Q2 2021 Opendoor Technologies Inc Earnings Call
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Hello, Thank you for standing by and welcome to the open door second quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone please be advised that today's conference.
May be recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today.
Swing VP of Investor Relations. Please go ahead.
Thank you and good afternoon.
<unk> full details of our results and additional management commentary are available in our earnings release and shareholder letter, which can be found on the Investor Relations section of our website.
Mr Bingle Dot com.
Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website.
Before we start I would like to remind you that the following discussion contains forward looking statements within the meaning of the federal securities laws, including but not limited to statements regarding <unk> future financial results and management's expectations and plans for the business.
These statements on either promises no guarantees and involve risks and uncertainties that may cause actual results to differ materially from those discussed here.
Additional information that could cause actual results to differ from forward looking statements can be found in the risk factors section of <unk> annual report on Form 10-K for the year ended December 31st 2020.
Open doors other periodic SEC filings, including the quarterly report on Form 10-Q for the period ended June 32021 to be filed with the SEC.
Any forward looking statements made in this conference call, including responses to your questions are based on current expectations as of today and open door assumes no obligation to update or revise them, whether as a result of new developments or otherwise.
As required by law.
The following discussion may contain non-GAAP financial measures.
For a reconciliation of each of these non-GAAP financial measures to the most directly comparable GAAP metric. Please see our web site at Investor Dr. <unk> Dot com.
I will now turn the call over to Eric <unk> co founder and Chief Executive Officer.
Thank you Elise and good afternoon on the call today I'm joined by carry Wheeler, our Chief Financial Officer, and Angela Walkie, our President IMAX.
Im excited to share our outstanding second quarter results and the significant progress towards our goal of making it possible to buy sell and move at the tap of a button.
As always the consumer experience is at the center of everything we do here at open door.
We recently hit a special milestone of completing our 100000th customer transaction and I am proud to have that family that pothitos share their experience with open door.
Jack.
And I am Nicole with Ido.
Those areas, California so.
We owned our AUM this year for about four years, we had our first son.
Five years ago.
Exterran holdings poised our space, just got smaller and smaller every single day.
We ballpark from home. So we obviously have a young kid who is scheduled changes daily.
Idea of having to lift the house show the house keep the house perfectly clean nonstop, depending on who is going to be viewing obviously, there's something in the traditional market has to do with that was something that did not work.
My experience with open door was an easy I don't know any other way to describe it was just so simple there was never really any unknowns that helps when undertaking.
Ron and I have communicated my wife, the App is obviously very user friendly to work with so we can both be in tune to what every step is along the way.
I think it was just.
Overall transparency, you and Barry honest and open the Easton Bell just meter similarly confident and comfortable moving forward.
Especially moving moving forward with our company and a service that was really new important, especially with the way in which we purchase our home originally.
Everyone I've interacted with so far has been perfect.
Can't say anything more about how great data.
You really have this type of experiences with our brands that makes you kind of have that while so you guys have done an incredible job.
Really couldn't have been more thankful that this is the route.
Jacqueline Nicole story is one of many that we hear every day from consumers, who have trusted us with their most important financial transaction and to make their life transition a whole lot easier.
We set out with an audacious goal to redefine how people buying zillow home and we knew we could reach a 100000 consumers en route to millions, but we didn't imagine that happening this quickly with.
We pride ourselves on a relentless focus on the consumer experience pricing expertise and operational excellence and our progress is clear in our results.
In the second quarter, our revenue grew 59% versus Q1 to nearly $1.2 billion.
This top line outperformance combined with our strong unit economics led us to generate $25.6 million in adjusted EBITDA, which is $28 million higher than the prior quarter as well as $2.5 million and adjusted net income.
What's even more exciting is that based on our current progress our second half revenue run rate is on track to exceed our 2023 target a full two years ahead of plan.
These results were driven by the progress we've made across our three strategic priorities starting with existing market share growth. We continue to drive all time highs again and seller offers and through solid conversion across our existing markets.
In Q2, we acquired a total of 8494 homes the highest in our history by nearly 50%.
