Q3 2021 Frontdoor Inc Earnings Call
Okay.
Ladies and gentlemen, welcome to front doors that coaches 2021 earnings call.
Today's call is being recorded I'm being broadcasted 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 2021 car, Inc Conference call.
Joining me today are front door as Chief Executive Officer, Rex turbine and front door as 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 stop 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 materially differ from those discussed here today.
These risk factors are explained in detail in the company's filings with the SEC.
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 October 28, 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 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.
Yes.
Thanks, Matt and good afternoon, everyone in the third quarter front door delivered strong financial results I'll just speaks to the progress. The organization has made theres still much more we are doing to build a stronger foundation for the future.
Starting on slide four since the onset as a public company Frank doors vision is to redefine the home services space and become a top provider of residential repair and maintenance solutions and his vision remains as strong as ever we believe the total addressable market for U S. Home services is approximately $400 billion no. One company has yet to provide an ideal homeowner.
Her experience.
We believe that front door is well positioned to become the industry leader over time.
Oh repair it represents about 25% of the addressable home services market. It's the most challenging segment to operate in as the customer already has something broken, but that's where we have mainly operate over a 50 year history.
Looking ahead. The long term roadmap include the expansion of the whole maintenance services and eventually home improvement as a way to appeal to a broader customer base.
We are doing this by transforming the way we evolve the customer experience from a difficult manual process to a seamless and digital best in class experience that homeowners will lap our long term vision remains the same to provide excellent service and take the hassle out of homeownership.
While the pandemic has presented a number of challenges to us our contractors, our vendors and our customers. We still have made significant progress over the last few years.
However, we're not satisfied at the pace of change and either accelerate the advancement of our technology initiatives as fast as possible.
Speak more about that in a moment.
Our first priority is to pivot and narrow our near term focus on improving the customer experience for our core home service plan customers.
We will do this by providing digital self service options and prioritizing a mobile first strategy.
This includes developing an application or app to better interact with our customers, which we are targeting to launch next year.
We already offer a self service option through our mobile lab customer portal that will further enhance this functionality for our app.
Additionally, we will also further leverage the synergies and functionality of stream a proprietary remote video communications platform and broken Act our on demand service across our core business to improve the overall experience.
We see the future of a digital first approach to customer problem solving through stream as well as providing more maintenance services through pro connect for a more holistic approach to solving the everyday hassles of homeownership.
Providing a home service plan represents the vast majority of our business today and our success is due to operating a dual value proposition of providing critical budget protection from unplanned out of pocket expenses and the convenience of using our qualified network of providers to complete their clients or system repair.
That's why it's critical that we improve the customer experience to achieve our long term objectives and a larger home services space.
Making it easier and seamless for customers and contractors to do business with us we will improve the customer and contractor retention drive revenue growth improve service efficiency and move further toward a best in class offerings.
We're also expanding into the larger home services market through our on demand offering pro connect and believe we are well positioned to emerge as a leader in home services space over time.
What are the main reasons I joined front door was the appealing proposition of transitioning an established nationwide network of contractors focused on home service plans to support an on demand offering.
The case today.
We remain on track to deliver over $20 million of on demand revenue in 2021.
We have expanded the depth of our services in the market.
Looking forward, we expect <unk> growth to continue to be strong. However, it may be somewhat slower in the outlook I shared with you late last year.
A lot has changed over the last year and a half or so billion of new business takes time and investment and we are now moving forward with an intentional balance between cost and growth, especially during this period of continued uncertainty.
We've had several learnings during the first year of operating pro connect and I firmly believe in the San Diego relationship between our home service plan and on demand businesses.
Well, we have been driving higher demand through protein next standalone digital marketing efforts, there's still more we need to do to enhance our overall standalone digital sales process. We also would like to create more job leads through our existing and prospective home service plan and customer base.
We're seeing mid single digit repeat business within the pro connected customer base that was primarily driven by our appliance trade.
Our plumbing electric trade expansions took longer to ramp, but we are now beginning to perform we.
We are continuing to apply these and other learnings and will adjust our go to market strategy to obtain optimize results.
As a result, we're now targeting <unk> revenue to be more than double in 2022 from the $20 million target in 2021 and we will provide further updates on our outlook in February.
Now turning to slide five and a discussion of the historically challenging market dynamics impacting our real estate channel.
Similar to past quarters, the National Association of Realtors or not reported a tight existing home sales market with homes remaining on the market for only 17 days and overall inventory levels at a near record low of two four months.
Additionally, you can see that in our reported a significant rebound in existing home sales late last year that contributed to the tight market conditions.
And the sellers market, we expect they will continue to be difficult to sell a home service plan as part of a real estate transaction for the next several quarters as this tight market does not show signs of loosening anytime soon.
Data for the home service plan industry is limited, but we are confident that most of the decline in our unit sales is due to the unprecedented market dynamics and then similar challenges are being faced by many of our competitors.
We also believe that this decline is transitory and then we will see improvements after the housing market reverts to more of a normal supply demand imbalance.
Now turning to the business update on slide six.
Let me start by saying that we continue to look for opportunities to mitigate the impact of the seller's market and reinvigorate our revenue growth within our real estate channel.
I mentioned on our last call. We are refining in three ways first our DTC channel launched the marketing campaign, specifically crafted for targeting recent homebuyers. While we are seeing early success from this program. It is very new it will take time to grow.
