Frontdoor Inc (FTDR) 2020 Q4 法說會逐字稿

Ladies and gentlemen, welcome to Frontdoor's Fourth Quarter and Full Year 2020 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'll begin today's call. Please go ahead, Mr. Davis.

Thank you, operator. Good afternoon, everyone, and thank you for joining Frontdoor's Fourth Quarter and Full Year 2020 Earnings Conference Call. Joining me today 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 2 of the presentation, I'd like to remind you that this call and webcast may contain forward-looking statements. These 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 SEC. Please refer to the Risk Factors section in our filings for a more detailed discussion of our forward-looking statements and the risks and uncertainties related to such statements.

All forward-looking statements are made as of today, February 18. And except as required by law, the company undertakes no obligation to update 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 their 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 afternoon, everyone. Turning to Slide 4. I want to start by saying I could not be prouder of how our associates navigated an extremely challenging external environment in 2020. They did a fantastic job tackling some of the most difficult issues this business has faced in our 50 year history. I truly believe we are a stronger, more nimble and more efficient organization as a result of how we responded to the COVID-19 pandemic.

While COVID-19 continues to plague the world, we remain focused on meeting the needs of our customers, contractors, associates and shareholders while achieving our goal of sustained double-digit revenue growth. The broader team continues to further the company's vision of taking the hassle out of owning a home, and in turn, made significant strides in improving key areas of our business.

For example, we were able to grow revenue by 8% in 2020 versus the prior year. This was an extraordinary accomplishment considering the difficulties we had to manage through. In comparison, we only grew annual revenue an average of 3% during the global financial crisis. We also increased revenue in 2020 by accelerating opportunistic marketing investments in our direct-to-consumer, or D2C channel, improving our customer retention rate and benefiting from a stronger-than-expected recovery in the real estate market in the second half of the year.

We drove DTC revenue growth by aggressively leaning into much lower broadcast media rates in the spring, when others were pulling back due to COVID-19. This was a very efficient spend for us as we were able to grow our DTC customer base by 12% in 2020, but only a modest increase in our customer acquisition costs. We also launched a new advertising campaign and deepened the talent bench within our marketing team. Expanding our in-house capabilities not only create a step change in efficiency but also bolstered our ability to drive sustained improvement.

Our real estate channel experienced significant swing in the overall demand in 2020. Existing home sales declined 19% in the second quarter and then experienced a remarkable recovery in the back half of 2020. The National Association of Realtors, or NAR, reported existing home sales increased almost 6% for the full year, which was significantly better than 2020 expectations in April.

The growth differential between our real estate channel and NAR data continues to be driven by a record low housing inventory, which, in turn, has created one of the strongest seller's market we have ever seen. This environment reduces the owner's desire to provide a home service plan as part of the sale, which has historically impacted our conversion rate. For us, that means we will sell a higher percentage of home service plans when a seller is paying for our services than when the buyer pays. I will talk about our action plan to address this shortly.

Within our renewal channel, I am pleased to note that our overall customer retention rate increased from 75% in 2019 to 76% in 2020. We are proud of this accomplishment given the macro pressure on our business. For comparison, overall retention declined from 73% to 71% during the global financial crisis from 2007 to 2008. Several factors contributed to our improvement in retention, including establishing a dedicated retention team, a number of process improvements and maniacal focus on moving in sold customers.

Over the last year, consumers have stayed home far more, which has increased both our value proposition and demand for our product. We believe this is a structural change in consumer behavior and will be a tailwind for demand and customer retention for years to come. We intend to use dynamic pricing to closely manage the shift in behavior.

Finally, we expanded our emerging businesses that included ProConnect and Streem. We launched our on-demand offering, American Home Shield, or AHS ProConnect, which grew from 5 to 35 cities in November and will allow us to capitalize on estimated 30 million annual visitors to our American Home Shield website. We also continue the development and expanded use of our Streem technology. Not only do we use Streem for our pandemic response, we are utilizing it internally as well to change the way we deliver service to our customers. In addition, we released software development kits that allow companies to easily integrate Streem into their business, which further enhances our augmented reality capabilities.

On the customer side, we expanded our Streem partner list in 2020 to include well-known brands such as Lowe's, Best Buy, Traeger, British Gas and CLEAResult.

Turning to Slide 5 and our 2021 objectives. First, we fully expect to deliver double-digit revenue growth as a result of the expansion across our 3 home service plan channels as well as growth from our emerging businesses. Within the DTC channel, we are targeting double-digit revenue growth while maintaining a flat customer acquisition cost in 2021 as a result of improvements to our conversion funnel. Maintaining marketing spend efficiency is especially important as marketing rates have increased in 2021 compared to lower COVID-19-driven rates in 2020. The team is also excited to launch new products in our DTC channel that will improve the customer experience and simplify our value proposition.

