Ladies and gentlemen, welcome to Frontdoor's Fourth Quarter and Full-Year 2025 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 morning, everyone, and thank you for joining Frontdoor's Fourth Quarter and Full Year 2025 Earnings Conference Call. Joining me today are Bill Cobb, Chairman and CEO; and Jason Bailey, Senior Vice President and CFO. 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 www.investors.frontdoorhome.com. As stated on Slide 3 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 26, 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 this presentation in order to better assist you in understanding our financial performance. I will now turn the call over to Bill Cobb for opening comments. Bill?

Thanks, Matt. We had a great 2025. But before I get into the financial highlights, here are three key takeaways for today's call. First, we expect ending member count to grow in 2026. Second, we are raising our long-term adjusted EBITDA margin target. And third, this business generates significant cash, and we are on track to complete our current share repurchase authorization by this time next year, well ahead of schedule. With that, let's get to the financial highlights for the year. Revenue increased 14% year over year to nearly $2.1 billion. Gross profit margin increased 150 basis points to a record of 55%. Net income grew 9% to $255 million. Adjusted EBITDA grew 25% to $553 million, and we bought back a record $280 million worth of shares. Now before we step into 2026, I want to connect our results back to our priorities for 2025 laid out on Slide 5. Our first and most important focus is to grow and retain home warranty members. And in 2025, we achieved an important milestone. We stabilized our member count. This was supported by traction across the business with growing demand and improving conversion in direct-to-consumer, strong second half momentum in the first-year real estate channel and higher renewal rates. Our second strategic priority, scaling non-warranty revenue is playing an important role as we expand the way we serve our members and create value. The new HVAC program grew an impressive 48% to $128 million, and we still have a massive opportunity ahead. We also took the next step in broadening our portfolio by launching our appliance upgrade program in select markets. And we're complementing that momentum with outside partnership opportunities with our contractor network, such as our Moen program that delivered $15 million in its first full year. Finally, our third strategic priority is optimizing the integration of 2-10. This was a highly strategic acquisition, and execution has exceeded our expectations. We have already realized more than $20 million of cost synergies, way ahead of our original 2025 target of $10 million. We are well on our way to a fully synergized multiple of less than 7x by 2028. And we are actively working on revenue synergies, including migration of the 2-10 Home Warranty platform to our systems in 2026 and creating additional opportunities with 2-10 Builders. The 2-10 acquisition was a great deal, and there is still a lot of runway left. Now let me take a moment to double-click on our number one priority at Frontdoor to grow and retain our Home Warranty members. Slide 6 captures the outcome. Member count stabilized in 2025. This was an excellent result and well ahead of schedule. And what is even more impressive is that we built momentum as the year progressed. Tariff concerns eased, housing supply improved, and our consistent execution paid off. Let's turn to Slide 7 to take a deeper look at the real estate backdrop in 2025. There are two distinct dynamics. First, existing home sales volumes remain constrained near historic lows. This weighed on our ability to sell home warranties in this channel. Second, the market began shifting toward a better balance between buyers and sellers, one of the most important drivers for our business. Inventory increased with average supply exceeding four months for the first time in five years and over 60% of homes sold below their original list price, the highest level since 2019. In addition, our team moved quickly to capitalize on this changing market dynamic. We increased localized investment, deepened engagement directly with real estate agents, and launched promotional pricing in the real estate channel for the first time. And the result, we had two consecutive quarters of sequential member growth to close out last year, the first time this has happened in the past five years. Now turning to Slide 8. Direct-to-consumer has been a source of consistent momentum for the business. Our differentiated strategy, discipline, and focus drove 3% member growth in the channel for 2025. At a high level, our DTC strategy is built around three pillars: brand leadership, growing demand, and improving conversion. Starting with brand leadership, we continue to hold the highest levels of awareness, interest, and trust in the category. Our technology enhancements through the AHS app and virtual experts have increased member value while further sharpening our differentiation with consumers. Second, growing demand. We continue to strengthen our value proposition to deliver more targeted and relevant messaging to key segments, including younger homebuyers. Utilization of AI in our marketing has allowed us to reach higher intent consumers more effectively. And finally, we are improving conversion through website and SEO enhancements, promotional pricing and AI tools to prompt our sales agents, creating a more personalized experience for prospects aiding us in getting them across the finish line. Turning to Slide 9. Renewal rates improved by 150 basis points to 75%. This is a very big deal. I am particularly proud of our performance with direct-to-consumer members. First year DTC renewal rates improved even as members moved away from introductory prices and into the renewal channel. This reinforces that our promotional pricing strategy did