Second we have a new real estate channel campaign that is aimed at reinforcing the value proposition of home service plans with both real estate agents and homebuyers were also continuing to focus on top brokers and agents to drive growth across our top national accounts.
And third we are focused on expanding our strategic partnership opportunities beyond our current real estate brokerage agreements.
Diversifying our partnership and distribution channels will open new channels for growth as well as help mitigate swings in the real estate market.
We remain focused on doing just that by expanding and growing into new segments over the next several years.
While we expected first year real estate channel to decline in the third quarter. We also faced some headwinds in the direct to consumer or DTC channel and in renewals, but let me provide details in each of these areas.
After a very strong performance in 2020, we've had some challenges in our DTC channel. This year as a result of a number of changing dynamics. The good news is that we believe most of these challenges are largely behind us that we will regain our momentum over the next few quarters.
Provide some additional context on the challenges we faced.
The primary drivers were lower than expected customer demand and higher than expected advertising costs driven by competition for advertising inventory per.
For example, we saw a nearly 20% decline in Internet search demand for home service plan category in the third quarter of 2021 compared to the prior year period as customers emerge from Lockdown and drove lower TV viewership and less digital search.
You'll recall that we saw a strong marketing efficiency last year as our value proposition are resonating extremely well with customers sheltering at home and advertising rates were very favorable.
The transition to the current environment has been more challenging than expected with our DTC broadcast rates, increasing more than 50% during the second and third quarters of 2021 compared with prior year period on a like for like basis.
This was much more than we anticipated as demand rebounded back from the pandemic driven lows we saw late last year.
In response, we have diversified our demand mix pivot to find new sources of demand and reevaluate our conversion funnel to improve the sales process. This.
This includes moving to a new digital sources and implementing an expanded broadcast strategy. We believe these changes will return customer demand for our products to levels. We originally projected.
Second we launched our good better best product lineup in the D to C channel and homeowners loved the offerings.
Our sales teams took longer than expected to ramp and become proficient at selling a higher price, but higher value new products to customers. We quickly responded and improved how our sales teams position, our new products through better trading in technology, we've already seen improvements to expected performance levels from earlier in the year.
And third the transition of technology from our legacy E Commerce platform to a more modern architecture it took longer than expected, while we intended to drive better lead conversion. The initial transition did not optimize our search traffic as well as we would have expected in response, we've improved our ecommerce platform through additional AB testing and optimization to help drive the higher conversion from customers.
Navigating our website.
Finally, the team understand did you see is our biggest lever for new unit growth and we simply must execute our plan more quickly and flawlessly going forward. This is a channel that can return to double digit revenue growth next year, but again it will take a few quarters for our volume improvements to show up in reported revenue. The good news is that we will see more price and mix driving strong revenue growth and unit.
<unk> recover to more normalized levels.
We remain laser focused on improving our customer retention rate, however, our customer retention rate rounded down to 74% in the third quarter followed.
The decline is mostly due to a drop in new customers specifically in our real estate channel. It's also being impacted by our dynamic pricing model continued challenges across the global supply chain and the overall customer experience.
As I mentioned before we are constantly adjusting our dynamic pricing model suggests that information and just customer pricing.
These changes wasn't to essentially increase prices for our highest usage customers, while our prices continue to be in elastic we saw more cancels than expected from those higher usage customers that received the highest price increases. This has impacted our revenue retention rate and customer growth. However, the essential a pruning of our lowest gross margin customers was a contributor to our store.
<unk> financial performance this quarter, which Brian will review in a moment.
While this action may have increased gross profit in the short term.
We have since taken a longer view and made changes to our model to reduce the cancellation rate across our highest risk customers outpacing our price increases out over a longer time frame with only a minimal impact to margins. Additionally, we continue to be faced with sourcing disruptions as a result of a challenging global supply chain, which continues to add friction to the overall customer experience we are.
The greatest impact on our appliance trade and with certain HVAC parts.
While we are seeing some improvement in parts and equipment availability over the last months, we are still not back to pre pandemic levels global supply chains continue to be very fragile with great uncertainty around transportation labor and chip availability for at least the next six to 12 months.
Our team continues to do a great job of mitigating the impact as much as they can but we expect cost inflation and parts and equipment availability challenges to impact our cost and customer experience heading into next year.
I'm disappointed we couldn't continue the momentum we generated in increasing the customer retention rate that we began last year I remain positive that we are doing the right things to improve it going forward.
Mentioned earlier, our number one near term objective is to improve the customer experience are.
Our new Chief Digital Officer, Tony <unk> and his team are extremely focused on improving the customer experience and have developed a set of digital first tenants to help guide our near term technology efforts.
Some of our expectations and comfort using digital tools are increasing and short anything our customers can do over the phone they should be able to do using a mobile app mobile web or desktop experience.
We are committed to providing customers with digital self service options with mobile being a priority. We've made significant progress on certain aspects of the experience such as our appliance and contractor portals, but we intend to do more to transform the entire experience into a digital one.
We want this to evolve quickly and the team is focused on reducing friction points across our system and increase in digital and mobile interactions with our customers over the course of the next 12 to 18 months at.
While we did face some near term challenges our long term vision remains as strong as ever we were still delivering strong profitability and growth. Despite unprecedented real estate market conditions are difficult supply chain and ongoing challenges from the pandemic will last through 2022.