The new product lineup of Shield Silver, Shield Gold and Shield Platinum is a good, better, best model than we will be rolling out across the U.S. over the next several months. Shield Platinum will be one of the most comprehensive plans on the market, and we will include services such as roof leak repair and higher coverage limits. Shield Platinum will also include maintenance services, such as a free seasonal HVAC tune up. This change aligns with our updated brand messaging of being an advocate and trusted ally for our customers. And we believe it further distinguishes us as having the best home service plan products in the market.

Let's turn to our first year real estate channel, where the strong real estate market fundamentals are expected to continue into this year. In fact, NAR is forecasting existing home sales will grow 15% in 2021 versus the prior year. As I mentioned earlier, NAR reported the housing inventory remains at record low levels, which has resulted in a strong seller's market. This may potentially impact our conversion rates for home service plans paid for by the existing homeowner. We are addressing this dynamic by focusing on selling directly to the buyer in a real estate transaction, leveraging technology to become more efficient in entering into new sales verticals.

For example, we recently signed an agreement with Mr. Cooper, one of the leading mortgage companies in the U.S., which expands our capabilities to sell home service plans.

Next, we are continuing our focus on automating business processes. Our goal of automating and digitizing our business allows us to be more proactive and efficient. This process improvement gives us line of sight with potential service issues and the opportunity to intervene before they become a customer problem. Some initiatives in this area include: one, staying up a customer-facing web-based appliance purchasing portal that will improve the customer experience. This will provide customers more control and choice, improve cycle time and reduce costs. Two, rolling out new mobile-first contractor portal that will offer significantly more contractor functionality over their smartphone. Features include automating approvals, parts ordering and billing. This will be supported by automating our internal authorization process to speed resolution times.

Third, integrating systems with top vendors to increase speed and automation with appliance and parts ordering. And fourth, expanding the use of Streem in our core operations. We are currently implementing Streem in our customer care centers with a goal of having significant usage in and appliance-related service requests and expanded contractor adoption by the end of the year. Streem also gives us an incredible ESG opportunity as we work with contractors to offset our carbon footprint by avoiding unnecessary truck rolls. We are tackling the most difficult manual processes head on this year. If we make these investments in automation, we expect to improve the overall velocity of the organization and reduce service time for customers. Our third objective for 2021 is to expand our customer attention initiatives. This is a holistic approach to the customer journey that involves a large cross-functional team focused on improving customer service, enhancing our technology and more efficiently, leveraging data.

On the customer service side, our North Star has developed a fully automated mobile-first self-service platform to deliver the best customer experience possible. We have made progress on this journey, and we'll continue this longer-term goal as we make more investments in the business. This is all part of our strategy to increase the speed of service.

As I mentioned before, COVID-19 had a 2-side impact on customer service last year. Requests for service increased simultaneously with reductions in staffing levels in our customer care centers. We repositioned resources to address the increase in service requests during the middle of last year and further increased our investment in customer service in the fourth quarter. We saw that effort pay off as customer service levels normalized in all parts of our business, except for the appliance trade. At this point, we are dealing with the industry-wide backlog for new appliances and parts that is a byproduct of the pandemic.

Our manufacturing partners expect this issue to continue through at least the middle of the year. For example, appliance manufacturers have added production lines and increased hiring in order to ramp production, but there is a backlog and it will take time to work through. To further address supply side challenges, we're expanding our supplier network, working with our partners to preorder inventory and automating process by establishing direct links to the manufacturers. The near-term friction in the appliance trade is our largest concern that we have for customer retention rates in 2021. We'll be watching our retention rates very closely through the first half of the year and take the additional steps to mitigate these external factors for our customers. Our cross-functional teams are also working on several customer retention projects in 2021. These include improving customer contact information, automating data capture, expanding outreach initiatives and improving staffing and training related to retention.

We believe continuously improving dynamic pricing will improve retention and expand our customer base as some customers were previously priced out of the market using the legacy state-wide pricing approach. For 2021, we are targeting a mid-single-digit overall price increase delivered to our renewal and DTC channels through dynamic pricing in a way that should not have a material impact on customer retention rates. I am confident we will continue to improve customer service as the impact of COVID-19 hopefully begins to dissipate in late 2021. While risks remain, we believe we have the ability to increase our retention rate again in 2021.

Our long-term retention target remains in the 80% range. We've been making good progress each year on this objective.

Fourth, we'll continue to execute our emerging businesses strategies. This includes AHS ProConnect, which I'll discuss more on the next slide as well as Streem. We intend to expand the use of Streem across our core business in a more meaningful way in 2021. Using Streem in our core operations was one of the original value propositions for the acquisition. They will allow us to increase the percentage of service requests that we resolve the first time and improve customer service. I continue to be impressed as I watch our enterprise partners leverage Streem to deliver an innovative and improved experience to their customers. We will continue to aggressively market Streem to other interested third parties as well.

