Frontdoor (FTDR) Q3 2026 earnings call transcript

Thank you, Operator. Good morning, everyone, and thank you for joining Front Door's third quarter 2026 earnings conference call. Joining me today are Bill Cobb, Chairman and CEO, and Jason Bailey, Senior Vice President and CFO. The press release and slide presentation that will be used during today's call can be found on the Investor Relations section of Front Door's website, which is located at www. investors. frontdoorhome. 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 factor 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, November 5th, and, except as required by law, the company undertakes no obligation to update any forward-looking statements, whether it is results of new information, future events, or otherwise. We will also reference certain non-GAAP financial measures throughout today's call. We have included these definitions and reconciliations of these non-GAAP financial measures to the 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 Bill Cobb for opening comments. Bill?

Thanks, Mr. Davis, and good morning, everyone. In case you didn't notice, this summer was the hottest on record. For us, that meant more breakdowns, more calls, and more members counting on us. Those conditions tested every part of our business, and I am incredibly proud of how our team responded. Their efforts translated to progress across all four of our strategic priorities.

First, and most importantly, we saw home warranty member count grow 1% again in the third quarter. Plus, retention continued to improve during our busiest time of the year. Second, we scaled non-warranty revenue as elevated HVAC claims created more opportunities to expand share of wallet with our members by cross-selling new systems.

Third, we delivered strong margins, absorbing a meaningful weather impact while still growing earnings. And finally, we remained committed to our capital allocation strategy as we stepped up the pace of share repurchases in the third quarter. Let me show you what that looks like on slide five. For the third quarter, revenue grew 6% to $655 million. Adjusted EBITDA grew 5% to $205 million.

Net income grew 10% to $116 million. Adjusted EPS grew 15% to $1.81 per share. and we returned $259 million to shareholders through share repurchases year-to-date through September. These results came during one of the most demanding summers we have seen, beginning with claims. In August, we told you that we expected the second quarter weather benefit to reverse in the third quarter. It did, and then some.

We absorbed those higher claims costs and still delivered adjusted EBITDA above the midpoint of our guided range. This is another example of how our operational discipline and process improvements have strengthened the business. But the heat affected both sides of our model. While it increased claims activity, it also created more opportunities to cross-sell new HVAC systems to our members, helping to drive revenue above the top end of our lookout. And we've accelerated our share repurchase program.

Through September, we have repurchased approximately 5% of our shares outstanding, and we now expect to complete our existing authorization in November, nearly a year early. As a result, I'm excited to announce that our board of directors has approved a new three-year, $1 billion share repurchase authorization that Jason will discuss in more detail.

Now, let's dive into the details of our number one priority on slide six, member growth. Total ending member count grew by 1% in the third quarter, with all three channels contributing to this success. Renewals were up, and in our first-year channels, direct-to-consumer grew 4%, and real estate grew 5%. Let's take a deeper look at each channel, starting with renewals on slide seven. Renewals remain the foundation of our business, accounting for three-quarters of our member base. In the third quarter, the channel edged back into growth, ending at approximately 1.6 million members. Our customer retention rate reached 79.7%, up 30 basis points year-over-year, and up sequentially three-quarters in a row. That improvement comes from a better member experience and operational improvements to drive a more effective renewal process.

Let's start with the member experience where the feedback has never been better. Our members again gave us record high five-star ratings and record low one-star ratings. Two things are helping to drive this.

First, more members are using our app, which makes getting help faster and easier. This includes connecting with a virtual technician who can at times solve the problem without a home visit.

Second, when a contractor is needed, about 84% of jobs continue to go to our preferred network. Within that network, we're refining how we allocate jobs to improve both quality and cost efficiency. We also continue to make operational improvements to remove friction across the renewal process. Our renewal pricing helps us to balance retention and margin. Auto-pay enrollment continues to increase, even more so as we bring 210 members onto our digital platform.

And our SAVE program helps us reconnect with members at the right time with the right message and offer. As I said last quarter, these improvements may seem small individually, but together they compound over time. Let's turn now to the direct-to-consumer channel on slide eight. Direct-to-consumer ending member count grew 4% to approximately 330,000 members, marking our eighth consecutive quarter of year-over-year growth. It starts with demand.

