Frontdoor Announces First Quarter 2019 Revenue Increase of 10 Percent to $271 Million Gross Profit Margin Improved 150 Basis Points to 47 Percent

MEMPHIS, Tenn.–(BUSINESS WIRE)–Frontdoor, Inc.
(NASDAQ: FTDR), the nation’s leading provider of home service plans,
today announced first-quarter 2019 results.

 
Financial Results
      Three Months Ended
March 31,
$ millions (except as noted) 2019     2018     Change
Revenue $ 271 $ 247 10 %
Gross Profit 128 113 13 %
Net Income 13 13 (3 )%
Diluted Earnings per Share 0.15 0.16 (6 )%
Adjusted Net Income(1) 16 22 (24 )%
Adjusted Diluted Earnings per Share(1) 0.19 0.26 (27 )%
Adjusted EBITDA(1) 43 32 34 %
Home Service Plans (number in millions)         2.1       2.0     5 %
 

First-Quarter 2019 Summary

  • Revenue increased 10 percent to $271 million on higher number of
    home service plans and improved price realization
  • Gross profit margin of 47 percent was 150 basis points higher than
    the prior year period due to lower number of claims from favorable
    weather and early progress from cost containment and business process
    improvement initiatives
  • Net income of $13 million was relatively flat compared to prior
    year period as greater gross margin contribution and lower Spin-off
    charges were offset by higher interest expense and continued
    investments in the business
  • Adjusted EBITDA of $43 million was up 34 percent over the prior
    year period
  • Progressed strategic objectives by fully implementing price
    increases across all channels, launching Customer Service Central to
    enhance the customer service experience and accelerating cost
    reduction initiatives
  • Completed the secondary equity offering of all remaining shares of
    common stock held by ServiceMaster

Full-Year 2019 Outlook

  • Increasing 2019 revenue outlook to $1.36 billion to $1.38 billion
    and increasing 2019 Adjusted EBITDA
    (2)
    outlook to $250 million to $260 million

“We advanced a number of our strategic objectives in the first quarter
and I am pleased with the velocity of our operational improvements as we
continue to discover additional opportunities to reduce costs and
improve the customer service experience,” said Chief Executive Officer
Rex Tibbens. “For the balance of 2019, we will look to leverage our
investments in technology and people to further unlock Frontdoor’s full
potential by improving our core home service plan business while
building the foundation for our on-demand services. Frontdoor remains
obsessed with taking the hassle out of owning a home and driving value
for our customers, contractors, and key stakeholders.”

“Our first quarter financial results reflect the benefit of lower claims
costs from both favorable weather and progress from our business process
improvements,” said Chief Financial Officer Brian Turcotte. “While we
expect the weather to revert to more normal seasonal patterns over the
remainder of the year, we are raising our full-year outlook to reflect
the promising trends from our cost reduction initiatives.”

 

First-Quarter 2019 Results

 
Revenue by Major Customer Acquisition Channel
      Three Months Ended
March 31,
$ millions 2019     2018     Change
Renewals $ 182 $ 162 13 %
Real estate (First-Year) 54 53 1 %
Direct-to-consumer (First-Year) 33 31 8 %
Other   1   1 *
Total $ 271 $ 247 10 %
 

* not meaningful

 

First-quarter 2019 revenue increased 10 percent over the prior year
period. Renewal revenue increased 13 percent as a result of growth in
the number of home service plans and improved price realization. The one
percent increase in real estate revenue reflects improved price
realization and a mix shift to higher priced home service plan
offerings. The eight percent increase in direct-to-consumer revenue
reflects growth in new sales, driven by ongoing investments in
marketing, as well as improved price realization.

First-quarter 2019 net income was $13 million, or diluted earnings per
share of $0.15, versus $13 million in first-quarter 2018, or diluted
earnings per share of $0.16. First-quarter 2019 net income included a
$15 million favorable impact from higher revenue conversion(3),
a 150 basis point increase in gross margin and lower Spin-off charges
versus prior year. These benefits were offset by a $15 million increase
in interest expense related to the debt offering completed in
conjunction with the Spin-off and a $7 million increase in selling and
administrative expenses primarily relating to investments in sales,
marketing and technology.

