Q3 2019 Earnings Call
Our self service capabilities will be an important cost advantage over time for redfin now.
For the third quarter Redfin now improved gross margins from negative 2.7% in 2018 to negative 0.9% in 2019, even with revenue growth above 600%.
Redfin now the other cost advantages our websites monthly audience of 36 million.
Which lets us avoid spending money to meet homeowners and our nearly 1600 real estate agents, who can sell the homes that redfin now ends up buying.
But what drives now margin. The most is our pricing if we paid too much for home for home it hardly matters, how efficiently Bennett acquiring renovating our selling that home because we wish we hadn't bought at all.
This is why machine learning improvements, we've recently made to the redfin estimate are so important to redfin now as anticipated profits.
Redfin estimate is Redskins estimated sale price for more than 85 million us properties. It has been the main draw for homeowners to visit our site, but but we also use it to guide redfin now offers.
For off market properties, we expect that the estimates median error rate will improve significantly.
As part of this improvement we will also rate how confident we are in the price we project for each home.
This will let us flag the homes that are two unique to price with high confidence, which will help redfin now avoid risky purchases.
And our last call, we said that demand for Ensign offers is here to stay as most homeowners will want to see how much and institutional buyer will pay for their home before listing it.
And because it's so important to our whole business to meet whom homeowners who are deciding whether and how to sell their home we want to run that sales process, mostly by making the instant offer ourselves. This is why we have expanded redfin now since July one from six markets to 10, adding Boston Usten Maass Vegas in San Antonio.
But the ultimate proof of Redfin now success isn't just in its own growth, but in redfin now its contributions to the Companys overall listing share.
Markets that launch Redfin now in 2018 or earlier have grown listing share about 14 points faster than comparable markets without redfin now.
This gain enlisting share, which we measured by comparing January through September end, 2018, and 2019 accounts for the homes, our brokerage sales for listening clients and for rent and now.
But even though we see redfin now is one component of a larger solution our plan as Fritz and make money on its own and we still see profit not growth as the fundamental challenged with institutional buying we're investing more in our capabilities in institutional buyer to improve redfin now profitability, even as we now.
So the range of homes in each market that we buy.
This focus on profits is why we've been conservative in how we measure redfin announced gross margins accounting for both the homes, we sold hand, the money pits, we're still struggling to sell.
We've also been conservative accounting every possible field expense against our growth Prof. Excuse me how gross profit.
For the home itself for all the employees to prepare instant offers to buy the home for repairs and improvements for taxes maintenance and listing fees for all the managers of Redfin announced field personnel.
Since we set up redfin now to make money in the future after accounting for all of these costs. We've included those costs in our tally of Redfin now present day gross losses.
We can be more disciplined than other institutional buyers about profits because red fence overall share growth doesn't depend exclusively on our buying homes.
Homeowner who rejects the retrofit now offer can list the home through Redskins brokerage for homes in markets that Redsun now hasn't yet reached we can turn into a partner like open door.
In the future. We May also call on partners to buy homes that we don't have the pricing confidence to bid on ourselves even in markets, where redsun now operates.
On July 11, we started promoting open door to read send dot com visitors into markets that Redsun now had not yet reached Atlanta Phoenix.
The number of Redfin Dot com visitors, who asked for an offer has been high and the number of homes opened or ended up buying has met our expectations.
There is enough demand for an instant offer from redfin dotcom visitors to support Reds and now its growth and also to support partnerships with other institutional buyers several of which have contacted us recently about a partnership similar to the one we have with open door.
No matter, how much we improved from year to year Redfin now long term margins are still speculative because the entire identifying industry still hasn't made any money.
Profitability for our mortgage and title businesses is far more straightforward just because each has many standalone competitors with well established margins.
We believe both title in March and can be even more profitable when combined with the technology powered brokerage avoiding the money most lenders entitled companies spend to Wu brokers and the cost of sending customer information back and forth between different companies using different software.
This is why our other category of revenues, which consists mostly of mortgage and title sales improved third quarter gross margin from negative 14.1% in the third quarter 2000, 18.9% in 2019.
Redfin mortgages salespeople are already much more efficient than a typical lenders just because our mortgage advisors work side by side with our real estate agents.
In one market in September 24.5% of our homebuyers completed the sale with redfin mortgages their lender.
This brings us tantalizingly close to redfin mortgages 2019 goal of loaning money to one in four redfin buyers in one market for an entire quarter.
