Q1 2022 Frontdoor Inc Earnings Call
Ladies and gentlemen, and welcome to the front doors first quarter 2022 earnings call today's call is being recorded and broadcast on the Internet.
Beginning today's call is Matt Davis, Vice President of Investor Relations and Treasurer.
And he will introduce the other speakers on the call at this time, we will begin today's call. Please go ahead Mr. Davis.
Thank you operator.
Good afternoon, everyone and thank you for joining front doors first quarter 2022 earnings conference call.
Joining me today are front doors, Chief Executive Officer, Rich 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 don't front door home Dot com.
As stated on slide three of the presentation I'd like to remind you that this call and webcast may contain forward looking statements. These statements are subject to various risks and uncertainties, which could cause actual results to differ materially from those discussed here today.
These risk factors are explained in detail in the 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 Nathan.
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 will now turn the call over to Rex for opening comments.
Yes.
Thanks, Matt and good afternoon, everyone front door delivered another strong quarter of revenue growth. Despite continued macroeconomic headwinds.
Today, we plan to focus our discussion on two near term external challenges cost inflation in the real estate market and our long term opportunity.
All of these challenges the rest of our business is generally on target with what we laid out last quarter.
Turning to slide four where we will provide an overall business update and how we are addressing the challenging macroeconomic environment.
We're moving with urgency to address accelerating inflation.
Ryan will address this topic in more detail, but in short U S inflation rates are rising at the highest level since 1981 inflation in the home services space is rising faster than the overall economy.
As a result, we are seeing service cost accelerate faster than we anticipated and higher than we price for it.
In response, we are redoubling, our efforts to address rising inflation and support our customers and contractors. During this extraordinary time.
Contractors across the country are experiencing record cost as they help us resolve the hassle of owning a home where.
We are essentially working with our contractor network to find innovative ways to reduce cost and improve customer service in these unprecedented times, but this comes with a near term cost.
Separately, our real estate channel continues to be impacted by historically strong seller's market as a result of extremely low home inventory levels.
This is driving a decline in our first year real estate sales that ill address this topic shortly.
Much of the near term pressure from inflation in real estate, it's macro in nature does not intrinsic to our normal business operations.
Main focus on improving the key drivers of our business and focusing on controlling the controllable.
We continue to work on mitigating the external factors many of them remain beyond our control in the near term.
Despite these challenges is in this environment that our resilient business model and scale demonstrates the ability to grow revenue and generate strong cash flow.
While others are cutting back we were able to continue investing in our customer experience and develop our contractor community in order to drive long term performance.
We believe we have a tremendous growth opportunity ahead of us and continue to propel our strategic initiatives, while building a strong foundation for future success.
Now turning to the real estate channel on slide five.
In short the real estate channel has been underperforming your expectations. When we provided our previous full year outlook in February we expect it to sell approximately the same number of home service plans and our real estate channel as we did in 2021.
However, it remains increasingly difficult to sell a home service plan with inventory levels remain extremely low and the seller has significant leverage in a transaction.
There are three markets statistics from the National Association of Realtors or not that we believe highlight this trend including based on market declined to 17 days in March Corrington Art. This was down from 18 days in the prior year period and less than half of the levels seen before the pandemic.
The second metric is inventory of unsold homes, which now reported was approximately 950000 at the end of March are only two months of supply. This is well below our normal market of around four to five months of inventory.
The third metric is the percentage of cash sales, which not reported was approximately 30% in March this is up from 23% in the prior year period. This dramatic increase reflecting the significant percentage of homes being purchased by investors has been a contributing factor impacting our ability to sell a home service plans since these investor buyers or not.
Really inclined to buy our product themselves and they shrink the inventory levels available to individual purchasers there are more likely to purchase our service plan.
As a result of the external market pressure, we're now expecting our real estate channel revenues is potentially decline in 2022.
Our response to this environment, we continue to be focused on the following actions.
First investing more on our direct to consumer or DTC channel and our renewal of channel to help offset some of the impacts from lower real estate channel sales.
We're also expanding our partnership strategy to help diversify our revenue over time.
