Q3 2021 Compass Inc Earnings Call
Thank you Ben and thanks to everyone for joining the call. We're excited to be back with you today to talk about compass and our outstanding third quarter results. Thanks to all the hard work by our agents and employees. We delivered another exceptional quarter as a result compass is in the strongest position we've ever been in.
And since going public we've done everything we said, we would do and we've done it faster we accelerated our top and bottom line more than expected, we accelerated our path to adjusted EBITDA profitability by a year.
We expand into 23, new markets year to date more than double our pre IPO pace, we expanded our title and escrow business to nine states plus Washington, DC up from three at our at our IPO and Relaunching mortgage a year sooner than he said we would.
Our ability to exceed these operational and financial expectations as a direct result of our intense focus on the agent as our customer.
Recent turbulent seen by alternative models looking to replace the traditional agents is an important reminder, that the agent is not going away.
<unk> will continue to be at the center of the transaction controlling 100 billion.
Commissions and being the primary source of referrals for an additional 140 billion in real estate related spend.
The question is who is going to be the company that best helps agents realize their entrepreneurial potential because that's the company that will win.
I believe compass with our 500 person technology team as well as the support organization dedicated to serving agents is the best in the world at listening to agent feedback and turning those ideas into software and services that help agent save time grow their business and serve their clients best.
That's the secret sauce of Compass.
We recognize that agents are one of the largest group of underserved business owners in the country. So we built a model dedicated to agent success, we only succeed when agents succeed and we put our money where our mouth is in fact no. One in real estate is investing more in the success of real estate agents than campus.
At Compass, we have always been laser focused on improving the traditional agent model rather than disrupting it.
The market Hasnt always agree with us that we've been consistent over the long term and our belief that technology can make agents even better at their jobs.
90% of homebuyers and sellers rely on agents to help guide them through the real estate process.
And the data shows that this is not changing anytime soon.
Now onto the quarterly results.
On the financial side, we posted record third quarter revenue of nearly $1 75 billion up 47% year over year and at the high end of our guidance adjusted.
Adjusted EBITDA was a positive $12 million exceeding our guidance.
Notably for the trailing four quarters, we generated $45 million of adjusted EBITDA. This is the second consecutive quarter. We've had positive trailing four quarters of adjusted EBITDA and we did it while continuing to invest and expansion into new and existing markets, improving the commerce platform and growing our adjacent services business.
Yeah.
These investments will continue into Q4 as we use the profits from our more mature markets to fuel these key growth drivers.
The heart of Compass is our agents and this quarter. We saw continued growth in our agent community and our biggest ever week of adding new principal agents.
Our average principal agent count increase of just over 11600 with 987 principal agent added during the third quarter alone.
Those new principal agents represent.
<unk>, 214% increase over the new principal agents in <unk> 2020.
More and more agents are seeing the value of the company's platform, enabling it to be a powerful recruiting and retention tool.
Our experienced agents have seen at all in the business. They know that <unk> is the only company in company and making the necessary investments to meet their needs today and tomorrow.
We saw this belief manifests itself once again and our principal agent retention metrics, which remained above 90%.
Particularly pleasing to see though was that our agent retention improved year over year, even as non-GAAP CFO margin improved 180 basis points as well.
Our agents recorded over 62000 transactions on the compass platform in the third quarter.
Beat our prior third quarter record by over 16000 transactions.
Despite all the talk in the past of a slowing real estate market. This was our second best quarter for transactions ever.
On a year over year basis transactions were up 36%.
And we again outpaced the industry, which declined by 1%.
With the step down in revenue in last quarter guidance, we saw transactions declined 5% from the second quarter, reflecting a return to more normal seasonality post COVID-19.
On average each of our principal agent close five four deals in the quarter.
Transactions per principal and for average principal agent was up 3% compared to the prior year and.
And it's continuing to outpace the industry, where transactions were down 1%.
The results this quarter show that compass agents can continue to outpace the industry in a variety of economic cycles.
