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William Blair 39th Annual Growth Stock
ConferenceJune 6, 2018
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Forward Looking StatementsThis presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, in particular, projected future performance and any statements about Frontdoor’s plans, strategies and prospects. Forward-looking statements can be identified by the use of forward-looking terms such as “believe,” “expect,” “estimate,” “could,” “should,” “intend,” “may,” “plan,” “seek,” “anticipate,” “project,” “will,” “shall,” “would,” “aim,” or other comparable terms. These forward-looking statements are subject to known and unknown risks and uncertainties, many of which may be beyond our control. Such risks and uncertainties include, but are not limited to: weather conditions and seasonality; weakening general economic conditions; lawsuits, enforcement actions and other claims by third parties or governmental authorities; the effects of our substantial indebtedness; the success of our business strategies; and failure to achieve some or all of the expected benefits of the Spin-off. We caution you that forward-looking statements are not guarantees of future performance or outcomes and that actual performance and outcomes, including, without limitation, our actual results of operations, financial condition and liquidity, and the development of new markets or market segments in which we operate, may differ materially from those made in or suggested by the forward-looking statements contained in this presentation. 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 presentation, you should refer to the risks and uncertainties detailed from time to time in Frontdoor’s periodic reports filed with the SEC as well as the disclosure contained in Item 1A. Risk Factors in our 2018 Annual Report on Form 10-K or other periodic reports 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 presentation 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 www.sec.gov and via Frontdoor’s website at frontdoorhome.com.
Non-GAAP Financial MeasuresTo 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, Adjusted EBITDA Margin, Free Cash Flow, Adjusted Net Income, and Adjusted Diluted Earnings per Share.
We define "Adjusted EBITDA" as net income before: provision for income taxes; interest expense; interest income from affiliate; depreciation and amortization expense; non-cash stock-based compensation expense; restructuring charges; Spin-off charges; secondary offering costs; affiliate royalty expense; (gain) loss on insured home service plan claims; and other non-operating expenses. We believe Adjusted EBITDA is useful for investors, analysts and other interested parties as it facilitates company-to-company operating performance comparisons by excluding potential differences caused by variations in capital structures, taxation, the age and book depreciation of facilities and equipment, restructuring initiatives, Spin-off charges, arrangements with affiliates and equity-based, long-term incentive plans.
We define “Adjusted Net Income” as net income before: amortization expense; restructuring charges; Spin-off charges; secondary offering costs; affiliate royalty expense; interest income from affiliate; (gain) loss on insured home service plan claims; and the tax impact of the aforementioned adjustments. We believe Adjusted Net Income is useful for investors, analysts and other interested parties as it facilitates company-to-company operating performance comparisons by excluding potential differences caused by items listed in this definition.
We define “Adjusted Diluted Earnings per Share” as Adjusted Net Income divided by the weighted-average diluted common shares outstanding.
See the schedules attached hereto for additional information and reconciliations of such non-GAAP financial measures. Management believes these non-GAAP financial measures provide useful supplemental information for its and investors’ evaluation of Frontdoor’s business performance and are useful for period-over-period comparisons of the performance of Frontdoor’s business. While we believe that these non-GAAP financial measures are useful in evaluating our business, this information should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similarly entitled measures reported by other companies.