This record volume was in part driven by our <unk> expansion as we are now able to underwrite the majority of homes in all of our existing markets.
We expect this increase in market coverage to play a key role in driving the next phase of our growth.
We are also observing an increase in awareness of our product offering with direct traffic up 103% since the beginning of this year.
This tells us our value proposition is resonating deeply with consumers and more and more home sellers are exploring opened or as an alternative to the traditional sale.
And our top five markets. For example, we are driving a combined acquisition run rate of over $8 billion.
This momentum is further evidence of the seismic shift in consumer demand towards a modern real estate experience.
And we are meeting this demand with a home sales experience that continues to exceed our net promoter score of 80.
Secondly, we continue our expansion efforts into new markets, making progress towards our goal of servicing buyers and sellers nationwide. We launched 12, new markets in the second quarter and two additional markets in July which broadens our total market presence to 41 as of today. The scalability of our model is driven by our.
Improvements in our launch playbook investments in technology, and automation and increased centralization, allowing us to expand into new markets quickly with limited upfront cost.
And finally, we continue to make progress towards our North star of building. The end to end digital experience for every buyer and seller our product teams are driving towards an on demand transaction that is simple.
And fast.
For sellers, we launched the self service assessments, allowing customers to completely self serve and on demand complete the home assessments with just their mobile device.
This is not only a superior customer experience, but also reduces our cost structure, allowing us to put more money in the pockets of our customers.
For buyers, we continue to see significant growth of our buy with open door product with the recent addition of opened our best offers experiencing a rapid adoption since launch less than six months ago.
We are excited to share that our buy with open door products has crossed the $1 billion run rate and will continue to grow in scale at a rapid pace.
This is a great example of the speed in which we are able to innovate to meet consumer demand on top of our platform.
Lastly, we know that 65% of sellers are also buyers. So we are integrating our products into one bundled experience, we're adding bio with open door for each of our sellers also looking to buy and bundling title escrow and home loans to meet their transaction completely seamless and low cost.
As we look ahead, we believe that a relentless focus on the consumer experience developing the most accurate pricing engine and building the lowest cost platform are our foundation to become a clear digital one stop shop for all home buyers and sellers.
Before I turn the call over to Kerry I want to thank all of our teammates that open door. It is their dedication and hard work in servicing our customers every day that allows us to deliver the industry's best in class conversion best in class unit economics, and best in class customer satisfaction.
Okay.
Yes.
Thanks, Eric.
Tailed summary of our second quarter financial results can be found in our shareholder letter so I'm going to quickly walk through key second quarter highlights before moving on to Q&A.
As Eric mentioned, we are driving strong momentum across our business. We achieved record acquisition volume in the quarter. We purchased 8494 homes up 136% versus Q1, largely driven by high conversion and buybacks expansion in existing markets.
We reached record mill conversion and over 35% of our total homes purchased in Q2 were homes that we were not able to offer on as of the end of 2019.
Acquisition momentum has further accelerated into Q3 and we're on track to significantly exceed Q2 levels in the back half.
On the retail front, we sold 3481 homes in Q2 up 41% versus the first quarter and generated revenue of nearly $1.2 billion up 59% quarter over quarter.
The increase in home sold was due to ramping inventory levels and high transaction velocity in a supply constrained market.
Revenue growth exceeded our initial expectations, primarily due to acquisition strength fueled by record offer growth and conversion.
Based on our resale strategies enabled by our position as principal versus the traditional agent, we moderated our resell pace against our inventory at the end of Q2 and into Q3.
We believe this maximize the ROI on our portfolio, while still maintaining very healthy absolute clearance levels and hold periods.
You should expect that we will continually evaluate and tune our resale strategies based on market dynamics and seasonality.
Unit margins were strong in the quarter with adjusted gross margin up 50 basis points versus Q1 of 13, 5% and contribution margin up 60 basis points versus Q1 at 10, 8%.
Our ability to use data and technology to manage our inventory resale is a structural advantage is beneficial to our margins we use data to manage our sell through velocity and margin and a portfolio approach to optimize price compared to individuals who don't have that same level of insight.
