Frontdoor Inc (FTDR) 2019 Q4 法說會逐字稿

Ladies and gentlemen, welcome to frontdoor's Fourth Quarter and Full Year 2019 Earnings Call. Today's call is being recorded and broadcast on the Internet. Beginning today's call is Matt Davis, Vice President of Investor Relations and Treasurer, and he will introduce the other speakers on the call.

At this time, we will begin today's call. Please go ahead, Mr. Davis.

Thank you, operator. Good morning, everyone, and thank you for joining frontdoor's Fourth Quarter and Full Year 2019 Earnings Conference Call. Joining me on today's call are frontdoor's Chief Executive Officer, Rex Tibbens; and frontdoor's Chief Financial Officer, Brian Turcotte.

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 investors.frontdoorhome.com.

As stated on Slide 3 of the presentation, I'd like to remind you that this call and webcast will contain forward-looking statements. Investors should be aware that any forward-looking 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 Securities and Exchange Commission.

Please refer to the Risk Factors section of our filings for a more detailed discussion of our forward-looking statements and risks and uncertainties related to such statements. All forward-looking statements are made as of today, February 26, and except as required by law, the company undertakes no obligation to publicly update or revise 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 the 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'll now turn the call over to Rex for opening comments. Rex?

Thanks, Matt, and good morning, everyone. 2019 was a transformational year for frontdoor. We set out on a journey to reimagine the company from a digital, operational and cultural perspective. I am truly proud of the team's performance to build many of the foundational aspects of our business while driving and delivering record financial performance.

We achieved the objectives we laid out at the beginning of the year. As shown on Slide 4, we're able to drive significant value for our shareholders through a series of technical and business process improvements which can create meaningful transformation as well as a strong team. In 2019, we attracted an impressive group of leaders to augment an already talented team. We also launched our house rules, which guide our decisions as an organization, including ensuring that we are obsessing over customers, being an owner and not a renter, being transparent and building trust and doing great things every day.

In the first half of 2019, the team demonstrated our ability to substantially reduce cost when compared to the prior year. We did this through a series of cross-functional teams that harness several process and technology improvements. These range from better leveraging our preferred contractors to exercising better operational discipline. These efforts, combined with our price increases, allowed us to get our margins back to where we believe they should be, gross margin of roughly 50% and a low 20% EBITDA margin.

In the back half of the year, we refocused on enhancing the customer experience to improve retention and drive additional customer growth. Our focus on the customer experience allowed us to move our retention levels back up to 75% at the end of 2019 and set the stage for further improvements this year. We also had a very active fourth quarter as we introduced dynamic pricing nationwide, an industry first; launched Candu, our on-demand offering; and acquired Streem, a technology start-up.

Now let's dive into Streem a bit more on Slide 5. We acquired Streem in December as we were attracted by its technology and how it can be applied to our business. Streem uses augmented reality, machine learning and virtual reality to improve communication with customers. It can capture relevant data such as brand, model, serial number and measurements to provide technicians with key information they need to complete a job.

I believe Streem is a perfect fit for frontdoor. The technology will be additive to the overall customer service experience, provide faster resolution time through remote diagnostics and reduce costs. In the future, Streem will also diversify our revenue by expanding into licensing agreements with third parties. We already have partners and contractors asking us to use the technology as they too see the power of Streem.

Next, on Slide 6, we launched Candu, our on-demand offering late last year. Since then, we have expanded our offering to a total of 3 cities. Candu offers a free membership that gives customers access to flat-fee appliance repairs, discounted appliance replacements and do-it-yourself content. One of our differentiators is that we offer customers next-day service with the Candu Pro in a convenient 2-hour window. We also provide greater cost transparency with our flat-fee pricing model, which we believe is the only one in the industry. And finally, we give consumers peace of mind through the Candu Will Do Guarantee. This includes a unique 6-month guarantee on all repairs.

We've been pleased with the customer interaction so far. However, we can expect Candu to have a very minor revenue impact in 2020 as we ramp up this newly launched offering, expand to a handful of major cities and at other core trades. As we have stated in the past, we intended to launch in 2019, grow the business in 2020 and further scale and optimize in 2021.

