FTDR - Frontdoor

[Broeb22]

Frontdoor has been mentioned multiple times on this site, so I figured I’d start a topic. I probably would have already bought this company if not for some family members (and seemingly many others) having negative experiences with this industry. In short, I think Frontdoor is making more progress on the path to dominate parts of the home services industry than others trying to do the same. 

Frontdoor is a former spinoff of Servicemaster, and offers home service plans to customers through real estate brokers as well as directly to customers. They function a lot like an insurance company and are partially regulated like an insurance company IIRC.

They generate about $1.5 billion in revenue, ~48% gross margins, mid-teens EBITDA margins, and 75% retention rate, and trade at about 20x FCF.

Their primary competitors are Old Republic Insurance as well as many small companies.  Almost all of these companies are not favorably reviewed by their customers if you briefly check BBB or other reviews. 

The reason this company is now interesting is due to Rex Tibbens’ involvement. Tibbens came from Lyft, so it was curious to have someone from the Silicon Valley world decide to run a sleepy pseudo-insurance company in a largely maligned industry.

Since joining, Tibbens has focused on improving the overall value proposition. Recent wins include an appliance portal which allows customers to choose their replacement appliance in an eCommerce-like experience. He has also acquired Streem, a company that provides video streaming between customers and service providers and enables better diagnosis of problems remotely and reduces frivolous service calls for easy-to-solve issues. ProConnect is a service for those people who choose not to purchase a home service plan that, as it’s name implies, connects customers to Frontdoor-approved service providers, and acts as a customer acquisition channel for Frontdoor while serving the needs of customers that may not desire a home service plan. 
 

All of that is helpful background but the crux of the thesis is this. Other companies trying to dominate the massive (~$250 billion+) home services industry have so far been most successful generating demand for services, but they have struggled to successfully get contractors to do the work customers want (controlling supply). Efforts to address this have been to create fixed-price offerings that remove friction from the time-consuming and non-revenue producing quoting process. Traction so far seems lacking.

By contrast, FTDR represents 40% of its contractors business, so in a sense they control the supply of contractors they use. FTDR only makes use of a small subset of contractors, but they control the supply of those they do. I think it would be a lot easier to continually expand their business to offer additional services/tiers and add more types of contractors to their suite of services. 
 

Thinking about similar industries that have gone from an offline to online transition, BKNG/ABNB gained their advantage by controlling supply of hotels and providing thorough descriptions of their hotel inventory in ways that helped hotels/AirBnBs grow their business. 
 

My working assumption is anyone that wants to control home services needs to control supply and FTDR seems to be doing better at controlling their niche of home services better than others, and I think they can leverage this success into other verticals of home services over time.

 

 

[n.r98]

I don't like it at current EV/EBITDA multiples but I think their business model is more predictable than the other home service companies; solving price transparency, subscription based and steady workflow for SPs. I agree that the reviews are worrying and their ~76% retention rate is less than ideal; considering other membership-type businesses enjoy high 80% like retention rate. Comparison is not apples to apples but still a definite bummer. 

Perhaps you could share some of the negative experiences you've heard from your family members? 

[Broeb22]

My dad did not use American Home Shield, so I can't speak to their service vs. others, although I would hope/expect AHS is more professional. Also, I want to caveat that my dad is pretty frugal so it's not outside the realm of possibility for him to get what he paid for in his home service purchase. 

Anyways, my dad got a home service plan for his house in Florida. I believe it was a 3 or 5 year contract, and he paid the cost of the contract upfront to the company. He noted that they never inspected the appliances for age or wear, and just quoted him a standard price. About 1 year into the arrangement, one of his appliances failed and instead of replacing the unit, the company basically gave him his money back, prorated for the amount of time that had passed. He fought company tooth and nail to get them to pay for his unit (that had already been replaced) but I spent the better part of a Thanksgiving weekend having him walk me through the whole saga. It sounded like an absolute nightmare. Finding a repair person when something breaks seems a whole lot better than dealing with that kind of experience. 

 

With that said, I think FTDR is working on improving the service they provide customers, and if successful in doing so they have a massive runway to take share from smaller competitors as well as grow the home service industry by attracting people who have never had one and perhaps getting people who have been burned to try home service again.

The payment dynamics my dad cited where he pays upfront and then receives service later is a great opportunity to invest the float, one that even FTDR does not really do a good job of. Even a short duration portfolio yielding 2% would generate about $11 million annually based on current cash on hand of $538 million, not a trivial amount when their free cash flow is $175 million. 

[Jurgis]

I don't want to be Mr. Totally Negative on home services area (I've posted negative comments on ANGI), but as a customer I'm pretty negative on this.

This is basically like extended warranties: it's mostly cash grab by the companies peddling FUD. In most cases, the homeowner likely is better off replacing the appliance themselves when they break rather than paying for warranty. Of course, your experience may vary. There is also the issue of companies playing dirty as @Broeb22 described: refusing repairs, refusing paying, refusing replacement with new/good appliance and replacing with used/crappy one. Definition: "Insurance company: a company that collects your money and refuses to pay out when something happens".

