Q4 2020 Frontdoor Inc Earnings Call

Ladies and gentlemen, welcome to the front door is fourth quarter and full year 2020 earnings call today's call is being recorded and broadcast on the Internet beginning.

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'll begin today's call. Please go ahead, Mr. Davis solution.

Thank you operator, good afternoon, everyone and thank you for joining front doors fourth quarter and full year 2020 earnings conference call.

Joining me today are front doors, Chief Executive Officer, Rex turbine and front doors, Chief Financial Officer, Brian Turcotte.

The press release and slide presentation that will be used during today's call can be found on the Investor Relations section of front doors website, which is located at investors <unk> front door home dotcom.

As stated on slide two 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 company's filings with the SEC. Please.

Please refer to the risk factors 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 February 18th and 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 today's call we.

We have included definitions of these terms and reconciliations of these non-GAAP financial measures for 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.

Turning to slide four I want to start by saying I could not be prouder of our associates navigating an extremely challenging external environment in 2020.

Fantastic job tackling some of the most difficult issues. This business has faced in our 50 year history.

I truly believe we are a stronger more nimble and more efficient organization as a result of how we responded to the COVID-19 pandemic.

While COVID-19 continues to plague the world we remain focused on meeting the needs of our customers.

Tractors associates and shareholders, while achieving our goal of sustained double digit revenue growth.

The broader team continues to further the company's vision I'm, taking the hassle out of owning a home and in turn made significant strides in improving key areas of our business for.

For example, we were able to grow revenue by eight per cent in 'twenty and 'twenty versus the prior year.

It is an extraordinary accomplishment considering the difficulties we had to manage through.

In comparison, we only grew annual revenue and average for three per se during the global financial crisis.

We also increased revenue in 2020 by accelerating opportunistic marketing investments in our direct to consumer or DTC channel, improving our customer retention rate and benefiting from a stronger than expected recovery in the real estate market in the second half of the year.

We drove DTC revenue growth by aggressively lean into much lower broadcast media rates in the spring when others were pulling back due to COVID-19.

This was a very efficient spend for us because we were able to grow or did you see customer base by 12% in 2020, but only a modest increase in our customer acquisition costs.

We also launched a new advertising campaign and deepen the talent bench within our marketing team.

Expanding our in house capabilities, not only create a step change in efficiency, but also bolstered our ability to drive sustained improvement.

Our real estate channel experienced significant swing in.

The overall demand in 2020.

Existing home sales declined 19% in the second quarter, and then experienced a remarkable recovery in the back half for 'twenty 'twenty.

The National Association of Realtors or Nara.

For the existing home sales increased almost six per cent for the full year, which was significantly better than 'twenty 'twenty expectations in April.

The growth differential between our real estate channel and our data continues to be driven by a record low housing inventory, which in turn has created what are the strongest sellers market we've ever seen.

This environment reduces the owners' desire to provide a home service plan as part of the sale.

That's historically impacted our conversion rate.

For us that means we will sell a higher percentage of home service plans when a seller is paying for our services when the buyer base.

Talk about our action plan to address this shortly.

Our renewal channel I'm pleased to note that our overall customer attention rate increased from 75 per cent in 2000 1976 per cent in 'twenty 'twenty.

We are proud of the accomplishment given the macro pressure on our business.

For comparison overall retention declined from 73 per cent for 71 per cent during the global financial crisis from 2007 for 2008.

Several factors contributed to our improvement in retention.

Establishing a dedicated retention team a number of process improvements and maniacal focus on moving in solar customers.

Over the last year consumers have stayed home far more which has increased both our value proposition and demand for our product.

We believe this is a structural change in consumer behavior, it will be a tailwind for demand and customer attention for years to come.

We intend to use dynamic pricing to closely manage the shifts in behavior.

Finally, we expanded our emerging businesses that included pro connect in stream.

We launched our on demand offering American home shield or H S. Pro connect which grew from five to 35 cities in November.

Low us to capitalize on an estimated 30 million annual visitors to our American home Shield website.

We also continue the development and expanded use of our stream technology.

Not only did we use stream for a pandemic response, we're utilizing it internally as well to change the way, we deliver service to our customers.

In addition, we released software development kits that allow companies to easily integrate stream into their business, which further enhances our augmented reality capabilities.

On the customer side, we expanded our stream partner list in 'twenty and 'twenty to include well known brands, such as Lowe's Bestbuy trigger British gas and clear result.

Turning to slide five and our 2021 objectives.

First we fully expect to deliver double digit revenue growth as a result of expansion across our three home service plan channels as well as growth from our emerging businesses.

But then the D to C channel, we are targeting double digit revenue growth, while maintaining a flat customer acquisition cost in 'twenty and 'twenty one as a result of improvements to our conversion funnel.

Maintaining marketing spend efficiency is especially important as market rates have increased in 'twenty and 'twenty, one compared to low or COVID-19, driven rates in 2020.

The team is also excited to launch new products in our D to C channel that will improve the customer experience and simplify our value proposition.

The new product lineup of shield Silver Shield gold and shield platinum is a good better best model that will we will be rolling out across the U S. Over the next several months.