We certainly don't expect to every market to reach a 25% mortgage attach rate every month and 2020.
But the brokerage isn't more redfin mortgage is only source of business.
Surprising number of redfin mortgage customers come from outside our brokerage despite our having made almost no efforts yet to promote redsun mortgage to Reds and dot com visitors and anyone else outside of our brokerage.
Because our mortgage advisors can get so many lending customers from our brokerage we're already more efficient than the average lender as we improve our loan origination software will make even more efficiency gains many and processing.
Underwriting in closing alone.
For these and many other reasons, we expect the mortgage business over the next 18 months to contribute to the profits already generated by our title business.
But the main engine of our profits is the brokerage, which also got more productive in the third quarter. This us because were routing more customers from our website to each agent this year and because use homes.
Accuse me because us home sales dropped sharply in the third quarter last year.
To drive long term margin gains we need to improve the rate at which are homebuyer succeed in buying a home through redfin.
This efficiency gain is also crucial to the company's mission, which is to get people buying and selling a home a better deal.
To improve homebuyer success rate will have to improve our service, but also better qualify the customers on our website.
In 17 pilot markets were now asking people signing up for their first redfin home tore questions about their home buying plants.
As we plan for our company wide rollout in January 2020, our hope is that this will reduce the number of new tour requests without significantly reducing sales. So our agents can focus on the customers most serious about buying a home.
In two pilot markets, we increased the rate at which agents follow up with customers within 24 hours of their first tore by approximately 30%.
If we can start next year with a similar change companywide, we would expect to see homebuyer success rate increase.
We can save for sure whether we'll get the same results when we roll out these changes to the whole company, but we've never gone into a new home buying season is well prepared at this stage as we are now in August 2019, We also launched performance standards that we expect to affect 20% of our agents in 2020.
This may increase attrition rates, starting next March, but we expect its long term impact will be an improvement in the overall quality of our workforce and in our service.
Since April we've been testing new price and they can if needed give us the latitude to invest more in our service and still improved gross margins for.
For all these reasons, we believe gross margins will keep rising into 2020.
Gains and customer success rate, coupled with traffic growth and higher redfin awareness can lift brokerage sales, which lets sales for each of our new businesses to all without the significant customer acquisition cost of a standalone lender or title company.
As we start to see evidence that each new business can make money the benefits of a complete solution compound not only for our customers, but for our profits.
Customers, who use Redskins website brokerage mortgage mortgage and title businesses have always loved the value and advocacy we offer at every phase of their move.
Because the move often comes together faster and easier than it could have before.
But combined those businesses can generate more profit from the customer than the brokerage alone.
Margins for our new businesses will we believe go up and down over future quarters, but mostly up.
And as each new business becomes more efficient by combining with the whole our profits can improve even faster than our revenues.
Before turning the call over to Chris, let's discuss the US housing market, which is now probably our hip hop out.
I've been reading as Dan script to law.
Let me try that again before tax free game.
Didnt before turning the call over to Chris, let's discuss the us housing market.
Thanks, just now probably healthier than the economy overall.
Residential construction contributed to gross domestic product growth for the first time in 18 months.
Yes, we should take the headlines about the housing market with the grain of salt in the fourth quarter, just because the comparisons to a dreadful end to 2018 will be so favorable but most markets are in decent shape in places like Atlanta, and Milwaukee, where prices have shot up sales have slowed just as they did in the coastal markets last year.
Overall low rates have strengthened homebuying demand at least marginally over the course of the year and after accounting for the season, the number of homes or sales at a five year low.
So we may see broader price gains in the first half of 2020 and the return of bidding wars.
The back and forth that has been playing out in 2019.
Wasn't quite as strong as we had hoped when the year began but it will probably continue for the next six months at least and here's how it goes.
Interest rate drops lift demand modestly an uptick in prices induces builders in homeowners to list more homes for sale, then sales increase but prices soften beginning the cycle and new.
It's not a boom, but it extends the market's long bull run.
Housing benefits so much from low rates, but it seems as solid as any sector. The economy can be given high levels of uncertainty in the U.S government and the global economy with that let's turn the call over to Chris.
Thanks, Glenn we delivered another strong topline results corridor and saw improved gross margin each of our reported segments third quarter revenue was $239 million up 70% from a year ago.
