Frontdoor(FTDR) - 2022 Q4 - Annual Report

Financial Performance - As of December 31, 2022, the company had 2.1 million active home service plans, contributing to a revenue of $1,662 million for the year[21][24] - The company achieved a 4% annual revenue growth from 2021 to 2022, despite the adverse economic impacts of the COVID-19 pandemic[37] - For the year ended December 31, 2022, the company reported an Adjusted EBITDA of $214 million, reflecting strong operational efficiency[24][38] - The company generated net cash from operating activities of $142 million and Free Cash Flow of $102 million for the year ended December 31, 2022[38] Customer Retention - 72% of the company's revenue in 2022 was generated through existing customer renewals, indicating strong customer retention[22][37] - Customer renewals accounted for 72% of total revenue in 2022, up from 69% in the previous two years, highlighting improved retention strategies[53] - The DTC channel generated revenue of $219 million in 2022, with a renewal rate of 74% after the first contract year, indicating strong customer retention potential[52] - The overall customer retention rate was 76% in 2022, calculated based on the number of ending home service plans relative to the total plans available, indicating a stable customer base[55] Market Potential - The home service plan category currently represents approximately $4 billion, with only about 4% of U.S. households covered by such plans, highlighting significant growth potential[25] - The company plans to increase home service plan penetration by targeting homeowners more effectively and improving customer experience[39] - The company anticipates continued strategic acquisitions in the fragmented home service plan market to grow its customer base and enhance service offerings[48] Operational Efficiency - The preferred contractor network completed 82% of service requests in 2022, enhancing service quality and customer retention[23] - The contractor network consists of approximately 15,000 pre-qualified firms, with preferred contractors completing 82% of service requests in 2022, enhancing service quality and customer retention[58] - Investments in technology, including the Streem platform, are aimed at enhancing service efficiency and customer engagement[31][42] - The company aims to leverage its extensive data platform, built since 1971, to improve business decisions and customer experience, potentially reducing operating expenses[47] Financial Strategy - The company maintains a capital-light business model, which supports strong cash flow generation and limits capital expenditures[38] - The company has implemented dynamic pricing in its renewal and DTC channels, allowing for adjustments based on contractor network strength and market characteristics, aiming to attract previously priced-out customers[44] - Direct supplier spend constituted about 20% of the cost of services rendered in 2022, with seven national suppliers accounting for over 5% of supplier spend, indicating reliance on key suppliers[59] Regulatory and Economic Factors - The company is subject to various federal, state, and local laws and regulations, which could increase operating costs and limit service offerings[75] - Changes in macroeconomic conditions, such as inflation and supply chain challenges, could materially impact future results of operations[79] Interest Rate Management - The company manages interest rate exposure through variable-rate and fixed-rate debt, utilizing an interest rate swap agreement with a notional amount of $350 million[251] - The fixed interest rate on the $350 million notional amount is 3.0865%, plus an incremental borrowing margin of 2.25%[251] - As of December 31, 2022, a one percentage point change in interest rates would result in an approximate $3 million change in annual interest expense on the Term Loan Facilities[252] - The company has a total variable rate debt of $265 million with an average interest rate of 6.2%[254] - The average rates paid and received on the interest rate swap during the year ended December 31, 2022, were 3.1% and 1.7%, respectively[254] Research and Development - The company plans to continue dedicating resources to research and development to maintain and improve its product offerings[72]