Now please turn to Slide 7. I'll review our objectives for 2020. First, let me talk about our focus to transform the customer experience by leveraging both technology and our great team of associates. On the technology front, we plan to leverage innovations from both Streem and Candu across the larger home service plan business this year. We want to improve the speed and convenience of our service by sharing best practices across all brands. As we continue to deploy new technology across our organization that will improve the customer experience, all of our customers will reap the benefits.

Our journey to improve customer retention will continue to be a key objective for us this year. Although I'm proud of the team's work last year, we still have a lot of opportunity for improving customer retention. To that end, we are redoubling our efforts to improve cycle time, response management and contractor excellence, amongst other initiatives.

Our second objective for 2020 is to drive top line growth. This is a pivotal year for our core home service plan business as well as our new product offerings. As I've stated in the past, we intend to continue to be responsible with our spending in order to balance profitability with growth. In our core business, we'll utilize dynamic pricing to deliver a low single-digit overall price increase, which will help us achieve our gross margin targets this year.

Now let me quickly review our go-to-market channels. Our real estate channel performance did not meet our expectations in 2019. As a result, we implemented a new sales team structure that launched in January of this year. This approach combines technology and increased market visibility to allow our sales group to better service existing real estate partners while focusing on growth.

We are also seeing some stabilization on the macro front with improving existing home sales, driven primarily from lower mortgage interest rates. For example, the National Association of Realtors reported January existing home sales increased 9.6% from a year ago. We believe that if that trend holds, it should translate to a better year for our real estate channel. As a reminder, since the impact of market swings, both positive and negative, is somewhat blunted by revenue being recognized over the course of our annual contracts, it will take time for improving existing home sales to translate into higher revenue growth.

In our direct-to-consumer channel, we continue to increase our investments in marketing to add new customers. We're also making improvements to better align marketing efforts with inside sales staffing and training to drive improved performance in 2020 versus the prior year. As I discussed earlier, we will have an increase in other revenue from Streem and Candu, which are starting off at a very small base.

Our third objective for 2020 is to advance operational efficiencies. We are consistently seeking new opportunities to drive margin improvement, which will partially fund some of our growth initiatives. This year, we are in a better position to leverage data and technology to drive out inefficiencies across our platform. These efforts usually have a dual benefit of accelerating customer repair times as well as reducing costs.

Containing contractor cost is also critical for 2020. We did a great job of maximizing preferred contractors in 2019, and we will continue to look for ways to leverage our scale to drive costs lower.

Additionally, we'll continue to focus on extracting additional value from procurement and customer service costs over time. For example, this year, we will deploy software that makes it easier to identify problems on behalf of our customers as well as help us more efficiently manage our network of customer care centers.

Recently, we added Sena Kwawu as our Senior Vice President of Operations. Sena has led supply chain, process improvement, finance and shared service functions at a number of world-class companies, including Starbucks and General Electric. We are confident Sena will help us improve our operational efficiencies and increase productivity.

Finally, our fourth objective for 2020 is to continue our technology evolution. At frontdoor, we're constantly looking for opportunities to use technology to make homeownership easier for our customers and service delivery simpler for our contractors as well as continue to drive efficiencies in our operations.

In conclusion, it's been a phenomenal year for us, and I'm extremely pleased with how fast we now execute and how far we now have come in such a short period of time. We have a lot to do in 2020, and we're focused on continuing the journey we started as an independent public company in October 2018. This is a critical time for our new businesses, and we remain very excited about the potential growth we can unlock as we launch and expand new services.

I'll now turn the call over to Brian, who'll cover our financial results in more detail and discuss our outlook. Brian?

Thanks, Rex, and good morning, everyone. Please turn to Slide 8, and I'll briefly review a few key financial results from the quarter before I dive deeper into our fourth quarter and full year 2019 performance.

We had another strong financial performance in the fourth quarter with revenue increasing 7% versus the prior year period to $300 million. Similar to the third quarter, the majority of the growth came from price increases implemented in late 2018 and early 2019. Net income increased 11% versus the prior period to $19 million, and adjusted EBITDA increased 3% to $48 million.

