Yahoo Finance Compass, Inc. (NYSE:COMP) Q1 2024 Earnings Call Transcript
Compass, Inc. (NYSE:COMP) Q1 2024 Earnings Call Transcript May 8, 2024
Compass, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by. My name is Kathleen and I will be your conference operator today. At this time, I would like to welcome everyone to the Compass First Quarter 2024 Financial Results. [Operator Instructions] Thank you. I would now like to turn the call over to Richard Simonelli, Senior Vice President, Investor Relations. Please go ahead.
Richard Simonelli: Thank you, operator and good afternoon to all of you. Thank you for joining the Compass first quarter earnings call. Joining us today will be Robert Reffkin, our Founder and Chief Executive Officer and Kalani Reelitz, our Chief Financial Officer. In discussing our company’s performance, we will refer to some non-GAAP measures. You will find the reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in our first quarter 2024 earnings release posted on our Investor Relations website. 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 second 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 out 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 and available on our Investor Relations website. You should not place undue reliance on any forward-looking statements. All information in this presentation is as of today’s date, May 8 and we expressly disclaim any obligation to update this information. I’ll now turn the call over to Robert Reffkin. Robert?
Robert Reffkin: Thank you for joining us today for our first quarter 2024 results conference call. We had strong first quarter results with revenue towards the higher end of our guidance range and adjusted EBITDA that exceeded our guidance range and with our agents continuing to outperform the market. I am pleased to say that in Q1 2024 in a historically challenged market and the slowest quarter of the year, Compass generated positive free cash flow. This proves that our focus on cost reductions and cash generation, while still investing in agent growth in our proprietary technology platform are working. We grew revenue considerably. In Q1 2024, we generated an increase in revenue of 10% year-over-year as we increased transactions 7.1% from a year ago.
This compares favorably to the 3.5% decline in transactions for an entire market in the first quarter. We grew market share considerably. In Q1 2024, our quarterly market share increased 26 basis points year-over-year and 35 basis points on a sequential basis compared to Q4 2023. This is a testament to our agent productivity, which is further enhanced by a proprietary technology platform. I have shared repeatedly that Compass has the best agents in the industry and they are demonstrating their skill and experience navigating this difficult market. We continue to grow our agent base considerably. Our principal agent count has increased by nearly 1,000 agents between Q1 2023 and Q1 2024. This is a 7.3% increase, which is in stark contrast to industry trends.
The vast majority of agents that come to Compass tell us that the platform is the number one reason that they join. Originally, we organically in Q1 2024, we recruited 518 principal agents, the highest quarterly count since we ceased using cash and equity sign-on bonuses. Just last month in April, we added more than 1,000 principal agents with our accretive acquisition of Latter & Blum, the largest agency in the Gulf South and New Orleans. We are growing total agents faster than the market. At Compass, the number of total agents increased 2.1% year-over-year, while our three largest public company competitors by agent count reported decreases of 2%, decreases of 5%, and decrease of 6% in the same period. Moreover, this includes a reduction of over 1,000 non-productive agents in the last two quarters.
As a reminder, Latter & Blum is not in these numbers. Our balance sheet is strong. We ended Q1 with $165 million in cash and cash equivalents and no outstanding draws on our credit facility. We continue to drive cost improvements internally. We remain laser focused on driving efficiencies and reducing costs using technology. These improvements are also positively contributing to free cash flow. We reduced our OpEx in the first quarter to $211 million, an increase of $32 million from Q1 2023 OpEx of $243 million. We also reduced OpEx sequentially from Q4 2023 OpEx of $224 million. As always, Kalani, our Chief Financial Officer, will walk you through the financials later on this call. Moving on to the market, I still believe 2024 will be better than 2023 and that 2025 will be better than 2024, with the mid-cycle coming in 2026.