 
 
Period-over-Period Adjusted EBITDA Bridge
$ millions
Three Months Ended March 31, 2018       $ 32
Impact of change in revenue(3) 15
Claims costs 3
Sales and marketing costs (2 )
Spin-off dis-synergies (2 )
Other   (4 )
Three Months Ended March 31, 2019 $ 43
 

First-quarter 2019 Adjusted EBITDA of $43 million was 34 percent higher
than the prior year period, primarily due to the following items:

  • $15 million of higher revenue conversion(3), including the
    net contribution from new customers and higher pricing;
  • $3 million of lower claims costs, primarily due to favorable weather
    as well as cost reduction initiatives which were partially offset by
    an increase in the underlying cost of repairs;
  • $2 million of increased sales and marketing costs to drive home
    service plan growth;
  • $2 million of Spin-off dis-synergies, primarily related to the
    separation of information technology systems; and
  • $4 million of other costs, primarily related to technology-related
    investments in the business and higher professional fees, incentive
    compensation and bad debt expense.
 

Cash Flow

 
      Three Months Ended
March 31,
$ millions 2019     2018
Net cash provided from (used for):
Operating Activities $ 52 $ 49
Investing Activities (5 ) (5 )
Financing Activities   (2 )   (37 )
Cash increase during the period $ 45 $ 8
 

For the three months ended March 31, 2019, net cash provided from
operating activities was $52 million, an increase of $2 million from the
three months ended March 31, 2018. Working capital was a $29 million
source of cash for the three months ended March 31, 2019 compared to $24
million for the prior year period.

Net cash used for investing activities was $5 million for each of the
three months ended March 31, 2019 and 2018.

Net cash used for financing activities was $2 million for the three
months ended March 31, 2019, and was primarily related to debt payments.
This compares to $37 million for the three months ended March 31, 2018,
which was related to net cash transfers to ServiceMaster that occurred
prior to the Spin-off.

Free Cash Flow(1) was $47 million for the three months ended
March 31, 2019 compared to $44 million for the prior year period. The
increase of $3 million includes higher Adjusted EBITDA and positive
working capital contributions that were partially offset by higher cash
payments for interest and taxes.

Cash and marketable securities totaled $348 million as of March 31,
2019, a $42 million increase from December 31, 2018.

Total restricted net assets increased to $197 million at March 31, 2019
from $187 million at December 31, 2018.

Updated Full-Year 2019 Outlook

  • Revenue is now anticipated to range from $1.36 billion to $1.38
    billion;
  • Gross profit margin is now anticipated to be approximately 46 percent;
  • Adjusted EBITDA(2) is now anticipated to range from $250
    million to $260 million;
  • Capital expenditures remains within a range of $30 million to $40
    million; and
  • Annual Effective Tax Rate has been updated and is now anticipated to
    be approximately 25 percent.

Additionally, second-quarter 2019 Adjusted EBITDA(2) is
anticipated to range from $75 million to $80 million.

First-Quarter 2019 Earnings Conference Call

Frontdoor has scheduled a conference call today, May 8, 2019, at 8:00
a.m. Central time (9:00 a.m. Eastern time). During the call, Rex
Tibbens, Chief Executive Officer, and Brian Turcotte, Chief Financial
Officer, will discuss first-quarter 2019 financial and operating
results. To participate on the conference call, interested parties
should call 877-407-8291 (or international participants, 201-689-8345).
Additionally, the conference call will be available via webcast which
will include a slide presentation highlighting the company’s results. To
participate via webcast and view the slide presentation, visit
Frontdoor’s investor
relations home page
. The call will be available for replay for
approximately 90 days. To access the replay of this call, please call
877-660-6853 and enter conference ID 13689612 (international
participants: 201-612-7415, conference ID 13689612).

About Frontdoor

Frontdoor is a company that’s obsessed with taking the hassle out of
owning a home. With services powered by people and enabled by
technology, it is the parent company of four home service plan brands:
American Home Shield, HSA, Landmark and OneGuard. Frontdoor serves more
than two million customers across the U.S. through a network of more
than 16,000 pre-qualified contractor firms that employ over 45,000
technicians. The company’s customizable home service plans help
customers protect and maintain their homes from costly and unexpected
breakdowns of essential home systems and appliances. With more than 45
years of experience, the company responds to over four million service
requests annually (or one request every eight seconds). For details,
visit frontdoorhome.com.