We will continue to look for opportunities to grow faster, while transforming our service experience into a digital one we were playing a long game and we are focused on strengthening our foundation to deliver strong and consistent growth in the future.
Now I'll turn the call over to Bryan Bryan.
Thanks, Rich and good afternoon, let's now turn to slide seven to review, our third quarter 2021 financial results.
Revenue increased 7% versus the prior year period to.
$471 million.
Not really driven by higher pricing in our home service plans.
All year over year growth in both brokerage and screen.
Higher prices accounted for 5% of our revenue growth.
Volume accounted for 2% of our growth primarily from Crowe conducting stream that's in them.
For a home service plan customers remained relatively flat versus the prior year period.
As volume gains in renewals were offset by challenges in the first year real estate channel.
Looking at our home service plan channels revenue derived from customer renewals was up 8% versus the prior year period.
Due to improved price realization and growth in number of renewed home service plans.
First year real estate revenue was down 5% versus the prior year period.
Due to a decline in the home service plans in this channel as a result of the tight existing home sales market.
Offset by improved price realization.
Direct to consumer or D to C channel revenue was up 7% versus the prior year period.
Primarily due to improved price realization.
Both our new product mix and normal rate increases.
As a reminder, our new good better best product mix in the DTC channel was launched earlier this year and consists of the silver gold and platinum offerings.
These are higher price.
But more inclusive coverage products compared to our previous offerings.
We believe that will drive greater customer satisfaction and higher retention.
Revenue reported in our other channel increased $6 million over the prior year period.
Primarily due to continued growth at pro conduct and screen.
Brokerage revenue was $4 million and streams revenue was $3 million in the third quarter.
September year to date pro connect revenue was $14 million.
<unk> revenue was $7 million.
As Rex mentioned earlier brokerage I've, just tracking to generate more than $20 million of revenue for full year 2021.
When players to more than double that amount of revenue in 2022.
Gross profit increased 18% in the third quarter versus the prior year period to $254 million and our gross profit margin was 54%.
Approximately 500 basis points higher than the prior year period.
Higher gross profit margin over 15 years.
What are the primary drivers of this improvement is the favorability of contract claims costs over the prior year period.
Primarily due to a lower number of service requests across all trades.
And the continued flow through of process improvement benefits.
Some of these benefits include dynamic pricing.
Improved contractor deployment.
Technology enhancements in our service software.
And cross functional team efforts across our platform.
Higher margins flow through net income, which was $76 million for the third quarter.
Adjusted net income increased 55% from the prior year period to $78 million.
Adjusted EBITDA was $122 million in the third quarter or 34% higher than the prior year period.
This exceeded our guidance range by more than $20 million as a result of improved gross profit margin.
As well as better than expected results from our cost management initiatives.
Let's move to the table on slide eight I'll walk through the adjusted EBITDA Bridge.
Third quarter 2020 to third quarter 2021.
Starting at the top we had $24 million of favorable revenue conversion in the third quarter versus the prior year period.
As a reminder, revenue conversion includes the impact of the change in the number of home service plans as well as the impact of year over year price changes.
The impact of the change in the number of home service plans considers the associated revenue on those plans less an estimate of contract claims cost base.
Based on margin experienced in the prior year period.
Contract claims cost flipped in the third quarter to a favorable variance of $16 million versus the prior year period.
But excluding the impact of the change from higher revenue.
As a reminder contract claims costs include the impact of changes in the number of service requests and cost inflation.
As I mentioned, the favorability of contract claims costs over the prior year period was primarily due to a lower number of service requests across all trades and process improvement benefits.
We're lapping the higher than normal COVID-19 related contract claims in the third quarter 2020.
And also had lower HVAC service requests due to milder temperatures across Texas and the southeast.
These benefits were partly offset.
By higher cost inflation, including unfavorable cost trends due to industry wide parts and equipment availability challenges.
In regard to weather during the third quarter. We noted the U S was approximately 3% cooler than the prior year period.
We benefited in key HVAC markets as I just mentioned.
We estimate the favorable weather impact on claims costs in the third quarter to be approximately $4 million.
Sales and marketing costs increased $7 million in the third quarter versus the prior year period, and primarily included investments in the DTC channel.
On our previous earnings call. We told you, we anticipated spending $13 million more this quarter versus the prior year period.
Due to the transition in our marketing tactics, we pulled back on our spending has shifted more to the fourth quarter to ensure more efficient deployment of our resources.
Customer service costs decreased $1 million in the third quarter versus the prior year period due to a lower number of service requests and challenges in hiring and retaining customer service staff.
And finally general and administrative costs increased $3 million in the third quarter versus the prior year period due to higher personnel costs and investments in technology.
Please now turn to slide nine for a review of our cash flow and cash position for third quarter 2021.
<unk> to the prior year period.
Net cash provided from operating activities was $142 million. The nine months ended September 32021.
It was comprised of $207 million in earnings adjusted for noncash charges offset in part by $65 million of cash used for working capital.
Cash used for working capital was driven by normal seasonality and the impact on deferred revenue related to a decline in the number of first year real estate home service plans and a higher proportion of monthly pay customers.
As a reminder, in the real estate channel, we typically collect the annual value of the home service plan upfront through the closing process when the homes sold and these funds are reported as deferred revenue on the balance sheet until recognized.
