Frontdoor(FTDR) - 2024 Q4 - Annual Report

Financial Performance - For the year ended December 31, 2024, Frontdoor generated revenue of $1,843 million, net income of$235 million, and Adjusted EBITDA of $443 million[34]. - The company generated 78 percent of its home warranty revenue through existing customer renewals, compared to 77 percent in 2023 and 72 percent in 2022[63]. - The renewal revenue for home warranties was$1,437 million, $1,367 million, and$1,203 million for the years ended December 31, 2024, 2023, and 2022, respectively[64]. - The company’s revenue is primarily derived from home warranty contracts, which are typically one year in duration, and recognized over time based on service costs incurred[215]. - The company experienced seasonal fluctuations, with approximately 21% of revenue recognized in Q1, 29% in Q2, 29% in Q3, and 21% in Q4 of 2024[206]. - The company’s labor, parts, and equipment costs are affected by inflation, impacting overall profitability[209]. - Operating expenses are influenced by inflationary pressures, including salaries, contractor costs, and regulatory compliance costs[216]. - Gross profit is calculated by deducting the cost of services rendered from revenue, with gross profit margin expressed as a percentage of revenue[217]. - Adjusted EBITDA is defined as net income before various expenses, with Adjusted EBITDA margin calculated as Adjusted EBITDA divided by revenue[219]. - Free Cash Flow represents net cash provided from operating activities less property additions, serving as a key cash flow measure[220]. Customer Base and Market Position - As of December 31, 2024, Frontdoor had approximately 2.1 million active home warranties across all brands in the United States[29]. - Approximately 78% of Frontdoor's revenue in 2024 was generated through existing customer renewals, with 84% of home warranty customers on a monthly auto-pay program[31][43]. - Frontdoor's home warranty category currently represents approximately $4 billion in annual revenue, with only about 6$125 million, $141 million, and$184 million for the years ended December 31, 2024, 2023, and 2022, respectively[60]. - The direct-to-consumer channel generated revenue of $166 million,$194 million, and $219 million for the years ended December 31, 2024, 2023, and 2022, respectively, with a renewal rate of 72 percent[62]. Acquisitions and Strategic Initiatives - The acquisition of 2-10 HBW in December 2024 expanded Frontdoor's builder partnerships to approximately 19,000, enhancing its position in the new home structural warranty market[28]. - The company completed the acquisition of 2-10 HBW on December 19, 2024, for an aggregate cash consideration of$585 million, enhancing its customer base and revenue opportunities[202]. - The company anticipates strategic acquisition opportunities in the fragmented home services industry, having recently acquired 2-10 HBW to expand its customer base and revenue[58]. - The company faces risks related to the integration of 2-10 HBW, which may include unforeseen difficulties and increased costs[149]. Technology and Innovation - The company plans to leverage its technology platform, including video chat and augmented reality, to enhance customer service and reduce the need for in-home visits[41][42]. - The company continues to invest in digital innovation, with approximately 46 percent of home warranty direct-to-consumer sales made online in 2024[73]. - The company has implemented a cybersecurity risk management strategy to protect its systems and data from potential threats, integrating it into its overall enterprise risk management program[176]. Regulatory and Compliance Risks - The company faces risks related to regulatory compliance, which could adversely affect its operations and financial position[86]. - The California Consumer Privacy Act (CCPA) and the California Privacy Rights Act (CPRA) impose new compliance requirements that may increase operational costs[126]. - The company is subject to various federal, state, and local laws that could increase legal and regulatory expenses, impacting financial performance[128]. - Evolving corporate governance regulations may increase administrative expenses and require significant management resources to ensure compliance[140]. Economic and Market Conditions - The company’s financial performance is influenced by macroeconomic conditions, including inflation and interest rates, which have negatively impacted home sales in recent years[93]. - The Federal Reserve's interest rate decisions have led to buyer apprehension, affecting home sales and consequently the company’s business[94]. - Consumer demand for home warranty services is influenced by macroeconomic conditions, including interest rates and inflation, as well as marketing efforts[104]. - Increased operating costs due to inflation and global supply chain challenges have led to a rise in contract claims costs, adversely impacting financial performance[111]. Workforce and Employee Relations - As of December 31, 2024, the company’s workforce is composed of 63% female, 37% male, and 42% racially/ethnically diverse employees[80]. - The company has engaged in a review and update of employee benefits and vacation programs in 2024 to enhance healthcare coverage[81]. - The company faces challenges in attracting and retaining qualified key employees, which could impact operational success and financial performance[114]. Debt and Financial Obligations - As of December 31, 2024, the company had $1,199 million in total consolidated long-term indebtedness, which includes borrowings for the 2-10 HBW acquisition[160]. - The company does not intend to pay cash dividends in the foreseeable future, focusing instead on business development and debt repayment[155]. - The company has significant variable rate indebtedness, with a one percentage point increase in interest rates resulting in approximately$6 million increase in annual interest expense on Term Loan Facilities and $3 million on the Revolving Credit Facility as of December 31, 2024[163]. - The company’s ability to generate sufficient cash flows from operations to service its debt obligations is uncertain, which may force it to delay capital expenditures or restructure its debt[169].