Q3 2020 Frontdoor Inc Earnings Call
[music].
Ladies and gentlemen.
[music] front doors third quarter 2020 earnings call today's call is being recorded and broadcast on the Internet.
Beginning today's call is Matt Davis, Vice President of Investor Relations and Treasurer, and he will introduce the other speakers on the call. At this time, we will begin today's call. Please go ahead Mr. Davis.
Thank you operator.
Good afternoon, everyone and thank you for joining front doors third quarter 2020 earnings conference call joining.
Joining me today are front doors, Chief Executive Officer, Rex Sevens, and front doors, Chief Financial Officer, Brian Turcotte.
The press release and slide presentation that will be used during todays call can be found on the Investor Relations section front doors web site.
Which is located outside investors.
Front door home Dot com.
As stated on slide three of the presentation I'd like to remind you that this call and webcast may contain forward looking statements.
These statements are subject to various risks and uncertainties, which could cause actual results to differ materially from those discussed here today.
These risk factors are explained in detail in the Companys filings with the SEC.
Please refer to the risk factor section in our filings for a more detailed discussion of our forward looking statements and the risks and uncertainties related to such statements.
All forward looking statements are made as of today November 4th.
Except as required by law the company undertakes no obligation to update any forward looking statements, whether as a result of new information future events or otherwise.
We will also reference certain non-GAAP financial measures throughout todays call.
We have included definitions of these terms and reconciliations of these non-GAAP financial measures to their most comparable GAAP financial measures in our press release and the appendix to the presentation in order to better assist you in understanding our financial performance.
I'll now turn the call over to Rex for opening comments Rex.
Thanks, Matt and good afternoon, everyone.
We recently celebrated our second year as a standalone public company.
So today, we have made significant strides in reshaping front door.
Our transformation it is far from over I'm extremely pleased with our progress to date.
Despite the pandemic and extremely challenging external environment. The team continued to deliver by accelerating our revenue growth expanding dynamic pricing, a growing or on demand business by launching our new Proconnect service offering.
Let's now turn to slide four and review our current business progress.
Last quarter, we talked about lead into marketing investments for digital and broadcast media.
I'm happy to report that this strategy to accelerate revenue growth is working well.
We increased our direct to consumer unit growth by over 20% in the third quarter a.
Additionally, our direct consumer revenue growth was firmly in the double digits in the third quarter and we expect that to continue into 2021.
As a result of the Halo effect from our efforts to date, even though we are reducing our fourth quarter marketing investments due to higher media costs from the election.
Our real estate channel performed better than we originally expected this quarter are a much stronger real estate fundamentals.
We're seeing the same drivers as you.
Families, leaving urban centers to move to the suburbs low mortgage rates and strong demand for second homes.
The National Association of Realtors warrant our reported existing home sales increased 13% third quarter because of these trends.
These factors are driving up prices resulted in the lowest hold inventory on record according to our.
As a result is a strong sellers market, which has the potential to negatively impact the industry's capture rate for home service plan sales compared to existing home sales.
Because sellers are less inclined to provide a home service plans as part of the transaction.
Despite the potential impact on capture rates, we still benefit from a much stronger real estate market.
This means that we now have a strong macro tailwind for our real estate channel going to 2021.
Given the drivers I just mentioned, we now expect that the top of our sales funnel or the combined growth of our first year direct consumer or real estate home service plans.
Be about 1% higher than 2019 this.
This is a tremendous accomplishment given the significant Kobe 19 headwinds.
I'm also pleased to report that our efforts to increase customer retention, our working despite the challenging external circumstances.
Customer attention is now at 76% and our home service plan growth was up 4% in the third quarter.
We'll continue to monitor.
Oh, the challenging near term environment could impact our customer retention, but we believe we're taking the right steps on our journey to move the retention rates into the 80% range.
Now turning to dynamic pricing.
We just launched our next phase of the product in our direct to consumer channel last month.
We believe this effort will expand our potential customer base to those previously priced out of the market due to the industry's historical practice a state level pricing.
Additionally, we expanded our dynamic pricing models and.
And there were no channel, where we'll start to just additional customer information such as service requests history, and playing tenure to our dynamic pricing algorithms.
We are now able to use dynamic pricing I think prices for over 80% of our customers.
Well better balance our dual goals of growing our customer base and protecting gross margins across geographies.
From an efficiency standpoint, it allows for real time price adjustments to offset increased costs and inflation.
Any pricing capability is a critical product, allowing us to be more nimble than ever and we manage through the current external environment.
As a reminder, approximately 70% of our customers or our auto renew at auto pay plans.
Its recurring revenue subscription based model, it's a huge advantage that dynamic pricing that's helped optimize in.
In fact by the end of 2021, we expect to cover most of our increased service requests costs relating to COVID-19 with additional price.
We'll deliver this increase their dynamic pricing in a way that minimizes the impact overall retention.
