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Frontdoor Announces Second-Quarter 2019 Revenue Increase of 9 Percent to $388 Million; Gross Profit Margin Improved 800 Basis Points to 53 Percent

Published : Wednesday, August 7, 2019, 1:05 pm
ACROFAN=Business Wire | info@businesswire.com | SNS

MEMPHIS, Tenn.--(BUSINESS WIRE)--Frontdoor, Inc. (NASDAQ: FTDR), the nation’s leading provider of home service plans, today announced second-quarter 2019 results.


 

 

 

 

 

 

 

 

 

 

Financial Results

 

 

Three Months Ended

 

 

June 30,

$ millions (except as noted)

 

2019

 

2018

 

Change

Revenue

 

$

388

 

$

355

 

9

%

Gross Profit

 

 

205

 

 

159

 

29

%

Net Income

 

 

60

 

 

45

 

34

%

Diluted Earnings per Share

 

 

0.71

 

 

0.53

 

34

%

Adjusted Net Income(1)

 

 

62

 

 

53

 

18

%

Adjusted Diluted Earnings per Share(1)

 

 

0.73

 

 

0.62

 

17

%

Adjusted EBITDA(1)

 

 

105

 

 

73

 

44

%

Home Service Plans (number in millions)

 

 

2.1

 

 

2.0

 

4

%

 

Second-Quarter 2019 Summary

  • Revenue increased nine percent to $388 million on higher number of home service plans and improved price realization
  • Record second quarter gross profit margin of 53 percent was 800 basis points higher than the prior year period due to accelerating business process improvements and seasonally mild weather
  • Net income increased 34 percent to $60 million as a result of higher gross profit contribution that more than offset greater investment in the business and higher interest expense
  • Adjusted EBITDA increased 44 percent over the prior year period to $105 million; Adjusted EBITDA Margin(1) of 27 percent was 660 basis points higher than the prior year period
  • Net Cash Provided from Operating Activities for the first half of 2019 was $140 million; Free Cash Flow(1) improved 24 percent to $130 million for the same period
  • Advanced 2019 strategic objectives by increasing velocity of business process improvements, opening Denver technology center and expanding customer product offerings

Full-Year 2019 Outlook

  • Affirming 2019 revenue outlook to $1.36 billion to $1.38 billion; increasing 2019 Adjusted EBITDA(2) outlook to $290 million to $300 million

“Our record-setting second quarter financial performance reflects greater than anticipated favorability from our business process improvements and the benefit of seasonally mild weather,” said Chief Executive Officer Rex Tibbens. “We continue to deliver on our promise to improve the business by increasing the velocity of change and focusing on running the business on data and technology, which is leading to improved financial results. While the team has done an exceptional job of advancing our strategic priorities, we are still in the early stages of improving the customer experience, building out our technology platform and developing our on-demand playbook as we launch current and future pilots this year. We still have work to do; however, this foundational effort will allow us to deliver a higher growth trajectory and superior customer service over time.”

“Based on our strong first-half 2019 financial performance and the anticipation of continued progress from our business process improvements, we are raising our full-year Adjusted EBITDA outlook,” said Chief Financial Officer Brian Turcotte. “In addition, we are affirming the full-year revenue outlook range despite the impact of lower unit growth in the first-year real estate channel.”

Second-Quarter 2019 Results

 

 

 

 

 

 

 

 

 

 

Revenue by Major Customer Acquisition Channel

 

 

Three Months Ended

 

 

June 30,

$ millions

 

2019

 

2018

 

Change

Renewals

 

$

263

 

$

235

 

12

%

Real estate (First-Year)

 

 

75

 

 

74

 

1

%

Direct-to-consumer (First-Year)

 

 

48

 

 

44

 

8

%

Other

 

 

2

 

 

1

 

*

 

Total

 

$

388

 

$

355

 

9

%

* not meaningful


Second-quarter 2019 revenue increased nine percent over the prior year period. Renewal revenue increased 12 percent primarily driven by growth in the number of home service plans and improved price realization. First-year real estate revenue increased one percent, primarily driven by improved price realization that was partly offset by a decline in new sales. First-year direct-to-consumer revenue increased eight percent due to growth in new sales, primarily driven by increased investments in marketing.

