Compass, Inc. (COMP) Q3 2022 Earnings Name Transcript

Compass, Inc. (COMP 31.35%)
Q3 2022 Earnings Name
Nov 10, 2022, 5:00 p.m. ET

Contents:

• Ready Remarks
• Questions and Solutions
• Name Individuals

Ready Remarks:

Operator

Good afternoon. My identify is Colby and I will likely be your convention operator right this moment. Right now, I want to welcome everybody to the Compass Inc. Q3 2022 earnings convention.

[Operator instructions] I’ll now flip the decision over to Richard Simonelli, vp of investor relations. You could start.

Richard Simonelli — Vice President, Investor Relations

Thanks, operator, and good afternoon, and thanks all for becoming a member of the Compass third quarter 2022 earnings name. Becoming a member of us on right this moment’s name will likely be Robert Reffkin, chief govt officer; Greg Hart, our chief working officer; and Scott Wahlers, our chief accounting officer. In discussing our firm’s efficiency, we are going to check with some non-GAAP measures. You could find these reconciliation of those non-GAAP measures to probably the most immediately comparable GAAP measures in our third quarter earnings launch and the presentation posted on our investor relations web site.

We are going to make forward-looking statements which might be primarily based on our present expectations, forecasts and assumptions and contain dangers and uncertainties. These statements embrace our steerage for the fourth quarter and full 12 months 2022 and feedback associated to our working bills. Our precise outcomes might differ materially from these statements. You could find extra details about dangers, uncertainties and different components that might have an effect on our ends in our most up-to-date Annual Report on Kind 10-Ok and Quarterly Report on Kind 10-Q filed with the SEC, additionally out there on our investor relations web site.

You shouldn’t place undue reliance on any forward-looking statements. All data on this presentation is as of right this moment’s date, November 10, 2022. We expressly disclaim any obligation to replace this data. With that, I will now flip it over to Robert.

Robert?

Robert Reffkin — Chief Govt Officer

Thanks, Wealthy, and thanks to everybody for becoming a member of us right this moment for our third quarter outcomes convention name. This has been a generationally dangerous 12 months in residential actual property, one of many worst years over the previous a number of a long time. The unbelievable velocity of the decline has been historic. Transactions have fallen considerably as hovering mortgage charges, excessive residence costs, lack of stock, inventory market declines and excessive ranges of uncertainty are maintaining many patrons on the sidelines.

The previous 12 months have been robust and the following 18 months seem that they are often harder. Compass will likely be diligent and protracted. We’re centered on attending to the opposite facet. For the reason that second quarter this 12 months, now we have been aggressively assembly down our bills to adapt to this quickly deteriorating market and already achieved vital value reductions in our expertise, engineering and different working bills by means of a wide range of measures, together with reductions in excursions.

With our heavy funding interval behind us, we’re working the enterprise extra effectively. We’ve achieved vital market share positive aspects amongst weakening opponents. We’ve constructed an extremely robust agent community, a extremely regarded model and probably the most superior expertise platform that assist us recruit brokers and make them extra productive. We consider that the actions now we have taken up to now and price discount initiatives at the moment in place put us on tempo to ship our focused non-GAAP working expense run fee of between 1.05 and $1.15 billion exiting 2022.

Nonetheless, we’re not executed. We’re managing the enterprise to scale back the price base with a really particular purpose to turn out to be free money circulation optimistic for 2023, beginning with being free money circulation optimistic within the second quarter of 2023. Market situations are persevering with to deteriorate. And because of this, we will likely be implementing extra value discount initiatives to get forward of any future market declines.

We’re seeing {industry} forecast of plus 1% to destructive 23% for the total 12 months 2023. We’ve been planning for a big double-digit decline. Whereas we don’t consider the market will go down 25% subsequent 12 months, we’re not ready and have already begun to construct a plan to account for a decline of this magnitude, and we count on this plan to be applied within the subsequent three months. I’m very lucky to have a variety of assist with a robust administration workforce, together with Greg Hart, our chief working officer; and Scott Wahlers, our chief accounting officer, who’re becoming a member of me right this moment.