As I mentioned earlier COVID-19 has resulted in an increase in service request, primarily in the appliance trade as our customers spend more time at home.
On one hand, we view the elevated service request levels as long term tailwind sits customers utilize their plan kinda revenue at a meaningfully higher rates we.
We also expect higher direct to consumer demand as the pressure is causing elevated levels of service request also drove a 20% increase in web searches for the term of warranty in the third quarter.
The other head.
Car service requests are impacting our near term results, which probably will speak to shortly.
At this point, we expect the elevated level of appliance service request to continue at least through the end of the year.
Additionally, we expect industry wide availability count challenges for appliances in parts to continue to early next year based on what we're hearing from our suppliers.
Keep in mind. These issues are not unique front door.
Navigating through an industry wide issue a little place availability demand has been significantly higher and appliance production has not been able to catch up from earlier supply disruptions.
I'd point out that over the last two years. Our team has developed the operational muscle to mitigate these types of swings in our business.
For example, we are addressing the higher service request an appliance the appliance trade I, taking the following actions.
First we are targeting a mid single digit overall price increases 2021.
Starting with price increases in our renewal channel now our direct consumer channel in January and we'll finish with real estate at February 2021 second.
Second we are reevaluating all of our supply and service processes, primarily relating to those impacting the appliance industry, which includes deepening and expanding our supplier relationships improving access to the fastest movie appliances, increasing speed of parts acquisition and expanding our service provider network.
Our preferred contractor deployment is that nearly 82% and 2020, despite higher demand.
Also our multi vendor strategy has helped to mitigate the macro impact on our business and we are still able to source parts in these challenging times.
These are two examples that validate our process improvements are working.
For those of you trying to model 2021, we have not yet seen the impacts our actions to mitigate higher appliance service request.
We'll see the full impact of these actions next year.
Higher service request demand and Koby 19 related staffing challenges at our third party call centers have also driven a decline in our customer service levels simply put we struggle to keep up with the call demand. This.
This is more than a little frustrating for me as we have previously made really good progress in improving our overall customer service levels since our spin off.
This issue has been particularly acute in the appliance trade normally in the fourth quarter would scale down our call center operations to match the lower level of demand.
However, this year, we are investing an incremental $5 million in service expense during the fourth quarter to handle the higher number of service request and improve the customer experience.
Over the last several months our team has been working on several initiatives to get us back to our targeted service levels by the end of the year before.
We have already begun to see improvements in late September and October as we continued to add an optimized staff around the globe.
Finally, we are still committed to continuing our self service journey.
And adding more service options for customers over time.
I would now like to give you an update on our emerging businesses beginning with stream on slide 520, 20 has been a building year for stream, which was a small startup team when we acquired them in late 2019 stream.
Streams augmented reality was recently featured by bulk Apple and Google as a great product to help businesses operate better.
Streams platform is being leveraged by innovative brands, including Lowe's, that's by Trager, British casting and clear result.
Additionally, we recently announced the release of software developer kits, how they refer to it as teekays to show how powerful it easily customizable extreme platform and technology can be for their business.
Business, we believe that stream can provide environmental health and cost benefits. We plan to do this by improving upfront diagnostics, which will drive an increase in the number of jobs completed the first visit they.
They use a stream will reduce the number of truck rolls and related carbon emissions and face to face interaction in a COVID-19 environment and improved cycle time.
Looking ahead to next year 2021, we'll be focused on leveraging nasty case to grow streams business and the partnerships as well as utilizing stream to operate richer service experience to our home service plan and on demand customers.
Now turning to our on demand offering on slide six.
A few days ago, we rebranded enhance our on demand service offering now called Proconnect under the American home Shield bread.
Proconnect well leverage the strength trust and brand awareness in American home shield to dramatically scale, our on demand offering health.
We also expanded our on demand offering from five to 35 cities, which extends our coverage the most major metro areas across the U.S.
Broken it will leverage the synergies synergies of being part of American home shield by effectively drafting under the overall brand marketing umbrella that's.
This will allow us to maximize existing traffic improve search rankings for proconnect.
For example, we have over 2 million home service thing customers and over 30 million annual visitors to our Hs website that can generate low acquisition cost jobs for on demand service.
The other unique visitors CHS dot com do not purchase a home service plan and we believe we can capture some of those prospective customers.
Still the whole maintenance and repair.
You also let us potentially until proconnect customers to into a home service plan it better suits their needs.
We will market Proconnect three ways first we will continue to market and then separately by investing in search and other digital marketing through Hs Dotcom Ford slashed Proconnect. It's.
We'll start with appliance other services for most of our 35 markets.
Expand services to our mode of license contractors over 2021, it looked at new markets in 2022.
Second we will market to existing Hs home service line customers I focus on focusing on cross selling and making services such as HIV assay upgrades.
Managed services, our unique way to engage our customers are services they need while also driving higher retention.
Third stock.
Starting early next year, we plan to market to perspective, new customers on the Hs website.