We invest a majority of our dollars behind American Home Shield, the most recognized brand in our category, by a large margin. That investment keeps us top of mind while helping more homeowners understand the value of protecting their home systems and appliances. Our multi-brand strategy extends that reach by allowing us to engage different homeowners with brands, products, and value propositions that fits their needs.

We're continuing to shift more of our marketing spend toward performance channels where we can target prospects with greater precision. And as consumer search behavior evolves, we're improving how our brands show up across both traditional and AI-assisted search. The next step is conversion, turning that demand into members. We're using promotional pricing strategically, giving homeowners an attractive entry point to experience the value of our membership.

We continue to refine our content and digital experience, making it easier for homeowners to understand our offerings. And our sales team is using AI-enabled tools to support more effective conversations with prospects. Everything we are doing across demand and conversion shows up in stronger unit economics. Members who join through promotional offers continue to renew at rates above non-discounted cohorts.

And customer acquisition costs are trending lower, reflecting our shift toward performance marketing. That combination of strong member value and improving acquisition efficiency gives us confidence that the DTC channel will continue to be a sustainable growth engine for front door. Let's now turn to real estate on slide nine. In the third quarter, real estate ending member count grew 5% to approximately 220,000 members. That performance reflects the progress we've made through our localized engagement strategy over the past 12 months.

And as a result, our capture rate continued to exceed 5% of U. S. existing home sales in the third quarter. But make no mistake, the housing market is effectively frozen and conditions deteriorated as we move through the quarter. Inventory has slightly increased. And under normal circumstances, that would be constructive for home warranties. But this is not a normal buyer's market.

First, fewer buyers can afford a home. Prices have increased for 39 straight months to an average of about $420,000. And mortgage rates are back above 7%. Second, fewer buyers are willing to commit. With economic uncertainty hampering consumer confidence, the pending home sales index fell to its lowest level on record. And third, fewer deals are closing as a result.

About 15% of signed contracts fell through in September. according to Redfin, and existing home sales fell to just under a seasonally adjusted $4 million, a historic low. So how does this impact us? We expect near-term headwinds, and we've lowered our expectation for real estate channel ending member count to be flat by the end of 2026. But even with that moderation, we remain on track to deliver approximately 1% total member growth for 2026 as improving renewals and consistent DTC growth offset the pressure in real estate While the first real estate channel is only about 7 of our total revenue we still view this channel as long option value The market will turn and when it does, we'll be well-positioned to capture that upside.

Let's turn now to non-warranty revenue on slide 10. Non-warranty and other revenue grew 32% in the third quarter, led by our HVAC upgrade program. What makes the model so attractive is that we are building from an existing trusted member relationship. We combine that relationship with our purchasing scale and a qualified contractor to deliver a complete solution, creating more value for the member and incremental share of wallet and revenue for front door with little to no customer acquisition costs. And the results demonstrate how effectively the model can scale.

We now expect approximately $175 million of HVAC upgrade revenue this year, up from just $13 million four years ago. Since 2022, only about 3% of our members have purchased a new HVAC system through our upgrade program. So the runway within our existing base remains significant. Now, before I turn it over to Jason, let's turn to slide 11 and spend a few minutes on a topic getting a lot of attention across industry.

agentic AI. The launch of Muse in September brought the agentic future to the forefront, and many of you have asked what it means for Front Door. We view this as a long-term opportunity and a natural evolution of the digital capabilities we've been building for years. There are two reasons we feel this way.

First, we're not starting from scratch. We've already built more technology into the member experience, from requesting service and managing our plans through our app to diagnosing and resolving problems with the virtual technician. And those digital capabilities work alongside our experienced save team, where any cancellation request still follows our existing process and gives us the opportunity to find a better solution to keep those members.