Now turn to Slide 6, where we'll cover AHS ProConnect. As I mentioned on the last call, we have 3 strategies to optimize our on-demand marketing as it relates to ProConnect. First, we invest directly in paid search to other digital marketing channels that support ProConnect. Second, we will focus on cross-selling services to existing AHS customers. We expect this effort to ramp-up in the second quarter of this year. And third, we'll add ProConnect to the AHS website and leverage organic traffic to generate on-demand jobs. Our target for the website addition is the middle of the year.

Additionally, we will be deepening the trade offerings across our 35 cities served. We already have a foundation in the appliance trade. We are expanding our network of licensed contractors in the plumbing and electrical trades. We will continue to target 80,000 job completions in 2021 as we add additional trades and services. We expect greater velocity of jobs with each passing quarter.

In summary, our business has performed extremely well in this challenging COVID-19 environment, and we have an aggressive set of goals this year. In many ways, 2021 is a year of execution and delivery on our promises. Our primary strategic objective continues to be growth, and the actions we are taking to build out a strong foundation will enable the sustainable double-digit revenue growth and increased profitability as we continue to scale and optimize our platform. We'll continue to look for ways to further our growth through both organic and inorganic means, focusing on growing the core while building an even more robust future with our emerging businesses.

Finally, I'd like to mention that we are taking every effort to dispatch our heating and plumbing contractors in Texas and other states impacted by recent power outages and extremely cold weather to our customers in need. While we expect a vast majority of broken or frozen water pipes and other home damage to be covered under our customers' homeowners insurance policy because they are storm-related or acts of God versus the normal wear and tear that we cover, I do expect an increase in the number of heating service requests. We also hope that people in these impacted areas stay safe and get power back as quickly as possible. I will now turn the call over to Brian. Brian?

Thanks, Rex, and good afternoon, everyone. Let's now turn to Slide 7, and I'll review our fourth quarter 2020 financial results. Revenue increased 8% versus the prior year period to $323 million, driven by approximately 5 points of higher price and 3 points of increased volumes.

If you look at our home service plan channels, revenue derived from customer renewals was up 8% versus the prior year period. Due to improved price realization and growth in the number of renewed home service plans. First year real estate revenue was up 1% versus the prior year period, reflecting improved price realization, partly offset by a decline in the number of first year real estate home service plans. First year real estate revenue was impacted by a 19% decline, the existing U.S. home sales during the second quarter as a result of COVID-19, which impacted revenue growth for the remainder of the year. First year direct-to-consumer revenue was up 13% versus the prior year period, primarily reflecting growth in the number of first year direct-to-consumer home service plans, mostly driven by the increased investments in marketing.

Gross profit decreased 1% in the fourth quarter versus the prior year period to $137 million, and our gross profit margin was 43%, consistent with our historical performance for this quarter. Net income was $2 million, while adjusted net income was $7 million. Adjusted EBITDA was $32 million in the fourth quarter, at the top end of the guidance range provided in early November. We estimate that COVID-19 negatively impacted results by approximately $18 million during the quarter, including $13 million of higher claims costs and an incremental $5 million investment in our service organization in response to the higher call volume and retention improvement efforts.

Moving to the table on Slide 8. We had $17 million of favorable revenue conversion in the fourth quarter versus the prior year period. Excluding the impact of the change from higher revenue, contract claims costs increased $18 million in the fourth quarter versus the prior year period. This was primarily driven by higher cost pressures and an increased number of service requests in the appliance trade as a result of COVID-19 as well as normal inflation across our other trades. We also experienced an elevated level of appliance replacements as a result of the industry-wide appliance and parts availability challenges that increased our costs during the quarter.

Sales and marketing costs increased $6 million in the fourth quarter versus the prior year, which helped to drive growth across our home service plan channels as well as in our emerging businesses. And lastly, the $8 million increase in customer service cost was largely in line with what we mentioned on our last earnings call. The increase was primarily related to managing a higher number of service requests and investments in customer retention improvement initiatives.

Let's now turn to Slide 9, where I'll review the key financial results for full year 2020. Revenue increased 8% versus the prior year to $1.474 billion. This growth was roughly evenly split between higher price and increased volume. Full year 2020 revenue derived from our renewal channel was up 9% versus the prior year. This was due to our retention improvement initiatives aimed at driving increases in renewal units as well as improved price. As a reminder, our retention levels benefit from our recurring revenue model where approximately 70% of our customers are on monthly auto payment or annual auto renewal.

First year real estate revenue was flat versus the prior year, reflecting a decline in the number of first year real estate home service plans, offset by improved price realization. The disruption of the existing home sales activity in the second quarter unfavorably impacted revenue growth in our real estate channel throughout the balance of the year, as I mentioned a moment ago. First year direct-to-consumer revenue was up 9% versus the prior year, reflecting strong growth in the number of first year direct-to-consumer home service plans, mostly driven by increased marketing investments and improved price realization.