I'll also provide an expanded offering of repair preventive maintenance and move in services and 2021.
Our north star for on demand remains the same or offer convenient scheduling for same day or next day service transparency with unproved, Brent pricing on select services savings from affordable pricing and peace of mind with a guarantee that the job will be done right.
At this point, we anticipate Proconnect well complete approximately 80000 service requests and 2021 200000 service requests and 2022 and 400000 service request and 2023.
Well, we expect our average revenue per job to vary as we add additional services. This translates into an estimated annual earned revenue of 20 million 60 million and $120 million respectively over the next three years.
In conclusion, we have a powerful and resilient business model.
The strong financial position and we are making investments today that will accelerate our revenue trajectory over the next several years.
Our investments to drive.
Growth are working we are building a business focused on sustainable double digit revenue growth and unlocking the full potential of our emerging businesses.
Despite the pending that we intend to grow faster in 2021 expect to deliver double digit revenue growth.
Finally, we are navigating the challenging external environment extremely well and I'm confident that we are becoming a stronger organization from our learnings this year.
I'll now turn the call over to Brian who will cover our financial results in more detail Brian.
Thank you Rex and good afternoon, everyone.
Let's now turn to slide seven I will review, our third quarter financial results.
Revenue increased 8% versus the prior year period to $440 million driven by approximately four points to both higher price and increased volumes.
If we look at her home service plan channels revenue derived from customer renewals was up 9% versus the prior year period due to growth in number of renewed home service plans driven in part by customer retention improvement initiatives and improved price realization.
First your direct to consumer revenue was up 13% versus the prior year period.
The growth in the number of first year direct to consumer home service plan.
Mostly driven by the increased investments in marketing Rex mentioned as well as improved price realization.
And for US your real estate revenue was down 2% versus the prior year period, reflecting a decline in number of first year real estate home service plans.
This decline was due in part to the adverse impact COVID-19 had on U.S. existing home sales in the second quarter, partially offset by improved price realization.
As Rex mentioned, our real estate channel performed better than we originally expected this quarter on much stronger real estate fundamentals, including a strong rebound in existing home sales compared with a significant decline in the second quarter.
As I mentioned last quarter macroeconomic factors take about 12 months to cycle through our quarterly results and this blondes, either positive or negative impact of our first year real estate sales in any quarter.
As a result, our reported revenue will somewhat lag any macro economic trends.
Gross profit increased $9 million or 4% in the third quarter versus the prior year period to $215 million and our gross profit margin was 49%.
Net income was $49 million, a 20% decline versus the prior year period, while adjusted net income was $50 million, a 19% decline versus the prior year.
Adjusted EBITDA was $91 million in the third quarter and at the lower end of our guidance range. We.
We estimate the COVID-19 negatively impacted results by approximately $23 million during the quarter, including $12 million to $14 million of higher claims costs and $9 million of incremental marketing investments, which I'll now cover on slide eight.
Starting at the top we had $28 million at favorable revenue conversion in third quarter versus the prior year period.
The increase was driven by approximately equal contributions from higher price and increased volume.
Excluding the impact of the change from higher revenue contract claims costs increased $19 million in the third quarter versus the prior year period.
This increase was primarily driven by both a higher number of service request and increased costs in the appliance and plumbing trades as well as normal inflation.
The higher costing appliance trade were driven in part by industry wide appliance availability challenges.
As I mentioned, we estimate the $12 million to $14 million of the higher claims costs related to increased appliance and plumbing usage and customer shopping at home during the pandemic.
On our second quarter earnings call I projected that we'd see $8 million to $10 million higher claims costs in the third quarter related to cope in 19, but the number of service request increase more than we expected.
The higher contract claims costs were partially offset by favorable weather impact of approximately $1 million and process improvement benefits.
Sales and marketing costs increased $16 million in the third quarter versus the prior year period.
This increase was primarily due.
To an investment of approximately $12 million in our direct to consumer or DTC channel.
Consistent with what we projected on our previous earnings call about $9 million of the increase was directed toward opportunistic marketing investments to increase our DTC customer count growth at attractive acquisition costs in response to the adverse impacts COVID-19 had our real estate channel in the second quarter.
As a reminder for sure real estate units lost in the second quarter when existing home sales dropped significantly well have an unfavorable impact on our revenue each quarter until we replace those units.
The 6 million dollar increase in service costs was primarily related to managing a higher number of service request and investments in customer retention initiatives.
As Rex mentioned, we believe our increased investment in service in 2020 has helped increase our customer retention rate is 76% on a trailing 12 month basis through the third quarter.
For full year 2020, we expect investments in our home service plan business as well as an additional $15 million to $20 million investment in our emerging businesses of on demand and screen to increase our full year SGN expense as a percent of revenue by 325 basis points versus prior year.
However, as a result of our actions to continue to invest in the business during the pandemic.
We estimate that we will deliver double digit revenue growth in 2021.