She'll platinum will be one of the most comprehensive plans on the market and we will include services such as roof leak repair and higher coverage limits Shield Platinum will also include maintenance services, such as a free seasonal HVAC tune up.

This change aligns with our updated brand messaging are being an advocate and trusted ally for our customers. We believe that further distinguishes us as having the best home service plan products in the market.

Now, let's turn to our first year real estate channel for the strong real estate market fundamentals are expected to continue into this year in.

In fact, nor is forecasting an existing home sales will grow 15% in 2021 versus the prior year.

As I mentioned earlier not reported the housing inventory remains at record low levels, which has resulted in a strong seller's market per.

This may potentially impact our conversion rates for home service plans paid for by the existing homeowner.

We are addressing this dynamic by focusing on selling directly to the buyer and the real estate transaction leveraging technology to become more efficient and entering into new sales verticals. For example, we recently signed an agreement with Mr. Cooper when the leading mortgage companies in the U S, which expands our capabilities to sell home service plans.

Next we are continuing our focus on automating business processes are.

Our goal of automating and digitizing our business allows us to be more proactive and efficient.

This process improvement gives us line of sight as potential service issues and the opportunity to intervene before they become a customer problem.

Some initiatives in this area include one share.

Ending up of customer facing web based appliance purchasing portal that will improve the customer experience. This will provide customers more control and choice improved cycle times and reduce costs.

True.

Going out new mobile first contract your portal.

It will offer significantly more contractor functionality over their smartphone.

Features include automating approvals parts ordering and billing.

It'll be supported by automating, our total authorization process to speed resolution times.

Third integrating systems with top vendors to increase speed and automation with appliance and parts ordering.

And for Sperry.

Spanning the use of stream in our core operations. We're currently implementing stream in our customer care centers for the goal of having significant usage and appliance related service requests they expanded contractor adoption by the end of the year.

Stream also gives us an incredible ESG opportunity as it work with contractors to offset our carbon footprint by avoiding unnecessary truck rolls.

We are tackling the most difficult manual processes head on this year.

We make these investments in automation, we expect to improve the overall velocity of the organization and reduce service time for customers.

Our third objective for 'twenty 'twenty, one is to expand our customer attention initiatives. This is a holistic approach to the customer journey that involves a large cross functional team focused on improving customer service enhancing our technology and more.

More efficiently leveraging data.

Other customer service side, our north star's develop a fully automated mobile first self service platform to deliver the best customer experience possible.

We have made progress on this journey, we will continue this longer term goal because we make more investments in the business.

This is all part of our strategy to increase the speed of service.

As I mentioned before COVID-19 had a two sided impact on customer service last year.

For request for service increased simultaneously with reductions in staffing levels in our customer care centers.

We repositioned resources to address the increase in service requests.

Middle of last year and for.

Other increased our investment in customer service in the fourth quarter.

We saw it ever pay off as customer service levels normalize in all parts of our business except for the appliance trade.

At this point, we're dealing with an industry wide backlog for new appliances and parts that is a byproduct of the pandemic.

Our manufacturing partners expect this issue to continue through at least the middle of the year. For example, appliance manufacturers have added production lines and increased hiring in order to ramp production, but there was a backlog it will take time to work through.

For further address supply side challenges, we're expanding our supplier network working with our partners to preorder inventory and automating process by establishing direct links to the manufacturers.

But near term friction in the appliance trade is our largest concern we have for customer retention rates in 2021 it.

We will be watching our retention rates very closely for the first half of the year and taking additional steps to mitigate these external factors for our customers.

Our cross functional teams are also working on several customer attention projects in 2021.

These include improving customer contact information automating data capture expanding outreach initiatives and improving staffing and training related to retention.

We believe continuously improving dynamic pricing will improve retention and expand our customer base and some customers were previously priced out of the market using the legacy statewide pricing approach.

For 'twenty and 'twenty, one we are targeting a mid single digit overall price increase delivered to our renewal and DTC channels through dynamic pricing in a way that should not have a material impact on customer retention rates.

I am confident we will continue to improve customer service as the impact of COVID-19, hopefully begins to dissipate in late 2021.

While risks remain we believe we have the ability to increase our retention rate again in 2021.

Our long term retention target remains in the 80 per cent range, we've been making good progress each year other subjective.

Fourth we will continue to execute our emerging businesses strategies. This includes H S Pro connect which I'll discuss more on the next slide as well as street, we intend to expand the use of stream across our core business in a more meaningful way in 'twenty and 'twenty one.

Using stream in our core operations was one of the original value propositions for the acquisition.

Allow us to increase the percentage of service requests that range.

As all of the first time and improve customer service.

I continue to be impressed as I watch our enterprise partners leveraged stream to deliver an innovative and improved experience to their customers.

We will continue to aggressively market stream to other interested third parties as well.

Now I'll turn to slide six where we will cover H S Pro connect.

But as I mentioned on the last call, we have three strategies to optimize our on demand marketing as it relates to pro connect.

First we will invest directly in paid search and other digital marketing channels that support broken Act.

Second we will focus on cross selling services to existing H S. Customers. We expect this effort to ramp up in the second quarter of this year and third fill at broken ex the H S website, and leveraged organic traffic to generate on demand jobs are.

