frontdoor, Inc. Aktie

Ladies and gentlemen, welcome to Frontdoor's first quarter 2026 earnings call. Today's call is being recorded and broadcast on the internet.

Beginning today's call is Matt Davis, Vice President of Investor Relations and Treasurer. He will introduce the other speakers on the call. At this time, we'll begin today's call. Please go ahead, Mr. Davis.

Thank you, operator. Good morning, everyone, and thank you for joining Frontdoor's First 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 Frontdoor's website, which is located at www.investors.frontdoorhome.com.

As stated on Slide 3 of the presentation, I'd like to remind you that this call and webcast may contain forward-looking statements. These statements are subject to various risks and uncertainties, which could cause actual results to differ materially from those discussed here today.

These risk factors are explained in detail in the company's filings with the SEC. Please refer to the Risk Factors section in our filings for a more detailed discussion of our forward-looking statements and the risks and uncertainties related to such statements.

All forward-looking statements are made as of today, April 30, and except as required by law, the company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

We will also reference certain non-GAAP financial measures throughout today's call. We have included definitions of these terms and reconciliations of these non-GAAP financial measures for 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, Matt Davis. Coming into 2026, we laid out an ambitious plan, grow the member base, deliver structurally higher margins and maintain a disciplined capital allocation framework to create shareholder value. I am happy to report that we are off to a fast start in 2026 and executing on each of these.

Turning to Slide 5. Revenue grew 6% to $451 million. Gross profit margin remained strong at 55%. Net income grew 11% to $41 million.

Adjusted EBITDA increased 3% to $104 million and we bought back $60 million worth of shares. Operationally, our member count trend continues to move in the right direction with growth in our first-year channels accelerating to 3%.

Combining this with our strong execution in the renewal channel, we now anticipate total member count will grow approximately 1% for the year. This would be a major milestone and would mark the first-year of organic member count growth since 2020.

Complementing our core business, our HVAC upgrade program continues to be a significant driver of growth and adds meaningful value for our home warranty members.

Let's now turn to Slide 6 to take a deeper look at channel performance. Starting with the direct-to-consumer channel, where ending member count grew 3% versus the prior year period, marking the sixth consecutive quarter of year-over-year member growth, proof that our strategy is working.

Our approach to DTC is anchored in 3 key areas, strengthening brand leadership, growing demand and improving conversion. First, strengthening brand leadership. We continue to benefit from strong brand awareness, which we further reinforced in March with the launch of our latest Warrantina campaign.

Campaign results continue to be terrific, with improvements across key brand metrics, including unaided awareness up 6% to 28%, purchase consideration up 5 points to 35% and likelihood to recommend up 8 points to 63%.

Second, we are growing demand through an optimized value proposition, a more refined targeting approach and enhanced performance marketing. These efforts are allowing us to drive higher intent to purchase traffic while maintaining discipline around our marketing investments. In short, we are improving both the quality and quantity of demand entering the funnel.

Additionally, we have started to see increased demand from the integration of 2-10 onto our platform with better SEO performance and an improved user experience. And third, we are improving conversion.

We continue to refine our sales funnel through optimized marketing content for LLMs, AI tools to improve sales performance and promotional pricing, all to drive stronger conversion. The beauty of our promotional pricing strategy is that we are able to deliver member count growth without compromising long-term renewal performance.

Most importantly, the renewal rates for our promotional cohorts are consistently exceeding those of non-discounted member cohorts.

Now moving on to the first-year real estate channel. While existing home sales remain near 30-year lows, home inventory continues to rise. This improvement in inventory is creating a more favorable selling environment for home warranties.

To capitalize on this, we have been deliberately investing at the local level and leveraging targeted promotions to position our brands for success. Here's a great metric.

Our attach rate has improved now for 8 consecutive months and was at nearly 6% of existing home sales in March. As a result, ending member count for first-year real estate grew 3%, the first time we have organically grown this channel in years. This is a very big deal.

Now turning to renewals, where our performance has been nothing short of amazing. Renewal rates remain near record highs, supported by a combination of factors, continuous improvement in the end-to-end member experience and reduced cancellations driven by engaging with members at the right time with the right message.

Now moving to non-warranty and other, we continue to scale during the quarter with revenue growth of 23% year-over-year to $41 million.

HVAC upgrades remain the primary driver and we continue to optimize how we run the program. By routing a greater share of HVAC claims to higher converting contractors, we have seen significant improvements in both quote rates and orders.

Let me now turn to Slide 7 to discuss our strategic priorities driving value creation. Last quarter, we were clear about the priorities that matter most for our business.

First, member growth. Improving first-year acquisition trends, combined with strong renewal rates, gives us confidence that we expect to deliver approximately 1% member count growth this year. Second, we continue to scale non-warranty revenue in a disciplined manner. We have proven our ability to expand share of wallet while deepening engagement with our member base.

Third, deliver structurally higher margins. Last quarter, we increased our long-term margin targets, underpinned by dynamic pricing and cost discipline. This margin performance translates into strong cash generation, which brings us to our final priority, disciplined capital allocation to drive long-term value creation.

Our capital allocation priorities remain unchanged. First, we invest to accelerate growth through organic initiatives and selective M&A. Second, we maintain a strong balance sheet and financial profile.

And finally, we return excess cash to shareholders and we are on track to complete our current share repurchase authorization by early 2027.

Execution across all of these long-term goals is clearly reflected in our financial performance.

With that, let me turn it over to Jason to walk through the financials and our outlook in more detail. Jason?

Thanks, Bill. Good morning, everyone. Let's start on Slide 9, where I will quickly cover some of the financial highlights for the quarter.

We are off to an excellent start in 2026. Our first quarter results reflect focused execution and consistency across the business. Versus the prior year period, revenue grew 6% to $451 million.

Gross margins remained strong at 55%. Adjusted EBITDA increased 3% to $104 million. And lastly, adjusted diluted EPS grew 14% to $0.73 per share, reflecting strong earnings growth and the positive impact of our share repurchase program.

Now let's turn to Slide 10 for a deeper look at our revenue performance. As I just highlighted, total revenue grew 6% to $451 million. This was driven by approximately 5% from higher realized price and 1% from higher volume, primarily due to the HVAC upgrade program.

From a channel perspective, compared to the prior year period, renewal revenue grew 6%, driven by higher price. First-year real estate revenue increased by 3% as higher volume was partially offset by slightly lower pricing. First-year direct-to-consumer revenue decreased 5%, driven by our promotional pricing strategy aimed at increasing member count growth.

This lower pricing reflects a higher mix of discounted first-year members from the past 12 months of new member acquisition, which was partially offset by higher volume as we added more new members.

Lastly, non-warranty and other revenue increased 23% due to both higher price and volume driven by our HVAC upgrade program.

Now moving down the P&L to gross profit and gross margin on Slide 11. Gross profit increased 5% versus the prior year period to $248 million, while gross profit margin held strong at 55%.

For the first quarter, our gross profit margin reflects higher price realization of 5% or $19 million, disciplined cost management leading to low single digit cost inflation, slightly higher incidence or service requests per member, which includes approximately $1 million from unfavorable weather in the quarter.

This gross profit margin also reflects the ongoing expected revenue mix shift as non-warranty and other revenue continue to scale within the portfolio.

Turning to Slide 12 to review our net income and adjusted EBITDA. For the first quarter, net income grew 11% to $41 million versus the prior year period.

Adjusted EBITDA grew 3% to $104 million. As planned, SG&A increased during the quarter to capitalize on the strong momentum from 2025 in the direct-to-consumer channel. Adjusted EBITDA margin remained strong at 23%, reflecting disciplined cost management and solid operational execution despite the higher levels of marketing investments.

Let's now turn to Slide 13 to discuss our free cash flow and capital deployment. Our recurring revenue and capital-light business model continued to generate excellent free cash flow of $114 million in the quarter.

As a reminder, we expect to convert adjusted EBITDA to free cash flow at a rate of over 60% in 2026. In the quarter, we returned $60 million to shareholders through share repurchases.

We ended the quarter with a strong liquidity position of $698 million and a low net leverage ratio. More broadly, this financial strength supports the capital allocation strategy Bill outlined earlier, providing the capacity to invest in long-term growth, maintaining balance sheet strength and returning excess cash to shareholders.

When stepping back, Q1 was another proof point of what our business model is built to do. We continue to deliver strong earnings, generate significant free cash flow and return substantial capital to shareholders while accelerating growth investments.

Let's now turn to our second quarter outlook on Slide 14. For the second quarter of 2026, we expect revenue to be in the range of $635 million to $650 million. This outlook reflects a low single digit increase in renewal revenue, a mid-single digit increase in first-year real estate revenue, a low single digit decrease in first-year direct-to-consumer revenue and a mid-20% increase in non-warranty and other revenue.

We expect adjusted EBITDA to be in the range of $198 million to $208 million. This reflects higher gross profit from revenue conversion, low single digit inflation, continued revenue mix shift to non-warranty and our strategic decision to increase sales and marketing spend with the strong momentum we are seeing in the first-year channels.

Turning to our full year 2026 outlook on Slide 15. We are reaffirming our full year 2026 outlook with key assumptions remaining essentially unchanged, as detailed in our earnings release and shown on the slide.

As a reminder, and for those of you that are new to our story, I want to take a moment to discuss how seasonality impacts our financial results. With our first quarter results and second quarter guide, we anticipate that 53% to 54% of our full year 2026 adjusted EBITDA will be generated in the first half of the year. This is similar to the split in 2025.

This is a normal part of our business and the reason why I encourage our investors to focus on our full year performance and guidance as the true measure of how we are delivering results.

While the geopolitical environment has become more complex, our execution across the business, combined with multiple levers we can deploy to offset inflation, give us confidence in our ability to deliver on our expected revenue and adjusted EBITDA growth for the year. With that, back to you, Bill.

Thank you, Jason. Our first quarter results reflect a continuation of the strong execution you've come to expect from Frontdoor. I'd like to highlight 3 things as we wrap up.

First, our member count growth. Our member count is now growing. The team is doing great work and we're seeing that translate into measurable progress. And as a result, we now expect our total member count to increase approximately 1% for 2026, a major milestone for our business.

Second, we are continuing to deliver strong margins in line with our long-term targets. The operating model we have been strengthening over the past several years is allowing us to deliver consistent results.

And finally, our business model is doing what it was designed to do, generate a lot of cash and return that to shareholders through share repurchases. We love the position we're in and we remain focused on executing with discipline as the year progresses.

Operator, please open the line for questions.

[Operator Instructions] Our first question is coming from Mark Hughes of Truist Securities.

Can you talk about the real estate channel? It seems like you're having good success there. I wonder if you might touch on the attachment rates.

You said they've been improving in recent months. Was it 8% in March? Where did they bottom out at? Where historically have they gotten up to in a stronger market?

Yes. If you recall, many years ago, and I'm talking 6 or 7 years ago, attach rates in the industry were around 30%. That has fallen through COVID and the real estate sluggishness into the mid-teens.

What has happened is we have steadily seen improvements in our attach rate, which is a measure of our warranties divided by existing home sales.

So in March, we hit 6% on that measure. And I think it reflects some really good work by our real estate team, some work we're doing on shifting our focus away from large MSAs to focusing really on the local real estate agent.

We have added some promotional pricing there. It's not at the level of 50% off, but it enables us to basically get the attention of real estate agents.

And we've seen -- we've spent a lot of time talking about the improvements we've made to our members with the app, our experts, et cetera. So it's a combination of factors and we're steadily moving up.

And like I said, I watch that measure very closely, the attach rate and our team with 8 consecutive quarters of improvement. That's a lot of what we think is driving the better performance.

Yes. And will the strategy be on renewal, you'll move that up pretty expeditiously like you've been doing in the direct-to-consumer channel?

Yes, it continues to be around 30%. It's a big initiative for our teams to try to -- we tick up into the 31% level, but we've been kind of stuck at 30%. But if we can unlock that, that would be great.

It used to be in the mid-20s. So we have made a lot of progress there. And as you saw in our 10-K, our renewal rates improved by 200 basis points in 2025. So I think that the combination of efforts is why we feel so good about where the renewal book is coming.

And if we can continue to grow the first-year channels, the renewal book is catching up and that's why we are now at 1% ending member count growth, what we're forecasting for '26.

And then one more, if I can. You talked about the 2-10 that you're integrating onto the platform, you're seeing some momentum as a result of that. Could you expand on that point?

Yes. We now run it as one, and this was always the plan. We thought that the synergies we could start to drive in revenue. So we run HSA, AHS and now 2-10, all of our DTC actions, all of our real estate transactions, all of our renewal transactions are all on one platform.

This gives our teams an ability to do specific initiatives. So for example, now 2-10 can do 50% off on the DTC channel. Now we can do the same kind of tactics that we've used to help drive the renewal channel. So that's why it makes it a lot easier for us to execute 2-10 as being part of the platform.

Yes, I'd add, Bill, to the other good examples would be our dynamic pricing tools can be applied, our contractor algorithms. It's just a great...

Yes. So we now have one integrated contractor relations team, one integrated customer support team, et cetera.

And our next question is coming from Eric Sheridan of Goldman Sachs.

I want to go a little bit deeper in how you continue to get message around scaling marketing investments around your brands, around driving customer acknowledgment of the product set and customer adoption of products broadly.

And how are you thinking also about applying marketing to the balance you want to strike between the warranty business and the non-warranty business over the long term in terms of the messaging you want to put in front of consumers?

Yes. Our primary focus is on the warranty business because the non-warranty business is primarily, at this point, a B2B2C business where we work very closely with our contractors. But there's a halo effect on the brands that come from talking about American Home Shield and what that does for our members.

So the way we operate is we talk about our marketing funnel. It starts at the top with our broad advertising message. We use the warranty as our main message. But that's a portion of our marketing investment because there are all the elements of search marketing, direct mail, social media. There's a variety of tactics that we use in our overall marketing.

Then what we do with non-warranty is that we're really marketing to our members directly. So with a 2.1 million member base, we find that very efficient for us. That's why we call it relatively CAC-free when we talk about non-warranty.

So -- and we have such a good relationship with our contractors. They're very excited about this additional piece of business that they can put in new equipment. And frankly, it has a downstream effect of less truck rolls because the equipment is so new.

So we think it's a virtuous cycle working together. Like I said, the primary focus is on American Home Shield, but we have a number of techniques that we're using, including some of the AI tools I referenced in my remarks. And it's really come together. The marketing team's done a terrific job.

And our next question is coming from Jeff Schmitt of William Blair.

So the new promotional strategy in real estate seems to be off to a good start. Are you seeing competitors respond to that? Are some starting to do the same thing? Or do you anticipate that happening?

We haven't gotten much intelligence that others have done that. Now we believe that they probably are taking a look at that. But right now we're trying to -- we're very focused on the local real estate agents. So that's where our focus is. But we haven't picked up a lot of noise around others trying to do that.