Real estate services revenue, which includes our brokerage and partner businesses grew to 22% year over year.
Brokerage revenue or revenue from home sales closed by our own agents was up 23% on a 25% growth in brokerage transactions.
Brokerage revenue per transaction was down 2% year over year, reflecting the continued mix shift towards our listing business and lower average home values compared with a third quarter of 2018.
Revenue from our partners was up 8% on a 5% increase in partner transactions.
Revenue per partner transaction was up 3% year over year.
The property segment, which consists of homes sold through our redfin now program generated over $80 million in revenue up from $11 million in the third quarter of 2018.
In October 2019, we began to utilize our new 100 million dollar asset backed credit facility, which we put in place last quarter.
We continue to expect that overtime, the vast majority of capital to buy homes will come from lenders.
Using the homes, we biased collateral.
Our cash and cash equivalents, including short and long term government securities held for sale totaled over $309 million as of September 30, 29 team.
We are comfortable that this cash balance combined with our asset backed borrowing capacity will provide us with sufficient liquidity to fund our future growth for the foreseeable future.
Our other segment, which includes mortgage title and other services contributed revenue of $5 million a year over year increase of 92%.
Total gross profit was $53.4 million up 26% year over year.
Real estate services gross margin was 35.1% up 110 basis points year over year, primarily driven by 120 basis point decrease in personnel costs, including stock based compensation and transaction bonuses as a percentage of revenue.
Properties gross margin was minus 0.9% up 180 basis points from year ago, primarily driven by 140 basis point decrease in personnel costs, including stock based compensation and a 40 basis point decrease in listing expenses, partially offset by a 50 basis point increase in the cost of property.
Each as a percentage of revenue.
Other segment had a gross margin of 0.9% and improvement of 1500 basis points from a year ago as our mortgage and title businesses continue to scale.
Total operating expenses increased 18% year over year and represented 19% of revenue down from 28% of revenue one year ago.
Technology and development expenses increased 31% driven by an increase in personnel costs, including stock based compensation and higher occupancy and office expenses to support growth in our technology personnel.
General and administrative expenses grew 14% year over year and marketing expenses increased just 2% as we did not run any offline advertising campaigns.
And stopped slower growth in performance marketing channels during the quarter.
Our net income, including stock based compensation and depreciation was $6.8 million compared to $3.5 million net income in the third quarter of 2018.
Diluted earnings per share with seven cents compared with four cents one year ago.
Now turning to our financial expectations for the fourth quarter of 2019.
Revenue is expected to be between $211 million in $220 million, representing year over year growth between 70% and 77%.
We expect our property segment to account for $80 million to $85 million about revenue.
Net loss is expected to be between $12.8 million and $9.5 million compared with the $12.2 million net loss in the fourth quarter of 2018.
Our guidance includes approximately $7.6 million of stock based compensation and $2.7 million of depreciation and amortization.
It assumes among other things at no additional business acquisitions investments restructurings or legal settlements are concluded that there no further revisions to stock based compensation estimates.
And with that we'll open up for your questions.
Thank you if you would like to ask your question. Please signal by pressing star one on your telephone keypad. If you are using and speakerphone. Please make sure your mute function in turned off to allow your signal to reach our equipment again press star one to ask a question, we'll take our first question from Tom White with D.A. Davidson. Please go ahead with your question Sir.
Hi, this actually for preview on for Tom White. Thanks for taking my question. So just on your mortgage business is that one in four attach rate in the realm of what you're targeting long term.
We're just trying to better understand unit economics in mortgage so any color you can refer I don't see average loan amounts or gain on sale that you're targeting will be will be helpful. Thank you.
We're not discussing gain on sale with investors at this point.
25% attach rate is an aggressive target in the near term.
But I think we can do better than that in the long term it depends on great sales execution, but also great pricing.
And today, we just have.
A significant cost advantage over our competitors, which were partially able to pass on the customers.
So I think the real upside on the mortgage business beyond the brokerage attach rate is just the fact, we have 36 million visitors on red send dot com, many of whom are not going to use in ancient from redfin, because they're on coal or their best friend as a real estate agent, but who would be completely open to a redfin mortgage so that team is champing at.
The bid to have us turn on the big Spigot and promote redfin mortgage on our website, we still feel that the website is probably under monetized.
Because the main monetization channel is just the brokerage so as soon as we can scale to that demand. We will today that team is hiring handover fast and we just want to protect the culture and the quality of service.
