Home warranty company Frontdoor (NASDAQ:FTDR) reported Q4 FY2023 results exceeding Wall Street analysts' expectations, with revenue up 8% year on year to $366 million. On the other hand, next quarter's revenue guidance of $375 million was less impressive, coming in 4% below analysts' estimates. It made a non-GAAP profit of $0.20 per share, improving from its profit of $0.13 per share in the same quarter last year.

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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

Reviewing a company's long-term performance can reveal insights into its business quality. Any business can have short-term success, but a top-tier one sustains growth for years. Frontdoor's annualized revenue growth rate of 7.2% over the last five years was weak for a consumer discretionary business. Within consumer discretionary, a long-term historical view may miss a company riding a successful new product or emerging trend. That's why we also follow short-term performance. Frontdoor's recent history shows the business has slowed as its annualized revenue growth of 5.4% over the last two years is below its five-year trend.

This quarter, Frontdoor reported solid year-on-year revenue growth of 8%, and its $366 million of revenue outperformed Wall Street's estimates by 1.8%. The company is guiding for revenue to rise 2.2% year on year to $375 million next quarter, slowing from the 4.6% year-on-year increase it recorded in the same quarter last year. Looking ahead, Wall Street expects sales to grow 6.1% over the next 12 months, a deceleration from this quarter.

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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.

Over the last two years, Frontdoor has shown mediocre cash profitability, putting it in a pinch as it gives the company limited opportunities to reinvest, pay down debt, or return capital to shareholders. Its free cash flow margin has averaged 7.9%, subpar for a consumer discretionary business.

Frontdoor's free cash flow came in at $54 million in Q4, equivalent to a 14.8% margin and in line with the same quarter last year.

Key Takeaways from Frontdoor's Q4 Results

We were impressed by how significantly Frontdoor blew past analysts' EPS expectations this quarter. We were also excited its operating margin outperformed Wall Street's estimates. On the other hand, its full-year revenue guidance missed and its revenue guidance for next quarter came in slightly below Wall Street's estimates. Overall, this was a mixed quarter for Frontdoor. The stock is flat after reporting and currently trades at $33 per share.

So should you invest in Frontdoor right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.