© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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 frontdoors, 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 or 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 Risk Factors section of our filings for a more detailed discussion of our forward-looking statements and the risk 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 our 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. You can't create meaningful transformation without 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 got our decisions as an organization including ensuring we are obsessing over customers, being an owner 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 harnessed 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 are 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 in the Streem a bit more on Slide 5. We acquired Streem in December as we were attracted by technology and how it can be applied to our business. Streem uses augmented reality, machine learning and virtual reality to improve communication with customers. They 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 that 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've expanded our offering to a total of three 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 a Candu Pro in a convenient two-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 six-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 hatched offering, expand to a handful of major cities and add other core traits. 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. It will continue to deploy new technology across the organization that will improve the customer experience, all of our customers will reap 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 saw 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 topline 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. At our core business, we will utilize dynamic pricing to deliver a low-single digit overall price increase which will help us achieve our gross margin target 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 implement 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 serve its 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'll 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.
Retaining contractor cost is also critical for 2020. We did a great job of maximizing preferred contractors in 2019. 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 [indiscernible] as our Senior Vice President of Operations. [indiscernible] 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 [indiscernible] will help us improve our operational efficiencies and increase productivity.
Finally, our fourth objective for 2020 is to continue our technology evolution. Our front door were constantly looking for opportunities to use technology to make homeownership easier for our customers, and service delivery simpler for our contractors, as well 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 are 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 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. Good morning, everyone.
Please turn to Slide 8 and I'll review a few key financial results in 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, majority of the growth came from price increase 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 of $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 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 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 of 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 three 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 lowered than the prior year as a $30 million benefit from process approving, a $22 million benefit related to the favorable impact of milder weather on claims incidence and a $10 million net favorable impact of adjustments related to contracts claims cost development more than offset $15 million from inflation and $10 million from higher tariff-related costs.
Sales, marketing, and customer service costs increased to combine $19 million versus prior year including planned incremental investments to drive home service plant growth primarily in a direct-to-consumer channel and to improve the customer experience. Next, we had $4 million of higher spin-off to 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 $3 million increase in other costs primarily professional fees.
Please now turn to Slide 12 for a view 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 investment 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 one year ago was driven primarily by net transfers to our then parent ServiceMaster that ceased to post spin-off on October 1, 2018. Free cash flow which we calculate is 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 we're considered to be restrictive 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 view of our capital structure. We successfully executed our strategy to improve our capital structure in 2019 as we reduce 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 2.4 times at the end of the year and clearly demonstrates the strong growth in attractive financial profile of frontdoor.
As a reminder, our excess cash use priorities in the ranked order continue the 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 $1.4 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 from dynamic pricing, continued process improvement and cost reduction efforts. Please also note that we are forecasting a normal seasonal weather pattern impact and 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 percentage of revenue to increase approximately 200 basis points versus prior year to roughly 31%, primarily due to increasing investments and technology sales, marketing, and customer service and higher corporate costs. This includes about $15 million to $20 million for Candu and Streem.
About two-thirds of the increase is weighed to sales, marketing and customer service, while the other one-third is related to general 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 that 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 a 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. Please proceed with your question.
Thanks for taking the question. Two, if I can. First, I was hoping you’d 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? Thanks so much.
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 two. One of the questions regarding the Candu investments.
Yes. So for - one of the questions you asked is kind of how does the technology help us in our core business. 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 setting 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 - what do we think about in terms of our KPIs. We will look at the effectiveness of our marketing spend. As we've talked to them last time, it's really not hard for us to expand into cities. We don't have the contractor base bill. 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 are viewing it and all while trying to balance profitability and growth.
Our next question comes from Cory Carpenter with JPMorgan. Please proceed with your question.
Thanks for the questions, two for me. On the 2020 margin guide, if you back out onto on-demand and Streem spend which you mentioned that $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 do a follow-up after.
Yes. Let me talk a little bit about our gross margin in 2019 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 incidents related to weather and we had $30 million of process improvement benefit. Those - I'm not expecting weather view 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.
Is there 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 tariffs related to steel in 2020.
Okay. Great. And then just follow-up. So on Candu, just, Rex, maybe if you could - or Brian, if you could 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 this is 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 margin profile similar to our current business, but it’s still early days.
Cory, this is Brian again. I didn't hit your - I did say 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 two-thirds is going to be sales and marketing, customer service, and the other third 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. Please proceed with your question.
Thank you very much. Two quick questions for me, and good morning, guys. 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 to 150 basis points. 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 margins do you see this business as supporting, and I'm talking adjusted EBITDA margins? Thank you.
Yes. Great question, Youssef. Thank you. I know you cover the FANG 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 part 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 did a lot of our appliance parts from the US 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 in 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 said long term, about 50% gross margin and the low-20s as far as EBITDA margins. So we're still pretty bullish on our margins.
Okay. Thank you very much.
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. Please proceed with your question.
Rex, can you maybe discuss a little bit about lead sources on Candu, how you’re actually going about acquiring the customers? How does the cost kind of - that you're seeing now compare to what you had anticipated originally and just more holistically about that? Thanks.
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, making sure that people understand the product and what it is and then driving adoption to conversion. So that's kind of where we are in the couple of months that we're in.
