Frontdoor Announces Full-Year 2018 Revenue Increase of 9 Percent to $1.26 Billion

MEMPHIS, Tenn.–(BUSINESS WIRE)–Frontdoor, Inc.
(NASDAQ: FTDR), the nation’s leading provider of home service plans,
today announced fourth-quarter and full-year 2018 results.

           
 
Financial Results
Three Months Ended Year Ended
December 31, December 31,
$ millions (except as noted) 2018 2017 Change 2018 2017 Change
Revenue $ 279 $ 257 9 % $ 1,258 $ 1,157 9 %
Gross Profit 125 120 3 % 572 567 1 %
Net Income 17 44 (62) % 125 160 (22) %
Diluted Earnings per Share 0.20 0.52 (62) % 1.47 1.90 (23) %
Adjusted Net Income(1) 19 31 (38) % 150 158 (5) %
Adjusted Diluted Earnings per Share(1) 0.23 0.36 (38) % 1.77 1.87 (5) %
Adjusted EBITDA(1) 47 50 (7) % 238 259 (8) %
Home Service Plans (number in millions)         2.1     2.0   6 %

Fourth-Quarter and Full-Year 2018 Summary

  • Revenue increased nine percent to $279 million in the
    fourth-quarter 2018 and to $1.26 billion for full-year 2018
  • Gross profit margin of 45 percent in the fourth-quarter 2018
    declined from 47 percent in the prior year period; full-year 2018
    gross profit margin of 45 percent declined from 49 percent in 2017
  • Net income of $17 million in the fourth-quarter 2018 declined from
    $44 million in the prior year period; full-year 2018 net income of
    $125 million was down from $160 million in 2017; fourth-quarter and
    full-year 2018 net income reflects the impact of higher claims costs,
    investments in the business, Spin-off charges, and interest expense
    from the debt offering completed in August 2018
  • Fourth-quarter 2018 Adjusted EBITDA of $47 million declined from
    $50 million in the prior year period; full-year 2018 Adjusted EBITDA
    of $238 million declined from $259 million in 2017
  • Executed initiatives to strengthen the core business by
    implementing pricing actions, improving business processes, reducing
    costs and further bolstering the leadership team; expect to pilot
    on-demand service offering in late 2019

Full-Year 2019 Outlook

  • Full-year 2019 outlook for revenue of $1.35 billion to $1.38
    billion and Adjusted EBITDA
    (2) of $240
    million to $255 million

“In the fourth quarter, we continued to drive strong revenue growth,
began to see the benefits from our process improvement initiatives, and
strengthened our leadership team,” said Chief Executive Officer Rex
Tibbens. “In 2019, we will be focused on improving all aspects of our
business by executing our profit enhancement initiatives, improving the
customer experience, and further developing our systems and platforms.
These efforts will not only bolster our core home service plan business,
but also build the foundation for our future on-demand offering.”

Fourth-Quarter 2018 Results

     
 
Revenue by Major Customer Acquisition Channel
Three Months Ended
December 31,
$ millions 2018 2017 Change
Renewals $ 187 $ 169 10 %
Real estate (First-Year) 57 55 3 %
Direct-to-consumer (First-Year) 34 32 9 %
Other   1   2 *  
Total $ 279 $ 257 9 %

* not meaningful

Fourth-quarter 2018 revenue increased nine percent over the prior year
period. Renewal revenue rose 10 percent as a result of growth in the
number of home service plans and improved price realization. The three
percent increase in real estate revenue reflects improved price
realization, primarily due to a mix shift to higher priced home service
plan offerings. The nine percent increase in direct-to-consumer revenue
reflects growth in new sales, driven by ongoing investments in marketing
as well as improved price realization.

Fourth-quarter 2018 net income was $17 million, or diluted earnings per
share of $0.20, versus $44 million, or diluted earnings per share of
$0.52 in 2017. The decrease in fourth-quarter 2018 net income was
partially driven by a $15 million increase in interest expense over the
prior year period as a result of the debt offering completed in August
2018. Prior to the Spin-off, ServiceMaster’s debt and associated
interest expense were not allocated to the company. The decrease in
fourth-quarter 2018 net income was also impacted by a $13 million
increase in tax expense, primarily driven by a one-time $20 million tax
benefit in 2017 related to the enactment of the Tax Cut and Jobs Act.
Additionally, fourth-quarter 2018 net income includes a $9 million
increase in claims costs, increased sales and marketing costs,
investments in the customer care centers and Spin-off dis-synergies.
These items were partially offset by a $13 million favorable impact from
higher revenue.

