COMPASS Earningcall Transcript Of Q2 of 2024
executive officer; and Kalani Reelitz, our chief financial officer. Discussing our company's performance, we will refer to some non-GAAP measures. You can find the reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in our second quarter 2024 earnings release, which we posted on our investor relations site earlier today. We will be making forward-looking statements that are based on our current expectations, forecasts and, assumptions, and involve risks and uncertainties. These statements include our guidance for the third quarter of 2024 and full-year 2024, including comments related to our operating expenses and free cash flow, as well as our expectations for operational achievements. Our actual results may differ materially from these statements. You can find more information about risks, uncertainties, and other factors that could affect our results in our most recent annual report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC, also available on our investor relations website. You should not place undue reliance on any forward-looking statements. And all information in this presentation today is as of today, July 31st. We expressly disclaim any obligation to update this information. I'll now turn the call over to Robert Reffkin. Robert? Robert Reffkin -- Founder and Chief Executive Officer Thank you for joining us today for our second-quarter 2024 results conference call today, I will discuss our second-quarter results, our 30/30 vision to strengthen our structural advantages, an update on the impact of the NAR settlement; and finally, I will discuss our continued commitment to reduce stock-based compensation and equity dilution. So let's start with our second-quarter results. I'm pleased to say that we had the best performance we have ever had as a company. We achieved our all-time high GAAP net income, a positive $20.7 million. This compares to a net loss of $47.8 million a year ago. We generated our all-time high adjusted EBITDA of $77.4 million, which is more than double adjusted EBITDA in Q2 2023. For the second quarter in a row and for four of the last five quarters, Compass generated positive free cash flow. We generated $40.4 million in free cash flow, which includes the impact of the $28.8 million antitrust litigation settlement payment, so $69.2 million excluding the cost of the settlement. We grew revenue significantly. In Q2 2024, we generated $1.7 billion in revenue, an increase of 14% year over year, 9% of which was organic growth. Transactions increased by 11.4% a year ago as transactions in the overall market declined by 3.3% during the same period. So Compass transactions increased 14.7% more than the market. As additional color, 7% of our transactions that closed in the quarter were likely to sell AI recommendations in the Compass CRM from the prior 12 months. As a reminder, these leads historically convert to listings at an 8% rate, more than a typical lead generation sources. We grew market share significantly. In Q2 2024, our quarterly market share was 5.13%, an increase of 50 basis points year over year and 37 basis points on a sequential basis compared to Q1 2024. We reduced our opex in the second quarter to $217.4 million, an improvement of $20.9 million from Q2 2023 opex of $238.3 million. Reducing our opex with platform investments, an example of this was our transactions operations team. We were able to reduce the cost of this team by 22% in 2023 compared to 2022, thanks to the Compass platform tools we developed to process transactions. From the first half of 2024, we are down 14% compared to the first half of 2023. We grew our cash balance, and our balance sheet is strong. We ended Q2 2024 with $185.8 million in cash and cash equivalents, and no outstanding draws on our $350 million revolving credit facility. Our cash balance increased from last quarter and from the prior year end despite the $28 million antitrust litigation settlement payments and the cash used in acquisitions of Latter & Blum and Parks Real Estate. We continue to seek accretive strategic acquisitions as inbound inquiries from brokerages continue to be robust. In the second quarter of 2024, we closed two transactions which added over 2,000 principal agents. We further increased our presence in the southeast with the acquisition of Latter & Blum, the number one agency in Louisiana with nearly 15% market share in New Orleans. In Tennessee, we acquired Parks Real Estate. When combined with our existing operations in Tennessee, we now have over 20% market share in Nashville and are the No. 1 agency in Tennessee. We also continue to hire principal agents organically. We hired 543 principal agents organically in the quarter. At the end of Q2 2024, The number of principal agents at Compass was 16,997 compared to 13,698 in Q2 2023, an increase of 24% year over year. We also continued the trend of strong agent retention with 97.3% quarterly principal agent retention in Q2 2024. Our title and escrow business continues to strengthen. We finished Q2 with our highest ever attach rates. Moreover, since January of 2024, we improved our attach rate by six percentage points. Additionally, we have