Second-quarter 2019 net income was $60 million, or diluted earnings per share of $0.71, versus $45 million in second-quarter 2018, or diluted earnings per share of $0.53. Second-quarter 2019 net income included a $23 million favorable impact from higher revenue conversion(3), a $24 million decrease in contract claims cost, and lower Spin-off charges versus prior year. These benefits were partially offset by a $17 million increase in selling and administrative expenses, primarily relating to investments in sales and marketing. Additionally, net income was impacted by $15 million in interest expense related to the debt offering completed in conjunction with the Spin-off and a $5 million increase in income taxes.

 

 

 

 

Period-over-Period Adjusted EBITDA Bridge

$ millions

 

 

Three Months Ended June 30, 2018

 

$

 

73

 

Impact of change in revenue(3)

 

 

23

 

Contract claims

 

 

24

 

Sales and marketing costs

 

 

(7

)

Customer service costs

 

 

1

 

Spin-off dis-synergies

 

 

(1

)

Other

 

 

(7

)

Three Months Ended June 30, 2019

 

$

 

105

 

 

Second-quarter 2019 Adjusted EBITDA of $105 million was 44 percent higher than the prior year period, primarily due to the following items:

  • $23 million of higher revenue conversion(3), including the net contribution from new customers and higher pricing;
  • $24 million of lower contract claims costs, consisting of:
    • $13 million in process improvements and cost reduction initiatives,
    • $12 million in net favorable impact of adjustments related to contract claims cost development,
    • $10 million in seasonally mild weather, and
    • $11 million in higher inflation and tariff costs;
  • $7 million of increased sales and marketing costs to drive home service plan growth, primarily in the direct-to-consumer channel;
  • $1 million of lower customer service costs;
  • $1 million in higher Spin-off dis-synergies, primarily related to the separation of information technology systems; and
  • $7 million of other costs, primarily related to insurance costs, incentive compensation, professional fees and bad debt expense.

Cash Flow

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30,

$ millions

 

2019

 

2018

Net cash provided from (used for):

 

 

 

 

 

 

Operating Activities

 

$

140

 

 

$

122

 

Investing Activities

 

 

(12

)

 

 

(16

)

Financing Activities

 

 

(4

)

 

 

(74

)

Cash increase during the period

 

$

124

 

 

$

32

 

 

For the six months ended June 30, 2019, net cash provided from operating activities was $140 million, an increase of $18 million from the six months ended June 30, 2018. Working capital was a $47 million source of cash for the six months ended June 30, 2019 compared to $41 million for the prior year period.

Net cash used for investing activities was $12 million for the six months ended June 30, 2019 compared to $16 million for the prior year period. The change in investing activities was primarily due to a decline in capital expenditures related to the Spin-off as compared to the first half of 2018.

Net cash used for financing activities was $4 million for the six months ended June 30, 2019 and was primarily related to debt payments. This compares to $74 million for the six months ended June 30, 2018, which was related to net cash transfers to ServiceMaster that occurred prior to the Spin-off.

Free Cash Flow(1) was $130 million for the six months ended June 30, 2019 compared to $105 million for the prior year period. The increase of $25 million includes higher Adjusted EBITDA and positive working capital contributions that were partially offset by higher cash payments for interest expense.

Cash and marketable securities totaled $425 million as of June 30, 2019, a $120 million increase from December 31, 2018.

Total restricted net assets increased to $203 million at June 30, 2019 from $197 million at March 31, 2019.

Updated Full-Year 2019 Outlook

  • Revenue is anticipated to remain within the range of $1.36 billion to $1.38 billion;
  • Gross profit margin is now anticipated to be approximately 49 percent;
  • Adjusted EBITDA(2) is now anticipated to range from $290 million to $300 million;
  • Capital expenditures is anticipated to remain within the range of $30 million to $40 million; and
  • Annual Effective Tax Rate is anticipated to remain at approximately 25 percent.

Additionally, third-quarter 2019 Adjusted EBITDA(2) is anticipated to range from $95 million to $100 million.