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Experienced leadership of driving rapid growth through industry disruptionTransforming customer experience through technology-enabled solutions
Rex Tibbens
Scaled Lyft’s overall operations, expanded customer support, and developed new innovations for driver and passenger experience
o Expanded service to every state
o Launched crucial strategic initiatives including the Express Drive rental service and expansion of driver and customer support centers
o Helped grow business over 10x in 2+ years
Led the technical infrastructure development of the Prime Now program
Pioneered the transformation and expansion of Global Kindle Services
ChiefOperating Officer
Vice PresidentLogistics
North America
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• Company Overview and Vision
• Key Investment Highlights
• Q1 Summary
Agenda
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2
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Our business, strategy and vision
What makes us special
How we create value for shareholders
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A powerful company with a history of service
go-to-market brands
More than 2 millioncustomers
150+account
executives in the field
Included in nearly
500,000real estate
transactions in 2018
More than $2 billionhome warranty claims paid
since 2014
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Founded the home service plan industry in1971of experience45+ years
Network of 16,000+contractor firms
More than 45,000technicians
who employ
$238 million2018 Adj. EBITDA1
$1,258 million2018 Revenue
4+ millionservice requests
annually
~4x largerthan next closest provider of home service plans by
revenue
50 statesserved
All figures are as of December 31, 20181 See Appendix for a reconciliation of Adjusted EBITDA, a non-GAAP measure, to the nearest GAAP measure. See “Non-GAAP Financial Measures” included in this presentation for a description of the calculation of Adjusted EBITDA.
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Large total addressable market
22%
27%
51%
Home Improvement
120Million
Occupied Homes
75Million
Owner OccupiedHomes
5Million
Home ServicePlan Customers
Increasing Penetration
On-Demand Service
Repair Service for Property Managers
Growth Strategy
~$400B U.S. Home Services Market
View by homes View by services
Home Maintenance
Home Repair
Source: U.S. Census Bureau; Management estimates as of December 31, 2018.
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Creating value for both customers and contractors
NATIONWIDEMARKETPLACE
45+ years of experience
16K+contractor firms
4M+jobs completed annually
2M+customers
Source: 2018 American Home Shield contractor annual surveyNote: As of December 31, 2018
Budget Protection
Convenience GuaranteedResolution
Peace of Mind
Our value proposition to contractors
Paid jobs, not just leads
Steady volume of work
Access to infrastructure for replacement systems/appliances and parts
Opportunities to up-sell value-added additional services
95% of contractors in our network want to expand relationships with us over next two years
Our value proposition to homeowners
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What is a home service plan and how does it work?
Agreement that protects homeowner from unexpected expenses and inconvenience of breakdowns to major systems and appliances
Repair or replacement of covered items that will inevitably breakdown due to normal wear and tear
Customer chooses coverage and plan and pays monthly or annual fee
Appliances planSystems plan
Combo planSystems & Appliances
1 2 3 4Customer requests service and pays Trade Service Fee
We assign a proCovered item breaks 5 We pay pro for
covered expenses
Overview
Process
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Diversified go-to-market strategy
All figures are as of December 31, 2018.1 First year revenue only.
Renewals66%
Real Estate21%1
Direct-to-Consumer
12%1
Real Estate channel Direct-to-Consumer (DTC) channel2018 revenue mix
Home service plans purchased by home sellers, real estate agents and home buyers in
conjunction with a real estate transaction
Home service plans purchased directly by homeowners outside of a
real estate transaction
Value proposition is peace of mind for new home buyers
Marketed through 150+ field sales professionals
Profitable in first year; renews at 29% after year one
Value proposition is budget protection from unexpected home system and appliance breakdowns
Marketed directly to consumers through digital, direct mail, TV, etc.
