is that helping on the reduce sort of claims cost or inflation? Can you put any numbers behind that?

Yes, we're digging that number out for you right now, Jeff.

And then one on -- yes, we can get -- come back to that.

…second question.

And then on favorable development looks to be $6 million in the quarter, what period was that related to? And I'm just looking at, I guess, the fourth quarter, I think it was $25 million, which felt like almost sort of a true-up for last year. So what is -- what period is that $6 million related to?

So on the contractor piece, I believe the number is we just exceeded 50%. Is that correct? Which is up from last year. We're less than that, because supply was in such high demand. On the second question, I'll defer to Jessica on that.

We just don't -- we don't break out the $6 million.

Thank you. At this time, we have no further questions. Ladies and gentlemen, thank you again for joining Frontdoor's First Quarter 2023 Earnings Call. Today's call is now concluded.