Yes. I think I'd add, too, our focus there in that strategy is more, as Bill said in his remarks, about engagement. And so I think in addition to the promotional pricing, we can drive engagement by highlighting the app, our experts and kind of our overall improvements to customer experience. And so I think this is just another tool in our kit that allows our field sales team to really succeed.

I think that's right, Jason, because I think what we try to think about is we need to keep bringing the agent new news, whether that happens to be during a promotional pricing period or the other elements that we've added to our arsenal.

Okay. And then, so there's 5% of realized pricing in the quarter, that was better than we had expected. Did you push through another round of pricing increases in December? And at what level? Or was that more from your dynamic pricing?

It's no incremental pricing since our last update. I think it's just the effectiveness of our dynamic pricing tools. We're pretty much in line with where we were expecting or where we are expecting the year to land.

Yes. I think, Jeff, when we talk dynamic pricing, what we're really saying is we're constantly looking at, frankly, increasing our prices. But some members get a price decrease and that's the advantage of dynamic pricing. We're really priced to the person.

So it really was a continuation of what we're trying to do with our [ 1/12 ] at a time recognized revenue base. We're able to -- while there's a disadvantage that it takes 12 months for it to be fully realized, there's an advantage that we can act very quickly and enact pricing changes and that's really what we've done.

But I think we're pleased with that effort. I think it also ties back to the strong renewal rates we've had, which also enables us to show a nice increase in pricing.

Yes. I think there's probably a little bit of timing in there in the compare to the Q1 versus Q1 of the prior year. We're still targeting that kind of low 2% to 3% full-year realized price impact.

And our next question is coming from Ian Zaffino of Oppenheimer.

This is Isaac Sellhausen on for Ian. So the question would just be on the customer retention for the quarter. It looks like that was just down slightly compared to last year.

Not sure if that is a timing thing, but maybe you could just touch on that piece of it, maybe in relation to the renewals channel specifically and then kind of your expectations for retention as you move through the year.

Yes. It's down slightly in Q1. That's just timing of 2-10 rolling into the book. I think we mentioned at acquisition, their retention rates were lower than ours.

Now that they're fully in our book, I'd say that's just a minor impact in the quarter. By year-end, we expect retention to be relatively flat.

The other thing I'd kind of point to is our renewal rates continue to be strong. I think Bill mentioned earlier, we were up almost 200 basis points year-over-year at the end of '25. And now with 2-10 on our platform, that's one of the upsides we see just as we put our tools and techniques on the base, we'll see that their rates come up to higher.

Yes. So Jason is right. It's a mix issue, but AHS retention rates continue to be very strong.

Okay. Understood. And then just as a follow-up, as far as the gross margin outlook for the year, you guys reaffirmed that. Maybe if you could just touch on the cost side, whether it be parts or equipment or labor, maybe just how things have trended in the first quarter and then the confidence you have in that as you move through the year to reach that margin target?

Yes. We're at low -- I'd say low single digit inflation in Q1. Our contractor relations team has done a great job working with our contractor network. We feel good about our outlook for the year.

I would obviously say Bill and I are monitoring macro conditions daily and working with the team. So we're pretty confident that we'll be right in line with our guide. The outlook is pricing flowing through, similar incidence rates to prior year and then low single digit inflation for the full year. Pretty normal weather is our expectation. And then we've obviously considered the mix of non-warranty as it grows all in that guide.

And our next question is coming from Sergio Segura of KeyBanc Capital Markets.

First question I just had was on the full year outlook. So can you maintain that? I guess last year, you had a pretty steady cadence of beating and raising.

So you beat this quarter in 1Q. So maybe just walk us through why you chose to keep the annual outlook unchanged despite the stronger-than-expected performance.

Yes, Sergio. I'd say the Q1 is just a little bit of timing on the beat. We're very confident in how we're operating. We just -- since we just gave the guidance and obviously watching all the macro news, we felt really good about reaffirming where we are. We think the team, both top line and bottom line, are operating very, very well. So that's just kind of how we ended up on reaffirming where we are.

Yes. It's a little bit of an anomaly because we report Q4 so late. It's like 2 months into the year and then we come right back only a month into Q2 to report Q1.

So -- but giving the guidance 60 days ago and we felt like we did beat. It wasn't a large beat, but we're very proud of it. And so we felt like let's stay, let's reaffirm guidance at this point, and then we'll see -- we'll take another look at midyear.

Understood. And then the second one I had, which is somewhat related, has to do with just the geopolitical tensions we're seeing and the macro uncertainty that you mentioned. Any comments you can provide on how the higher and volatile oil prices might be impacting your input costs and how much of a swing factor that could be to margins for this year?

Yes. Like I said a minute ago, Bill and I monitor this really probably almost hour to hour, day to day, Sergio. But the team is operating very, very well.

In Q1, we were really successful. We haven't seen a huge impact from fuel costs. It's definitely an input for our contractors. But remember, we manage cost overall on a total cost per job.

And the levers as we think about there are probably 4 or 5 key tools we use to kind of manage that cost base. One, I'd start with, we're always thinking about our mix of preferred contractors and how much business we have with them and trying to optimize that mix.

Two, Bill and I continue to remain laser-focused on SG&A and how we control costs there and what levers we have. Three, we are in a great position with our supply chain and being able to manage among multiple vendors and suppliers as we think about where we want to put our volume.

And then the last two would be probably the more normal things you think of, but that's how we manage our trade service fees and how we manage dynamic pricing if we need to go to that level. So I think we've got a lot of tools in our toolkit to help us manage through this as we think about kind of the big macro picture right now.

Our next question is coming from Cory Carpenter of JPMorgan.

I wanted, Bill, to go back to a comment you made in the prepared remarks. I think you said renewal rates for the promotional cohorts are exceeding those for the non-promotional cohorts. Can you just expand a bit on that? Obviously, that's a bit counterintuitive. And then does that make you want to lean more perhaps even into that discounting strategy?

Yes. It is counterintuitive, Cory. And we talk about this all the time and I press the team multiple times, but these numbers, right, I think it has to do with consumer behavior beyond just home warranties. This is a tactic that a lot of consumer services companies are using where you really discount your first year and then there's almost an expectation among consumers that I got a great deal in the first year, I'm going to have to absorb an increase in pricing.

As we've said, however, we believe or we've proven, we've been at this for about 3 years now. So we've been able to see that we're able to climb back up to the, if you will, normalized pricing level within 18 to 24 months.

So we test this all the time, but I think what has happened is that it just proves out that people and it has to do with what kind of service they get, do they have the right contractors, a lot of factors. The moment of truth is really the most important piece there. So I know it's counterintuitive, but we've been testing this and proving it out continuously.

To your point about would this indicate that we would do more, I think that's something we pulse. We stay very close to this every month in terms of how we want to pull the trigger on promotions.

We are now moving into early days of dynamic discounting so that it isn't just the broad brush. We'll continue to do broad brush promotions like 50% off. But we're encouraged about what is potentially going to happen with dynamic discounting.

So I think we're very active in this field. Like I said, we've been at it for about 3 years and we feel good about it. And obviously, the important point is to make sure that those renewal rates continue to stay high.

And I wanted to ask one more question on macro. I know you touched on kind of the cost side question earlier, but I wanted to ask it more on the demand side. And there's been a lot of -- the potential for higher inflation and more stress on the lower end consumer.

Are you seeing any change at all in consumer behavior? And maybe if you could just remind us of what your kind of mix of consumers demographically looks like?

Yes. So let me take that. So the mix of consumers is about 50% below $100,000, 50% above that. The piece that we have not seen, no impact on demand, is because with the budget protection that our core value proposition brings, I think it actually kind of plays to our advantage.

It may hurt us a little bit in the real estate sector with the real estate market continuing to be sluggish. But I think the core value proposition, which we try to hit very hard and we try to do this on a targeted basis, we talked in the past about targeting more millennials, targeting our Hispanic markets.

So I think that has worked to our advantage. So to date, we haven't seen a softness in consumer demand. You can see that from some of our numbers. So -- and I think that speaks to the value proposition of a home warranty.

And our next question is coming from Michael Rindos of Benchmark.

Can you talk a little bit about your relationship with SkySlope, how that works and how much business is coming through them?

Yes. Jason has been very close to that relationship. So I am going to let him take that. I may add something. But go ahead, Jason.

Yes, Mike. SkySlope, we have an ongoing relationship with them, and the announcement you saw was an expansion of that relationship. I think we were originally in 4 or 5 states and now we are expanding to over 40 states.

It is -- the easiest way to describe it is think of SkySlope as a platform that makes things easier for real estate agents. And then for us, the way that translates is we're in that workflow.

So it's easier to attach a home warranty. We're pleased with the relationship. And again, it's just another tool for our field sales team to be successful and kind of build on the momentum they already have.

Okay. And just as a follow-up, is that an exclusive situation that you have there? And also, as far as the growth in the real estate channel, where are you seeing the most growth on a regional basis? And how many competitors do you see in some of those markets?

Yes. I will take that in 2 parts. The SkySlope relationship is not exclusive, but we're really comfortable with our position there and how well we work together. And then on a regional basis, we're seeing success.

I think it is pretty consistent with our overall business, what we call the Smile states. And our biggest markets are Texas and California, Georgia, et cetera.

I think as far as competitors go, in the real estate part of the DTC, we have a larger share, smaller share, about 1/3 in real estate because we have many more competitors. But from a geographic perspective, it's pretty consistent with the way our overall business plays out.

Well, we appear to have reached the end of our question-and-answer session and indeed the end of the conference call. This does conclude today's conference, and you may disconnect your phone lines at this time. We thank you for your participation.

Thanks, Jenny.

Thank you so much.

Ladies and gentlemen, welcome to Frontdoor's Fourth Quarter and Full-Year 2025 Earnings Call. Today's call is being recorded and broadcast on the Internet. Beginning today's call is Matt Davis, Vice President of Investor Relations and Treasurer, and he will introduce the other speakers on the call. At this time, we'll begin today's call. Please go ahead, Mr. Davis.

Thank you, operator. Good morning, everyone, and thank you for joining Frontdoor's Fourth Quarter and Full Year 2025 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 Frontdoor's website, which is located at www.investors.frontdoorhome.com.

As stated on Slide 3 of the presentation, I'd like to remind you that this call and webcast may contain forward-looking statements. These statements are subject to various risks and uncertainties, which could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the company's filings with the SEC.

Please refer to the Risk Factors section in our filings for a more detailed discussion of our forward-looking statements and the risks and uncertainties related to such statements. All forward-looking statements are made as of today, February 26, and except as required by law, the company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

We will also reference certain non-GAAP financial measures throughout today's call. We have included definitions of these terms and reconciliations of these non-GAAP financial measures to their most comparable GAAP financial measures in our press release and the appendix to this 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, Matt Davis. We had a great 2025. But before I get into the financial highlights, here are 3 key takeaways for today's call. First, we expect ending member count to grow in 2026. Second, we are raising our long-term adjusted EBITDA margin target. And third, this business generates significant cash, and we are on track to complete our current share repurchase authorization by this time next year, well ahead of schedule. With that, let's get to the financial highlights for the year.

Revenue increased 14% year over year to nearly $2.1 billion. Gross profit margin increased 150 basis points to a record of 55%. Net income grew 9% to $255 million. Adjusted EBITDA grew 25% to $553 million, and we bought back a record $280 million worth of shares. Now before we step into 2026, I want to connect our results back to our priorities for 2025 laid out on Slide 5. Our first and most important focus is to grow and retain home warranty members. And in 2025, we achieved an important milestone.

We stabilized our member count. This was supported by traction across the business with growing demand and improving conversion in DTC, strong second half momentum in the first-year real estate channel and higher renewal rates. Our second strategic priority, scaling non-warranty revenue is playing an important role as we expand the way we serve our members and create value. The new HVAC program grew an impressive 48% to $128 million, and we still have a massive opportunity ahead.

We also took the next step in broadening our portfolio by launching our appliance upgrade program in select markets. And we're complementing that momentum with outside partnership opportunities with our contractor network, such as our Moen program that delivered $15 million in its first full year. Finally, our third strategic priority is optimizing the integration of 2-10. This was a highly strategic acquisition, and execution has exceeded our expectation.

We have already realized more than $20 million of cost synergies, way ahead of our original 2025 target of $10 million. We are well on our way to a fully synergized multiple of less than 7x by 2028. And we are actively working on revenue synergies, including migration of the 2-10 Home Warranty platform to our systems in 2026 and creating additional opportunities with 2-10 Builders. The 2-10 acquisition was a great deal, and there is still a lot of runway left.

Now let me take a moment to double-click on our #1 priority at Frontdoor to grow and retain our Home Warranty members. Slide 6 captures the outcome. Member count stabilized in 2025. This was an excellent result and well ahead of schedule. And what is even more impressive is that we built momentum as the year progressed. Tariff concerns eased, housing supply improved, and our consistent execution paid off. Let's turn to Slide 7 to take a deeper look at the real estate backdrop in 2025.

There are 2 distinct dynamics. First, existing home sales volumes remain constrained near historic lows. This weighed on our ability to sell home warranties in this channel. Second, the market began shifting toward a better balance between buyers and sellers, one of the most important drivers for our business. Inventory increased with average supply exceeding 4 months for the first time in 5 years and over 60% of homes sold below their original list price, the highest level since 2019.

In addition, our team moved quickly to capitalize on this changing market dynamic. We increased localized investment. We deepened engagement directly with real estate agents, and we launched promotional pricing in the real estate channel for the first time. And the result, we had 2 consecutive quarters of sequential member growth to close out last year, the first time this has happened in the past 5 years.

Now turning to Slide 8. Direct-to-consumer has been a source of consistent momentum for the business. Our differentiated strategy, discipline and focus drove 3%-member growth in the channel for 2025. At a high level, our DTC strategy is built around 3 pillars: brand leadership, growing demand and improving conversion. Starting with brand leadership. We continue to hold the highest levels of awareness, interest and trust in the category.

Our technology enhancements through the AHS app and virtual experts have increased member value while further sharpening our differentiation with consumers. Second, growing demand. We continue to strengthen our value proposition to deliver more targeted and relevant messaging to key segments, including younger homebuyers. Utilization of AI in our marketing has allowed us to reach higher intent consumers more effectively.

And finally, we are improving conversion through website and SEO enhancements, promotional pricing and AI tools to prompt our sales agents, we are creating a more personalized experience for prospects aiding us in getting them across the finish line. Turning to Slide 9. Renewal rates improved by 150 basis points to 75%. This is a very big deal. I am particularly proud of our performance with direct-to-consumer members.

First year DTC renewal rates improved even as members moved away from introductory prices and into the renewal channel. This reinforces that our promotional pricing strategy did not come at the expense of renewals. Our performance is being driven by continued improvements in the member experience and includes the following actions. First, adoption of the AHS app continues to grow since its launch in October of 2024, and we now have nearly 600,000 member downloads.