Over the last few years, we have consistently increased this number from $12 eight and full year 2019 to $16 7 million in 2020, and we expect it to be around 20 at the end of this year.
The combination of our agent's performance on completed transactions and a 6% increase in average home prices drove GTD to a third quarter record of 69 billion.
In the quarter up 45% year over year.
We also expanded our footprint in mid tier markets in the quarter, we launched five new markets.
Including <unk>.
Kansas City, Missouri, Hartford, Connecticut in Durham, North Carolina, bringing our total market count to 67, covering approximately 47% of the U S population.
We will continue to expand our business, both within existing markets and to new markets in future quarters.
Now, let's move to our adjacent services, which comprised 1% of revenue today, but we will continue to be a bigger percentage of revenue each year.
Adjacent services is accelerating as we continue to scale title and escrow and start writing mortgages in the near future.
As I've said before we are more than just a brokerage yes, I'm proud that we have built one of the fastest growing brokerage in the country.
But our strategy is to be much more than that and I believe the key to creating a long term sustainable financial advantage is our platform.
Unlike any other traditional brokerage.
Jason services will be fully integrated and embedded in the entirety of the agent workflow through the platform as a result companies will be able to recommend the right products and services at the right point in the lifecycle of the transaction.
The platform will serve as the foundation on top of which we will layer a myriad of new products and services that give us the capacity to increase value for agents drive higher attach and uniquely position us to capture more of the agent and client spend in the real estate ecosystem.
The platform, we are creating will serve agent in residential real estate transactions as well as the adjacent spend thats around those transactions. This is important for three reasons.
First these adjacent services will enhance our long term profitability profile.
Integrating these services into the platform will empower <unk> to deliver a more integrated seamless experience to their clients contributing to higher attach rates and third the best thing about the adjacent service business model is that there is little to no incremental customer acquisition costs for compass, because our agents already have the client relationship.
We see a clear path to facilitating and monetize a large number of adjacent services on our platform over the next few years.
And <unk>.
Since the close of the second quarter, we set up operations in Texas, Pennsylvania, New Jersey, and Colorado, and we are now covering half of our total transactions, which is where we said we would be by year end.
Our land and expand strategy is well underway in these markets, we're growing attach but keep in mind that in many of these markets are teeny business is still small and can't have served the full agent base.
In mortgage we currently are doing all the background work to get ready to launch hiring loan officers, receiving regulatory approvals and establishing warehouse lines of credit.
We recruited loan officers in our expected.
And we're also going up.
Each operating in six states, we are on track to right of first mortgages in the fourth quarter and can't wait to show you what we've put together.
I'm now going to hand, it over to Christian who will go through the financials in more detail, but I just wanted to say once again, how pleased I am with the performance this quarter and our outlook for what is still to come.
And one plug before I leave.
We're going to Austin, Texas next week for annual agent Conference.
Like the south by southwest for real estate agents tuna, and if you want to see what is likely surrounded by thousands of passionate combos agents, who are excited to build the future real estate will be webcasting. The main event on the afternoon of the 16th where we'll be talking about the future product releases that were going to give to our agents. We're all really excited about these products and.
Hope you can see see what we have in store for them I'll be.
Back at the end to answer Q&A, but now let me pass it onto Christian will take the floor.
Thanks, Robert I'm excited to share our third quarter results, we delivered an outstanding third quarter, where we met and in several areas exceeded our expectations and guidance. This is the third quarter and umbrella, where we've done just that our year over year results were strong proving again that Congress can compete effectively in a V.
Variety of macro environments, and we were excited to get again raise our full year revenue and EBITDA guidance.
Here are some of the financial highlights for the quarter revenue grew 47% to $1 $74 billion or non-GAAP margin improved by 180 basis points year over year.
We generated positive adjusted EBITDA of $12 million exceeding our guidance and $45 million and adjusted EBITDA on an LTM basis.
And at quarter end, we had $791 million of cash and an untapped $350 million revolver, giving us significant flexibility to execute our plan.