My opinion is influenced by the following. One, inventory is up 33% from a year ago. More inventory leads to more sales. Two, the percentage of all cash homebuyers is at the highest level in over 2 years, with the stock market nearing all-time high. Homebuyers are less reliant on mortgages. Three, the percentage of sellers with 4% mortgage rates or below is approaching 50% after dropping from approximately 75% at the peak. At this rate, we believe in 2 years, only approximately 25% of people may still have 4% mortgage rates or below, nearly eliminating the biggest bottleneck to the mid-cycle real estate market. And four, we now have over 2 years of pent-up demand assuming 2024 is just modestly better than 2023. This will end up being a 3-year housing downturn, forcing many people to live and remain in homes that they don’t want to be in.
We believe when rates come down, it will create a massive surge in transactions. The longer this lasts, the stronger the market bounce back will be. As I mentioned on the last call, assuming we continue to add net agents annually, maintain or modestly improve our agent economics and keep our $600 million of annual cost savings with minimal inflationary growth of 3% to 4% in 2025 and beyond, we believe that is a formula for generating hundreds and hundreds of millions of dollars in adjusted EBITDA and free cash flow as the market recovers to a more normalized mid-cycle annual home sales level of 5.4 million to 5.6 million homes. But in the meantime, as I mentioned on our last earnings call, we have conservatively budgeted for a flat year on transactions and have brought our OpEx to that level.
We expect to be free cash flow positive in 2024, even after the cost of the first payment related to our litigation settlement, which we agreed to in April ‘24 and which we expect to make in the second quarter. The number one question we are getting from investors is, what is the settlement having on the business? What effect is it having? To help with this question, let me share with you five facts as well as five beliefs. Let’s start with the facts. One, buyers are using buyer agents now more than ever. In 2023, 89% of buyers use an agent, which is up from 75% just 20 years ago in 2003. Two, buyer agreements are not new and are already required in half of the states in which Compass operates. Thousands of Compass agents have been getting buyer representation agreements signed for years with no issue.
Three, 90% of our agents have been trained and are prepared for the rules. Since the verdict, we have provided our agents with 57 national training sessions and hundreds of local training sessions. With these efforts, I have seen our agents transition from initially being worried to now being confident. Four, per NAR and RealTrends, commissions were 5.5% in 2023 that compares to 5.1%, just 20 years earlier in 2003. Five, the industry has not seen a noticeable change in either the percentage of sellers that offer a buyer agent’s commission, nor in the average commission amount they are paying the buyer’s agent. We reviewed the MLS data in the markets generating the majority of our revenue since the announcement of the NAR settlement on March 15.
Here is what we found. More than 99% of new listings since March included offers to pay the buyer agent. Furthermore, more than 96% of all listings included offers to pay 2% or more and more than 67% are offering to pay 2.5% or more. To-date, we are not hearing from agents that any of these numbers are coming down. We believe the sensational press has caused significantly more reaction than what we expect to see from the actual rule changes. Specifically, the headlines since the March 15 NAR settlement have led to sellers asking if they need to pay a buyer agent more than ever before. And the result of those conversations is that sellers felt more than 99% of the time that it was still in their interest to provide a commission to buyer’s agents.
Now, here are some of our beliefs after conversations with hundreds of our agents across the country. One, we believe there will be little impact on the professional full-time agents. And Compass is composed of experienced full-time agents with very strong repeat and referral business. Two, we believe that agents will increasingly need to be able to sell their brokerages value proposition to communicate that to buyers. And that Compass has the best value proposition for buyers of any brokerage firm. For example, Compass has access to off-market inventory through Compass private exclusives and Compass coming soon, which is particularly important in a low inventory environment. Another example being buyer technology tools like Compass collections, like Compass digital tour sheets, like Compass CNA and the client dashboard launching in less than a year.