 
 
Period-over-Period Adjusted EBITDA Bridge
$ millions    
Three Months Ended December 31, 2017 $ 50
Impact of change in revenue 13
Claims costs (9)
Sales and marketing costs (3)
Customer service costs (2)
Spin-off dis-synergies (1)
Other   (2)
Three Months Ended December 31, 2018 $ 47

Adjusted EBITDA in the fourth-quarter 2018 was $47 million compared to
$50 million from 2017, as $13 million of higher revenue conversion was
offset by:

  • $9 million of higher claims cost, primarily related to the underlying
    costs of repairs, particularly in the appliance and heating,
    ventilation and air conditioning (“HVAC”) trades;
  • $3 million of increased sales and marketing costs to drive sales
    growth;
  • $2 million of incremental investments in our customer care centers to
    deliver an improved level of customer service;
  • $1 million of Spin-off dis-synergies, primarily related to the
    separation of information technology systems historically shared with
    ServiceMaster; and
  • $2 million of other costs, primarily related to higher professional
    service fees.

Full-Year 2018 Results

     
 
Revenue by Major Customer Acquisition Channel
Year Ended
December 31,
$ millions 2018 2017 Change
Renewals $ 835 $ 759 10 %
Real estate (First-Year) 262 249 5 %
Direct-to-consumer (First-Year) 156 144 8 %
Other   6   5 *  
Total $ 1,258 $ 1,157 9 %

* not meaningful

Full-year 2018 revenue increased nine percent over the prior year
period. Renewal revenue rose 10 percent as a result of growth in the
number of home service plans and improved price realization. The
customer retention rate increased slightly versus 2017, which
contributed to a six percent overall growth in the number of home
service plans to 2.1 million. The five percent increase in real estate
revenue reflects improved price realization, primarily due to a mix
shift to higher priced home service plan offerings. The eight percent
increase in direct-to-consumer revenue primarily reflects growth in new
home service plans resulting from ongoing investments in marketing.

Full-year 2018 net income was $125 million, or diluted earnings per
share of $1.47, versus $160 million, or diluted earnings per share of
$1.90 in 2017. The decrease in full-year 2018 net income was primarily
driven by an increase in claims costs of $58 million, higher sales and
marketing costs, investments in the customer care centers and Spin-off
dis-synergies. Additionally, interest expense was $22 million higher
over the prior year period as a result of the debt issued in August
2018. Prior to the Spin-off, ServiceMaster’s debt and associated
interest expense were not allocated to the company. These items were
partially offset by the favorable impact of $64 million from higher
revenue and $18 million from a lower provision for income taxes compared
to the prior year.

 
 
Period-over-Period Adjusted EBITDA Bridge
$ millions    
Year Ended December 31, 2017 $ 259
Impact of change in revenue 64
Claims costs (58)
Sales and marketing costs (10)
Customer service costs (8)
Spin-off dis-synergies (4)
Other   (5)
Year Ended December 31, 2018 $ 238

Adjusted EBITDA in full-year 2018 was $238 million compared to $259
million in 2017, as $64 million in higher revenue conversion was offset
by a number of items including $58 million in increased claims costs
consisting of:

  • $23 million related to the underlying cost of repairs, particularly in
    the appliance and plumbing trades;
  • $17 million related to a higher number of work orders, primarily in
    the HVAC trade, driven by colder winter temperatures in the first
    quarter of 2018 and significantly warmer temperatures in the second
    and third quarters of 2018 compared to historical averages;
  • $15 million related to higher replacements versus repairs, primarily
    in the appliances trade within the second and third quarters of 2018;
    and
  • $3 million adjustment related to adverse development of prior year
    claims.