The decline of course your real estate plans is the primary driver for a lower deferred revenue balance.
Net cash used for investing activities was $23 million and was primarily comprised of technology related capital expenditures net cash used for financing activities was $407 million.
Reflecting debt reduction and refinancing in the first half of the year and share repurchases in the third quarter.
As we announced in September our board of Directors approved a three year $400 million share repurchase program.
We repurchased $25 million worth of stock during the third quarter.
Free cash flow calculated as net cash provided from operating activities minus property additions.
$419 million for the nine months ended September 32021.
Compared to $127 million for the prior year period.
We ended the third quarter of 2021 with $309 million in total cash.
Which included restricted net assets of $178 million.
Unrestricted cash of $131 million.
Our unrestricted cash combined with $248 million.
Bill capacity under our revolving credit facility.
Provides us with a solid available liquidity position of $379 million.
As we continue to generate robust free cash flow, we're targeting a full year 2021, adjusted EBITDA conversion to free cash flow of approximately 55% or a range of $170 million to $175 million.
Going forward, our capital allocation strategy remains the same.
First we will invest for growth, which.
Which includes organic investments and acquisitions.
We're focused on finding the right balance of organic investments to drive both higher revenue growth and consistently strong margins.
In terms of acquisitions, we continue to evaluate opportunities in the larger home services space as well as in technology to drive the demand side or the supply side of our business.
Our second objective is to provide a prudent debt structure for the long term and we achieved our objective with the debt repayments and refinancing completed in June.
The benefits of this refinancing show up on our balance sheet and on the interest expense line, which is half of the prior year level.
Our third capital allocation objective is to return cash to you our valued shareholders.
With the refinancing completed.
Our capital allocation strategy progressed to the point where.
Where we instituted the aforementioned share repurchase program in September.
It's our intention to return the majority of our excess cash to shareholders in the near term.
But we would pause that program for an acquisition.
Other considerations detailed in our public filings.
I'll now conclude my prepared remarks, with our fourth quarter and full year 2021 financial outlook on slide 10, and our current thoughts regarding 2022.
We expect our fourth quarter revenue to be within a range of $330 million to $340 million. This includes mid single digit growth.
In our DTC and renewal channels.
Along with our approximately 20% decrease in our real estate channel.
I'll also mentioned for the fourth quarter is typically the lightest quarter of the year in terms of revenue as a result of the seasonal adjustments to revenue related to claims cost pesos.
Fourth quarter adjusted EBITDA is expected to range between 40 million and $45 million.
Turning to full year 2021 rep.
Revenue is projected to be within a range of 1.59 billion to $1 $6 billion and implies a year over year revenue growth rate of approximately 8% in.
In line with our social growth rates as a Standalone company.
Our full year 2021 gross profit margin is expected to increase to approximately 50%.
This implies a roughly 46% gross profit margin for the fourth quarter as we expect the favorable trends I previously discussed to continue for the rest of the year.
We're targeting full year 2021, SG&A to be approximately $520 million 5 million to $15 million lower than the outlook range, we provided last quarter.
Due in part to better cost management.
I'll also note for those of you who try to bridge from 2021 SG&A to.
Our adjusted EBITDA outlook that.
We expect noncash stock based compensation to increase approximately $8 million in 2021 versus the prior year.
Additionally, our SG&A projection includes approximately $30 million combined operating expense for pro connected screen.
As we invest to ramp their size and scale.
Heading into 2022.
We've increased our full year 2021, adjusted EBITDA outlook to be between $310 million.
$315 million, a 20 million to $25 million increase from the midpoint of our previous annual guidance range. Due to continued gross profit margin favorability in our cost management activities.
The updated range also implies an impressive increase of 15% to 17% compared to our full year 2020, adjusted EBITDA total of $270 million.
Based on our current view of the full year 2022 revenue outlook.
We believe a high single digit revenue growth rate was achievable.
This is a similar growth rate to both 2020 and 2021.
And considers the continued unprecedented market challenges and the real estate channel.
The lower than expected unit growth throughout 2021, and the corresponding recognition of revenue over a 12 month period.
In terms of our full year 2022 gross profit margin outlook.
While we believe we'll continue to see the benefits from dynamic pricing.
Process improvements continuing into next year.
We're trying to balance inflationary cost pressures that appear to be increasing as we exit 2021.
Typically around raw materials transportation and labor.
In addition, we'll need to estimate the number of service request for 2022 based on history and recent trends.
An example, with inflationary cost pressures include water heater Oems announcing six separate price increases over the course of 2021 due to rising steel prices.
As I've mentioned on previous calls.
Our strategic sourcing team has done a tremendous job mitigating inflationary pressures for parts and equipment throughout the pandemic.
I expect them to continue their great work in 2022.
I hope this early view of 2022, it's helpful.
And look forward to providing our detailed outlook on our fourth quarter and full year 2021 earnings call in February.
In conclusion, we are.
Tackling the challenges will make us a better company in the long run and are delivering strong cash flows that we're now returning to shareholders. We have a lot of opportunities ahead of us and I remain optimistic that we will achieve great things in the years to come.
With that I will 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. The guidance is limited to the outlook we provided.
Operator, let's open the line for questions.
Thank you.
You would like to ask a question. Please press star followed by one on you kind of think he pads now.