integrated six of our 70 title and escrow partners into our Compass platform and will have all seven partners integrated into the platform by the end of Q3. And finally, over the next 18 months, we are focused on launching title operations across all of our most mature transaction rich markets, including the San Francisco Bay area market, New York City, Seattle, Houston, Boston, Chicago, and Austin. I now want to talk about our vision for the future, which we are calling our 30/30 vision, to realize on average 30% market share in our top 30 cities achieved in 2026. Our 30/30 vision unlocks our complementary and compounding inventory-based structural advantages that make Compass a compelling company for agents, home buyers, home sellers, employees, and investors. We are the only brokerage firm that has combined these advantages into one cohesive offering that rests on our technology platform. Most importantly, we believe our structural advantages result in clear financial advantages. Today, I'd like to share with you the sources of our structural advantages, the impact of our structural advantages to date, and what we are doing to strengthen our structural advantages going forward. The sources of our structural advantages come from the following four attributes. There is no other brokerage firm that has the combination of these attributes, and few brokerages have even one. Our first structural advantage is the integrated nature of our end-to-end platform. The Compass platform is unrivaled in its ability to drive agent productivity and brokerage company operating efficiencies. We offer the only contract to close platform, where an agent can go from first contact with a new client to closing and to commission collection all in one place and where employees can execute the key employee to agent functions like transaction management, support, marketing support, and title and escrow support for the agents, all through the same platform as the agent is using. Our second structural advantage is our national scale. With over 33,000 agents across the United States, we are able to build upon our technology differentiation and continue to invest by amortizing the cost of our investments over more agents. This is something that smaller brokerages are unable to do. Our third structural advantage is our top agent network. Per real trends, more top agents work at Compass than any other brokerage firm. In fact, Compass has 50% more top agents as the next largest brokerage firms for real terms. We have the best agent-to-agent client referral network in the country. And Compass' find-an-agent tool helps drive agents to agents client referrals. Our average agent derives 17.5% of their business from agent referrals. Referrals not only result in more revenue for Compass but act as a recruiting and retention flywheel. Our fourth structural advantage is our depth and breadth of inventory. At compass, we take the advantage, we take advantage of our inventory position to create better financial outcomes for sellers and therefore agents, and therefore Compass. The foundation of every entity success in real estate is access to inventory. The source of success for all players in the industry, whether MLS's aggregators, buyer agents or listing agents, is access to inventory without inventory. Agents have nothing to help their clients sell or buy, and the MLS and aggregators have nothing to list. Listing data is valuable and belongs to our listing agents. We believe that in any market where Compass has No. 1 market share, we have a clear path over the near term to have more publicly searchable listing than any other public site, which will send a signal to the consumer that they need to search compass.com. The combined effect of each of our four structural advantages is bigger than the sum of the parts. All Compass constituents, agents, sellers, buyers in Compass can reap the powerful benefits from this combination of attributes. For agents, that means helping them generate more revenue and less time with lower third-party cost to operate their business. For sellers, it means selling their homes for more money and less time with less cost to market or prepare their house for sale. For buyers, it means helping them access the most inventory to find the best house for them at the best price in the least amount of time. For Compass, it means growing brokerage and integrated revenue while -- integrating services revenue while creating a lower cost to serve agents than any traditional brokerage firm. We have three key initiatives to strengthen our structural advantages and we expect them to drive search traffic leads, agent recruiting, agent retention, gross margin improvement, and market share gains. The first initiative is creating the largest inventory of homes for sale in the country. As previously mentioned, our 30/30 vision is to have on average 30% market share in our top 30 cities in 2026. We plan to add on top of our active inventory a larger pool of passive inventory. Think of passive inventory as homeowners who have a price in mind that they would accept for their home but haven't listed it in the open market. Agents may know these prices for some of their clients, but