Q1 2025 Frontdoor Inc Earnings Call
[music].
Ladies and gentlemen, welcome to front doors first quarter 'twenty 25 earnings call.
Speaker Change: 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. He will introduce the other speakers on the call at this time, we will begin today's call. Please go ahead Mr. Davis.
Speaker Change: Thank you operator, good morning, everyone and thank you for joining front doors first quarter 2025 earnings conference call. Joining me today are front doors, chairman and CEO, Bill Com and front door CFO Jessica Ross.
Speaker Change: The press release and slide presentation that will be used during today's call can be found on the Investor Relations section upfront doors website, which is located at investors <unk> front door home Dot com.
Speaker Change: 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.
Speaker Change: These risk factors are explained in detail in the Companys filings with the SEC.
Speaker Change: Please refer to the risk section 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.
Speaker Change: All forward looking statements are made as of today may burst 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.
Speaker Change: 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.
Speaker Change: I'll now turn the call over to Bill Cob for opening comments Bill.
Bill Cob: Thanks, Matt David and good morning, everyone front door and continues to operate extremely well in the first quarter was another example of outstanding financial and operational performance in short we are off to a terrific start in 2025.
Bill Cob: As you can see revenue increased 13% to $426 million net income grew 9% to $37 million.
Bill Cob: Adjusted EBITDA grew 41% to $100 million.
Bill Cob: Very importantly, our member count grew 7% to $2 1 million members and finally, our use of preferred contractors has grown to 85% of services performed during the quarter.
Bill Cob: What makes this even more impressive is that it's being done against its still challenging macroeconomic environment go down real estate market high interest rates, the specter of the trade wars, and the resulting decline in consumer confidence, but despite all of these challenges and more front door continues to outperform and by a lot.
But we are not satisfied not by a long shot and our number one strategic priority remains growing our member base.
Bill Cob: Number two we are focused on growing and scaling revenue from our non warranty business and number three we are optimizing the integration of 210, homebuyers warranty, which by the way remains on track.
Bill Cob: So let's get into the business deal details starting with the DTC channel on slide six.
Bill Cob: This continues to be a positive story that began in the middle of last year. As you can see we ended the first quarter up 15% versus prior year to 310000 DTC members. This is primarily due to 210, but our success here is also due to organic growth of 4% and since the end of the second.
Bill Cob: Order of last year, we've now had three consecutive quarters of organic BTC unit growth.
Bill Cob: Now the key takeaway for DTC in the first quarter. Our actions are working to drive our cat organic unit growth demand is up conversion is up and as a result, our DTC member count is up.
Bill Cob: But that thinking for a moment, especially when again you consider the macroeconomic headwinds it's not a stretch to say we are breathing new life into this category.
Bill Cob: Our success is attributable to several factors first the marketing campaign and relaunch of the American home Shield brand are working.
Bill Cob: We are targeting audiences better, especially millennials are digital advertising is more effective, particularly in the midpoint of the marketing funnel when homeowners are seriously considering a purchase.
And we are deploying our media assets in the areas, where we have the best potential ROI.
Bill Cob: We are able to do this because our data is better we more deeply more deeply understand the segments of homebuyers and our marketing approach is more targeted.
Bill Cob: Also our discounting strategy continues to be a strong and proven lever for driving units while reported DTC revenue is down 9% for the quarter due to our promotional pricing strategy. Our focus is on driving organic unit growth.
Bill Cob: For Q1, we were pleased that number was 4% we accept this revenue trade off due to new member growth being our number one strategic priority and our subsequent ability to renew members at a high rate.
Bill Cob: Here is the key takeaway the result of the first quarter DTC performance is that we now expect our annual DTC member count to be up from last year.
Bill Cob: Now, let's take a look at the real estate channel as you know this channel continues to be a headwind for our business. Although there are some signs of improving conditions.
Gordon: Gordon to the latest information from the National Association of Realtors or nor for March 2025 existing home sales slipped five 9% to a seasonally adjusted annual rate of 4.02 million.
Gordon: The median sales price for existing homes climbed to $403700. That's the 20 <unk> consecutive month of price increases.