Turning to Slide 9. I'll now walk you through the adjusted EBITDA bridge from fourth quarter 2018 results $47 million to $48 million in fourth quarter 2019. Starting at the top, we had $16 million of favorable revenue conversion, primarily driven by the price increases I just mentioned. Claims costs were $1 million higher than the prior year period as a $3 million benefit from process improvements, a $3 million net favorable impact from adjustments related to contract claims cost development and a $2 million benefit related to the favorable impact of seasonally mild weather on claims incidents were more than offset by $9 million of higher inflation and tariff-related costs in the quarter. Sales, marketing and customer service costs increased a combined $6 million versus prior year due to planned incremental investments to drive home service plan growth and to improve the customer experience. And finally, we had a $7 million increase in general and administrative expense, primarily consisting of higher personnel costs.

Let's now turn to Slide 10, where I'll review the key financial results for full year 2019. Revenue increased 8% versus the prior year to $1.365 billion with approximately half driven by higher price and half from increased volume. Net income for 2019 was $153 million or 23% higher than prior year, and adjusted EBITDA of $303 million was up $65 million or 27% versus the prior year.

In regard to the performance of our 3 customer acquisition channels versus prior year, renewal revenue was up 11%, first year direct-to-consumer revenue was up 7% and first year real estate revenue was relatively flat as improved price realization was offset by a decline in new sales units. Gross profit increased 18% to $678 million in 2019, while gross profit margin increased 420 basis points to 50%.

I'll now walk you through the adjusted

EBITDA bridge on Slide 11, which shows the drivers of change from 2018 to 2019. Starting at the top, we had $74 million of favorable revenue conversion, including $57 million from price and $17 million from volume. Contract claims costs were $37 million lower than the prior year as a $30 million benefit from process improvements, a $22 million benefit related to the favorable impact of seasonally mild weather on claims incidents and a $10 million net favorable impact of adjustments related to contract claims cost development more than offset $15 million of inflation and $10 million of higher tariff-related costs. Sales, marketing and customer service costs increased a combined $19 million versus prior year, including planned incremental investments to drive home service plan growth primarily in the direct-to-consumer channel and to improve the customer experience.

Next, we had $4 million of higher spin-off dis-synergies. And finally, we had $25 million in higher general and administrative expense consisting of $10 million of higher personnel costs, $7 million of higher insurance costs, $5 million related to higher incentive compensation and a $3 million increase in other costs, primarily professional fees.

Please now turn to Slide 12 for a review of our cash flow and cash position for 2019 compared to prior year. Net cash provided from operating activities was $200 million, $11 million increase versus prior year, primarily driven by our higher earnings. Net cash used for investing activities was $61 million, an increase of $51 million versus 2018, primarily due to cash used in the acquisition of Streem and a decline in cash flows related to the purchase and sale of marketable securities. In regard to the Streem acquisition, the total purchase price was $55 million, consisting of $36 million in cash and another $19 million of frontdoor equity.

Capital expenditures decreased $5 million in 2019 versus the prior year to $22 million. We ended the year with lower-than-expected capital spending due to the timing of certain call center investments shifting into 2020 as well as lower-than-anticipated technology investment. Net cash used for financing activities was $7 million in 2019, $158 million lower than prior year. The 2019 total included debt payments while the significantly higher financing activity 1 year ago was driven primarily by net transfers to our then parent ServiceMaster that ceased post spin-off on October 1, 2018.

Free cash flow, which we calculate as net cash provided from operating activities minus property additions, was $178 million in 2019, $16 million higher than the prior year. This 10% increase was primarily driven by higher adjusted EBITDA and lower spin-off charges, partially offset by higher interest and tax payments. I am pleased to note that our full year 2019 adjusted EBITDA conversion to free cash flow was a robust 59%.

Year-end cash and marketable securities totaled $434 million, a $129 million increase from year-end 2018. $168 million of the total were considered to be restricted net assets. This is a $34 million reduction from the end of the third quarter of 2019, due to actions taken to reduce the restricted asset requirements in certain states.