Second, video chat with an expert has become a clear point of differentiation. Since launching in February 2025, we've completed about 80,000 chats, helping resolve issues virtually. Third, we increased the number of members on monthly auto pay by about 100 basis points to 84%. Additionally, we've strengthened onboarding, continued strong usage of our preferred contractors and improved our internal processes.

The impact of these efforts is showing up clearly in member feedback with record high 5-star reviews alongside record low 1-star reviews for all of 2025. Now turning to Slide 10. With a strong foundation in our core membership base, we continue to advance our second priority in 2025, scaling non-warranty services. And the most meaningful driver within non-warranty today is our new HVAC upgrade program. In 2025, new HVAC upgrade revenue grew by $41 million to $128 million.

And we remain in the early innings with only about 55,000 installations in the program to date, leaving substantial opportunity across our 2.1 million members. Let me spend a moment now on new HVAC upgrade margins because this is an area we feel very good about. Gross margins for our new HVAC program are currently around 20%. While this is lower than our core business, the economics are favorable for 3 reasons.

First, increasing share of wallet with our members supports higher engagement, satisfaction and retention. Second, contractors value the program supporting stronger adoption; and third, we get higher revenue and incremental gross profit and EBITDA with little to no customer acquisition costs. Now let's look forward and talk about our aggressive long-term goals on Slide 11. First, drive member growth, still the #1 priority at Frontdoor.

Second, scale non-warranty revenue streams; third, deliver on structurally higher margins; and fourth, remain disciplined with our capital allocation strategy to create long-term value. Let's turn to Slide 12 for a deeper discussion on driving member growth. I'll start with the key takeaway. We expect total member count to grow in 2026. This would mark the first year of ending member count growth since 2020.

This growth is driven primarily by continued strength in our first-year channels, which we expect to grow about 5% on a combined basis. This reflects disciplined execution across real estate and direct-to-consumer, supported by a more constructive market backdrop. Renewals remain a critical part of the equation. While we expect renewal rates to remain strong, renewal member count is expected to be a modest headwind in 2026 [Technical Difficulty] first year real estate units over the past several years. That dynamic is temporary.

Growth in first year acquisitions in 2025 and 2026 flows into the renewal book with a natural lag, positioning renewals to become a tailwind beginning later in 2027 and accelerating beyond. Taken together, this is about building a durable growth engine, driving first year growth today while setting up renewal-led growth over the longer term. With that, let me turn to Slide 13 and our non-warranty business. As this slide shows, our approach is straightforward.

Non-warranty consists of a 3-part strategy: grow share of wallet with our 2.1 million members, leverage our base of 17,000 contractors and unlock the opportunity across our network of 19,000 homebuilders. Starting with members. Our focus is on growing share of wallet, which is the most immediate opportunity and where we're seeing traction today. We've proven this model with our new HVAC upgrade program and are now extending it into appliances.

Second, we're leveraging our contractor network more strategically. We started this initiative last year with Moen. Longer term, we're exploring additional partnership models and other ways to monetize the network. Third, we see a meaningful opportunity to unlock additional value from the 2-10 Builder network. Through our new homebuilder relationships, we're exploring ways to broaden the set of products we offer builders over time, creating a potential B2B distribution channel.

And as non-warranty continues to scale, we are confident in our ability to protect overall profitability. That brings us to our next priority on Slide 14, delivering structurally higher margins as we scale. Our performance over the last several years reflects a fundamental shift in how we run the business, which gives us confidence that these improvements are structural. How have we done this? We have really leaned into our dynamic pricing model, which has been a game changer for us.

We have become more nimble at using trade service fees to further protect margin. We have increased our use of preferred contractors. We have improved our purchasing power across our supply chain, and we are seeing more SG&A leverage as we scale. Taken together, we now have the confidence to raise our long-term adjusted EBITDA margin targets, which Jason will walk through shortly.

These margin gains translate directly into strong cash flows and capital deployment. With that, let's turn to the next slide. As this slide shows, our capital allocation priorities are consistent and straightforward. First, we prioritize accelerating growth through organic investments to drive growth and retention and through selective M&A like 2-10.

Second, our strong balance sheet and financial profile provides us flexibility in how we deploy capital. And third, as you have seen from our recent actions, we buy back a lot of shares, allowing us to consistently return capital back to shareholders. Taken together, this framework drives long-term value creation. I will now turn it over to Jason to walk through the financial results and outlook.

Thanks, Bill, and good morning, everyone. With a record 2025 and a strong fourth quarter, our results reflect solid revenue growth, expanding profitability and excellent cash conversion that led to record amounts of share repurchases. Let's start on Slide 17. Here, I will quickly cover the financial highlights for the fourth quarter. Revenue grew 13% versus the prior year period to $433 million, reflecting higher volume from 2-10 as well as higher price.

Gross margin grew 70 basis points to 49%, reflecting low single-digit inflation and a continuation of our strong operating performance. Adjusted EBITDA grew 21% to $59 million. Fourth quarter adjusted diluted earnings per share was $0.23. And lastly, during the fourth quarter, we returned $87 million to shareholders via share repurchases. Now let's pivot to full year 2025 results, starting with revenue on Slide 18. Revenue increased 14% year over year, surpassing the $2 billion mark.

This was driven by 2-10 volume, expansion in non-warranty and other and approximately 3% from higher price. On an organic basis, revenue grew 3.7%. From a channel perspective, renewal revenue grew 10%, driven by higher 2-10 volume and price. First year real estate revenue grew 13% from the addition of 2-10.

First year direct-to-consumer revenue grew 4% with higher volume, partially offset by lower price and non-warranty and other revenue grew 66%, driven by the success of our new HVAC and Moen programs as well as the addition of new homebuilder revenue from the 2-10 acquisition. Now moving to Slide 19 to discuss our gross profit and margin. Gross profit dollars grew 17% versus the prior year, exceeding $1 billion.

Gross margin expanded 150 basis points to a record 55%, driven by higher realized price, low single-digit cost inflation as operational execution helped offset macro pressures and favorable weather impacts of approximately $7 million. Turning to Slide 20. Let's review net income and adjusted EBITDA. For the full year, net income grew 9% to $255 million versus the prior year, and adjusted EBITDA grew 25% to $553 million.

Adjusted EBITDA margin expanded more than 200 basis points to 26%, reflecting the gross margin improvements we discussed earlier. While SG&A dollars increased year-over-year due to the addition of 2-10 and higher personnel costs, we generated approximately 100 basis points of operating leverage across the business. Now let's turn to Slide 21, and I'll walk through how the strong earnings performance translated into cash generation, a strong financial profile and capital deployment.

Our recurring revenue business model continues to generate robust cash flow, which underpins an exceptionally strong financial profile. We generated record free cash flow of $390 million, reflecting the strength and capital-light nature of our business. We remain in a strong financial position with ample liquidity of about $660 million and a strong net leverage ratio of only 1.4x. This positions us well to invest in the business while also returning excess cash to shareholders.

In 2025, we completed our fourth consecutive year of increasing buybacks. Now let's turn to Slide 22, where I'll highlight our track record of share repurchases. Our repurchase program has been a meaningful driver of shareholder value. Since 2021, we've used $720 million to repurchase approximately 17 million shares, reducing our shares outstanding by about 17% on a net basis.

Additionally, we completed almost half of our current $650 million authorization that started in late 2024, and we are on track to complete the remaining $329 million by early 2027, ahead of schedule. Let's now move to our 2026 outlook on Slide 23. We expect another year of revenue growth with revenue in the range of $2.155 billion to $2.195 billion.

We expect to maintain strong gross margin levels in the 54% to 55% range. SG&A is expected to be relatively flat versus the prior year and range between $660 million to $680 million. Adjusted EBITDA margins are expected to remain strong at approximately 26% with adjusted EBITDA of $565 million to $580 million. This outlook includes about $16 million of interest income and adds back about $8 million of integration costs and stock-based compensation of $33 million.

Additionally, our conversion of adjusted EBITDA to free cash flow is expected to remain at a very high rate in the low 60% range. We anticipate CapEx of $30 million to $35 million. And lastly, our effective tax rate is expected to be approximately 25% for 2026. Turning to the next slide, I'll walk through how we're thinking about revenue growth in 2026.

From a channel perspective, we expect low single-digit growth in our renewals channel, reflecting higher price, partially offset by lower volume due to the natural lag of when first year members flow into the renewal base.

A low single-digit decline in our first year direct-to-consumer channel, reflecting the deliberate revenue trade-off to drive member growth through promotional pricing, first year real estate channel revenue to be relatively flat as volume stabilizes; and lastly, non-warranty and other revenue to grow to $220 million to $240 million, driven by the continued scaling of our new HVAC upgrade program, which we expect will generate about $165 million in revenue.

These dynamics translate to total revenue growth in the range of 3% to 5%. Let's now turn to a detailed look on how we are thinking about margin performance in 2026 on Slide 25. At the adjusted EBITDA level, we expect margins to remain strong at 26% for the year. Gross margin is expected to be in the range of 54% to 55%. This outlook reflects higher price, similar incidence rates, low single-digit cost inflation, normalized weather and a higher mix of non-warranty revenue.

Our 2026 margin outlook reflects structural improvements across the business. Turning to the next slide, I'll summarize how we're using that foundation to raise our long-term margin target. As Bill discussed, over the last several years, we've made improvements across pricing, contractor management and cost discipline that have fundamentally increased the earnings power of our model.

As a result, we're pleased to announce that we are increasing our long-term adjusted EBITDA margin target from the low 20% range that we shared with you at Investor Day last year to the mid-20% range. Included in this Investor Day comparison is a stronger gross margin framework along with operating leverage as we scale. Our long-term revenue assumptions remain unchanged.

We expect our revenue growth to accelerate in 2027 and further in 2028 as more first year member growth transitions into our renewal base and non-warranty continues to scale. This translates to $2.5 billion by 2028 and mid- to high single-digit percentage growth over the long term. Now let me quickly touch on our first quarter outlook for 2026 on the next slide. For the first quarter of 2026, we expect revenue to be in the range of $440 million to $445 million.

This reflects a mid-single-digit increase in renewal revenue, a low single-digit increase in our first-year real estate channel, a high single-digit decrease in the first year direct-to-consumer channel and a mid-double-digit increase in non-warranty and other. We expect adjusted EBITDA to be in the range of $95 million to $105 million.

It's important to note we are lapping a $7 million favorable claims cost development from Q1 of last year. This outlook also reflects higher gross profit from revenue conversion and increased SG&A investment as we better balance sales and marketing spend throughout the year to capitalize on the strong momentum we've built in our first-year channels. With that, I'll hand it back to you, Bill.

Thank you, Jason. Once again, Frontdoor has delivered. We have had 3 great years. As you know, one of the hardest things about positive business trend -- business trends like ours is now we have to overlap last year's results, let alone the last 3 years of outsized performance. But I am confident in our strategy and our team, and we've got momentum. Now I want to close with the 3 things I told you upfront.

First, we are growing member count. This has been a key focus as we've kept home warranty membership at the core of all our business objectives and growth initiatives. Second, I'm proud to be raising our long-term adjusted EBITDA margin target. This comes with continued efficiencies, effective cost management as well as technology and AI enhancements.

And finally, we generate a lot of cash. We bought back a lot of shares, and we're not done yet. We will continue this trend into 2026, returning capital to our shareholders at an impressive rate. With that, I want to thank everybody for joining us today, and we'll now turn it over to the operator for Q&A.

[Operator Instructions] Our first question is coming from Sergio Segura with KeyBanc.

I have a few. So I guess first one on just pricing growth, just how we should think about it with the promotional pricing strategies, specifically in the DTC and real estate channels, how we should think about pricing growth for 2026? And then as those customers graduate to renewal customers, does that create any initial drag on the renewal channel growth for pricing? That's question number one.

Yes. I'll take the first part, and I'll let Jason handle the second part. Our pricing strategy remains the same. We will not be increasing the number of discounting days on the 50% off program we've been running. But we're very pleased with the urgency that, that brings to prospective members, and we'll continue to employ that, but not at an increased level.

We are going to move into the real estate channel with some promotional pricing directly with agents. It will not be anywhere near the level of 50% off, but we've tested it, and we've seen it's been effective at spurring action to drive attach rate. So we'll pulse that into the into the program. And like I said, it's proven to be a strong benefit to us in DTC, and we think it can be like that in real estate. Jason, I'll let you take the second half question.

Yes, Sergio. As Bill mentioned, I think we're real happy with the results from the pricing. And maybe what I'd do is highlight some of our comments from the call on the renewal rates. As we -- this year was our first full year in thinking about promotional pricing. So you'll see that kind of flow over into 2026. But our renewal rates have been extremely strong in that channel as we've transitioned them to the renewal book. So we're pretty pleased with the balance there on how we're able to add the member count and looking at total overall revenue.

Got it. That's helpful color. And then a second one, if I could, on the real estate channel. Could you guys just speak to where attach rates and your market share within real estate is now? And then for your 2026 outlook, what are your expectations for existing home sales and attach rates for 2026?

Yes. In terms of existing home sales, there's various estimates. NAR is always very rosy in their predictions. We anticipate slight growth, substantially the same, but there may be -- we've seen a lot of reports around 3% or 4%. So that's what we modeled. In terms of attach rates, we don't -- we're not going to disclose exactly what our attach rate is.

In terms of our share, it continues to be about one-third of the real estate side of the business. And -- but that is clearly the focus of our real estate team is to drive those attach rates. And like I said, with some of the work we're doing on increasing localized investment, dealing directly with real estate agents and the promotional pricing I just spoke of, we anticipate -- we're forecasting 5%-member count -- sales unit growth in 2026.

Our next question is coming from Jeff Schmitt with William Blair.

You're assuming SG&A expenses stay kind of roughly flat in '26. And I know a good portion of that is marketing costs. Could you speak to how you'll keep costs flat there? And do you see that having any impact on growth?

Yes. I think from an overall perspective, we expect sales and marketing to also be relatively flat year-over-year. With the team -- working closely with the team, we've gained a lot of efficiencies in how we go to market, in particular, some of the tools Bill mentioned earlier on the call, as we think about our Warrantina campaign really taking hold, kind of now in its second edition, use of AI tools and a couple of other things. We look to be much better from a sales and marketing conversion standpoint.

Yes, I think that's true. I think there's always a tendency or an urge to spend more, but I'm proud of the marketing team and the efforts that Kathy Collins and her team have done, just driving much more efficiency, much more effectiveness and I think that we feel good about how the plan is laying out. Jason, I don't know if you mentioned, we may shift a little bit quarter-by-quarter in terms of the spending to go between -- depending on the drive period we have and look for new Warrantina commercials during March Madness, by the way. So just a little commercial for that.

Good. All right. And then you mentioned that you launched the appliance upgrade pilot recently. How long do you plan on staying in that pilot stage? And then maybe just more broadly, how do you view that revenue opportunity compared to HVAC?