not come at the expense of renewals. Our performance is being driven by continued improvements in the member experience and includes the following actions. First, adoption of the AHS app continues to grow since its launch in October of 2024, and we now have nearly 600,000 member downloads. Second, video chat with an expert has become a clear point of differentiation. Since launching in February 2025, we've completed about 80,000 chats, helping resolve issues virtually. Third, we increased the number of members on monthly auto pay by about 100 basis points to 84%. Additionally, we've strengthened onboarding, continued strong usage of our preferred contractors and improved our internal processes. The impact of these efforts is showing up clearly in member feedback with record high five-star reviews alongside record low one-star reviews for all of 2025. Now turning to Slide 10. With a strong foundation in our core membership base, we continue to advance our second priority in 2025, scaling non-warranty services. And the most meaningful driver within non-warranty today is our new HVAC upgrade program. In 2025, new HVAC upgrade revenue grew by $41 million to $128 million. And we remain in the early innings with only about 55,000 installations in the program to date, leaving substantial opportunity across our 2.1 million members. Let me spend a moment now on new HVAC upgrade margins because this is an area we feel very good about. Gross margins for our new HVAC program are currently around 20%. While this is lower than our core business, the economics are favorable for three reasons. First, increasing share of wallet with our members supports higher engagement, satisfaction, and retention. Second, contractors value the program supporting stronger adoption; and third, we get higher revenue and incremental gross profit and EBITDA with little to no customer acquisition costs. Now let's look forward and talk about our aggressive long-term goals on Slide 11. First, drive member growth, still the number one priority at Frontdoor. Second, scale non-warranty revenue streams; third, deliver on structurally higher margins; and fourth, remain disciplined with our capital allocation strategy to create long-term value. Let's turn to Slide 12 for a deeper discussion on driving member growth. I'll start with the key takeaway. We expect total member count to grow in 2026. This would mark the first year of ending member count growth since 2020. This growth is driven primarily by continued strength in our first-year channels, which we expect to grow about 5% on a combined basis. This reflects disciplined execution across real estate and direct-to-consumer, supported by a more constructive market backdrop. Renewals remain a critical part of the equation. While we expect renewal rates to remain strong, renewal member count is expected to be a modest headwind in 2026 due to the natural lag of first year real estate units over the past several years. That dynamic is temporary. Growth in first year acquisitions in 2025 and 2026 flows into the renewal book with a natural lag, positioning renewals to become a tailwind beginning later in 2027 and accelerating beyond. Taken together, this is about building a durable growth engine, driving first year growth today while setting up renewal-led growth over the longer term. With that, let me turn to Slide 13 and our non-warranty business. As this slide shows, our approach is straightforward. Non-warranty consists of a three-part strategy: grow share of wallet with our 2.1 million members, leverage our base of 17,000 contractors and unlock the opportunity across our network of 19,000 homebuilders. Starting with members, our focus is on growing share of wallet, which is the most immediate opportunity and where we're seeing traction today. We've proven this model with our new HVAC upgrade program and are now extending it into appliances. Second, we're leveraging our contractor network more strategically. We started this initiative last year with Moen. Longer term, we're exploring additional partnership models and other ways to monetize the network. Third, we see a meaningful opportunity to unlock additional value from the 2-10 Builder network. Through our new homebuilder relationships, we're exploring ways to broaden the set of products we offer builders over time, creating a potential B2B distribution channel. And as non-warranty continues to scale, we are confident in our ability to protect overall profitability. That brings us to our next priority on Slide 14, delivering structurally higher margins as we scale. Our performance over the last several years reflects a fundamental shift in how we run the business, which gives us confidence that these improvements are structural. How have we done this? We have really leaned into our dynamic pricing model, which has been a game changer for us. We have become more nimble at using trade service fees to further protect margin. We have increased our use of preferred contractors. We have improved our purchasing power across our supply chain, and we are seeing more SG&A leverage as we scale. Taken together, we now have the confidence to raise our long-term adjusted EBITDA margin targets, which Jason will walk through shortly. These margin gains translate directly into strong cash flows and capital deployment. With that, let's turn to the next slide. As this slide shows, our capital allocation priorities are consistent and straightforward. First, we prioritize accelerating growth through organic investments to drive growth and retention and through selective M&A like 2-10. Second, our strong balance sheet and financial profile provide us flexibility in how we deploy capital. And third, as you have seen from our recent actions, we buy back a lot of shares, allowing us to consistently return capital back to shareholders. Taken together, this framework drives long-term value creation. I will now turn it over to Jason to walk through the financial results and outlook.