On the operational facet, Greg is main the cost for persevering with to reinforce our expertise platform and decreasing bills by utilizing our software program platform to standardize, automate and ultimately additional monetize our platform. On the monetary facet, Scott has been a worthwhile member of our finance workforce for 4 years and has executed a fantastic job, significantly as we transition to our new CFO. I’m delighted to let you know about Kalani, our new CFO. Kalani brings practically 20 years of expertise, together with seven years in govt roles at one of many high industrial actual property corporations, Cushman & Wakefield, and 12 years in a big nationwide company model, Walgreens.

In our seek for a CFO, the board and I needed greater than only a robust CFO. We needed somebody with robust enterprise acumen who may turn out to be an integral chief on our administration workforce and play a crucial function serving to set the strategic route of the corporate. We needed somebody with a robust monitor document in enterprise and actual property who’ve seen varied cycles, and we bought that with Kalani. He not solely brings wonderful monetary expertise to our enterprise, however as a former CFO and COO of Cushman & Wakefield Americas.

He was instrumental in streamlining the operations of the corporate in driving efficiencies all through the group. Kalani joins us subsequent week, and I am unable to wait so that you can meet him. I’m assured that Greg and Kalani, together with the remainder of the administration workforce will take Compass to the following degree and drive worthwhile progress. We simply reached our 10-year anniversary as an organization, and I spent many of the previous two months assembly with and speaking to our brokers all around the United States.

A few weeks in the past, we had 2,500 of our brokers at our annual agent retreat in Atlanta. I’m satisfied that now we have one of the best brokers within the {industry} and that they consider in Compass as a lot as I do. Whereas we consider the housing market will stay challenged throughout 2023, we proceed to construct a strong basis in order that we will absolutely capitalize when stability and progress return sooner or later. The Compass workforce stays devoted to offering our brokers with one of the best expertise, workflow instruments and advertising and marketing help to achieve success available in the market over the medium and long run.

Within the meantime, we proceed to be laser-focused on lowering prices so we will attain our purpose to turn out to be free money circulation optimistic for 2023, beginning with being free money circulation optimistic within the second quarter of 2023. I will now flip it over to Greg.

Greg Hart — Chief Working Officer

Thanks, Robert. We’ve constructed the No. 1 brokerage in the US by gross sales quantity with a fraction of the variety of brokers in contrast with the competitors, whereas masking lower than half of the U.S. inhabitants.

It is true that high quality, not amount, is the precise technique to constructing a profitable brokerage enterprise. Regardless of fierce financial headwinds, our core enterprise continues to strengthen primarily based on our potential to proceed so as to add brokers, enhance our expertise benefit and preserve our industry-leading principal agent retention of over 90%. Within the third quarter, we continued to efficiently roll out our enhanced nationwide end-to-end workflow platform, which we consider permits our brokers to be the best within the {industry} and ship their patrons and sellers a best-in-class expertise. Brokers come to Compass for our nice community, our tradition and our expertise benefit.

We consider we’re extraordinarily properly positioned getting into this downturn with the {industry}’s solely end-to-end expertise answer, which helps entice and retain brokers and, extra importantly, helps them develop their enterprise. We processed near 55,000 transactions within the third quarter, a decline of 12% from a 12 months in the past, which compares favorably to the 21% decline in transactions for your complete residential actual property market as reported by NAR. We consider the Compass benefit is much more compelling in tough market situations. We’re additionally utilizing our expertise as a instrument to additional decrease bills in our enterprise.

In Q3, we launched Compass Companies in our Florida area. Companies makes working with Compass easy and straightforward for our brokers with a personalised answer for brokers to handle duties, discover assist and get help. Supporting suite of inner instruments unlock velocity to decision, will increase transparency and empowers Compass help groups to offer the {industry}’s greatest agent expertise. We count on providers to proceed to be launched throughout areas to serve each brokers and our workers, driving enhancements and providers primarily based on brokers and workers suggestions.

As we attempt to be free money circulation optimistic in 2023, now we have to stability the need for high line progress with the price related to reaching that progress. Within the close to time period, meaning lowering prices. On the Adjoining Companies facet of the enterprise, we paused all M&A to be able to preserve money and as an alternative internally on rising the companies we personal and are working right this moment. From a expertise perspective, we’re within the means of integrating title and escrow into our expertise platform in Southern California, which is one in all our largest brokerage markets and one in all our most profitable title markets.

