Frontdoor, Inc. 2020 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Frontdoor is a U.S. provider of home service plans operating under the American Home Shield, HSA, OneGuard and Landmark brands. Its plans cover repair or replacement of major home systems and appliances. The company also operates Candu, an on-demand home services business, and owns Streem, a technology platform using augmented reality and related tools for remote diagnostics.
This filing covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods. The company served more than two million customers annually across all 50 states and the District of Columbia.
Key Financial Metrics
| Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 |
|---|---|---|---|---|
| Revenue | $417 million | $388 million | $711 million | $658 million |
| Gross profit | $218 million | $205 million | $364 million | $333 million |
| Gross margin | 52% | 53% | 51% | 51% |
| Net income | $49 million | $60 million | $62 million | $73 million |
| Net margin | 12% | 16% | 9% | 11% |
| Adjusted EBITDA | $100 million | $105 million | $147 million | $149 million |
| Adjusted EBITDA margin | 24% | 27% | 21% | 23% |
| Diluted EPS | $0.57 | $0.71 | $0.72 | $0.87 |
| Operating cash flow | Not separately provided | Not separately provided | $140 million | $140 million |
Revenue increased 8% in both the quarter and year-to-date period. Renewal revenue increased 10% in both comparisons, supported by more renewed plans and improved price realization. Six-month revenue mix was approximately 69% renewals, 18% real estate first-year sales, 12% direct-to-consumer first-year sales and 1% other.
Cash and cash equivalents were $545 million at June 30, 2020, compared with $428 million at December 31, 2019. Cash and short-term marketable securities totaled $548 million. Available liquidity was $622 million, consisting of $372 million of unrestricted cash and $250 million of undrawn revolving credit capacity.
Total debt was approximately $978 million at June 30, 2020, including a $650 million term loan facility, $350 million of 6.750% senior notes due 2026 and other debt, net of issuance costs and discounts. The balance sheet reported $971 million of long-term debt, including the current portion. The company was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Q2 revenue rose $29 million, or 8%, while six-month revenue rose $53 million, or 8%.
- Q2 net income declined 19% to $49 million; six-month net income declined 16% to $62 million.
- Higher appliance and plumbing claims, increased marketing, customer-service investments, technology spending and COVID-19-related costs reduced profitability.
- Q2 cost of services rendered increased 9% to $200 million, exceeding revenue growth, and gross margin declined from 53% to 52%.
- Q2 selling and administrative expenses increased 20% to $125 million; six-month expense increased 19% to $229 million.
- Adjusted EBITDA declined 5% in Q2 and 1% for the six-month period.
- Real estate revenue declined slightly in Q2 and was approximately flat year to date because of lower first-year sales associated partly with reduced existing-home transactions. Direct-to-consumer revenue increased 7% in both periods, supported by additional marketing.
- Home service plan growth declined to 3% from 4%, while customer retention remained 75% at June 30, 2020.
- Operating cash flow remained $140 million year to date. Capital expenditures increased to $18 million from $10 million, and the company expects full-year 2020 capital expenditures of approximately $30 million to $40 million.
Guidance, Outlook, Risks and Unusual Items
Management did not provide formal revenue or earnings guidance in the filing. It expects COVID-19 to continue adversely affecting U.S. existing-home sales and first-year real estate sales, while claims and marketing investment may remain elevated. The company stated that the overall effect of COVID-19 through the remainder of 2020 remains difficult to predict.
- COVID-19 increased appliance and plumbing claims, reduced real estate sales, increased direct-to-consumer marketing, caused incremental contact-center wages and generated temporary employee-benefit, childcare and outsourcing-related costs.
- Restructuring charges were $4 million year to date, including lease termination, severance and technology-system costs. Landmark operations were consolidated with OneGuard during the first quarter.
- The company recorded a $3 million investment loss in Q2 and year to date.
- A second-quarter acquisition costing $5 million expanded the Candu offering. Purchase-price allocations for this acquisition and the prior Streem acquisition remained preliminary, and additional adjustments could be recorded.
- The company reported no indicators of goodwill or indefinite-lived intangible-asset impairment as of June 30, 2020, but will continue monitoring COVID-19 and macroeconomic effects.
- Interest-rate exposure is managed partly through an interest-rate swap. Accumulated other comprehensive loss increased to $37 million, and $8 million net of tax of unrealized hedging loss was expected to be reclassified into earnings over the following 12 months, subject to actual interest rates.
- Key risks include the pandemic, housing-market weakness, competition, contractor and labor availability, regulatory and consumer-protection matters, cybersecurity, adverse weather, inflation in parts and service costs, acquisition execution, substantial indebtedness and interest-rate changes.
- Pending and threatened legal matters arise in the ordinary course. Management does not expect them to have a material adverse effect, but unfavorable outcomes could materially affect a particular period.
Important Facts for Investors to Verify
- Whether COVID-19-related declines in first-year real estate sales and higher claims persist and affect renewal growth, margins and future revenue.
- Customer retention, plan growth and the relative economics of renewal versus new-customer channels.
- Adjusted EBITDA reconciliation and the extent to which restructuring, COVID-19, investment losses and acquisition costs affect comparability.
- Debt maturities, variable-rate exposure, interest-rate-swap obligations and continued compliance with credit-agreement covenants.
- Availability of unrestricted cash, regulatory restrictions on subsidiary distributions and the adequacy of liquidity for debt service.
- Actual 2020 capital expenditures versus the $30 million to $40 million estimate.
- Final purchase-price allocations for the Candu-related acquisition and Streem, including potential goodwill or intangible-asset adjustments.
- Claims accrual assumptions and adverse developments in litigation, regulation, contractor availability or cybersecurity.