Profitable in second year; renews at 76% after year one
Acquisition channels Acquisition channels
Unique access to customers who are moving, including many before a home is even sold
Deep and long-standing relationships with real estate agents and brokers
Diverse marketing channels, which both capture existing demand (e.g., paid search) and grow the category (e.g., broadcast)
Data-driven marketing approach within the DTC channel
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Strong core business well-positioned for long-term growth
Source: Management estimates
Grow Category
Geographies
Segments
Improve
Repair
Maintain
3. Data Platform
1. Core Business 2. Home Services
Significant upside in U.S. home service planhousehold penetration
Repair makes up only ~25% ofhome services industry
Assets Parts MaintenanceNeeds Warranties Recalls Inspection
ReportsRepairHistory
Internet of Things
Consumer education Customer experience
U.S. penetration International growth
Multi-family homes Convenience seekers
Remodeling, flooring replacement, painting
HVAC repair, electrical, appliance, plumbing
HVAC checkups and gutter cleaning
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• Company Overview and Vision
• Key Investment Highlights
• Q1 Summary
Agenda
1
2
3
Our business, strategy and vision
What makes us special
How we create value for shareholders
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Key Investment Highlights
Building on a great core business with significant upside opportunity
Leading position in large, underpenetrated, growing markets1
Subscription-based model drives recurring revenue streams2
Nationwide, pre-qualified contractor network provides competitive advantage4
High-value service offering that appeals to a broad range of demographics3
Technology-enabled platform drives efficiency, quality of service, and customer retention5
Strong core business well-positioned for long-term growth with key initiatives underway 6
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Industry leader in home service plans1
Frontdoor’s scale is a key competitive advantage and results in stronger financial performance
More customers in a local market
Ability to negotiate annual volume discounts with
contractors
More dispatches from those customers
Gross margin to invest in growth
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The value of scale creates a virtuous flywheel driving…
…both profitability… … and top-line growth
50%1
Competitor A13%
Competitor B10%
Others27%
Home service plan category (by revenue)
Source: Company filings; Management numbers1 Derived from December 31, 2018 results
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U.S. home service plan industry is underpenetrated1
Source: Census, National Association of Realtors, Company materialsNote: 2018 data
Real Estate Channel Direct-to-Consumer Channel
Fewer than 4% of U.S. households have a home service plan
Households(less home resales)
Households with home service planHome Resales Home Resales with homeservice plan
3.8M homes sold without home service
plan
1.5M sold with home service
plan
67%Competitors
33%Frontdoor
5.3M 1.5M
112M homes without home service plan
<50%Competitors
>50%Frontdoor
115M 3M
3M with home
service plan
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Subscription-based model provides consistency and predictability in our revenue streams
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Source: Company Data. All figures are AHS only
Monthly Auto-Pay
67%
Pay Upfront 31%
Other2%
Customer Payment Method – FY 2018
67% of our customers (nearly 1.4 million accounts) are on a monthly auto-pay program
Monthly auto-pay customers are more likely to renew
31% of customers pay upfront, primarily in the real estate channel
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17%
31%
17%
20%
16%
1st Year DTC
We have a high-value service offering that appeals to a broad range of demographics
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1 2017 Internal Home Repair and Replacement Cost Study2 2016 GoBanking Rates StudyNote: Based on DTC contracts with effective dates between July 2017 and June 2018; Demographic data from Experian
36% of DTC customers have household income of $100K+
Household income
12%
21%
22%
29%
16%
1st Year DTC
$0-100k
$100k-200k
$200k-300k
$300k-400k
$400k+
19-29
30-39
40-49
50-64
65+
$1k-35k
$35k-75k
$75k-100k
$100k-150k
$150k+
13%
35%
24%
12%
16%
1st Year DTC
Home purchase price Head of household age
Our customers use their plans an average of twice a year, helping protect their budget from covered repair or replacement costs such as:o Refrigerator: $1,035 average replacement cost1 without a home service plano Air Conditioning: $3,565 average replacement cost1 without a home service plano Stove: $755 average replacement cost1 without a home service plan
69% of Americans have less than $1,000 saved, and 34% have no savings at all2
Broad customer base demographics
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Superior contractor development is a key competitive advantage
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All figures are AHS only
Our contractor management expertise is rooted in our robust quality control and cost management structure
10 10 11 12 13 14 16
2012 2013 2014 2015 2016 2017 2018
Number of contractors (000’s) Contractor Average Rating (out of 5)
2017 4.0