By integrating title and escrow immediately into the expertise platform, we’re making a low friction approach for our brokers to supply title and escrow providers to an current brokerage transaction, growing the connect fee of adjoining providers. We are going to replace you on our progress in future quarters. To make sure we rationalize our prices in mild of market situations, we decreased the dimensions of our progress workforce, which recruits new brokers to Compass over the summer time. These reductions happened in June and September, simply as we launched our zero incentive method to recruiting in mid-August.

The good thing about these mixed steps signifies that we decreased our personnel prices for our progress workforce whereas concurrently transferring to a a lot better financial method to recruiting brokers as we not use fairness or money incentives to draw brokers to Compass. Our potential to do this can be a reflection of the worth our platform offers, our robust firm tradition and our industry-leading community of high brokers and the popularity of the worth these belongings present throughout the agent neighborhood, each inside and outdoors Compass. In Q3, we added 335 principal brokers, down from 405 principal brokers added in Q2 however weren’t involved. In October, the primary month of recruiting was zero incentives after our September discount in pressure, our progress got here by means of the extra anticipated revenue per recruited principal agent than we have ever had.

By way of agent progress, we proceed so as to add principal brokers. In Q3, our common variety of principal brokers elevated to 13,314, representing 15% progress 12 months over 12 months. We consider brokers are making this resolution to hitch due to the ability of our platform, our robust model and the help that we provide because the deciding components versus monetary incentives. And we’re happy to report that we noticed over 90% principal agent retention but once more in Q3 of this 12 months.

As at all times, we proceed to evaluate our value construction to match the market situations we’re dealing with, and we’re maintaining all choices open. For instance, as a part of our total working expense discount, we signed a contract with Genpact, a number one BPO supplier that can allow us to faucet into a world pool of lower-cost expertise. We’re dedicated to driving our non-GAAP working bills properly under the low finish of our vary of $1.05 billion in 2023. I’ll now flip it over to Scott Wahlers.

Scott Wahlers — Chief Accounting Officer

Thanks, Greg, and whats up to everybody becoming a member of us on the decision right this moment. I will evaluation our third quarter monetary ends in extra element, after which I will present an replace on our steerage expectations for the fourth quarter. However earlier than I try this, I needed to additionally share my enthusiasm for Kalani becoming a member of us as CFO. I’ve had the chance to get to know him in the course of the recruiting course of, and I am assured that he will likely be a robust addition to our senior administration workforce and a fantastic chief to our proficient finance group when he formally joins us subsequent week.

Turning to our monetary outcomes. Third quarter income was $1.49 billion, coming in on the excessive finish of our income steerage vary of $1.4 billion to $1.5 billion. This compares to $1.74 billion of income within the prior 12 months interval, representing a 14% discount 12 months over 12 months. Gross transaction worth was $57.3 billion within the third quarter, a decline of 17% from a 12 months in the past, reflecting the decrease transactions that Greg referred to, in addition to a lower in common promoting value of about 5%.

Our non-GAAP commissions expense as a share of income elevated by roughly 20 foundation factors from Q3 of final 12 months to 80.7%. Per what we mentioned on our name in August, the year-over-year improve was pushed primarily by the decreased participation within the 2022 agent fairness program relative to 2021. Excluding the affect of the decreased program participation, we noticed a 65 foundation level enchancment 12 months over 12 months within the core enterprise. Web page 17 of the Q3 investor deck contains extra particulars on the agent fairness packages affect on the fee line.

Our adjusted EBITDA for the third quarter was a lack of $42 million, which represented a $30 million enchancment versus the midpoint of the steerage vary we offered in August. A few third of this enchancment was as a result of income coming in on the excessive finish of our Q3 steerage vary and the opposite two thirds was attributable to a decrease degree of working bills as we decreased bills extra rapidly than initially deliberate. Our whole non-GAAP working bills, excluding commissions, have been $328 million for the third quarter. As we talked about beforehand, lots of our noncommission-based working bills are considerably mounted in nature and have traditionally elevated sequentially from quarter-to-quarter versus various according to income.