the challenge is that information doesn't live in one central place or the entire agent network of agents to access. However, since Compass is the only platform that combines our agents search listings and their CRM contacts in the same place, we have the unique ability to add aspirational, make-me-move prices to the almost 100 million contacts that currently reside in the compass CRM. With only 1 million single family homes on the market today, I expect that in 2025, Compass will have a combined off MLS and make-me-move inventory that is many times more than the publicly searchable active market. This will further make clear to buyers that they need to work with a Compass agent to see the market. As of this week, our agents are able to add make-me-move prices to their clients in their Compass CRM. The second initiative is making Compass the required destination for real estate. Our goal is to make it clear that Compass agents and compass.com have more inventory than third-party sites, sending a strong signal to buyers that if you aren't working with Compass agents or aren't searching Compass, you are not seeing all the inventory. With more web traffic comes more leads, we can send to our agents transactions that result from leads that are given to our agents at approximately a 50% margin. Our third initiative is launching the Compass client dashboard. Only Compass can provide a true end-to-end experience for agents and clients because only Compass offers all the products and features agents and clients need in one platform launching in six months. The client dashboard will put all the key agent to client interactions in one place including agent client communication, transaction timeline, tasks, documents, CMA valuations, listing marketing, listing insights, buyer search results, offers in negotiations, buyer tours, open house feedback title and escrow, and more. Over time, we plan to incorporate the key service providers interactions into the client dashboard as well, such as loan officers, home inspectors, home appraisers, photographers, videographers, home insurance, and home security providers, as well as ongoing home improvement vendors. With these three initiatives, I Expect compass to be in a place where any agent is at an undeniable advantage by being a Compass agent, and any home buyer or home, seller is at an undeniable advantage by being a compass client all within 2025. Ultimately, these structural advantages drive our KPIs, cash flow generation, and shareholder value creation. Moving on to the NAR settlement. Compass entered into a nationwide settlement agreement covering all of the sell side antitrust claims against us, and that settlement has been preliminarily approved by the court. We expect final approval of our settlement in late October 2024. It has been four and a half months since the announcement of the NAR settlement, and we have not seen a noticeable change from before the settlement in either the percentage of sellers that offer buyer's agent commission or in the average commission amount. They are paying the buyer's agent. To be clear, the fears many had about commissions going down or buyer compensation disappearing has simply not materialized. Over the months of May and June in the markets generating the majority of our revenue, more than 99% of new listings on the MLS, not just Compass listings, included offers to pay the buyer agents. Furthermore, about 96% of new listings on the MLS during that time period included offers to pay 2% or more, and more than 80% are offering to pay 2.5% or more. We do not expect the actual rule change requiring a buyer protection agreement on August 17th to impact the commission to buyer agents for three reasons. First, as seen from the data, after the unprecedented press attacking agent commissions, which we saw as the biggest risk. And the subsequent unprecedented questions from sellers about whether or not they should pay buyer commissions, the data clearly shows that sellers continue to value uh incentivizing the buyer agent. Second, after August 17th, the seller will continue to determine the buyer agent commission, and we don't believe the seller will be influenced by the buyer representation agreement since the buyer agreement is shared only with the buyer. Third, buyer representation agreements have already been required in half the states Compass operates in, and we have not seen them impact commissions. And this has been for many, many years before the NAR settlement. Now on to stock-based comp. Over the last two years, we created in our DNA the muscle to bring down annualized operating expenses by close to $600 million while still growing our business. As we move forward, we continue to identify opportunities to create shareholder value. We fully recognize that opex is not the only cost we have in our control. And over the past few years, we have significantly reduced the annual dollar amount of stock-based compensation with six straight quarters of decreases. Importantly, our stock-based compensation expense is expected to be about $130 million for 2024, which is over $100 million less or 44% less than the $234 million we reported just two years ago in 2022. And our