Second-Quarter 2019 Earnings Conference Call

Frontdoor has scheduled a conference call today, August 7, 2019, at 3:30 p.m. Central time (4:30 p.m. Eastern time). During the call, Rex Tibbens, Chief Executive Officer, and Brian Turcotte, Chief Financial Officer, will discuss second-quarter 2019 financial and operating results. To participate on the conference call, interested parties should call 877-407-8291 (or international participants, 201-689-8345). Additionally, the conference call will be available via webcast which will include a slide presentation highlighting the company’s results. To participate via webcast and view the slide presentation, visit Frontdoor’s investor relations home page. The call will be available for replay for approximately 90 days. To access the replay of this call, please call 877-660-6853 and enter conference ID 13692383 (international participants: 201-612-7415, conference ID 13692383).

About Frontdoor

Frontdoor is a company that’s obsessed with taking the hassle out of owning a home. With services powered by people and enabled by technology, it is the parent company of four home service plan brands: American Home Shield, HSA, Landmark and OneGuard. Frontdoor serves more than two million customers across the U.S. through a network of more than 16,000 pre-qualified contractor firms that employ over 45,000 technicians. The company’s customizable home service plans help customers protect and maintain their homes from costly and unexpected breakdowns of essential home systems and appliances. With more than 45 years of experience, the company responds to over four million service requests annually (or one request every eight seconds). For details, visit frontdoorhome.com.

References in this news release to “ServiceMaster” refer to ServiceMaster Global Holdings, Inc. and its consolidated subsidiaries. References to the “Spin-off” refer to the spin-off by ServiceMaster of the ownership and operations of its businesses operated under the American Home Shield, HSA, OneGuard and Landmark brand names into Frontdoor, which was completed on October 1, 2018 and resulted in Frontdoor operating as an independent, publicly traded company trading on Nasdaq under the symbol “FTDR”.

Forward-Looking Statements

This news release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, in particular, projected future performance and any statements about Frontdoor’s plans, strategies and prospects. Forward-looking statements can be identified by the use of forward-looking terms such as “believe,” “expect,” “estimate,” “could,” “should,” “intend,” “may,” “plan,” “seek,” “anticipate,” “project,” “will,” “shall,” “would,” “aim,” or other comparable terms. These forward-looking statements are subject to known and unknown risks and uncertainties, many of which may be beyond our control. Such risks and uncertainties include, but are not limited to: weather conditions and seasonality; weakening general economic conditions; lawsuits, enforcement actions and other claims by third parties or governmental authorities; the effects of our substantial indebtedness; the success of our business strategies; and failure to achieve some or all of the expected benefits of the Spin-off. We caution you that forward-looking statements are not guarantees of future performance or outcomes and that actual performance and outcomes, including, without limitation, our actual results of operations, financial condition and liquidity, and the development of new markets or market segments in which we operate, may differ materially from those made in or suggested by the forward-looking statements contained in this news release. For a discussion of other important factors that could cause Frontdoor’s results to differ materially from those expressed in, or implied by, the forward-looking statements included in this document, you should refer to the risks and uncertainties detailed from time to time in Frontdoor’s periodic reports filed with the SEC as well as the disclosure contained in Item 1A. Risk Factors in our 2018 Annual Report on Form 10-K filed with the SEC. Except as required by law, Frontdoor does not undertake any obligation to update or revise these forward-looking statements to reflect new information or events or circumstances that occur after the date of this news release or to reflect the occurrence of unanticipated events or otherwise. Readers are advised to review Frontdoor’s filings with the Securities and Exchange Commission, which are available from the SEC’s EDGAR database at sec.gov, and via Frontdoor’s website at frontdoorhome.com.

Spin-off Impact to Financials

The accompanying condensed consolidated and combined financial statements for periods prior to the Spin-off include all revenues, costs, assets and liabilities directly attributable to us. ServiceMaster’s debt and corresponding interest expense have not been allocated to us for periods prior to the Spin-off since we were not the legal obligor of the debt. The accompanying condensed consolidated and combined financial statements include expense allocations for certain corporate functions historically provided by ServiceMaster. These allocations may not be indicative of the level of expense which would have been incurred had the company operated as a separate entity prior to the Spin-off, nor are these costs necessarily indicative of costs we may incur in the future.