Thank you as a reminder to ask a question that is star one and please limit yourselves to one question. When you want to follow up please re queue up.
The next question will come from Jason dilute with Piper Jaffray. Please go ahead.
Yes, thanks for taking the question just from a strategic and kind of how you're thinking about running the business. It seems like with the marketing spend.
As a percentage of revenue being less you're better qualifying customers to performance standards for agents. It seems like Theres, an increased focus on managing the business from margin versus growth not that the growth is bad. It's just that seems like you're more focused on the margin front. So is that the case and just kind of give us your thoughts on.
And then also the agent productivity.
They used to be 34 transactions a year looks like we're going to be around there again this year, what's kind of the target or what can we think about just remind us the range that you have for agent productivity. Thank you.
So I'll talk about margin versus growth and then Chris do you want to address agent productivity Sir.
I don't think we've shifted our tone.
On margins versus growth we want both.
We've always been clear, though that we are in the mid March and business that we have to be disciplined about our costs that were going to run this business sort of the cash register whenever we can there have been investments in new businesses that are somewhat capital intensive, but fundamentally we want to make sure everyone knows that we know how to make money.
So maybe the emphasis on profit was stronger in this call when we talked about redfin now and I think thats, because we realize that in the broader space. There are companies that have a higher risk tolerance that are more aggressive about growth in the properties business than we.
We are we know that everyone is going to want to evaluate an instant offer but we think we have to be really picky about which houses we buy so growth is the easy part in the properties business, because it's such a novel product and because it's so easy to sell dollar bills for 95 cents.
So I think we just have to be really careful when we look at the properties business, which has grown on 600% year over year that we grow that business and responsible way. So if you were looking for a shift in tone. It probably came there, but almost everything else.
He is the way that we've always been and even with redfin now I feel like Thats the way we've always been.
But the market has just had a different view that other players in the space has been more growth oriented. So we wanted to be clear about where we stand.
And then in terms of Asian side activity. We are pleased Weve continued to see agent productivity tick up in each of the corridors. So far this year. That's what we expect that as we increased the number of customers that each of our agents was meeting on really starting in the latter part of 2018, the biggest opportunity for that going forward.
As what Glenn mentioned on the call and that's just related to homebuyer success rate, helping more customers get all the way through a close transaction. We continue to me a lot of customers are really interested in purchasing homes and we view again as Glenn mentioned have a variety programs underway help those customers get through to closings and.
The biggest opportunity as it relates to.
Including agent productivity over time.
Thank you for the question. The next question will come from Jason helps fine with Oppenheimer. Please go ahead with your question Sir.
Thanks question, then we'll follow up on that that profitability.
Can you expand a bit more by the takeaways from Austin in Boston.
Just having all of those product offerings in one market and then how you can give out expanding that share since the auto markets over time, and then just specifically on oil and then on profitability as a business is showing better profitability broadly the guidance implies better margins in the fourth quarter.
Can you comment next year do you expect EBITDA breakeven for the year or better. Thanks.
Hi, Jason we're not commenting on next year.
I want to emphasize that.
Growth has accelerated and we've got more leverage so.
Hopefully, we can have our cake and eat it to.
The main engines for this growth have been in the core brokerage itself, but also in these ancillary businesses mortgage and title I think your questions about Austin in Boston relate to direct access to properties direct to offers that is not going to affect our near term.
Profitability or even drive near term growth.
It is a long term bet that we can change in a very fundamental way the real estate market. We believe there is a segment of customers who want full service and there's another segment of customers, who want to do it themselves and we want to have the best product for each and so.
That customer segments that wants to do it itself is.
The new segment and it's the one we really want.
To have a leadership role developing.
Thank you for the question. The next question will come from Jack Cinco with Susquehanna Financial Group. Please go ahead your question.
Glenn I think in the prepared comments you talked about.
Where you are active in redfin now your market share increases have been greater and so thinking through that and it's been a angel debate. Whether this is driving sales or seller leads are not do you think its brand awareness, that's driving that market share with rates and now in the market or do you think you're starting to see real progress in terms of seller leads.
Leads from.
Being at that Incent offer whether they take it or or decide to list spreads in anyway.
I don't think its general brand awareness the redfin now drives it drives more seller inquiries.
Now the controversy around that is.
When redfin now finds the house it hires the redfin brokerage to listed so every redfin now.