Furthermore, we continue to drive efficiency in our cost structure, which resulted in over 200 basis points of structural improvement over the last year.
In addition to these durable improvements we did see higher than expected home price appreciation core HPA as a tailwind to margins.
We also continue to benefit from having a healthy inventory mix weighted to recently acquired homes.
We anticipate both of these benefits to moderate during the course of the second half.
As a result, as we also indicated last quarter, we are planning for our contribution margins to trend lower in the second half of the year.
Normalizing for these temporary benefits, we would expect contribution margin to trend to the mid single digit level.
We operated ever greater scale and leverage our structural advantages around resale strategy and cost structure, we feel confident in our ability to deliver our target contribution margin and any HPA environment.
Adjusted EBITDA in the quarter was 26 million income.
Third to negative $2 million in Q1 adjusted.
Adjusted EBITDA margin was two 2% up from negative <unk>, 3% in Q1.
Adjusted EBITDA was well ahead of our expectations due to revenue outperformance and strong unit economics.
Both of which provided incremental leverage against our operating expense base.
Adjusted operating expenses or the delta between adjusted EBITDA and contribution profit were $102 million in Q2 up $24 million quarter over quarter.
We expect Q3 sequential opex to increase approximately $30 million from Q2 levels and we continue to invest behind the growth of the business.
We ended the quarter with positive adjusted net income of $2.5 million with 0.2% of revenue compared to negative $21 million or negative two 8% of revenue in Q1.
Turning to the balance sheet, we ended Q2 with $1.8 billion in cash.
Cash and cash equivalents and marketable securities and total borrowing capacity of $4.3 billion across our nonrecourse asset backed facilities.
As we continue to outpace our prior growth projections, we are well positioned to scale, our borrowing capacity and support of our rapid growth.
And as we look ahead, we are optimistic about our outlook starting with what we're seeing for the housing market, which continues to be underpinned by strong demand and hence supply.
Inventory levels did pick up sequentially in Q2, they remain at multi decade lows in terms of available supply.
Mortgage rates remain low and homeownership levels are still well off the previous decade highs further supported demand for housing.
On the HPA front, we're observing a moderation from the recent all time highs and we are reflecting this in our pricing that SEC.
Given our outlook for continued strong housing fundamentals, we expect HPA to remain elevated even when considering normal year end seasonality.
But taking a step back it's important to remember that the key macro driver behind our results is the massive secular shift in consumer demand for integrated digital first solution to buying Zillow home.
Our proprietary pricing capabilities allow us to optimize our acquisition and resale strategies and being a market maker across all market conditions.
Seeing clear evidence of this through our record results, England arguably the hottest sellers market in history, giving us the confidence that we will be a share gainer across all cycles.
Turning to our guidance.
Given current market dynamics, and our accelerating rating momentum, we expect acquisition and revenue growth remains strong in the back half.
For the third quarter, we forecast revenue to be between one eight and $1.8 billion, which represents 56% sequential growth over Q2, 'twenty one at the midpoint of the expected range.
As a leading indicator of our momentum we had a record 858 homes under contract to be purchased at the end of Q2.
Representing $3 billion of value that is more than double the number of homes, we had under contract at the end of Q1.
We expect adjusted EBITDA to be between 15, and $25 million and that represents a 1% margin at the midpoint of the expected range.
This reflects our planned moderation in contribution margins as I mentioned earlier.
As we looked at our second half trajectory household to put into context, the acceleration we've seen in our business year to date.
As Eric mentioned, we are operating in our second half revenue run rate at tracks to the 2023 target. We provided at the time of our listing just seven months ago, we've effectively pulled forward our financial plan by two years on both the top and bottom lines.
We're extremely proud of our teams for making this possible. It is clear that our value proposition is resonating with customers more than ever and we are relentlessly focused on building our business for scale and continuing to delight our customers with a best in class experience at simple SaaS uncertain.
And with that I'd like to open up the call now for questions. Thank you.
Okay.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw.
Your question. Please press the pound key.
Please standby, we compiled the Q&A roster.