2018 4.3
2016 3.8
Recruiting Onboarding Network PreferredDirect Dispatch
Target markets with greatest needs or expected growth
Background checks coupled with mandatory
training
More jobs based on performance; matched
with one of 80+ contractor relations reps
Largest number of jobs with more stringent quality
requirements; annual cost and volume targets
Begin in direct dispatch; small number of jobs;
monitored for feedback
~80% of service work is handled by our Preferred Network
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Our technology-enabled platform drives efficiency, quality of service, and customer retention
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Foundation for operational and customer service excellence, driving customer retention and contractor growth
TECHNOLOGY PLATFORM
Customers ContractorsReal Estate
Professionals
Electronic chat
Purchase plan
Pay bills
Track service progress
Interact with Frontdoor
Servecustomers
Facilitatepurchase
View / manageexpiring orders
~6,500 Active users1 ~80,000 Active users1
1As of December 31, 2018
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Customer Experience Enhancing the Customer Experience
Pricing Optimizing Pricing /Launching Dynamic Pricing
Business Processes/Cost Containment
Managing to the Inputs of the Business
People Building a Fast-Moving Culture /Enabling Frontline Employees
Technology Advancing Systems and Platforms
On-Demand Establishing Playbook for the Future
6 2019 Strategic Objectives
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Optimizing the pricing function to drive profitability
Location State: CAZip code: XXXXX-XXXX
State: CAZip code: YYYYY-YYYY
AHS contractor coverage Good Good
Home size 2,066 sq. ft. 2,050 sq. ft.
Home age 1997 2007
Home value $800K - $1.5M $200K - $400K
Appliance grade High-end Mid-range
Labor rates High Low
Current price (Combo-$100) $39.99 / month $39.99 / month
Achieve consistent gross margin across geographies
Target lower risk customers
Utilize our data capabilitiesto measure price elasticity and costs to set price
Dynamic pricing objectives and illustrative example
Home A Home BCurrently launching dynamic pricing
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Price increases take time to be fully realized as revenue is recognized each month
About half of the benefits of price increases are expected to be realized in 2019, with full benefit expected in 2020
Attrition rates at or better than originally forecasted across all channels
Price increases have been incorporated and are realized over time
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Pioneering on-demand home services
On-demand service Service experience transparency
Transparent pricing Preventative maintenance
Early version of mobile on-demand platform and functionality
Target trajectory Key elements of home services strategy
Launch on-demand business with repair services and expand into maintenance and improvement services
Initially market to our 2M+ existing home service plan customers
Pilot
2H 2019
Optimize
2021
Scale
2020
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• Company Overview and Vision
• Key Investment Highlights
• Q1 Summary
Agenda
1
2
3
Our business, strategy and vision
What makes us special
How we create value for shareholders
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• Marketing spend to ramp through balance of year and continue to drive customer growth
• Benefiting from customer acquisition optimizationDirect-to-Consumer
• Addressing real estate headwinds by adding new brokerage partners to increase unit growth
• Lower interest rates expected to improve real estate market conditions in the second half of 2019
RealEstate
• Expanding HVAC tune-up service pilot that has shown promising trend to date
• Tiger teams focused on improving customer retentionRenewals
6 Q1 Business Update
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Q1 2019 Summary
Revenue increased 10% to $271 millionGross profit margin increased 150 bps to 47%Adjusted EBITDA1 increased 34% to $43 million
Home Service Plans increased 5%Customer Retention of 75% despite price increasesProcess improvements continued to drive results
Chief People Officer completes leadership teamAdvanced execution of strategic objectivesCompleted offering of SERV retained shares
41 See Appendix for a reconciliation of Adjusted EBITDA, a non-GAAP measure, to the nearest GAAP measure. See “Non-GAAP Financial Measures” included in this presentation for a description of the calculation of Adjusted EBITDA.
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Why Frontdoor?
Great core business —a growing subscription business with high margins
Opportunities within core business alone represent significant upside
Unique and powerful marketplace model in home services
Well-positioned to be a leader in the $400B U.S. home services market
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Appendix
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Consolidated and Combined Results
Note: See elsewhere in this Appendix for a reconciliation of Adjusted Net Income, Adjusted EBITDA and Adjusted Diluted Earnings per Share, non-GAAP measures, to the nearest GAAP measure; see “Non-GAAP Financial Measures” included in this presentation for a description of the calculation of these measures; amounts presented in table may not sum due to rounding.
