Q4 2021 Redfin Corp Earnings Call
Please standby we're about to begin.
Good day and welcome to the Redfin Corporation Q4, 2021 earnings Conference call. Today's conference is being recorded at this time I'd like to turn the conference over to Mike Nally head of Investor Relations. Please go ahead ma'am.
Thanks, Katie good afternoon, and welcome to Redfin financial results Conference call for the fourth quarter ended December 31st 2021.
I'm Meg Nunnally redfin as head of Investor Relations.
Turning me on the call today is Glenn Kelman, our CEO and Chris Nielsen our CFO .
Find the press release on our website at investors Redfin Dot com.
Before we start note that some of our statements on today's call are forward looking we believe our assumptions and expectations related to these forward looking statements are reasonable, but our actual results may turn out to be materially different.
Please read and consider the risk factors in our SEC filings together with the contents of today's call.
Any forward looking statements are based on our assumptions today and we don't undertake to update these statements in light of new information or future events.
During this call the financial metrics will be presented on a GAAP basis and include stock based compensation as well as depreciation and amortization expenses.
In the event, we discuss any non-GAAP measures today, we will post a comparable GAAP measures and a reconciliation on our website.
All comparisons made in the course of this call are against the same period in the prior year unless otherwise stated will also be sharing Hubei equities preliminary financial results for 2021 pay equity in the theater have not yet completed their process for auditing the company's 2021 financial statements. So actual results may vary.
From the estimated preliminary results that we presented at <unk>.
Lastly, we will be providing a copy of our prepared remarks on our website by the conclusion of today's call and a full transcript and audio replay will also be available soon after the call.
With that let me turn the call over to Glenn.
Thanks, Meg and hi, everyone.
Overall fourth quarter revenue of $643 million exceeded our expectations on the strength of our <unk> sales.
But the $225 million in revenue from our core business of brokering home sales through our own agents at our partners. So that the low end of our range growing only 14% from an exceptionally strong fourth quarter of 2020.
Our market share was $1, one 5% up 11 basis points from the fourth quarter of last year similar in magnitude to the third quarter's 12 point year over year game.
Our fourth quarter net income or loss of $27 million was better than we projected in our last earnings call.
2021, we invested in a restored advertising budget and the software developers to support new initiatives like rentals on redfin Dot com and high growth businesses like <unk>.
Side of the expenses from running acquired businesses that Werent part of registered at this time last year, we expect 2022 operating expense growth to slow significantly with Red sands gross profits improving across our brokerage and referral mortgage title and high volume businesses.
We don't need to buy other companies or launch new products. Our focus is on executing the strategy, we've laid out over the past year.
Building, a complete real estate destination for finding a home to buyer rents improving customer success rates and customer loyalty to accelerate brokerage share.
In scaling our mortgage title and high volume businesses into an integrated nationwide offering.
At this time last year, the brokerage was the only business generating significant gross profits, but now our properties business turned its first annual gross profit since launching in 2017 with a one 2% gross margin for all of 2021, even better than we expected as recently as last quarter.
<unk> acquisition of Bay equity home loans will generate far more lending revenue overall and from our brokerage customers at much higher gross margins than <unk> original mortgage business.
Part of that planned acquisition, we also stopped investing in our own loan origination system, which will save more than $13 million in 2022.
But after a year of rebuilding our title business began growing revenues again in the fourth quarter of 2021 entering 2022 on pace to double sales with meaningful 2022 gross profit.
The business accounting for most of our losses as Red pass, which we bought out of bankruptcy in April its new leader started in August and already he has hired new exists and reorganize the sales force.
We will invest in initiatives to drive Red pass sales, but will also take steps over the coming months to run rent path more efficiently.
As each of these businesses performed better redfin overall will generate more value for each customer and improve operating margins.
We'll also keep broadening the range of customers. We reach one of the main engines of Red since 2022 growth and its brokerage I buying in rentals businesses is still our listing search site, even as mortgage rates have been rising traffic has been accelerating the year over year gain in visitors to redfin dot com and residents' mobile applications was one <unk>.
Percent in the fourth quarter after being flat in the third quarter with traffic growth improving every month from October through January when comparing the second half of 2021 to the sizzling second half of 2020 any growth would have been welcome, especially as Comscore indicates we're growing faster than any of our major rivals.
To sustain these search share gains we've recently added to our site climate driven risk factors for homeowners and data about groceries restaurants and parks, we expect to add rental listings next month. We're also expanding the parts of the U S covered by our listing search site and mobile applications by the end of 2021 Redfin listings search supported 80.
8% of the U S population up from approximately 79% the year before at the end of this year, we expect that number to reach 95%.
The number of home buyers on our web site and in contact with our agents have been in line with expectations, but it's hard to say, how many will actually buy a home with inventory, so low and home affordability changing so fast early touring activity hasn't led to as many accepted offers as we'd expect.
We're sure that reducing the number of homebuyers and agent support by as much as 28% in some markets will over time increase our homebuyers likelihood of winning an offer with redfin.