Home turns into a redfin brokerage listing so theres that direct contribution to listing share that is in contra vertical and there are some customers who contact us about redfin now who I don't think would have contacted us for the brokerage just because redfin now as some more differentiated product.
So that's just incremental.
Where I still think theres upside for Red San and the other players in the property space is when someone evaluates an instant offer on says it's actually to low I'm going to go ahead and list. My property. We've really tried to have an integrated sales experience where right away the real estate agents as well, let me help you with that and sometimes that works and sometimes.
It doesn't.
We're working hard on that and we've made good progress.
But I still lot more so that's the area, where I think we can have a more seamless sales experience and a better overall capture rate from the inquiries.
Thank you for the question. The next question will come from Eagle Iranian with Wedbush Securities. Please go ahead with your question Sir.
Hey, guys. Thanks for the questions. So I want to ask on.
What specifically drove the decrease in personnel costs the contribution to.
The gross margin and real estate services I know last quarter.
You talked about the increased costs and touring and I know you're addressing some of that sounds like long term as well.
That helped contribute to to costs and in this quarter.
Yeah.
And then maybe talk a little bit about the reference direct expansion and no.
Expanded into Texas, and you're looking to expand it further.
Over the course, the or what are the what are your expectations. There at this point and.
You know the you're starting to close the closed transactions there and how should we think about how that contributes to growth and margins at least through the end of this year and as much as you're willing to share about next year. Thanks.
Sure. So let me start with the question on real estate services gross margin on those did primarily improve related to personnel expenses as a percentage of revenue and not only did we get improvement in agent productivity that support staff productivity in the third quarter of 2019 as compared to third quarter of 2018 part of that.
Just as a reminder, as that the real estate market started to slow down in the third quarter of 2018, and so that was a headwind on productivity over that period of time, but just generally we were quite pleased.
With all the staff productivity and on your question related to home touring expenses that was a big headwind in the second quarter that was less so in the third quarter and.
And so we're hopeful that some of the changes we've been making earlier in the final to help qualified customers have contributed to that time will tell whether that's the entire driver.
On Redsun direct is just a little baby a gal.
Mortgage was this way two years ago and people were wondering if it was going to have a significant financial contribution and we counseled patients in the same way.
We are constantly patients with direct we have been pleased at how easy it is to expand.
There are some.
Industry headwinds, where we have to make sure that the local real estate Commission really understands what we're doing but it's totally above board and it's going to expand relatively quickly I. Just think the challenge is going to be making sure that people can get through the process preparing an offer without a real estate agent and really driving completion rate.
On that form and conversion rate for redfin lift things to turn into sales without an agent. So that'll take some time, but I do think that trend is only going in one direction and it's important that you have a portfolio of businesses with different growth rates and maturities because.
At one point a year from now two years from now three years from now we think this could be a significant driver of profits. It's a very high margin business segment.
Thank you for the question. The next question will come from John Campbell with Stephens. Please go ahead your questions.
Hey, guys good afternoon, and congrats on the continued success.
Great and I've got one more on direct offers.
And don't we're we're going to stay patient there, but you guys have rolled that out and I guess, a handful of markets now it's only on redfin for sell properties, but.
Recently, maybe a couple months ago, you guys started to solicit feedback around basically open that up outside of redfin and come into the broader industry, but I'm curious about how that's gone so far and what if any pushback you might have received.
John not a sparrow false with now Youre noticing it.
Turning to be sneaky about that.
Just because.
Our diabolical plans have been announced to the world.
So at some point it makes sense for us to let other agents, including me agents, who have complained about rents indirect put that button on their own listings because it's good for their clients and it's actually good for their own business.
I don't think were quite ready to do it yet.
But the results of the survey you asked about where we asked image ones would you be willing to do this.
We are good.
Plenty of agents would be interested in doing it.
Thank you for the question. The next question will come from Mark Mahaney with RBC capital markets. Please go ahead Sir.
Great. Thanks. This is my Chen on for Mark.
On properties gross margin in nicely reached.
Hey, a record highs. So I was I was wondering if you could talk about some of the other future levers of expansion for this segment and when we could possibly think about positive margin and also on Reds and now you've expanded to several new cities. This quarter now you're up to 10 I'll. Just wondering if you have any change views on the high by.
Your opportunity and how we should think about the pace of market expansion over the next several quarters.
So.
The properties business.
