Frontdoor, Inc. · NASDAQ:FTDR
Frontdoor — Investor Day (September 2018)
78 slides from Frontdoor's investor day presentation, September 2018
Slide 1: Welcome home happiness
welcome home happiness 1
Slide 2: Forward Looking Statements
Forward Looking Statements Information Regarding Forward-Looking Statements This presentation contains forward-looking statements and cautionary statements, including 2018 revenue growth, Adjusted EBITDA margins and capital expenditures, as well as statements with respect to the potential separation
Slide 3: Today's presenters
Today's presenters Rex Tibbens Brian Turcotte Raj Midha Chelsea Sumrow Charlie Ngo Rob Eshleman Chief Executive Officer Chief Financial Officer Chief Marketing Officer VP, Direct Marketing and Sr. Director, Strategy Director, Product Telesales Development 3
Slide 4: Agenda
Agenda 1• Introduction Our business, vision and strategy 2• Business Overview How our business works 3• Key Investment Highlights What makes us special 4• Growth Opportunities How we intend to grow our business 5• Financial Overview How we create value for shareholders 6• Our Future Our vision for t
Slide 5: Introduction
Introduction Rex Tibbens Chief Executive Officer 6
Slide 6: We are obsessed with taking the hassle out of owning a home
We are obsessed with taking the hassle out of owning a home, with services powered by people and enabled by technology 7
Slide 7: Home services are a hassle
Home services are a hassle Home Services Journey Home Finding a Appointment Problem Problem maintenance provider scheduling diagnosis resolution Homeowners Information Too many Large Lack of Multiple visits buried in provider options appointment transparent to resolve manuals windows pricing an issu
Slide 8: A powerful company with a history of service
A powerful company with a history of service 4 go-to-market brands Founded the home service plan industry in 1971 45+ years of experience 4x 2 million Nationwide larger than the next Coverage largest competitor customers 15,000 contractor firms 45,000 technicians 150+ account executives Included in
Slide 9: Building on a great foundation for an even greater tomorrow
Building on a great foundation for an even greater tomorrow Industry n Leader in home service plan n More than just a home service plan Leadership category n Reactive repair n Deep expertise in all value-added Expertise n Home service plan services in and around your home Customer n Budget protectio
Slide 10: A strong core business…
A strong core business… 1. Core Business 2. Home Services Consumer education Remodeling, flooring Grow Category § § § Customer experience Improve replacement, painting U.S. penetration HVAC repair, electrical, Geographies Repair § § § International growth appliance, plumbing Multi-family homes HVAC
Slide 11: We have a large total addressable market
We have a large total addressable market View by homes View by services Growth Strategy Home Home 5 Improvement Million Increasing Maintenance Home Service Penetration 22% Plan Customers ~$400B 75 On-Demand Service U.S. Home Million 51% Owner Occupied Services Homes Market 120 Property 27% Million M
Slide 12: Megatrends are in our favor
Megatrends are in our favor DIFM vs. DIY Digital Natives Internet of Things 13
Slide 13: Frontdoor creates value for both customers and contractors
Frontdoor creates value for both customers and contractors 2M 15K contractor firms customers NATIONWIDE MARKETPLACE 45+ years of experience 4M jobs completed annually Note: As of 12/31/17 14
Slide 14: Enhanced opportunities as an independent company
Enhanced opportunities as an independent company Independent valuation Greater flexibility Access to capital markets Fit and focus Alignment of management Pursue growth opportunities 15
Slide 15: Why Frontdoor?
n Great core business — a growing subscription business with high margins Opportunities within core Why n business alone represent significant upside Frontdoor? n Unique and powerful marketplace model in home services n Well-positioned to be a leader in the $400B U.S. home services market 16
Slide 16: Business Overview
Business Overview Raj Midha Chief Marketing Officer 18
Slide 17: What is a home service plan?
What is a home service plan? n Agreement that protects homeowner from unexpected expenses and inconvenience of breakdowns to major systems and appliances n Repair or replacement of covered items that will inevitably breakdown due to normal wear and tear 19
Slide 18: How does a home service plan work?