Our targeted for the website addition is the middle of the year.

Additionally, we will be deepening the trade offerings across our 35 City served you already have a foundation in the appliance trade we are expanding our network of licensed contractors in the plumbing and electrical trades we.

We will continue to target 80000 job completions in 'twenty and 'twenty one.

As we add additional trades and services.

We expect greater velocity of jobs with each passing quarter.

In summary, our businesses performed extremely well in this challenging COVID-19 environment and we have an aggressive set of goals this year.

In many ways 'twenty 'twenty, one as a year of execution and delivering on our promises.

Our primary strategic objective continues to be growth in the actions, we're taking to build out a strong foundation will enable the sustainable double digit revenue growth and increased profitability as we continue to scale and optimize our platform.

We will continue to look for ways to further Barbara through both organic and organic means focusing on growing the core by building, an even more robust future with our emerging businesses.

Finally, I'd like to mention that we were taking every effort to dispatch our heating and plumbing contractors in Texas and other states impacted by recent power outages extremely cold weather to our customers in need.

We expect the vast majority of broken or frozen water pipes and other home damage to be covered under our customers homeowners insurance policy because they are storm related or acts of God versus the normal wear and tear that we cover we do expect an increase from a number of heating service requests.

We also hope that people in these area impacted areas, they stay and get power back as quickly as possible.

I'll now turn the call over to Bryan Bryan.

Thanks, Rex and good afternoon, everyone.

Let's now turn to slide seven and I'll review, our fourth quarter 2020 financial results.

Revenue increased 8% versus the prior year period to $323 million driven by approximately five points of higher price and three points of increased volume.

If we look at our home service plan channels revenue derived from customer renewals was up 8% versus the prior year periods due to improved price realization and growth in the number of renewed home service plans.

First year real estate revenue was up 1% versus the prior year period.

Reflecting improved price realization, partly offset by a decline in the number of first year real estate home service plans.

For sheer real estate revenue was impacted by a 19% decline.

Existing U S home sales during the second quarter as a result of COVID-19, which impacted revenue growth for the remainder of the year.

First year direct to consumer revenue was up 13% versus the prior year period.

Primarily reflecting growth in the number of first year direct to consumer home service plans.

Mostly driven by the increased investments in marketing.

Gross profit decreased 1% in the fourth quarter versus the prior year period to $137 million and.

Our gross profit margin was 43 per cent.

Consistent with our historical performance for this quarter.

Net income was $2 million, while adjusted net income was $7 million.

Adjusted EBITDA was $32 million in the fourth quarter at the top end of the guidance range provided in early November.

We estimate that COVID-19 negatively impacted results by approximately $18 million during the quarter, including $13 million of higher claims costs.

And an incremental $5 million investment in our service organization in response to the higher call volume and retention improvement efforts.

Moving to the table on slide eight we had $17 million of favorable revenue conversion in the fourth quarter versus the prior year period.

Excluding the impact of the change from higher revenue contract claims costs increased $18 million in the fourth quarter versus the prior year period.

This was primarily driven by higher cost pressures.

No. We're a service request in the appliance trade as a result of COVID-19, as well as normal inflation across our other trades.

Yes.

We also experienced an elevated level of appliance replacements as a result of the industry wide applying some parts availability challenges that increased our cost during the quarter.

Sales and marketing costs increased $6 million in the fourth quarter versus the prior year, which helped to drive growth.

Ross our home service plan channels.

As well as in our emerging businesses.

And lastly, the $8 million increase in customer service costs was largely in line, what we mentioned on our last earnings call.

The increase was primarily related to managing a higher number of service requests and investments in customer retention improvement initiatives.

Let's now turn to slide nine we'll review the key financial results for full year 2020.

Revenue increased 8% versus the prior year to one point for seven $4 billion. This growth was roughly evenly split between higher price and increased volume.

Full year 2020 revenue derived from our renewal channel was up 9% versus the prior year.

This was due to a retention improvement initiatives aimed at driving increases in renewal units as well as improved price.

As a reminder, our retention levels benefit from a recurring revenue model for approximately 70 per cent of our customers are on monthly auto payment for annual auto renewal.

For sure real estate revenue was flat versus the prior year.

A decline in the number of first year real estate home service plans.

All set by improved price realization.

The disruption of existing home sales activity in the second quarter unfavorably impacted revenue growth in our real estate channel throughout the balance of the year as I mentioned a moment ago.

First year direct to consumer revenue was up 9% versus the prior year, reflecting strong growth in the number of first year direct to consumer home service plans.

Mostly driven by increased marketing investments and improved price realization.

Gross profit increased 6% for $716 million from 2020, and our gross profit margin was 49%. This is a strong result, given the challenging external environment.

Full year 2020, net income was $112 million, while adjusted net income was $132 million.

Full year adjusted EBITDA of $270 million was at the top end of our guidance range.

We estimate that COVID-19 negatively impacted results by approximately $54 million during full year 2020.

This includes approximately $36 million related to higher appliance and plumbing service requests.