Please now turn to slide nine for a review of our cash and cash flow position.
Net cash provided from operating activities for the nine months ended September 32020 was $154 million the same as the prior year period.
Net cash used for investing activities was $25 million, an increase of $6 million versus the prior year period.
This is primarily due to an increase in capital expenditures, mostly to support investments in technology.
Net cash used for financing activities was $6 million the same as the prior year period.
It was primarily comprised of required debt payments.
Free cash flow, which we calculate as net cash provided from operating activities minus property additions was $127 million for the nine months ended September 32020, compared to $138 million for the prior year period.
This decrease eat free cash flow was primarily due to higher capital expenditures in 2020.
Our adjusted EBITDA conversion of free cash flow rate for the nine months ended September 32020 with 53%.
As I mentioned on our previous earnings calls our adjusted EBITDA conversion free cash flow rate is typically higher in the first half of the year because of the timing related to cash payments, specifically cash paid for service requests and cash taxes.
We still anticipate our full year 2020, adjusted EBITDA to free cash flow conversion rate to be around 50%.
Cash and marketable securities totaled $551 million at the ended the third quarter.
$3 million increase compared to June 32020.
That total restricted net assets required to meet state regulatory reserve requirements totaled $176 million, while the remaining $374 million are considered to be unrestricted.
Our available liquidity at the end of the third quarter was $624 million, which includes the aforementioned $374 million of unrestricted cash plus an available undrawn revolving credit facility of $250 million.
And our first quarter earnings call in early May.
I've mentioned that we viewed our available liquidity in.
And ability to generate cash to be significant advantage as we navigated through the uncertain COVID-19 economic environment.
That Stephen has proven to be accurate as we continue to invest in the business during the pandemic pandemic, both organically and through the on demand business acquisition, while adding to our cash balance.
As we look forward our priorities for cash allocation remain the same in terms of investing in organic growth.
Pursuing strategic acquisitions, repaying debt and returning cash to shareholders. However.
However, we plan to be opportunistic and considering all of these cash uses in the priority ranking can certainly change as we continue to strive to increase shareholder value.
I'll now conclude my prepared remarks, with some comments regarding our fourth quarter financial outlook.
Based on our preliminary October results and current forecast for November and December.
We expect our fourth quarter 2020 revenue to range between 350 and $325 million or.
For an increase of 5% to 8% versus the prior year period.
We also expect adjusted EBITDA to range between 28, and $32 million compared to $48 million in the prior year period.
The fourth quarter outlook includes three key assumptions first continued direct to consumer and renewal channel revenue growth and first year real estate revenue to be relatively flat versus the prior year period second.
An estimated unfavorable claims cost impact of $12 million to $14 million from higher appliance and plumbing service requests.
As a result of our customers continuing to shelter at home and third an additional 9 million dollar investment in service expense in the fourth quarter versus the prior year period to handle the higher number of service requests and improve the customer experience.
Oh that total increase in service investment.
Approximately $5 million is attributed to the impact of the cold at night too.
In closing.
While we remain as optimistic as ever about the long term prospects of the business. However.
Our near term results continued to be impacted by Copel I'd like to.
In the third quarter, we estimate that COVID-19 negatively impacted our adjusted EBITDA by approximately $23 million.
Mostly related to the additional service request.
Rental marketing investments I previously mentioned.
For the fourth quarter, we estimate the negative impact on adjusted EBITDA from Carbonite team to be approximately $17 million to $19 million due primarily to the increased appliance and plumbing service requests and the incremental investment service I mentioned.
Despite these challenges we continue to generate meaningful revenue growth.
Attractive margins and strong cash flows.
You're making productive and efficient investments for the long term health of the business.
Customer retention is increasing and we have a substantial and growing liquidity position.
How's us to take advantage of market opportunities.
With that I'll now turn the call back over to Matt to open the question and answer session Matt.
Thanks, Brian as a reminder, during the question and answer session. We encourage you to ask any questions that you may have but please note that guidance is limited to the outlook we provided.
Operator, let's open the line for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question comes from Aaron Kessler from Raymond James. Please go ahead.
Thanks, guys. A couple questions here, maybe first just on the proconnect ever going to get a sense for it maybe revenue that you think are could be driven from current it's subscribers versus kind of new business. I'm also be interested with any kind of name change maybe potential cost savings as you get more organic traffic.
No just the investments and Proconnect, we should think about for 2020 and 2021 as well.
Hey, Aaron.
So for a corporate Proconnect you know I think one of the major drivers for us or for the name change was really to a good time to do.
To be able to get to go behind our Ah you know HHS web site and be able to leverage our.
Our marketing spend so we think that we have the ability to really drive a lot of organic traffic, especially when you consider that yeah.
To cross sell to 2.2 million customers today, and then you know 30 million visitors and I think that's a lot of a Bible. So to speak that Oh, we have already paid for so yeah. That's that's that's really all I wanted to get to to change the name.