Within the real estate channel, we are aggressively looking to expand our channel share with our largest real estate partners.
We are completing a strategic realignment of our real estate sales organization focused on key geographic markets and we've recently launched a new good better best home service plans and our real estate channel a comparable products, we launched last year in our DTC channel. They are the most comprehensive products, we've ever offered and we believe will help us better position our products.
A market.
To be clear none of these actions will fix our real estate channel overnight.
However, we believe that this channel is core to our home service plan business and we will continue to rebuild our demand footprint over time as the macro market factors become more favorable.
Let's take hold.
Now turning to slide six and a review of our top objectives for 2022.
I'll start by reminding you that our objectives have not changed since our last call.
Let's now dive deeper into some of these priorities and how we are progressing through the early part of 2022, starting with our DTC channel where the team continues to perform well after making improvements in late 2021.
Remain on target, providing double digit revenue growth as we did this quarter.
Our comments from last quarter still hold true Marcy <unk> stabilized our platform late last year, we expect that to continue through 2022 are spending media footprint and conversion funnel are all operating as expected and we continue to make minor changes to optimize the platform.
For example, our ecommerce platform is working well and we are casting a broader net with our media coverage and this time last year.
And the renewal channel our team continues to improve their renewal process. We've increased the number of customer outreach touch points improve call center staffing and training and leverage technology to make it easier to renew your home service plan.
We are just launching a new feature where you can upgrade your plan through our online platform.
While it's still early we believe there is a lot of potential around upgrading more of our customer base to the more inclusive platinum offering which provides both coverage and maintenance services.
We're still looking to improve overall customer retention in 2022, however, the decline in real estate sales and higher pricing will have an impact on our total customer count.
In response, we continue to progress these initiatives ive spoken about previously.
We're working to improve the service experience by leveraging technology and our digital first focus such as stream to make it easier for customers to interact with us and for us to walk in their shoes.
For example, we just began operating our new click to call feature that allows customers to more easily launch a street call to drive better customer adoption.
We're also committed to further our progress on the service delivery experience by allowing for more digital self service options utilizing more preferred contractors and by continuing to optimize dynamic pricing.
Over the last few years, we have improved our self service capabilities are now processing more than half of our initial customer interactions through my account or automated phone system.
As we rollout our customer App later this year, we think we can make our self service capabilities even better.
Well, if our door is facing some near term external challenges around accelerating inflation rates and the macro real estate environment that are beyond our control we remain focused on improving the key drivers of our business and focusing on controlling the controllable.
We strongly believe that our long term vision of transforming the home services space and taking the hassle out of home services.
I'll leave you with three reasons to believe in front door first we continue to profitably grow this business despite dependent making current macroeconomic conditions.
Stated in our last call. We spent the majority of our public company life and uncertain times and yes, we continue to deliver profitable growth.
We are uniquely positioned to transform an antiquated inefficient industry, one that begs for disruption.
Firmly believe we have the knowledge and scale to transform into a digital first model allows you to solve your whole muscle that much more delightful way.
Lastly, we continue to build products that bundled traditional home service plans and do maintenance services to provide a more holistic and complete set of offerings for not only our current customers, but for those who may not need a home service plan, thus, reaching a much larger audience.
This industry is ripe for digital transformation. It has a massive opportunity to grow into on demand services and that's exactly what we plan to do.
Now I'll turn the call over to Brian to review our financial results Brian .
Thanks, Rex and good afternoon, everyone. Please turn to slide seven and I'll review, our first quarter 2022 financial results.
First quarter 2022 revenue increased 7% versus the prior year period to $351 million as a result of higher pricing and a mix shift to higher priced products in our home service plan business.
Looking at our home service plan channels first quarter revenue derived from customer renewals was up 10% versus the prior year due to improved price realization and growth in the number of renewed home service plans.
First year real estate revenue was down 20% versus the prior year.
Selecting a continued decline in the number of home service plans in this channel.
Offset in part by improved price realization.
The decline in the number of home service plans in this channel was higher than we had projected due to the continuation of the challenging seller's market driven in part by extremely low home inventory levels across the U S.
