Frontdoor, Inc. 2021 Q1 Form 10-Q Summary
Business Context and Reporting Period
Frontdoor provides annual home service plans covering repairs or replacement of major home systems and appliances through the American Home Shield, HSA, OneGuard and Landmark brands. It also operates ProConnect, an on-demand home services business, and Streem, a technology platform. As of March 31, 2021, the company had approximately 2.25 million active home service plans across all 50 states and the District of Columbia.
This Form 10-Q covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020. The interim financial statements are unaudited.
Financial Results and Key Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $329 million | $294 million | 12% |
| Gross profit | $148 million | $147 million | 1% |
| Gross margin | 45% | 50% | Down 5 percentage points |
| Net income | $5 million | $13 million | Down 63% |
| Net margin | Approximately 1.5% | Approximately 4.4% | Down approximately 2.9 percentage points |
| Adjusted EBITDA | $36 million | $47 million | Down 23% |
| Adjusted EBITDA margin | Approximately 10.9% | Approximately 16.0% | Down approximately 5.1 percentage points |
| Operating cash flow | $52 million | $60 million | Down 13% |
| Capital expenditures | $7 million | $8 million | Down $1 million |
| Basic and diluted EPS | $0.06 | $0.15 | Down $0.09 |
Revenue growth was driven by renewals of $224 million, direct-to-consumer revenue of $41 million, real estate revenue of $57 million and other revenue of $8 million. Renewal revenue increased 12%, direct-to-consumer revenue increased 16%, real estate revenue increased 2%, and other revenue increased from $3 million to $8 million, primarily from ProConnect and Streem.
Cost of services rendered increased 23% to $181 million, materially faster than revenue. Contract claims costs increased because of higher appliance and plumbing claim incidence, appliance parts and trade availability constraints, inflation, and an unfavorable weather impact of approximately $5 million. Selling and administrative expenses increased 12% to $118 million, reflecting higher marketing, customer service, personnel and technology costs, as well as higher stock-based compensation.
The effective income tax rate decreased to 9.8% from 25.0%, primarily because of excess tax benefits from share-based awards. Interest expense declined to $13 million from $15 million, primarily because of lower rates on unhedged variable-rate debt.
Balance Sheet, Debt and Liquidity
| Metric | March 31, 2021 | December 31, 2020 |
|---|---|---|
| Cash and cash equivalents | $538 million | $597 million |
| Total assets | $1.355 billion | $1.405 billion |
| Total debt carrying amount | $875 million | $975 million |
| Term Loan Facility | $529 million | $629 million |
| 2026 Notes | $346 million | $346 million |
| Revolving Credit Facility drawn | $0 | $0 |
| Deferred revenue | $227 million | $187 million |
Frontdoor repaid $100 million of its Term Loan Facility on February 17, 2021 and recorded a $1 million loss on extinguishment of debt. Management estimates that the repayment will reduce interest expense by approximately $12 million in total for 2021 through 2025.
Available liquidity was $611 million at March 31, 2021, consisting of $363 million of unrestricted cash and $248 million of available revolving-credit capacity. Two million dollars of letters of credit were outstanding. Approximately $175 million of net assets remained subject to third-party regulatory restrictions. Management stated that operating cash flow, cash on hand and available borrowing capacity should be sufficient to meet obligations for the foreseeable future. The company was in compliance with its debt covenants.
Cash Flow and Capital Allocation
Operating cash flow was $52 million, compared with $60 million in the prior-year quarter. Investing cash use was $7 million, primarily capital expenditures. Financing cash use was $105 million, primarily the $100 million Term Loan repayment. Cash therefore decreased by $59 million during the quarter, ending at $538 million.
Management expects full-year 2021 capital expenditures of approximately $35 million to $45 million, including recurring needs and investments in information systems and productivity-enhancing technology. No additional material capital commitments were disclosed.
Material Changes Versus the Prior Comparable Period
- Revenue increased 12%, supported by renewal growth, improved price realization, direct-to-consumer growth and higher ProConnect and Streem revenue.
- Gross profit was essentially flat because claims costs rose substantially faster than revenue, reducing gross margin from 50% to 45%.
- Net income fell from $13 million to $5 million and Adjusted EBITDA fell from $47 million to $36 million.
- Home service plans increased to 2.25 million from 2.17 million; reported growth increased to 4% from 3%, while customer retention remained 75%.
- Cash declined by $59 million, largely because of the $100 million debt repayment.
- Deferred revenue increased by $40 million to $227 million, reflecting advance customer payments and contract accounting.
- Restructuring charges declined to $1 million from $3 million. Q1 2021 charges primarily related to accelerated depreciation of technology systems.
Guidance, Outlook, Risks and Unusual Items
The filing provides capital expenditure expectations of approximately $35 million to $45 million for 2021 but does not provide formal revenue, earnings or Adjusted EBITDA guidance.
Management stated that COVID-19 adversely affected Q1 2021 results. The real estate channel remained affected by lower prior-period existing-home sales and a strong seller’s market. Customers spending more time at home increased appliance and plumbing claims and customer-care demand, while parts shortages and trade availability constraints increased replacement and service costs. Management expects remote work and elevated home-system usage could continue affecting service demand and costs, but stated that the overall pandemic impact remains difficult to predict.
Other key risks include competition, economic conditions and existing-home sales, contractor and labor availability, inflation in parts and appliances, weather, consumer-protection regulation, cybersecurity, technology execution, substantial indebtedness and interest-rate increases. Certain regulated subsidiaries face restrictions on distributions, dividends and transfers of funds to the parent.
In January 2021, the Arizona Attorney General filed a lawsuit against Landmark seeking $14.7 million in damages plus penalties and other amounts. The matter was settled in March 2021 for $1.8 million. The settlement amount had already been accrued in 2020, so no additional Q1 2021 expense was recognized.
The company reported no goodwill or trade-name impairment charges, no significant off-balance-sheet arrangements and no material changes to its previously disclosed risk factors or internal controls.
Facts an Investor Should Verify
- Whether higher appliance and plumbing claims, parts shortages and unfavorable weather persist and continue to pressure gross margin.
- Trends in renewal volume, pricing, customer retention and direct-to-consumer acquisition costs.
- Progress of ProConnect and Streem investments and their contribution to revenue and profitability.
- Cash generation after the debt repayment, expected $35 million to $45 million of 2021 capital expenditures and future debt-service requirements.
- The extent to which regulatory restrictions limit upstreaming cash from subsidiaries.
- Interest-rate exposure, including the effectiveness and future accounting impact of the interest-rate swap.
- Potential developments in legal and regulatory proceedings, including the Arizona matter and consumer-protection compliance.