In terms of you know how much is organic how much is a you know a true through search or not were going that detail just just yet but yeah. We laid out in our our comments, we do see significant growth for the next three years, which we you know we have laid out.
Got it okay, great and then quickly on a oh the service costs across quarters, they've talked about for imports. Most service top is that still the case potentially or should we think about continued headwinds from higher service costs really until consumers shelter at home was the kind of Costco that here.
In terms of the service cost you know certainly as.
Yes people continue to to a shelter at home and that begins to lift and obviously that will give us a tremendous tail.
Tailwind, but as we talked about earlier, yeah, we haven't seen the impact to our dynamic pricing changes. We just recently made oh, the dynamic pricing change for renewals I'm just two thirds of our other business. So you know, we we hope that a the impact for appliances and plumbing or start to to Wayne.
And then early 21, but we're preparing for a the impact a true.
A process change that we laid out.
Earlier in the comments or pricing and then could.
Continuing to work with our contractors.
Great. Thanks, so much.
Yeah.
Next question comes from Ralph Schackart from William Blair. Please go ahead.
Hi, good evening, thanks for taking the other question what's.
So Brian I, just wanted to get a sense of sort of linearity or sort of the order of magnitude service request that you saw during the quarter and just sense are they starting to slow or do they continue to be steady you know are they increasing just curious on sort of the pace of that in Q3 and kind of what you've seen so far in Q4.
Hey, Ralph I hope you're well.
I certainly if you think about our business. It's it's really in a bell curve. So obviously were busier and Q2 in Q3.
For for Q4 increased service cost are simply because we have a higher.
Volume for for appliances, but when you look at kind of the overall.
You know service requests for the business starts to tail off and in Q4, but it.
It is higher for clients and so we're not seeing really a change to other parts of the business is just a strictly appliances.
Right and just lastly, Brian <unk>.
Hey, Ralph this is Brian and I know if you call. It the end of my prepared remarks, but I I did lay out another 12 to 14 million.
Claims cost from appliances and plumbing in Q4, which is the same number from Q3. So you can see it as being fairly linear.
From the impact from COVID-19 on our claims costs in Q2, Q3 and Q4.
Okay. That's.
That's helpful. Thanks, Brian one more if I could just switching gears to customer service.
Hi, I'm, assuming just adding incremental call center agents, but perhaps you know give us some perspective other initiatives you're taking on here during a coven and.
Thoughts on how this can strengthen the overall customer service experience going forward.
It was cold environment. Thank you.
Yeah, well certainly you know the I guess the silver lining in a very dark cloud is that COVID-19 actually benefits us I think from a long term perspective and that certainly has increased our value proposition that demand for our services.
Specifically to the.
Yes, it's a services we've really moved you move teams around in order to.
Be able to you know the only answer our phones more quickly but also.
The the big struggle, we have is for Oems will you rely on staying true to their call centers to check the status of of a appliance replacements and so you know I think as we work with those Oems to lower there.
You know, they're they're called times are we should we should see the the tail end of that on our side as well, but the the team's done a phenomenal job of kind of re shifting a lot of head count and you know processes to streamline it for customers and we are you know pretty.
Pretty pretty bullish that going into next year.
Hello are you, even this quarter, well well see a much better service times and hopefully much improved cycle time.
Alright, Thanks, Rex Thanks, Brian for ship.
Yeah, that's right.
Good questions.
Next question comes from quite Carpenter from JP Morgan. Please go ahead.
Great. Thanks for the questions, maybe just starting a wrestling with on demand I definitely appreciate the commentary around revenue targets for the next few years, just kind of hoping you could help frame, how you're thinking about that the level and the types of investments that may be needed to be made behind that especially relative.
Kinda 15 to 20 million level this year.
Yeah.
Yeah, so so a word on.
Huh.
We're not prepared to give a complete guidance for next year in terms of that but I think I said I think you'll find will be roughly in the same range as this year I don't see a a a big increase.
Incremental increase.
From from a from a spend perspective, yeah years, two and three I think.
We still need to look at but I think next next year should be roughly in line with where we are today.
That's helpful. And then just a follow up if I can on.
On customer retention I think it's the highest you know certainly the high spend in a really long time I'm. Just curious are you seeing that coming more from from real estate direct to consumer and maybe both and then could you just expand a bit more on some of the initiatives that have been successful with retention.
I think I think the biggest.
Biggest a help for us has been to our our retention team. So we have dedicated.
Retention teams. This has been a huge cross functional effort for many quarters now and.
And give I get the kind of kudos to that team.
Who wakes up every morning, and kind of thinking about retention and certainly are beginning to pay off so I wouldn't say, it's it's you know specifically real estate or direct consumer keep in mind that the customers. After here too are you at the same rate. So they are very focused on.
You know.
Having the retention teams very focused on on cancellations, making sure that there's no issues. So that we can you retain that customer for the following year and so those those process improvements have really.