Thanks, Bill, and good morning, everyone. With a record 2025 and a strong fourth quarter, our results reflect solid revenue growth, expanding profitability and excellent cash conversion that led to record amounts of share repurchases. Let's start on Slide 17. Here, I will quickly cover the financial highlights for the fourth quarter. Revenue grew 13% versus the prior year period to $433 million, reflecting higher volume from 2-10 as well as higher price. Gross margin grew 70 basis points to 49%, reflecting low single-digit inflation and a continuation of our strong operating performance. Adjusted EBITDA grew 21% to $59 million. Fourth quarter adjusted diluted earnings per share was $0.23. And lastly, during the fourth quarter, we returned $87 million to shareholders via share repurchases. Now let's pivot to full year 2025 results, starting with revenue on Slide 18. Revenue increased 14% year over year, surpassing the $2 billion mark. This was driven by 2-10 volume, expansion in non-warranty and other and approximately 3% from higher price. On an organic basis, revenue grew 3.7%. From a channel perspective, renewal revenue grew 10%, driven by higher 2-10 volume and price. First year real estate revenue grew 13% from the addition of 2-10. First year direct-to-consumer revenue grew 4% with higher volume, partially offset by lower price and non-warranty and other revenue grew 66%, driven by the success of our new HVAC and Moen programs as well as the addition of new homebuilder revenue from the 2-10 acquisition. Now moving to Slide 19 to discuss our gross profit and margin. Gross profit dollars grew 17% versus the prior year, exceeding $1 billion. Gross margin expanded 150 basis points to a record 55%, driven by higher realized price, low single-digit cost inflation as operational execution helped offset macro pressures and favorable weather impacts of approximately $7 million. Turning to Slide 20. Let's review net income and adjusted EBITDA. For the full year, net income grew 9% to $255 million versus the prior year, and adjusted EBITDA grew 25% to $553 million. Adjusted EBITDA margin expanded more than 200 basis points to 26%, reflecting the gross margin improvements we discussed earlier. While SG&A dollars increased year-over-year due to the addition of 2-10 and higher personnel costs, we generated approximately 100 basis points of operating leverage across the business. Now let's turn to Slide 21, and I'll walk through how the strong earnings performance translated into cash generation, a strong financial profile and capital deployment. Our recurring revenue business model continues to generate robust cash flow, which underpins an exceptionally strong financial profile. We generated record free cash flow of $390 million, reflecting the strength and capital-light nature of our business. We remain in a strong financial position with ample liquidity of about $660 million and a strong net leverage ratio of only 1.4x. This positions us well to invest in the business while also returning excess cash to shareholders. In 2025, we completed our fourth consecutive year of increasing buybacks. Now let's turn to Slide 22, where I'll highlight our track record of share repurchases. Our repurchase program has been a meaningful driver of shareholder value. Since 2021, we've used $720 million to repurchase approximately 17 million shares, reducing our shares outstanding by about 17% on a net basis. Additionally, we completed almost half of our current $650 million authorization that started in late 2024, and we are on track to complete the remaining $329 million by early 2027, ahead of schedule. Let's now move to our 2026 outlook on Slide 23. We expect another year of revenue growth with revenue in the range of $2.155 billion to $2.195 billion. We expect to maintain strong gross margin levels in the 54% to 55% range. SG&A