It's going to be heart of redfin.
For the foreseeable future, we think consumers are going to want to evaluate that option I don't know that we're going to be very aggressive about expanding markets because it's so operationally intensive.
So we are now branding our own vans in filling them up with Vanity counters in sinks and all this other stuff to be able to fix up the houses that we buy and the faster we get those vans rolling around the city the less money, we have to waste paying for the long to get caught in the taxes and maintenance.
These in the capital that we borrowed to buying a house so.
I think our focus is going to be more on gaining share within a market then expanding to other markets I will probably take a balanced view of that but it will shade toward concentration.
And then the levers on profit are really the ones that we already discussed operational excellence and just grinding on margin are something that we really pride ourselves on because we've been in a cost sensitive business for so long we've been the value leader for so long we view the properties business as a race to the.
Bottom nobody cares, whether the check came from redfin or somebody else they care about the amount and so this is an economic war that we feel well equipped to fight.
Having said that pricing is just so important.
If you missed price a house by five or 10000 Bucks no matter, how many efficiency gains you get on mall in the lawn for $55 instead of $60 a week. It just doesn't manner. So that is the software problem. It's a software problem. We've been working on for a long time, the fact that our machine.
Learning team just came up with another astounding increase and and accuracy for our estimate we feel good about it and we've also made some organizational changes so that we have more governance on who gets the price the home how much financial expertise that person has.
Centralizing some of those decisions and managing by exception.
Has really.
Then beneficial to us so I want to make forward looking statements about.
When redfin now it's going to make money.
But I will tell you that.
We're just very tough on that business.
We sold our arms, Chris and I and say, you think you're going to make might prove it to me.
Because there's so many ways you can baloney yourself on this one.
And.
And the addressable market the size of the market goes up and down depending on your willingness to take risk.
And lose money.
Thank you for the question. The next question will come from Thomas Champion with Cowen. Please go ahead with your question Sir.
Hi, good afternoon.
Given the de Minimis loss in.
Add red Sun now I'm, just curious if it's safe to assume that.
You are seeing some.
Better profitability in early markets like inland Empire, and maybe maybe San Diego.
Just just curious any any comment on.
The profitability of now and in any of your older markets and then also noticed that in the brokerage business you launched genetic.
Dan.
Maybe in Tennessee in Northern Kentucky. These struck me is.
Generally smaller markets and I'm just curious if your thought on.
The size requirements in order to to support services have changed at all whether or not you can.
Actually operate the decor brokerage business in smaller places. Thank you.
Let me start at the second question first so related to real estate services expansion brokerage expansions. We have added a few markets recently will continue to do that and we'll see those are opportunistic around mobilicity multiple listing services that are combining our areas near adjacent to places we're already operate.
I am so you Shouldnt think about our stance with regard to ongoing into many smaller markets is any different we'll do that opportunistically, but it's not a core strategy for the company.
And the question about.
Vintages in Redfin now are older markets running at higher margins, we're trying not to segment this market by market, because it's such a crapshoot quarter by quarter market by market that your results are really going to vary wildly I think the question. We have as we organized markets into cohorts is weather.
We should do that by vintage where profits just improve as you gain more market experience.
Our whether we should do that by home type. So if you go to Denver, Dallas, probably Phoenix its ground zero for I buy you have a commodity product et cetera reasonable price.
So you can drive significant volume and that lets you train the algorithms better too.
But it's also just.
Competitive frenzy.
And then you go into the coastal markets, where you have to do more renovations theres a lot of older properties.
But if you fixed amount theres a big gain on sale. So those are almost two different businesses.
And we have significant traffic in the coastal markets.
A bigger brokerage footprint in the coastal markets and some strong home services capabilities. Just generally we've invested in that area. Both for redfin now, but also this business we've talked about in past calls concierge, where we fix up a customer's home.
And get more money for the customer so.
I think thats, the more interesting way too to sub divide our profits and.
We're still exploring which one of those cohorts is going to be most profitable.
Obviously, the coast cohort is higher risk so even if.
You have alpha there you also have plenty of beta.
Thank you for the question. The next question will come from Heath, Terry with Goldman Sachs. Please go ahead Sir.
Hi, guys. This is Adam on for Jason Thanks for taking the questions on pricing. It looked like revenue per transaction was down in the brokerage side any update to the way you're thinking about the balance between the seller commission reductions and buyer rebates or is this more a function of top 10 markets coming down as a percent of total and not continued progress.