Gordon: 30 year mortgage rate averaged nearly 7% as of April 17, and the inventory of unsold existing homes jumped eight 1% to $1 33 million hose or the equivalent of four months of supply.
Gordon: While growing inventory is a positive sign the combination of high home prices and elevated mortgage rates continues to keep consumers out of the market.
Gordon: As a result of our first year organic real estate you member count is down 6% in the first quarter compared to the same period last year.
Gordon: Now turning to slide eight and retention for the first quarter of 2025 retention was at 79, 9%, which includes do 10. While this does include a lower mix of real estate members retention continues to perform well due to better engaging members during onboarding and throughout the member journey.
Gordon: This includes an expanded calling program that is reducing the number of cancellations.
Gordon: We are also continuing to enhance our member service, especially through increased use of our preferred contractors and finally, 84% of our members are on monthly order okay.
Gordon: Product differentiation is another reason for our attention success no. One in this industry innovates better than front door. The release of the Hs App last October and the launch in late February of a true industry differentiator video chat with an expert are just the latest examples of our innovation and giving members what they want.
Gordon: These innovations are a plus for attention.
Gordon: Members Love, a better and faster experience and they've responded very well to the App and video chat.
Gordon: Since the launch in late October the IHS App has been downloaded almost 200000 times and members have submitted 80000 service requests.
Gordon: Leo chat with an expert is also a hit and here's an interesting tidbit about 17% of EHS video chats. So far have resulted in the expert being able to resolve the problem right over the phone.
Gordon: Or the expert David remember the information they needed to fix it themselves.
Gordon: That is a great member experience not to mentioned in saving us and our members time and money by not having to send the contractor out to the home.
Gordon: Moving to slide 10, non warranty and other revenue. This continues to be a growing part of front door. We are very proud of our new HVAC program demand for it is growing and the number of contractors, who want to participate is also growing as such we are increasing our revenue outlook for 2000 $25 million to $105 million.
Gordon: To refresh this program benefits, our members who want to take advantage of our scale pricing to replace their HVAC upgrading to a system that is new more efficient and compliant with the latest refrigerant standards.
Gordon: Moving to the MAU and partnership as a reminder, we partnered with Mone, starting in California to provide homeowners access to our plumbing contractors to install a smart water shutoff valve to prevent potential flooding in.
Gordon: In late March we expanded this partnership and we are now in 21 states with more states expected later this year.
Gordon: Another Great addition to other revenue is the new homes structural warranty business that came with the <unk> acquisition as we've dug into this business. We've been very pleased with the relationship our team has with new homebuilders, we expect that new home structural warranty business to generate $44 million in revenue in 2025.
Gordon: So on that high note I'll summarize our first quarter by simply say front doors performance continues to be truly outstanding both from a financial and operational standpoint.
Gordon: This is a continuation of the tremendous winning streak we've been on now for 12 quarters in a row with that I'll now turn the call over to Jessica for the specifics of our financial performance Jessica Thanks, Bill and good morning, everyone.
Jessica Ross: Where I get into the details.
Gordon: Items I want to highlight.
Jessica Ross: First <unk> delivered another outstanding quarter, as we exceeded expectations about revenue and adjusted EBITDA.
Jessica Ross: Second we are expecting to generate a record amount of cash this year and we have a strong financial position that allows us to invest well and return excess cash to shareholders.
Jessica Ross: And third we are raising our full year outlook for revenue by $20 million and adjusted EBITDA by nearly $50 million.
Jessica Ross: Now, let's get into the numbers on slide 12, you can see revenue increased 13% versus the prior year period to $426 million.
Jessica Ross: This was comprised of 2% organic growth and 11% from the <unk> acquisition.
Jessica Ross: Net income increased 9% to $37 million.
Jessica Ross: Adjusted EBITDA increased 41% to $100 million.
Jessica Ross: Turning to slide 13, and our earnings per share.
Jessica Ross: Earnings per share increased 13% to <unk> 49 per share on a GAAP basis.
Jessica Ross: Adjusted earnings per share increased 46% to $60 per share.
Jessica Ross: This is slightly above the increase in adjusted net income due to the impact of our share repurchase program.
Jessica Ross: Last year, we repurchased approximately 4 million shares or about 5% of our total share count.