Second, agents open a new path to the homeowner. to the homeowner. As digital commerce evolves, AI agents will become another way to discover and access our brands, products, and services. We're building on our position as category leader by making sure AI agents know us too. Helping homeowners manage their homes is our mission, and agentic AI gives us another way to deepen that relationship and deliver more value over time.

With that, I'll turn it over to Jason to walk through our third quarter financial results. Jason?

Thanks, Bill. The third quarter highlighted the strength of our financial model. Even with significant weather-related pressure, we delivered strong earnings, generated substantial cash, and returned significant capital to shareholders. Let me walk you through how, starting on slide 13. Revenue grew 6% to $655 million, with growth split evenly between price and volume. Adjusted EBITDA increased 5% to $205 million as disciplined cost management helped us absorb higher claims from the extreme heat.

Net income grew 10% to $116 million. Adjusted earnings per share grew 15% to $1.81. cents. Share repurchases totaling $259 million year-to-date amplified our earnings per share growth. Let's now take a deeper look at revenue on slide 14. Renewals and new HVAC sales continue to drive revenue growth. Renewal revenue grew 4% on higher price and stable volume. Our new HVAC upgrade program helped to drive a 32% increase in non-warranty and other revenue.

Direct-to-consumer revenue was down slightly at 1%, as lower price from our promotional pricing strategy was partially offset by higher volume as we added more members. Real estate revenue increased 3%, primarily due to higher volume.

Moving to slide 15, gross profit grew 3% to $362 million. This increase was driven by pricing actions and operational improvements, partially offset by weather, revenue mix shift, and normal cost inflation. This resulted in gross margin of 55%, a 200 basis point decline from the prior year period, primarily driven by $9 million of unfavorable weather, more than reversing the favorability we saw in the second quarter.

This is an example of the seasonality and timing characteristics of our business, which is why we continue to focus on full year gross margin targets, which remain unchanged. Turning to slide 16, adjusted EBITDA grew 5% to $205 million. Higher revenue conversion of $17 million from pricing and volume growth, along with SG&A leverage, more than offset the gross margin pressure I mentioned on the prior slide. With us delivering adjusted EBITDA margin of 31%, relatively flat to prior year.

Let's now turn to our cash flow on slide 17. Our recurring revenue model generates significant operating cash flow and has CapEx needs of less than 2% of revenue. As a result, we delivered $298 million of free cash flow through the first nine months, and we continue to expect to convert more than 60% of adjusted EBITDA into free cash flow this year.

That strong free cash flow combined with our liquidity position of $680 million allows us to invest in the business while still returning substantial excess cash to shareholders. Through the first nine months of the year, we allocated 87% of our free cash flow to share repurchases. As a result, we bought back 3.7 million shares for approximately 5% of our shares outstanding.

Let's turn to slide 18 for the details of the new $1 billion share repurchase authorization that Bill mentioned earlier. This new authorization builds on a capital return strategy that has continued to grow alongside the business. We completed our initial $400 million authorization in 2024. We now expect to complete our current $650 million authorization in November, about a year ahead of schedule. As a result, our board of directors approved a new three-year $1 billion authorization reflecting both our confidence in the model and our commitment to creating long-term shareholder value.

Let's now pivot to a discussion on our updated financial outlook on slide 19. We are pleased to announce that we are again raising our full-year financial guidance at the midpoint. We now expect revenue of $2.205 to $2.215 billion, a $10 million increase at the midpoint, reflecting improved expectations for both realized price and volume, now approximately 4% and 2% respectively. Moving down the P&L, our gross margin of approximately 55% remains unchanged, as does SG&A of $685 to $695 million.

As a result, our adjusted EBITDA outlook is now $590 to $600 million. That outlook also considers about $45 million of stock compensation and integration costs and about $20 million of interest income.

Finally, CapEx of $30 million is unchanged, and our effective tax rate is now approximately 24%. Our updated full-year outlook implies fourth-quarter revenue of $453 to $463 million and adjusted EBITDA of $62 to $72 million.

Stepping back, this quarter shows our model at work. We grew the business, delivered strong earnings through a tough summer, and compounded value per share. With that, I will now turn the call back over to you, Bill.