Around $13 million incremental DTC marketing investments to mitigate the decline in first year real estate volume and about $5 million related to higher service costs.

Moving to the top of slide 10, we.

We had $88 million for favorable revenue conversion to full year 2020 versus the prior year.

Excluding the impact of the change from higher revenue contract claims costs increased $49 million in 2020 versus the prior year.

Similar to the fourth quarter. The increase was primarily driven by higher cost pressures and an increase number of service requests in the appliance and plumbing trades as a result of COVID-19, as well as normal inflation across our other trades.

I'd like to note that our claims costs include the benefit of process improvements made during the year for.

For example, our operations team was able to increase our mix of service requests.

By preferred contractors to 82%.

Over 1% from 2019.

As previously mentioned a higher percentage of preferred contractor metric correlates to lower cost for us but more.

<unk>, a better service experience for our customers.

The higher contract claims costs were also partially offset by a favorable weather impacts from approximately $7 million during the year.

Sales and marketing costs increased $42 million for full year 2020 versus the prior year.

This was primarily due to investments to drive growth in our D to C channel, including approximately $15 million of opportunistic investments as well as a normal year over year investment increase.

Additionally, the increase reflects growing investments to support our emerging businesses.

And lastly, the $19 million increase in customer service costs.

Primarily related to managing a higher number of service requests and investments in customer retention improvement initiatives.

We believe our service investments in 2020 helped increase our customer retention rate 90 basis points to 76 per cent.

Let's now turn to slide 11 for a review of our cash flow and cash position for full year 2020 compared to prior year.

Net cash provided from operating activities was $207 million, a $7 million increase versus prior year price.

Not really due to favorable changes in working capital, which more than offset lower net income.

The decrease in cash required for working capital substantially improved during the year.

Driven by an increase in amounts due to contractors and suppliers and the timing of trade payables.

This increase net amounts due to contract and suppliers was due in part to the timing of claims payments as a result of industry wide appliance and parts availability challenges.

Net cash used for investing activities was $31 million, a decrease of $30 million versus the prior year, primarily due to cash used in the acquisition of stream at the end of 2019, partly offset by an $11 million increase in capital expenditures in 2020.

Primarily driven by technology improvements.

Net cash used for financing activities was $7 million in 2020, the same as the prior year and consisted of a required debt principal payments.

Free cash flow calculated as net cash provided from operating activities minus property additions it was $175 million in 2020.

$3 million lower than the prior year, primarily.

Primarily due to higher capital expenditures.

Our full year 2020, adjusted EBITDA conversion to free cash flow was a robust 65 per cent.

This was due in part to the favorable working capital changes I mentioned earlier.

Our 2021 conversion is forecasted to be at a more typical level of approximately 50% as a result of an anticipated reversal of working capital this year.

Year end cash and marketable securities totaled $597 million and $163 million increase from prior year.

Nearly $600 million in cash $180 million was classified as restricted net assets.

Our available liquidity at the end of 2020 totaled $668 million and included $418 million of unrestricted cash plus an available undrawn revolving credit facility of $250 million.

Now turning to slide 12 for I'll update you on our capital allocation strategy I have been extremely pleased with our ability to generate strong cash conversion during the COVID-19 pandemic.

With our robust cash generation, we have significantly reduced our net debt leverage from <unk>.

<unk> four times at the time of spin in late 2018 to two one times at the end of 2020.

The obvious question is what are we going to do with our cash first and foremost we are a growth company and.

And we will continue to prioritize organic growth.

This starts with responsibly investing in both the core home service plan business as well as our emerging businesses.

Ever even with these investments we would expect our business to generate a sizable amount of excess cash this year.

Beyond organic growth.

We remain acquisitive and continue to evaluate potential opportunities within the home services industry.

Technology space, but have not found a transaction that meets our requirements at this point.

Debt repayment remains a priority and we were paid $100 million of our term loan this week.

We will also evaluate additional debt repayments later this year if appropriate.

It's important to note that lenders look at our net debt leverage ratio and then Amy debt repayment does not change this metric.

Also as I have mentioned in the past.

We would look to flex our net debt leverage ratio up to finance an acquisition if needed.

And then direct excess cash to debt repayment to flex leverage down post acquisition.

Our final priority for capital allocation is returning cash cash to stockholders, we continue consider share buybacks as an option for our excess cash.

But it's a lower priority at this time.

Yeah.

I'll now conclude my prepared remarks for some comments regarding our full year and first quarter 2021 financial outlook on slide 13.

We expect full year revenue to range between 163 billion and $1.65 billion for an increase of approximately 11% to 12% versus 2020.

Revenue growth in our core home service plan business is expected to be approximately 10%.

With slightly more than half of that growth coming from volume versus price.

The remaining 1% to two per cent of total revenue growth is expected to come from our emerging businesses.

We're targeting gross margin to be similar to last year at approximately 48 per cent as we see continued external pressure from COVID-19 on our business.

As well as a larger mix of our revenue coming from first your D to C and pro connect.

We expect the elevated level of appliance service request, we experienced exiting 2020 to continue through the middle of the year.

And then dropped to a lower rate.

Still be somewhat higher than historical averages. We're also planning on low single digit inflation across trades.