Yes. A couple of things on that. So we are hoping to launch that post peak later on in the year, around Q4 is our current plan. We're still working through in the markets exactly the model that we have. Obviously, we're modeling it, if you will, on the way we've approached HVAC. What was the second part of the question?

Just that how do you view the revenue opportunity? Yes.

So it's going to be a different revenue opportunity. I apologize, Jeff. It's going to -- because obviously, the price point between HVAC and appliances is quite different. There are many more appliances. So we do think that there's a real opportunity here. But that's what we're working through. And the replacement rates on appliances are also less than they are in HVAC.

So that combination gives us a lot of confidence that this can be a business of some scale. But more to come, but we're still trying to work through, and I want to make sure we get this right before we just launch this out there. But we're targeting towards the end of the year. Jason, do you want to add some?

Yes, just a minor impact on 2026 growing into -- yes.

Our next question is coming from Mark Hughes with Truist.

The -- what's your assumption in terms of the kind of the real estate market for this year, talking about steady real estate revenue, some discounting. What do you think is going to happen? What's your baseline case?

Well, I've really become a student of this market over the past few years. But I think NAR is very bullish on where existing home sales are going to go. I don't think we share that enthusiasm. We think it's going to be more a modest increase of 3% or 4%. A lot of it depends on interest rates, but we are encouraged by the increase in inventory.

We're encouraged by some of the things we've been doing with our real estate team and the like and their direct engagement with real estate agents where we've got a lot of hopes for how our promotional pricing will impact our units. So I think we feel pretty good about that, but we don't anticipate a large increase in existing home sales. If it comes, that would be great because that will -- this all becomes an attach rate game.

Yes, yes. How about Assurant has launched a home warranty product. They've got some relationship with Compass. Does that -- how does that impact you all, do you think? What's your assessment of that initiative?

Yes. Assurant is a terrific company. I've known a couple of the Board members there, and they've always spoken highly of the business around the work they do in auto warranties and cell phone warranties. And in reading about what they stated about coming into home warranty, I'm encouraged by them talking about looking to expand the category, which is certainly something that I think will benefit all of us as they enter. Having said that, there are a couple of things I do want to point out.

We've had a long-standing marketing services agreement with Anywhere. We've moved on from that. They signed up with Assurant. But it's not an exclusive arrangement. It's really a marketing agreement. Agents continue to have the freedom to discuss and select whatever home warranty product they feel best meets their needs. So that's why we're -- we've got a lot of agents we've worked with for a lot of years who choose AHS. So we are confident that we will do just fine.

The other thing is that I think they'll find is we cover 27 systems and appliances throughout the home, not just appliances. We have a contractor network. That's the advantage of being in this business for 50-plus years. We have contractors that have been with us for a long time. And I think notwithstanding that, we bring new contractors on all the time. They are vetted, they're trusted.

They're on our schedules. You can see from our retention and renewal rates, how strong that's been, especially as we increase our preferred contractors. So we have the full array of service trades, not just appliances. So I think we're still in good shape, and we're just going to execute our plan and our model.

Very good. I'm not sure if you've elaborated on this. I missed the first question or 2, but the B2B sales channel development with builders, how meaningful could that be? And could you maybe elaborate a little bit on what you're looking at?

Not meaningful in 2026, and that's in development. We've been talking to the builders about various ways that with our supply chain, we could help them. We have a number of small and midsized builders. And with our purchasing power, they might be able to put together a system where we can help procure -- help them with procurement. But early days with that, but I think it's just another way that we're thinking about how we leverage our system to find new revenue streams.

Yes. And then promotional or marketing spend in 2026 versus 2025, how are you thinking about that?

In line with 2025, around the same level of dollars. And part of that is we feel really good about the efficiencies we've gained both in search marketing. We're obviously jumping on AI with the way that is advanced as a search tool. So we've had to adjust our algorithms to basically make sure that we can appeal -- we can drive efficiencies through that, if you will, channel.

So we think that we've kept it the same. We've been -- we've also done a lot of work on our website and SEO conversion. So I think a good marketing plan these days covers a lot of areas. And I think that we feel good about where the total marketing spend will be at.

Yes. I would probably add, Mark, the one thing you will see this year, we'll probably pace a little differently through the year. Bill and I talked about kind of coming out of Q4 and some of the momentum we have to stay really balanced. So we'll probably -- you'll probably see us load a little more sales and marketing in the first half of the year than prior year. But overall, as Bill said, consistent with prior year spend right now.

Our next question is coming from Cory Carpenter with JPMorgan.

I had 2 questions. Maybe Bill, I want to start with the revenue. Good to see you reiterate your 2028 target. I know that in the acceleration that you expect in '27, '28. When I look at Street numbers, I think people are generally a little bit below that today. So that may be helpful. Could you just bridge us on kind of how you're getting to that number and that accelerating growth and what you're seeing today giving you confidence in reiterating that framework?

Yes. And -- Jason can certainly jump in. What we're trying to do, and I mentioned that in the script, the durable growth engine, what gives us confidence that we look for an increase in the revenue line in '27 and further in '28 is as we've had success and continue to drive success with first year units, that's going to fold into the renewal book, assuming as we do that we've put together a strong program of keeping our members retained.

We have reduced the number of cancels we have. So I think it's just really a mathematical exercise that as we fill the top funnel and it feeds through into the renewal book, with our dynamic pricing model, we can be very consistent with what we realize in pricing. So as we model it out, we think that based on the guidance we gave for '26, we still think the $2.5 billion is the right target. But Jason, do you want to add anything to that?

Yes. The only thing I'd add is we also see a lot of opportunity with non-warranty and lots of different ways to attack that part of the business. I think you're spot on to that...

And then -- sorry, second one, just claims cost inflation was a big topic. I think it ticked down actually this quarter. I think it was 4% last quarter. You're saying low single digit in 4Q, and you guided to low single digit next year. One question we get a lot is just around tariffs. Of course, there's been a little bit of a recent reflaring of uncertainty there, if you will. So maybe could you just remind us how tariffs are or not impacting you and kind of what you're assuming in your outlook for that?

Yes. I think just to comment on '25 and how we close out the year. The teams have done an excellent job all year long, managing through both the contractor network. So a big shout out to the contractor relations team as well as our supply chain team. I think we've managed through that. Historically, we talked about the way we would manage through that is around price, trade service fee and operational execution, and we've certainly done that.

For our outlook, Bill and I, we are constantly talking about tariffs on, tariffs off, tariffs on, tariffs off. But we think we are in a good position for low single digit again this year where the team can manage through that with those same tools. Preferred contractor network usage is at a high point in the mid-80s.

Supply chain keeps doing well, has lots of options between our suppliers for parts and equipment. Our biggest exposure is probably in appliance trade when we think about circuit boards and a couple of other products from there. In HVAC, we're less exposed, a lot more domestic manufacturing. So I think we'll handle it pretty well.

Yes. That's why what's been a benefit to us is that beyond appliance, we're pretty much domestically sourced. So that is certainly why we've been able to maintain a low single-digit approach. And certainly, we're guiding to that.

Our next question is coming from Ian Zaffino with Oppenheimer.

This is actually Isaac Sellhausen on for Ian. On the home warranty count up this year, I know you touched a bit on the drivers in the prepared remarks and the higher growth in the first-year real estate, but maybe you could just provide more color on mix expectations for first year real estate and DTC, that would be great.

Yes. We're looking at 5% growth -- unit sales unit growth for 2026. We think of each channel, we're anticipating doing about the same. Obviously, there is a -- it's about the 3:2 ratio of DTC to real estate in terms of size. So I think that we anticipate continuing. And like we said, we look at it all as first year growth. There are different retention rates and renewal rates as we go forward, but we look for 5% each for each of the channels.

Okay. Understood. And then as far as first quarter guide, just curious if you guys anticipate any weather headwinds or anything baked into that outlook?

I think our guide for Q1 kind of factors in the weather we've seen year-to-date. And I'd say we're probably expecting what I'd call normal weather for the balance of the quarter.

Yes. I think the other thing, Isaac, is especially with some of the Snowmageddon and bomb cyclones, these become insurance claims as opposed to warranty claims. So notwithstanding the fact that we want to certainly serve our members in whatever way we need to. But I think Jason and team have done a good job of taking that into account as we look at the guide.

Our next question is coming from Eric Sheridan with Goldman Sachs.

Maybe just put a finer point on a lot of the topics we've talked about, especially in the prepared remarks. When you think about the next 12 to 18 months, what are your must do in terms of investing in the business that align with your strategic priorities? Because I guess we're trying to think through some elements of upside or torque on the margin side of the equation as some of those investments come more to the good as you think over the next sort of 1 to 2 years.

Yes. I think that we're trying to be very balanced. We're excited about the growth engine that non-warranty can provide. So as we continue to bring -- put together the platform and the process to make that more efficient for our contractors, we like the fact that we -- it's a low cost of acquisition channel as we use our contractors and there's great benefit for the contractors in having larger jobs to handle.

I think in addition to that, it's always the sales and marketing investment, as we talk about our #1 priority. We are holding steady on the actual dollar amount, but I think the team, we've gotten more efficient in the field. We're working very hard with what we call our integrated sales or inside sales group. We're using AI tools to help the sales agents with various prompts and objections that they get.

It's really big. It's early days, but we're really pleased with how that is helping us. And then like we said a few times, with the creative horsepower we're showing with the enhancements we've made to the website and SEO, our work in the whole AI area of search. We think we can do that in an efficient way. But really, we're trying to stay balanced on our investments while having a real eye toward our #1 priority of growing ending member count.

The other thing I would say is the great thing about our model, and I talked about it, Jason, I talked about it throughout, we turn up a lot of cash. We have very low CapEx relatively. I think we're guiding, Jason, to $30 million to $35 million. So with the cash generation we have, we're fortunate that this is a model that requires relatively low CapEx.

Thank you. Ladies and gentlemen, this will conclude today's question-and-answer session and also today's conference. You may disconnect your lines at this time, and we thank you for your participation.

All right. Perfect. I think we're going to get started. My name is Alec Brondolo. I cover small and mid-cap Internet here at Wells Fargo. I'm very pleased to be joined by Bill Cobb, CEO of Frontdoor; and Jason Bailey, CFO. Guys, thank you so much for joining us.

Thanks for having us.

Jason, you've recently been promoted to CFO. For the audience who's less familiar with you, could you give us a little bit of insight on your path to becoming CFO here.

Yes, happy to. I started my career in public accounting. I was fortunate. I spent time both at Arthur Andersen and Deloitte in the audit practice. And my time frame covered a lot of public company audits, I got to see a lot of transactions. Probably most notable was being in accounting at the time of the rollout of Sarbanes Oxley focus was really on risk assessment and understanding businesses, which I think was a great foundation. I left Deloitte to join our former parent company, ServiceMaster to lead the M&A practice, which was at a company with multiple business units to consolidate a function across business units and really get hyper focused on operations as a great path for me, I think a good basis to set me up for additional roles in FP&A, leading to promotion a couple of weeks ago to take on the CFO chair.

Little known fact about me. I still use my PwC backpack. I got on my first day working as an auditor, 10-plus years later. Bill, for those newer to the story, could you maybe give a brief overview of the business model and the industry?

Yes. We invented the home warranty industry in 1971. So we've been around over 50 years. Home warranties are something that is not required. Home insurance is required, but it is a discretionary purchase, but we always like to say that Home insurance is there for -- if something happens, home warranties are there when something happens. We cover 29 systems and appliances in the home. We have over 2 million members. We have 17,000 contractors. And the way the model works is when you're in need of a repair or replacement for your system or appliance, you call us or come to us via our app. We set out a contractor and we complete the job, we charge a trade service fee. And it's a recurring revenue model. It's 12-month contracts and the key to our business is to keep that renewal book strong. I mean there's 2 keys. One, drive new users in and then keep the renewal book strong.

How do you frame the addressable market for the home warranty space?

Yes. I mean if you go to the widest area of home services, you're at a $500 billion TAM or thereabouts. We like to think of it as by number of homes. So there's 87 million owner-occupied homes in the U.S. We think that home warranty is about 15 million of that is the addressable market because some of it is either too high income or lower income. So we're kind of a middle class right in the middle zone there. 15 million is a number that we've done a lot of research on. Right now, home warranty is about 5 million home warranty sold. We do 2 million, so we have about 40% share of the market. What has hurt the home warranty industry was COVID when everything became a seller's market, real estate, which was the way the business started was you would be part of a real estate transaction. Now our direct-to-consumer business is even bigger than our real estate business. But it can come into either one of those channels and then it goes over the renewal book, and I'm sure we'll talk a little bit about each of the channels.

So with regard to the real estate channel, residential real estate, existing home sales are at kind of a cyclical trough. Inventories seem to be climbing, but EHS is still at a record low today. How do you think about these dynamics? How do you translate that into real estate channel growth this year or next year?

Yes. It's been a long, long road. We just announced in our earnings a few weeks ago, the first quarter where we had organic growth in Real Estate one for the first time in 5 years. So it has been a long road. But the macro is a big part of how we interact in the real estate business. We do about 200,000 -- 210,000 units each year or this year is what we're targeting. That is down from almost 500,000 6 years ago or so. So it's been hard. And that's why we've built up such a big direct-to-consumer business. But the dynamics are it is -- the market is turning a little bit more into a buyer's market. So inventory is up, as you mentioned, Alec. It's about 1.5 million homes now. It's about 4 or 5 months' supply. Prices are still high. Affordability is an issue. But -- and interest rates, who knows? Generally, that would be a good thing for the real estate business. But we're not waiting for interest rates.

So we have -- we're increasing our sales force, the number of people who call on real estate agents. We are having a series of meetings introducing all the functions that we have with our new app that's on the American Home Shield, everybody's phone. It's -- we also have a virtual experts, with the experts are people we've hired that now our employees who came off the road, contractors in plumbing, electrical, HVAC, appliances, who now, as part of the service, you can call them directly, a video chat with them. They'll analyze your problem. A lot of times, about 1 out of 6 times, you can fix it yourself. But if not, they give you a direction on how to deal with the contractor. So we're trying to build a number of services around the real estate business so that we can just -- and the other -- the final piece, I would say, we finally got getting aggressive with promotional pricing. That's been sort of something that no one ever really does in the real estate business, but we're starting to be more aggressive on promotional pricing, which real estate agents are responding to well.

While the real estate business has been challenging over the last couple of years, the direct-to-consumer business has been performing really well. You've grown units over the last 5 quarters. What is working well? And then how do you think about that channel as we go into '26?

Yes. First of all, our Warrantina campaign, our advertising campaign is working really well. We have directed that effort toward millennials with an emphasis on Hispanics. And so we have done a very good job of driving likability, relevance, et cetera. We do our research and base it on divided into cohorts. So while older cohorts know a lot about home warranty, we are increasingly getting good relevance scores from that core target. So that's one thing. Then our overall media strategy, our digital strategy, we have certainly gotten enhancements from all the work we've done on search. We're now working hard on the ChatGPT area, large language models to -- because that more and more is increasing in search. We've done -- we got some really smart people who are driving that piece. And so overall, I think that we've done a lot of things across the board that have really helped to drive that -- not only the top of the funnel, which is the awareness piece, but that piece in the middle that drives consideration.