Please now turn to Slide 13 for a review of our capital structure. We successfully executed our strategy to improve our capital structure in 2019 as we reduced our net debt by 23% and leverage ratio by about 40% since the spin-off. Our adjusted EBITDA growth and increasing unrestricted cash balance drove our net debt to adjusted EBITDA leverage ratio down to 2.4x at the end of the year and clearly demonstrates the strong growth and attractive financial profile of frontdoor. As a reminder, our excess cash use priorities in rank order continue to be organic growth and acquisitions, debt repayment and distributions to shareholders in the form of share repurchases and dividends.

Turning to Slide 14 and our full year 2020 outlook. We project revenue to range between $1.47 billion and $1.49 billion. Please note that the vast majority of our 2020 revenue is expected to be derived from our traditional home service plan business as projected revenue from Candu and Streem will be modest in the early stages of their respective growth profiles.

We expect full year gross margin to range between 49% and 50% in 2020. This reflects the favorable impact of dynamic pricing, continued process improvement and cost reduction efforts. Please also note that we are forecasting a normal seasonal weather pattern impact on claims incidents in 2020. Additionally, our suppliers do not foresee any unfavorable impact on their supply chains from the coronavirus at this time, but it's an area that we will continue to monitor very closely.

Full year 2020 adjusted EBITDA is anticipated to range between $300 million and $320 million. We expect selling and administrative expenses as a percent of revenue to increase approximately 200 basis points versus prior year to roughly 31%, primarily due to increased investments in technology, sales, marketing and customer service and higher corporate costs. This includes about $15 million to $20 million for Candu and Streem. About 2/3 of the increase is related to sales, marketing and customer service, while the other 1/3 is related to general and administrative expense, which includes our non-capitalized technology investment. We expect these investments to improve our ability to scale the business more efficiently and drive profitable growth in 2020 and beyond.

Full year 2020 CapEx is projected to range between $30 million and $40 million, primarily related to technology and call center investments and include some spend that rolled over from 2019. The full year 2020 annual effective tax rate is expected to be approximately 25%. In addition, in terms of the first quarter of 2020 outlook, we expect adjusted EBITDA to range between $40 million and $45 million.

With that, I'll now turn the call back over to Matt to open the question-and-answer session. Matt?

Thanks, Brian. As a reminder, during the question-and-answer session, we encourage you to ask any questions that you may have but please note that guidance is limited to the outlook we provided in our press release and webcast presentation.

Operator, let's open the line for questions.

(Operator Instructions) Our first question comes from Justin Patterson with Raymond James.

Two, if I can. First, I was hoping you can go through the puts and takes on top line guidance more. Could you elaborate more on unit growth, pricing and retention assumptions related? How should we think about Streem and Candu's benefit, both from a direct revenue standpoint and from improving operations in the core business? Then the second question, could you talk about -- more about Candu, the pace of expansion and the KPIs you're monitoring to dictate investment level there?

Justin, it's Brian. I don't think I got all those down, but let me try to remember what you asked. Regarding the revenue guidance for 2020, I think between price and volume, it's probably not that different from 2019, where I think we said it was 50-50 roughly between the 2. I think there's a question regarding the Candu investments.

Yes. So for -- one of the questions you asked is kind of how does the technology help us on our core business. Yes, certainly, from a Streem perspective, being able to kind of take that customer journey with the customer and being able to kind of see what they see really will allow us to: one, better understand the problem; two, hopefully avoid sending out a technician; and three, reduce the number of truck rolls, if you will, for Streem.

For Candu in terms of the kind of what do we think about in terms of our KPIs, yes, we really look at the effectiveness of our marketing spend. As we've talked last time, it's really not hard for us to expand into cities. We already have the contractor base built. It's really about getting the efficiency down on your marketing, making sure that -- we're really excited about other forms of marketing, like local marketing, for example. So we're more focused kind of in those areas. And the ultimate KPI is obviously the number of jobs. So that's kind of how we're viewing it, and -- all while trying to balance profitability and growth.