In regard to pricing will benefit more in the second half of the year from our mid single digit price increases.

Which will be delivered through dynamic pricing to our D to C and renewal customers.

I'll also note we've planned for some higher weather related risks in 2021, following two very mild weather years from an HVAC service request perspective for.

We're targeting SG&A expense to be approximately 530 million to $540 million for just over 32% of our revenue in 2021.

More than half of the increase versus prior year. This is comprised of higher sales and marketing investments to drive double digit revenue growth from our core business as well as investments in our emerging businesses.

It also includes service improvements in our customer care centers to manage additional coal volumes and drive retention improvements.

I'll also note for those of you who tried to bridge from SG&A. So our EBITDA guidance in your models, we expect noncash stock based compensation will increase approximately $10 million 2021.

Excluding capital expenditures combined investments of approximately $30 million and pro conducting scream in 2021 will help drive our revenue.

Who will have a dilutive impact on our adjusted EBITDA.

I should note that the investment will be somewhat higher than pro connect where she stream this year.

We believe we'll begin to see improvements from both of these nascent businesses as we are ramping in 2022 and beyond these investments combined with dynamic pricing improving retention and exiting 2021 with a more normal service request profile in the appliance trade should provide strong tailwind.

For revenue leverage and adjusted EBITDA growth entering 2022.

For 2021, we expect adjusted EBITDA to range between $280 million and $300 million up about 7% or $20 million at the midpoint versus prior year.

And we're targeting between $35 million and $45 million of capital expenditures for 2021, primarily technology investments.

And an annual effective tax rate of approximately 25% with a cash tax rate of 23 per cent.

Turning to the first quarter, we expect our revenue to range between $325 million and $330 million. We also expect adjusted EBITDA to range between 30 million and $35 million.

The first quarter outlook includes the following for 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.

And.

An estimated unfavorable claims cost impact of 12 million to $14 million from higher appliance service requests and costs as a result of our customers continuing to stay at home.

We expect the first quarter's impact from COVID-19 to be the largest year over year service request increase for the year.

Also we're anticipating a higher number of heating service request than planned due to the cold weather impact Rex mentioned and believe it's covered in our first quarter EBITDA range.

Third.

A $6 million increase in sales and marketing investments to support our growth objectives and for a $4 million increase in service investments about $2 million to $3 million of which is to handle the elevated level of appliance related service requests and the balance to improve the customer experience and retention.

In closing, we believe that front door continues to offer a compelling investment thesis, we're projecting double digit revenue growth with an expanding emerging business opportunity strong margins and cash flow generation.

We are a people powered technology has driven organization is dedicated to improving our products and offerings and providing long term value to our customers contractors.

Sock holders and other stakeholders in 2021 and beyond.

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 youre 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'll pause momentarily to assemble our roster.

And the first question will come from Cory Carpenter with J P. Morgan. Please go ahead.

Great. Thanks for the questions I had two maybe just first and you touched on this a bit in your prepared remarks, but just hoping you could talk more about your marketing plans. This year. The level you think is needed to support the double digit revenue growth and just how you're thinking about that.

It can be hot and newer products that use steel platinum in pro connect and then secondly, just on broken out for I know, it's still early but it would be helpful to hear about the traction you've seen since the rebranding and expansion to 35 cities last quarter.

Yes.

Hey, Cory threats.

You'll hear from you.

In terms of in terms of marketing.

You've had a couple of different ways certainly.

You know the tailwind there'll be other where he received from from lower broadcast rates has kind of gone you know gone back to normal rates and so what we're very focused on conversion this year and we're expecting to grow.

First your direct to consumer by double digits with a flat customer acquisition cost. So it's going to all be about conversion and the focus I'm using.

Using technology to to achieve that are you know that.

No.

Is it as it relates to the pro connect you know still early days.

But you know where where are where we're right on plan, maybe slightly better than planned, but I would also say that you know.

As the year goes on the plane gets harder as we add more services to the 35 cities. So all systems are go for for Broken Act and no we're pretty pretty excited about the you know kind of really scaling up this year.

Yes.

Thank you Bob.

The next question will come from Justin Patterson with Keybanc. Please go ahead.

Great. Thanks, I hope, you're all healthy and safe amid everything that's going on too if I can first to follow up with Corey on pro connect could you talk about just some other metrics here looking at the dictate the pace of investment and really warrant further market expansion going be.

Beyond just cross selling to the existing customer base. That's question number one and then question number two you know it sounds like you're making a lot of progress with the retention initiatives. So curious to hear what you think the biggest levers are around that going forward and then how we should think about the benefits of stream playing into that over time.

So much.

Sure. So so as it relates to the pro connect you know, where we're very focused on a number of jobs, obviously, but more so ensuring that we're expanding for.

From just appliances, where we are in 35 cities to adding trade services such as plumbing electric.

For.

First and foremost for investing in both the search and digital around H S Dot com.

Slash pro connect so really focused on the digital aspects of that so we're measuring the our CAC ratios second you know as we've talked about before I think there's a great opportunity to cross sell with our existing customers.

And offer them, a maintenance services as well as repair services.

Then.