Our first question comes from Yigal <unk> with Wedbush Securities. You May proceed with your question.
Hey, good afternoon, guys. Thanks for taking my questions I guess.
The first one for Eric.
Can you just sticking to open their back offers.
And Bob is open door, a little little more and maybe get a little bit more color on how that flywheel is working.
It is it goes up $1 billion.
Our run rate at <unk>.
Was that referencing.
Exactly.
And then Zillow hi.
Highlighted a product that kind of gives discounts around.
Different things to bring someone in all of the top of the funnel.
Bollywood funnel, that's something you guys.
I thought about doing as well and it's for Kerry.
Expand on.
The strategy around moderating resell pace.
Q2, Q3 and.
Why that why you.
Use that approach just want to understand that a little bit better.
Okay.
I'm not sure if we got caught up.
Taking my questions.
Got it I think we are we are on mute so.
But let me let me let me first thank you for the question.
And so I might tag team this with Andrew but dig into opened back offers we're excited about the progress. We've made we launched the feature less than six months ago, and we're seeing rapid adoption, it's very clear that buyers love the service and are attaching to buy with open door one of the things we look at as a leading indicators.
Of the homes, we sell how many customers are saying, yes to buy with open door and some of our mature markets. We're seeing a 50% attach that means for every two homes. We sell we're seeing one customer. So you asked about the open door, which is part of our flywheel.
The second part of that question, we are seeing a $1 billion GMB number again its very early since launch and we are seeing rapid adoption in some of our core cities. We're focused on driving attach. So we're really excited about the product market fit there about the growth and subsequently the conversion of <unk> into services from that.
You mentioned the bundled services.
Something that we've been focused on for years transparently, we've talked a lot about building a digital one stop shop, and we've made big investments in our platform to make that possible and for US. This means a consumer can buy sell and move at the tap of a button and thats been our product vision for a very long time, we integrated huddled in escrow in 2017 and that was a big.
Step towards that vision with lost by with open door in home loans as additional steps and we're leading the way and we're building the connective tissue between all of these services in house to make it truly seamless for the consumer.
I'll pass of the carrier to answer the second part of your question.
Thank you Sir.
The retail let me, let me answer that in two parts one how we think about retail can you talk about what we're doing today.
We are structurally better selling in the market. We are operating as a principal not an agent not a single answer.
Making decisions.
Theyre all economically base informed by substantial amounts of data and we're doing that against the diversified scale portfolio.
Very different from how any individual home seller agent is going to make those decisions.
And we're managing retail relative to the environment, we're in and we're balancing all the time, how we maximize return on our portfolio at the same time, we managed risk in our balance sheet <unk> inventory balance.
That's the first one to retail with respect to the comment that we slow retail in Q2, which we did I would say that was just frankly different flavor of fast, though we are still selling into a very very receptive market for residential housing.
We are maintaining very healthy sell through rates.
In terms of how quickly we signed our inventory base and we're still managing to very short holding periods relative to historical averages. So they did they did moderate relative to say prior quarter, but again I think we feel very good still about how we are selling down in managing their inventory.
And in Q3, you will see a pickup that refill pace just to foreshadow that as a responder seasonality. That's just what we do.
Okay. Thank you.
And quick follow up on.
Excuse me on OBL.
Hormones.
If you could share in terms of.
The attach rate there or how <unk> is driving.
The mortgage product.
Sure.
Standard as they've been pressing on services, our focus really has been on driving that higher product is that because we know they are very strong in half between that buyer offering and a whole host of other services that go around it we've been focused therefore on really pressing on on the buyer offering.
The leading indicator.
As the tip of the spear so to speak.
Around driving driving adjacent services.
Great. Thanks, Thanks for the questions appreciate it.
Thank you. Our next question comes from Nick Jones with Citi. You May proceed with your question.
Great.
Two.
First.
As your profitability comes in kind of better than expected.
Could you potentially accelerate market launches.
Today is that an opportunity in this in this market to be able to do that and then the second question is that was interesting on the homeowners that came back.
After the first offer.