Yes. I might add to some of the enthusiasm we had on our last quarter call, if you think about the pressure in the channels, that pressure in real estate that Bill mentioned, it's kind of built over the last 5 years, that's really what's driven the pressure on our overall customer count base. It's not just in the channel, but you're not filling the bucket as fast. And so some of the enthusiasm you probably heard us mention as both channels, real estate starts to turn and we maintain and grow in D2C, this is what makes us pretty excited about looking forward into '26. Now it will take time as customer count turns. We're on this 1/12 at a time revenue model. So it will take a little bit more time for the revenue channel to flow through. But we're real optimistic about where we see customer counts going, which we haven't been able to say that over the last 5 years. So I think that, combined with some of the pricing initiatives we have are a real springboard for the future.

Yes. I would say that not you could argue this is the biggest, but us driving to trying to discount our first year units. So we made the strategic decision a few years -- a couple of 3 years ago to really be aggressive on first year pricing. And the idea is with the strong retention rates we have, we can make up for that discount with the renewal book. And so we'll talk about renewals, I would guess, in a little bit. But what we've been able to do with that promotional strategy is to get more units in the door. So as real estate starts to come back, as we continue our DTC efforts, we've been asked before, and I wanted to clarify this today, we see sometime in '26, we'll turn positive on our ending member count. So we'll have more numbers in our ending member count that's been coming down. But I think there was some confusion there, when is that going to happen? Right now, we're projecting it will happen sometime in '26.

That's helpful. As clearly, it's a hot topic for investors I think it will be helpful to put that out there. Let's talk about the renewal channel. I think retention rates have improved about 300 basis points over the last several years. Could you maybe speak to the drivers of that improvement? And then how you think about the trade-offs between pricing and retention over time?

Yes. I think we have gotten much more cognizant and much more focused on the member journey. So when people enter the renewal, they move from the first year channel, and we're trying to drive them in to have them stay. We have done a number of things to help solidify them staying. As you mentioned, retention rates have improved. That's because we are sending more of our better contractors, what we call our preferred contractors who have a better experience for -- they have higher 5 stars, lower 1 stars. For us, we have a benefit that's a lower cost contractor for us. Secondarily, we have done a number of things to drive auto pay, auto renewal so that people are on a monthly fee so that for a recurring revenue business, we think that's really important.

We have also, as I mentioned a little bit ago, the app has been a big driver for us. People really love how seamless it is to call on service requests and then the virtual expert piece. So I think overall, we have done a good job of surrounding our members with a variety of initiatives. And I think the proof is in how well we've been able to maintain our retention rates. So that's something we focus a lot on. Cancels is something that we've improved on also when people will cancel. We've had a big initiatives against that. So there's a number of things, and I think good operators do this. I think they do a series of events to help drive the top line, but it's really about how you serve the member experience.

I was going to say the words that -- as you answered that, Bill, operational execution, I think, has been key. Bill has brought a lot of discipline around these are the things we have to execute on. And I think that has been increasingly important as we've embarked on this strategy. We mentioned in the DTC channel, we've taken this promotional pricing approach. And the only way that can work is if we can leverage our pricing tools in the renewal channel. And then that only works if we're executing on all of our operational points because we can't -- that doesn't work if you see a degradation in renewal rates, and we haven't. So we've been able to leverage promotional pricing to bring the members in the door, raise pricing pretty rapidly to get them back up to market at term 2 and term 3. And then you see very little impact on renewal rate, and that's kind of the key to success for us.

Yes. So there are several different factors at play here, right? The recovery of the real estate market, I think continued strength in DTC, improvements you've seen in retention. I think you brought a clear perspective to bear here that customer count -- member count is going to turn positive in '26. How do we put these pieces together and think about revenue growth over the medium term?

Yes. So I think we mentioned on our last call, we will have probably 3% organic revenue growth this year. So we look to expand on that in 2026. And one of the big questions we've been asked is, okay, we know there's revenue growth. It's still to come as you see this customer count turn. We've leveraged pricing tools really to maintain that revenue growth over time. So we'll look forward to that continuing in '26 and '27. The other question we often get asked is around margin profile. And so I know you said we'll talk a little bit about non-warranty in a minute, but we're at record margin levels. We'll talk about mix shift as non-warranty comes on, but I think we anticipate our focus has been on gross margin dollar growth and EBITDA dollar growth, especially as we talk about things like share of wallet and how we target customers with these incremental services.

Yes. There's a little confusion out there that I don't know how some of the analysts have put in their projections for '26. We do not anticipate declining EBITDA dollars. So EBITDA dollars will grow in '26. I want to make that very clear. But I think that what Jason said, if you -- is really important. If you come back to our core strategy, we are driving -- we are purposely reducing our revenue in the year 1 channels and making it up on the back end. And I think that's a tribute to the work we've done on what we call our dynamic pricing model, which we price to the individuals. So based on how many service requests they have, what their ZIP code is, when we know what they have in the home. So there's a number of factors that have made our pricing very specific. And bear in mind, we're lowering the price in the first year and effectively raising the price on the back -- on the renewal book. And that -- since that's almost 80% of our membership, we're able to get through to where we can get 4% or so price increases each year.

That's helpful. Could we maybe talk about non-warranty a little bit? Maybe can you just give us a broad overview? Historically, it's been a warranty business. Now you're moving into this new space. Can you maybe just give us an overview of the offering to start out?

Yes. So we -- a few years ago, we were sort of doing this on an ad hoc basis, and we got together as a team and said, we've got -- and we're looking at on-demand businesses and going off platform and setting up a separate brand. And then we realized we have a member base of 2.1 million -- about 2 million members at a time. Now it's 2.1 million. We need to focus on share of wallet. So with the warranty business, we're really trying to drive member count or market share with the number of units. But with the non-warranty business, the strategic thrust is a share of wallet. So for existing members, we have -- and we've started with HVAC because that is the one where there generally is the biggest angst when heating goes out or air conditioning goes out. And so as we -- and it really has started as a repair business. When our contractors go out, we have now built a model where they can say to the homeowner, I'll repair it, but I have an opportunity for you to upgrade to new equipment.

And for that, American Home Shield has great prices on original equipment. We have made a deal with our contractors for a fixed margin, so we know exactly what that is. and we're going to give a repair credit to the consumer. So what that nets to is for the member, it's -- depending on the market, it's about a 30% reduction from if you just called up for a new HVAC equipment. So it's been very attractive for us. We are currently taking a low margin on that because we really were trying to drive adoption and get the model right. We've done that. So there are ways that we're working on now over the next few years to drive that margin up. But now we have a model that we can apply to appliances, which is what we plan on rolling out in '26. roof and then water heaters.

That's, I think, the question in my mind. Clearly, this concept, there's a broader aperture here beyond HVAC, right? Then there's 1 million different categories that you can get into. How do you think about prioritizing kind of what comes first? Is it the margin profile? Is it the size of the addressable market? How do you think about prioritizing as you move into non-warranty?

So really, what we did was it was based on the amount of service requests we get. And the 2 biggest service request areas are HVAC and appliance. So that was kind of -- once we got HVAC up and going in that model, we can now apply it to appliance. Now it's different because HVAC is pretty much one system, there's variations thereof. Appliances, there's a lot of appliances in the house, and it's a lower dollar average. So we've got to figure out how we drive that to where it's a meaningful number. But we think we have the model. And the good thing is while the price will be lower for a new dishwasher or a new refrigerator, there's a lot of appliances in the house. So it should work out well. And then we're then studying right now roof replacement and water heaters. But right now, the focus is continue with HVAC. As I think Jason might have mentioned, we're at $125 million guide really from a standing start 3 years ago. And now we're going to be bringing appliances out in 2026. We're in testing right now, but we plan to go nationwide in '26, and then we'll see where we go from there.

Yes. I think 2 key things, I think, matters for us. One is scale. Our purchasing scale allows us to do this for customers at below market rates and a significant enough volume that it's very appealing. The second is relationship with contractors. This has been something where our value prop to contractors is a set number of jobs through the warranty business. Non-warranty not only gives us another job, but it gives us another large dollar job and a CAC-free arrangement, as Bill mentioned, we can prenegotiate that price. They'll be below market for the customer. The customer wins, the contractor gets a large job, no CAC, they win and then we win because it's a great experience for a customer. And long term, if you can imagine, as we replace system units, we see continued high customer sat scores and no falloff in retention. So we'll have a long-term win. So I think our scale and relationship with contractors have enabled us to supercharge this price faster than I think most people would have thought possible.

And I think from a P&L side of it, the gross margin will be lower. But as Jason said, we'll call it relatively CAC-free because it's a lot of interaction with the members that we're doing already. Plus the contractors are our sales force. So we train them on how to do this. So from an EBITDA margin, and we haven't disclosed this, we're still working through how to -- from an EBITDA margin, it is not -- it is a profitable venture for us. So it works really well because, like I said, we're driving share of wallet. We're doing it in a way, and we think that there are ways that we can grow the margin from there with pricing. Right now, we're pricing nationally. We can charge more out here in L.A. versus Kansas City.

Yes.

There's been -- maybe to shift the focus of the conversation towards margins. There's been a ton of inflationary pressure over the last several years, but you're at kind of record margins in '25. Could you maybe speak to how you manage the business through that inflationary pressure? And then maybe how we should be thinking about the durability of the current level of margin as we move into '26?

You want to go first?

Yes, yes. So I think for our business, we saw kind of -- we were a little bit of a delayed reaction from COVID-related impacts. Costs kind of hit us a little bit later as the supply chain slowed down in '22. We responded pretty decisively. I think I'd say, mid-teen price increases to try and respond to those really depressed by record low margins, and we've been on the steady trajectory forward. So I'd look at our gross margin in 2 key factors. One, pricing. We've hit on this a little bit around the first year to renewal dynamic pricing capabilities and our ability to go from an industry practice of statewide pricing to a ZIP code, ZIP plus 4 to now where we're almost at the individual level pricing has really been an enabler for us.

And then second, I'd say, a real partnership with contractors driving, what I think Bill mentioned earlier, record level percent of preferred, which not only gives us our most favorable pricing, but our highest quality scores. And you combine that with our ability to leverage supply chain and our purchasing volumes, it's kind of that 3-pronged approach that have allowed us to drive margins where they are.

I think even this year, when we talk about inflation, all the news, especially when we were talking about guidance back in February, it's tariffs this, tariffs here. And I think we were a little hesitant. We've been able to manage inflation to kind of that low single digit. We talked a little bit about it on the Q3 call. I think we inched up from 3% to 4% and we got a lot of questions about that. And still, we think maintaining inflation at those levels is very manageable for us and not a big concern. And I think that's a testament to the way we manage contractors and our supply chain team really executing around managing who our suppliers are and how we ship those volumes over time.

So I would add one thing to that, Alec, because you asked about durability of our margins. So without committing to a specific numbers, we'll be looking at that more. I feel really good about it because I think we are so close to our contractors, so we know labor rates, insurance, fuel, we are so close to our OEMs. We have a really good sense of our cost of equipment. A lot of our equipment is domestic. Yes, there are some component parts, especially in appliances that come from China.

But for the most part, we have a really good sense for the cost structure of what would lead to inflation. Plus, we then have this pricing model, which enables us to effectively manage pricing almost every year so that we are -- we don't have to sit there and -- because it's a continuous look at pricing through the dynamic model. Plus we do other things where we look at external measures. But -- so in terms of our ability to sustain the margin levels that we're currently focused on. And like I said, we're going to give you a range in February. I feel really good because I think your question was about durability, and that's where I feel really good about that.

Yes. I might even add too, Bill, our mix in the warranty side of the business, if you think about our first year mix versus our renewal book, our renewal book is our most profitable customer, and it's about 85% of our revenue. And as we think about how consistent that mix will be for the foreseeable future, that should remain pretty steady. That gives us some incremental confidence in where we think margins can be.

How do you think about the relationship between existing home sales growth, the growth of the real estate channel and inflation in your categories? It feels like, to some extent, if there's a cyclical recovery in real estate, right, that benefits the top line, but perhaps it introduces some inflationary pressure to the bottom line. Is there any kind of historical precedent or rule of thumb that you could share with us to maybe frame that issue?

What I'd say, I think historically, we looked at the real estate market as about a 30% capture rate of existing home sales, and then there's about a 30% attach rate for home warranty of that. We know that attach rate has -- or that capture has come down to probably the mid-teens, roughly 15%. We think we've held our share pretty well. So even a slight uptick in that attach rate, we think, provides a lot of opportunity. From a business standpoint, though, and from an impact on margins, I think I'd be excited about telling a story if that channel is growing, probably the biggest business impact. First year real estate has good gross margins. It has a lower renewal rate just because of the channel dynamic that's coming out. So I don't think that would be a big concern. It puts some pressure on our overall retention rate. But again, I think that would be a good story to tell if we get the tailwind of the market coming back at the top of the funnel.

Since the real estate market, real estate units come through the title company, we have very low cancels in that because we get all the money upfront through the title settlement.

Helpful.

Yes, the cash flow profile of that channel in particular is fantastic.

Jason, as incoming CFO, what do you perceive as the most important points for capital allocation going forward? Do you -- are you thinking about any deviations from the current strategy?

No, I think we have the right strategy and the right capital allocation framework where we continue to be focused on growth, and we will. We want to maintain a strong balance sheet, and we have a strong balance sheet now. And then third, we'll think about returning cash to shareholders. It's interesting. We think following our Q3 results, I thought Bill and I were going to be having more detailed discussions, but I think those discussions are pretty easy when you look at our valuation today. I think our focus on share repurchase now is a great time for that. Matt and I spent a lot of time talking about that on a daily basis, just given where we are. We like to talk about M&A. I think Bill and I would say our best M&A right now is in us.

Yes. Perhaps I could ask, the business is going to generate more than $500 million of EBITDA this year. I think it's levered at 1x net, 2x gross. How do you think about the amount of leverage the business could support over time?

Yes. I think depending on what our targets are or what -- how we want to deploy cash, we could lever up for any number of transactions. I think we're comfortable with where we sit right now. I think we're pretty excited about where we are.

Yes. I don't think we want to lever up just to -- I think we have a lot of capacity.

Yes.

I think that we -- right now, we're focused on the integration of 210. That was a scale play for us to bring in their real estate, DTC and renewal book. We're putting it on our platform. By first half of '26, it will be on our back end on our platform. We can run it as one multi-brand business. We also bought as part of the purchase of 210, this new home structural business, which gives us exposure to new homes, which are about 700,000 in the U.S. this year, and we have about a 20% share of new home structural warranties. So we have a nice blend of -- but right now, the focus is on really getting that integrated into us fully.