How does a home service plan work? 1 2 3 4 5 Customer chooses Covered item Customer We assign a pro We pay pro for coverage and plan breaks requests service covered expenses and pays monthly and pays Trade or annual fee Service Fee Systems plan Appliances plan Combo plan Systems & Appliances 20
Slide 19: Home system & appliance breakdown customer mindset
Home system & appliance breakdown customer mindset n Urgent n Essential n DIY not an option n Non-standard pricing n Technical and high risk 21
Slide 20: Our value proposition to homeowners
Budget Protection Protection against high cost of home repairs and replacements Our value Peace of Mind Having a plan for inevitable but unexpected proposition to home service needs Convenience homeowners One company to contact with a pre-qualified network for any need Guarantee The job will get com
Slide 21: A home service plan is a high engagement product
A home service plan is a high engagement product Insurance covers what A home service plan might happen. covers what will happen. 156% Annual claim frequency ~5% ~5% ~5% ~5% Utility Service Line Homeowner's Insurance Auto insurance Extended Warranty American Home Shield Protection High engagement dr
Slide 22: Go-to-market strategy
Go-to-market strategy Real Estate channel Direct-to-Consumer (DTC) channel 2017 revenue mix Direct-to Real Estate Consumer 22%1 12%1 Renewals Home service plans purchased by 66% Home service plans purchased home sellers, real estate agents directly by homeowners outside and home buyers in conjunctio
Slide 23: Go-to-market strategy: Real Estate channel
Go-to-market strategy: Real Estate channel n We built the home service plan industry through the real estate channel over 45 years ago n Value proposition is peace of mind for home buyers, which facilitates home sales n Marketed through 150+ field sales professionals who build relationships with rea
Slide 24: Go-to-market strategy: Direct-to-Consumer channel
Go-to-market strategy: Direct-to-Consumer channel n We pioneered the DTC channel within the last decade n Value proposition for existing homeowners is budget protection from unexpected home system and appliance breakdowns n Marketed directly to consumers through digital, direct mail, TV and other ch
Slide 25: Large and pre-qualified contractor network
Large and pre-qualified contractor network ü 15,000 independent contractor firms ü 45,000 trained technicians Licensed, insured and background checked Proactively managed on 15 metrics, including quality and cost 80% of jobs handled by preferred network (highest quality and lowest cost) Note: As of
Slide 26: We offer a strong value proposition for contractors
We offer a strong value proposition for contractors § Paid jobs, not just leads § Steady volume of work throughout the year § Access to infrastructure for replacement systems/appliances and parts § Ability to provide a great customer experience, which leads to opportunities to up-sell value- added a
Slide 27: Significant customer service infrastructure
Significant customer service infrastructure § Dedicated team of 2,000+ customer service associates § 5 geographically diverse call center locations: § Memphis, TN § LaGrange, GA § Carroll, IA § Phoenix, AZ § Salt Lake City, UT § Lower cost outsourcing partners to handle seasonal peak volume 29
Slide 28: Key Investment Highlights
Key Investment Highlights Rex Tibbens Chief Executive Officer 31
Slide 29: Key Investment Highlights
Key Investment Highlights 1 Leading position in large, underpenetrated, growing markets 2 Diverse revenue streams 3 High-value service offering that appeals to a broad range of demographics 4 Nationwide, pre-qualified contractor network provides competitive advantage 5 Technology-enabled platform dr
Slide 30: Industry leader in home service plans
1 Industry leader in home service plans Home service plan segment The value of scale Gross margin to More customers invest in growth in a local market Others 46%1 34% 1 4 2 3 Competitor B 9% Ability to negotiate More Competitor A annual volume dispatches from 11% discounts with those customers contr
Slide 31: The U.S. home service plan industry is underpenetrated
1 The U.S. home service plan industry is underpenetrated Real Estate Channel Direct-to-Consumer Channel 5.5M 1.5M 115M 3M <50% 4M homes 68% Competitors sold without Competitors home service 112M homes plan without home service plan 3M with home >50% service Frontdoor 1.5M sold with 32% plan home ser
Slide 32: Diverse revenue streams
2 Diverse revenue streams Customer mix by service line Revenue mix by state Real Direct-to- Estate Consumer 48% 52% 2M customers > $100M $60 – $100M $40 – $60M $30 – $40M $20 – $30M $10 – $20M ≤ $10M Source: 2017 data from company filings and management reports 35
Slide 33: We have a high-value service offering…
3 We have a high-value service offering… Our customers use their plans an average of twice a year, helping protect their budget from covered repair without a home service plan without a home service plan without a home service plan or replacement costs like these: $1,035 average $3,565 average $755
Slide 34: …that appeals to a broad range of demographics
3 …that appeals to a broad range of demographics Home purchase price Head of household age Household income 16% 16% $150k+ 16% $400k+ 65+ 12% $300k-400k 20% $100k-150k 29% 50-64 24% $200k-300k 17% $75k-100k 22% 40-49 31% $35k-75k 35% $100k-200k 21% 30-39 17% $1k-35k 13% $0-100k 12% 19-29 1st Year DT
Slide 35: Frontdoor has one of the largest contractor networks in the U.S.