stock-based comp expense in Q2 was the lowest in our history as a public company. I am committed to reducing dilution from stock-based comp and increasing free cash flow and free cash flow per share. Kalani will provide more detail on what we've done to date and what we plan to do in his prepared remarks. In closing, we see the industry consolidating around the winners. Compass is the No. 1 one brokerage for three consecutive years. We are delivering excellent financial results, and we have a strong balance sheet given the fiscal responsibility we have exhibited by moving to being free cash flow positive with no draw on our credit facility, no convertible debt, and ample liquidity allowed through our revolver. I want to end by thanking the entire Compass team of employees and agents. I see their commitment to making Compass successful with their incredible dedication and determination. I will now pass it over to Kalani. Thank you. Kalani Reelitz -- Chief Financial Officer Thank you, Robert. But before I go into details of our Q2 performance, I wanted to start my prepared remarks by acknowledging and thanking our head of IR, Richard Simonelli. As many of you know, Richard's moving on from Compass but leaves Compass in a much better place than when we started. Richard is a professionals' professional, a pros' pro and has helped Robert and I tell the Compass story through some of the most exciting and turbulent times in company's history. Rich, thank you personally and from all of us at the Compass Team. Thank you for all the great work you've done. Now, before I get into the results for the quarter, I want to add to Robert's comments about achieving a 30% market share in the top 30 cities. Let me share how we're going to get there. It will be through a mix of organic growth and accretive M&A. We believe many of the 1.4 million prospective agents can grow their business and improve their quality of life by joining Compass. Compass gives agents a comprehensive offering of technology, people, and network that no one else has. This is why the pace of brokerage firms seeking to join Compass has increased during the downturn. We have capitalized on this by making strategic, accretive acquisitions. We are being very selective. We're interested in and talking to premium blue chip local and regional brokerages. However, the financials have to make sense. These acquisitions become more attractive when we build in the benefits of synergies, including lowering the overall operating costs for our agents by leveraging the Compass platform, including our technology, real estate footprint, and back office processes that already exist. In 2023, we added three brokerages in Arizona, California, and Texas. And in 2024, we added two brokerages in Louisiana and Tennessee. Now let me provide you with some detail on our operations for the quarter. In the second quarter, we processed 60,390 transactions, an increase of 11.4% from a year ago, which compares very favorably to the 3.3% decline in transactions for the entire residential real estate market in the second quarter as reported by the National Association of Realtors. Our market share for Q2 2024 was 5.13%, up 50 basis points year over year and up 37 basis points sequentially from Q1 of 2024. As of June 30, 2024, we had 16,997 principal agents, compared to 13,698 as of June 30, 2023, an increase of 3,299 year over year or 24%. This increase was driven by 2,375 principal agents that we acquired through the Latter & Blum acquisition in Louisiana and the Parks Real Estate acquisition in Tennessee. Additionally, on an organic basis, our team recruited 543 principal agents in the second quarter, which was a strong recruiting quarter for us. Our quarterly retention in the second quarter was 97.3%. Turning to our financial results for the quarter. Our second-quarter revenue was $1.7 billion, an increase of 14% from the year ago period, which was at the high end of our guidance range of $1.6 billion to $1.7 billion. Gross transaction value was $65 billion in the second quarter, an increase of 14% from a year ago, reflecting the 11% increase in total transactions combined with an increase in average selling price. Our commission expense as a percent of revenue was 82.6%, an increase of 70 basis points from Q2 of last year. While we continue to see the long-term structural tailwinds related to Compass commission expense in the quarter, about two-thirds of the increase in commission expense as a percent of revenue is attributable to changes in geo mix in the markets in which we operate and, from brokerage acquisitions we closed since the year ago period that were made in markets with lower average splits than our overall brokerage rate. Our total non-GAAP operating expenses, excluding commission and other related expenses, were $217 million for the second quarter. This reflects a reduction in expenses of $21 million or 9% from Q2 a year ago even after considering the added expenses we assumed related to each of the two brokerage acquisitions we completed in Q3 of 2023, the Florida title acquisition this past January and two brokerage acquisitions we closed this past quarter. As a reminder, the non-GAAP operating expenses