First year direct to consumer or DTC channel revenue was up 14% versus the prior year due to improved price realization and a mix shift to higher priced products.
First quarter revenue reported in our other channels.
<unk> $5 million over the prior year, primarily due to continued solid growth at broken that can screen.
First quarter revenue for program can shrink was $7 million and $2 million respectively.
And should continue to ramp up over the balance of the year.
Gross profit declined 3% in the first quarter versus the prior year period to $144 million and our gross profit margin was 41%.
Net income declined $3 million in the first quarter of 2022 as lower gross profit and increased investments in sales marketing and technology.
As well as higher personnel costs more than offset lower interest expense.
Adjusted net income decreased $5 million over the prior year period to $3 million.
Adjusted EBITDA was $25 million in the first quarter were $11 million lower than the prior year period.
Let's move to the table on slide eight.
And I'll provide context for the year over year decline in adjusted EBITDA.
Starting at the top we had $21 million of favorable revenue conversion in the first quarter of 2022.
Versus the prior year period.
Contract claims costs increased $24 million in the first quarter versus the prior year period.
The increase was primarily in the appliance plumbing and HVAC trades due to accelerating inflationary trends.
<unk> rising contractor labor and fuel costs as.
As well as continued industry wide parts and equipment availability challenges.
This was partly offset by a lower number of service requests and process improvement benefits.
Additionally contract claims costs for the first quarter of 2022 include a $9 million unfavorable.
Unfavorable adjustment related to the adverse development of prior period claims primarily from the fourth quarter of 2021.
Sales and marketing costs increased $4 million in the first quarter versus the prior year period.
Not really related to increased investments in the DTC channel and broken neck.
And finally general and administrative costs increased $3 million in the first quarter due to increased professional fees investments in technology and higher personnel costs.
Turning to slide nine.
Now I will go into more detail on the significant claims cost inflation were experiencing.
The effects on the business.
And our ongoing cost mitigation strategies.
Based on the claims cost trends, we experienced exiting last year, we assume that a high single digit year over year increase was appropriate.
Based on higher contractor labor parts and equipment costs.
Our actual first quarter year over year cost inflation rate was in the mid teens.
There have been several changes since our last earnings call. They have resulted in a greater acceleration of inflationary cost pressure than we originally anticipated.
The war in the Ukraine has resulted in global cost inflation, especially fuel prices and supply chain uncertainty second the COVID-19 related shutdowns in China have impacted the global supply chain by creating production issues and logistics challenges that could impact overseas parts and equipment availability for the foreseeable.
Future.
And third we have seen an increase in overall inflation those impacted the macroeconomic environment.
These factors have all contributed to U S inflation rising at the highest rate in 1981.
With the consumer price index, increasing eight 5% in March however.
And to point out that cost inflation in the home services space is rising well ahead of this rate.
For example, we're seeing our service request cost now rising of double digit inflation rates as contractors pass along the higher labor rates as well as higher fuel parts and equipment costs.
While we have great visibility and an ability to influence their own direct purchases of parts and equipment.
We don't have that same level of visibility into our contractor costs.
Especially when they supply their own parts and equipment.
As a result of the current environment, we are aggressively addressing rising inflation and global supply chain challenges through a number of actions first we are implementing another round of price increases and now targeting an upper single digit overall price increase in 2022.
That will be delivered through dynamic pricing to minimize the sales unit impact.
Our price testing continues to show that our customers are mostly in elastic price and we expect to be able to increase our price over time to cover the inflationary pressure.
We are implementing a host of process improvements with our contractors such as increasing for some jobs assigned to our preferred contractors.
Redoubling, our recruiting efforts.
And driving broader adoption of technology and automating processes.
Third we are continuing to expand our supply chain efforts by broadening front door source parts and equipment for contractors.
And fourth we're taking SG&A cost reduction actions across the business.
Please now turn to slide 10.
For a review of our cash flow and cash position for the first quarter 2022 compared to the prior year.
Net cash provided from operating activities was $47 million for the three months ended March 31 2022.