What are your thoughts on that dynamic and does that increase as a percent of the offers are buying as you know.
We opened our solution kind of marinate for these homeowners.
Sure.
Happy to take take both of those in terms of our overall launch cadence launch sequence.
We're really pleased that we're on track to deliver our 21 markets in 2021 as Eric mentioned, we currently launched 20 market this year and the new launches are performing really well.
With hone that that launch playbook and continue to refine it you saw us launch six quarter six markets in a single day this quarter.
And given that we're on track to deliver those market watchful.
And then at the same time, our run rate acquisition volume is really where we're targeting.
In our three year plan.
We're shifting some of the resources away from incremental market launches really to help us operationally sales of meat that massive demand and also driving more and better integration as we execute on that digital one stop shop that Eric Eric <unk> been talking about our focus is really on scaling the business and providing an absolute best in class experience to our customers right.
Now versus more markets.
With respect to the second part.
Sure.
To your question or your second question around homeowners that came back we think it's a powerful testament to the brand experience that we offer the experience. We offer is the sum total of the brand. We have is the sum total of all of these rapidly the customer has and we think that the fact that 35% of our Q2.
Physicians actually came from customers, who first engage with us or the beginning of the year speaks to the value the customers customer.
Customer fee and receive from open door and then they are willing to engage.
At different points in time, as we build up our offering as we build up awareness added those people come back and that they really value that the offer and the service that we deliver.
Yes, one more thing to add on.
On top of that Nick is that are you.
There's a there's a world where every single home seller starts their journey of a move with an open door offer and that can happen in 12 months from the moves are six weeks are excited to really drive towards that that outcome.
Well.
That's great just maybe a quick follow up on that.
What do you think happens like it did they come get an offer and then maybe talk to an agent and start kind of realizing what they're going to have to go through or to sell it and they're just kind of like the seems easier and better I mean any thoughts on.
Maybe what they are doing between the first offer when they come back.
Well, it's a high consideration transaction and so theres a lot of things at the line up for people to move and reminding us of why people move there they have a new family of it Scott Murray.
A new job or a downsizing and it's not just about the equity in their current AUM, but there are other things that impact that timeline, but what.
They want from open doors are certainties simplicity and speed of the sell side transaction today and so they come to open door, they get to get a signal of what they could afford and their next purchase to have uncertainty. They can complete that transaction and they will actually work with us over the course of many months to start that at that time, they need to transact where they are.
For them and so it's not really an impulse decision to sell its actually a planned move.
Got it thank you for the questions.
Thank you and as a reminder to ask a question you will need to press star one on your telephone. Our next question comes from Jason <unk> with Oppenheimer. You May proceed with your question.
Thanks, I'll ask two so.
Given the large HPA are you using that as an opportunity to reduce service fees to consumers.
And then second.
I guess.
Any commentary on percent of homes purchased for over $1 million and how that compared to first quarter. Thanks.
Hey, Jason Andrew I'm happy to.
<unk>.
We continue to offer a flat fee of 5% that you are seeing in the market.
I wouldn't over anchor on SEC.
We're calibrating our pricing every day to make sure that we're operating really competitive.
Value over time, we've seen that customers really focus and care about the net cash that they receive and offer and we're trying to keep things simple for a consumer which is why we are setting fees at or below what you would see in the traditional market and where things resonate strongly for consumers.
Record high conversion that we mentioned earlier.
That simplicity is pulling through.
Okay.
Okay.
Your second question I believe just around percent of homes purchased over $1 million and we've made really good strides this quarter continue to increase the buyback a good part of that is price.
Creasing the the cap on wherever we're tapping into transit pricing given markets. There are other components you talk about in the past home types ZIP codes what have you.
I can't break out exactly what percent was driven by mix.
Mix shift because of buybacks, but.
And is it reasonable.
Reasonable chunk I would say.
But the reality is.
Most of our existing markets and we were approaching our business is driving the majority vast majority of our revenue in Q2.
And just can I ask a quick follow up.
Any inherent limitation to expanding the mortgage product.
How do you think about scaling it.