Non-GAAP Financial Measures

To supplement Frontdoor’s results presented in accordance with accounting principles generally accepted in the United States (“GAAP”), Frontdoor has disclosed the non-GAAP financial measures of Adjusted EBITDA, Free Cash Flow, Adjusted Net Income, and Adjusted Diluted Earnings per Share.

We define "Adjusted EBITDA" as net income before: provision for income taxes; interest expense; interest income from affiliate; depreciation and amortization expense; non-cash stock-based compensation expense; restructuring charges; Spin-off charges; secondary offering costs; affiliate royalty expense; (gain) loss on insured home service plan claims; and other non-operating expenses. We believe Adjusted EBITDA is useful for investors, analysts and other interested parties as it facilitates company-to-company operating performance comparisons by excluding potential differences caused by variations in capital structures, taxation, the age and book depreciation of facilities and equipment, restructuring initiatives, Spin-off charges, arrangements with affiliates and equity-based, long-term incentive plans.

We define “Adjusted EBITDA Margin” as Adjusted EBITDA divided by revenue. We believe Adjusted EBITDA Margin is useful for investors, analysts and other interested parties as it facilitates company-to-company operating performance comparisons by excluding potential differences caused by variations in capital structures, taxation, the age and book depreciation of facilities and equipment, restructuring initiatives, Spin-off charges, arrangements with affiliates and equity-based, long-term incentive plans.

We define “Free Cash Flow” as net cash provided from operating activities less property additions. Free Cash Flow is not a measurement of our financial performance or liquidity under GAAP and does not purport to be an alternative to net cash provided from operating activities or any other performance or liquidity measures derived in accordance with GAAP. Free Cash Flow is useful as a supplemental measure of our liquidity. Management uses Free Cash Flow to facilitate company-to-company cash flow comparisons, which may vary from company to company for reasons unrelated to operating performance.

We define “Adjusted Net Income” as net income before: amortization expense; restructuring charges; Spin-off charges; secondary offering costs; affiliate royalty expense; interest income from affiliate; (gain) loss on insured home service plan claims; and the tax impact of the aforementioned adjustments. We believe Adjusted Net Income is useful for investors, analysts and other interested parties as it facilitates company-to-company operating performance comparisons by excluding potential differences caused by items listed in this definition.

We define “Adjusted Diluted Earnings per Share” as Adjusted Net Income divided by the weighted-average diluted common shares outstanding.

See the schedules attached hereto for additional information and reconciliations of such non-GAAP financial measures. Management believes these non-GAAP financial measures provide useful supplemental information for its and investors’ evaluation of Frontdoor’s business performance and are useful for period-over-period comparisons of the performance of Frontdoor’s business. While we believe that these non-GAAP financial measures are useful in evaluating our business, this information should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similarly entitled measures reported by other companies.

_______________________________________________________________________________________________________________
(1) See “Reconciliations of Non-GAAP Financial Measures” accompanying this release for a reconciliation of Adjusted Net Income, Adjusted Diluted Earnings per Share, Adjusted EBITDA, Adjusted EBITDA Margin, and Free Cash Flow, each a non-GAAP measure, to the nearest GAAP measure. See “Non-GAAP Financial Measures” included in this release for descriptions of calculations of these measures.
(2) A reconciliation of the forward-looking third-quarter and full-year 2019 Adjusted EBITDA outlook to net income cannot be provided without unreasonable effort because of the inherent difficulty of accurately forecasting the occurrence and financial impact of the various adjusting items necessary for such reconciliation that have not yet occurred, are out of our control, or cannot be reasonably predicted. For the same reasons, the company is unable to assess the probable significance of the unavailable information, which could have a material impact on its future GAAP financial results.
(3) Revenue conversion is calculated using the estimated gross margin impact of new home service plan revenue along with the impact of price changes. 



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frontdoor, inc.
Condensed Consolidated and Combined Statements of Operations and Comprehensive Income (Unaudited)
($ millions, except per share data)

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2019

 

2018

 

2019

 

2018

Revenue

 

$

388

 

 

$

355

 

 

$

658

 

 

$

602

 

Cost of services rendered

 

 

183

 

 

 

195

 

 

 

326

 

 

 

330

 

Gross Profit

 

 

205

 

 

 

159

 

 

 

333

 

 

 

272

 

Selling and administrative expenses

 

 

104

 

 

 

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