4 Frontdoor has one of the largest contractor networks in the U.S. Nationwide contractor network 15,000 independent, 4 million service requests pre-screened local home each year service contractor firms 2 million customers 45,000 technicians 80% of the service work that is driven through the network
Slide 36: Superior contractor development is a key competitive advantage
4 Superior contractor development is a key competitive advantage Recruiting Onboarding Direct Dispatch Network Preferred More jobs based on Largest number of jobs Target markets with Background checks Begin in direct dispatch; performance; matched with more stringent quality greatest needs or couple
Slide 37: Our technology-enabled platform drives efficiency, quality of service, and customer retention
5 Our technology-enabled platform drives efficiency, quality of service, and customer retention TECHNOLOGY PLATFORM Real Estate Customers Contractors professionals 40
Slide 38: Unique and valuable customer acquisition channels
6 Unique and valuable customer acquisition channels Unique access to customers who are moving, including many before a Real Estate home is even sold Deep and long-standing relationships with real estate agents and brokers Diverse marketing channels, which both capture existing demand (e.g., paid sea
Slide 39: Frontdoor's Real Estate channel is a key differentiator
6 Frontdoor’s Real Estate channel with its long-standing strategic relationships is a key differentiator Field Sales organization Select national Real Estate partners 150+ field sales professionals 50+ phone based sales agents Select regional Real Estate partners Southeast Northeast West Midwest Nat
Slide 40: Growth Opportunities
Growth Opportunities Chelsea Sumrow Charlie Ngo Rob Eshleman VP, Direct Marketing and Telesales Sr. Director, Strategy Director, Product Development 44
Slide 41: Opportunities to grow existing platform
Opportunities to grow existing platform Acquire effectively 1 n Advertising optimization n Geographic expansion Engage and retain n Customer engagement 3 n Additional services 2 Serve profitably n Dynamic pricing n Self-service enhancement 45
Slide 42: Strategic, data-driven marketing mix to drive demand
1 Strategic, data-driven marketing mix to drive demand Acquire effectively Direct mail Broadcast Digital Social & other 24% 22% 16% 38% Note: 2017 % of marketing spending 46
Slide 43: Proven ability to scale marketing investment
1 Proven ability to scale marketing investment Acquire effectively 2013 2018F 2018F 2017 2016 DTC Units 2015 2014 2013 DTC Ad Spend Note: Spend adjusted for timing of January mail campaign across years; Units adjusted for change in wait period from 15 to 30 days 47
Slide 44: We continuously improve the digital and mobile experience
1 We continuously improve the digital and mobile experience Acquire effectively eCommerce sales as % of total DTC sales Desktop Mobile 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2014 2015 2016 2017 2018F 48
Slide 45: Optimizing campaign measurement
1 Optimizing campaign measurement Acquire effectively Goal: measure the incremental lifetime value of each dollar spent Tie each customer contact back to the Target customers with highest advertising investment that drove it lifetime value Randomized A/B testing to get Granular measurement of a true
Slide 46: TV advertising campaign optimization
1 TV advertising campaign optimization Acquire effectively +15% Increase in spend +18% Cost Per Call improvement +27% Cost Per Sale improvement Note: Management internal calculations based on Jan-Jun performance in 2018 vs. 2017 50
Slide 47: Predictive models target the highest value customers
1 Predictive models allow us to target the highest Acquire effectively value customers Predicted Marginal Cost per Sale § Our predictive models rank U.S. households § We determine spending based on model curves and cost per sale targets § A/B testing to validate and improve models and 1 2 3 4 5 6 7
Slide 48: Significant room for increased penetration
1 Significant room for increased penetration Acquire effectively American Home Shield penetration by state American Home Shield penetration¹ 0.1 - 0.4% 0.4 - 1.1% 1.1 - 1.9% 1.9 - 2.7% 2.7 - 4.3% 4.3 - 9.4% While underpenetrated regions like the Northeast have substantial room for growth, there is s
Slide 49: We align pricing and sales strategy to generate profitable growth