Gross profit increased 6% to $716 million in 2020, and our gross profit margin was 49%. This is a strong result given the challenging external environment. Full year 2020 net income was $112 million, while adjusted net income was $132 million. Full year adjusted EBITDA of $270 million was at the top end of our guidance range. We estimate that COVID-19 negatively impacted results by approximately $54 million during full year 2020. This includes approximately $36 million related to higher appliance and plumbing service requests, around $13 million of incremental DTC marketing investments to mitigate the decline in first year real estate volume and about $5 million related to higher service costs.

Moving to the top of Slide 10, we had $88 million of favorable revenue conversion at full year 2020 versus the prior year. Excluding the impact of the change from higher revenue, contract claims costs increased $49 million in 2020 versus the prior year. Similar to the fourth quarter, the increase was primarily driven by higher cost pressures and an increased number of service requests in the appliance and plumbing trades as a result of COVID-19 as well as normal inflation across our other trades.

I'd like to note that our claims costs include the benefit of process improvements made during the year. For example, our operations team was able to increase our mix of service requests handled by preferred contractors to 82%, up over 1% in 2019. As previously mentioned, the higher percent preferred contractor metric correlates to lower costs for us, but more importantly, a better service experience for our customers.

Higher contract claims costs were also partially offset by a favorable weather impact of approximately $7 million during the year. Sales and marketing costs increased $42 million for full year 2020 versus the prior year. This was primarily due to investments to drive growth in our DTC channel, including approximately $15 million of opportunistic investments as well as a normal year-over-year investment increase. Additionally, the increase reflects growing investments to support our emerging businesses.

And lastly, the $19 million increase in customer service costs was primarily related to managing a higher number of service requests and investments in customer retention improvement initiatives. We believe our service investments in 2020 helped to increase our customer retention rate 90 basis points to 76%.

Let's now turn to Slide 11 for a review of our cash flow and cash position for full year 2020 compared to prior year. Net cash provided from operating activities was $207 million, a $7 million increase versus prior year, primarily due to favorable changes in working capital, which more than offset lower net income. The decrease in cash required for working capital substantially improved during the year, driven by increase in amounts due to contractors and suppliers and the timing of trade payables. This increase in amounts due to contracting spars was due in part to the timing of claims payments as a result of industry-wide appliance and parts availability challenges.

Net cash used for investing activities was $31 million, a decrease of $30 million versus the prior year, primarily due to cash used in the acquisition of Streem at the end of 2019, partly offset by an $11 million increase in capital expenditures in 2020, primarily driven by technology improvements. Net cash used for financing activities was $7 million in 2020, the same as the prior year and consistent of required debt principal payments.

Free cash flow, calculated as net cash provided from operating activities minus property additions, was $175 million in 2020, $3 million lower than the prior year, primarily due to higher capital expenditures. Our full year 2020 adjusted EBITDA conversion to free cash flow was a robust 65%. This was due in part to the favorable working capital changes I mentioned earlier. Our 2021 conversion is forecast to be at a more typical level of approximately 50% as a result of an anticipated reversal of working capital this year.

Year-end cash and marketable securities totaled $597 million, a $163 million increase from prior year. Of the nearly $600 million in cash, $180 million was classified as restricted net assets. Our available liquidity at the end of 2020 totaled $668 million and included $418 million of unrestricted cash plus an available undrawn revolving credit facility of $250 million.

Now turning to Slide 12. I'll update you on our capital allocation strategy. I have been extremely pleased with our ability to generate strong cash conversion during the COVID-19 pandemic. With our robust cash generation, we have significantly reduced our net debt leverage from approximately 4x at the time of spin in late 2018 to 2.1x at the end of 2020. The obvious question is, what are we going to do with our cash?

First and foremost, we are a growth company and we will continue to prioritize organic growth. This starts with responsibly investing in both the core home service plan business as well as our emerging businesses. However, even with these investments, we would expect our business to generate a sizable amount of excess cash this year.

Beyond organic growth, we remain acquisitive and continue to evaluate potential opportunities within the home services industry and the technology space, but have not found a transaction that meets our requirements at this point. Debt repayment remains a priority, and we repaid $100 million of our term loan this week. We will also evaluate additional debt repayments later this year, if appropriate.

It's important to note that lenders look at our net debt leverage ratio and that any debt repayment does not change this metric. Also, as I have mentioned in the past, we would look to flex our net debt leverage ratio up to finance an acquisition if needed, and then direct excess cash to debt repayment to flex leverage down post acquisition.

Our final priority for capital allocation is returning cash to stockholders. We continue to consider share buyback as an option for our excess cash, but it's a lower priority at this time.