Thanks, Jason. Before we open the line for Q&A, I want to come back to what this quarter tells us about our business. First, we have a durable member base. Even with a frozen real estate market, we're on track for approximately 1% total member growth this year, driven by improving renewals and strong DTC growth.

Second, we have multiple growth engines. Our growth isn't limited to home warranty. Our member relationships give us a platform to cross-sell, led by HVAC upgrades today and expanding into other trades in the future.

Third, our earnings power is structurally higher. We are getting more from every dollar of revenue through pricing, better operations, and the benefits of scale. That's why we raised our long-term adjusted EBITDA margin target earlier this year to the mid-20% range. And fourth, our cash generation gives us flexibility. Strong free cash flow allows us to invest in the business while returning significant capital to shareholders.

In closing, this was a challenging quarter, and we delivered. That says a lot about the strength of our business model, but even more about our people. Their discipline and focus are what makes this business work, and I want to thank each and every one of them. Operator, please open the line for questions.

We're great.

Yeah. Let me go back to when we started the business. You know, we didn't know a lot about the business, but we felt that if we gave a really good member experience and a really good member value that we could do something, especially with the great contractor base we have. So, in essence, how we price this is we start with what we want to have as a discount for our members relative to retail. And we used to price nationally. We now price essentially state by state, because there is such a wide variety of loss, you know, in HVAC, you know, new systems. So we price by state. We have had an opportunity to start to raise prices depending on the location.

As Jason outlined a couple of quarters ago, we are targeting about a gross margin of about 20%. What that translates to is a margin of about a discount, rather, to our members of somewhere in the neighborhood of 25 to 30 percent. And that can differ by market generally higher. But we want to have that margin. We have cut a deal with our contractors to get what they view as a very valuable margin. We have scale in terms of our supply chain. So it works really well. It's a win for the contractors. It's a win for the members. and it's a win for us because it's incremental revenue. In terms of how big this will get, you know, we're not, you know, I think we keep going back to, you know, the number of systems that have gone into our members is about 3% of our total members.

So as we said earlier, there's a lot of runway there.

Jason, I don't know if there's anything you want to add. The only thing I'd add, Bill, is since we're focused on the memory end, you know, there's not a lot of SG&A load on this part of the business. So while that gross margin is lower than the home warranty business, it still drops through at a pretty high rate. And I think long-term, we're not ready to quite call it yet, but I think long-term, just as new equipment cycles through the system, there'll be a benefit on the warranty side as we think about incidents and breakdowns, you know, providing some uplift there. But, you know, that's a little further out, but I think that's just a natural evolution as part of the business.

Yeah, and the other point is, you know, systems in a, you know, we have people who own systems that are a couple of years old, you know, eight years old, 12 years old. That's why it will adjust over time, and that's why we're so excited about the 3% number.

Yeah, I mean, essentially it is all, All one. We do get, you know, claims. And actually, one of the things that our contractors want is they like off-season business. So they like to do this business in the fall and the spring, generally in the summer. And we've been successful at upgrading in the summer also, as you can see by our Q3 numbers. But they like to do business in the spring and the fall. So I think that, you know, heating is part of that. So that's why I think there's a lot of opportunity out there.

Okay, thank you very much. Appreciate you taking my questions. Thank you.

Hey, Bill.

I would say yes, and I'll let Jason weigh in also. So, you know, I think, as I said, we had to be pretty nimble this quarter. The heat, you know, had a summer on record. But what I'm also pleased about, and I'll let Jason speak more specifically to the market, we delivered for our members. There was no cutback in us servicing our members. There was no cutback in claims.

That's why I was so proud of the team and the job they did. But, I mean, I think we feel pretty good about the targets we've put out there. But I don't know, Jason, if you want to add anything.

Yeah, the only thing, Sergio, just as it speaks to the long-term margins, I think Bill and I have a lot of confidence in that mid-20s target that we've shared with you all. I think what gives us a lot of confidence in that, you know, coming through this summer, big renewal base, and it's really an accumulation of all the process improvements we've made over the last two or three years as we drive and continue to focus on that preferred contractor network delivering.