is expected to be relatively flat versus the prior year and range between $660 million to $680 million. Adjusted EBITDA margins are expected to remain strong at approximately 26% with adjusted EBITDA of $565 million to $580 million. This outlook includes about $16 million of interest income and adds back about $8 million of integration costs and stock-based compensation of $33 million. Additionally, our conversion of adjusted EBITDA to free cash flow is expected to remain at a very high rate in the low 60% range. We anticipate CapEx of $30 million to $35 million. And lastly, our effective tax rate is expected to be approximately 25% for 2026. Turning to the next slide, I'll walk through how we're thinking about revenue growth in 2026. From a channel perspective, we expect low single-digit growth in our renewals channel, reflecting higher price, partially offset by lower volume due to the natural lag of when first year members flow into the renewal base. A low single-digit decline in our first-year direct-to-consumer channel, reflecting the deliberate revenue trade-off to drive member growth through promotional pricing, first-year real estate channel revenue to be relatively flat as volume stabilizes; and lastly, non-warranty and other revenue to grow to $220 million to $240 million, driven by the continued scaling of our new HVAC upgrade program, which we expect will generate about $165 million in revenue. These dynamics translate to total revenue growth in the range of 3% to 5%. Let's now turn to a detailed look at how we are thinking about margin performance in 2026 on Slide 25. At the adjusted EBITDA level, we expect margins to remain strong at 26% for the year. Gross margin is expected to be in the range of 54% to 55%. This outlook reflects higher price, similar incidence rates, low single-digit cost inflation, normalized weather and a higher mix of non-warranty revenue. Our 2026 margin outlook reflects structural improvements across the business. Turning to the next slide, I'll summarize how we're using that foundation to raise our long-term margin target. As Bill discussed, over the last several years, we've made improvements across pricing, contractor management and cost discipline that have fundamentally increased the earnings power of our model. As a result, we're pleased to announce that we are increasing our long-term adjusted EBITDA margin target from the low 20% range that we shared with you at Investor Day last year to the mid-20% range. Included in this Investor Day comparison is a stronger gross margin framework along with operating leverage as we scale. Our long-term revenue assumptions remain unchanged. We expect our revenue growth to accelerate in 2027 and further in 2028 as more first-year member growth transitions into our renewal base and non-warranty continues to scale. This translates to $2.5 billion by 2028 and mid- to high single-digit percentage growth over the long term. Now let me quickly touch on our first-quarter outlook for 2026 on the next slide. For the first quarter of 2026, we expect revenue to be in the range of $440 million to $445 million. This reflects a mid-single-digit increase in renewal revenue, a low single-digit increase in our first-year real estate channel, a high single-digit decrease in the first-year direct-to-consumer channel and a mid-double-digit increase in non-warranty and other. We expect adjusted EBITDA to be in the range of $95 million to $105 million. It's important to note we are lapping a $7 million favorable claims cost development from Q1 of last year. This outlook also reflects higher gross profit from revenue conversion and increased SG&A investment as we better balance sales and marketing spend throughout the year to capitalize on the strong momentum we've built in our first-year channels. With that, I'll hand it back to you, Bill.