We talked about last quarter I think there's a great.

Opportunity and frankly, why we switched to a you know two to the rebranding is at we have 30 million annual visitors to our you know to our EHS website or American home Shield website to purchase a home service plan. So we think there's a great opportunity.

Two to market to those folks as well.

So we're looking at all those factors as we as we grow.

Each each marketplace for each market rather.

And then you know we have specific metrics around each of those.

And.

Kind of how we're focused on that in terms of in terms of retention.

You know.

This is a.

As you know we've been focused on retention or yes. It says since we spun the company.

A lot of work this year kind of went into moving and sold.

We continue to invest in training in our dedicated retention team.

Yes, I think dynamic pricing certainly.

<unk> will play a factor in and improving retention as we.

Get even better about.

You know, how we how we price.

And then we you know we're automating a lot of processes to improve data capture for our real estate customers obviously.

You don't have the proper contact information, it's really tough to to try to get that customer to renew.

We're focused on communications and then to your I'm sure you pointed about stream you know that's that's really the other longer term vision.

Vision that we have.

For for integrating stream within our core business is that I think there's a real opportunity here too.

Not just pick up the phone and say hey, we'll send someone out to take a look at it but I really have a two way conversation digitally with with the customer be able to capture.

The make model serial number would be able to really.

Hopefully even provide a DIY solution for for the customer for.

For example for things like.

No.

From a refrigerator freezers that are frozen over it's just a.

Neither have any when it come out you can help the customer walking through that problem.

Get them back on their way, so we really see stream as an incredible opportunity.

For us to reduce truck rolls and in the future, which obviously has a great ESG benefit, but should have a cost savings benefit in the future as well.

Got it thank you Rex.

Sure.

The next question will come from Matt Gaudioso with Compass point. Please go ahead.

Hey, Good afternoon, guys. Just a quick question on the mental state channel just.

Just wondering for the real estate channel.

Just given the dynamics in the market with it being a strong seller's market and you mentioned trying to focus on buyers more could you give a little bit more color. There on what you guys are doing.

And then just with it being quite like what the dynamics amidst a really strong housing backdrop. How are you thinking about overall marketing spend in that channel.

Well, we are we're confident that we can still grow double digits in real estate. This year. The team has done a lot of work around kind of shifting to that.

That you know that the buyer versus the seller obviously.

We're looking at geographic mix and a real true partner performance. So.

So we have we have a lot more data and a lot more analytics around.

What's working and what's not.

Per to you know a couple of years ago.

By focusing on the on the buyer, we're partnering with our real estate partners.

You know, we're using technology to alert us windows.

Buyer data becomes available and then reaching out.

And then you know, we're leveraging technology to really deep.

Deepen and frankly integrate with our top real estate brokers and then you know as we mentioned on the call.

Additional channels such as.

Mr. Cooper will also help us start to think about beyond just you know the real estate transaction, but also get into refinancings as well.

Got it that's helpful. And then just actually actually a quick follow up on that are you.

You're still.

Having real estate agent for us screen for virtual touring does that seem like it's a longer term trend that sticking.

We always we don't still offering it.

From an adoption perspective, it's more on our contractor side, because they've really I think.

You know in terms of touring other there's a lot of different tools that they can use.

But from a contractor perspective you.

We're seeing a nice uptick in the.

Yeah really working with the more.

Tech for contractors, who see the value of being able to.

You know do do.

More more truck rolls per.

Per day, because they're they're having the ability to have a conversation with a customer.

Order parts, you know understand whats going on that that type of thing so.

We're seeing higher adoption for them.

You know from our contractors and realtors, but the real true piece was always a just a day.

Ability to help our real estate partners and they've kind of been in the forefront if you will.

It worked through the pandemic.

That's helpful. Thanks.

Thank you.

The next question will come from Ian Zaffino with Oppenheimer. Please go ahead.

Hey, Good afternoon, guys. This is mark on for Ian.

A bit on dynamic pricing for our on the five points of price. This corner is there any way toward.

To parse out how much came from dynamic pricing and then you know going forward can you give us a sense of the progress of dynamic pricing within each business segment and how much came through so far within each other you know just for year to date. Thanks.

Sorry, I missed the first part of the question Brian If you. If you if you caught it feel free of it.

I didn't catch the first part of the other question.

Yeah, I think Mark you were asking about you know as far as the five points of price. The contributor to Q4 is that what you're asking about and how much of that was from dynamic pricing.

Yes, that's correct correct.

And I think you asked what channel and in Rex I I think.

It was really the renewals channel that would have driven most of that dynamic pricing benefit right.

That's right.

Yeah.

9% of our revenues is.

It's from the renewables channel. So that's that's where we focused our effort our efforts first.

For from a dynamic pricing perspective, you know we.

Ah, we're able to look at it both from a risk decile perspective, as well as a usage perspective.

And price accordingly, so.

That's that's kind of how we're looking at each each kind of the Sal if you will for both renewals and entered in the direct to consumer.

Okay got it. Thank you guys and then just a quick follow up on the Capex spend for 2021, you guys mentioned this mostly on technology is this more a broken them for was there any other adventures for for sales and marketing also within that number.