And was comprised of $14 million in earnings adjusted for noncash charges and $33 million of cash provided from working capital.
The cash provided from working capital was primarily driven by seasonality.
Net cash used for investing activities was $8 million and was primarily comprised of technology related capital expenditures.
Net cash used for financing activities was $47 million, primarily driven by $40 million used for share repurchases.
Free cash flow calculated as net cash provided from operating activities minus property additions was $39 million for the three months ended March 31 2022.
Compared to $45 million for the prior year.
We ended the first quarter 2022 with $255 million in cash.
Restricted net assets totaled $163 million in unrestricted cash totaled $92 million.
Our unrestricted cash combined with $248 million.
Available capacity under our revolving credit facility.
<unk> provides us with a solid available liquidity position of $340 million.
It remains our intention to return the majority of our excess cash to shareholders over the next few years through our share repurchase program.
We certainly could pause the program.
Our strategic acquisition or other considerations as detailed in our public filings.
I'll now conclude my prepared remarks, with our current thoughts regarding the financial outlook for the second quarter and updated full year 2022 provided on slide 11.
We expect our second quarter 2022 revenue to be within a range of 475 million to $485 million.
Which reflects an increase in direct to consumer and renewal channel revenue versus the prior year period.
Hartley offset by a nearly 30% decline in real estate channel revenue.
Second quarter, adjusted EBITDA is expected to range between $75 million and $90 million, which is significantly below the prior year period.
As a result of the accelerating inflationary cost trends.
Turning to our updated full year 2022 outlook revenue is projected to be within a range of $1 six 6 billion to $169 billion the.
Full year revenue growth assumptions include double digit revenue growth in the DTC channel comprised of higher price and the continued shift in product mix to higher priced products.
Upper single digit revenue growth in the rule channel drip.
Driven primarily by price realization.
And higher renewal customer counts.
And a mid 20% decrease in real estate channel revenue due to a decline in our expectations for this channel.
Weighted to the historically challenging sellers' market and extremely low level of home inventory.
On a consolidated basis.
Our core home service plan business revenue growth is now expected to be in the low to mid single digits. Additionally.
Customer count is now expected to decline slightly in 2022.
Primarily driven by the weakness in first year real estate sales.
In regard to our emerging businesses.
<unk> revenue is still expected to reach about $40 million in SRAM revenue is targeted to be between 10 million and $15 million as originally projected.
Our full year 2022 gross profit margin is expected to be between 44% and 45% driven primarily by the acceleration of inflationary cost pressures.
Partly offset by higher pricing and process improvement efforts that are projected to have a greater impact in the second half of the year.
For 2022, we anticipate that the inflationary pressure will drive cost per service request to increase at a low teens percentage.
While the actual number of service requests is expected to be flat to slightly down versus prior year.
The rate of cost inflation is expected to remain elevated in the first half of the year and then improve in the second half of the year as we lap some of the increases from late 2021.
I should note that while our long term gross margin target for our core home service plan business remains the same which is approximately 50%.
Our goal is to provide you with the best real time data, we can as we navigate this a volatile macroeconomic environment.
And take every action to mitigate the inflationary impact.
We are now targeting full year 2022, SG&A to range between $540 million and $565 million.
The $10 million decrease from our previous guidance.
Primarily relates to the SG&A expense reduction actions I mentioned earlier.
Based on these updated inputs full year 2022, adjusted EBITDA is expected to range between $215 million and $245 million.
In conclusion.
We are doing our best to manage through this very challenging set of macroeconomic conditions by controlling the controllable and executing our internal business initiatives.
While our near term performance continues to be impacted by geopolitical and pandemic driven inflationary cost pressures in the historically challenging real estate market.
We're focused on delivering on an aggressive set of actions.
Help us navigate through this challenging period.
Despite these near term pressures.
We remain confident or a long term business outlook and we continue to invest in building a strong foundation for the future.
With that I'll 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 our guidance is limited to the outlook we provided.
Let's open the line for questions.
Thank you, Matt if you'd like to ask a question today. Please press star followed by one on your telephone keypad.