We've been really pleased with the synergies we've been able to realize already on 210. When we bought the -- when we purchased the asset, we said it was going to be $30 million plus by 2028. We're already halfway there in the first year. So that, again, gives us the capacity to do a lot of things. So we have a whole range of things. As Jason said, given this odd reduction, we just raised -- we beat consensus in Q3, we raised our guidance and the stock fell. So okay, best thing we can buy right now is ourselves.

A lot of that going around the market [indiscernible] alone. Maybe I can ask about AI. It's been at the forefront, I think, of investors' minds this year, certainly at this conference. Can you talk about the shift from traditional search to LLM search? How do you think about that in terms of customer acquisition? And then maybe help us understand how you plan to leverage AI to improve the business more broadly even outside of marketing and distribution.

Yes. I think I would just change your wording a little bit. It's an augment to our search. I mean Google is still the dominant area for our digital efforts. But we've had to -- we've realized this is real. This is coming. It's growing in terms of share. So we have adapted our algorithms to bring, if you will, ChatGPT into our thinking. And I think we've done a really nice job. I think it's part of what has helped the DTC One business. Our demand is up, our conversion is up. So we feel really good about what we're doing on the marketing side. Now to your broader question, we have 2 initiatives, and there'll be others to come, but the 2 that I would talk to. One is in the service area, a request comes in for service. So with our authorization agents because -- and what I mean by that is the request comes in, they then have to tell the contractor what the job is, authorize it. But what happens is it comes in as a request for a GE model, this refrigerator.

And -- so before we had these people scurring through kind of catalogs that we had put together. But now AI feeds it directly. So we are so much faster on our authorization. And then for our sales, we do a lot of phone sales. I mean it's the old-fashioned way, but people -- the home is so important to people. They want to talk to somebody about what this is, trying to understand it. Home warranty is still a little confusing to people. So we are actually employing AI now in real time with our sales agents to handle objections. And it's been pretty slick that the team has -- they really like that because you can get a variety of pushback. So the 3 areas that to date that we're talking about is marketing, sales and service. But there's some other plans we have an innovation team that's working on that. But we're pretty excited about what the possibilities are for AI.

Perfect. All right. Bill, I think I'm going to leave the conversation there. Bill, Jason, thank you so much for your time. This was great.

Great.

Thank you.

Thanks, Alec.

Good day, ladies and gentlemen, and welcome to Frontdoor's Third Quarter 2025 Earnings Conference Call. Today's call is being recorded and broadcast on the Internet. Beginning today's call is Matt Davis, Vice President of Investor Relations and Treasurer, and he will introduce the other speakers on the call. At this time, we'll begin today's call. Please go ahead, Mr. Davis.

Thank you, operator. Good morning, everyone, and thank you for joining Frontdoor's Third Quarter 2025 Earnings Conference Call. Bill Cobb, Chairman and CEO; Jessica Ross, CFO; and Jason Bailey, VP of Finance, will be joining me on today's call.

The press release and slide presentation that will be used during today's call can be found on the Investor Relations section of Frontdoor's website, which is located at www.investors.frontdoorhome.com.

As stated on Slide 3 of the presentation, I'd like to remind you that this call and webcast may contain forward-looking statements. These statements are subject to various risks and uncertainties, which could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the company's filings with the SEC. Please refer to the Risk Factors section in our filings for a more detailed discussion of our forward-looking statements and the risks and uncertainties related to such statements.

All forward-looking statements are made as of today, November 5, and except as required by law, the company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

We will also reference certain non-GAAP financial measures throughout today's call. We have included definitions of these terms and reconciliations of these non-GAAP financial measures to their most comparable GAAP financial measures in our press release and the appendix to the presentation in order to better assist you in understanding our financial performance. I will now turn the call over to Bill Cobb for opening comments. Bill?

Thanks, Matt Davis, and good morning, everyone. What a year Frontdoor is having. Our results reflect the continuation of superior financial and operational performance and we are on track for record financial results in 2025.

Let's get into the third quarter highlights on Page 4. Starting with revenue, which increased 14% period-over-period to $618 million. Gross profit margin increased 60 basis points to 57%. Net income grew 5% to $106 million and adjusted EBITDA grew 18% to $195 million. Additionally, first year organic DTC ending member count grew 8%.

Real estate member count grew sequentially in Q3, a milestone that we have not seen for the past 5 years. New HVAC revenue continues to crush it. Synergies from the 2-10 acquisition remain ahead of schedule, and we have used our strong cash flows to repurchase shares, totaling $215 million through October 31. Our results speak for themselves, and they show the power of our strategy and the momentum we've built.

Now flip to Slide 5. We are firing on all cylinders, and that strong momentum has positioned us to deliver across our business. First, operational excellence is at our core. Three years of disciplined execution have built a strong foundation to accelerate growth. Second, DTC continues to perform, 5 straight quarters of organic member growth.

Third, we see the real estate channel turning the corner, supported by the return of a buyer's market. Fourth, retention rates are strong and remain near all-time highs. We're committed to delivering an outstanding experience for our 2 million-plus members through continuous innovation and technology. And finally, our nonwarranty growth continues to be a game changer. Leveraging the success of the new HVAC program, we are well positioned to replicate that model by expanding into other replacement categories.

Let's double-click on each point, beginning on Slide 6. We've talked a lot over the past few quarters about building a foundation of operational excellence and for good reason. These efforts have translated directly into stronger financial results.

Over the past 3 years, we have focused our margin improvement efforts in 2 key areas: one, pricing actions; and two, operational efficiencies.

Let me start with pricing. In 2022, we faced the highest inflation in the generation, and we responded decisively with double-digit price increases, not only to catch up to those inflationary pressures, but also to address where inflation was heading. We did this using our dynamic pricing capabilities, which deliver smart and strategic price adjustments, particularly for higher usage members. We also raised our trade service fee, which is actually an offset to claims costs, providing us another lever to respond to inflation.

Now turning to operations. We've made meaningful strides in improving execution and cost discipline. We have enhanced and accelerated our contractor management process. This has driven better alignment, better execution, better member experiences and better costs. One key proof point is that our preferred contractor utilization has improved 200 basis points on average over the last 3 years.

Our supply chain team has done an excellent job of leveraging our purchasing volume and extensive supplier network to negotiate better terms and allocate purchases to maximize cost savings. When you combine these pricing actions and operational efficiencies, we have improved our gross profit margin over 1,000 basis points since I started in the middle of 2022.

In fact, we have had so much success improving our margins that we are reevaluating the long-term margin targets we provided at Investor Day earlier this year, and we will provide more information about that on our next earnings call.

Moving to the direct-to-consumer channel on Slide 7. The DTC channel is performing very well, and our efforts to drive member count growth are paying off. In the third quarter, we grew organic DTC member count by 8% versus the prior year period. This is now 5 consecutive quarters of organic growth. Our success in DTC is due to several factors.

First, the Warrantina campaign is working. I'll show you supporting data on the next slide, but we developed this campaign with younger audiences in mind, specifically millennials, since the average first-time homebuyer is now 38 years old. From a targeting perspective, we have sharpened our media strategy to focus on the middle of the media funnel, where consumers go from being aware of us to considering us. This strategy has improved our marketing effectiveness and media efficiency.

Next, simply speaking, our promotional pricing strategy is bringing in more members. This strategy works because we can quickly return these cohorts to traditional pricing within the first 2 years without compromising renewal rates. Further, we are directly targeting new homebuyers who did not purchase a warranty with their new home transaction. Our multichannel approach includes paid search, social media, commercial partnerships and word-of-mouth campaigns and we are getting more sophisticated in our digital marketing approach.

AI is coming into play and enhancing our search strategy by moving beyond traditional keyword targeting. We are using more intelligent, context-driven approaches, which have improved discoverability and relevance with large language models or LLMs, such as ChatGPT.

Let's turn to Slide 8 to talk about the effectiveness of the Warrantina campaign. The campaign is resonating, and we are leaning into education to balance the entertainment factor. Our research shows that key metrics such as likability, relevance and purchase interest are up significantly in just 6 months' time. And as you can see in red, our value proposition of budget protection and convenience is landing even more with those under the age of 45.

The team's work over the past 5 quarters has been excellent. But we are not stopping here. We are allocating more marketing spend in the fourth quarter to position us for another strong year in 2026.

Now turning to Slide 9 and the real estate channel. The story here is finally one of optimism. Despite ongoing macro challenges, our ending member count in the real estate channel has increased sequentially in the third quarter, the first improvement since 2020. While the macro environment in the real estate sector is showing some signs of improvement, challenges still remain.

According to the National Association of Realtors, September existing home sales increased 4.1% to a seasonally adjusted annual rate of $4.06 million. However, this is still among the lowest level of home sales in 30 years. Moreover, affordability remains a concern with home prices climbing another 2% on average in September to $415,000. The bright spot Total housing inventory increased 14% year-over-year, and we are now at 4.6 months of supply.

While inventory remains below pre-COVID levels, it is now at a 5-year high. This shift signals that a transition to a buyer's market is underway, where homes stay on the market longer and sellers are more likely to add a home warranty to help close the deal.

Here are some of our aggressive actions to improve sales. Increasing engagement with real estate agents, we are delivering a differentiated product and agent interest has picked up significantly around our video chat with an expert feature. We are also continuing to provide education on the benefits of a home warranty and have a compelling value proposition that keeps our brands top of mind. Additionally, we have implemented targeted promotions to drive renewed interest and excitement with both agents and new homebuyers. Our actions, combined with these market dynamics are resulting in us outpacing the market.

Moving on to retention rates on Slide 10. In the third quarter, our customer retention rate was at 79.4%. Retention remains strong because we are delivering a better member experience through technology and process improvements.

On the technology side, we have had 2 big wins. First, AHS App adoption is growing. Launched only a year ago, almost 20% of our members have already downloaded our app, an outstanding result. This enables easier service request submission and real-time contractor updates. In the past 12 months, members have submitted 200,000 service requests through the app and usage continues to ramp.

Second, and to quote one of our members, "Video chat with an expert is dope." Since the launch in February, our visual experts have completed about 35,000 video chats and members love it, giving us nearly perfect thumbs-up ratings. It is a true differentiator in the home services industry and it is free for our members.

Behind the scenes, we're also driving continuous improvements to deepen member loyalty and strengthen retention such as early engagement with new members through onboarding and tailored offers, improving the number of members on AutoPay, usage of preferred contractors, which was 84% in the third quarter. And we are also leveraging technology to improve the member experience, including system improvements to support smarter job routing to our contractors, and using AI to accelerate authorizations and assist in coverage decisions, enabling a 10x increase in the speed of coverage reviews.

The impact is clear. Stronger relationships, higher satisfaction and a service experience that sets us apart. Retention isn't just a metric. It's proof that our strategy is working.

On Slide 11, let's talk about another bright spot of Frontdoor, nonwarranty revenue. This is a major success story and an even bigger opportunity. As a reminder, nonwarranty is comprised of a number of programs but is currently fueled by our new HVAC sales. The program is scaling fast, and we are raising our full year outlook for new HVAC revenue again.

Now to $125 million, a 44% increase over 2024. The opportunity ahead is enormous. In 3 years' time, we have sold around 50,000 HVAC units to our base of more than 2 million members. The runway for expansion is clear.

We are now applying these learnings to other trades. We recently expanded our appliance replacement pilot, offering great deals on a full range of new appliances, and we are looking to launch this great offer nationwide next year. We are also exploring opportunities in roof and water heater replacement. Again, together, these categories represent an opportunity of $2 billion with our members, opening the front door to significant long-term growth.

We especially love this program because every sale is a relatively CAC-free opportunity across our member base. And looking into the future, we see additional potential through our 210 acquisition, which provides us access to 19,000 builder partners. This positions us to expand beyond HVAC and create new revenue streams across multiple trades and in new customer channels. We will share more about this on our next earnings call. On that high note, I'll now turn the call over to Jessica.

Thanks, Bill, and good morning, everyone. I will now cover the financial results for the third quarter, beginning with revenue on Slide 13. We delivered strong top line growth of 14% in the third quarter with revenues reaching $618 million. This performance was driven by 12% from higher volume and 3% from higher price.

From a channel perspective, renewal revenue was up 9%, benefiting from 2-10 volumes and higher price realization from leveraging our dynamic pricing capabilities. Real estate revenue grew 21%, driven primarily by contributions from 2-10.

Direct-to-consumer revenue increased 11%, supported by volume gains from our promotional pricing strategy and targeted marketing efforts as well as contributions from 2-10. This was partially offset by lower pricing. And finally, our nonwarranty business continues to be a key growth engine with other revenues up 73% year-over-year. This growth was propelled by our new HVAC and loan programs along with contributions from 2-10 new home structural offering.

Now moving down the P&L to gross profit on Slide 14. Gross profit grew 16% to $353 million in the third quarter, with gross profit margin expanding by 60 basis points versus the prior year period. During the quarter, inflation was in the low to mid-single digits across contractors, parts and equipment. Favorable weather trends reduced the number of service requests in the HVAC trade, providing a $6 million benefit and claims cost development was a $5 million benefit compared to a $3 million benefit in the prior year period.

Turning to Slide 15, where we will review net income and adjusted EBITDA. For the third quarter, net income grew 5% to $106 million and adjusted EBITDA grew 18% to $195 million. Adjusted EBITDA margin improved to 32% in the third quarter, up about 100 basis points from the prior year period.

Let me quickly walk you through the drivers. We had $47 million of favorable revenue conversion, primarily from the 2-10 acquisition and higher price. Contract claims costs were flat versus the prior year period, which includes the already discussed inflation impacts and favorable incidents and claims development. We also had $20 million of higher SG&A due to the addition of 2-10 and personnel costs.

Now moving to earnings per share on Slide 16. On a fully diluted basis, earnings per share grew 9% to $1.42 per share, and adjusted earnings per share grew 15% to $1.58 per share.

Now turning to Slide 17 and our free cash flow and financial position. Our year-to-date free cash flow increased 64% to $296 million, and our total cash position increased to $563 million. Through October, we purchased $215 million worth of shares.

Now let me take a step back and really highlight our cash flow conversion. Our year-to-date cash conversion was 60% compared to 46% in the prior year period. This sustained cash generation and conversion is a defining feature of our business model and a cornerstone of our financial strength. With that, I will now turn it over to Jason to walk through the outlook.

Thanks, Jessica. Now turning to Slide 18 and our fourth quarter outlook. For the fourth quarter, we expect revenue to be in the range of $415 million to $425 million. We expect fourth quarter adjusted EBITDA to be in the range of $50 million to $55 million. This range anticipates higher SG&A spend as we are reinvesting some of our gross profit favorability in the marketing to drive growth.

Now turning to Slide 19 and how this translates into our full year outlook for 2025. For the full year, we are increasing our revenue outlook to be in the range of $2.075 billion to $2.085 billion, driven by better-than-expected performance in the new HVAC program, the renewals channel and the real estate channel. This is approximately a $15 million increase from our prior outlook at the midpoint.