Our $1 $74 billion of revenue was at the high end of our guided range. Despite a difficult comp in the prior year when revenues were up 80%.
Last quarter, we talked about looking at two year caters to normalize for the unusual seasonal trends. We saw in 2020 this quarter. Our two year CAGR was 62% in line with the two year CAGR of 65% we signed two COVID-19.
<unk> 2021.
What drove the revenue in Q3, it was a combination of more agents in more markets more transactions higher average transaction values and is stable Commission rate, we continue to drive transaction growth for our agents outpacing industry growth by 37 percentage points.
We saw transactions per principal agent growth, 3% year over year to 5.4 in line with our expectations. It's worth noting that transactions per principal agent was impacted by the large number of new agents, who came onto the platform in the quarter and who have not yet ramped to normal productivity, we nearly tripled the number of agents we brought on.
In this quarter compared to the same quarter last year.
Those agents fully ramp we will see the benefit of their production and our future financial results.
We grew our national market share to five 4% in the third quarter up 130 basis points year over year, reflecting the 45% increase in our G. Television, we did see a sequential decline from six 2% share in the second quarter due to the poor ended the market catching up with the luxury segment. This.
Is not the start of a long term trend and in fact in October we've seen market share returning to levels well above those seen in Q3.
We also continued to make progress on our profitability goals faster than expected our non-GAAP CFO margin increased by 180 basis points year over year, which was an acceleration from Q1 and Q2.
The improvement reflects our focus on driving margin as we improve our agent cohort economics and continue to scale adjacent services. The renewed strength in New York also contributed to this improvement in margin.
Our adjusted EBITDA of $12 million exceeded expectations as leverage Encino, and sales and marketing offset planned investments in the platform and adjacent services.
We continue to expand to new markets and benefit from the Tam opened up by the 23 markets. We've launched year to date and we continue to make progress in growing our adjacent services business, a tam of $140 billion that we're just beginning to attack.
Turning up these teams will help to grow our top and bottom lines in the future.
Now, let me provide some context on the housing market.
Activity may have normalized some from the frenzy of the second quarter, but demand remains high inventory remains tight and our revenue and transactions remain at near record levels. There is new demand coming from millennials entering the market and foreign buyers returning to the market as COVID-19 related travel restrictions ease.
Americans continue to express an interest in moving homes as remote work creates new flexibility and prospective buyers have record levels of home equity to fund new purchases.
As we talked about last quarter continued strong demand for homes simply cannot be met by the current low supply as a result, we expect continued strength in the housing market and the remainder of 'twenty, one and beyond.
Now we're watching interest rates, just like everybody else, but we're much more focused on the controllable growth drivers of our business. We continue to successfully add agents to our platform and grow their transactions, we continue to expand to new markets and we're moving into new revenue streams adjacent to the core transaction. Despite.
Success to date, we have significant runway to grow.
Our positive view of the market and the momentum that we've seen in the quarter. So far as reflected in our updated guidance for fiscal year 2021.
On our last earnings call, we increased our annual guidance to $6, one five to $6 three $5 billion in revenue today.
Today, we are again, increasing our revenue expectations to $6 $3 75 to $6 $4 billion to $5 billion. This reflects a year over year growth rate of 72% at the midpoint or an increase of $150 million compared to our prior guidance.
Our prior adjusted EBITDA guidance for full year 2021 was a loss of 45% to $85 million. We now expect a loss of $5 million to $25 million with an adjusted EBITDA margin of negative <unk>, 2% at the midpoint.
This reflects an improvement of $15 million at the midpoint compared to prior guidance and $141 million improvement compared to a loss of $156 million for the full year of 2020.
For the fourth quarter, we expect revenue of 1.5 75 to one $6 billion to $5 billion at the midpoint. This implies year over year growth of 30% and a two year revenue KR up 55%, we're seeing healthy activity across our markets in Q4, so far.
Year over year, we expect <unk> transactions to be up five roughly 20%.
Yeah.