If you think about the tools we've used, things like HVAC upgrades, being really nimble with our supply chain. I think we feel pretty good, and this summer is a good vote of confidence in how durable we feel that margin is.

Yeah, and some of the things you don't see, you know, per se, with our contractor network, we've improved job routing, we've improved planning, cost control. So, you know, we keep talking about our discipline and our operational improvements, and that's part of what they are.

Yeah, I think in terms of our preparation, I feel we're very well prepared. You know, we have people who try to cancel, you know, all the time, if you will. We track cancels very closely. It only turns out to be about 1% of the time. So we have a really good save team. We have a really good process for that.

Whether the cancel request comes in through an agent or an individual, you know, we know how to operate against this. So I think that, you know, in the end, that's why I say we think this is more of an opportunity than a threat. Sure, there will be people who will try to camp, but we deal with that all the time. But I think the opportunity we have, and as people adopt agents more and more and as different companies come out with their own agents, I think our ability to, you know, adjust our content and the like to deal with agents, and, you know, we feel very confident. That's why we're actually excited about the launch of, you know, Muse and some of these others that are coming.

Understood. Thanks for taking the questions, guys. Okay, thanks. Thank you.

I think it's mainly in the field. We have seen very little, you know, and obviously we're quite attuned to this at this point, but I think adoption of personal agents has probably been a little slow. I mean, you're just spending a lot of money on marketing. You know, it'll take off, but I think we're, you know, we've got, you know, as you would imagine, the right task force together. We're certainly working with our inbound team. But we haven't seen much of anything to date.

No one-timers, Mark. I think we just remain very, very focused and disciplined on cost management, you know, top to bottom. It's mainly personnel costs. I think I mentioned to you before, you know, we go through a regular review. Bill and I review headcount with the ELT monthly. So we're very, very focused on managing costs top to bottom.

Yeah, and I think on the personnel piece, we've gotten more efficient over time. And so we make selected reductions where it's appropriate. But I think it's mainly in the personnel area, as Jason said.

I don't think we gave it, Mark, but it's in that mid-80s up slightly from what we've discussed.

Yeah, I think it's around 85. Yeah, about 85%.

Hello.

Welcome to Front Door.

Yeah, I don't think DTC were looking for that to moderate. We think that will be pretty consistent. In real estate, obviously, we said, and I mean, you cover a number of companies. You know, we don't have to go into chapter and verse on that. But, you know, that's why we said we look by the end of the year. It's probably going to be flat a year ago in terms of ending member count. But I think in terms of your question about strategies, et cetera, the promotional pricing piece we think has worked extremely well with DTC. The work we done all the process improvements I went through for the renewals that what really been able to keep up our total ending member count Real estate is real estate You know we just have to you know continue to adapt Our focus is on keeping that capture rate above 5%.

And we know it's a tough market, but, you know, we're grinding every day. We don't see a change in strategy, per se, in terms of real estate. But in terms of our core business, DTC and renewals, with real estate tough, fewer people are moving, which is why they need that budget protection and peace of mind we talk about so often. So I think that's what we try to say is the strength of our model. We have a number of different ways that we can drive the top line and manage efficiently through the whole P&L.

No, not on the DTC side. On real estate, frankly, we're experimenting all the time, but no significant change to speak of at this point.

Yeah, Susan, I'd say no changes from capital allocation. Our priorities remain growth. So Kathy and I constantly talk about investments for organic growth, balancing LTV and CAC. We are always evaluating the M&A pipeline, nothing imminent on that front, but we're, you know, willing to talk to or discuss the right target for us. Strong, strong balance sheet. And so we're at that level in capital allocation where we remain committed to returning capital to shareholders right now. And I think that's reflected in the new authorization.

Hey, Susan, one last thing. I forgot. I should have mentioned this about promotional pricing. The other reason why we haven't changed our strategy is, as I know you're new to the story, but we've been very pleased with the promotional cohort actually renewing at a higher rate than people who don't come in to us with a discount. It's been a bit of a surprise to us, but it's a pleasant surprise, and that's why we feel very good at our overall pricing strategy, that by bringing them in at a discount, I think a lot of, you know, to your point about consumer confidence, people are looking for deals these days. But our ability to renew them and get them back to, you know, the pricing that, if you will, we would have had within 18 to 24 months has been a real strength for us.