References in this news release to “ServiceMaster” refer to
ServiceMaster Global Holdings, Inc. and its consolidated subsidiaries.
References to the “Spin-off” refer to the spin-off by ServiceMaster of
the ownership and operations of its businesses operated under the
American Home Shield, HSA, OneGuard and Landmark brand names into
Frontdoor, which was completed on October 1, 2018 and resulted in
Frontdoor operating as an independent, publicly traded company trading
on Nasdaq under the symbol “FTDR”.

Forward-Looking Statements

This news release contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, including, in
particular, projected future performance and any statements about
Frontdoor’s plans, strategies and prospects. Forward-looking statements
can be identified by the use of forward-looking terms such as “believe,”
“expect,” “estimate,” “could,” “should,” “intend,” “may,” “plan,”
“seek,” “anticipate,” “project,” “will,” “shall,” “would,” “aim,” or
other comparable terms. These forward-looking statements are subject to
known and unknown risks and uncertainties, many of which may be beyond
our control. Such risks and uncertainties include, but are not limited
to: weather conditions and seasonality; weakening general economic
conditions; lawsuits, enforcement actions and other claims by third
parties or governmental authorities; the effects of our substantial
indebtedness; the success of our business strategies; and failure to
achieve some or all of the expected benefits of the Spin-off. We caution
you that forward-looking statements are not guarantees of future
performance or outcomes and that actual performance and outcomes,
including, without limitation, our actual results of operations,
financial condition and liquidity, and the development of new markets or
market segments in which we operate, may differ materially from those
made in or suggested by the forward-looking statements contained in this
news release. For a discussion of other important factors that could
cause Frontdoor’s results to differ materially from those expressed in,
or implied by, the forward-looking statements included in this document,
you should refer to the risks and uncertainties detailed from time to
time in Frontdoor’s periodic reports filed with the SEC as well as the
disclosure contained in Item 1A. Risk Factors in our 2018 Annual Report
on Form 10-K filed with the SEC. Except as required by law, Frontdoor
does not undertake any obligation to update or revise these
forward-looking statements to reflect new information or events or
circumstances that occur after the date of this news release or to
reflect the occurrence of unanticipated events or otherwise. Readers are
advised to review Frontdoor’s filings with the Securities and Exchange
Commission, which are available from the SEC’s EDGAR database at sec.gov,
and via Frontdoor’s website at frontdoorhome.com.

Spin-off Impact to Financials

The accompanying condensed consolidated and combined financial
statements for periods prior to the Spin-off include all revenues,
costs, assets and liabilities directly attributable to us.
ServiceMaster’s debt and corresponding interest expense have not been
allocated to us for periods prior to the Spin-off since we were not the
legal obligor of the debt. The accompanying condensed consolidated and
combined financial statements include expense allocations for certain
corporate functions historically provided by ServiceMaster. These
allocations may not be indicative of the level of expense which would
have been incurred had the company operated as a separate entity prior
to the Spin-off, nor are these costs necessarily indicative of costs we
may incur in the future.

Non-GAAP Financial Measures

To supplement Frontdoor’s results presented in accordance with
accounting principles generally accepted in the United States (“GAAP”),
Frontdoor has disclosed the non-GAAP financial measures of Adjusted
EBITDA, Free Cash Flow, Adjusted Net Income, and Adjusted Diluted
Earnings per Share.

We define “Adjusted EBITDA” as net income before: provision for income
taxes; interest expense; interest income from affiliate; depreciation
and amortization expense; non-cash stock-based compensation expense;
restructuring charges; Spin-off charges; secondary offering costs;
affiliate royalty expense; (gain) loss on insured home service plan
claims; and other non-operating expenses. We believe Adjusted EBITDA is
useful for investors, analysts and other interested parties as it
facilitates company-to-company operating performance comparisons by
excluding potential differences caused by variations in capital
structures, taxation, the age and book depreciation of facilities and
equipment, restructuring initiatives, Spin-off charges, arrangements
with affiliates and equity-based, long-term incentive plans.

We define “Free Cash Flow” as net cash provided from operating
activities less property additions. Free Cash Flow is not a measurement
of our financial performance or liquidity under GAAP and does not
purport to be an alternative to net cash provided from operating
activities or any other performance or liquidity measures derived in
accordance with GAAP. Free Cash Flow is useful as a supplemental measure
of our liquidity. Management uses Free Cash Flow to facilitate
company-to-company cash flow comparisons, which may vary from company to
company for reasons unrelated to operating performance.