And the catalyst or a yeah for the change in retention.
Great. Thank you.
Thank you.
Next question comes from Ian Zaffino from Oppenheimer. Please go ahead [noise].
Hi, great. Thank you very much.
Just talk a little bit more about that pricing, maybe how it should be done through how long will it take to get it all through.
And you know on the backside of this size people shots or less in place.
How do you think about dynamic pricing in that environment.
And then maybe your ability to hold on to some pricing. Thanks.
Hey, you know I'll take that one yeah for four renewals we've already made the change the great thing about dynamic pricing is it's just that dynamic. So we were able to make those changes and as a matter of days versus once that used to take us.
So <unk> so for two thirds of our revenue as it begins its folks begin to renew those.
You'll see a different price and keep in mind that.
It's it's based on on each customer. So so some of it will see less some we'll see more and in terms of the on the rollout direct consumer will be next followed by real estate a direct consumer will be January.
And you tell me about February real estate should follow so you should you should see all the price increases starting no later than Q1, but keep in mind at least for renewals, it's when the customer renews right. So its going take the full year.
Kind of get through that to your second question in terms of you know what happens in a in a post covered world.
I I for one and looking forward to that day, but.
But you know the great thing about that pricing allows you to flex up or flex down and so we certainly have the ability to to change pricing power for.
For all channels again, I think you know its weve proven this is a fairly inelastic market. So I think there will be some opportunity to still capture still.
Still capture price the love to kind of see once we get to yeah to cut that time.
All right. Thank you very much.
Thank you thanks again.
The next question comes from Michael Inc. from Goldman Sachs. Please go ahead.
Hi, Thank you very much for the question I was wondering if you could expand a little bit more on your outlook for del <unk> double digit revenue growth in 2021.
You know, what's not really driven by that.
The mid single digit pricing you spoke about is better retention is that they benefit from Proconnect just would love to hear that some of the drivers and your confidence level in that acceleration in revenue growth.
Hey, Michael attracts I hope you're doing well.
Yeah, we were we're confident about the double digit revenue growth from a couple aspects one oh, we think that even though it's a tight inventory, we'll see a at least a modest improvement and real estate next year.
We're really bullish on our direct to consumer opportunities worker continue our work as it relates to retention. The teams aren't aren't finished yes, as we've said before we're not going to stop until you get to the Eightys and then we're going to figure out. The next plan. After that so you know from a core home.
Service plan business perspective, I think we're really had the opcone fire on all cylinders you add that to.
Two emerging businesses of both Proconnect in stream.
That's what really allows us to deliver that double digit growth.
Great. Thank you and you know like I can appreciate you probably aren't giving detailed guidance for 2021, yet but yes.
Should we expect gross.
Gross margins to normalize next year.
Obviously gross margins this year are a little bit weaker than expected, but as you know pricing catches up to make up the.
Higher claims costs should be 2021 be more of a normal gross margin here.
Brian do you want to go and Michael Yeah, Hey, Michael.
A good question, Yeah, where our forecast for this year from four years between 40, and 49% as you know which is not that much lower than our typical 50% target that we've given to the street for the past two years. So we're not really in a position yet to give you you know gross margin for 2021, but.
Yes, 40 to 49 to 50, you know in that range be probably a realistic estimate for next year.
Okay, great. Thank you Rex Thank you Brian.
<unk>. Thank you.
Next question comes from Mack Cali audio so from Compass point. Please go ahead.
Hey, good afternoon, guys. Just a question on marketing spend obviously nice to see the revenue growth acceleration in the channel. There I was wondering if you could touch on I'm just.
Did the.
Did this come in line with.
Your expected increase as it related to the to the higher spend in the channel I'm. Just wondering if it came in line with your targets there and then how that strategy evolves into 2021 with the real straight real estate trends. We're seeing now I know you mentioned that I think I heard that the.
<unk> expenses were.
325 basis points higher in 2021. Thanks.
Yeah, So hey, Matt attracts the poorer direct consumer actually outperformed our expectations. So.
Yeah, we saw a 20% plus increase from up from a unit perspective that double digit revenue growth.
So we thought it performed very well I think the team is a <unk> or some other chicken apparently for 2021.
But definitely yellow, but you need to invest in that channel as it as it makes sense.
In terms of that's you now I'll turn it over to Brian.
Yeah, I think in my comments I mentioned it was up 325 basis points this year.
And you know to drive all the initiatives and that's why you see the double digit revenue growth that we're forecasting for next year, Matt. So it's a good story and its a big part of our growth profile going forward.
What was your precise question regarding yesterday.
Got it yeah no. The question on that she and I was I I thought I heard that it was up 325 basis points for 2021, So got it that was for 2020.
Right.
Right. Thank you.
Thank you.
Next question comes from Youssef Squali from true Securities. Please go ahead.
Great. Thank you very much and Rex it's nice to hear you talk about double digit growth.
Next year.