Three, we believe real estate agents are project managing a highly complex, multi-month process where they can often be coordinating between over a dozen different parties, loan officers, title officers, home inspectors, home appraisers, painters, stagers, photographers, videographers, agents on the other side and so on. We do not believe this important role will be displaced or discounted. Four, we believe the percentage of buyers and sellers that will use an agent will continue to be at the 90% level. Buying and selling a home is the biggest financial decision that most people make in their lifetime. However, for decades, people have been declaring that there will be a decline in the use of the real estate agent. In the last 20 years, since the rise of the internet, we have seen so many attempts to replace the agent, such as for sale by owner companies and then you had the Aggregators and then you had the Discounters, then you have the iBuyers and then the Power Buyers.
Yet despite all of these attempts to disrupt the real estate agent, buyers and sellers are using agents more than ever before. In the last 20 years, the percentage of buyers using an agent has increased from 75% in 2003 to 89% in 2023. And finally, we believe the vast majority of buyers and sellers prefer to pay for value over receiving a discount. If saving money on commissions was the most important thing to a seller, the majority of home sales would be for sale by owner. Obviously, that is not the case. In every market we know of, there are countless agents and brokerages that offer low commission rates. Discounters are not new and have been operating the market for decades. Many of these discount firms have either gone out of business or have not gained traction.
In fact, one of the largest public companies in residential real estate today is a professional discounter, offering the majority of the country discounted commissions with salaried agents for decades. This company can go to every seller and say, we have more than 50 million visitors on our site a month. More internet exposure than every other brokerage firm in the country combined for your listing. And we only charge 1%. However, after 20 years of offering discounts, they have only 0.8% market share. That is the proof that buyers and sellers are speaking with their checkbooks in that they prefer professional advice over a discount. In closing, I believe Compass is approaching an inflection point. We have done the hard work. We have brought expenses down and continue to grow our agent count and inventory advantage.
The market will inevitably come back. And when the Fed cuts rates, we will be in a position to thrive. I want to thank the entire Compass team of employees and agents. I see their commitment to making Compass successful with their incredible dedication and determination. It has allowed us to be named the number one real estate brokerage by sales volume in the United States for 3 years in a row and to have a strong foundation for the future. I will now pass it over to Kalani.
Kalani Reelitz: Thank you, Robert. Before getting into financials, I wanted to give you some details on our operations. In the first quarter, we processed 38,449 transactions, an increase of 7.1% from a year ago, which compares favorably to the 3.5% decline in transactions for the entire residential real estate market in the first quarter, as reported by National Association of Realtors. Our market share for Q1 2024 was 4.76%, up 26 basis points year-over-year and up 35 basis points sequentially from Q4 2023. Historically, we disclosed our principal agent count as an average for each quarter, which reflects the average of the principal agent count as of the end of each of the 3 months in any given quarter. We have been consistent with that since our IPO and the logic was to avoid the choppiness that can sometimes occur as a result of using a specific date at the end of the quarter versus an average across the quarter.
However, the feedback we have received from many analysts and investors is that this was a confusing metric. As a result, on a go-forward basis, we will disclose our principal agent count as of the last day of the quarter. On this basis, as of March 31, 2024, we had 14,591 principal agents compared to 13,601 as of March 31, 2023, an increase of 990 year-over-year or 7.3%. Our team recruited 518 principal agents in the first quarter, which was a strong recruiting quarter for us. Historically, the first quarter tends to be a higher than average quarter for attrition and we saw that again this Q1. Our net principal agent count shows a net decline of 92 in Q1, but this number includes more than 100 principal agents who exited that had no production in the prior 12 months and therefore their absence will have no impact on our financials.
Let me now turn to our first quarter financial results and our guidance for the second quarter. Our first quarter revenue was $1.05 billion, an increase of 10% from a year ago period, which was towards the higher end of our guidance range of $975 million to $1.075 billion. Gross transaction value was $40.1 billion in the first quarter, an increase of 9.6% from a year ago, reflecting the 7.1% increase in total transactions, combined with a slight increase in average selling price. Our non-GAAP commission expense as a percent of revenue was 81.8%, an increase of 39 basis points from Q1 of last year. The majority of this or about 25 of the 39 basis points is attributable to the acquisitions we closed since the year ago period that were made in markets with lower average splits than our overall brokerage.