2018 Adjusted EBITDA was also unfavorably impacted by a number of items
compared to the prior year period, including:

  • $10 million of increased sales and marketing costs to drive sales
    growth;
  • $8 million of incremental investments in customer care centers to
    deliver an improved level of customer service;
  • $4 million of Spin-off dis-synergies, primarily related to the
    separation of information technology systems historically shared with
    ServiceMaster; and
  • $5 million of other costs, primarily related to higher professional
    service fees and bad debt expense.

Cash Flow

   
Year Ended December 31,
$ millions 2018 2017
Net cash provided from (used for):
Operating Activities $ 189 $ 194
Investing Activities (10) (11)
Financing Activities   (165)   (68)
Cash increase during the period $ 14 $ 114

For the 12 months ended December 31, 2018, net cash provided from
operating activities was $189 million, a decrease of $5 million from
2017, primarily due to a $7 million decrease in earnings adjusted for
non-cash charges. Working capital was a $32 million source of cash in
2018 compared to $30 million in 2017, partially offsetting the decrease
in earnings adjusted for non-cash charges.

Net cash used for investing activities was $10 million for the 12 months
ended December 31, 2018, compared to $11 million in 2017.

Net cash used for financing activities was $165 million for the 12
months ended December 31, 2018, compared to $68 million in 2017. The
increase was primarily due to net cash transfers to ServiceMaster that
occurred prior to the Spin-off, as well as payments for debt issuance
costs incurred in connection with the debt offering.

Free Cash Flow(1) was $163 million for the 12 months ended
December 31, 2018 compared to $179 million for 2017. The decrease of $16
million includes a $12 million increase in property additions and the
year-over-year changes in net cash provided from the operating
activities disclosed above.

Cash and marketable securities totaled $305 million as of December 31,
2018. This was a $54 million increase from cash and marketable
securities as of October 1, 2018.

In connection with the Spin-off and effective as of October 1, 2018, the
inter-company balance due to ServiceMaster of $144 million, as of
September 30, 2018, was settled in cash. Additionally, in connection
with the Spin-off and effective as of October 1, 2018, ServiceMaster
contributed $81 million of cash to the company. The effect of these
transactions was a net reduction of cash and cash equivalents of $63
million.

Total restricted net assets decreased to $187 million at the end of 2018
from $198 million at October 1, 2018.

Full-Year 2019 Outlook

  • Revenue is anticipated to range from $1.35 billion to $1.38 billion;
  • Gross profit margin is anticipated to be approximately 45 percent;
  • Adjusted EBITDA(2) is anticipated to range from $240 million
    to $255 million;
  • Capital expenditures are anticipated to range from $30 million to $40
    million; and
  • Annual Effective Tax Rate(3) is anticipated to be
    approximately 24 percent, with cash tax impact expected to be
    approximately 26 percent.

Additionally, first-quarter 2019 Adjusted EBITDA(2) is
expected to be roughly in line with reported first-quarter 2018 Adjusted
EBITDA.

Fourth-Quarter and Full-Year 2018 Earnings Conference Call

Frontdoor has scheduled a conference call today, February 27, 2019, at
8:00 a.m. Central time (9:00 a.m. Eastern time). During the call, Rex
Tibbens, Chief Executive Officer, and Brian Turcotte, Chief Financial
Officer, will discuss fourth-quarter and full-year 2018 financial and
operating results. To participate on the conference call, interested
parties should call 877-407-8291 (or international participants,
201-689-8345). Additionally, the conference call will be available via
webcast which will include a slide presentation highlighting the
company’s results. To participate via webcast and view the slide
presentation, visit Frontdoor’s investor
relations home page
. The call will be available for replay for
approximately 90 days. To access the replay of this call, please call
877-660-6853 and enter conference ID 13686912 (international
participants: 201-612-7415, conference ID 13686912).

About Frontdoor

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

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

Forward-Looking Statements

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

Spin-off Impact to Financials

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

Non-GAAP Financial Measures

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

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

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

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

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

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

(1)   See “Reconciliations of Non-GAAP Financial Measures” accompanying
this release for a reconciliation of Adjusted Net Income, Adjusted
Diluted Earnings per Share, Adjusted EBITDA, and Free Cash Flow each
a non-GAAP measure, to the nearest GAAP measure. See “Non-GAAP
Financial Measures” included in this release for descriptions of
calculations of these measures.
 