For the fourth quarter, we expect adjusted EBITDA to be a loss of $55 million to $75 million. This implies an adjusted EBITDA margin of negative 4% at the midpoint.
As we discussed previously our strong future outlook has given us the confidence to make investments in our business to drive profitability over the long term. This.
This year, we launched 23, new markets versus our typical pace of eight to 10 markets per year.
We're also investing to expand title and escrow markets and long term mortgage business a year sooner than planned and there is cost associated with these investments that will show up in Q4 before driving to sustainable adjusted EBITDA profitability next year.
We continue to invest in our platform, which is what we believe drives drives campuses outperformance relative to the industry.
Since the IPO, we've grown the business ahead of our expectations and generated significantly more adjusted EBITDA than anticipated as we effectively manage the expense base that has allowed us to accelerate our timeline to adjusted EBITDA profitability and our updated annual guidance shows a continued trend of shrinking EBITDA losses.
We believe that sets us up well to deliver on our commitment to adjusted EBITDA profitability in 2022.
We have more conviction in our agent focused strategy than ever before agents are not going away. In fact, we see their importance growing as they sit at the center of the ecosystem that drives 90% of real estate transactions as well as all the adjacent services around the transaction.
We're not looking to disrupt them replace agents, but to empower them, but the software and services to transform the two trillion dollar residential real estate industry.
And our business model is directly aligned with our agents' success as we deliver on our promise to empower our agents. We also deliver on our financial and operational goals setting strong expectations and exceeding them consistently make no mistake about it at compass, we have the same steadfast commitment.
To deliver for you our investors that we have to deliver for our agents.
Now with that we are happy to take your questions.
Okay.
Okay.
Thank you very much Mr anchor Brent ladies and gentlemen at this time did you have any questions with simply press star one and if you are joining us they're using a speakerphone. Please pick up your handset before pressing the star in the one. Additionally, if you do find your question have already been answered you can remove yourself from the queue by pressing star one again and we'll pause for just one moment.
Take our first question this afternoon from Ross Sandler with Barclays.
Hey, guys.
Krishna could you said you expect transaction growth, 20% junior in the fourth quarter was going to clarify that.
Can you also just talk about the linearity that you saw.
That would put you at about 57000, I believe from the fourth quarter, so with the linearity that you're seeing.
Across our largest markets and if we get something like.
Parcel comps do you expect that to be.
Positive or how should we think about something like that playing out.
In terms of your business and the second question is on peony.
You said mid single digit penetration.
Of total so I think we're probably twice that on the come.
Coverage zone.
How quickly do you guys expect to get up to where you are in Socal, which I think is north of 40% at this point what else do you have to put in place to get at least the coverage.
Correct.
Thanks, a lot.
Sure. Thanks, Thanks, Ross good to talk to you. So yes, you are correct, we are expecting year over year transaction growth of about 20%.
And as indicated in our in our guidance. We have seen we are starting to see a return to more normal seasonality following quite a quite a.
Different 2020, as a result of Covid.
We started to see a little bit of that return in Q3, and we expect to see a mid single digit decline in revenues sequentially.
In Q4, and so are our transactions well will likely come down as a result of that as well.
In terms of your second question on on Teeny. We are we have at this point you were looking at that attach rate as an attach rate across all of our transactions are in the in the U S. So that's really a measure of.
The total transactions in our base that have title and escrow services attached overtime, we expect to grow that in a few different ways first we will look to further penetrate the markets, where we already have a presence right. When we talked about having a presence in nine states for title and escrow business.
We are at different levels of penetration across those different states. So we'll continue to look to penetrate those markets. Further out. We'll also look to expand our title and escrow services into new states and well we've got plans to do that you know through the through the course of our of the remainder of this.
Here into 'twenty, two and then of course, well, we're also launching our mortgage business at the end of <unk> at the end of.
This year, and we'll expect to see real momentum there starting in 2022, and so we look at that adjacent services attach rate across both title and escrow and mortgage and across all of our transactions. It will take us some time to get to you know the.