And then also - I know we touched on tariffs. Is there any other installation that's kind of baked into 2020? And, Brian, I know when we talked last, you were talking about maybe about 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. Thanks.
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, it rolls 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. Please proceed with your question.
I’ll just circle back on Candu. Just curious if you’d give 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 in the guide this year for 2020, I think you said you're in three cities now. Just curious how many new markets may be incorporated in the 2020 outlook. Thank you.
Sure. So our - we started out in appliances only, so fairly, fairly small base. We've just recently expanded to Houston and Dallas to make up three cities - so, Atlanta, Houston, Dallas. I think what's going well is the - been able to attract our contractors. The actual work product has been, I think, really well received by customers.
The part that we're 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.
In terms of kind of what other city, I think we'll be in a handful of the 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 that once would be hard for us. It's more about making sure that we feel good about the marking scale that we can gain from doing that.
Our next question comes from Chris Gamaitoni with Compass Point. Please proceed with your question.
I was hoping you could expand on Streem partnerships. How are the partners in that's envisioned benefiting and how do you monetize that relationship? Not clear, I get it, yet.
Sure. So, I can't because we're under the AM. I can't name the actual companies but several large companies. I think the first used case that people get really excited about is the same used case that got us excited about Streem, and that's the ability for the customer service agent to send their customer a text, no app needed to use, open up the link and then you have almost like a FaceTime like conversation with the customer where you're walking through the issues. So, you can imagine, let's say, you are 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 I'm going to put the detergent, whether I pull this part out or etcetera. All that can be done through virtual help. You can annotate the beauty of the software that also would be knowing the augmented reality features but also the ability to recognize what refrigerator or appliance or whatever it 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 - how would that be monetized, like, are you licensing the software or is - what do you envision a per usage basis?
Yes. We like it as a software, so within the call center then it's a - could be a per-seat license or enterprise license all things we vary today. But we’ll need to standardize. And then for some use cases like for example our contractors are already begging for the technology. And so I view that 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.
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 two, three 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 that 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. Please proceed with your question.
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 planned growth number in the slides today, but based on your disclosure over the last couple of quarters, 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 the 8% by reaccelerating plant growth?
Jim, it's Rex. I’d like to take that one. I think a couple things to think through. One is over two-thirds of our revenue is renewals. So really what we're seeing on ensuring that we're doing the right thing to drive retention which you saw we rounded back up to $75 million and we're happy with $75 million. So we're going to continue to do a lot of work in that area. That certainly drives growth. When you think about - we talked about we're 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 call for the 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 lower interest rates, 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, but 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 and seats for our internal sales team. So, a lot of changes there from alignment perspective to make sure that we’re driving top end growth - or topline 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 is the technology is built, we launched 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 is a lot - a lot more things that we can do with dynamic pricing to drive topline growth kind of midway this year, we'll launch it for direct consumer and then to be honest we can figure out the real estate because it's still kind of a paper world. So that's - that combined with work out - we work with 10 of the top 10 royalty firms. We think we're pretty bullish on the business.
Our next question comes from Kevin McVeigh with Credit Suisse. Please proceed with your question.
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?
How dynamic pricing can do what, the phone kind of impact.
Yes, how the dynamic pricing initiative for 2020, how that can impact competence if we 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 such efficient level, if you will, it's always been our hypothesis is that in some areas we probably overpriced given the level of claim cost that we should expect. So in terms of driving topline growth, I think this is a great way of kind of rebalancing, look at the world kind of [indiscernible] basis for dynamic pricing.
For margins - today it's really on labor rates as we begin to make dynamic pricing smarter, if you will, injecting data such as 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 topline and margin expansion ideas around dynamic pricing that we're pretty excited about.
Our next question comes from Brian Fitzgerald with Wells Fargo. Please proceed with your question.
You know that 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, I came to apologize if this is 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? Thanks.
While we take the last one first - and Brian can talk about restricted cash, great question on Candu shipments in earlier. We started in appliances, but our goal is to expand to all of our core trades. What holds us back there is actually not supply our contractors it kind of goes back to - product work as well as marketing 99% marketing. So what we plan this year to, at least some cities rollout far more than just appliances, and that will give us an even better signal in the market. Brian, you want to talk about the restricted cash?
Sure yes great question. Yes - our treasury, legal, accounting, FP&A teams really drove 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 the $34 million.
And hopefully, we can continue to look at those requirements going forward and bring it down even more because that cash was 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 that helped?
Our next question comes from Michael Ng with Goldman Sachs. Please proceed with your question.
I just had two. The first is just on process improvements. While appreciating that you guys said that there isn't that 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 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 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 quarterly cadence? Thank you.
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 we talk about things like procurement leverage and moving the world to more of 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 what, Brian, 6% to 8% 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 tire teams haven’t stopped in terms of harnessing more opportunity. This can be a little a longer term, a little more use of both product and technology to solve the problems. So I would say we're still being very aggressive in that area. In terms of Candu, one thing that I really think about - the team thinks about is really staging marketing in terms of - the market expense versus the output, right.
So in terms of pacing, we've kind of set this $15 million to $20 million budget, but we also have stage gates built along the way to really understand are we gaining the maximum efficiency that we expect; and if not, let's pivot and try something different. So that's really the roadmap 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 I may say that we’re 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 wind 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 D&A 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 - 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.