Okay.
We have the first question from the phone lines today from Jeff Schmitt of William Black say, Jeff. Please go ahead of it in July.
Hi, good afternoon.
Question on pro connect and it sounds like it's on track to hit the $20 million of revenue this year.
I think you'd previously said that would be kind of 80000 service request at a cost of 250 per request.
Just curious if it's tracking to that.
And then you assume you think revenue will double next year like how does that unit cost.
Does the cost per request go up in your assumptions I guess.
As you kind of roll out higher cost services.
Yeah. Thanks, Thanks for your question Jeff.
Hopefully wherever we ever said $250 per request, maybe back into that number, but but certainly 80000 service requests for this year in terms of next year, we're certainly targeting doubling.
Doubling revenue it really comes down to the mix. So that's why I'm, a little hesitant to back into the $2 50 number because we plan on having the expanding our trades.
You know, what the appliance and electric plumbing and HVAC.
That number will be I think somewhat fluid based on those.
The type of work, we do we also plan on expanding our maintenance services.
H Bac Tune-ups.
Upgrades that type of thing so it's going to really be dependent on the mix. So I think it would be hard to give a concrete dollar amount for each of us each service request.
Okay.
And then the investments in pro connect can stream just to scale them.
You mentioned it would be around $30 million.
SG&A is.
Is that all going to hit this year or I guess how much.
Are you expecting is that going to be the majority of the costs or should we expect more than.
Next year to scale those.
Well, that's the number that Brian indicated earlier our are for this year certainly as we move into next year I think.
The majority of other costs will be around marketing so.
I think that we need to look at a couple of different things. One is certainly will continue to.
You know use search and digital for Broken Act I think Theres also a great opportunity to cross sell to our existing <unk> customers, which is certainly a great way to all of our you know.
Our acquisition cost and then I'd also look at.
We're really trying to drive more.
It services as well, which will also lower our CAC.
And then the last thing I would point out is China.
I made my prepared remarks is that you know.
At least in the appliance trade, we're seeing mid single digit repeat business and.
That's one of the key indicators I think.
One for success in the program, but to.
To also lower our overall marketing costs, and so that will really help us scale going going into 2022.
Okay, great. Thank you for the color.
Thank you.
Thank you.
We now have a question on the line from Cooley Copycat of J P. Morgan Sarah Cooley Youre line is open.
Great. Thanks for the questions.
I had two just one on claims.
I know they came in lower than you were expecting but just curious I mean are those basically back to pre pandemic levels today or maybe even below the low prevent any levels and what are your what expectations are you assuming for that.
Next year in.
And then broken that Rex maybe could you just provide a little more detail around what kind of why you may need you to balance more profit and growth.
Growth next year any more color you can provide there would be helpful. Thanks.
Sure Cory I'll I'll start with <unk>, and then I'll hand, it over to Brian to talk about.
Kind of overall.
Gross margin or cost.
You know as I said in my prepared remarks, I think we're growing well as you'll recall, we're in 35 cities, our plumbing and electric trade expansions took a little longer to ramp than we anticipated.
We will continue to apply these and our other earnings.
Our go to market strategy.
Well, we don't want to do is kind of overheat the market from a from a marketing perspective, if we're not ready.
From an expansion perspective, so that's why we that's.
That's what we mean by a kind of balancing the market if you will.
And then as we consider expanding into our current base.
The cross sell initiatives, we wanted to make sure we want to make sure we have enough.
Offerings in terms of.
Maintenance services for our customers as well so.
I think everything is kind of you know.
Well, we just want to make sure that we have enough selection for customers to drive that.
The business that I talked about earlier.
Brian you want to take the Cogs question.
Sure rich, thanks, and Cory Thanks for the question, Yes service request trended pretty close to pre pandemic levels in Q3, which is a great trend for us and we really saw.
No impacts from the Delta surge that we anticipated so that was good news as well.
And looking forward I think we're cautiously optimistic about Q4, and then going into 2022, but we're going to watch the trends really closely.
But at this point in time, the trends look pretty good as far as service requests across trades, especially the pandemic traits of plumbing and appliance.
Okay.
Great. Thank you.
Thank you.
Thank you. Thank you we have another question on the line from an army some ocana site and please go ahead.
Alright, thank you.
You know you guys believe you mentioned labor.
<unk> can you just talk a little bit more about that how you're going about getting around that where is that actually hurting your business and.
What type of inflation should we expect from that.
Sure I'll take that this is rex.
Certainly.
Well one of the things we're very proud of is our contract relations team has done a phenomenal job of continuing to strengthen our community we have with our with our contractors our percent to preferred this year as you know when the highest levels as I think Ben as you know since our certainly as a standalone company and maybe overall.
What what are the areas, where we are seeing.
Signals anyway from our contractors as is and our network contractors, so those who.
We kind of used sparingly and trying to kind of grow them into becoming more of our.
Our our direct dispatch or our preferred contractors and so.
Certainly those those contractors are beginning to feel the squeeze from a labor perspective, they tend to be.
Smaller.
Smaller players for us I think in the industry overall, and so continuing to be able to recruit and retain.
Skilled tradespeople I think is beginning to create an issue for them I think the great thing for US is that because we have this relationship with our preferred providers we seem to be.
During that storm pretty pretty well.
The only thing from a preferred perspective that.