Theoretically, it is possibly good to have your appliances regularly serviced because they are on a support/warranty plan. I think the issue in the US is the labor cost. Regular servicing works well in low-labor-cost countries, where the appliance costs 100x-1000x 1hr professional work. Then you can have yearly service at 1%-0.1% appliance cost. In US, where the labor cost is up to 10% (if not more) of appliance price, the service cost is equal to appliance cost through 10 years. So you are likely better off not paying for service and just replacing the appliance whenever it fails.

JMO. Currently I have no service plans/warranties. I've had them in the past. Not horror stories but mostly "not worth it".

Partially OT: I have done couple crappy-economic choices where I have called a repairman for an appliance, paid the base cost of $100-200, refused to pay exorbitant "real repair costs" of $300+, and just bought new appliance. The right thing to do was to replace it immediately without calling repairman.

 

Edited May 12, 2021 by Jurgis

[Broeb22]

16 hours ago, Jurgis said:

I don't want to be Mr. Totally Negative on home services area (I've posted negative comments on ANGI), but as a customer I'm pretty negative on this.

This is basically like extended warranties: it's mostly cash grab by the companies peddling FUD. In most cases, the homeowner likely is better off replacing the appliance themselves when they break rather than paying for warranty. Of course, your experience may vary. There is also the issue of companies playing dirty as @Broeb22 described: refusing repairs, refusing paying, refusing replacement with new/good appliance and replacing with used/crappy one. Definition: "Insurance company: a company that collects your money and refuses to pay out when something happens".

Theoretically, it is possibly good to have your appliances regularly serviced because they are on a support/warranty plan. I think the issue in the US is the labor cost. Regular servicing works well in low-labor-cost countries, where the appliance costs 100x-1000x 1hr professional work. Then you can have yearly service at 1%-0.1% appliance cost. In US, where the labor cost is up to 10% (if not more) of appliance price, the service cost is equal to appliance cost through 10 years. So you are likely better off not paying for service and just replacing the appliance whenever it fails.

JMO. Currently I have no service plans/warranties. I've had them in the past. Not horror stories but mostly "not worth it".

Partially OT: I have done couple crappy-economic choices where I have called a repairman for an appliance, paid the base cost of $100-200, refused to pay exorbitant "real repair costs" of $300+, and just bought new appliance. The right thing to do was to replace it immediately without calling repairman.

 

That's definitely good perspective and I can see how that makes sense. 

I made a different (probably not better) decision (I paid the $300) when it came to an old HVAC unit at my rental property, so we'll see how that works out for me. 

Playing devil's advocate, might you be an outlier financially where you can afford the total cost of replacing an appliance where others cannot? I think back on the common statement made that 40% of Americans can't afford an unplanned $400 expense. I wonder how many could afford a $1,000 expense. 

Either way, my main interest in the company is that Tibbens seems to be approaching the company's opportunity in a different (broader) way. It would probably benefit them to "invest in better service" but if I thought this was the same old company it would not really interest me.

[Spekulatius]

The problem I see for FTDR is that the old way of doing business is very profitable for FTDR, but less beneficial for the customer. Is there really a win win where both the customer experience get's better and the business stays just as profitable but will be growing more (because of a better value proposition for  customers). I don't think it's going to be easy and if they try to shake up the business, the road could be rough.

[Jurgis]

1 hour ago, Broeb22 said:

Playing devil's advocate, might you be an outlier financially where you can afford the total cost of replacing an appliance where others cannot? I think back on the common statement made that 40% of Americans can't afford an unplanned $400 expense. I wonder how many could afford a $1,000 expense.

Oh definitely. IMO poor people are screwed up either way: if they repair for $300, they are paying ~>1/2 of the new price and the appliance may break again; if they don't repair, they don't have money for new; if they buy "warranty"/"service plan", they are likely paying a significant chunk of the appliance price and the company may screw them with repair or replacement like it happened to your dad.

I'm all for FTDR doing a better job with a better price/experience for customers. I just doubt that it works economically with USA labor prices. If they could fix an appliance remotely (from a call center in Bangladesh ), this would be way better business proposition for everyone.

Partially OT: a relative in Lithuania called a plumber for a minor issue. Cost? Euro10. I did the same in MA. Cost? $200. IMO this hugely matters.

[Broeb22]

2 hours ago, Spekulatius said:

The problem I see for FTDR is that the old way of doing business is very profitable for FTDR, but less beneficial for the customer. Is there really a win win where both the customer experience get's better and the business stays just as profitable but will be growing more (because of a better value proposition for  customers). I don't think it's going to be easy and if they try to shake up the business, the road could be rough.

I don’t know that the margins will be as high in the future if Tibbens is successful, but with a business like this where it requires little capital, I would rather  push the pedal on growth than margin. I don’t know that Tibbens will be successful. He’s definitely doing something different and I’ll be paying attention.