And our first question.
Is from the line of Jeff Schmidt from William Blair.
Jeff Your line will be opened now if you'd like to proceed with your question.
Hi, good afternoon, everyone.
Did you say that our claims cost inflation was sort of in the lower mid teens, but then you're targeting kind of high single digit price increases.
And I'm curious just because I guess why not just push for 10% to 15%.
Price increases to combat this or is it is the market environment to competitive I would think you know your competitors are going through the same type of pain. So I guess why not get more more aggressive on the pricing front.
Yes. This is Rex.
Got a couple of things one.
In our last call, we talked about kind of a mid single digit price increase because we thought that is kind of where our inflation was going to be and so as Brian mentioned, you know an hour.
You know we're targeting.
Kind of another round of price increases so I think between those two things as Brian mentioned.
Over time, I do believe that that begins to mitigate the impact of of inflation or anything.
Anything you'd add to that.
Yeah.
Yeah, and just to be clear.
Inflation rate will be mid teens.
First half year, and then end the year, a full year basis in the low teens. So it trails off a bit in the second half as we lap some of the pressure from last year.
Okay.
And a question on the new platinum plans.
The which I think you said included some kind of maintenance options.
What's the progress of that what type of growth are you seeing there and is there any.
Cannibalization of I guess, the pro connect maintenance business at all.
No so for platinum what we're actually seeing something that customers like the blend of both a whole home service plan coverage as well as maintenance services and so what we're actually seeing a higher mix of platinum than we originally had forecasted for which is which.
There's always a great sign.
We don't think it cannibalize is pro connected at all.
And we actually think that you know maintenance services as a great retention tool for our for our customers longer longer term.
Okay. Thank you for the answers.
Yeah.
Thank you.
Thanks, Jeff and our next question is from Ian Zaffino of Oppenheimer.
Your line is now open.
Uh huh.
Okay, great. Thank you very much.
On the pricing side.
Is there anything you can do to get pricing more immediately have you thought about surcharges or some other form of.
Price increases that you could take to maybe offset some of the inflation.
Better than that then you're able to do right now thanks.
Yeah, Hey, anthrax.
Certainly it's something we've explored I think so.
We sell an annual contract there's not an opportunity to.
To have an immediate a surcharge if you will but you know.
A lot of the things that we've worked through with our pricing increases as you know we've taken kind of a data science approach to our models or or dynamic pricing.
To remind the group dynamic pricing, we look at you know both usage as well as a kind of cost within the.
The ZIP code so between those things and the risk bestsellers and we've looked at we've been pretty.
I think surgical in terms of how we're how we're raising prices keep in mind that our service contracts are or are you know our annual therefore, we recognize the revenue of 12 at a time so.
That's why.
We think that you know.
This plays out over time, but it's not going to be an immediate improvement.
Okay, and then just a follow up on the pro connect side.
Are you gonna be taking similar price increases to cover inflation. There is there an opportunity to take more and I'm just trying to think of it and how that kind of foots with your $40 million guidance.
Case, it might be higher than that maybe help us understand that thanks.
Sure. So so certainly I think there are some areas there is a potential opportunity, but it's also the areas that we're that.
We're currently building within pro connect so just as a reminder, we started with appliances and maintenance services certainly.
Theres, maybe a small opportunity in appliances, but as we roll into both plumbing and electrical you know, there's an opportunity to take more more price, but it's also you know somewhat nascent and thats the part that Youre building up so.
I think it'll it'll help I'm not sure it's going to take us beyond our revenue target of $40 million.
Okay. Thank you very much.
Our next question is from the line of your <unk> Squali of two of Securities. Yes. If your line is now open. Please proceed.
Great. Thank you so two quick questions for me.
One still on pricing so versus this.
Listen assumption hitting you in the call it low to mid teens for the year versus the price increase in the high single digits. Arguably has your attitude. The price increase is going to take time for it to them over how much are you assuming that youre going to be able to recapture.
From that you know call it low teens.
This inflation and second.
Can you maybe talk about the marketing efficiency, you're seeing in your DTC channel some time back.