I'll now conclude my prepared remarks with some comments regarding our full year and first quarter 2021 financial outlook on Slide 13. We expect full year revenue to range between $1.63 billion and $1.65 billion or an increase of approximately 11% to 12% versus 2020. Revenue growth in our core home service plan business is expected to be approximately 10%, with slightly more than half of that growth coming from volume versus price. The remaining 1% to 2% of total revenue growth is expected to come from our emerging businesses.

We're charting gross margin to be similar to last year at approximately 48% as we see continued external pressure from COVID-19 on our business as well as a larger mix of our revenue coming from first year DTC and ProConnect. We expect the elevated level of appliance service requests we experienced exiting 2020 to continue through the middle of the year and then drop to a lower rate. That would still be somewhat higher than historical averages. We're also planning on low single-digit inflation across trades.

In regard to pricing, we'll benefit more in the second half of the year from our mid-single-digit price increases. This will be delivered through dynamic pricing to our DTC and renewal customers. I'll also note, we've planned for some higher weather-related risks in 2021 following 2 very mild weather years from the HVAC service request perspective.

We're targeting SG&A expense to be approximately $530 million to $540 million or just over 32% of our revenue in 2021. More than half of the increase versus prior year is comprised of higher sales and marketing investments to drive double-digit revenue growth from our core business as well as investments in our emerging businesses. It also includes service improvements in our customer care centers to manage additional call volumes and drive retention improvements.

I'll also note for those of you who try to bridge from SG&A to our EBITDA guidance in your models, we expect noncash stock-based compensation to increase approximately $10 million in 2021. Excluding capital expenditures, combined investments of approximately $30 million in ProConnect and Streem in 2021 will help drive our revenue but will have a dilutive impact on our adjusted EBITDA. I should note that the investment will be somewhat higher in ProConnect versus Streem this year. We believe we'll begin to see improvements from both of these nascent businesses as we ramp in 2022 and beyond. These investments, combined with dynamic pricing, improving retention and exiting 2021 with a more normal service request profile in the appliance trade should provide strong tailwinds for revenue leverage and adjusted EBITDA growth entering 2022.

For 2021, we expect adjusted EBITDA to range between $280 million and $300 million, up about 7% or $20 million at the midpoint versus prior year. And we're targeting between $35 million and $45 million of capital expenditures for 2021, primarily technology investments. And an effective tax rate of approximately 20% with a cash tax rate of 23%. Same to the first quarter, we expect our revenue to range between $325 million and $330 million. We also expect adjusted EBITDA to range between $30 million and $35 million.

The first quarter outlook includes the following 4 assumptions. First, continued direct-to-consumer and renewal channel revenue growth and first year real estate revenue to be relatively flat versus the prior year period.

Second, an estimated unfavorable claims cost impact of $12 million to $14 million from higher appliance service requests and costs as a result of our customers continuing to stay at home. We expect the first quarter's impact from COVID-19 to be the largest year-over-year service request increase for the year. Also, we're anticipating a higher number of heating service requests than planned due to the cold weather impact Rex mentioned and believe it's covered in our first quarter EBITDA range.

Third, a $6 million increase in sales and marketing investments to support our growth objectives. And fourth, a $4 million increase in service investments, about $2 million to $3 million of which is to handle the elevated level of appliance-related service requests and the balance to improve the customer experience and retention. In closing, we believe that Frontdoor continues to offer a compelling investment thesis. We're projecting double-digit revenue growth with an expanding emerging business opportunity, strong margins and cash flow generation. We are a people-powered, technology-driven organization that is dedicated to improving our products and offerings and providing long-term value to our customers, contractors, stockholders and other stakeholders in 2021 and beyond.

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. Operator, let's open the line for questions.

(Operator Instructions) And the first question will come from Cory Carpenter with JPMorgan.

I had 2. Maybe just first, and you touched on this a bit in your prepared remarks. But just hoping you could talk more about your marketing plans this year. The level you think is needed to support the double-digit revenue growth and just how you're thinking about marketing behind newer products such as Shield Platinum and ProConnect. And then secondly, just on ProConnect, I know it's still early, but it would be helpful to hear about the traction you've seen since the rebranding and expansion to 35 cities last quarter?

Hey Cory, it's Rex. Good to hear from you. In terms of marketing, I think about a couple of different ways. Certainly, the tailwind that we received from lower broadcast rates has kind of gone back to normal rates. And so we're very focused on conversion this year, and we're expecting to grow first year direct-to-consumer by double digits with a flat customer acquisition cost. So it's going to all be about conversion and the focus of using technology to achieve that goal. And then as it relates to the ProConnect, still early days. But we're right on plan, maybe slightly better than planned. But I would also say that as the year goes on, the plan gets harder as we add more services to the 35 cities. So all systems are go for ProConnect and we're pretty excited about kind of really scaling it this year.