we referred to amid expenses that we exclude from the calculation of adjusted EBITDA, including stock-based compensation and depreciation and amortization, and as always, we've included tables on page 12 and 13 in our Q2 investor decks that reconcile these amounts to our GAAP operating expenses. Our adjusted EBITDA for the second quarter was $77 million, which was slightly better than the high end of our guidance range of $55 million to $75 million. This adjusted EBITDA level reflects an improvement of 157% over the year-ago results. And importantly, it reflects a new company record as the highest level of adjusted EBITDA we reported as a company. In addition to a new all-time record of adjusted EBITDA, we also achieved a new record as it relates to GAAP net income. During the second quarter. Our GAAP net income was $20.7 million, which is the first time in the company's history that we are reporting a quarter with positive GAAP earnings. This is an incredible milestone for us as it validates that at the right levels of operating expenses, the financial model works. It's important to note that the achievement of positive GAAP net income was made possible by our relentless focus on reducing our operating expenses but was also assisted by reducing some of the expense lines traditionally excluded from the calculation of adjusted EBITDA. Most notably, stock-based compensation expense was $31 million during the second quarter, which reflects a reduction of 21% from a year ago and reflects the lowest level of stock-based compensation expense that we've reported at the public company. As Robert mentioned, we are constantly focused on creating value for our shareholders. We have put a focus on bringing down stock-based compensation with the same approach and discipline that allowed us to successfully reduce our operating expenses by nearly $600 million. It's important to highlight that we've already accomplished several action items over the last 18 months to manage stock compensation. First, we sunset our agent equity program in December of '22, which allowed agents to convert a portion of their cash commission into Compass equity. Second, we eliminated the use of equity as an incentive to recruit agents in the third quarter of 2022, around the same time that we eliminated the use of cash as a sign-on recruiting incentive for agents. Third, we greatly reduced the workforce over the several reductions in force during 2022 and 2023, including reduction in the size of our product and engineering team, which consumes the largest portion of our employee-based equity grants. And fourth, we've shifted a considerable amount of labor to low-cost offshore markets through the use of contractors. In addition to this helping to reduce cash expenses, this also reduces the use of equity as we don't issue equity to contractors. These measures have resulted in significant reduction in our stock-based compensation expense. And in 2022, our stock-based compensation expense was $234 million. In 2023, our stock based compensation reduced by $76 million or 32% to $158 million, and we expect our stock-based compensation will reduce to approximately $130 million for the full year of 2024. This will reflect a reduction of 44% or over $100 million for the first two years since 2022. Going forward, we will continue to offshore work through our low-cost labor efforts, where opex is reduced and equity compensation is not utilized. Also stock compensation will gradually reduce as the higher priced shares issued at the time of our IPO will vest out over the next 1 to 2 years since the stock-based compensation expense is determined based on the share price at the time of grant. In addition to the reduction in stock-based compensation expense, we are focused on minimizing dilution in other ways as well. One example of this is the way we net settle employee RSUs when they vest through this net settlement, company pays the cash for employees payroll, withholding taxes, and withholds an equal amount of shares at the time of vesting. The share hold back from taxes reduces dilution from stock compensation by about 40% and effectively operates like a regular share buyback program during the year. Further, any issuance of equity for M&A going forward will continue to be made through a strict framework that allows -- that applies to accretive deals at favorable multiples that grow revenue and EBITDA and ultimately shareholder value. While we believe stock-based compensation is an important tool to align the actions of our team members to the outcomes of Compass, we also understand it represents a real cost. In the exact same way we delivered operating expenses, expense reductions, Robert, myself and our full management team are focused with action plans to continue to bring down stock-based compensation. As the housing market recovers and revenue growth occurs, we do not believe there is a need to materially increase the absolute dollar amount of stock based compensation. In the future, as we have done with our opex efforts, we look forward to showing progress on this commitment in upcoming earnings calls. Turning back to our financial results, free cash flow during the second quarter