I think you pulled back a little bit on marketing because marketing efficiency through that channel was not as good as you had hoped maybe your assumption about.
Sustained double digit growth in DTC does that come at the expense of maybe ROE as or that's still within your acceptable over last thank you.
Yeah sure I'll take the direct to consumer or question and then Brian I'd ask you to.
And then on how.
How are pricing.
What kind of lap into this year and next so for direct consumer you're right.
Late last year.
<unk> faced a couple of the challenges.
But as we reported last quarter.
That's behind Us.
We're still seeing a great you know certainly things are more expensive, but I think the team has worked on both conversion and our.
Efficiency.
Yeah, we optimize their e-commerce platform and our digital marketing, if we spread over other other areas and so those things continue to perform well and that's why we're.
Still still bullish on direct to consumer and still think that we'll have double digit growth for.
For the remainder of the year, what we're seeing it somewhat in price and mix first but you expect units towards.
The back of back of the year, but these actions that we've taken last year are definitely providing some some green shoots as we.
Look forward to the second half of this year.
And to your question about the pricing in reclaiming some gross profit or gross margin as Rex said. It just takes time right. It takes a few months to roll these price increases out there.
And then you recognize revenue.
Monthly and so you've got the cost upfront and then you get the.
You get the margin recovery over time so.
It's not going to happen. This year as you saw from our forecast of 44% to 45% gross margin, but as we get into next year, we'll be able to get more of that pricing benefit and as we think about long term.
Pricing certainly be a great lever for us.
Back to a 50% gross margins for the home service plan business, but it will be dependent on how quickly Richard real estate rebalance et cetera, So anyway, it's going to take some time.
Long story short to get back to gross margins, we need to get.
Okay.
Thanks for the clarification.
Okay.
Thank you and our next question is from Aaron Kessler of Raymond James.
Your line is now open if you'd like to proceed.
Great. Thank you maybe a couple of questions. Maybe first if you can just talk about kind of customer acquisition cost you are seeing and maybe specific to the DTC channel.
And then I think you just maybe just to clarify you talked about inflation in kind of in the mid teens, what's kind of the rough mix between in your estimates between kind of labor cost as well as parts as well. Thank you.
Sure. So I'll take a direct consumer and ask Brian to comment on the unemployed dairy costs.
For for a direct to consumer you know certainly we're seeing.
Slightly higher Capex, but also keep in mind that with price increases and mix changes to tomorrow.
More of our platinum product.
That actually helps helps helps give us more headroom if you will from an LTV perspective.
So we're certainly seeing some some inflationary pressures there but nothing.
Out of the ordinary.
Since we've.
The transition to our e-commerce platform and changed our mix profile.
I think that you know the team is executing very well.
We are last year brought in some programs in house, so that that continues to to provide.
Green shoots for us so as we spread.
Our marketing across.
Digital direct mail and broadcast.
We're still pretty pretty confident in our plan.
Got it great.
It's Brian what was your inflation question again I'm sorry.
Yeah. Thank you kind of mentioned mid teens overall inflation. Just curious I think you may have mentioned the labor costs of about 10% does that mean kind of parts around kind of the remainder how should we think about the mix between labor costs in parts. If you have a good sense.
Yeah.
The data that we've seen shows that.
It looks like labor cost it would probably hitting our contractors are the mid to high single digits.
They're facing with their technicians.
And when they look at their what they're paying for parts and equipment.
Places, probably the rate of 15% to 25%.
Inflation, which is very high.
We're facing more like 10%, we buy due to our purchasing leverage so that's pretty high and thinking about fuel, they're paying 50% more today than they did a year ago for fuel from their trucks. So there is a lot of inflation. That's let me say some of our contractors today, but.
From what we purchase it's more like 10%.
That's helpful got it great.
Got it thank you.
Yeah.
Yeah.
Thank you and our next question is from the line of Justin Patterson of Keybanc.
Your line is now open. Please proceed.
Great. Thank you and good afternoon I wanted to go back that was one of the comments you went off with Iraq about.
Just.