Quick question on just dynamic pricing you guys, obviously have been talking about and rolled out dynamic pricing even before cove. It as you think through you know kind of how to tweak prices just based on the inefficiency of the old pricing model versus maybe go.
Greater usage and higher risk customers.
Our booth now part of the Aldo for Domino's dynamic pricing is it still based on the way you guys were thinking about it pre cove. It and then secondarily I was wondering if you can maybe just speak to the availability of service providers, maybe percentage of Srs that get sort of.
Request they kept fills by preferred sbcs. Thank you.
Sure yourself or a double digit growth as well I'll take your last question first we're actually doing very well from a percent preferred perspective as I mentioned in the prepared.
Prepared comments, a we were over Ah, yes, 80% I believe 82%. It if it comes to appliance <unk> percent. The preferred I think were roughly in the same range as it relates to all of our prefer contractors are preferred providers. So so yeah I think that's a credible testimony.
Due to the team and that even.
Even with a higher service requests were still able to.
Get our most experienced and and thankfully lowers most cost contractors out to get to the service those those units.
As it relates to dynamic pricing.
I'm going to think about you know the first journey for <unk> dynamic pricing was really.
Just to be able to to price on a you know it is up nine level or the almost a subdivision level.
You know what we're continuing to you know more for that those models into being able to look.
Look at things like service history, and other factors that will allow us to make the the models even better that's coming in.
In 2021, so our strategy for dynamic pricing hasn't really changed that still marching to.
Being able to continue to refine the bottles can be able to ingest the different types of data that really allows us to provide a differentiated price you know core for each customer rather than yeah, kinda kinda blanket pricing. If you will so so those things will come over the course of the next year, but.
You know I think that that pricing really allows us to continue to build this very resilient model for us.
And one last question if I may on stream I think commission stream as part of the you know what gives you confidence in that double digit growth rate. So you did breakout the proconnect. So I was wondering if you can maybe help us it just get a general sense of how how Ah Ah well kind of.
Revenue stream contribute next year I know, it's really early but since you mentioned it.
Yeah, I think I think majority of the revenue comes from from Proconnect or whether it's one thing to keep in mind.
Yeah, when we bought the company late last year.
Just had a team of of a handful of people than weve since grown the team and absent some great marquee accounts, but.
But still so early or early innings in terms of growth. So you know certainly I expect you know yeah to the double if not triple growth as we are.
Uhhuh for it but it's a very small base. So I think you'll see see more of the power of upstream revenue as we get.
Further out into the out years.
Okay, great. Thank you.
Thank you Keith.
Next question comes from Kevin Mcveigh from Credit Suisse. Please go ahead.
Great. Thank you Hey wonder.
What drove the decision just particularly given the elevated costs.
Archie side to step up the sales and marketing Oh, I guess just in the context stopes.
So overall I guess, you know <unk> <unk> associates.
You know just any color.
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Hey, Kevin that strikes me the Directionally. The decision was was I think the decision was simple you know co that there's not going to last forever and so we want to make sure that we'll continue to invest.
In the long game and really invest in the business overall.
You know last last quarter, we saw tremendous opportunity and and broadcast and digital is as rates were at historic lows and.
So why not take advantage of those we think we can use dynamic pricing to begin to offset some of the cost pressures that we're seeing from carbonite team.
And we don't expect you know connecting to last forever, but let's say it did that pricing will allow us to get through that as well so rather than focus solely on cost and kind of Oh, you know back off if you will we saw a great opportunity to lean forward and accelerate our revenue growth and take advantage of.
Of of some pretty attractive.
Attractive rates from from a marketing perspective so.
That's that's really the catalyst for a prior decision, making I think that's it's paid off and that we had done that we wouldn't see double digit revenue growth for next year, because again two thirds of our revenue is is renewals and so yeah. The faster we can fill the funnel the yeah. The faster you can grow.
And then I guess any sense of the cadence.
So the 76.
Oh touch spiritually expect that and is there any sensitivity to what I said about 50 basis points.
<unk> revenue.
Yeah in terms of you know take on Brett.
I was just going to say theoretically a point of of retention would add you know $15 million to $20 million revenue, but but on an annualized basis, it's probably going to be less than that probably something more in the range of.
I don't know 10 to 14 million.
Realistically on on a point of of retention and excellent.
Excellent you take the first part of that question is like.
Sure.
So Kevin as you see with we've kind of been on a.
Very ER.
Yes, [laughter] Ernie to increase retention and it requires a lot of process work and.
Yeah, Frank a lot a lot of data analysis, Oh, we're not prepared to give a time on a you know how do we get from 76 to 85 by by quarter, but yeah. The <unk>. The <unk>. The team continues to wake up every day thinking about how do we how do we change that change the game here and what do you think that differentiated service offerings that you know for example.
So a better utilization of stream that helps us oh, gosh fixed fixed prop problems a faster for customers.