Maybe causing some issues or things like office staff, but I think the team has done an incredible job of really kind of working our way through what is certainly a very very tight labor market.
Okay, great. Thank you very much.
Thank you Hugh.
Thank you you now have a question from Mike <unk> from Goldman Sachs, Hey, Mike. Please go ahead, when you're ready.
Hey, good afternoon, and thank you very much for the question I was just wondering if you could provide a little bit more color around your assumptions.
When you talk about the high single digit revenue growth rate in 2022.
Should we assume that real estate in 2020 to realize a similar decline as you're looking for in the fourth quarter.
Any additional information there would be great and then also on 2022 I'm.
I'm, sorry, if I missed it but is the 50% gross margin outlook for 2021.
Good way to think about next year.
I appreciate that.
This cost inflation that you will have to manage through thank you.
Brian you will tell you that I'm happy to see them.
Happy to please jump in Rex.
The first question about 2022 our revenue guide, Mike I think that's what.
I wrote down here.
Yeah, we're guiding towards something similar to the past this year and less which is sort of in the 8% range and I think based on the trends in real estate first year real estate.
We'll have another the revenue growth will be negative next year as well in the real estate channel.
Just because of the way that business builds overtime and we've got to rebuild our volume, we will get price and mix, but we're going to have volume.
Challenges in the next year until the back half of the year and that'll begin to grow.
Hopefully towards historic rates it'll be a good year for DTC, we think that's going to rebound nicely and also renewals will have.
Maybe comparable to this year, maybe a little less but that will all build towards that 8% revenue growth year over year does that helpful.
Thank you.
And then your other question was I'm, sorry, I forgot it already.
The gross margin percent gross margins.
Yeah.
The challenge is going to be I think as I mentioned in my prepared remarks.
That.
I think dynamic pricing seems to be.
Working very well for us and all the process improvements, we're making will flow through but I'm concerned about inflation like every other CFO that should probably.
I've heard the past few weeks.
We just don't know what's going to happen.
We see parts and equipment availability is improving.
Each month, but not to pre pandemic levels, but the inflation on <unk>.
Labor raw materials transportation, I think are going to drive prices higher.
Parts and equipment heading into next year. So that's a concern.
And I really don't have a good feel for global commodities like whether it's steel or copper <unk>.
<unk>.
What have you and I just it just feels like those will be challenged at least until the back half of next year.
Keep the inflation pressure on so based on that.
That's what we're factoring into our gross margin calculus for next year, the benefits of dynamic pricing and process improvements offset.
By potentially higher inflation.
Great. Thank you Brian I appreciate all the incremental color.
Sure.
Yeah.
Thank you.
We now have you said 20 from mature Securities. Sir. Please go ahead when you're ready.
Yeah, Hi, this is Nick <unk> on for yourself.
Thanks for taking my questions just one for me.
All of this dynamic pricing played in normalizing gross margins in the current environment.
What's really good this quarter.
More color would be helpful. Thanks.
Yeah, Hi, it's Rex.
Certainly it played a part.
It wasn't I think the overarching part.
As Brian mentioned before or we've had a lot of.
Process improvements as well as.
I think we are.
Also lower service requests as well.
You know the issue.
I think it was a good issue pricing as we continue to.
To optimize our models.
This quarter we.
For our highest usage, our highest cost customers we.
We had higher price increases while it's still in elastic we should see.
And then the unexpected cancellations for those customers, which does it does.
Flow too.
Higher profitability, but I wouldn't say it was it was the key driver of the profitability.
Profitability this quarter, but certainly helped.
And so in terms of dynamic pricing, we've since adjusted those models so that.
We continue to retain those customers in and ramp up.
The pricing overtime, so that we're able to keep the customer and and continue to keep the revenue as well.
But the real I think the real drivers as Brian pointed out in his prepared remarks.
Outside of dynamic pricing, we're really around.
Our process improvements, which include higher percent deferred some of our technology improvements.
Certainly as we continue to tweak.
With him is around dispatching in some of our customer service software that's definitely helped.
It helped us as well.
But really the install of a cross functional effort of the team.
Coupled with you know.
Good good weather and lower service requests, especially for HVAC.
The main drivers this quarter.
Brian feel free to chime in there.
No I think you nailed it.
Yes.
Got it thank you.
Thank you.
Thank you we now have find win of credit Suisse, Hey, Brian Your line is open.
Hey, guys. This is Brian on for Kevin.
I appreciate you taking our questions.
Brian Our first one here is.
Hey, guys.
First one here is just on.
As it relates to the macro environment, you sort of touched on how obviously, it's impacting your competitors as well.
We're just curious.
Have you seen the macro environment.
As we step changes in the competitive.
Environment overall and.
Given you guys are I think four times the size of your next largest here do you think maybe the these cross currents could be.
Sort of as an opportunity for some share gains recognizing obviously the team overall has.
No pretty underpenetrated, but just any thoughts there.
Yeah I can't.
Certainly I think the biggest thing we have going for us Friday is our scale.
When you think about our buying ability to think about that.
Our our supply chain team of how we're expanding.
Our parts and replacements availability I think that certainly we have.
Greater buying power over.
Over our competition, but we don't have any definitive data that would prove that obviously well I do think we have the data is if you look at our gross margin compared to some of our our competitors I do think that.
We are winning in that category.