We align pricing and sales strategy to generate Serve profitably profitable growth 2 Pricing Example: State-level DTC monthly prices for homes <5k square feet Systems Appliances Combo Trade Service Call Fee $75 $39.99 $39.99 $49.99 per service call $100 $29.99 $29.99 $39.99 per service call Most Pop
Slide 50: Dynamic pricing opportunity
Dynamic pricing opportunity: Serve profitably Acquire and retain customers at the right price 2 Illustrative example Dynamic pricing objectives Home A Home B Utilize our data capabilities to measure price elasticity and costs to set price State: CA State: CA Location Zip code: XXXXX-XXXX Zip code: Y
Slide 51: We can reduce cost as we improve customer experience
We can reduce cost as we improve customer experience Serve profitably 2 Opportunity to simplify, automate and Re-work improve processes by leveraging technology and data platform Reduce cost Waste Complex, manual Process defects process Lead times Improve customer Customer satisfaction effort 55
Slide 52: Example: Expanding online self-service
Example: Expanding online self-service Serve profitably 2 Online service work order requests (% of total) MyAccount enhancements Customer education 41% A/B testing and user design 37% Opportunities to drive growth Launched new n Expand capabilities MyAccount n Improve messaging 32% n Utilize artific
Slide 53: Example: Expanding online renewal self-service
Example: Expanding online renewal self-service Serve profitably 2 Contracts renewed online1 (% of total) Mobile optimization 32% Customer A/B testing education Opportunities to drive growth Launched new 21% n Evergreen conversion MyAccount 17% n Email promotion n Continued A/B testing 8% 2015 2016 2
Slide 54: Improving customer engagement to increase renewal rates
Improving customer engagement to increase renewal rates 3 Engage & Retain 1st term Real Estate renewal rate n 1st term Real Estate renewal rate is 28%1 compared to 29% 28% 75%1 for DTC n Continuous improvements to 27% 1st term customer 26% communication 25% and engagement have helped 23% drive incre
Slide 55: Product enhancement example: Re-keying of homes
Product enhancement example: Re-keying of homes 3 Engage & Retain Developed and deployed Re-key service to meet the needs of Real Estate customers while driving low-cost engagement March 15th, 2017 August 15th, 2017 February 1st, 2018 Pilot launched in Expansion to National Rollout: 5 states 14 addi
Slide 56: Many opportunities to increase the breadth of the home service plan
Many opportunities to increase the breadth of the 3 Engage & Retain home service plan Current Services New or Currently in Pilot Future Services Refrigerators Air conditioning Locksmith Filter subscription Painting Dishwashers Heating HVAC tune-up Dryer vent cleaning Smart Home installation Ranges E
Slide 57: Benefits of adding services to the home service plan
Benefits of adding services to the home service plan 3 Engage & Retain Engage customers in a Customer engagement Little to no incremental positive use circumstance and higher loyalty claims cost Opportunity to develop “SKUs” Home service plan becomes a for on-demand offering “home maintenance” solut
Slide 58: Financial Overview
Financial Overview Brian Turcotte Chief Financial Officer 63
Slide 59: Investment thesis
Investment thesis Impressive Robust Strong free Capital-light growth margins1 cash flow1 model ~12% 22%+ 65%+ <2% Historical revenue Average EBITDA Average FCF Capex as a % of CAGR since 2013 margins since 2013 conversion since revenue 2013 Attractive core business with significant upside – making a
Slide 60: Strong revenue growth and consistent customer retention
Strong revenue growth and consistent customer retention Revenue and Retention Rates over time Revenue ($M) Combined business retention rate (%) 1.8% -’17: 1 1,157 1200 3 100% AGR ’1 C 1,020 1000 917 3.7% CAGR ’07 -’13: 90% 828 800 721 740 657 687 80% 5961 6191 630 600 73% 75% 75% 75% 76% 75% 73% 73%
Slide 61: Track record of consistent Adjusted EBITDA growth
Track record of consistent Adjusted EBITDA growth Adjusted EBITDA1 and margins over time Adjusted EBITDA ($M) Margin (%) 259 218 3.8% 205 ’09 -’17: 1 CAGR 179 145 117 107 92 90 22% 22% 21% 22% 20% 16% 16% 15% 14% 2009 2010 2011 2012 2013 2014 2015 2016 2017 Averaged 22% Adjusted EBITDA margins since
Slide 62: Strong free cash flow to fund growth
Strong free cash flow to fund growth Free Cash Flow1 Free Cash Flow ($M) Free Cash Flow Conversion (%) 200% 200 9.0% 179 AGR ’13 -’17: 2 160% C 150 144 131 127 120% 100 80% 65 73% 69% 62% 66% 50 40% 44% 0 0% 2013 2014 2015 2016 2017 Generated over $600M of cumulative free cash flow in last 5 years 1