Jessica Ross: We remain confident in our ability to drive sustained EPS well overtime supported by strong operational execution and elevated buyback activity.
Jessica Ross: Turning to slide 14, you will see gross profit increased 21% versus the prior year period to $235 million.
Jessica Ross: Gross profit margin improved 380 basis points to a first quarter record of 55%.
Jessica Ross: Continuing on the topic of margins, let's turn to slide 15.
Jessica Ross: I wanted to take a moment to dig into how fragile our pro actively attractive cost inflation, including the potential impact of tariffs.
Jessica Ross: <unk> current margin enhancement as well.
Jessica Ross: Strict and the learnings coming out of the pandemic.
Jessica Ross: Since then we've established a heightened focus on tracking current events.
Jessica Ross: Genomic indicators and monitoring cost trends across the business.
Jessica Ross: As a result, we believe we have much better visibility on our cost drivers.
Jessica Ross: At the same time, we are evaluating these drivers. We are also constantly focused on leveraging our scale to manage inflation.
Jessica Ross: We work very hard to keep our costs down internally before passing along higher costs to our members.
Jessica Ross: First we continuously discuss cost and equipment availability with our manufacturing partners.
Jessica Ross: Our supply chain team does an excellent job keeping costs down while ensuring we have the parts and equipment to service to our members.
Jessica Ross: Especially in these fluid kind they are focused on leveraging our purchasing power to find new sources of supply to manage prices.
Jessica Ross: Second our contractor relations team is dedicated to improving cost per service request and strengthening service levels at foster our contractor network.
Jessica Ross: They continuously worked to increase the percentage of our jobs that go to our preferred contractors.
Jessica Ross: And at the same time work to manage each individual contract at the best cost and service pop out in their geography to optimize results.
Jessica Ross: The next step in our process is to leverage our dynamic pricing capability, which is always balancing member count and gross margin.
Jessica Ross: We are actively optimizing price at Plaza renewal base, and we customize our pricing strategy to serve each individual members' needs.
Jessica Ross: And 2025, we forecast that we will net to an average overall price increase of about 4% and we have the ability to amend that trajectory later this year if needed depending on where inflation land.
Jessica Ross: Additionally, we have the ability to raise our trade service fee.
Jessica Ross: While this is a less frequently used lever it does help us manage margins and share higher costs with our members.
Jessica Ross: In summary, we are confident in our strategy to manage cost inflation and we have multiple levers that we are prepared to Paul to protect our margins in this dynamic environment.
Jessica Ross: Now, let's turn to the first quarter adjusted EBITDA Bridge on Slide 18.
Jessica Ross: First we have $32 million of favorable revenue conversion driven by a 3% increase in price and a 10% increase in volume primarily from the acquisition of <unk>.
Jessica Ross: Second we had an 8 million dollar decline in contract claims costs.
Jessica Ross: The largest driver of the improvement with favorable claims cost development of $7 million compared to only $1 million and favorable claims cost development in the first quarter of 2024.
Jessica Ross: We also experienced favorable cost trends, which included the benefits of continued process improvements that more than offset normal inflation.
Jessica Ross: As a result, our cost inflation in the first quarter was essentially flat on a net basis.
Jessica Ross: This was offset by a slightly higher number of service requests per customer.
Jessica Ross: This quarter, we had a $5 million unfavorable weather impact in the HVAC trade, which was offset by a $4 million benefit from lower incidents across our other trades.
Jessica Ross: Moving down to customer service costs, and G&A, which increased $4 million and $10 million respectively. Both increased primarily due to the addition of <unk> 10.
Jessica Ross: In summary, adjusted EBITDA increased to $100 million, which exceeded the midpoint of our outlook by $25 million.
Jessica Ross: Now, let me take a moment to unpack the B, which is obviously different than the comparison to prior year.
Jessica Ross: In short it was a great quarter with more than half of the beat driven by better than expected contract claims costs with the remainder driven by better than expected revenue conversion.
Jessica Ross: Let's now turn to slide 19, and our statement of cash flows.
Jessica Ross: Net cash provided from operating activities was a record $124 million for the first quarter due to exceptionally strong earnings primarily comprised of $68 million in earnings adjusted for noncash charges and $61 million of cash provided from working capital and long term insurance related accounts.