Our next question comes from Cory Carpenter with JP Morgan.

Two for me. On the 2020 margin guide, if you back out on-demand and Streem spend, which you mentioned at $15 million, it implies margins for the core home service plan business that are relatively flat year-over-year. Could you talk about some of the puts and takes on the margin side this year? Any help quantifying certain buckets of spend such as tariffs? And maybe I'll hop back to a follow-up after.

Yes. Let me talk a little bit about gross margin in '19, and then we can talk about 2020. As you know, in the prepared remarks, we had $22 million of favorability in gross margin from weather, favorable incidence related to weather, and we had $30 million of process improvement benefit. Those -- we're not expecting weather would be that favorable again in 2020. But it could be, but we just don't think it will. We haven't projected that way. And the $30 million are baked in our run rate. So we continue to work on process improvements, but the focus in 2020 is more on retention at this point than the gross margin cost reduction. So that's baked into the calculus for 2020.

There was another question there. Oh, tariffs. We're not seeing -- through our negotiations with all of our vendors, the $10 million that we saw in 2019 is in our run rate. And we weren't hit with any other tariff related to steel in 2020.

Okay. Great. And then just a follow-up on Candu. Just Rex, maybe if you could -- or Brian, if you talk about the unit economics of an on-demand service request versus that of a core home service plan and how that margin profile could differ longer term.

Yes. So just as a reminder, we're a couple of months in, so unit economics are vastly different because we're growing the business. But I think over time, one should expect a margin profile similar to our current business but it's still early days.

Cory, this is Brian again. I didn't hit your -- I just hit gross margin, I didn't hit the total EBITDA margin, which was your question, I believe. As I mentioned, we're going to invest more in SG&A in 2020. I think I broke it out. 2/3 is going to be sales and marketing and customer service, and the other 1/3 is going to be technology and general, administrative. Again, that's -- we're trying to grow units and improve the customer experience. So that explains the SG&A side of it.

Our next question is coming from Youssef Squali with SunTrust.

Two quick questions for me. So the first is just around China. I was wondering how much visibility you actually have into your supply chain. And it seems like, from your prepared remarks, you said you don't see much of an impact. That seems a bit hard just considering what we're hearing from others. So maybe you can flesh that out a little bit for us.

And second, if I look at the midpoint of your 2020 guidance, I think it implies margin contraction of about $100 million to $150 million. So I'm assuming most of that is from that $15 million increase in sales and marketing and G&A -- and tech that you mentioned Brian. But as you look at the business longer term, what kind of long -- margins do you see this business supporting? And I'm talking adjusted EBITDA margins.

Yes, great question, Youssef. Thank you. I know you cover the FAANG companies and they're being hit pretty hard by China. But ever since the coronavirus became public, we've been speaking with our OEMs and parts suppliers regarding their supply chain. And at this point in time, as I mentioned, they just don't see a disruption in their supply chains from China.

The good news is not everything that we purchase comes from China. We get a lot of our appliance parts from the U.S. and Mexico. We've got extensive inventory on hand according to our suppliers. South Korea is also a source of appliances for us. So we just don't see the disruption yet, but we're not going to be so Pollyanna that we don't think it couldn't happen. But as of right now, we just don't see an impact on our supply chain.

I'd also add that the majority of our systems and appliances are 10-plus years old. So the parts have already been manufactured from a parts perspective. It's -- more of the watch out is around replacements, which we watch closely.

And regarding your margin question, Youssef, a little compression from a very outstanding year in 2019, where we had all that favorability, again, from the weather and the process improvement. So although it's down a little bit, it's still within our guidance that we set long term of about 50% gross margin and low 20s as far as EBITDA margin. So we're still pretty bullish on our margins. And I guess you asked about long term, and that still holds for long term.

Our next question is from Ian Zaffino with Oppenheimer & Company.

Rex, can you maybe discuss a little bit about lead sources on Candu? How are you actually going about acquiring the customers? How is the cost kind of that you're seeing now compared to what you had anticipated originally and just more holistically about that?