That's through a lot of work that we've done over.
Last two three years as it relates to.
Inserting technology, where are you.
We can further our scale and that's you know around dynamic pricing that's around.
Improving our supply chain. We are we now have an appliance poorly.
Billy to preposition, some of our fast moving inventory.
And really increasing our efforts around customer experience and not only is better for the customer, but some of the things. We're doing is actually better for gross margin as well.
So we think that the.
Real real share gains will come as we continue to focus on making the customer or service experience more of a digital one.
You know, we're committed to to really providing more self service options, which will.
Hopefully lower cycle time, Inc.
Increase more.
A more digital experience so she had lower costs as well so it's all about removing friction from our from our processes and.
It makes it better for the customer and we think that's how we you know we went overall.
A piece of your customers.
Makes sense and then a follow up here was just.
Obviously, a lot of capacity on the balance sheet and I appreciate the commentary on kind of how you. How you guys are thinking about M&A, but if you could just remind us what's the what's sort of a framework you employed.
Be it in return hurdle or whatever the case may be win.
Do you have any potential potential.
Potential deals and if you could just comment on.
And each of the verticals what valuations are looking like from your standpoint. Thanks, so much.
Hey, Brian Brian feel free to chip in here, but certainly.
As it relates to M&A I mean, if you want to price it certainly talk about our overall.
Capital allocation strategy, but as it relates to M&A, we still stay on the same.
You saw the same viewpoint as it relates to looking for technology.
<unk> technology that helps our <unk>.
Or that the digital.
Experience I just talked about we think our acquisition of stream that's really.
Starting to pay dividends as it relates to especially our appliance customers being able to you know.
Kind of see what they see virtually and it really provides a very different experience. So we'll continue to look for technology.
Either tuck ins or or <unk>.
Jason <unk> to help us with that and then as it relates to.
You know kind of a roll up strategy, if you will for other home.
A home service plan companies, where we're certainly not against that we still think that.
Valuations.
It services overall seems to be still very very high and so one of the things that I think that we continue to deploy its a very disciplined strategy as it relates to.
Making sure were not giving away our synergy values and so.
Yeah, we look at a lot of things, but I think we have a very high bar in terms of if we acquire something that we want to ensure that.
It's truly accretive for for our investors, Brian anything you'd add to that.
I guess I'd only add that you know you mentioned in your question about capital allocation overall, Rex, Matt and I.
I've really been laser focused on cap allocation pre spin and over the past three years and.
You know we've been investing in the business. We've made a few small acquisitions one modest.
Other modest one.
And stream.
We knew at some point.
We're going to repay debt refinance our debt repay our debt, which we did earlier this year.
And while we're looking for acquisitions and we have nothing on the horizon as Rex mentioned that we think is the right value for us so that sort of leads into why we announced the share repurchase plan.
Was.
We've got a refinancing debt repayment behind us we've been investing strongly in the business. We had a lot of cash on the balance sheet, we generate a lot of cash.
I think we mentioned way to generate $170 million to $175 million. This year free cash flow. So we thought it was a great time to announced a share repurchase plan that our board approved and return value to shareholders that way. So hopefully that's helpful.
We now have Brian Fitzgerald of Wells Fargo, you say, Brian I think your line.
<unk> got a lot of questions answered maybe one on on what you just touched on the benefits from process improvement I'm wondering how much runway you see there for additional benefits and then you just touched on steam a couple of times, how does that fit into the process improvements how's it rolling out.
Post your purchasing it.
Is it deploying to your playbook is it deploying faster or are you seeing better synergies and more impacts than than you originally thought with stream.
Yeah, I'll start I'll start with stream that we can talk about.
The.
The cost side after that yes.
Certainly.
This this year has been I think a good a good year as it relates to stream.
And our ability to integrate it within our business, we've been rolling out over kind of our core home service business.
This year.
Customers and contractors when they use it seem to really enjoy.
The ability to really look at.
Or have someone look at kind of what theyre seeing and we think that is.
That is the future of the <unk>.
Company as it relates to.
We found out of the business 50 years ago and.
Well it hasnt changed as you've kind of roll a truck to kind of see what's what's wrong.
And then it seems like a really antiquated way when now we can have almost a zoom.
Zoom like call with.
With the customer we can see what they see in terms of problems, but in the future, we'll be able to predict what's going on and we'll be able to understand or predict what what is that we're looking at we should be able to understand.
What our supply position is in terms of the replacement parts or replacement overall, so once we build all the kind of backend capability of doing that it becomes a very differentiated.
Uh huh.
Tool for <unk> for front door, but also for our contractor base in general So helps us continue to even build the base.
Within our existing contractor.
Contractor base that the other thing I'm really excited about for stream is I think it's a it's an incredible ESG benefits in that.
When you're not rolling trucks to kind of understand.
The issue that is far better for our environment and.
Far better for our.
Our future world as well and so we're still very bullish on stream and the other thing I would say as you know we purchased stream prime.
Primarily a car for our internal capability, but we continue to focus and add enterprise accounts as well and you know anytime you have a software. It's a it's a great business. So a very very small a small base and we have a long way to go but are considering.
Considering how how early we are into the cycle as well I think stream is kind of off and running.
Your second question it was kind of around.
Keep me honest here, but but I think well will these gross margin improvements continue into next.