Jessica Ross: Net cash provided from investing activities was $47 million and was primarily comprised of the disposal of marketable securities partially offset by capital expenditures related to technology projects.
Jessica Ross: Net cash used for financing activities was $85 million and was primarily comprised of $70 million of share repurchases as well as $7 million of scheduled debt payments.
Jessica Ross: Free cash flow increased 60% to a record $117 million for the first quarter of 2025.
Jessica Ross: Our free cash flow yield is currently at 9%, which is an outstanding value indicators for our share price.
Jessica Ross: We ended the quarter with a total of $506 million in cash.
Jessica Ross: This was comprised of $185 million of restricted cash and $322 million of unrestricted cash.
Jessica Ross: We remain focused on using excess cash to buy back shares.
Jessica Ross: In fact, our $322 million of unrestricted cash is after returning $70 million to shareholders in the first three months of the year.
Jessica Ross: While the U S economy faces growing uncertainty we are confident we are well positioned to weather any storm as a result of our strong financial position as shown on slide 20.
Jessica Ross: <unk> has ample liquidity to run the business with $570 million available to us.
Jessica Ross: Our net leverage ratio is about one nine times based on front doors reported financial results.
Jessica Ross: We continue to be in a strong financial position and our net leverage ratio is below our long term target of two to two five times.
Jessica Ross: As part of the 210 acquisition, we completed our debt financing in December of last year and as a result, our next debt maturity is nearly five years away.
Jessica Ross: We had a capital light business model with capital expenditures at less than 2% of our total revenues.
Jessica Ross: And finally, our strong cash flows and balance sheet provide us with significant flexibility when it comes to capital allocation.
Jessica Ross: Now that is a great transition to slide 21, and our commitment to share repurchases.
Jessica Ross: We have returned over $100 million in cash to shareholders repurchasing over 2 million shares in the first four months of the year.
Jessica Ross: Given our strong cash flows we are now increasing our 2025 share repurchase target to at least $200 million. We are very aware of our current share price and multiple and we are deploying a substantial amount of cash into repurchasing shares. This year as we believe our share price remains significantly below our intrinsic.
Jessica Ross: <unk>.
Jessica Ross: This would mark the fourth consecutive year of increasing share repurchases and puts us well on our way to achieving our $650 million authorization within the three year timeframe.
Jessica Ross: Now turning to slide 22, and our second quarter and full year outlook.
Jessica Ross: Our second quarter revenue, we expect a high single digit increase in our renewal channel.
Jessica Ross: A roughly 15% increase in our real estate channel.
Jessica Ross: A 10% increase in our D to C channel.
Jessica Ross: And a $10 million to $15 million increase in other revenue.
Jessica Ross: Taken together, we anticipate second quarter revenue to be between 600 and $605 million.
Jessica Ross: We also expect adjusted EBITDA to come in between 185 and $190 million.
Jessica Ross: Let's now move to our full year outlook, starting with revenue.
Jessica Ross: We are increasing our revenue outlook to be between <unk>, three and <unk> 5 billion.
Jessica Ross: Our revenue guide includes a 2% to 4% increase in realized price as well as a 7% to 8% increase in realized volume.
Jessica Ross: This nets to a $20 million increase from our prior guide, which is split between warranty and other revenue.
Jessica Ross: We assume a high single digit increase in the renewal channel.
Jessica Ross: Low to mid single digit increase in the D to C channel.
Jessica Ross: A high single digit increase in our real estate channel and $165 million to $175 million in other revenue.
Jessica Ross: Other revenue now includes $105 million from HVAC sales $15 million per MAU, and approximately $44 million in new homes, Truxal warranty revenue and slightly under $10 million of other non warranty services, such as HVAC tune up.
Jessica Ross: From a member count perspective, we are raising our outlook.
Jessica Ross: We now expect the number of home warranties Tuesday to decline, 1% to 3% versus the prior 2% to 4% due to the improvements we are seeing in our renewal rates.
Jessica Ross: Moving onto gross profit, where we are raising our full year margin outlook to be between 54% and 55%.
Jessica Ross: This is over a 200 basis point increase versus our prior outlook, which incorporates our favorable first quarter financial results and the continued strong performance of the business.