Yes, as we talked about earlier as we've been pressing on services. Our focus has really been on driving that buy our products, where we see a compelling consumer value proposition will help people can be more successful in winning the under their guidance of that offer and we know there's really high attach and so as we look at as we look to grow in scale.
That business very much were focused on the buyer of the Io product that a leading indicator.
Thank you.
Okay.
Yeah.
Thank you. Our next question comes from Mike, England.
Goldman Sachs. You May proceed with your question.
Alright. Thank you very much for the question I was just wondering if you could talk a little bit about what's happened.
With open door and I by our market share.
And some of the I guess I'll call it more mature high barrier markets like Phoenix.
I think there've been a couple of reports out there theyre down from pre pandemic levels I would just love to hear a little bit more about.
What youre seeing there and whether or not.
It's indicative of where it can get to investor markets. Thank you.
Michael appreciate the question and no were actually from a <unk> standpoint, where are above pre pandemic levels in terms of market share and especially with within our ecosystem open door, we're well above pre pandemic market share levels.
The business is really driven on acquisitions and so we measure ourselves based on the homes that.
We're acquiring and we again, we have exceeded our pre pandemic highs.
Great. Thank you very much.
One other small point I'd like to Americas.
The appetite for a simpleton and fast digital experiences, we think it's mainstream and all homeowners crave, what we're offering and so when it comes to.
The long term potential of what we may call an eye buyer, we think over the long haul it could be the majority of transactions and so we're already seeing significant market share gains in our mature markets and we don't expect that to.
Decelerate in fact, we believe that can accelerate.
Great. Thanks.
Thank you. Our next question comes from Edward Europe, with Keybanc Capital markets. You May proceed with your question.
Hey, Thanks, very much for taking our question I guess first on the acquisition cadence and you guys indicated a lot of it had kind of accelerated further in <unk>. You've also mentioned, though that you did get some pickup on the from a bigger buybacks I guess as you adjust for HPA normalizing have you seen any change in kind of your close rates or the customers that are using.
Your service and then as a follow up just thinking about this comment into 2023 guiding kind of pulling forward two years.
And finally these are kind of.
Ex HPA kind of a sustainable trend going forward and that we should expect this to look more like you had initially planned in 2023.
Thanks for the question.
So first part of that acquisition came when I think about the drivers.
It really few Jonathan pickup we had in volume.
A bunch of factors Linda one we're in more markets rate was almost doubled our footprint year on year.
Growing consumer awareness of our offering and part of that has been increasing our investment in marketing and thats been very effective.
<unk> increased by about science here to your question to that just means we can turn more consumer interest into a real offer which is great and the last point to point, Andrew talked about earlier, which is just the success we've had with the re engagement funnel.
I would also say the same time, we are seeing an increasing set of consumer quality intent and all that is driving higher acquisition volumes.
Second part of your question is just in it but.
Believe unless you want to ask you and repayment is around how are we thinking about margin ex HPA and what's the what's the outlook for margins going forward.
A couple of things on that sort of bucket our margin structure into two components. Certainly there has been a component of our margin, we're seeing tailwind from unprecedented levels of HPA.
And this continued fresh inventory makes you talked about in the past.
Called out both of those factors are things that are benefiting us, but they will deteriorate over time and they'll come down in the second half.
The biggest call higher margin structure is that we continue to drive a very low cost system, we call that 200 basis points of improvement year on year, which is fantastic and we continue to optimize our own portfolio management capabilities.
I called out Christy and moderate in the back half of the year as we've been doing the last two quarters that I called it out.
Mid single digits in the second half and I would think of that as a good proxy for where we think the business is operating today on a sustained basis.
So I got it.
Our long term margin targets, we talked about previously those so we're just frankly tracking well ahead of where we thought we'd be right now.
Great. Thank you for that color.
Sure.
Youre welcome.
Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to Eric <unk> for any further remarks.
I just want to end by thanking our customers and neither is the customers that they really do trust <unk> with their largest and most important financial decision.
So I just wanted to give all of our customers throughout the years a huge thank you.
Okay.
Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
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