The next question will come from Justin Patterson with KeyBanc.

Great. I hope you're all healthy and safe amid everything that's going on. Two, if I can. First, to follow-up with Cory on ProConnect. Could you talk about just some of the metrics you're looking at to dictate the pace of investment and really warrant further market expansion going beyond just cross-selling to the existing customer base? That's question number one. And then question number two, it sounds like you're making a lot of progress with the retention initiatives. So curious to hear what you think the biggest levers are around that going forward? And then how we should think about the benefits of Streem playing into that over time?

Sure. So as it relates to ProConnect, we're very focused on number of jobs, obviously. But more so, ensuring that we're expanding from just appliances where we are in 35 cities to adding trade services such as plumbing, electric. We're -- first and foremost, we're investing in both the search and digital around ahs.com/proconnect. So really focused on the digital aspects of that. So we're measuring our CAC ratios. And second, we talked about before, I think there's a great opportunity to cross-sell with our existing customers and offer them maintenance services as well as repair services. And then as we talked about last quarter, we think there's a great opportunity in place of why we switched to the rebranding is that we have 30 million annual visitors to our AHS website or American Home Shield website, who don't purchase a home service plan. So I think this is a great opportunity to markets to those folks as well. So we're looking at all those factors as we grow each marketplace or each market rather, and then we have specific metrics around each of those. And that's kind of how we're focused on that.

In terms of retention, this is a -- as you know, we've been focused on retention for -- since we spun the company. A lot of work this year kind of went into moving and sold. We continue to invest in training in our dedicated retention team. I think dynamic pricing certainly will play a factor in improving retention as we get even better about how we price. And then we're automating a lot of processes to improve data capture for real estate customers. Obviously, we don't have the proper contact information. It's really tough to try to get the customer to renew. We're focused on communications.

And then to your point about Streem, that's really the longer-term vision that we have, for integrating Streem within our core business is that, I think there's a real opportunity here to not just pick up the phone and say, hey, we'll send someone out to take a look at it. But really have a 2-way conversation digitally with the customer, be able to capture the make, model and serial number, be able to really, hopefully even provide a DIY solution for the customer, for example, for things like refrigerator freezers that are frozen over. It's just a -- and then suddenly, they're having anyone come out, you can help the customer, walk you through that problem and get them back on their way. So we really see Streem as an incredible opportunity for us to reduce truck rolls in the future, which obviously has a great ESG benefit but should have a cost savings benefit in the future as well.

The next question will come from Matt Gaudioso with Compass Point.

Just a quick question on the real estate channel. Just wondering, for the real estate channel, just given the dynamics in the market with it being a strong sellers market and you mentioned trying to focus on buyers more, could you give a little bit more color there on what you guys are doing? And then just with the being -- like what the dynamics amidst a really strong housing backdrop, but how are you thinking about overall marketing spend in that channel?

Well, we're confident that we can still grow double digits in real estate this year. The team's done a lot of work around kind of shifting to that -- the buyer versus the seller. Obviously, we're looking at geographic mix in our realtor partner performance. So we have a lot more data and a lot more analytics around what's working and what's not, compared to a couple of years ago. Yes, by focusing on the buyer, we're partnering with our real estate partners, we're using technology to alert us when the buyer data becomes available and then reaching out. And then leveraging technology to really (inaudible), in fact, we integrate with our top real estate brokers. And then as we mentioned on the call, additional channels, such as Mr. Cooper, will also help us start to think about beyond just the real estate transaction, but also get into refinancings as well.

Got it. That's helpful. And then just actually a quick follow-up on that. Are you still having real estate agents use Streem for virtual touring? Does that seem like it's a longer-term trend that's sticking?

We're still offering it. It's -- I think from an adoption perspective, it's more on our contractor side, because they've really -- I think, in terms of touring, there's a lot of different tools that they can use. But from a contractor perspective, we're seeing a nice uptick in really working with the more tech-forward contractors who see the value of being able to do more truck rolls per day because they're having the ability to have a conversation with the customer, order parts, understand what's going on, that type of thing. So we're seeing a higher adoption from our contractors than the realtors. But the realtor piece was always just an ability to help our real estate partners and kind of being in the forefront, if you will, as they work through the pandemic.

The next question will come from Ian Zaffino with Oppenheimer.

This is Mark on for Ian. Just a bit on dynamic pricing for us. On the 5 points of price this quarter, is there any way to parse out how much came from dynamic pricing? And then going forward, can you give us a sense of the progress of dynamic pricing within each business segment and how much came to you so far within each trial, just (inaudible).

Sorry, I missed the first part of the question. Brian, if you caught it, feel free, but I think that's the first part of the question.

Yes. I think, Mark, you were asking about, as far as the 5 points of price that contributed to Q4, is that you're asking about, and how much of that was from dynamic pricing?

Yes, that's correct. Correct.