Thank you, Jason. Once again, Frontdoor has delivered. We have had three great years. As you know, one of the hardest things about positive business trends like ours is now we have to overlap last year's results, let alone the last three years of outsized performance. But I am confident in our strategy and our team, and we've got momentum. Now I want to close with the three things I told you upfront. First, we are growing member count. This has been a key focus as we've kept home warranty membership at the core of all our business objectives and growth initiatives. Second, I'm proud to be raising our long-term adjusted EBITDA margin target. This comes with continued efficiencies, effective cost management, as well as technology and AI enhancements. And finally, we generate a lot of cash. We bought back a lot of shares, and we're not done yet. We will continue this trend into 2026, returning capital to our shareholders at an impressive rate. With that, I want to thank everybody for joining us today, and we'll now turn it over to the operator for Q&A.

Our first question is coming from Sergio Segura with KeyBanc.

I have a few. So I guess first one on just pricing growth, just how we should think about it with the promotional pricing strategies, specifically in the DTC and real estate channels, how we should think about pricing growth for 2026? And then as those customers graduate to renewal customers, does that create any initial drag on the renewal channel growth for pricing? That's question number one.

Yes. I'll take the first part, and I'll let Jason handle the second part. Our pricing strategy remains the same. We will not be increasing the number of discounting days on the 50% off program we've been running. But we're very pleased with the urgency that that brings to prospective members, and we'll continue to employ that, but not at an increased level. We are going to move into the real estate channel with some promotional pricing directly with agents. It will not be anywhere near the level of 50% off, but we've tested it, and we've seen it's been effective at spurring action to drive attach rate. So we'll pulse that into the program. And like I said, it's proven to be a strong benefit to us in DTC, and we think it can be like that in real estate. Jason, I'll let you take the second half of the question.

Yes, Sergio. As Bill mentioned, I think we're really happy with the results from the pricing. And maybe what I'd do is highlight some of our comments from the call on the renewal rates. As we... this year was our first full year in thinking about promotional pricing. So you'll see that kind of flow over into 2026. But our renewal rates have been extremely strong in that channel as we've transitioned them to the renewal book. So we're pleased with the balance there on how we're able to add member count and look at total overall revenue.

Got it. That's helpful color. And then a second one, if I could, on the real estate channel. Could you guys just speak to where attach rates and your market share within real estate is now? And then for your 2026 outlook, what are your expectations for existing home sales and attach rates for 2026?

Yes. Regarding existing home sales, there are various estimates. The NAR tends to have very optimistic predictions. We expect slight growth, remaining largely the same, but we have seen reports suggesting 3% or 4%. That's what we have modeled. As for our attach rates, we will not disclose the exact figure, but our market share remains around one-third of the real estate segment. The focus of our real estate team is to enhance those attach rates. With the initiatives we are implementing, such as increasing localized investment and engaging directly with real estate agents along with the promotional pricing mentioned, we anticipate a 5% growth in member count sales units by 2026.

Our next question is coming from Jeff Schmitt with William Blair.

You're assuming SG&A expenses stay kind of roughly flat in '26. And I know a good portion of that is marketing costs. Could you speak to how you'll keep costs flat there? And do you see that having any impact on growth?

Yes. Overall, we expect sales and marketing to remain relatively flat year-over-year. By working closely with the team, we have achieved significant efficiencies in our market approach, particularly with some of the tools Bill mentioned earlier regarding our Warrantina campaign, which is now in its second edition, and the use of AI tools among other things. We anticipate improvements in our sales and marketing conversion rates.

Yes, I think that's correct. There’s always a tendency to increase spending, but I’m proud of the marketing team and the efforts that Kathy Collins and her team have made in driving greater efficiency and effectiveness. We feel good about how the plan is shaping up. Jason, I’m not sure if you mentioned it, but we might adjust our spending quarter by quarter depending on the drive period, and be on the lookout for new Warrantina commercials during March Madness. Just a little heads up on that.

Good. All right. And then you mentioned that you launched the appliance upgrade pilot recently. How long do you plan on staying in that pilot stage? And then maybe just more broadly, how do you view that revenue opportunity compared to HVAC?

Yes. A couple of things on that. So we are hoping to launch that post peak later on in the year, around Q4 is our current plan. We're still working through in the markets exactly the model that we have. Obviously, we're modeling it on the way we've approached HVAC. What was the second part of the question?

Just that how do you view the revenue opportunity?

It will be a different revenue opportunity, and I apologize for any confusion. The price point for HVAC and appliances varies significantly, and there are many more appliances available. We believe there is a genuine opportunity here, and we are currently assessing the situation. Additionally, the replacement rates for appliances are lower than those for HVAC. This combination gives us confidence that this could grow into a substantial business. We are working through the details and want to ensure we approach this correctly before launching. Our target is towards the end of the year. Jason, would you like to add anything?

