Frontdoor, Inc. 2021 Q2 Form 10-Q Summary
Business context and reporting period
Frontdoor is a U.S. provider of annual home service plans under the American Home Shield, HSA, OneGuard and Landmark brands, with additional ProConnect on-demand services and Streem technology operations. At June 30, 2021, the company had approximately 2.24 million active home service plans across all 50 states and the District of Columbia. This report covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods.
Financial performance and key metrics
| Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 |
|---|---|---|---|---|
| Revenue | $462 million | $417 million | $791 million | $711 million |
| Gross profit | $242 million | $218 million | $390 million | $364 million |
| Gross margin | 52% | 52% | 49% | 51% |
| Net income | $40 million | $49 million | $45 million | $62 million |
| Net margin | 9% | 12% | 6% | 9% |
| Adjusted EBITDA | $114 million | $100 million | $150 million | $147 million |
| Adjusted EBITDA margin | 25% | 24% | 19% | 21% |
| Diluted EPS | $0.47 | $0.57 | $0.53 | $0.72 |
Revenue increased 11% in both the quarter and year-to-date period. Renewal revenue remained the largest source, rising 9% in the quarter and 10% year to date. Direct-to-consumer revenue increased 12% in the quarter and 14% year to date, primarily from increased marketing investment. Other revenue, including ProConnect and Streem, increased substantially from a low base.
Cost of services rendered increased 10% in the quarter and 16% year to date. Selling and administrative expenses increased 9% in the quarter and 11% year to date. Operating performance improved on an adjusted basis, but GAAP net income declined because of debt extinguishment charges.
Net cash provided by operating activities was $119 million for the six months ended June 30, 2021, compared with $140 million in 2020. Capital expenditures were $15 million, producing implied free cash flow of approximately $104 million. Management expects full-year 2021 capital expenditures of approximately $30 million to $40 million.
Liquidity, debt and financial position
- Cash and cash equivalents were $323 million at June 30, 2021, down from $597 million at December 31, 2020.
- Available liquidity was $398 million, consisting of $150 million of unrestricted cash and $248 million of available revolving-credit capacity.
- Long-term debt, net of current maturities, was $616 million at June 30, 2021, compared with $968 million at year-end 2020. Total debt carrying value was $633 million and estimated fair value was $640 million.
- The company refinanced its debt on June 17, 2021 with a $260 million Term Loan A, a $380 million Term Loan B and a $250 million revolving facility. The Term Loan A and revolver mature in 2026; the Term Loan B matures in 2028.
- The refinancing redeemed the remaining $534 million of the former term loan and $350 million of 2026 Notes at 106.1%, resulting in a $30 million second-quarter loss on extinguishment of debt, including a $21 million make-whole premium and $9 million of written-off debt costs and discounts.
- As of June 30, 2021, the company was in compliance with its debt covenants. The first-lien leverage covenant is generally no greater than 3.50 to 1.00, subject to specified acquisition-related provisions.
- Total shareholders’ equity improved to a $3 million surplus from a $61 million deficit at December 31, 2020, primarily because of year-to-date net income.
Material changes versus the prior comparable period
- Revenue grew $45 million, or 11%, in the quarter and $80 million, or 11%, year to date.
- Contract claims costs increased because of parts shortages, inflation, additional appliance replacements and, in the first quarter, elevated appliance and HVAC service incidence.
- The company increased sales, marketing and customer-service spending to support direct-to-consumer growth, customer retention, ProConnect and Streem.
- Net income declined 17% in the quarter and 27% year to date, principally because of the debt extinguishment loss. Excluding that unusual charge, adjusted EBITDA increased to $114 million from $100 million in the quarter and to $150 million from $147 million year to date.
- Customer retention was 75% in both periods, while the number of home service plans increased 3% year over year to 2.24 million.
- Deferred revenue decreased to $162 million from $187 million at year-end 2020, reflecting a shift from annual-pay to monthly-pay customers.
Outlook, risks, contingencies and unusual items
Management expects operating cash flow, cash on hand and available revolver capacity to provide sufficient liquidity for the foreseeable future. No formal revenue or earnings guidance was provided in the filing.
- COVID-19 continued to affect demand and costs. Tight existing-home sales constrained first-year real-estate channel demand, while customers spending more time at home increased appliance and plumbing claims and customer-care labor needs.
- Industry-wide parts availability challenges, labor shortages, inflation, weather and higher appliance, home-system and contractor costs may pressure margins.
- The business is seasonal, with higher central HVAC work orders generally occurring during summer months.
- The company uses an interest-rate swap to hedge a portion of variable-rate debt. Approximately $8 million of net-of-tax unrealized hedging loss in accumulated other comprehensive income was expected to be reclassified into earnings over the following 12 months, subject to actual interest rates.
- Home service plan claims liabilities rely on actuarial estimates. Legal and regulatory matters arise in the ordinary course; management does not expect currently known matters to have a material adverse effect, although outcomes cannot be predicted with certainty.
- Other stated risks include competition, real-estate market weakness, customer acquisition and retention, contractor and labor availability, cybersecurity, regulatory compliance, substantial indebtedness, interest-rate increases and the company’s ability to generate sufficient cash to service debt.
Important facts for investors to verify
- Whether claims-cost inflation, parts shortages and labor constraints continue to reduce gross and Adjusted EBITDA margins.
- Whether direct-to-consumer, ProConnect and Streem growth offsets pressure in the real-estate channel.
- Actual cash generation and debt reduction relative to the $640 million of scheduled future principal payments and estimated $126 million of future interest payments disclosed at June 30, 2021.
- Compliance with the amended credit agreement’s leverage covenant and availability under the revolving facility.
- The effect of the shift toward monthly-pay customers on deferred revenue, working capital and future cash flow.
- Progress toward the expected $30 million to $40 million of 2021 capital expenditures and the company’s ability to sustain liquidity after regulatory cash restrictions.
- Whether COVID-19, weather, home sales, parts availability or service-request trends materially change claims frequency and profitability.