We define “Adjusted Net Income” as net income before: amortization
expense; restructuring charges; Spin-off charges; secondary offering
costs; affiliate royalty expense; interest income from affiliate; (gain)
loss on insured home service plan claims; and the tax impact of the
aforementioned adjustments. We believe Adjusted Net Income is useful for
investors, analysts and other interested parties as it facilitates
company-to-company operating performance comparisons by excluding
potential differences caused by items listed in this definition.

We define “Adjusted Diluted Earnings per Share” as Adjusted Net Income
divided by the weighted-average diluted common shares outstanding.

See the schedules attached hereto for additional information and
reconciliations of such non-GAAP financial measures. Management believes
these non-GAAP financial measures provide useful supplemental
information for its and investors’ evaluation of Frontdoor’s business
performance and are useful for period-over-period comparisons of the
performance of Frontdoor’s business. While we believe that these
non-GAAP financial measures are useful in evaluating our business, this
information should be considered as supplemental in nature and is not
meant to be considered in isolation or as a substitute for the related
financial information prepared in accordance with GAAP. In addition,
these non-GAAP financial measures may not be the same as similarly
entitled measures reported by other companies.

(1) See “Reconciliations of Non-GAAP Financial Measures”
accompanying this release for a reconciliation of Adjusted Net Income,
Adjusted Diluted Earnings per Share, Adjusted EBITDA, and Free Cash
Flow, each a non-GAAP measure, to the nearest GAAP measure. See
“Non-GAAP Financial Measures” included in this release for descriptions
of calculations of these measures.

(2) A reconciliation of the forward-looking second-quarter
and full-year 2019 Adjusted EBITDA outlook to net income cannot be
provided without unreasonable effort because of the inherent difficulty
of accurately forecasting the occurrence and financial impact of the
various adjusting items necessary for such reconciliation that have not
yet occurred, are out of our control, or cannot be reasonably predicted.
For the same reasons, the company is unable to assess the probable
significance of the unavailable information, which could have a material
impact on its future GAAP financial results.

(3) Revenue conversion is calculated using the estimated
gross margin impact of new home service plan revenue along with the
impact of price changes.

 
frontdoor, inc.
Condensed Consolidated and Combined Statements of Operations and
Comprehensive Income (Unaudited)

($ millions, except per share data)

 

 
      Three Months Ended
March 31,
2019     2018
Revenue $ 271 $ 247
Cost of services rendered   143     134  
Gross Profit 128 113
Selling and administrative expenses 89 81
Depreciation and amortization expense 6 4
Restructuring charges 2
Spin-off charges 1 7
Interest expense 16
Interest income from affiliate (1 )
Interest and net investment income   (1 )   (1 )
Income before Income Taxes 18 18
Provision for income taxes   5     5  
Net Income $ 13   $ 13  
Other Comprehensive Income (Loss), Net of Income Taxes:
Net unrealized loss on derivative instruments   (5 )    
Total Comprehensive Income $ 8   $ 13  
Earnings per Share:
Basic $ 0.15   $ 0.16  
Diluted $ 0.15   $ 0.16  
Weighted-average Common Shares Outstanding:
Basic 84.6 84.5
Diluted 84.7 84.5
 
 
frontdoor, inc.
Condensed Consolidated Statements of Financial Position
(Unaudited)

($ millions, except share data)

         
 
As of
March 31, December 31,
2019 2018
Assets:
Current Assets:
Cash and cash equivalents $ 341 $ 296
Marketable securities 7 9
Receivables, less allowance of $2 in each period 8 12
Prepaid expenses and other assets   13     13  
Total Current Assets   369     330  
Other Assets:
Property and equipment, net 48 47
Goodwill 476 476
Intangible assets, net 156 158
Operating lease right-of-use assets 18
Deferred customer acquisition costs 20 21
Other assets   12     10  
Total Assets $ 1,097   $ 1,041  
Liabilities and Shareholders’ Equity:
Current Liabilities:
Accounts payable $ 48 $ 41
Accrued liabilities:
Payroll and related expenses 8 10
Home service plan claims 61 67
Interest payable 4 9
Other 28 26
Deferred revenue 219 185
Current portion of long-term debt   7     7  
Total Current Liabilities   374     345  
Long-Term Debt 976 977
Other Long-Term Liabilities:
Deferred taxes 38 39
Operating lease liabilities 21
Other long-term obligations   22     24  
Total Other Long-Term Liabilities   80     63  
Commitments and Contingencies
Shareholders’ Equity:
Common stock, $0.01 par value; 2,000,000,000 shares authorized;
84,617,424 shares issued and outstanding at March 31, 2019 and
84,545,152 shares issued and outstanding at December 31, 2018
1 1
Additional paid-in capital 3 1
Accumulated deficit (323 ) (336 )
Accumulated other comprehensive loss   (14 )   (9 )
Total Deficit   (334 )   (344 )
Total Liabilities and Shareholders’ Equity $ 1,097     1,041  
 