Based on this, total revenue is expected to be up 13% in 2025, driven by about 10% from the 2-10 acquisition and 3% from organic growth. Our underlying revenue assumptions include a 10% increase in renewal channel revenue, a 12% increase in real estate channel revenue, a 3% increase in D2C channel revenue and a $75 million increase in other revenue.

Turning to operating performance. We are narrowing our gross profit margin expectation to be approximately 55.5%. As previously mentioned, we are increasing our sales and marketing spend during the fourth quarter which translates to full year SG&A in the range of $670 million to $675 million.

Taking this combined with the strong third quarter performance, we are raising our full year adjusted EBITDA to be in the range of $545 million to $550 million. As a reminder, our full year adjusted EBITDA outlook also includes interest income and excludes $8 million of 2-10 integration costs and stock-based compensation of approximately $33 million. We are lowering our capital expenditure expectations to approximately $30 million. And lastly, our annual effective tax rate is expected to be approximately 25%.

And while we're not providing 2026 guidance today, we look forward to sharing more details on our expectations and priorities during our next earnings call. I will now turn the call back over to Bill for a few closing remarks.

Thanks, Jason and Jessica. I wanted to close with a few thoughts. Once again, the Frontdoor has delivered. Our execution has been outstanding, and we have fundamentally changed how we think and how we operate. This has helped to drive record financial performance and cash flows. We are raising our revenue and adjusted EBITDA outlook again. And with that, we expect to finish 2025 on a high note. And at the same time, we have made measurable progress on our strategic initiatives, and we remain hyper-focused on driving member growth.

Now one final item. Earlier this morning, we announced that Jessica has resigned as CFO and will be succeeded by Jason Bailey effective November 10. We regularly challenge ourselves to make sure we are organized to best leverage and deploy our deep bench of talent. As Jessica feels, she has accomplished what she set out to do when she first joined us that led to her decision to resign from the company.

To her credit, Jessica has agreed to stay on as an adviser to me through December to ensure a smooth transition. Jessica has made many contributions to our company over the past 3 years. During her tenure, our revenue and profits have grown to new heights, and we have delivered on our financial commitments to our shareholders. I would like to thank Jessica Ross for her dedicated service as CFO.

At the same time, the Board and I are very excited to name Jason Bailey as our next CFO. Jason brings over 25 years of progressive leadership experience in finance and public accounting, including over 15 years of service with Frontdoor and its predecessor. He also has 11 years of public accounting experience at Deloitte and Arthur Andersen.

I've had the privilege of working closely with Jason for the past 7 years. He knows the home services industry deeply. He is truly an expert in all aspects of our business, and I'm very confident in his ability to lead our finance organization. This will be a seamless transition. With that, operator, please open the line for Q&A.

[Operator Instructions]. Thank you. Our first question is coming from Jeff Schmitt with William Blair.

On the cost inflation, it sounds like it increased to maybe 4% or even 5% in the quarter. It had been trending in the low single digits. Could you talk about what drove that, whether it -- was it mainly tariff impacts just on parts and equipment and it could be temporary?

So Jeff, it was not 5%. It was closer to 4%, just about ticking toward 4%, which means we have to call it low to mid. Obviously, for the year, we're still projecting low single-digit inflation. But essentially, you nailed it. It's -- it was a tick up in appliance cost.

Most of our another component parts, but our equipment is domestically produced. So we have not been hit anywhere near as much by tariffs as some other areas, but appliance has ticked up. But like we said with our dynamic pricing model and with our trade service fee approaches, with the operational execution we have, we feel we're strongly that we're able to manage through that. But it's something we watch.

Okay. And then could you talk about the promotional strategy that you implemented in the real estate channel what all is going on there? And did that drive an increase in attachment rates in the quarter?

Yes. I think good news for us is -- as I talked about, the macro environment is improving for us, which enables our -- the initiatives we've undertaken to gain more fuel.

Now specific to promotions, we ran a -- generally, we've never run price off promotions. We did do $100 off for the months of July and August. And we also did a partner -- a couple of partner specific promotions that we ran that helped us from our analysis to outpace the real estate market overall.

So we're very pleased with certainly the direction and the trajectory of where real estate is going. And as I've said in the call finally.

Our next question is coming from Maxwell Fritscher with Truist.

I'm calling in for Mark Hughes. In the nonwarranty section or segment the pilot program, what are your early observations there? What sort of timing and pace are you anticipating for that expansion?

Yes. We're shooting -- we're not giving a specific -- we'll talk more about this in February, but we're shooting for it to expand nationwide in 2026. It's a little more complicated than HVAC in the sense of the number of appliances. We have to work through that in our platform and the like. But that's also part of the excitement of it is that we have many opportunities to interact with our members across a variety of appliances.

So the plan is to go nationwide at some point in 2026. We're still working through that and we're still working through the specifics of appliance ordering and the like. But we think it's a real opportunity and our initial impression is this is being well received by our members.

Got it. And then a small piece of the overall revenue number here, but the DTC guide of up 3% for the full year, if my math is correct, it implies around a mid-single-digit decline there. So what's driving your thoughts around that segment in 4Q?

So pricing is with our unit strength, which is what we feel is the #1 priority because, obviously, that feeds over time into our renewal book, which is the backbone of the company. So the price reductions that we've done, the promotional pricing strategy has taken that revenue down but we're able to offset it and maintain healthy margins and healthy pricing because of the strength of our retention rates.

So we do give up some revenue upfront with our first year customers, but we made the strategic decision that that's worth it in order to get our renewal -- get that into the renewal book over time.

So I'd probably also add that Q4 is impacted by our seasonal adjustment. It's our lowest quarter as we know our guidance.

Our next question is coming from Sergio Segura with KeyBanc Capital Markets.

Bill, Jessica. I just want to say it was a pleasure working with you and best of luck with what the future holds for you.

I had 2 questions. Maybe first on the member growth in the real estate channel. How much of that success there would you attribute to the market shifting to a buyer's market versus some of your strategic initiatives and the promotional strategy and increased agent engagement that you called out in the presentation?

And then on the second question, just for the SG&A for the year, the increase in the outlook. Just provide any more color on where those -- where you're investing those incremental dollars?

Okay. So on the first one on real estate. I think what -- to your question, which is an insightful one. I think the macro environment improving helps our actions. So it's not that we've suddenly discovered some of these actions of meeting with agents. But the new thing is a promotional program that we talked about earlier. So I think that this has enabled us to -- the macro environment has enabled us to fuel some of these actions.

So I'm not sure I can differentiate exactly what's macro and what's our promotional pricing. But it is all working together to help us start to turn the corner in real estate.

Now as far as SG&A, where are we spending money, we're -- as we said in the call, we're pretty pleased with the Warrantina campaign, especially how it's doing relative to home -- potential homebuyers under the age of 45, which is where our marketing team is targeting their efforts. So where we're looking to deploy the extra money is around not only the Warrantina campaign, but what we call the middle of the funnel, which is where consideration is higher.

So you go from the top of the funnel, which is trying to build awareness and the like, to the middle of the funnel where you're building consideration. And then we're pretty excited about some of the things we're doing in digital marketing, as I talked about, where we're enhancing our traditional search engine marketing with the work we're doing with large language models, the ChatGPTs of the world. And then we think we're getting more sophisticated in that and getting higher demand and eventually higher conversion.

And thank you, Sergio. It's been great working with you as well. Yes.

You'll not hear -- this will not be the last of Jessica Ross.

[Operator Instructions] Our next question is coming from Cory Carpenter with JPMorgan.

Bill, thought it was notable that you mentioned on -- in your prepared remarks, the potential reevaluation of your long-term margin target, that's certainly been a big topic of the date given you're punching above what you said earlier this year.

Maybe could you just help us with what's changed since the Investor Day that's giving you the confidence to potentially do this when you're doing the exercise this year. And Jason, just a very quick question for you. Thinking you told us organic revenue, I think you expect to be 3% for the full year. Are you able to comment on what organic revenue growth was in the quarter?

So I'll take the first one. So Cory, I think what's giving us conviction and as I said, we'll -- we'll talk about this more in February. But with our -- with the strength of our margins, the execution we've done, all of the things I talked about in the call, our ability to price and use trade service fees to potentially combat inflation.

All of those things together have given us pause to say, look, I think that we have moved to a new level. We're going to work through what that level is. But I think that the targets we gave you, which were during a time frame when there was a lot of uncertainty, not that -- well, as we go into the year, there's always uncertainty, but we feel pretty confident in our model, and so we'll be looking to come forward with a reassessment of what we said at Investor Day. So I won't comment specifically on what that will be, but that's what we're working through. We're working through getting our final plans approved by the Board, et cetera. But we'll have lots to tell you in February. Jason, as far as the organic revenue question?

Yes, Cory, for Q3, we'd say it was mid-single digits, probably 3 key drivers there. One, to think about our nonwarranty pricing and then there's still some seasonal adjustment. So when you're comparing that, that's why I'd probably pull you back to the full year at 3%.

Thank you, ladies and gentlemen. As we have no further questions in the queue, this will conclude today's conference. You may disconnect your lines at this time, and we thank you for your participation.

Greetings, and welcome to the Frontdoor Incorporated Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to your host, Mr. Matt Davis, Vice President of Investor Relations and Treasurer. Sir, the floor is yours.

Thank you, operator. Good morning, everyone, and thank you for joining Frontdoor's Second Quarter 2025 Earnings Conference Call. Joining me today are Frontdoor's Chairman and CEO, Bill Cobb; and Frontdoor's CFO, Jessica Ross.

The press release and slide presentation that will be used during today's call can be found on the Investor Relations section of Frontdoor's website, which is located at investors.frontdoorhome.com. As stated on Slide 3 of the presentation, I'd like to remind you that this call and webcast may contain forward-looking statements. These statements are subject to various risks and uncertainties, which could cause actual results to differ materially from those discussed here today.

These risk factors are explained in detail in the company's filings with the SEC. Please refer to the Risk Factors section in our filings for a more detailed discussion of our forward-looking statements and the risks and uncertainties related to such statements. All forward-looking statements are made as of today, August 5, and except as required by law, the company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

We will also reference certain non-GAAP financial measures throughout today's call. We have included definitions of these terms and reconciliations of these non-GAAP measures to their most comparable GAAP financial measures in our press release and the appendix to the presentation in order to better assist you in understanding our financial performance.

I will now turn the call over to Bill Cobb for opening comments. Bill?

Thanks, Matt Davis, and good morning, everyone. Frontdoor continues to perform exceptionally well, and we've delivered another quarter of very strong financial results. This is the latest chapter in a continuing line of superior financial and operational performance. Our second quarter highlights include, revenue increased 14% year-over-year to $617 million. Excellent operational execution contributed to a second quarter gross margin of 58%, a 130 basis point improvement over prior year.

Net income grew 21% to $111 million. Adjusted EBITDA grew 26% to $199 million. Additionally, we grew first year DTC organic home warranties by 9%. We saw continued strong non-warranty revenue driven by the new HVAC program. The synergies from the 2 2-10 acquisition are ahead of schedule, and we used strong cash flows to repurchase $150 million worth of shares year-to-date through July 31. Altogether, when we combine results from the first and second quarters, Frontdoor has had an amazing first half of the year.

Now for a quick refresh on our 3 strategic priorities that are driving value for our shareholders. First, grow and retain home warranty members. That's job #1. Number two, scale revenue from our non-warranty business. This is well underway, and we are now raising our outlook for new APAC revenue for a second time this year. And number three, optimize the integration of 2-10 Home Buyers Warranty, which, as I mentioned, is ahead of schedule, and I'll address that in more detail shortly.

Now to provide some very important context, I'd like to take a step back and look at the impact the macro environment has had on home warranties. As shown here, in 2020, Frontdoor had 460,000 first year real estate home warranties. But the challenge of a strong seller's market driven by low inventories, 2 million fewer existing home sales and record high home prices and mortgage rates combined to result in a 63% decline in our real estate units over the last 5 years. Today, the real estate market remains challenging.

According to the latest information from the National Association of Realtors or NAR, in June 2025, existing home sales slipped 2.7% month-over-month to a seasonally adjusted annual rate of 3.93 million, among the lowest in 30 years. But there is some reason for optimism. NAR also said the inventory of unsold existing homes in June rose 18% year-over-year to 1.53 million homes or the equivalent of 4.7 months of supply. That's up from 3.5 months in January of 2025. With inventory increasing, it appears that a transition to a buyer's market is underway, which will be welcome news for our home warranty attach rates.

Now moving to the direct-to-consumer channel. In spite of the pressure real estate has put on our overall ending home warranty count, the DTC channel is performing well. In the second quarter, the number of home warranties grew organically by 9% versus the prior year. This is now 4 consecutive quarters, a full year of organic home warranty growth. Our success in DTC is due to several factors.

Number one, we continue to refine and optimize our marketing campaign and media strategy, leading to record high brand awareness. We are targeting current and new audiences better. We are more effective in our digital advertising, particularly when homeowners are seriously considering a purchase. Finally, our discounting strategy continues to be a proven and highly effective way to fuel member growth.

Moving on, we continue to be pleased with our retention rate, even with significant price increases and the continuing macroeconomic challenges. Through the second quarter, retention stood at 78.3%, near an all-time high. While this does include a lower mix of real estate members, retention is strong because we are creating a better member experience along with continued process improvements. Now regarding the member experience, we are continuing with the heavy use of our preferred contractors who currently perform 84% of our member jobs.

We are also using technology to enhance the member experience. To date, AHS app downloads are growing to 14% of members since we launched it in October and usage of the video chat with an expert feature launched in February has proven to be a big hit with our members. Under process improvements, we continue to focus on early engagement with new members. Additionally, we are taking a more aggressive approach to reducing the number of cancellations through proactive engagement and selective incentives with members who are on the fence, resulting in an improvement in our member save rate.

Finally, and very importantly, members on autopay remain at a very strong 84%. So let's bring this all together. On Slide 10, this shows our total home warranties across DTC, real estate and renewal. What's most encouraging is that we have stabilized the trajectory of total home warranties. We have found our way back from the nadir of 2023. After years of macro headwinds related to real estate and inflation, our efforts are working. Through organic DTC growth, the acquisition of 2-10, continued strong renewals and the eventual return of the real estate market, we are now well positioned to grow overall home warranties.

Let's now talk about our second strategic priority, scaling non-warranty revenue. Jessica will discuss our results in the broader non-warranty part of the business, but I'm going to focus now on the new HVAC program. To refresh, this program benefits our members who want to take advantage of our scale purchasing power to proactively replace their HVAC, upgrading to a system that is new, more efficient and compliant with the latest government standards. In short, this program continues to perform exceptionally well with huge upsides.