Next year I believe I believe Brian addressed that earlier in terms of I think we're seeing a lot of.
A lot of improvements this year from.
From from dynamic pricing and from our technology and process improvements the real wildcard for us going into next year is going to be.
On the supply chain is still still a very fragile.
I didn't really understand what does inflation looks like for next year, it's still too early to call the ball, but certainly we're not taking our foot off the gas as it relates to continuing to find ways to the pool to pull cost out from a technology or a process improvement perspective, it's really going to come down to.
What is what is inflation looks like for next year and how much of that can we.
Mitigated through dynamic pricing Brian.
Brian anything else you would add to that.
No that was spud on Rex.
Awesome I appreciate it guys.
Yeah, absolutely. Thank you.
Thank you Brian we now have a question from.
And Tesla is Raymond James site and please go ahead.
Great. Thanks, just a couple of questions. One just on the follow up to the DTC rebound.
So you kind of said you have good confidence in for 'twenty. Two just a couple of factors that give you that strong confidence and DTC rebalance easier comps pricing et cetera, and then maybe just on the you call up on the inflation costs.
Assuming you can kind of adjust the name of pricing how quickly can you adjust that if we do see greater than expected inflation costs as well. Thank you.
Sure I'll take the last one first as it relates to pricing.
With the exception of <unk>.
The real estate.
We can make pricing changes fairly quickly as it relates to renewals, which is two thirds of our revenue.
We can make it.
Uh huh.
Less than a week so it's a it's pretty it's a pretty quick.
In terms of your question around DTC, what gives us confidence as you know a lot of a lot of things that we talked about for this quarter are.
Truly behind US I think we have an opportunity to continue to diversify our demand mix, we've pivoted to new sources of.
Demand and I think the team as you know.
I think we're seeing the level of execution that we saw.
Previously, we reevaluated our conversion funnel to improve our sales process.
Sales teams now understand our new our new product lineup as it relates to that it's a good better best.
And.
We've made a lot of improvements to our e-commerce site through a b testing and optimization. So those are the things that gives us confidence that.
Our direct to consumer should should rebound next year.
Keep in mind that from a unit perspective, it'll take a while for it to.
To show the numbers since we recognize revenue with 12 at a time, but we will we will see the added benefit of both better mix and price going into next year as well. So that's what gives us confidence.
For direct consumer going into 2022.
Got it thank you.
Yes.
Yeah.
We now have the final question on the line from Justin Anderson of Keybanc say, Justin. Please go ahead when you're ready.
Thanks, I haven't heard that variation of my last name before.
But you changed your name.
Yeah, well, hopefully you're all doing well.
I appreciate that you're rationalizing spend and broken that given market conditions.
We'd be viewing this as a temporary pause or more of a shift in the business.
And perhaps related to that are there factors that would cause you to ramp up that investment.
And drive more expansion there again that's quest.
Question, one on broken activity investment dynamics, and then just digging into the labor dynamics.
More what do you think is the biggest driver gating factor or a core really broadening out the selection that customers see is it really just labor at the existing contractors or do you actually need to broaden out the types of contractors are working with a detailed market by market. Thank you.
Yes, I can hear me Justin Yeah, I think I think.
Taking the last question first.
I think we need to continue to expand our.
Maintenance services for existing customers as well as you know.
Expand our core.
Core trades.
In our existing <unk> markets.
So just a quick history lesson as you know we started with primarily appliance and then we moved to plumbing electric and we're in HVAC in a couple of cities, we need to further expand those I really want to see that.
In terms of your question.
What makes you go faster LLC, a greater repeat business I wanted to see.
Our ability to cross sell to our existing IHS customers all things we have seen.
Our plumbing electric trade expansion like I said, it took a little longer to ramp.
We are beginning to perform.
Cause at all it really comes down to once we see.
See a lowering of our customer acquisition costs.
And repeat business that gives me.
Yeah.
As well as a you know a good customer experience that's what gives me.
Optimism to pour more money into the market knowing well.
Yet.
More stickier demand if you will.
So those are the things that we look at it and continue to drive with but you know keep in mind. It's yes, we're two years into the journey we went from.
Basically zero to $20 million first year content, we can double it next year, if we see greater opportunity.
Well definitely.
That's more.
To grow.
<unk> <unk> from <unk>.
Labor perspective, certainly one of the things we are watching carefully is.
Making sure that there is labor there.
These jobs, so far it hasn't been.
But again, it's a small base right. So so just like we're watching labor very closely and our broader.
Contractor.
Market as it relates to home service plans are doing the same thing as it relates to pro connect.
And so far.
It's not a mountain we can't.
Can't comment.
Got it thank you.
Thank you.
Thank you Justin.
As we have no further questions on the line I would like to hand that Quebec for some closing remarks.
Thank you operator, while we are facing some near term headwinds our long term vision remains as strong as ever.
We're still delivering strong profitability and growth despite unprecedented real estate market conditions are difficult global supply chain and ongoing challenges from the pandemic that will last into 2022 we.
We will continue to look for opportunities to grow faster, while transforming our service experience into a digital one we're playing the long game and we are focused on strengthening our foundation to deliver strong and consistent growth in the future.
Look forward to talking to you in our next earnings call.
Ladies and gentlemen, thank you again for joining front doors that coated 2021 earnings call. Today's call is now concluded.
Yeah.
[music].
Okay.