Jessica Ross: Our margin guide also assumes mid single digit cost inflation, which is comprised of low single digit normal cost inflation and the remainder from tariffs and macro economic uncertainty.
Jessica Ross: An unfavorable weather impact of approximately $15 million compared to the prior year as we expect to return to normal weather patterns, specifically as we head into our peak summer season.
Jessica Ross: An increase in customer incidence rates as we have lapped the prior increases in trade service fee.
Jessica Ross: Now, let's turn to our full year, SG&A outlook, which we are increasing to $650 million to $670 million.
Jessica Ross: This is a $10 million increase from our prior outlook as we are increasing our marketing investments to drive member growth.
Jessica Ross: Based on all of these inputs, we are increasing our full year adjusted EBITDA guidance to be between $500 million to $520 million.
Jessica Ross: Our full year outlook also includes $15 million of interest income $8 million from 210 integration costs and reflects stock compensation expense of approximately $31 million.
Bill Cob: And finally, our full year expectations for capital expenditures and the effective tax rate remain unchanged with that I will now turn it back to bill before opening it up to Q&A.
Bill: Thanks, Jessica I want to close with some final thoughts before we take your questions.
Bill Cob: Let's start with valuation.
Bill Cob: At our high point in early 2021 on door was valued at about 18 times adjusted EBITDA.
Bill Cob: Now I understand that the valuation of many companies has been reduced due to the recent market volatility.
Bill Cob: We now sit at a multiple of eight on our current midpoint guide of $510 million and adjusted EBITDA, that's more than 50% below our high point.
Bill Cob: The year is screaming that front door is undervalued, we're clearly not an eight times multiple company with the great results, we continue to post.
Bill Cob: But here's why I feel confident in my assertion that we are undervalued number one as I said front door has delivered as you saw from our results. We continue to operate extremely well from both a financial and operational perspective.
Bill Cob: Again, this makes 12 consecutive quarters that we've beaten consensus.
Bill Cob: Number two we are extremely well positioned to reiterate we've raised guidance nearly across the board full.
Bill Cob: Full year revenue and warranty and non warranty member count gross profit margin share repurchases and importantly, we are raising our adjusted EBITDA guidance by nearly $50 million and don't forget we generate an amazing amount of free cash flow in short we have a very strong financial position and.
Bill Cob: And number three we are ready for tomorrow.
Bill Cob: We now have three months of hard data on 2025, we feel very good about Q2, and we are well prepared.
Bill Cob: While no business is recession proof, we are whether in tough times before for example, we learned a lot. During COVID-19. These learnings are serving us well as we navigate the macroeconomic uncertainty that continues to persist.
Bill Cob: The point is we know how to work through these issues, we have planned accordingly, and we are executing.
Bill Cob: These are the reasons why we continue to be successful and why I believe we will remain so for the foreseeable future with that we're now ready to take your questions. Operator. Please open the line.
Bill Cob: Thank you very much at this time, we will be conducting a question and answer session.
Bill Cob: If you would like to ask a question. Please press star one on your phone keypad now a confirmation tone will indicate that your line is in the queue. You May press star two if you would like to remove your question from the key fall any participants using speaker equipment. It may be necessary to pick up your handset before pressing the keys. Please Mike.
Bill Cob: And also we poll for questions.
Mark Hughes: Thank you very much. Our first question is coming from Mark Hughes of tourists Securities Mark Your line is live.
Mark Hughes: Yes. Thank you very much congratulations on the quarter.
Mark Hughes: What about the tariffs any impact on say HVAC equipment or anything else Thats important for your.
Mark Hughes: Home warranty.
Mark Hughes: <unk>.
Mark Hughes: Yes, as we said we had virtually no inflation in Q1 and that was actually HVAC was contributed to that in a big way. It was actually down now having said that we we do see a couple of suppliers who are raising their prices. We then move our supply around so I think that Jessica.
Mark Hughes: <unk> out in the guidance I think we've covered it really well, but we're staying nimble on this.
Mark Hughes: And staying very close to our contractors et cetera. So.
Mark Hughes: Who knows where the tariffs are going but we think we've built sufficient conservatism.
Mark Hughes: The second half that we think we have.
