Frontdoor, Inc. Common Stock 2026 Q2 Earnings Call

Thank you, operator. Good morning, everyone, thank you for joining Frontdoor's second 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 three of the presentation, I'd like to remind you that this call and webcast may contain forward-looking statements. These statements are subject to various risks and uncertainties, which could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the company's filings with the SEC. Please refer to the Risk 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 6th, 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, Matthew, good morning, everyone.

Frontdoor delivered exceptional results in the second quarter across all key areas of the business. At the mid-year mark, we are driving member growth, with total ending member count up 1%, the first organic growth in five years. We are successfully scaling our non-warranty and other business, which is rapidly approaching a quarter of a billion dollars in annual revenue. We're delivering structurally higher margins, we continue to maintain capital discipline. We expect to repurchase approximately $330 million of our stock in 2026, which will complete our latest authorization nearly a year ahead of schedule. Let's turn to slide five to cover the Q2 highlights. Revenue grew 5% to $645 million. Gross profit margin expanded 100 basis points to 59%. Net income grew 13% to $125 million.

Adjusted EBITDA increased 10% to $220 million, and we repurchased $181 million worth of shares through July 31st. It was truly an outstanding quarter. Mid-single-digit revenue growth, combined with continued gross margin strength and SG&A leverage, drove a double-digit increase in net income, all resulting in adjusted EPS growth of nearly 20%, which also includes the impact of our share repurchases. This powerful combination shows that our model is working. Let's turn to slide six to take a deeper look at our member count performance. Our direct-to-consumer channel grew 5%. Our real estate channel grew a resounding 7%, and our renewal member count was stable due to strong retention rates and sustained growth in our first-year channels, another major milestone for our business. Taken together, this translated to total ending member count growth of 1% for the quarter.

I want to pause there for a moment because this inflection point is a big deal. Our number one priority at Frontdoor is to grow and retain home warranty members. For the first time since 2021, our total ending member count is growing again. This reflects the progress we've made across the business and the execution we're seeing in both our first-year channels and our renewals. Let's take a deeper look at how we're driving direct-to-consumer growth on Slide seven. Ending member count in this channel grew 5%, marking our seventh consecutive quarter of year-over-year growth. This kind of consistency proves that our playbook is working. That playbook is built around two things. One, growing demand through brand leadership, and two, improving conversion. Starting at the top of the funnel, our Warrantina campaign is reaching more of our audience than ever.

More than 40% of homeowners recall seeing our ads. Our brand health metrics, likability, relevance, differentiation, effect on interest, all continue to improve and outperform the category. We also intentionally pulled forward the timing of our planned marketing spend to align with our selling season, and it is paying off. We continue to shift more of our marketing spend to performance channels, where we can be more targeted, more flexible, and reach consumers at the right moment. We are also expanding demand through our multi-brand strategy and proving we can accelerate growth by elevating acquired brands to our operating standards. 2-10 is a great example. When we acquired it, we talked to all of you about revenue synergies we believed we could unlock by bringing 2-10 onto our platform. We're now starting to see those synergies come through.

By applying the AHS toolkit, we are meaningfully growing the 2-10 brand. This is exactly the kind of value creation we can drive when we put our full weight behind a smaller brand. Turning to the second area of the playbook, improving conversion. How consumers find us is changing across traditional search engines such as Google and increasingly AI. We're recreating our content and restructuring our sites to stay prominently positioned, and it's already improving our search outcomes. With the assistance of AI tools, we are also reshaping how our inside sales team operates. Real-time enablement tools guide our agents during calls, pinpoint the best time and channel to reach prospects, and surface the behaviors that drive conversion. This is helping newer agents ramp faster and sell more efficiently. Finally, promotional pricing continues to be a strategic acquisition tool.

Renewal performance of these cohorts continues to hold up as well as, if not better than, our non-promotional cohorts. That means that the long-term unit economics remain very strong. Let's turn to slide eight and the real estate channel, which had a standout quarter as ending member count grew 7%. Let me set the context on the housing environment first. Inventory has improved to 4.5 months of supply from the 2.6 months in 2022. That gives buyers more leverage and is allowing home warranties to be a more frequent part of the home transaction again. Let me be clear, the broader market remains challenged. Existing home sales are still sluggish and are expected to finish around 4 million homes sold for the fourth year in a row as higher mortgage rates and affordability issues continue to limit transactions.

Against that backdrop, we are engaging more directly with real estate agents. That means expanding our geographic coverage, running targeted promotions where the opportunity is the greatest, and bringing agents the strongest value proposition in the market. As a result, even though existing home sales remain flat, our attach rate improved 30 basis points versus the prior year period. Put another way, in the second quarter, we attached a home warranty to over 5% of existing homes sold in the U.S. Let's turn to renewals, the foundation of our business on Slide 9. A decision to renew with us is made across multiple moments during the member journey, and we think about enhancing that journey in 4 stages. It starts with onboarding, the first impression. Getting a new member set up quickly, helping them understand their coverage, and making that first experience a good one.

From there, it's about engagement, the day-to-day of being a member. Every claim we handle well, every contractor who does the job right, that's where trust is built. Comes the renewal itself, where all the moments of the member journey come together to drive our high retention rates. Finally, post-renewal, because once a member renews, the next journey begins, and we want them with us for years to come. On the next slide, I'll walk through the results for renewals. The proof is in our retention rate. We continue to be near all-time highs in the quarter at 79.6%, a clear sign our strategy is working. Two things are driving it. First, the member experience, and nothing is more paramount in this business. Our differentiated technology is designed to get members a faster answer, a faster fix, and a better outcome conveniently and sometimes virtually.

Our app is a great example of that, and members are using it more than ever. Active users engaging with our app is up 65% year-over-year, and usage of our video chat with an expert feature through the app more than doubled during the quarter. Technology is only part of it. Trust is really earned when something breaks, and that's where our service delivery comes through. We continue to drive strong volume to our preferred contractor network with 84% of our jobs, which delivers a more consistent and higher-quality service experience. Our service ratings improved again this quarter. Record high 5-star ratings and record low 1-star ratings, a trend we have seen now for 36 straight months. The second driver is operational, the blocking and tackling of the renewal itself. This is where discipline and focus matter, and we continue to raise our game.

Our SAVE program keeps getting sharper, reaching members who choose not to renew with the right offer at the right moment to win them back. AutoPay is our most effective retention tool, we are making it an easier choice for our members. Enrollment is now at 85% and near all-time highs. We're seeing that same AutoPay benefit as we migrate 2-10 members onto our platform, where enrollment has increased meaningfully. Individually, these are small, disciplined improvements. Together, they compound, that's a large part of what returned us to total member growth this quarter. Let me turn to non-warranty, which is anchored by our new HVAC upgrade program on Slide 11.