 
frontdoor, inc.
Condensed Consolidated and Combined Statements of Cash Flows
(Unaudited)

($ millions)

 
 
      Three Months Ended
March 31,
2019     2018
Cash and Cash Equivalents at Beginning of Period $ 296 $ 282
Cash Flows from Operating Activities:
Net Income 13 13
Adjustments to reconcile net income to net cash provided from
operating activities:
Depreciation and amortization expense 6 4
Deferred income tax provision 3
Stock-based compensation expense 2 1
Restructuring charges 2
Payments for restructuring charges (3 )
Spin-off charges 1 7
Payments for spin-off charges (1 ) (3 )
Other 1
Change in working capital, net of acquisitions:
Receivables 4 7
Prepaid expenses and other current assets 1 1
Accounts payable 8 (2 )
Deferred revenue 34 35
Accrued liabilities (10 ) (17 )
Accrued interest payable (6 )
Current income taxes   (1 )    
Net Cash Provided from Operating Activities   52     49  
Cash Flows from Investing Activities:
Purchases of property and equipment (4 ) (5 )
Purchases of available-for-sale securities (9 )
Sales and maturities of available-for-sale securities 3 10
Other investing activities   (3 )    
Net Cash Used for Investing Activities   (5 )   (5 )
Cash Flows from Financing Activities:
Payments of debt and capital lease obligations (2 )
Net transfers to Parent       (37 )
Net Cash Used for Financing Activities   (2 )   (37 )
Cash Increase During the Period   45     8  
Cash and Cash Equivalents at End of Period $ 341   $ 290  
 
 

Reconciliations of Non-GAAP Financial Measures

 

The following table presents reconciliations of net income to
Adjusted Net Income.

 
      Three Months Ended
March 31,
($ millions, except per share amounts) 2019     2018
Net Income $ 13 $ 13
Amortization expense 2 2
Restructuring charges 2
Spin-off charges 1 7
Interest income from affiliate (1 )
Gain on insured home service plan claims (1 )
Secondary offering costs 1
Tax impact of adjustments   (1 )   (2 )
Adjusted Net Income $ 16   $ 22  
Adjusted Earnings per Share:
Basic $ 0.19 $ 0.26
Diluted $ 0.19 $ 0.26
Weighted-average common shares outstanding(1):
Basic 84.6 84.5
Diluted 84.7 84.5
 

(1) For the three months ended March 31, 2018, earnings
per share was calculated based on the 84,515,619 shares of
Frontdoor stock that were outstanding at the date of distribution.

 
 

The following table presents reconciliations of net cash provided
from operating activities to Free Cash Flow.

 
 
      Three Months Ended
March 31,
(In millions) 2019     2018
Net Cash Provided from Operating Activities $ 52 $ 49
Property Additions   (4 )   (5 )
Free Cash Flow $ 47   $ 44  
 
 

The following table presents reconciliations of net income to
Adjusted EBITDA.

 
 
      Three Months Ended
March 31,
(In millions) 2019     2018
Net Income $ 13 $ 13
Depreciation and amortization expense 6 4
Restructuring charges 2
Spin-off charges 1 7
Provision for income taxes 5 5
Non-cash stock-based compensation expense 2 1
Interest expense 16
Secondary offering costs 1
Interest income from affiliate (1 )
Gain on insured home service plan claims     (1 )
Adjusted EBITDA $ 43 $ 32  
 
 

Key Business Metrics

 
 
    As of March 31,
2019     2018
Growth in number of home service plans 5 % 6 %
Customer retention rate(1) 75 % 75 %
 

(1) Customer retention rate is presented on a rolling
12-month basis in order to avoid seasonal anomalies.

Contacts

Investor Relations:
Matt Davis
901.701.5199
[email protected]

Media:
Nicole
Ritchie
901.701.5198
[email protected]

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