There and then if you could just delineate if theres been any change to the level of demand you're seeing.
From the buyer and seller side, thanks, a lot.
Yes, so revenue per transaction was down a bit third quarter versus third quarter last year.
He looked at that sequentially for the second quarter to third quarter, that's pretty typically what we see such partially influenced by the types of homes in the markets on the tend to be it in the third quarter and then there is some pressure from what you mentioned in terms of.
The top 10 markets as a percentage of revenue headed down and that over time, but fundamentally we don't have a different view on what our pricing will look like we think about it as a combined center revenue between buyers and sellers.
Thank you for the question. The next question will come from Andrew Hargreaves with Keybanc capital markets. Please go ahead your questions.
Thanks.
You could provide a little more detail on the performance standards changes you guys are making it.
When just the impetus and sort of key metrics you guys will be focusing on and then.
How you're expecting that impact hiring and volume.
Okay.
Sure. So the impetus behind these performance standards for real estate agents is just a broader shifts that we discussed some in the last call toward a value driven salesforce.
In some ways I've been the opponent of running a salesforce here at redfin, because the whole premise of the company has to be a customer advocate and not to turn the real estate consumer upside down and shake every penny out of her pocket.
But we found that we were sometimes to passive when dealing with a customer so the customer wasnt sure, which neighborhood to be in which home to buy and we would say well just let US now when you make up your mind, because we don't want to press you into the wrong purchase when really we needed to step forward and say herothree neighborhoods that are up and coming here.
Our five listings I think would be a really good fit for your family, let's work on this together and so having a salesforce that is more proactive, but still driven by the values of the company be to be different than every other brokerage and to take care of the customer end to tell that customer to walk away from the wrong deal is.
The balance we're trying to strike, it's a huge cultural shift and I think it's absolutely crucial because.
For the longest timely engine of our growth has been our website in most employees at the company real estate agents have not had a role in driving growth. They basically have been relegated to some kind of fulfillment role and they want to be those partners and so the performance standards are just.
What about.
Being very clear that have you made a bunch of customers from our website and none of them end up buying a home.
Maybe now is bad luck, but over time, they're voting with their fee and where we become more skeptical is we used to survey customers based on whether they were happy with their Asian and that was the measure of an agents performance, except that all the people who ended up buying a home filled out the survey and all the people who didnt didnt.
Fill out the survey and so I think we take.
A closed sale as the most sincere expression of confidence in the agents service and telling me agents that.
If you're going to meet a bunch of customers who have been.
Sourced from our website.
You got to keep up year end of the bargain and really knock your socks off so.
We look every month at.
For a number of customers they met in how many of them ended up sticking with us and how many ended up successfully buying a home and if people are way off the budget.
We then say this is what's going to happen so you're going to go on a performance improvement plan, we're going to try to coach to do better, but ultimately we have to ask you to leave and so I think will improve the quality of our workforce and improve the quality of our service and.
Doing everything through programs and more questions on web forms and.
Everything except a better agent was only going to get us so far having a better workforce is going to go do wonders for the business in my view.
Okay.
Thank you for the question. The next question will come from Britain, Phil with Jefferies. Please go ahead with your question.
Thanks for taking the question. This is Alex on for Brad. So the re acceleration of revenue growth you're seeing on the brokerage side can you help us size how much of that you believe is macro improvements over last year versus fundamental share gains and then I understand youre not going to provide any color for next year, but as we move forward and you comp a year.
Sure of heavy marketing spend should we expect some stabilization in brokerage revenue growth. Thanks.
Oh man tough question.
Fortunately, we report on share gains explicitly to try to address the tailwinds and headwinds of the housing market.
And some of our revenue growth is driven by that tailwind. We do have a soft comparison to the third quarter of last year, but market share growth is also up we were doing 10 points 10 basis points a share growth couple of quarters ago for two quarters straight and now we've elevated that to allow.
Evan.
So I do think there is durable brokerage.
Share growth that is separate from a tailwind in the market.
As for next year.
Yes, we're going to be comparing ourselves.
2019, when we had elevated levels of marketing spend but I think we're going to have better sales execution.
And higher close rates so.
With strong traffic growth and awareness that pays dividends over multiple years.
I feel reasonably good about next year I'm trying to say this in the sufficiently big way that lawyers and Investor Relations folks want me to Red Hot Dang, assigning we're going to do pretty well.