Yes, just a minor impact on 2026 growing into this.

Our next question is coming from Mark Hughes with Truist.

What's your assumption in terms of the kind of the real estate market for this year, talking about steady real estate revenue, some discounting. What do you think is going to happen? What's your baseline case?

I have really studied this market over the past few years. The National Association of Realtors is very optimistic about the direction of existing home sales, but we don't share that level of enthusiasm. We expect a more modest increase of about 3% to 4%. Much of this is dependent on interest rates, though we are pleased with the rise in inventory. We also have confidence in the initiatives we've been implementing with our real estate team and their direct engagement with real estate agents, which gives us hope that our promotional pricing will positively affect our units. Overall, we feel fairly confident, but we do not expect a significant rise in existing home sales. If it happens, that would be wonderful, as it would turn this into a game of attach rates.

How does Assurant's launch of a home warranty product and its relationship with Compass affect you? What is your assessment of that initiative?

Assurant is a great company. I've known several Board members there, and they consistently speak highly of their business in auto and cell phone warranties. I'm encouraged by their interest in expanding into home warranties. This expansion will likely benefit all of us as they enter the market. However, I want to highlight a few things. We had a long-term marketing services agreement with Anywhere, but we've moved on from that as they have partnered with Assurant. This is not an exclusive partnership; it's primarily a marketing agreement. Agents still have the freedom to choose whatever home warranty product best suits their needs. That’s why we have many agents who have chosen to work with us for years. We believe we will continue to perform well. Additionally, we cover 27 systems and appliances in homes, not just appliances. Our contractor network is a significant advantage of being in this business for over 50 years. We have long-standing contractors and continually bring in new, vetted, and trusted contractors. Our strong retention and renewal rates reflect this, particularly as we enhance our network of preferred contractors. We provide a comprehensive range of service trades, not just limited to appliances. Thus, we are in a solid position, and we will continue to execute our strategy and business model.

Very good. I'm not sure if you've elaborated on this. I missed the first question or two, but the B2B sales channel development with builders, how meaningful could that be? And could you maybe elaborate a little bit on what you're looking at?

Not meaningful in 2026, and that's in development. We have been discussing various ways to assist builders with our supply chain. We work with a number of small and midsized builders, and with our purchasing power, we could help them develop a system for procurement. It's early in this process, but we're exploring how to utilize our system to discover new revenue streams.

Yes. And then promotional or marketing spend in 2026 versus 2025, how are you thinking about that?

In line with 2025, we expect to maintain a similar level of spending. We're optimistic about the efficiencies we've achieved in search marketing, especially with our integration of AI as an advanced search tool. This has required us to adjust our algorithms to ensure we drive efficiencies through this channel. We believe we've maintained our spending level and have also made significant improvements to our website and SEO conversion. A comprehensive marketing strategy these days encompasses multiple areas, and we feel confident about our total marketing expenditures.

Yes. I would probably add, Mark, the one thing you will see this year, we'll probably pace a little differently through the year. Bill and I talked about coming out of Q4 and some of the momentum we have to stay really balanced. So you'll probably see us load a little more sales and marketing in the first half of the year than prior year. But overall, as Bill said, consistent with prior year spend right now.

Our next question is coming from Cory Carpenter with JPMorgan.

I had two questions. Maybe Bill, I want to start with the revenue. Good to see you reiterate your 2028 target. I know that in the acceleration that you expect in '27, '28. When I look at Street numbers, I think people are generally a little bit below that today. So that may be helpful. Could you just bridge us on kind of how you're getting to that number and that accelerating growth and what you're seeing today giving you confidence in reiterating that framework?

Yes. Jason can certainly add to this. What we're focusing on, as mentioned in the script, is our durable growth engine. We are confident in seeing an increase in revenue in 2027 and further into 2028 because of our success in driving first-year units. This will contribute to our renewal book, assuming we maintain a strong member retention program. We have successfully reduced the number of cancellations. It’s essentially a mathematical calculation where filling the top funnel positively impacts the renewal book. With our dynamic pricing model, we expect to maintain consistency in our pricing. Based on the guidance we provided for 2026, we still believe that targeting $2.5 billion is appropriate. Jason, do you have anything to add?