Nonetheless, resulting from our value discount initiatives, together with our reductions in pressure throughout Q2 and Q3, the $328 million of opex for the third quarter displays a $38 million discount from Q2 of this 12 months and was according to the opex degree from Q3 a 12 months in the past. Our GAAP web loss for the third quarter was $154 million in comparison with $100 million in the identical interval a 12 months in the past. Included within the GAAP web loss for the quarter are noncash fees, which included $50 million of stock-based compensation expense and $21 million of depreciation and amortization expense. Additionally, included in GAAP web loss this quarter was $29 million in restructuring prices associated to our value saving actions, primarily associated to the discount in pressure we introduced in September, in addition to a $10.5 million of expense associated to the settlement of a litigation matter.

Per prior quarters included within the press launch issued right this moment is a schedule that reconciles GAAP web loss to adjusted EBITDA. We’ve $355 million of money and money equivalents on our stability sheet on the finish of September. Free money circulation in the course of the quarter was destructive $69 million, which was down over the prior 12 months as a result of larger adjusted EBITDA loss, in addition to roughly $18 million of severance funds associated to our reductions in pressure and the Modus exit that we introduced final quarter. Now, turning to our monetary steerage.

For This autumn of this 12 months, we count on income of $1.15 billion to $1.3 billion, which is a discount to the implied This autumn steerage we offered in August. Reflecting the strain on the actual property market, pushed by continued will increase in mortgage charges and volatility within the fairness markets. Particularly, since our August name 90 days in the past, mortgage charges have risen an extra 1.5 to 2 share factors to over 7%. When mixed with our precise outcomes by means of September, this This autumn income outlook interprets to full 12 months income within the $6.05 billion to $6.2 billion vary in comparison with the beforehand said steerage vary that we gave in August of $6.15 billion to $6.45 billion.

Our adjusted EBITDA expectations for This autumn are a lack of $50 million to $80 million. This interprets into an adjusted EBITDA loss for the total 12 months of $185 million to $215 million, which is throughout the vary of the total 12 months adjusted EBITDA loss steerage we offered in August, reflecting the favorable affect that our value reductions have needed to partially offset the continued weak spot we’re seeing on the income line. Regardless of the market challenges we have seen within the second half of 2022 and the expectation for continued market challenges into 2023, your complete administration workforce stays dedicated to managing the working bills of this enterprise by means of the present difficult macroeconomic surroundings and delivering on our dedication to construct and handle a worthwhile enterprise sooner or later. With that, let me flip the decision again to the operator to start out the Q&A portion of the decision.

Questions & Solutions:

Operator

[Operator instructions] Your first query comes from the road of Matthew Bouley from Barclays. Your line is open.

Matthew Bouley — Barclays — Analyst

Hey, good night, everybody. Thanks for taking the questions. I needed to the touch on the price reductions. I do know you held the information to exit 2022 at a $1.05 billion to $1.15 billion vary when it comes to opex.

And I believe I heard you say — I believe Greg stated that your intention was to return in decrease than that in 2023, and please appropriate me if I misheard you. However in the event you may type of communicate to what you are considering there? Is that this kind of momentary actions? What is the type of potential vary of outcomes for the extra value reductions?

Greg Hart — Chief Working Officer

Sure, the overwhelming majority of actions are everlasting nontemporary on that time. What we shared is that we see attention-grabbing forecasts between plus 1% to destructive 23% for 2023, and that we do not see — we do not count on the market to be down 25% subsequent 12 months, however we have already begun to construct a plan to account for that decline and magnitude at that degree. After which, that will likely be applied over the course of the following three months. And so, you are searching for extra specificity, however we consider that with the numbers that we shared which you could get to what you are searching for.

Matthew Bouley — Barclays — Analyst

Bought it. OK. No, that is useful there, Robert. Second one, simply zooming into the fee splits, it seems like if I am doing the maths proper, that fee splits got here down a bit, so in your favor, sequentially.

There’s an argument that in one of these housing market that the kind of share of exercise by high producing kind of larger cut up brokers tends to be much more pronounced within the favor of these brokers. So, I imply, are you anticipating to see one thing like that in your individual enterprise? Or ought to we count on the fee splits to type of proceed to go in your favor right here?