I always lead to a better retention and so we have other things that we need to work on a as a company and that's those those things those are the things that are going to really allow us to.
You get into the Eightys.
Understood. Thank you very much [noise].
Thank you. Thank you.
Next question comes from Robert Culbreth from Wells Fargo Securities. Please go ahead.
Oh, great. Good afternoon. Thanks for taking the questions facts are going back to your comments on that sellers market dynamic that you're seeing in real estate chat with you a few questions there or can you give us a snapshot on your mix of business going into co, but Ah versus now between seller pays buyer pays agent pays then secondly anything.
Being incrementally you think you can do on agent or fire outreach or education that drives category adoption and preference for H S. And then finally right as you maybe do see more of the business tilt toward buyer pays over time or any thoughts on how that could impact retention in the real estate channel right. Thank you.
Yes. So certainly we are you know we've been leaning more on the on the buyer side than the seller side for obvious reasons that I talked about a we haven't really broken it out in terms of the specifics and channel, but safe to say that.
Our focus will remain and seller.
Yeah, I'm, sorry buyer as as we.
It's as inventory remains tight in terms of kind of how are we working through that yeah. We've done a lot of work as a real estate team to really lead into all of our provider and says I talked about or other partners rather as I talked about on the last call I think we are seeing.
The Halo effect of.
Being able to you know we offered stream we offered to other things to to agents or when the you know the the pandemic again, so we'll be top of mind. We continue to you know to drive you know kinda joint efforts together.
Across all of the top 10 or Realty car so I.
I think that will definitely help US you know in California. We've we've you know beginning to offer a natural hazard disclosure or things like that to help set to help our Asia. So a very like joint effort with our agent partners, but we're hopeful for 21.
I think.
Next question comes from Justin Patterson from Keybanc. Please go ahead.
Great. Thank you, Hey, Brian Hey, Rob So if you're both well I'll start with broken out to Justin's you talk about the initial learnings from the first five markets and how you thought about refining the product for those big 30, New ones. For example, I do know there were some changes on both the flat the pricing and the six month guarantee.
Hi, Justin Great to hear your voice again welcome back Yeah, certainly a as you launch new markets, there's always going to be learnings you know I think that some of the biggest earning learnings for us.
Yeah, we are always a tweaking their algorithms around the flat fee pricing and will [laughter] well do that until you know until the dawn of time, so to speak the biggest thing for US was really making sure. We can get to a marketing campaign that that they made sense and this is why we really are.
Our lean into to a you know drafting under the the Hs umbrella because it's really about distribution. So I'll be able to cross sell to or you know are 2.2 billion existing customers, we had that opportunity, but now the 30 million people who come to our site.
Really give us a lot of opportunity to potentially lower those acquisition costs. So.
Yeah, but by focusing on those things, we think that scrubber cost that we can roll. This out to 35 cities and began to really scale in terms of your your guarantee question. Yeah. I think we're always going to be tweaking kinda that that piece of my element of of a convenience technology.
Savings and peace of mind, I think is a it's a small tweak but yeah. We'll continue to look at those those type of things you know every every month as we as we scale.
Got it Thanks, and then my next question I'm Kinda up levels some of that as we think about on demand scaling.
The great progress it sound like the renewal rate and nine and just the refinements the dynamic pricing you know how much human investment differently in customer acquisition money that in the past since it seems like a lot of these trends are positive LTV and that's theoretically you could get more aggressive on that customer acquisition side.
Absolutely it and so as we look at a good things in terms of Hearts.
Well, what channel Oh, I'm it on and.
And so it does give us an opportunity to.
To market at a different rate so to speak as it as it relates to the customer's LTV.
So those are all things that you know, we've really built out over or last couple beers or they will continue to be fine but.
But you're right. This gives us an opportunity then to to make a very you know pinpoint decision on how much you're willing to spend to acquire a customer.
And when markets that you may be more advantageous than than others. So that's the power of a kind of bringing these three things together and not just having a.
Singular a single focused business.
Any oh, we we think that that on them and that really gives us an opportunity to market to customers differently is you know as as hsp or home service plans allow this to the market to unmet customers as well. So it's a very symbiotic relationship, but well definitely change how we think about a long term value for customer.
Right. Thanks, so much.
Thank you. Thank you.
There are no more questions in the queue. This concludes our question and answer session I'd like to turn the conference back over to Rick students for any closing remarks.
Thank you operator, and thank you to all of our investors and analysts who participate on today's call as I mentioned, our first call front door is playing the long game in terms of increasing shareholder value our investments to accelerate both near term and long term revenue growth are working we.
We also outlined a solid growth plan for our emerging businesses that will become a much more significant revenue driver for us over the next few years.
Finally, I could not be more proud of how the front door team has continued to navigate the ever changing environment, while embracing new challenges, we have a resilient business model and we are becoming a stronger more nimble organization as a result of the pandemic. Thanks.
Thank you again for your continued interest in front door and I look forward to speaking to you all against it.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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