Our total non-GAAP operating expenses, excluding commissions and other related expenses were $211 million for the first quarter. This reflects a reduction in expense of $32 million, or 13% from Q1 a year ago. Even after considering the added expenses we assumed related to each of the three brokerage acquisitions we completed in 2023 and our Florida Title acquisition this past January. I’m very pleased at the continued cost discipline in place across the organization, and we’ve committed to it as a management team, and it’s become part of the culture of how we operate as a company. That said, it’s important to note that Q1 OpEx figure is the low watermark for OpEx for the 2024 quarters, as there is some anticipated inflation to consider beginning in Q2, in particular related to the effect of compensation increases for our staff coming out of our annual performance cycle at the end of March.
The additional OpEx we assume from Latter & Blum acquisition that closed in April, and the seasonal increase in agent marketing expenses typically seen in the second quarter. As a reminder, the non-GAAP operating expenses we refer to exclude certain expenses that exclude from the calculation of adjusted EBITDA, including stock compensation, depreciation, and amortization, and in this quarter, the $57.5 million charge related to the class action litigation settlement. We’ve included tables on Pages 12 and 13 in our Q1 investor deck that reconcile these amounts to our GAAP operating expenses. Our adjusted EBITDA for the first quarter was a negative $20.1 million, which was slightly better than the favorable end of our guidance range of a negative $22 million to negative $40 million, and an improvement of 70% over the adjusted EBITDA loss of $67 million a year ago.
Our GAAP net loss for the first quarter was $133 million, which reflects the full charge of the $57.5 million settlement for the class action lawsuit that we previously disclosed. We took the full P&L charge during Q1. However, we expect that half of this amount will be paid in cash in Q2 of 2024 and the other half in Q2 of 2025. Free cash flow for the first quarter was positive, $5.9 million, which compares very favorably to negative $59 million of free cash flow in the year-ago quarter. It’s extremely rewarding to see the results of our efforts over the past 2 years. that have allowed us to generate positive free cash flow in the first quarter, which is a seasonally weak quarter for the brokerage industry. As we consider full year performance, it’s important to note that our positive cash flow in Q1 is partially due to a couple of timing items that will have offsetting effects later in the year.
First, 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 the 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 the cash collections from our brokerage commissions are higher at the end of 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 two timing items should be neutral for the year but can create choppiness for individual quarters within the year.
For those listening to the call that are modeling cash flow for the year, you should not assume a similar conversion of adjusted EBITDA to free cash flow for the remaining quarters of 2024. With that said, I have maintained since I started here at Compass that we will be focused on free cash flow, and over the last six quarters, our operations and finance teams are delivering on that relentless focus, and the results are becoming more and more evident each quarter. We ended the first quarter with $166 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 Q2 of 2024, we expect revenue in the range of $1.6 billion to $1.7 billion, and we expect adjusted EBITDAs to be in the range of $55 million to $75 million.
Last quarter, we stated that for the full year of 2024, we are targeting a non-GAAP OpEx level between 855 to 875 with a midpoint of 865. As a reminder, the midpoint of this range equates to $850 million for the company’s core OpEx, plus the additional $15 million of OpEx from two acquisitions we closed in September 2023. We are maintaining that range for the current business, but are increasing the range – the total range by $12 million on both the low and high end to consider the additional OpEx for the balance of 2024 that we assumed for the Latter & Blum acquisition that we just closed in April. We expect this acquisition to be accretive to adjusted EBITDA in 2024, but the additional OpEx needs to be considered. Additionally, we are reiterating our expectation to be free cash flow positive for the full year of 2024.
I’ll end by saying thank you again to our agents and team members for all that you do for Compass, and I would now like to turn the call over to the operator to begin Q&A.
See also
15 Countries Hosting the Most Foreign Students in the World and
15 States With the Highest Rates of SNAP Recipients in the US.
To continue reading the Q&A session, please click here.