Brian you'll take that one.

Yeah, I'm happy to yeah in that range, probably it's like 85% of that Capex spend would be technology focus and it covers.

The entire company Mark to be honest with you we've got pro connect in there. We've got stream, we've got the hsp business. So it's really covering the entire company, but yes. It does have broken up in there.

No.

Great. Thank you.

Much.

Oh.

Sorry lost you.

The next question will come from Michael <unk> with Goldman Sachs. Please go ahead.

Hi, Thank you very much for the question.

I was just wondering if I could ask about.

Parts availability, you mentioned that is something that can be a risk to our retention rates in 2021.

You know where do we stand today as it relates to parts availability and could you talk about your progress in terms of.

Establishing direct relationships with.

With Oems to secure parts and then I just have a quick follow up on per connect.

Well I'll, let Brian cover that since it seems that all the great work around it.

Thanks, Rex and Hi, Mike how are you doing.

Yeah, that's been a big part of this whole COVID-19 pandemic issue we've been facing is.

Parts availability.

And our team our sourcing team has done a I think a great job working with our operations team and finding alternative sources of supply wherever we can to find the parts because we certainly don't want to replace an appliance if he can repair it. So a lot of it works a lot of work has been done there and it will only get better as we go forward, but still the the.

Manufacturers are focused on building units right now not.

Parts, so that will change as we go further into the first half for this year and hopefully get back to normal after mid year and will have parts available like we used to pre pandemic.

Help.

Yeah that does thank you, Brian and just as a clarification on the pro connect guidance.

The $30 million of investments in AR.

And per connect and stream is that net of the $20 million of revenue or said differently like do you expect a 10 million dollar loss from pro connect after investments. Thanks.

Yes, the 30 million is the opex for our emerging businesses.

And we did put out.

Low marker for $20 million of revenue for pro conduct this year and we did mention that combined the emerging businesses would be.

EBITDA negative for the year, we havent broken that out into the pieces, but they will be EBIT EBITDA negative for the year.

Thank you for the classification I appreciate it Brian.

Mhm.

The next question will come from Youssef Squali with true of Securities. Please go ahead.

Hi, This is Nick Conan on for Youssef. Thanks for taking my questions. Two if I can as the pandemic changed in any way your view on gross margins are 50% or better over time, and then secondly is the introduction of dynamic pricing within the real estate segment still slated for February and if so how is that going to be rolled out. Thanks.

Yes, so from a gross margin perspective, I don't think it changes the end of it.

Changes are you know our long term view.

The great thing about dynamic pricing has allowed us to make our moves quickly, but as Brian just talked about you know I think.

We're still square in the middle of the pandemic and we will still.

Carry the cost of the appliance burden for.

For at least the first half of the year.

So through through dynamic pricing and a lot of the other work that we've been talking about we think we helped mitigate that.

But certainly not not solve it all and so as the pandemic subsides.

We have the.

The tail winds of having made the pricing change that.

That will certainly improve gross margins, which you know we can do either.

Lee leave as is or we can always change pricing again.

Our focus on growth so it really has.

Several levers there.

Terms of dynamic pricing for real estate.

You know.

Real estate is as you know it was a little more or little less automated as we work through our <unk> are different.

Top tier brokerage firms.

So we leverage the models for.

For for the pricing.

But we're not planning on implementing it from an automated perspective cause R.

Our realty partners aren't going to have the capability, yet, but we do leverage the.

The underlying models to determine the price that's.

That's not the automated yet but it is for.

Renewables, which are getting almost 70 per cent of our.

Total revenue in the first year direct to consumer so.

Between those two things that's that's all fully automated but it'll still be a while I think before our real estate partners or are able to.

Test to handle an automated pricing.

Great. Thank you so much.

Thank you.

The next question will come from Brian Fitzgerald with Wells Fargo. Please go ahead.

Thanks, guys a couple of questions on me.

On the new product segmentation have you been testing that new segmentation could you give us a sense of the pricing tiers, maybe versus the current offering and maybe a sense of how you expect.

Customers segment for themselves or any thoughts on you know where the weighted average pricing might be going as you roll out those those segmentation.

And then a quick follow up on maybe a housekeeping.

What percentage of the other line.

<unk> was cancellation revenue versus broken neck.

How does that breakout compare maybe versus prior year.

I'll talk for the first one then I'll hand, it over to Brian for for the second one you know.

In terms of.

Rolling out the kind of good better best or.

Gold.

Platinum gold and silver.

You know I think that in the markets, where we have tested it.

It definitely plays well for for platinum because it's a I think one of the most comprehensive.

Our home service plans, you can get which includes higher.

[noise] coverage limits.

A seasonal HVAC tune up it comes with it as well and so we're expecting our mix to change.

Somewhat to more platinum, but we again, we don't we're not fully rolled out yet so it would be tough to give you a.

A number in terms of what the average share price is going to be.

Brian you will take the second one.

Sure.

Brian are you asking about the other bucket of our revenue by channel.

Yes.

For full year, yeah, yeah, less than a half of that would have been our emerging businesses.

And in 2020 and for 'twenty one.