We expect revenue to come in this year nearly 40% higher than last year, and we are raising our full year outlook for this program to $120 million. We have many reasons to believe this program has much more runway. Penetration is currently less than 2% of our membership, so we know there is more opportunity here. In addition to the new HVAC program being great for our members, we have done a number of things to enhance its appeal. First, we introduced a new financing option, which includes an interest-free loan for the first 12 months.

In the emerging non-warranty space, giving our members the flexibility to finance large purchases without breaking their budget is leading to greater demand. As such, usage of financing is up 75% in 2025. Next, contractors are also very excited about the new HVAC program. We've more than doubled their participations in 2023. And with the onboarding, training and marketing materials we provide, contractors have helped us raise the number of quotes to members by over 40% in the first half of the year.

Our third strategic priority is optimizing the integration of 2-10. As a reminder, 2-10 was a great acquisition and strategic fit because it adds a complementary home warranty business. It diversifies our revenue stream through 2-10's new home structural warranty business, and it provides significant cost synergies and cross-selling opportunities. On the synergies front, we've reduced costs faster and better than we originally estimated with additional synergies in back office, sales and marketing and service.

In our estimate, we expected to derive about $10 million in synergies this year, but we now expect that to be closer to $15 million. When factoring in all of the expected synergies, the adjusted purchase price EBITDA multiple is now below 7x, underscoring the strength of this acquisition. In short, 2-10 was a great deal for us.

Finally, before I turn it over to Jessica, I want to touch on what Frontdoor is doing to leverage artificial intelligence to enhance the member experience and increase operational efficiency. I'll keep this high level for competitive reasons, but we are partnering with best-in-class AI providers to progress our initiatives across the marketing, sales and operations functions. In marketing, AI is helping us to enhance campaign performance through more accurate predictive modeling, delivery of more relevant and accurate search results and smarter audience targeting.

In sales, we are using AI to provide real-time coaching to agents during customer engagements as well as streamlining lead qualification and conversion. On the operations front, we are using AI to standardize and accelerate member support calls and to enhance the accuracy and timeliness of authorization. Again, this is high level, but the key takeaway is that we are already seeing positive results using AI.

On that high note, I'll now turn the call over to Jessica.

Thanks, Bill, and good morning, everyone. In the second quarter, Frontdoor continued to deliver outstanding financial results, underpinned by favorable external factors and focused execution across the business. This drove another exceptional quarter for gross profit margin, adjusted EBITDA and cash flows, which all helped to further improve our financial position.

Let's get into the details on Slide 16. As you can see, our second quarter results built on the strong momentum we established in the first quarter. Second quarter revenue grew 14%. Net income increased 21% and adjusted EBITDA rose 26%. For the first half of 2025, our revenues grew 13% to over $1 billion. Net income increased 17% to $148 million and adjusted EBITDA grew 31% to $300 million.

Now let's unpack the drivers for the second quarter, starting with revenue on Slide 17. Our second quarter revenue grew 14% year-over-year to $617 million. This was driven by a 2% increase in price and 12% growth in volume, which is primarily attributable to the 2-10 acquisition. From a channel perspective, renewal revenue increased 9% due to the benefit of the 2-10 acquisition as well as higher price realization. Our dynamic pricing model continues to work well, allowing us to actively increase price while maintaining strong renewal rates.

Real Estate revenue increased 21%, primarily due to the 2-10 acquisition. Direct-to-Consumer revenue grew 12%, supported by both organic volume growth and the addition of 2-10. Higher volumes were partially offset by lower price realization due to our targeted discounting strategy to drive new member growth. And finally, Other revenue grew 63% versus the prior year period, driven by continued success in our new HVAC and Moen programs as well as the addition of 2-10's new home structural business.

Let's now move down the P&L to gross profit on Slide 18. Gross profit increased 16% versus the prior year to $356 million. This increase was driven by a 130 basis point increase in gross profit margin to 58%. During the second quarter, we experienced low single-digit cost inflation on a net cost per service request basis. We also experienced a lower number of service requests per member, primarily from favorable weather in the HVAC trade. This resulted in a benefit of $5 million in the second quarter compared to the prior year period.

Now moving to Slide 19. We are strengthening our operational muscle and advancing a culture of continuous process improvements to drive greater efficiency across the organization. Our sharpened focus on process improvements include leveraging dynamic pricing to increase price in a smart way while maintaining strong member retention rates, using data and technology to streamline service request assignments, improving our ability to match jobs with the right contractor the first time. We are maximizing utilization of preferred contractors with 84% of jobs assigned to them in the second quarter. And finally, we are flexing our scale and purchasing power with our suppliers and contractors, enabling an overall better cost structure.

Now let's turn to the second quarter net income and adjusted EBITDA on Slide 20. For the second quarter, net income grew 21% to $111 million and adjusted EBITDA grew 26% to $199 million. Adjusted EBITDA margin improved to 32% in the second quarter, which is up about 300 basis points and one of the highest we have ever seen. This growth was mainly driven by $51 million of favorable revenue conversion, primarily from the 2-10 acquisition and higher price.

Sales and marketing costs were also favorable for the quarter, primarily due to timing. We expect to allocate more marketing dollars in the third and fourth quarter to help drive member count growth. Contract claims costs were $1 million higher during the second quarter, which we discussed earlier. Customer service costs and G&A increased $2 million and $9 million, respectively, primarily due to the addition of 2-10.

Next, moving to Slide 21. On a fully diluted basis, earnings per share grew 26% to $1.48 per share and adjusted earnings per share grew 28% to $1.63 per share.

Now turning to Slide 22 and our statement of cash flows. Starting on the left, net cash provided from operating activities was $251 million for the first half due to exceptionally strong earnings and positive working capital. Net cash provided from investing activities was $42 million and was primarily comprised of sales of marketable securities, partially offset by capital expenditures related to technology projects. Net cash used for financing activities was $153 million and was primarily comprised of $134 million of share repurchases as well as $14 million of scheduled debt payments.

We ended the second quarter with a total cash balance of $562 million. This was comprised of $185 million of restricted cash and $377 million of unrestricted cash. Strong cash generation remains a cornerstone of our investment thesis on Slide 23. In the first half of the year, strong operating performance resulted in free cash flow of $237 million, a 44% increase versus the prior year period. Let me repeat that. Free cash flow of $237 million, not bad.

Our strong cash generation provides us ample liquidity and when combined with our higher earnings has resulted in an improved net leverage ratio, which is trending towards 1.5x. This strong financial position enables flexibility across the 3 key pillars of our capital allocation strategy.

As we transition to Slide 24, you will see that we are focused on returning excess cash to shareholders through share repurchases. This year, we have returned approximately $150 million in cash to shareholders, repurchasing over 3.1 million shares through July 31, which represents over 4% of shares outstanding. Given our strong first half results, cash flows and share repurchases to date, we are increasing our full year share repurchase target again to approximately $250 million, which will mark our fourth consecutive year of increasing share repurchases.

Now turning to Slide 25 and our third quarter and full year outlook. For the third quarter revenue, we expect a high single-digit increase in our Renewals channel, a low double-digit increase in our Real Estate and D2C channels and a $20 million to $25 million increase in Other revenue versus the prior year period. Taken together, we anticipate third quarter revenue to grow 13% to be between $605 million and $615 million. We expect third quarter adjusted EBITDA to grow 12% to be between $180 million and $190 million. This outlook includes the hot weather we've seen in July, a slight increase in claims costs and higher SG&A spend due to timing and the addition of 2-10.

Now let me take a moment to address our second half adjusted EBITDA outlook, which is $60 million lower than our first half results, primarily due to 2 items. First, nearly half of the difference is driven by our regular seasonal adjustment practice, which is designed to better align revenue in relation to claims costs throughout the year. Second, SG&A is expected to increase nearly $20 million in the second half of the year, primarily to drive member growth.

Now moving to full year, starting with revenue, where I'm excited to report that we are increasing our outlook by $25 million to be between $2.055 billion and $2.075 billion. The increase is primarily driven by strong performance in our Renewals channel and our new HVAC program. We expect volume to be up nearly 10% and realized price to increase 2% to 4% for the year. Our revenue expectation by channel assumes a nearly 10% increase in the Renewals channel, a low single-digit increase in the D2C channel as we continue to leverage discounting to drive member growth.

A high single-digit increase in the Real Estate channel, Other revenue to range between $180 million and $190 million, driven by $120 million from our new HVAC upgrade program, up from $87 million in 2024, $15 million from Moen, $44 million from the new home structural warranty business and about $10 million from other non-warranty services. Our member count expectations for the year remain unchanged, and we expect the number of home warranties to decline 1% to 3%.

Moving on to gross profit margin. We are raising our full year outlook to be between 55% and 56%. This is a 100 basis point increase over our prior outlook as the macro environment related to inflation, tariffs, customer incidence rates and supply chain continue to come in more favorable than originally expected. Additionally, our internal actions to drive revenue conversion and process improvements are helping to expand margins.

Our margin guide incorporates a flow-through of favorable first half results, combined with low single-digit cost inflation in the second half of the year as we expect a slight increase in costs versus the first half of the year and a modest increase in the number of service requests per member.

Now moving down to P&L. We are narrowing our SG&A outlook to be between $660 million and $670 million. Our full year adjusted EBITDA outlook also includes $18 million of interest income, $9 million of 2-10 integration costs and reflects stock-based compensation expense of approximately $33 million. Based on all of these inputs, we are increasing our full year adjusted EBITDA guide to be between $530 million to $550 million. Finally, our full year effective tax rate is now expected to be 24%, and our capital expenditure outlook is now approximately $35 million.

With that, I will now hand it back to Bill for some final comments.

I want to close with a couple of important final points. First, as Jessica just showed you, Frontdoor continues to deliver. The second quarter was another round of very strong financial and operational performance. As such, we are raising our full year revenue and adjusted EBITDA outlook for the second part of this year. None of this would be possible without the dedication of our 2,000-plus company associates and valued partners. Every day, they are living our company purpose to make life easier for every homeowner.

And our company mission to think like an owner, act like a pro, help like a friend. And our internal associate engagement surveys show our team is super engaged with scores well above industry benchmarks. This team's efforts have put Frontdoor in its strongest financial position in our history. They have built Frontdoor into the stock to own in the home services sector.

With that, thank you, and we are now ready to take your questions. Operator, please open up the line for questions.

[Operator Instructions]

Our first question is from Jeffrey Schmitt with William Blair.

Yes. So what drove the increase in 2-10 cost synergies from $10 million to $15 million for '25; obviously, pretty large jump. And are you still expecting run rate synergies of $30 million by '28, which includes revenues?

Yes, so what drove it from the $10 million to $15 million is we're just getting better as we learn the business, and we've done some things on the back end and really across all functions to where we found efficiencies to drive it to $15 million. And yes, at this point, we're consistent with what we said at Investor Day that over time, I believe it's through '28, Matt, that will be $30 million plus.

Okay. Great. And then growth of the upgrade program continues to be really strong. Is your guidance all for HVAC? Or does that include water heaters? And any update on that and potential timing of adding those?

Yes. It's all HVAC. We are not ready yet to do the other groups, but we're working on it. We're certainly working on that. But right now, it's all HVAC. But we do have some tests we're running, and really nothing to report just yet, but we still think the opportunity remains quite large.

Our next question is coming from Sergio Segura with KeyBanc Capital Markets.

First, I guess, on the Real Estate revenue. It looks like that came in pretty strongly ahead of your prior guidance. I know you talked about 2-10 getting that a boost in your last call and called that out as driving some strength this quarter. So just curious if you can dive into what came in better than expected for the Real Estate channel this quarter?

I would just, again, point to our seasonal investment, as I called out in my prepared remarks. Remember, our regular practice is really to shift some of that revenue from Q1 and Q4 into the main part of the -- the middle part of the year, which is where we get more of that activity.

What I would say, Sergio, operationally is, we have done a really good job with our real estate sales team, integrating 2-10. We have a dedicated 2-10 real estate sales team there. They're quite good. They're a great combination with our AHS team. So I think operationally, the other advantage we have is that we've really hit the ground running. We haven't had a lot of growing things. And we're in high season right now, and they're all working very hard.

Got it. And then -- that's helpful. And then on the gross margin guide, are you still baking in the $50 million in headwinds for the back half of the year? It doesn't seem like you're seeing the impacts of those yet. So just curious if that's still the right number? And -- go ahead, Jessica.

No. Sorry, there's a delay here, Sergio. I mean, the macro is just coming in, and we're not alone in that much better than we anticipated, both from our guide at the beginning of the year and where we stood at Q1. So if our previous guide is baked in, I think, we were saying kind of mid- to high single digits in the back half. We're projecting low single digits now, based on what we've seen in the business to date and just what we're projecting for the back half. But again, much better than we anticipated previously.

And as always, when looking at our business, it's always best to look at the full year because of some of the seasonal fluctuations that we do around our regular accounting practice. So I would certainly look to the full year, and that's what I think Jessica tried to lay out in her guide.

Our next question is coming from Mark Hughes with Truist.

Could you comment on how 2-10 is doing in its own sales process kind of selling their structural warranty? What kind of momentum are you seeing there?

Yes. We've been really pleased with the efforts there. We operate, and I'll defer to Jessica on the rev rec on this, but we really operate the business, how many structural warranties can we sell per year. That's what the team focuses on. And again, similar to what I just said about real estate, the transition has gone very well. We are hitting our numbers, and we're quite pleased with how that business has come along. It's a nice little jewel to add to the -- certainly the home warranty business, which is our scale play.

Yes. And then just on that rev rec piece, to Bill's point, this is a very predictable business. And so we're able to really focus on operations in the current year. But from a revenue recognition perspective, that is over a much longer period of 10 to 14 years. So what we bought is coming in exactly how we expected, but we're continuing to drive new revenue, new business, and that's landed very well.

And Mark, the only thing I'd say we're still learning. We have a new -- group of new homebuilders. And we've been used to dealing with contractors and now we have builders. But we do see opportunity in the future in various ways of interacting with the builders beyond the obvious way of trying to work with them on structural home warranty. So that part of the business is going quite well.

Yes, interesting. Bill, you've mentioned rising inventories should be good for attach rates. Have you started to see any of that yet?

Well, here's what I would say. And obviously, I can't talk about the third quarter or what's happened so far in July and early August. But I think we're starting to see, and you've heard this from some of the other real estate companies that the market with the inventory increase that things seem to be moving in the right direction. And we certainly believe that, that is certainly something that will help real estate attach rates for home warranties.

So I think the indications are -- we've been playing at this for the 3-plus years I've been here, and it always looks like -- but this time, there's some real data to support that the market could be moving in the right direction for -- certainly for us to make a more balanced market, which is ultimately what's best for us.

Understood. And then one more, if I might. Jessica, within 2-10, any claims development on their reserves?

Nothing that we're seeing, pretty straightforward.

Thank you. As we have no further questions on the lines at this time, this will conclude today's call. You may disconnect your lines at this time, and we thank you for your participation.