$ millions, except per share amounts
2019 2018 Better / (Worse)Revenue $ 271 $ 247 $ 24 YoY Growth 10%
Gross Profit 128 113 15 % of revenue 47.2% 45.7% 1.5 pts
Selling and administrative expenses 89 81 (7) % of revenue 32.8% 32.9% (0.2) pt
Depreciation and amortization expense 6 4 (2) Restructuring charges — 2 2 Spin-off charges 1 7 6 Interest expense 16 — (15) Interest income from affiliate — (1) (1) Interest and net investment income (1) (1) 1 Income before Income Taxes 18 18 — Provision for income taxes 5 5 — Net Income $ 13 $ 13 $ — Earnings per Share:Basic $ 0.15 $ 0.16 $ (0.01) Diluted $ 0.15 $ 0.16 $ (0.01)
Weighted-average common shares outstanding(1):Basic 84.6 84.5 0.1 Diluted 84.7 84.5 0.2
Adjusted EBITDA $ 43 $ 32 $ 11 Adjusted Net Income $ 16 $ 22 $ (5) Adjusted Diluted Earnings per Share $ 0.19 $ 0.26 $ (0.07)
Three Months EndedMarch 31,
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Net Income to Adjusted EBITDA Reconciliation
Amounts presented in table may not sum due to rounding.
$ millions
Net Income $ 13 $ 13 Depreciation and amortization expense 6 4 Restructuring charges — 2 Spin-off charges 1 7 Provision for income taxes 5 5 Non-cash stock-based compensation expense 2 1 Interest expense 16 — Secondary offering costs 1 — Interest income from affiliate — (1) Gain on insured home service plan claims — (1) Adjusted EBITDA $ 43 $ 32
Revenue $ 271 $ 247 Adjusted EBITDA Margin 16% 13%
Three Months EndedMarch 31,
2019 2018
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$ millions
Net Income $ 125 $ 160 Depreciation and amortization expense 21 17 Restructuring charges 3 7 Spin-off charges 24 13 Provision for income taxes 42 60 Non-cash stock-based compensation expense 4 4 Affiliate royalty expense 1 2 Interest expense 23 1 Interest income from affiliate (2) (3) Gain on insured home service plan claims (2) (1) Adjusted EBITDA $ 238 $ 259
Revenue $ 1,258 $ 1,157 Adjusted EBITDA Margin 19% 22%
Year EndedDecember 31,
2018 2017
Net Income to Adjusted EBITDA Reconciliation
Amounts presented in table may not sum due to rounding.
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Net Cash Provided from Operating Activities to Free Cash Flow Reconciliations
(1)For the three months ended March 31, 2018, earnings per share was calculated based on the 84,515,619 shares of Frontdoor stock that were outstanding at the date of distribution.
Net Income to Adjusted Net Income Reconciliations
Amounts presented in table may not sum due to rounding.
$ millions, except per share amounts
Net Income $ 13 $ 13 Amortization expense 2 2 Restructuring charges — 2 Spin-off charges 1 7 Interest income from affiliate — (1) Gain on insured home service plan claims — (1) Secondary offering costs 1 — Tax impact of adjustments (1) (2) Adjusted Net Income $ 16 $ 22 Adjusted Earnings per Share:Basic $ 0.19 $ 0.26 Diluted $ 0.19 $ 0.26 Weighted-average common shares outstanding(1):Basic 84.6 84.5 Diluted 84.7 84.5
March 31,2019 2018
Three Months Ended
$ millionsNet Cash Provided from Operating Activities $ 52 $ 49Property Additions (4) (5)Free Cash Flow $ 47 $ 44
2019 2018
Three Months Ended March 31,