And I think you asked about channel. And Rex, I think it was really the renewals channel that would have driven most of that dynamic pricing benefit, right?

That's right. 69% of our revenues is from the renewals channel. So that's where we focused our efforts first. From a dynamic pricing perspective, we were able to look at it both from a risk decile perspective as well as a usage perspective and price accordingly. So that's kind of how we're looking at each kind of decile, if you will, for both renewals and direct-to-consumer.

Okay. Got it. And then just a quick follow-up. On the CapEx spend for 2021, you guys mentioned this, mostly on technology. Is this more on ProConnect? Or is there any other venture for sales and marketing that's also within that number?

Brian, you want to take that one?

Yes. Happy to. Yes, in that range, probably, it's like 85% of that CapEx spend would be technology focused. And it covers the entire company, Mark, to be honest with you. We've got ProConnect in there, We've got Streem. We've got the HSP business. So it's really covering the entire company. But yes, it does have ProConnect in there.

The next question will come from Michael Ng with Goldman Sachs.

I was just wondering if I could ask about parts availability. You mentioned that as something that could be a risk to retention rates in 2021. Where do we stand today as it relates to parts availability? And can you talk about your progress in terms of establishing direct relationships with OEMs to secure parts? And then I just have a quick follow-up on ProConnect.

I'll let Brian cover that since his team's done all the great work around it.

Sure. Thanks, Rex. And hi, Mike, how are you doing? Yes, that's been a big part of this whole COVID-19 pandemic issue we've been facing is parts availability. And our team, our sourcing team has done, I think, a great job working with our operations team on finding alternate sources of supply, wherever we can to find the parts because we certainly don't want to replace an appliance if you can repair it. So a lot of work has been done there, and it will only get better as we go forward. But still, the manufacturers are focused on building units right now, not parts. So that will change as we go further into the first half of this year and hopefully get back to normal after midyear, and we'll have parts available like we used to pre pandemic. Does that help?

Yes. That does. And just as a clarification on the ProConnect guidance. The $30 million of investments in ProConnect and Streem, is that net of the $20 million of revenue? Or said differently, like do you expect a $10 million loss from ProConnect after investments?

Yes. The $30 million is the OpEx for our emerging businesses. And we did put out the mile marker for $20 million in revenue for ProConnect this year. And we did mention that combine the emerging businesses would be EBITDA negative for the year. We haven't broken that out into the pieces, but they will be EBITDA negative for the year.

The next question will come from Youssef Squali with Truist Securities.

This is Nick Cronin on for Youssef. Two, if I can. Has the pandemic changed in any way your view on gross margins of 50% or better over time? And then secondly, is the introduction of dynamic pricing within the real estate segment still slated for February? And if so, how is that going to be rolled out?

Yes. So from a gross margin perspective, I don't think it changes -- the benefit changes our long-term view. Certainly, the great thing about dynamic pricing, it's allowed us to make moves quickly. But as Brian just talked about, I think we're still square in the middle of the pandemic, and we'll still carry the cost of the appliance burden for at least the first half of the year. So through dynamic pricing and a lot of the other work that we've been talking about, we think we help mitigate that, but certainly not solve at all. And so as the pandemic subsides, I think we have the tailwinds of having made the pricing change. That will certainly improve gross margins, which we can either leave as is or we can always change pricing again and focus on growth.

So we really have, I think, several levers there. In terms of dynamic pricing for real estate. Real estate, as you know, is a little more -- or a little less automated as we work through our different top 10 brokerage firms. And so we leverage the models for the pricing, but we're not planning on implementing it from an automated perspective, because our realty partners aren't doing to have that capability yet. So we do leverage the underlying models to determine the price, but it's not automated yet. But it is for renewals, which are, again, almost 70% of our total revenue in first year direct-to-consumer. So between those 2 things, that's all fully automated, but it will still be a while. I think, before our real estate partners are able to handle an automated pricing.

The next question will come from Brian Fitzgerald with Wells Fargo.

A couple of questions on the -- a few on the new product segmentation. Have you been testing that new segmentation? Could you give us a sense of the pricing tiers maybe versus the current offering? And maybe a sense of how you expect customers to segment themselves or any thoughts on where the weighted average pricing might be going as you roll out those segmentations? And then a quick follow-up on maybe housekeeping. What percentage of the other line was cancellation revenue versus ProConnect? How does that breakout compare maybe versus the prior year?

I'll talk about the first one, then I'll hand it over to Brian for the second one. In terms of -- we're just rolling out the kind of good, better, best or gold -- platinum, gold and silver. I think that in the markets where we have tested it, it definitely played well for platinum because it's, I think, one of the most comprehensive home service plans you can get, which includes higher coverage limits, a seasonal HVAC tune up comes with it as well. And so we're expecting our mix to change somewhat to more platinum. But we -- again, we're not fully rolled out yet. So it'd be tough to give you a number in terms of what the average price is going to be. And then Brian, do you want to take the second one?