Investing more around it improving.
Proving customer service, improving our self service capabilities can you talk about the timeline for that to phase into the business and then as these investments start to bear fruit and macro conditions normalize how should we think about the potential benefit that could have to both retention rates margins and pricing downward over time. Thank you.
Hey, Justin.
I think that.
This is kind of been an ongoing work I don't think I know this has been ongoing works.
Since we since we started and we're really starting to see.
Traction from a.
From a self service perspective, I give the team a lot of kudos in terms of our my account feature is definitely.
Proved our automated phone systems have improved so you know I think I said early on the last time I wanted to talk to someone was never and we still believe that and that you should be able to.
Resolve any issue you have through digital means and so we think that as.
As we rollout our App later in the year that continues to strengthen what.
Customers can do from a from a self service perspective, we think that.
Starting with a digital first approach for resolving problems through stream.
You may now starting to click to call feature where you can bring.
Bring the agent on online, but it's kind of walking in your shoes and understand your.
Your issue digitally those are all things that make the customer experience better and the byproduct of that is there also a lower cost and so.
The combination of those things should help us over time and bring down our our service cost.
And then.
From a retention perspective, we think that a lot of these things are more delightful experience and should.
Drive retention because it would be a very different approach to solving the problem then.
Than we've seen in the industry. So we think those those combination of factors.
Will help not only improve our support costs going forward.
But also provide a more delightful customer experience, which should then adopt.
Dovetail into better retention.
Thank you.
You bet.
Yeah.
And our next question is coming from the line of Brian Fitzgerald from Wells Fargo.
Brian Your line is now open.
Thanks, guys a couple questions Yeah nice performance in DTC in the quarter wondering if you could tease out volume versus pricing trends. There. Many of the drivers of the strength that you saw in the channel in the quarter.
Then we're actually talked about.
Upgrading customers to premium.
Includes coverage of maintenance can you give us the kind of.
Any trajectory there.
Tien Tsin look like what are what's the conversion rates there, what's the penetration rate there I'm trying to trying to assess.
Assess what kind of the opportunity and the momentum is there.
Yeah.
Sure so from a direct to consumer perspective, you should expect.
At least in the first half of the year it would be driven primarily by by price and mix.
And then you'll see units come on towards the.
The latter part of the year.
As it relates to our platinum products we.
Kind of test our way into into platinum in and realize that customers kind of enjoy having not just you know a break fix kind of Ah Ah moment with us, but also rely on us for for maintenance services as well.
And the primary maintenance service for platinum is an HVAC tune up but we'll be rolling out additional things.
Months as well so in terms of penetration I don't think we've we've outlined.
Outline of our mix, but certainly a platinum is performing better than we thought.
Brian I don't know if you could comment on you know.
What we said publicly from a mixed perspective, but at least to my knowledge I don't think we've.
I mean, given mixed numbers.
Not at this time.
Okay. Thank you guys I appreciate it.
Yes.
Yeah.
Thank you and our next question is from the line of Cory Carpenter with Jpmorgan. Your line is now open. Please go ahead.
Great. Thank you.
Sounds like the change in the revenue guide is completely due to the real estate you know.
Rex and Brian just wanted to confirm that with you and then.
Hoping you could talk more broadly just around what youre seeing in the competitive environment for a bit you know do you think you're gaining or losing any share.
In the real estate or direct to consumer market more broadly thank you.
Yeah, absolutely FERC for real estate I think I think your your summation is correct certainly.
It's been challenging as we think about both inventory continues to go.
Go down and then the more troubling thing for US was the higher percentage of of.
Investor buyers, which takes away even more inventory from a traditional home buyer, who we would be marketing too so.
As it relates to two direct consumer I think that you know we're focused on controlling the controllable.
Both direct consumer and renewals or are two areas, where I think we can really.
Make headway and so certainly direct consumer we diversified our spend our conversion is looking well are looking pretty well and then.
From a renewal perspective, we've optimized our dynamic pricing, we continue to change our our products from our good better best strategy, that's actually what it was.
From a real estate perspective, as we've launched that will help us but in terms of of share.
