Frontdoor, Inc. 2022 Q2 Form 10-Q Summary
Business Context and Reporting Period
Frontdoor provides home service plans under the American Home Shield, HSA, OneGuard and Landmark brands, and also operates ProConnect and Streem. At June 30, 2022, the company had approximately 2.17 million active home service plans across all 50 states and the District of Columbia. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods.
William Cobb became Chief Executive Officer effective June 1, 2022, while continuing as Chairman of the Board.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 |
|---|---|---|---|---|
| Revenue | $487 million | $462 million | $838 million | $791 million |
| Gross profit | $211 million | $242 million | $355 million | $390 million |
| Gross margin | 43.3% | 52.4% | 42.4% | 49.3% |
| Net income | $33 million | $40 million | $35 million | $45 million |
| Net margin | 6.8% | 8.7% | 4.2% | 5.7% |
| Diluted EPS | $0.40 | $0.47 | $0.42 | $0.53 |
| Adjusted EBITDA | $77 million | $114 million | $102 million | $150 million |
| Adjusted EBITDA margin | 15.8% | 24.7% | 12.2% | 19.0% |
| Cash flow from operations | Not separately provided | Not separately provided | $94 million | $119 million |
| Free cash flow | Not separately provided | Not separately provided | $75 million | $104 million |
Revenue increased 5% in the second quarter and 6% for the first six months. Renewal revenue rose 10% in both periods, while direct-to-consumer revenue increased 15% in the quarter and 14% year to date. Real estate revenue declined 26% in the quarter and 24% year to date. Other revenue, including ProConnect and Streem, increased 43% in the quarter and 51% year to date.
Material Changes Versus the Prior Comparable Period
- Cost of services rendered increased 25% in the quarter and 20% year to date, substantially outpacing revenue growth.
- Contract claims costs increased to $272 million in the quarter from $217 million and to $474 million year to date from $394 million.
- Second-quarter contract claims costs included a $7 million unfavorable adjustment for adverse development of prior-period claims; the six-month adjustment was $12 million.
- Inflation, higher contractor labor, fuel, parts and equipment costs, parts shortages, elevated appliance replacements and extremely hot weather increased claims costs.
- Customer retention declined to 74.4% from 74.9%, and active plans declined 3% year over year to approximately 2.17 million.
- Adjusted EBITDA declined 32% in the quarter and 32% year to date, primarily because of higher claims, sales and marketing, general and administrative and bad debt costs.
- Interest expense declined to $7 million from $12 million in the quarter and to $14 million from $25 million year to date, reflecting 2021 debt reduction and refinancing activities.
- The prior-year periods included $30 million and $31 million of debt extinguishment losses in the quarter and year to date, respectively; no such charges were recorded in 2022.
Debt, Liquidity, Cash Flow and Capital Allocation
- Long-term debt totaled $617 million gross, or $600 million net of the current portion and debt issuance adjustments, at June 30, 2022, compared with $625 million gross and $608 million net at December 31, 2021.
- Debt consisted primarily of a $245 million Term Loan A maturing in 2026 and a $371 million Term Loan B maturing in 2028. The revolving facility had no borrowings.
- Cash and cash equivalents were $269 million, including $159 million subject to third-party regulatory restrictions. Available liquidity was $357 million, consisting of $109 million of unrestricted cash and $248 million of revolving-credit capacity.
- The company had $2 million of outstanding letters of credit and stated that it was in compliance with its debt covenants.
- Operating cash flow was $94 million, capital expenditures were $19 million and free cash flow was $75 million for the first six months.
- The company repurchased 1.9 million shares for $59 million during the first six months and had repurchased 4.48 million shares for an aggregate $162 million under its $400 million authorization as of June 30, 2022. Remaining authorization was $239 million.
- Full-year 2022 capital expenditures were expected to be approximately $40 million to $50 million.
Outlook, Commentary, Risks and Unusual Items
- Management expects inflation, supply-chain disruption, labor shortages, higher parts and appliance costs and COVID-19 effects to remain sources of cost and demand uncertainty.
- The challenging home seller’s market and low housing inventory are constraining first-year real estate-channel sales. Management is responding through pricing, increased use of preferred contractors, greater direct sourcing of parts and equipment and accelerated contractor recruitment.
- The company exited its Memphis headquarters on June 27, 2022, with the intent to sublease the facility. This resulted in an $11 million non-cash impairment charge, included in $12 million of restructuring charges for the quarter and year to date.
- Management stated that an impairment of goodwill and intangible assets related to the Streem reporting unit is reasonably possible as the company focuses more on integrating Streem technology into its core business and less on selling the platform to third parties.
- Interest-rate exposure is managed through variable- and fixed-rate debt and an interest-rate swap. Rising interest rates could increase debt-servicing costs.
- Home service plan claims are based on actuarial estimates and may require material adjustments if claims experience changes. Management disclosed ordinary-course legal and regulatory matters but does not expect them to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
- Other significant risks include dependence on real estate distribution, contractor and vendor availability, customer retention, competition, cybersecurity, regulatory compliance, climate and weather events, significant indebtedness and the ability to generate sufficient cash to service debt.
Important Facts for Investors to Verify
- Whether claims-cost inflation, adverse prior-period claims development and extreme weather persist or normalize.
- Trends in customer retention, active plans and first-year real estate sales.
- The potential magnitude and timing of any Streem goodwill or intangible-asset impairment.
- Compliance with debt covenants, scheduled debt maturities and the availability of unrestricted liquidity.
- The remaining pace and economic effect of share repurchases relative to operating cash generation.
- Whether the company achieves its estimated $40 million to $50 million of 2022 capital expenditures while maintaining positive free cash flow.