Home warranty company Frontdoor (NASDAQ:FTDR) met Wall Street’s revenue expectations in Q3 CY2024, with sales up 3.1% year on year to $540 million. On the other hand, next quarter’s revenue guidance of $367 million was less impressive, coming in 2% below analysts’ estimates. Its non-GAAP profit of $1.38 per share was 31.9% above analysts’ consensus estimates.
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Frontdoor (FTDR) Q3 CY2024 Highlights:
- Revenue: $540 million vs analyst estimates of $541.9 million (in line)
- Adjusted EPS: $1.38 vs analyst estimates of $1.05 (31.9% beat)
- EBITDA: $165 million vs analyst estimates of $133.4 million (23.7% beat)
- Revenue Guidance for Q4 CY2024 is $367 million at the midpoint, below analyst estimates of $374.5 million
- EBITDA guidance for the full year is $430 million at the midpoint, above analyst estimates of $394.6 million
- Gross Margin (GAAP): 56.5%, up from 51.1% in the same quarter last year
- Operating Margin: 28.1%, up from 19.5% in the same quarter last year
- EBITDA Margin: 30.6%, up from 24.4% in the same quarter last year
- Free Cash Flow Margin: 3%, similar to the same quarter last year
- Home Service Plans: 1.95 million, down 90,000 year on year
- Market Capitalization: $3.79 billion
“We have dramatically improved our operations over the last two years and are on pace for a record year of financial performance," said Chairman and Chief Executive Officer Bill Cobb.
Company Overview
Established in 2018 as a spin-off from ServiceMaster Global Holdings, Frontdoor (NASDAQ:FTDR) is a provider of home warranty and service plans.
Specialized Consumer Services
Some consumer discretionary companies don’t fall neatly into a category because their products or services are unique. Although their offerings may be niche, these companies have often found more efficient or technology-enabled ways of doing or selling something that has existed for a while. Technology can be a double-edged sword, though, as it may lower the barriers to entry for new competitors and allow them to do serve customers better.
Sales Growth
A company’s long-term performance is an indicator of its overall business quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for multiple years. Over the last five years, Frontdoor grew its sales at a sluggish 6.3% compounded annual growth rate. This shows it failed to expand in any major way, a rough starting point for our analysis.
Long-term growth is the most important, but within consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends and consumer preferences. Frontdoor’s recent history shows its demand slowed as its annualized revenue growth of 4.8% over the last two years is below its five-year trend. 
We can better understand the company’s revenue dynamics by analyzing its number of home service plans, which reached 1.95 million in the latest quarter. Over the last two years, Frontdoor’s home service plans averaged 5.1% year-on-year declines. Because this number is lower than its revenue growth during the same period, we can see the company’s monetization has risen. 
This quarter, Frontdoor grew its revenue by 3.1% year on year, and its $540 million of revenue was in line with Wall Street’s estimates. Management is currently guiding for flat sales next quarter.
Looking further ahead, sell-side analysts expect revenue to grow 6.6% over the next 12 months, an improvement versus the last two years. While this projection shows the market thinks its newer products and services will spur better performance, it is still below average for the sector.
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Cash Is King
Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.
Frontdoor has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 11.2% over the last two years, slightly better than the broader consumer discretionary sector.
Frontdoor’s free cash flow clocked in at $16 million in Q3, equivalent to a 3% margin. This cash profitability was in line with the comparable period last year but below its two-year average. In a silo, this isn’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.
Over the next year, analysts predict Frontdoor’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 12.8% for the last 12 months will decrease to 10.7%.
Key Takeaways from Frontdoor’s Q3 Results
We were impressed by Frontdoor’s optimistic full-year EBITDA forecast, which blew past analysts’ expectations. We were also excited this quarter's EBITDA and EPS outperformed Wall Street’s estimates. On the other hand, its full-year revenue guidance slightly fell short. Overall, we think this was still a decent quarter with some key metrics above expectations. The stock remained flat at $49.61 immediately after reporting.
Frontdoor put up rock-solid earnings, but one quarter doesn’t necessarily make the stock a buy. Let’s see if this is a good investment. We think that the latest quarter is only one piece of the longer-term business quality puzzle. Quality, when combined with valuation, can help determine if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.