Yes. The only thing I'd add is we also see a lot of opportunity with non-warranty and lots of different ways to attack that part of the business. I think you're spot on to that...

Claims cost inflation was a significant topic, and it appears to have decreased this quarter. It was 4% last quarter, and you're suggesting low single digits in the fourth quarter, with guidance for low single digits next year. We often get questions about tariffs, especially with the recent increase in uncertainty. Could you clarify how tariffs are affecting you and what assumptions you have in your outlook regarding them?

Yes. I think just to comment on '25 and how we close out the year. The teams have done an excellent job all year long managing through both the contractor network. So a big shout out to the contractor relations team as well as our supply chain team. I think we've managed through that. Historically, we talked about the way we would manage through that is around price, trade service fee, and operational execution, and we've certainly done that. For our outlook, Bill and I, we are constantly talking about tariffs on, tariffs off, tariffs on, tariffs off. But we think we are in a good position for low single digits again this year where the team can manage through that with those same tools. Preferred contractor network usage is at a high point in the mid-80s. Supply chain keeps doing well, has lots of options between our suppliers for parts and equipment. Our biggest exposure is probably in appliance trade when we think about circuit boards and a couple of other products from there. In HVAC, we're less exposed, a lot more domestic manufacturing. So I think we'll handle it pretty well.

Yes. That's why what's been a benefit to us is that beyond appliance, we're pretty much domestically sourced. So that is certainly why we've been able to maintain a low single-digit approach. And certainly, we're guiding to that.

Our next question is coming from Ian Zaffino with Oppenheimer.

This is actually Isaac Sellhausen on for Ian. On the home warranty count up this year, I know you touched a bit on the drivers in the prepared remarks and the higher growth in the first-year real estate, but maybe you could just provide more color on mix expectations for first year real estate and DTC, that would be great.

Yes. We're expecting a 5% growth in unit sales for 2026. We anticipate similar performance across each channel. There's a 3:2 ratio of DTC to real estate in terms of size, and we believe this will continue. We view it all as first-year growth. There are varying retention and renewal rates as we move forward, but we are aiming for 5% growth in each channel.

I think our guide for Q1 kind of factors in the weather we've seen year-to-date. And I'd say we're probably expecting what I'd call normal weather for the balance of the quarter.

Yes. I think the other thing, Isaac, is especially with some of the Snowmageddon and bomb cyclones, these become insurance claims as opposed to warranty claims. So notwithstanding the fact that we want to certainly serve our members in whatever way we need to. But I think Jason and the team have done a good job of taking that into account as we look at the guide.

Our next question is coming from Eric Sheridan with Goldman Sachs.

Maybe just put a finer point on a lot of the topics we've talked about, especially in the prepared remarks. When you think about the next 12 to 18 months, what are your must-dos in terms of investing in the business that align with your strategic priorities? Because I guess we're trying to think through some elements of upside or torque on the margin side of the equation as some of those investments come more to the good as you think over the next sort of 1 to 2 years.

We are aiming for a balanced approach and are excited about the growth potential from non-warranty services. As we work on enhancing our platform and processes for efficiency, we appreciate that utilizing our contractors is a low-cost acquisition strategy, which also benefits them with larger jobs. Sales and marketing remain our top priority; while we are maintaining our investment levels, our team has become more efficient on the ground. We’re collaborating closely with our integrated sales group, employing AI tools to assist our sales agents with prompts and handling objections. Although it's early in the process, we are happy with the support this provides. Furthermore, our improvements to the website and SEO, as well as our work in AI-driven search, are being done efficiently while keeping our focus on increasing our member count. Importantly, our business model generates substantial cash with relatively low capital expenditures, which we estimate will be between $30 million and $35 million. This cash generation is a key advantage of our model.

Thank you. Ladies and gentlemen, this will conclude today's question-and-answer session and also today's conference. You may disconnect your lines at this time, and we thank you for your participation.