Okay.
Thank you for the question. The next question will come in we legally comfort Hot day [laughter].
Thank you. The next question will come from the Beep Khan with Suntrust Robinson Humphrey. Please go ahead your question.
Thanks. This is Robert seller on from event.
What early positive or negative trends or.
From consumers using the direct access are you seeing and what are you learning about consumer behavior here and is there any color you can provide on efforts to improve conversion rates from tours. Thank you.
Okay.
The thing that struck me as that their normal.
I remember when we launch redfin.
10, 15 years ago, the people, who first tried our service were some pretty odd ducks.
You just had to be a little bit crazy to put your face in redfin when it was three or four of us in an apartment.
And so I sort of expected that it would be oddballs, all over again with redfin direct I wanted to know the profile of the person buying that house I thought maybe it would be a millennial who grew up buying her textbooks off Amazon dot com, but softened boomers to say I above five houses I know how this works.
Saw the place on my own.
And I know, what I want to pay for it so.
So.
Thats been reassuring to me I don't know that we have.
Such a cause them to cross demographically, because young and old folks have been using this product.
Almost to you a more mechanically as.
I don't know how many screens there are I forget, but there are a lot and the drop from screen to screen to screen is something that a product manager on engineered just loves to geek out on where you work harder and harder to improve that and it's a very straightforward problem. So.
I'm sure that they're cultural issues, we'll have to address but the most straightforward one is just to make the web form better.
Thank you for the question. The next question will come from Josh Lemurs with William Blair. Please go ahead with your question.
Thanks, and good afternoon at this point most my questions have been asked so.
Maybe I'll just double back on hires hoping you can walk us through your expectation for engine hires in 2020, maybe how we should wait to your comments about a better housing backdrop.
On the potential for agent attrition in 2020.
And also if you're.
If you are focused on the top 10 markets are more broadly based that'd be helpful. Thanks.
Sure. So generally in terms of hiring agents, we do that based on the demand we're seeing in those local markets.
We've already put together projections for what we expect in all the places in which we operate and we'll hire into that in the early part of the year and then as we get into February and March will adjust hiring based on what we're actually seeing on for this final such as higher so you shouldn't expect that we approach hiring in any different way. This next year.
Then we did in the past several years, it's based on that demand that we see I think we're getting better candidates for what it's worth yes. The brand awareness has helped to share gains of help.
The income difference really matters, our agents earn a good living.
Thank you. The final question will come from Ryan the keep me with Zelman and associates.
Sure.
Thank you so much so one quick follow up on a couple of questions ago that the performance standards.
I am curious does that entail any change to that the actual compensation structure with agents like the split between salary and bonus and.
And then just at a separate question I'm curious totally separate topic, but on the I buyer side of things.
With the markets with the open door relationship versus your own markets I'm. Just curious as there is there much of a difference in either the agent or the consumer experience.
You know anything you're learning from just doing it in the partnership fashion versus doing yourself thread to now.
The comments along those lines will be very helpful. Thank you.
Sure so.
We have not made major changes to the compensation plan. There is a new level called principal agent.
For some of our best performing agents.
And that rewards not just productivity or customer success rate, but also customer loyalty if you've been at redfin for 568 years is an agent.
You often can be off the website for six nine months out of the year because so many customers are asking for you by name there referrals that repeat business and all the rest. So we want those agents to earn a premium because theres, so profitable for us and recognizing them as principal age.
It's probably the harbinger of.
Other changes, where we continue to encourage our agents to use the website to build a book of business. But then also invest in that book of business over time, where the check it in on clients are sending holiday cards.
Because obviously online loyalty programs can be effective but it makes a difference when your agents in the neighborhood and stops by the say high.
As far as what we've learned from opened or it's just that they put together they offer faster.
We're very careful about how much we're willing to pay on Im sure open door is too but that process for them.
Is more efficient than it is for us and I can only assume that it helps drive offer acceptance rate. So that has driven us to raise our game.
Those guys had been doing instant offers for a long time and they really put the EPS that an instant offer.
Speakers are no further questions at this time I'll turn it back to you for closing remarks.
Thanks, Brandon and thanks, everyone for joining us today.
We appreciate your interest and Redfin annual peak when the again next quarter.
Thank you ladies and gentlemen. This concludes today's event you may now disconnect your lines.