Mark Hughes: We covered our the tariff issue.
Mark Hughes: Understood.
Mark Hughes: Latest thinking on new refrigerants.
Mark Hughes: The impact perhaps on repairs that you have to do more thorough repair based on the new refrigerant on the other hand, maybe you sell more units in the on demand.
Mark Hughes: How are you.
Mark Hughes: Are you thinking about that yes, so a couple of things Mark. So we're working through the old equipment right now Theres still some available we've done a good job of securing that equipment. So we continue to to <unk>.
Mark Hughes: Generally that we're also obviously onto the new equipment with the with the beverage standards that we referred to in the script. So at this point and Theres been a benefit to us.
Mark Hughes: We met with the new equipment, we may have to replace whole systems.
Mark Hughes: But so far we worked through that we do feel really good about where we're at right now we have raised our guidance for the year, but we're managing this very closely it's a year, where we are in transition, but I really give our contractor relations team and our supply chain team the marketing team and everybody.
Mark Hughes: They've done a really nice job of managing through this.
Mark Hughes: And then one final if I might the reserve gains in the quarter.
Speaker Change: How much of that was your home warranty as opposed to the 210.
Speaker Change: Could you address anything favorable.
Speaker Change: Favorable development.
Speaker Change: Oh in terms of favorable development.
Speaker Change: Yes, Alex you separately, just there was about $7 million, we didn't break it out between 210.
Speaker Change: And and the remainder of the company.
Speaker Change: So I'd like to break that out now.
Speaker Change: Mostly.
Speaker Change: Yes, okay very good thank you.
Speaker Change: Thanks, Mark Thanks, Mark Thank you very much.
Jeff Schmitt: Okay. Our next question is coming from Jeff Schmitt of William Blair, Jeff. Your line is life Hi, good morning.
Jeff Schmitt: The number of service requests they were higher in the quarter due to unfavorable weather.
Jeff Schmitt: But I guess when you back that out what was the trend and do you still expect them to normalize to $4 million for the year or is it just a little too early to tell yes.
Jeff Schmitt: Yes, Jeff I would say that the number of incidents increase was really driven by 210 and the addition of 210, but we're still anticipating as I said at Investor day about $4 million.
Jeff Schmitt: Yes, yes, because you remember, Jeff we had dipped below $4 million, but then as we've added 210.
Jeff Schmitt: It's getting back up right.
Jeff Schmitt: Okay that makes sense.
Jeff Schmitt: And then unit growth in the direct channel continues to be good.
Speaker Change: How often did you run promotions during the quarter.
Speaker Change: How sustainable do you think that is I mean can you continue to run promotions at this level or do you think youre going to have to sort of spread them out.
Speaker Change: So interestingly this year, we've taken a little bit different approach to our promotional pricing we had been running month long events last year, primarily we changed our strategy this year, where we're pulsing events shorter duration.
Speaker Change: And I think it's I think it's been successful so we actually feel good about continuing on with the pulsing strategy that we have now we think we can sustain this as I said in my remarks, we're going to accept.
Speaker Change: Our revenue offset.
Speaker Change: Our number one priority is to drive member count and Thats driven by the way we are running our renewal book, where we continue to have high retention. So this is going to pay out and we think it's paying out now we're covering up some of the revenue shortfall with other revenue and the strength with renewals. So the whole thing is the whole mix is.
Speaker Change: Working well together I feel so we're going to continue this for the foreseeable future.
Speaker Change: Okay. Thank you.
Speaker Change: Thanks very much.
Speaker Change: Your next question is coming from Mr. Joseph <unk> of Keybanc.
Speaker Change: Your line is live.
Leo Morningstar: Leo Morningstar here.
Speaker Change: Hey, Bill Hey, Jessica and good morning, Thanks for taking the question.
Speaker Change: I have a few I guess the first one is just on the outperformance you guys saw in the quarter it.
Speaker Change: It looks like that was primarily driven by renewals revenue above the outlook you provided.
Speaker Change: Last quarter or so.
Speaker Change: I'm curious if you could provide any color on what drove the outperformance relative to your expectations was that more price or volume driven.