was positive $40.4 million. As previously disclosed, the first payment of our class action legal settlement was made in the second quarter which reduces the cash flow in the quarter by $29 million. Excluding the effect of that payment, free cash flow would have been $69 million, which would have meant an improvement of 36% over the free cash flow of $51 million in Q2 of last year. As a reminder, and consistent with my comments last year, it's important to note that our positive cash flow in the first half of 2024 is partially due to a couple of timing items that will have offsetting effects later in the year. First, many of these fees that are -- many of the fees that are billed to our agents occur at the beginning of the calendar year, so our cash flow in the early part of the year, is aided by timing of when the fees are paid, and it will have an offsetting effect later in the year. Second, we tend to see seasonal impacts to working capital that are favorable in the first two quarters of the year when cash collections from our brokerage commissions are higher at the end of these quarters -- each of these quarters compared to the beginning of these quarters. The opposite is generally true in Q3 and especially in Q4 when seasonality impacts working capital in a negative way. These timing items should be neutral for the full year but can create choppiness for individual quarters within the year. We expect to be free cash flow positive for the full year even after considering the $29 million legal settlement payment made in Q2. However, we expect that free cash flow will be only slightly positive in Q3 and free cash flow will be negative in Q4. We ended the second quarter with $186 million of cash and cash equivalents on our balance sheet, and we have no outstanding draws on our revolving line of credit. We believe we are well-positioned to react to continued market challenges. Now turning to our financial guidance. For Q3 of 2024, we expect revenue in the range of $1.425 billion to $1.525 billion, and we expect adjusted EBITDA to be in the range of $30 million to $50 million. The midpoint of each of these revenue and adjusted EBITDA ranges reflect increases of 10% and 83% compared to Q3 of last year. Let me provide a few additional data points as it relates to financial modeling you may be doing for the second half of 2024. First, consider our commissions as a percent of revenue for Q2 was 82.6%. We would expect this margin to remain around this level for the balance of the year, which reflects the integration of our recent M&A transactions that have commission rates that are higher than our core brokerage. Second, as it relates to opex, we have updated our opex range for the year 2024 of $876 million to $896 million. As we laid out last quarter, this range starts with our core company opex of $850 million and adds in $15 million for 2023 M&A, opex $12 million of opex for Latter & Blum acquisition that closed in April and an additional $9 million for the balance of 2024 from the Parks entities that we just acquired in May. For modeling purposes, you should expect an additional sequential increase to opex in Q3 and Q4 as the partial quarter impact of our Q2 acquisitions of Latter & Blum and Parks contribute to a full quarter's worth of opex in Q3 and Q4. Finally, as I stated earlier, we are reiterating our expectation to be free cash flow positive for the full year. However, on a quarterly basis, we expect free cash flow to be marginally positive in Q3 and negative in Q4 given the seasonality of our business. As I wrap up my prepared remarks, I'd just like to recap some of the highlights that we made that made the second quarter such a standout. First, we grew revenue by 14% versus a year ago with market share increasing 50 basis points to over 5%. We delivered an 11% increase in transaction volume from a year ago compared to a 3% decline in transaction volume for the overall industry. The number of our principal agents increased by 24% versus a year ago, an increase of nearly 3,300 principal agents. We achieved an additional opex reduction of $21 million versus Q2 of last year or $83.6 million on an annualized basis even after considering the additional opex assumed for recent acquisitions. We delivered a new record level of adjusted EBITDA of $77 million despite revenue being down by $250 million compared to Q2 of 2021, which was a quarter of our prior adjusted EBITDA record. We completed two M&A transactions through which we became the No. 1 brokerage by sales volume in the Nashville and New Orleans market. We produced over $40 million of free cash flow and increased our cash position despite paying out over 28 million in legal settlements. And finally, we reported GAAP net income of $21 million, which marks the first time as a public company that we've ever reported positive GAAP net income. Results like these don't happen without the incredibly hard work and dedication of our team members, and I'd like to say thank you again to our agents and employees for all that you do for Compass. I would now like to turn the call over to the operator to begin Q&A. Operator Questions & Answers: |
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