Yes. So certainly, we rely on digital. We're also relying on other local marketing channels as well. I think we're kind of in line with our expectations in terms of -- from a cost perspective. It's really about driving awareness at this point, right? So that's the area we're super focused on, is making sure that people understand the product and what it is and then driving adoption and conversion. So that's kind of where we are in the couple of months that we're in.

Okay. And then also, I know we touched on tariffs. Is there any other inflation that's kind of baked into 2020? And Brian, I know when we talked last, you were talking about maybe consolidating your purchasing. I don't know if you've done that already or in the process of doing that and what that would do maybe to inflation as well.

Yes. Thanks, Ian. Good question. Yes, typically, we bake in low single digits for inflation just from contractors and parts, but we negotiate pretty hard. And to the second part of your question, as Rex mentioned a few quarters ago, procurement supply chain enrolls under the finance team so we scrutinize every purchase and every agreement pretty closely. So we're going to continue to expect that part of our business to reduce costs. So there's more to come on that.

Our next question comes from Ralph Schackart with William Blair.

Just circle back on Candu. Just curious if you can give us some perspective or some feedback on how the product or service is doing versus your expectations on the supply side with contractors and engagement on the demand side. Perhaps what's going better than expected? What maybe needs some more fine-tuning?

And then just on the guide this year, for 2020, I think you said you're in 3 cities now. Just curious how many new markets may be incorporated in the 2020 outlook.

Sure. So we started out in appliances only, so a fairly small base. We've just recently expanded to Houston and Dallas to make up the 3 cities, so Atlanta, Houston and Dallas. I think what's gone well is being able to attract the -- our contractors. The actual work products has been, I think, really well received by customers. The part that we're -- that frankly need more work on, and we expected it, is driving the right level of marketing awareness and conversion. So those are the things that we knew we need to be focused on, and we are, as a team.

And in terms of kind of what other cities, I think we'll be in a handful of NFL cities. It's really more about setting the budget and making sure that we're getting the right level of conversion and adoption that we're looking for and to light up intensity in the ones that would be hard for us. It's more about making sure that we feel good about the marketing scale that we can gain from doing that.

Our next question comes from Chris Gamaitoni with Compass Point.

I was hoping you could expand on Streem partnerships. How are the partners in -- as that's envisioned, benefiting? And how do you monetize that relationship? I'm not clear I get it yet.

Sure. So I can't -- because we're under NDA, I can't name the actual companies but several large companies. I think the first use case that people get really excited about is the same use case that got us excited about Streem. And that's the ability for your customer service agent to send the customer a text, no app needed, you just open up the link and then you have almost like a FaceTime-like conversation with the customer where you're walking him through the issue. So you can imagine -- let's say, you're a cable company and you don't know how to hook up your router, that's one use case. You're an appliance company and you don't know kind of where to -- something as simple as where do I put the detergent in, where do I pull this part out or, et cetera. All that can be done through virtual help.

You can annotate the beauty of the software is also with the -- mainly the augmented reality features but also the ability to recognize what refrigerator or appliance or what have you is. That all saves time on the back end. So if you're a major retailer, this could be a great way to deliver an incredible customer experience.

And I think it's a robust pipeline, but again, a small team. So my first objective is to make sure that we can leverage the technology for frontdoor and then secondly, move more towards third-party relationships that are advantageous to both frontdoor as well as the customer.

And how would that be monetized? Like are you licensing the software? Or is it -- would you envision a per-usage basis?

Yes, sorry. We license the software. So within the call centers and it's a -- could be a per-seat license or enterprise license. All things we -- vary today, but we need to standardize. And then for some use cases like -- for example, our contractors are already begging for the technology. And so I view it as a great way of maybe something we provide for our preferred contractors but charge other contractors, right? So those are all potential revenue streams that we have to unpack, if you will.

Okay. And then moving to Candu. How do you think about the scaling of marketing costs? I understand this is kind of a growth year. My question really is, will marketing -- will we see a multiyear growth year where revenue kind of lags expansion? Or will there be a period in the next 2, 3 years that we can see it move to at least breakeven?