Speaker Change: Well, so I think a couple of things that was probably more of the non warranties, though it was split between non warranty and warranty is and renewals as you said on the non warranty side, that's a split between HVAC and Marlin and then renewals again that was really.
Speaker Change: And just strong renewals and which has continued.
Speaker Change: Strength in how we're improving the member experience.
Speaker Change: Lastly from a volume perspective, there and then on just on the margin side more than half. The beat was really due to contract claims costs with the remainder driven by revenue conversion dropping down as I. Just said, we had about $7 million in favorable development. We also had better than expected card business as Bill said, we had normal inflation, but when you offset that with process improve.
Speaker Change: Concentrated service fees, we landed about flat and then also better than expected incidence rate, which was driven by some weather and.
Speaker Change: And favorability across all the other trades.
Speaker Change: One of the key points here is we're building a portfolio now which enables us if you think about what I just said about DTC pricing. So we're accepting a revenue shortfall because our other revenue is performing so well our renewal revenues performing so well so the mix is coming together and.
Speaker Change: A really nice way that we can balance our topline and then deliver outstanding results on the bottom line.
Speaker Change: Got it that's helpful. Thanks.
Speaker Change: I guess the second question I had was.
Mark Hughes: In response to Mark's question Bill I think you said that some suppliers are raising prices and you are moving around where youre purchasing some parts.
Mark Hughes: No and I take a step back thinking historically when suppliers do this I guess when do other suppliers respond to that or just.
Mark Hughes: Other competitors raising prices or just rising input costs.
Mark Hughes: In the past and is there any reason to think that this.
Mark Hughes: It would be different this time around given the current macroeconomic environment.
Joe: Yes, So let me take your first one goes to if you want to add anything so let me break it down so Joe.
Joe: We're looking at water heaters were looking at HVAC equipment, we're looking at our appliances, and then Theres a whole parts components, we have not seen inflation in parts to days, we get a lot of our parts from China. So we're waiting to see what impact that will have and we have built in what we think is enough in the second half and the guidance to account for that with regard to the other areas.
Joe: Suppliers are kind of eyeing each other as they can.
Joe: Go forward and as we work with them some of the contracts we already have locked in through dates in 2025. So I think on balance we feel good about the way our supply chain supply chain team has been able to manage that through but we'll see we'll see where it nets out, but jessica pointed out with our pricing and the way we want.
Joe: Entering all as.
Joe: We think we've got things covered knowing that like with every company. That's that's facing the uncertainty that's existing today.
Joe: We have to be nimble in our responses yeah, no and I would just add is as I said in my prepared remarks like this is not new behavior for us now coming out of the pandemic really built our strength I'd say on our supply chain team and so these relationships that we've built historically are what really are putting us in a good position to be able to leverage our purchasing power.
Joe: And make sure that we're protecting supply and pricing heading entities. These times.
Joe: Got it. Thank you very very helpful on the thoughts thanks.
Jill: Thanks Jill.
Speaker Change: Thank you very much. Our next question is coming from Danny <unk> of J P. Morgan Stanley Your line is live.
Jill: Okay. Thanks.
Jill: Again, thanks for the questions.
Speaker Change: First Jessica in your prepared remarks, I think you guided to 10% growth in DTC and <unk> can you maybe just parse out what drives that implies sequential growth in the quarter and then I've got a follow up.
Jill: I mean, I think as Bill said, we are going.
Jill: I'd say going hard actively using the discounting strategy, which has been working and so that momentum is flowing through and we're expecting to see that business in Q2.
Jill: Got you and then on the <unk>.
Jill: Second can you maybe expand on what gives you the confidence to raise the 2025 gross margin guide. This early in the year and whether you're assuming that the current tariff rates implemented today remain especially from China, yes.
Jill: Yes, no I mean, it's essentially what we're doing is we're taking the goodness, we saw in Q1 and flowing that through to the full year. We talked about we had flattened ablation and as you can tell by our Q2 guide we are expecting that goodness to flow through to Q2 as well.
Jill: With the uncertainty on the tariffs we've got it said mid single digit inflation for the full year and so that really implies that we've got low on the front half mid to high on the back half.
Jill: So what I said was we would probably have low single digit inflation absent tariffs you add a couple of points on there. We've said publicly 1% translates to about $10 million in costs. So you can anticipate about $20 million to $30 million in the back half again with <unk>.