Sure. Brian, were you asking about the other bucket of our revenue by channel? $16 million for full year?

Yes.

Yes, less than half of that would have been our emerging businesses in 2020. And for '21, as I said in my prepared remarks, it's more like 1% to 2% of the rev growth. So you do the math, and you can see it's a much bigger part of the like 0.5% that it would have been of that bucket for '20. So it's a much bigger part going forward as we grow those nascent businesses.

The next question will come from Kevin McVeigh with Crédit Suisse.

Great. Congratulations. Brian, I think you talked about a $54 million headwind in COVID, kind of related impact in 2020. And we still did a real nice job coming in at the high end of the range. Were there some offsets that -- and was it maybe just on the delivery footprint, just any offsets that helped to offset some of those headwinds that allowed you to still deliver really, really nice outcome on the (inaudible)

Yes. I think I called out a few, if I could remember, I think we had $7 million of favorable weather in '20. Again, a mild year. Not that we're starting this year mild, but a mild year in '20. We had a number of operational improvements, getting our (inaudible) preferred for our contractor mix to 82% is a great win, as we keep driving that number further up. So yes, there are a number of offsets just through all the initiatives within the company. And I'm probably missing some, Rex. So please feel able to jump in, feel free to jump in.

I think, Kevin, the big one. The things that we're bullish about is, we developed an appliance portal for customers to make replacements easier. Our supply chain team on Brian's team is really, I think, done a nice job in terms of vendor diversification and scale, so that we can focus on parts and replacements. And then I think the team overall, as Brian mentioned, the higher -- chain some more algorithms to get even higher percentage of preferred on our contractors definitely was helpful to us in '20.

And then is there any way to quantify like -- again, maybe another, so I don't -- but just what 100 basis points of that shift to kind of the percentage of preferred would mean from an EBITDA perspective?

Yes. Happy to take that one, Rex. I think in terms this round math, Kevin, of -- it's got to be close to $5 million.

The next question will come from Aaron Kessler with Raymond James.

Maybe first, just on the customer support side, can you just maybe talk us through kind of which inning you're in for some of the changes you're making and kind of what's maybe a completion date -- never a completion date, but just kind of where the progress is? And then maybe from an inflation in parts cost, anything more than kind of normal inflation levels that you recall or pretty average that we've seen it go up a couple of years?

Yes, in terms of customer service, sorry what my phone was a little garbled, what, kind of what...

In some of the changes that you're planning to make there that you've been investing in?

Well, certainly, our North Star for customer service is to be as self-service as possible, meant to be a web or mobile-based self-service so that you don't have to pick up the phone to call anyone, you can solve your problems at your fingertips, so to speak. And it really depends on what part of the business we're talking about in terms of what inning we might be in. Certainly, the appliance portal I talked about before, definitely gets us a lot closer to being fully reliant on self-service. Our ability on our e-commerce platform, which we've done a fair amount of work on this year is, I would say, for the most part, touchless.

But then we have the real estate channel, which still is -- requires a lot of touch for customers. Other things, I think they're going to see in the coming year as we really improve our authorizations process, so we built a new contractor portal, so contractors can resolve what they need digitally as well. So we don't pick up a phone to call for authorization. We can do all that digitally, or a majority of that digitally. And then integrating a lot of our supply chain and our multi-vendor strategy through APIs and things like that, obviously, will help us be more digital as well. So it really depends on the area in terms of the innings. But this is something that's going to be a multiyear journey, but we're -- we continue to be very focused on.

Got it. And just on the inflation of parts cuts, anything out of normal you would call out or just kind of in line with previous years?

Brian, you want to take them?

Sure. Inflation as far as parts cost or just overall, Aaron?

Yes, let me address both overall and a parts cost, specifically.

Yes. We negotiate pretty well on parts cost. The one thing we're keeping our eyes on is steel prices. And I've been following steel at all, but those prices are going up pretty quickly due to auto demand, believe or not. So supply versus demand, prices are going up, and we use a lot of steel in the products we buy. So we're watching that pretty closely. So that's probably first and foremost right now. Is always watching whatever has a lot of steel in, like water heaters and other components.

This concludes our question-and-answer session. I would like to turn the conference back over to Rex Tibbens for any closing remarks. Please go ahead, sir.

Thank you, operator, and thank you to all of our employees, investors and analysts who are on today's call. In summary, I'm extremely proud of how our team met the unprecedented challenges from COVID-19 while delivering solid financial results. We've been making the right investments to accelerate growth and those investments are working. In 2021, we expect to generate sustained double digit revenue growth, while also automating processes, expanding customer retention and advancing our emerging businesses. Thank you again for your continued interest in Frontdoor, and I look forward to speaking with you all again soon.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.