Yes. I don't think it's a long-term horizon. Frankly, I would back it down a little bit, if you will, if we can't get it really to scale in the next couple of years. The thing that -- our major tenet here is we're a public company, we want to grow responsibly and balance growth and profitability. And I think we can achieve both of those objectives with Candu. What that means is that we're not going to run with scissors, if you will, from a marketing perspective and blow a lot of money to get a lot of units. I want to do that in a way that's sustainable, and that may take a little longer than a traditional kind of start-up method might take. But I think it's the right thing for shareholders, and that's kind of how we're viewing it.

Our next question comes from Jamie Clement with Buckingham Research Group.

Brian, if I could get -- just ask another question about top line guidance. I think the low end is about 8%. I didn't see a plan growth number in the slides today. But based on your disclosure over the last couple of quarters, that -- the pace of growth has kind of gone from kind of mid-single digit to kind of low mid-single digit. Do you expect in 2020 to be able to realize the same kind of level of pricing that you got in 2019 via dynamic? Or do you expect to get to 8% by reaccelerating plan growth?

Jamie, it's Rex. I'd like to take that one. I think a couple of things to think through. One is over 2/3 of our revenue is renewals, so really just focusing on ensuring that we're doing the right thing to drive retention, which you saw we rounded back up to 75%. And we're not happy with 75%, so we're going to continue to do a lot of work in that area. That certainly drives growth.

When you think about -- we've talked about we're not happy with where we were from a real estate perspective last year. We actually saw, from a macro perspective, the real estate market was improving in the back half of the year. The issue is that because we recognize revenue 1/12 at a time, if we have a good December, it doesn't really show up in the numbers, right? So we think that the work we're doing around real estate as it relates to the new sales team structure, the new comp structure from the technology we put in place and then just the macro changes that we're seeing with the lower interest rate, all should provide great tailwinds for real estate this year.

For direct to consumer, the last kind of leg in the stool there, is that -- I think we saw great marketing efficiency. What we didn't see last year was a great alignment with marketing and our internal sales team. So we've made a lot of changes there to ensure that for every dollar we're spending on the front end, if you will, from a marketing perspective, that we can harness that dollar and making sure that we have the correct butts in the seats for our internal sales team. So a lot of changes there from an alignment perspective to make sure that we're driving or top line growth.

And Rex, just a follow-up. How is the progress in terms of getting more involved with some of the online realtors?

We're on track. So we talked about our partnership with HSOA. That's going really well.

The other thing I didn't mention, Jamie, was dynamic pricing. So the great thing that now that the technology is built, we launched it in late October for renewals, we don't have to worry about trying to kind of peanut butter spread pricing. We can do that now on a ZIP+4 basis. We expect there's a lot more things we can do with dynamic pricing to drive top line growth. Kind of midway this year, we'll launch it for direct to consumer. And then, to be honest, we got to figure out real estate because it's still kind of a paper world. So that, combined with work -- we work with 10 of the top 10 realty firms. We think we're pretty bullish on the business.

Our next question comes from Kevin McVeigh with Crédit Suisse.

Yes. I wonder -- Rex, can you give us a sense of what dynamic pricing can mean to margins in 2020 and how you're balancing that against the strategies around improving your retention?

Sorry, how dynamic pricing can do what? The phone kind of...

Yes. How -- the dynamic pricing initiative for 2020, how that can impact kind of margins -- what you have in terms of dynamic pricing relative to the margin benefit in 2020 and then ultimately, how you're balancing that against the retention initiatives.

Sure. So the power of dynamic pricing is that now that you have pricing on a kind of sub-division level, if you will, it's always been our hypothesis, is that in some areas, we probably overpriced given the level of claim costs that we should expect. So in terms of driving top line growth, I think this is a great way of kind of rebalancing, look at the world kind of in a decile basis for dynamic pricing.