Speaker Change: Is essentially the impact of the tariff uncertainty and we also added Danny above.
Jill: About $15 million of normalized weather, we've had weather.
Jill: <unk> ability to last couple of years. So we can just count on that every year.
Jill: Jessica pointed out in her remarks.
Jessica Ross: The amount of incidents we feel will will go up to more normalized levels. So it's circa $50 million or so that we've built into the guide and it's still nets out to a gross margin guidance.
Jessica Ross: Guidance between 54, and 55% of that 200 bps increase so we're feeling really good about the balance of taking the performance on the front half.
Jessica Ross: But we're in a position that we can put some caution in there and still feel good about our margin rate feel great about it.
Speaker Change: That's super helpful. Thanks.
Danny: Thanks Danny.
Speaker Change: Thank you very much and your next question is coming from Ian Zaffino of Oppenheimer.
Speaker Change: Your line is live.
Ian Zaffino: Hi, Ann.
Speaker Change: Hey, good morning. This is actually <unk> on for <unk>, Thanks for taking our questions.
Speaker Change: The strong quarter alright. Thanks, Yeah. My first question is on the real estate side.
Speaker Change: Guidance calls for high single digit increase this year.
Speaker Change: I believe you mentioned you expect 50% growth in the second quarter. So maybe help us understand what drives that growth given how existing home sales have trended through the start of the year.
Speaker Change: And do you assume a rebound.
Speaker Change: Or is promotional activity in the IHS relaunch, helping drive some of that growth. Thanks.
Speaker Change: Okay.
Speaker Change: Well I think.
Speaker Change: It's the addition of <unk>, which is which has a very strong real estate portfolio. So thats I think contributing greatly we did have improved unit performance, but it was.
Speaker Change: Down 6% versus last year were down close to 10%. So the combination of the addition of 210 and slightly improved performance in real estate.
Speaker Change: Organic real estate leads to that so I think it all nets out to but the <unk>.
Speaker Change: Answer to your question is more specifically primarily to Tim.
Speaker Change: Okay understood and then just to follow up on the retention rate is.
Speaker Change: Super strong this quarter at around 80%.
Speaker Change: I think you went through a couple of the main drivers of that I think part of it is the mix shift.
Speaker Change: Maybe help us understand how you expect that to trend through the year.
Speaker Change: And then if.
Speaker Change: If you could highlight on some of the drivers of retention. Thanks, yes.
Speaker Change: We view this.
Speaker Change: This is a grinding initiative for the entire company, we have a lot of people lined up against this because this is the backbone of our company.
Speaker Change: We pointed out in this time.
Speaker Change: We've introduced this expanded calling program that has reduced the number of people, who cancel which counts as a as I saved unit.
Speaker Change: We've got the preferred contractor reserve contract relations team the increase in preferred contractors as they've done a nice job on the marketing folks are working really hard on staying close to our members through the through the journey. So it's a series of initiatives that.
Speaker Change: Excuse me we take.
Speaker Change: In order to drive that number and we think that will sustain.
Speaker Change: Youre going to project any specific numbers because we're just we're just learning the <unk> part of the business now, but they have a strong retention also which is one of the things we're attracted to that asset as we pursued it. So it's all coming together quite nicely, but this is something we work at day after day after day.
Speaker Change: Okay understood. Thank you very much.
Speaker Change: Other thing I would point out.
Speaker Change: <unk>.
Speaker Change: This edition and I talked about it a video chat with an expert this is really sparking some interest we did a nice job with one of our one of our warranty has introducing video chat with an expert I gave you some of the stats earlier about how we.
Speaker Change: We are helping people to fix it themselves, which is downstream benefit for us from a cost perspective, but.
Speaker Change: But we have a lot of interest from our members and under the <unk>. It's a great user experience and I think that is another thing that is contributing to origin. So all of these things are coming together to net to net to the retention number.
Speaker Change: Okay very helpful. Thank you.
Speaker Change: Thanks, Doug.
Speaker Change: Well, we have reached the end of our question and answer session.
Speaker Change: At the end of the conference you May now disconnect. Your lines at this time and have a wonderful day, we thank you for your participation.