Slide 63: Subscription-based model provides consistency and predictability
Subscription-based model provides consistency and predictability in our business performance Customer Payment Method – FY 2017 Other 2% Pay Upfront n 67% of our customers (nearly 1.4 31% million accounts) are on a monthly auto-pay program n Monthly auto-pay customers are more likely to renew Monthly
Slide 64: Disciplined approach to capital allocation
Disciplined approach to capital allocation n Invest in core business and grow organically n Capex – capital-light business n Opex – aimed at driving efficiencies n M&A n Funded primarily through free cash flow n Repay debt n Return cash to shareholders 69
Slide 65: Strong EBITDA conversion ratio
Strong EBITDA conversion ratio Cost structure (% of revenue) Overview of margin expansion opportunities Costs FY 2017 n Dynamic pricing to align labor rates to Claims 50% contract prices Selling 8% n Better technology to measure end-to-end cost Marketing 6% profile per contract Service (Call Center)
Slide 66: YTD Financial Update
YTD Financial Update YTD’18 update Initiatives n 9% organic revenue growth YTD YoY, driven by unit growth and price realization n YTD’18 Adj. EBITDA impacted by a $22M increase in People: Strong leadership in place contract claims costs, primarily due to a higher mix of appliance replacements vs. re
Slide 67: Long-term targets for home service plan business
Long-term targets for home service plan business Metrics 2018F Long-term annual targets Revenue growth 8-10% High single digit organic Gross margin 46-47% ~50% Adjusted EBITDA margin ~20% Low 20’s Capex $20-30M ~$20M Principally reflects costs to replicate IT systems historically shared with SERV; c
Slide 68: Our Future
Our Future Rex Tibbens Chief Executive Officer 73
Slide 69: Our vision for the future.
Our vision for the future. 74
Slide 70: A strong core business…
A strong core business… 1. Core Business 2. Home Services Consumer education Remodeling, flooring Grow Category § § § Customer experience Improve replacement, painting U.S. penetration HVAC repair, electrical, Geographies Repair § § § International growth appliance, plumbing Multi-family homes HVAC
Slide 71: Key elements of home services strategy
Key elements of home services strategy n On-demand service n Service experience transparency n Transparent pricing n Preventative maintenance 78
Slide 72: A robust data platform will unlock value throughout the home services category
A robust data platform will unlock value throughout the home services category and beyond Sources of Data Data Platform Users of Platform § Service visits with § Homeowners our customers § Home service plan § Our contractors Assets Parts Recalls business § Data aggregators § Our contractors § Manufa
Slide 73: Why Frontdoor?
n Great core business — a growing subscription business with high margins Opportunities within core Why n business alone represent significant upside Frontdoor? n Unique and powerful marketplace model in home services n Well-positioned to be a leader in the $400B U.S. home services market 80
Slide 74: Appendix
Appendix 84
Slide 75: Non-GAAP reconciliation definitions
Non-GAAP reconciliation definitions Adjusted EBITDA is defined as net income before: depreciation and amortization expense; interest expense; interest income from affiliate; provision for income taxes; non-cash stock-based compensation expense; restructuring charges; spin-off charges; non-cash impai
Slide 76: Net Income to Adjusted EBITDA Reconciliations
Net Income to Adjusted EBITDA Reconciliations Six months ended June 30, Year Ended December 31, (In millions) 2018 2017 2017 2016 2015 2014 2013 Net Income $58 63 $160 $124 $120 $74 $84 Depreciation and amortization expense 9 9 17 13 9 9 8 Interest expense 0 0 1 – – – – Interest income from affiliat
Slide 77: Net Cash Provided from Operating Activities to Free Cash Flow Reconciliations
Net Cash Provided from Operating Activities to Free Cash Flow Reconciliations Year Ended December 31, (In millions) 2017 2016 2015 2014 2013 Net Cash Provided from Operating Activities $194 $155 $135 $142 $78 Property additions (15) (11) (7) (11) (13) Free Cash Flow $179 $144 $127 $131 $65 Adjusted
Slide 78: Pro forma capitalization
Pro forma capitalization PF Spin Amount ($M) x Adj. EBITDA Cash and marketable securities $275 New $250M Revolver - New 7-Year Term Loan B 650 Total Secured Debt $650 2.58x Net Secured Debt1 $600 2.38x New Senior Unsecured Notes due 2026 350 Total Debt $1,000 3.97x Net Debt1 $950 3.77x SpinCo LTM 6/