For margins, we -- today, it's really on labor rates. As we begin to make dynamic pricing smarter, if you will, ingesting data such as is this a Sub-Zero neighborhood versus a Whirlpool neighborhood, we'll be able to price accordingly. Also, I think there's a lot of benefit to be able to understand price curves by neighborhood. Dynamic pricing really gives you that opportunity as well. So there's a lot of both top line and margin expansion ideas around dynamic pricing that we're pretty excited about.

Our next question comes from Brian Fitzgerald with Wells Fargo.

You noted some actions to reduce restricted cash requirements in certain states. Was that a change that you were able to drive? Was that a product of engagement with state regulators or legislative action? Are there additional opportunities there?

And then at Candu, apologize if this was covered, I don't think it was. But the website notes that you have some additional service areas coming, plumbing, electrical, HVAC, what are the gating factors on getting those services out in the market versus appliance repair?

Why don't we take the last one first, and then Brian can talk about restricted cash. Great question on Candu. As just mentioned earlier, we started in appliances, but our goal is to expand to all of our core trades. The -- what holds us back there is actually not supply or contractors. It just kind of goes back to both product work as well as marketing. It's 99% marketing. So we plan this year to, at least in some cities, roll out far more than just appliances, and that will give us an even better signal in the market.

Brian, do you want to talk about restricted cash?

Sure. Yes, it's a great question. Yes, we -- our treasury, legal, accounting, FP&A teams really dove into this issue. And as you know, we've got these third-party restrictions regarding net worth and capital requirements in certain states. And I think just by better understanding the requirements and a lot of good work done internally, we're able to drop that by $34 million. And hopefully, we can continue to look at those requirements going forward and bring it down even more because that cash is just tied up and we can't do anything with it. So the more we can make unrestricted, the more we can employ it in growing the business. Did that help?

Yes.

Our next question comes from Michael Ng with Goldman Sachs.

I just had 2. The first is just on process improvements. And while appreciating that you guys said that there isn't set much in guidance for 2020 in terms of incremental process improvements, it seems like there should be some more opportunities, whether that's in procurement or in customer service. Is that right? And could you just talk about what you're working on there?

And then the second question is just on the -- on Candu investments. The $15 million to $20 million, how did you decide that, that was the right number for 2020? And how should we think about the cadence of that spending through OpEx throughout the rest -- throughout 2020 in terms of the quarterly cadence?

Michael, it's Rex. In terms of process improvements, I think there's a lot of opportunity left at frontdoor. It's just not low-hanging fruit, right? So when I talk about things like procurement leverage and moving the world to more self-service, those things take a little more time but should bear a lot of fruit when you consider that our customer service costs are still like around 68% of our overall revenue.

So we think there's still a lot of areas to go harvest, if you will. And the teams haven't stopped -- the entire teams haven't stopped in terms of harnessing more opportunity. This could be a little longer term, a little more use of both product and technology to solve the problems. So I'd say we're still being very aggressive in that area.

In terms of Candu, one of the things that I really think about and the team thinks about is really staging marketing in terms of the marketing expense versus the output, right? So in terms of phasing, we've kind of set this $15 million to $20 million budget. We also have stage gates built along the way to really understand are we getting the maximum efficiency that we expect? And if not, let's pivot and try something different. So that's really the road map for how we think about 2020.

And in terms of how do we get to the $15 million to $20 million number, it's really just a function of how many cities do we think we're going to launch in and how many trades will we expand into and what's the rough number that we'll need in order to achieve those goals. And that's how we wound up with the $15 million to $20 million.

Ladies and gentlemen, that concludes the question-and-answer session. We will now turn the call back over to Rex Tibbens for some closing remarks.

Thank you, operator, and thank you to all our analysts who participated on our call today. I'm extremely pleased with our strong performance in 2019. The team had a great year and should be proud of their accomplishments. However, our DNA is focused on doing great things every day. So we have already turned our attention to making tremendous progress in 2020 as well.

We have a robust set of goals and objectives for this year and look forward to reporting on our progress against them on our first quarter earnings call. Thank you again for your interest -- continued interest in frontdoor.

Ladies and gentlemen, this does conclude today's teleconference and webcast. We thank you for your participation, and you may disconnect your lines at this time.