Can't I can't comment on kind of what.
What other.
Folks are doing but you know it's historically.
When we look at look at share, we're not losing share so to speak and in real estate.
For sure.
But certainly it was a much lower inventory.
Hi has gotten a lot smaller, but our portion of that pie at least in our analysis.
Suggest that we're not.
We're not losing losing share there and then overall I think we continue to to perform and we don't see any signs of.
Weakness from a competitive perspective.
Certainly just a weakness from a.
Macroeconomic an inflationary perspective, so we're still.
Focusing on the things, we can control and I think you know.
We will continue to deliver profitable growth on on those areas.
In core your assumption was what your assumption was correct.
Our outlook for DTC and renewals.
It was really the same from the February call. The only change was the real estate away from decline of just over 10% to mid 20% Rev decline. So you are correct.
Yeah.
Sure. So from a dynamic pricing perspective, you know this is something that we watch very closely.
Again, we we we have on a you know a ZIP plus nine basis, we look at you know our customer or our customers and when you segment them by by decile.
So whether it's by by usage or by risk, we have a pretty I think.
Pretty robust models around each one of those deaths aisles and as we raise prices you know what.
What is the level of it.
Elasticity for each one of those those decile.
Haven't seen any changes in that.
Even with the.
The level of price increases that we that we've given.
We do think there's an opportunity in our higher decile.
We go where our customers are using us more than more than the norm to charge them, an even higher premium and we've seen that.
Those customers are our.
Willing are willing to pay because they they liked that coverage. So we haven't seen any changes.
Changes to our models, we haven't seen any backlash if you will than from what we expect from a retention perspective for each one of those decile. So it seems.
To keep it to two continues to be working very well for us and then.
I'm sorry on the on the on the other questions.
Brian If you don't take the inflation, one I'll Ah I.
I can oh actually both of them I think you can handle.
Yeah, I think the second one was about the improving process improvements.
Crews with contractors.
Hi, there.
Yeah, just on improving contractor processes and expanding supply chain, how should we be thinking about the duration of those impacts playing out in the quarters ahead. So we start to see benefits from that but whatever youre putting in place for mitigation standpoint, just so we can understand that thanks.
Right yes.
Please jump in with regarding.
The process improvements with contractors improving percentage of preferred.
Next from the historic low.
80%.
It is pretty sudden yes, that's quick impact the more we can push our artist service request to a percent preferred.
The lower our costs are going to be so that's pretty quick.
The amount of time, it's going to take to raise that level.
I think the contrail team is doing a great job of that today. So we should be able to see more of that as we go forward and regarding supply chain as I mentioned.
We are paying 8% to 12% more today for parts and equipment and we did a year ago, but our contractors, who are paying 15% to 25%.
Round numbers, so anything we can shift to our sourcing from there is going to save us money and help gross profit and gross margin. So again that could be fairly quick as well, we just have to get them to allow us to purchase for them.
Rex or anything else like that.
I'll add two things one is on our preferred contractors they seem to have a much better.
Handle on being able to help us manage cost just because the volume they handle and so that's why it's so important that we increase the percent that preferred because.
The kind of network contract to see if you will are certainly a lot more.
Expenses that are preferred and then the second is I think there there has been some work or it will continue to do some work on optimizing our selection out of their algorithms for.
Contractors, so that we.
We can help them increase that percent of preferred. So this is definitely a big unlock.
Our cost mitigated for us as well as what Brian spoke about in terms of when.
When we source parts versus.
Our contractors.
Yeah.
Great Great and that was it for all the questions today, so I'd like to hand back to Ricks Timmins for any closing remarks.
Thank you in closing, while our front door is facing some near term external challenges around accelerating inflation rates of the macro real estate environment are beyond our control we absolutely remain focused on improving the key drivers of our business and it really focusing on controlling the controllable.
So thank you again for your time this afternoon, and we look forward to talking to you in our next earnings call.
Ladies and gentlemen, thank you again for joining front doors first quarter 'twenty to 'twenty two earnings call. Today's call is now concluded.
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