The attach rates that that we saw with our travel business in southern California, but we point, we think that those those rates or industry average rates are achievable within you know certainly the next three to five years, we think there's a possibility we can do even better than that over time.
Yeah.
Next question please operator.
Thank you we'll take our next question now from Jason <unk> of Oppenheimer.
Hey, Thanks, I'll ask two so how do you incentivize your agents to push you on title and escrow and mortgage versus alternatives.
Given kind of respirable and then secondly.
There's obviously been numerous technical factors that have weighed on the stock.
Get passed to lock up your earnings blackout, I mean, the stock cannot get more support.
Are you willing to consider a buyback or kind of more aggressive opex reductions and maybe kind of just give us your perspective there. Thanks.
Yes.
But I'll answer the first question I'll, let krishnan for a second.
So of course, the rest of the rules.
That we follow.
Industry follows where you can economically incentive borrowers and even for us.
Recurring title and mortgage to their clients or even the any other any other.
Product and service was required with the transaction complete and so we called out and so we have to be able to compete by having the best title off sort of the best known author the good old fashioned way with the best server.
And what's unique about what we are building in the platform.
Who's going to integrate the onshore title and mortgage solution through the ETA work for them and it will be embedded in the workflow and integrated into the workflow making it.
You know easier for the agent and their clients to complete the transaction and so you know.
Good old Gotcha, and we've done a better service.
On the human side, but also on the software side.
And in terms of our in terms of your second question I, Jason We look we remain very confident in our strategy here. So what we are focused on first and foremost is is execution.
So the six 2% you saw in the second quarter. Thanks.
Yeah.
I think just taking a step back first I just wanted to reiterate.
The Q.
<unk> market share.
The sequential decline over Q2 is not part of any long term trends as Chris mentioned in October it was upfront from that Q3 level Oh, Yeah. We don't we don't share those month to month numbers, but it was also I think it's worth noting that <unk>.
Shortly we have seen the third quarter relative to the second quarter market share decline.
In the past and do that that's due to seasonality.
In this circumstance is really being driven by the low end taken off relative to the high end in the third quarter.
We see in the market is that there is.
There is a sense of buyer urgency and the low end as rates were rising to get ahead of that rate increase.
Where we're comforted that are our business did what we said it would do or we thought it would do in the third quarter and you.
You can actually see if you look at.
Other other commvault brokerages the hire there they are in the luxury space. They saw similar trends and lower people are and the more people are in the low end space that they saw the opposite trend. So you can really see that it was driven by this incredible momentum and the low end and those.
In this quarter.
Okay, great that makes sense. Thank you.
Yeah.
Ladies and gentlemen, just a quick one.
Go ahead, I'm sorry, Mr. Eric go ahead.
Thank you I was just going to remind everyone star one for any further questions today, ladies and gentlemen.
And we do have a follow up question now from Jason Hempel Stena, Bob Heinemann.
Hi, I figured why not.
Does it get easier to hire agents of the market flows just philosophically maybe talk about that thanks.
Yes, no. It absolutely does is one of the benefits of our scoring Margaret when things are incredibly busy agents don't have the time to have a conversation or that you're busy with their clients, which of course is their priority because they don't have time to learn about it.
On our campus and go see.
What we can provide with our platform.
Yeah, and so that was definitely one of the benefits.
It's also worth noting though that we have.
We've seen extraordinary levels of retention.
One thing you didn't mention on the call is our retention of the last two quarters was the highest it has been in the past two years.
And so we're working with a lot of strong indication that agents are seeing value from the platform.
And per day, and they continue to want them. They continue to see the bulk of the place where they can grow their business to save time and best serve their clients.
Thank you.
And ladies and gentlemen, just a final reminder, star once a day for any questions or comments.
Okay operator.
Sure.
If there are no more questions, we'd like to thank everyone for coming and please reach out and have a great day.
Okay. Thank you everybody to bear ladies and gentlemen.
We'll conclude today's conference call, we'd like to thank you all for joining us.