Greg Hart — Chief Working Officer

Sure. So, there’s a sentiment that in down markets, one of the best brokers preserve the enterprise and the worst brokers go away the enterprise. And I believe that confirmed us as much as be true over a number of cycles. And so, I do count on a variety of lower-producing brokers to depart the enterprise.

That stated, at Compass, we deal with high 50% brokers, we at all times have and have continued to. And so, I do not suppose the combination shift in our agent inhabitants will not change as a lot. I believe they’re going to proceed to realize market share throughout the enterprise from brokers which might be leaving at different corporations.

Matthew Bouley — Barclays — Analyst

Bought it. All proper. Effectively, thanks, Robert. Good luck, everybody.

Robert Reffkin — Chief Govt Officer

Thanks.

Operator

Your subsequent query comes from the road of Michael Ng from Goldman Sachs. Your line is open.

Michael Ng — Goldman Sachs — Analyst

Hey, good afternoon. Thanks very a lot for the query. I simply needed to comply with up on the prior line of questioning, possibly in a barely totally different approach. It is encouraging to listen to in regards to the purpose to get to free money circulation optimistic in 2023.

It sounds prefer it may be some combination of extra value financial savings. So, does that additionally indicate optimistic EBITDA? Or are there some working capital advantages that may be related to what feels like a slight deemphasis on a few of the adjoining providers stuff? Possibly some extra coloration there could be useful maybe like a non-GAAP opex quantity that you just may be concentrating on as a quarterly run fee?

Robert Reffkin — Chief Govt Officer

Let me begin, after which I will let Scott add to it. Sure, we’re not giving formal steerage for subsequent 12 months. However like I discussed earlier than, I believe that we’re — with the numbers that we offer, you are capable of run your fashions and I am comfy you’ll get to what you want. However we’re not offering formal steerage for subsequent 12 months this time.

However Scott, please add to that, no matter you would like.

Scott Wahlers — Chief Accounting Officer

Sure. I’d simply add, and once more, reiterating, we’re not offering steerage for subsequent 12 months, however free money circulation and EBITDA do have a tendency to maneuver in sync with one another to a sure diploma. However the major purpose for the enterprise is free money circulation optimistic, interval, and that is what we’re centered on over EBITDA.

Michael Ng — Goldman Sachs — Analyst

All proper. Thanks, guys.

Operator

Your subsequent query comes from the road of Bernie McTernan from Needham & Co. Your line is open.

Bernie McTernan — Needham and Firm — Analyst

Nice. Thanks for taking the query. Possibly to start out, simply the 15% progress in brokers within the third quarter, is {that a} good run fee to consider going ahead? Or ought to we count on that deceleration to proceed?

Robert Reffkin — Chief Govt Officer

Sure, when it comes to the 15% year-over-year progress, a few issues to remember. When you return a 12 months in the past, there have been two points of our agent progress that we purposely paused from a price perspective. One is, we have been nonetheless increasing into new markets in Q3 a 12 months in the past, and we have been additionally doing M&A brokerages the place we thought it made sense for us. From a price perspective, given the surroundings that we’re in now, we paused each of these actions.

And so, these are headwinds on a year-over-year foundation from an agent perspective. We proceed, nonetheless, to recruit brokers, as we at all times have with our strategic progress managers, our agent recruiting workforce. We consider that has moved to zero incentive, recruiting is off to a very good begin. As I discussed in the course of the name, we had a really robust October.

We began that effort in the course of August. And it is nonetheless early days, however we’re optimistic on that.

Bernie McTernan — Needham and Firm — Analyst

Bought it. After which, is there any approach to escape any coloration when it comes to what you are seeing within the West — you gave type of like a extremely big selection of potential outcomes for the broader actual property market. Simply attempting to see if there’s any geographical diversification inside that?

Robert Reffkin — Chief Govt Officer

Sure. What we’re seeing is extra weak spot in California. We’re beginning to see extra weak spot in sure elements of Florida. It is not a one-size-fits-all, however I believe a common progress on the markets that had the quickest value will increase are seeing probably the most ache presently.