Okay.

Hey, Brian.

Yeah, good to hear from you, Andrew. I think long term, you know, we look to balance member account growth, pricing, and then non-warranty growth. If I'm thinking that mid to high single digit, you could think of that almost. The targets would be almost a third, a third, and a third. From a channel perspective, if I'm thinking about member account growth, obviously there's pressure in real estate that Bill and I both discussed on the call. So we're pretty excited that the direct consumer, first-year direct consumer, growing in that mid-single-digit range, and now that the renewal book has turned positive, that's really what's supporting kind of the short-to-medium-term member count growth target.

And as we just talked about with Susan, we are aggressive on promotional pricing. Our number one issue is bringing in additional members, which also gives us a larger base for our non-warranty business. So it's a virtuous cycle that we're pleased with.

Thank you.

Hi, Tyler.

Yeah, appliances are next trade that we're looking to move into. We're at about half the country or so, maybe a little more than that in terms of our rollout. We plan to have it rolled out into next year. And one of the reasons we had talked about potentially having it roll out in Q4, it's been a little slower by design.

And that is the goal here is to train the contractors. We have to train the contractors. These are different contractors and HVAC contractors. It's a different sell because, you know, an HVAC contractor is focused on, you know, systems that are $6,000, $7,000, $8,000. With appliance, you're looking at $800 refrigerators, $400 dishwashers, you know, in that range. We're looking for the same model to give our members an excellent discount. But the key here is to make sure that our contractors are equipped properly and trained. And that's why we're, like I said, we're pleased with where the rollout is.

And right now we're very focused on training. It's a different process. It's essentially the same approach that we can get people to upgrade their equipment. And, you know, it's a cell that happens with sometimes it's a washer and a dryer. Sometimes it's a whole kitchen. So we're working through all of those. But we're off to a nice – the model is working well and more to come in 2027.

Yeah, so we call it, you know, the renewal journey, which you're referencing. We're very active in the beginning with our members, welcoming them into the service, et cetera, and then throughout that we'll have touch points to the journey, and then as they head toward the renewal part in the, you know, month 9 to 11 or so, that's when we really start to engage on getting them to renew.

The feedback we get depends on the engagement. I think what I've been pleased with is that we don't have a one-size-fits-all. We work through a number of different ways depending on what the members' needs are. You know, we have a variety of members, you know, who have large houses, medium-sized houses, smaller houses. So we work through those elements so that we get to know the member specifically. But I think what the members have really responded to is app adoption continues to grow up. Our virtual technicians are a big win for people that, you know, really can't get anywhere else. So with us being, and also we're so focused on trying to get as many of our preferred contractors into their homes.

That all in concert works together to really help our renewal book. And that's why we're really pleased. Retention was up for the third straight quarter. And so, you know, it's just something that we're relentless with. And, you know, the retention team has done a really great job.

Yeah, I was chuckling at your use of the term turmoil because that's very apt. But, you know, like I said, you're right about the Compass piece. That doesn't mean we aren't doing business with Compass because it's not an exclusive arrangement. We had it for years. We're very involved with Compass's franchisees, which is about 80% of their business. So we continue to be pleased with our business with Compass franchisees, which is up year over year.

Yes, we're very engaged with a number of the brokerage houses. As a matter of fact, just the other day, our top real estate people were all in four different brokerages at the time, talking about that. But the bulk of our team is working on training, local sponsorships, and working with agents and franchisees at the local level. That's really where we've put our effort. It doesn't mean we're not talking to the top of the house either, but we have over 100 field sales folks, and they are spread out across the country.

We're all in this together, if you will, from the brokerage side to the franchisees to warranty people, title people, et cetera. It's a tough market right now, but we believe that the best foot forward for us is to stay really engaged and with them at the local level.