(2) A reconciliation of the forward-looking first-quarter and full-year
2019 Adjusted EBITDA outlook to net income cannot be provided
without unreasonable effort because of the inherent difficulty of
accurately forecasting the occurrence and financial impact of the
various adjusting items necessary for such reconciliation that have
not yet occurred, are out of our control, or cannot be reasonably
predicted. For the same reasons, the company is unable to assess the
probable significance of the unavailable information, which could
have a material impact on its future GAAP financial results.
 
(3) The decrease in the Annual Effective Tax Rate is driven primarily by
Disallowed Transaction Costs that occurred in 2018 and is not
expected to recur in 2019.
       

frontdoor, inc.

Condensed Combined Statements of Operations and Comprehensive
Income (Unaudited)

($ millions)

 
Three Months Ended Year Ended
December 31, December 31,
2018 2017 2018 2017
Revenue $ 279 $ 257 $ 1,258 $ 1,157
Cost of services rendered   155   137   686   589
Gross Profit 125 120 572 567
Selling and administrative expenses 80 71 338 312
Depreciation expense 4 2 12 9
Amortization expense 2 2 8 8
Restructuring charges 1 3 7
Spin-off charges 1 7 24 13
Affiliate royalty expense 1 2
Interest expense 15 23 1
Interest income from affiliate (1) (2) (3)
Interest and net investment income   (1)     (2)   (2)
Income before Income Taxes 23 37 166 220
Provision (Benefit) for income taxes   6   (7)   42   60
Net Income $ 17 $ 44 $ 125 $ 160
Other Comprehensive Income (Loss), Net of Income Taxes:
Net unrealized loss on securities
Net unrealized loss on derivative instruments   (9)     (9)  
Total Other Comprehensive Income (Loss), Net of Income Taxes:   (9)     (9)  
Total Comprehensive Income $ 8 $ 44 $ 116 $ 160
Earnings per Share:
Basic $ 0.20 $ 0.52 $ 1.47 $ 1.90
Diluted $ 0.20 $ 0.52 $ 1.47 $ 1.90
Weighted-average Common Shares Outstanding:
Basic 84.5 84.5 84.5 84.5
Diluted 84.7 84.5 84.7 84.5
   

frontdoor, inc.

Condensed Combined Statements of Financial Position (Unaudited)

($ millions)

 
As of
December 31,
2018 2017
Assets:
Current Assets:
Cash and cash equivalents $ 296 $ 282
Marketable securities 9 25
Receivables, less allowance of $2 and $1, respectively 12 406
Prepaid expenses and other assets 13 10
Deferred customer acquisition costs     18
Total Current Assets   330   741
Other Assets:
Property and equipment, net 47 31
Goodwill 476 476
Intangible assets, net 158 165
Long-term marketable securities 2
Deferred customer acquisition costs 21
Other assets   10   1
Total Assets $ 1,041   1,416
Liabilities and Equity:
Current Liabilities:
Accounts payable $ 41 33
Accrued liabilities:
Payroll and related expenses 10 15
Home service plan claims 67 57
Interest payable 9
Other 26 19
Deferred revenue 185 573
Current portion of long-term debt   7   9
Total Current Liabilities   345   705
Long-Term Debt 977
Other Long-Term Liabilities:
Deferred taxes 39 38
Other long-term obligations   24   11
Total Other Long-Term Liabilities   63   49
Commitments and Contingencies
Equity:
Net Parent Investment 661
Common stock, $.01 par value; 2,000,000,000 shares authorized;
84,545,152 shares issued and outstanding at December 31, 2018
1
Additional paid-in capital 1
Accumulated deficit (336)
Accumulated other comprehensive loss   (9)  
Total (Deficit) Equity   (344)   661
Total Liabilities and Equity $ 1,041   1,416

Contacts

Investor Relations:
Matt Davis
901.701.5199
ir@frontdoorhome.com

Media:
Nicole
Ritchie
901.701.5198
nicole.ritchie@frontdoorhome.com

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