However I imply, everyone knows what occurred right this moment. Mortgage charges went down 60 foundation factors right this moment, one of the vital dramatic single-day declines within the historical past of mortgage charges. And so, that — I’d count on that this may spur a variety of demand. Clearly, it isn’t baked into the issues that we have been speaking about right this moment.

However that is principally a free — a fantastic calling card for each agent to name their patrons which might be on the sidelines and say, this can be a nice time to lock in a fantastic fee. And so, that is what’s occurring at this second.

Bernie McTernan — Needham and Firm — Analyst

Bought it. After which, only one extra, if I’ll. Simply to get some readability on the brand new cost-cutting initiatives, is that locked and loaded? Like in the event you noticed rates of interest proceed to fall, and it seems just like the housing market wasn’t going to be as dangerous for ’23. Would you continue to go ahead with these value minimize — these up to date cost-cutting plans or would you pivot the enterprise?

Robert Reffkin — Chief Govt Officer

When you’re referencing my level that we’re — we don’t consider the market will go down 25% subsequent 12 months. And that, nonetheless, we’re starting to construct a plan to account for a decline of that magnitude and it is going to be applied over the following three months. That plan will likely be applied no matter what we see over the course of the interim three months, as a result of we consider that is proper factor for the enterprise.

Bernie McTernan — Needham and Firm — Analyst

Understood. Thanks very a lot.

Operator

Your subsequent query comes from the road of Justin Ages from Berenberg. Your line is open.

Justin Ages — Berenberg Capital Markets — Analyst

Hello. Thanks for taking the questions. First, on the agent progress recruitment, as you’ve made the choice to not broaden into new markets, is there any thought given to the truth that in the event you proceed to develop brokers that brokers may be competing with one another and you are going to see some headwinds to efforts there?

Robert Reffkin — Chief Govt Officer

No, that is not one thing that has created an affect on Compass up to now. We’re in plenty of markets the place now we have upwards of 20%, 30% market share. And the fact is, brokers compete with their counterpart brokers simply as a lot as in the event that they’re in the identical firm or at a special firm. And so, it hasn’t — that hasn’t been one thing that has pushed the monetary affect of the corporate or that we’re involved to purchase if we proceed to get extra brokers throughout the identical market.

Justin Ages — Berenberg Capital Markets — Analyst

OK. After which, on the Compass platform itself, has the headwinds on the housing market been dealing with set there to a rise in agent utilization of the Compass platform? Or is it type of stayed regular there? Simply attempting to get a way of whether or not the instruments that you just’re offering are working otherwise you want extra and even much less or one thing alongside these traces?

Robert Reffkin — Chief Govt Officer

Sure. The platform continues to see very robust utilization from our brokers. In some ways, the platform in a down market may help an agent in several methods than in an upmarket, assist them generate new enterprise, assist them attain again out to previous shoppers utilizing our CRM, utilizing our motion plans, and so on. And so, we consider that the good thing about the platform is the truth that it offers a single end-to-end built-in approach for brokers to run and develop their enterprise.

And with the rollout of the ultimate items of that over the course of the top of the summer time, we stay very bullish on that and we’re seeing actually robust utilization from our brokers even because the market has began to melt.

Justin Ages — Berenberg Capital Markets — Analyst

All proper. That is useful. Thanks for the colour.

Operator

[Operator instructions] There are not any additional questions presently. I’ll now flip the decision again over to Robert Reffkin, chief govt officer, for closing remarks.

Robert Reffkin — Chief Govt Officer

Sure. I simply wish to say thanks to all of our buyers for being with us on this journey. It is a very uneven time in the actual property market, and we stay up for persevering with to work collectively. Thanks for all the things, and we’ll see on the subsequent earnings name.

Operator

[Operator signoff]

Period: 0 minutes

Name contributors:

Richard Simonelli — Vice President, Investor Relations

Robert Reffkin — Chief Govt Officer

Greg Hart — Chief Working Officer

Scott Wahlers — Chief Accounting Officer

Matthew Bouley — Barclays — Analyst

Michael Ng — Goldman Sachs — Analyst

Bernie McTernan — Needham and Firm — Analyst

Justin Ages — Berenberg Capital Markets — Analyst

Extra COMP evaluation

All earnings name transcripts