As I said in my prepared remarks, it's more like 1% to 2% of the Rev growth. So you do the math and you can see it's a much bigger part.

Hum like half a percent that it would've been.

Of that bucket for 20, so it's a much bigger part going forward as we grow those nascent businesses.

Got it perfect. Thanks, Brian Thanks Rex.

Absolutely.

The next question will come from Kevin Mcveigh with Credit Suisse. Please go ahead.

Great. Thanks, so much.

Congratulations.

Brian I think you've talked about.

$4 million headwind and Covid related impact in 2020.

And you still did a real nice job of coming in at the high end to the range.

Were there some offsets.

Was it may be just kind of delivery footprint, just any offsets that helped to offset some of those headwinds.

You to still deliver really really nice out from on the door.

Yeah, I think I called out a few if I can remember I think you know we had 7 million of favorable weather.

And in 'twenty again, a mild year not that we're starting this year mild but a mild year in 'twenty, we had a number of operational improvements you know getting our.

Preferred for our contractor mix to 82% is a great win because we keep driving that number further up so yeah. There are a number of offsets just through all the initiatives.

You know within the company.

I'm, probably missing some of Rex. So please feel free to jump in feel free to jump in.

I think you covered the big ones.

The other thing that we're bullish about.

As you know, where we developed our appliance portal for customers to make a replacement for easier.

You know.

Our supply chain team on Bryan's.

Bryan's team is really I think done a nice job in terms of of vendor.

Diversification and scale.

So that we can.

You know focus on on parts rather than replacements and then.

You know I think the team overall as Brian mentioned, you know the higher change somewhere algorithm to get even higher princess per cent of preferred contractors definitely was plus it was helpful to us in 'twenty.

And then is there is there any way to quantify like.

Maybe another 100 basis points of that shift to kind of the percentage of preferred would mean from us.

EBITDA perspective.

Yes.

Yeah happy to take that one <unk> I think in terms.

This round math Ken.

Kevin of it's got to be close to $5 million.

Great.

Thank you all very much.

Thank you.

The next question will come from Aaron Kessler with Raymond James. Please go ahead.

Great. Thank you guys, maybe first on the customer support side can you maybe talk us through kind of which inning you are in for some other changes youre, making and kind of what's maybe a completion day I'll never have completion day for just kind of where where the progress is and then maybe for me inflation and parts costs are you seeing anything more than kind of normal inflation levels.

For a call out or just pretty average that you've seen over the last couple of years. Thank you.

Yes, so in terms of customer service sorry, what.

My phone was a little garbled, Oh, you just kind of a wet winter.

And kind of some other changes that youre planning to make there.

So you've been investing in.

Well certainly you know are our norstar for for customer services.

Ah yes.

B as self service as possible and then to be a you know.

A web or mobile based.

Self service so that you don't have to pick up the phone the colony one day.

Solve solve your problems at your fingertips, so to speak and.

It really depends on what part of the business, we're talking about in terms of what inning, we might be in certainly.

The the appliance portal I've talked about before.

Before definitely gives us a lot closer to it.

It being a totally.

Totally relying on self service.

Our our ability.

Our E commerce platform, which we've done on that.

Fair amount of work on this.

This year is you know what I'm, saying for most part touchless, but other.

And then we had the real estate channel, which are still.

Is requires a lot of touch for.

For.

For customers other things I think theyre going to see.

On me here.

We are really improves our authorizations process. So we built a new contracted portal.

Contractors can resolve.

What they need digitally as well.

So they don't pick up the phone to call for authorizations, we can.

Do all of that digitally for a majority of that digitally.

When you're integrating a lot of our supply chain.

Our multi vendor strategy.

For Aps and things like that obviously will help us be more digital as well so it really depends on.

The area in terms of earnings but you know this this is something that's gonna be a multiyear journey, but we're you.

We continue to be.

It would be very focused on.

Got it and just the other inflation on the parts costs anything out of normal you would call out there just kind of inline with previous years.

Brian you want to go.

And for inflation as far as parts cost or just overall Erin.

Yeah, Let me address both overall and other parts cost specifically, yeah, we we negotiate pretty well on parts cost. The one thing we're keeping our eyes on is steel prices I know if you've followed steel at all for those prices are going up pretty quickly due to auto demand believe it or not so supply versus demand price there.

As for growing up and we use a lot of steel.

Yeah.

And the products, we buy so we're watching that pretty closely so that's probably first and foremost right now.

As always watching whatever has a lot of steel in it like water heaters and.

The other components.

Great. That's helpful. Thank you.

Sure.

This concludes our question and answer session I would like to turn the conference back over to Rex <unk> for any closing remarks. Please go ahead Sir.

Thank you operator, and thank you for all of our employees investors and analysts who are on today's call.

Summary, I'm extremely proud of our team at the unprecedented challenges from from COVID-19, while delivering solid financial results.

We've been making the right investments to accelerate growth and those investments are working.

'twenty and 'twenty, one we expect to generate sustained double digit revenue growth also automating processes, expanding customer retention and advancing our emerging businesses.

Thank you again for your continued interest in front door and I look forward to speaking with you all again soon.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Yeah.

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Sure.

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