Listing so scarce homebuyers need more personal service than ever and there's no evidence that the reduction in Homebuyers Commission refund, which we used to fund the service improvement is limited demand.
But to deliver this higher level of service, we have had to hire more agents unusual 23% of our lead agents, who joined redfin since October one which is nearly as much as the whopping 25% in 2021.
As these agents guide customers through their months long home search the gains we expect from better customer service and market share and gross profit will come in the second half of 2022.
Now that we staff for this level of service our agent hiring for future home buying seasons will mostly be in line with our growth, especially as the annualized attrition rate for lead agents has declined from a peak of 36% in the second quarter of 2021% to 30% in the fourth quarter.
Despite the agent retention challenges often discussed on these calls redfin outperformed all of our rivals in Egypt retention last year.
Yeah.
One benefit excuse me one business benefiting from the shortage of homes for sale in Redfin now.
Let me try that one more time, one business benefiting from the shortage of homes for sale is redfin, now, which blew out its revenue forecast because the homes, we buy our own account for selling faster than ever in the first quarter of 2022 when comparisons to the 2021 will be a different challenge redfin now is still expected to triple year over year.
We've been more successful buying homes at profitable prices, because there are fewer buyers bidding against us.
Based on anecdotes from the Redfin employees, making offers the price range of competitors bids is narrower when we lost the bid last summer, we sometimes lost by 50000 Bucks, but now when we lose it's more likely to be about $5000.
We're still more active in coastal markets and other eye buyers buying older homes and more expensive neighborhoods. We have so far earned higher gross profits from these homes, albeit at a lower margin starting in December we significantly raised our offer prices in anticipation of low inventory for the opening three months of the home buying season a decision that.
Likely to pay off.
Reds.
And now's contribution to gross profits is a major milestone for our company that have been taking money from the brokerage cash Register to fund our ancillary businesses.
With the acquisition of Bay equity home loans will have an even larger impact on our profit.
On its own by equity earn more than $50 million in 2021 net income for more than $350 million in revenue about 53% of it from purchase mortgages, rather than refinances refinancings are likely to dwindle as rates rise, but redfin can offset that by connecting our agents with bay equity loan officers.
With 396 loan officers compared to Redfin mortgages 28 day equity has the scale to serve red since 2000, and 450 lead agents because they equity supports loans that redfin mortgage previously had not including Veterans affairs, the federal housing administration loan and far more competitive pricing for jumbo loans.
We can serve nearly every brokerage homebuyer.
What we like best about pay equity is its culture of putting the customer first.
We evaluated dozens of lenders before deciding to acquire the equity many were eager to meet our customers, but most assumed we wanted to give those customers the worst deal possible not the best day.
Equity with different among the lenders with more than $5 billion on originations back within the top 25 on Red cells Open book review site for all time closings and customer satisfaction.
But what's equally striking to US was bay equity's commitment to its own people. Many of the lenders we met had bench hire during the boom, but they equity had grown revenues without adding many employees instead investing in its culture.
Mortgage experts told us to expect at least 20% EMEA equities loan officers to leave soon after the deal was announced.
But one month after the announcement.
Equities loan officers are seeing the value of meeting redfin brokerage customers and the trust they equities leaders.
Only seven of the 396 have resigned so far.
Pay equity has hired seven loan officers in that time, there's been no net change in the number of loan officers once the deal closes the equity loan officers in redfin agents seem excited to meet we expect the deal to close in April .
We are company, we acquired the year prior rent path starting from the opposite position of the equity emerging from bankruptcy rather than notching record profits with customers uncertain about its future.
Year over year declines in revenues and customers have narrowed but this business is still at the beginning not the end of a turnaround.
<unk> sales execution and an increase in the number of rental inquiries for each of our customers will help us drive 2022 sales from the fourth quarter of 2020 to the fourth quarter of 2021.
<unk> spending on search engine adds fell 63%, but if you set aside traffic from advertising rent pass visits over that time increased 13%.
Even with such a drastic reduction in advertising the inquiries redpath generated for each property that a customer page promote on our site increased over that time by 9%.
One reason, we can recruit more customers is that we're now giving those customers more value that.
And that value will get another boost when we promote rent past properties on redfin Dot com. This march and redpath customers won't be the only beneficiary. This will also boost red Sands authority as a real estate destination nearly all the major real estate sites Redfin Dot com competes against have rental listings.
Even as rent pass sales recovers.
We also have to reduce spending in many areas, which redpath couldnt do well in bankruptcy because of an earlier failed acquisition attempt by the time John started in August change was long overdue.
Already developed a new management team in the coming months, we expect that team to align the company's resources behind Jon's initiatives to grow revenue.
Now before turning the call over to Chris, let's discuss the housing market.
It's the start of the year mortgage interest rates have risen from three 1% to three 9% with more increases likely from January 2021 to January 2022, the mortgage payment for medium priced U S home.
Increased by more than 25%.
December pending sales were down 7% year over year and down 15% in the west column to six of Redfin top 10 markets.
But redfin expects to grow significantly in 2022 powered by traffic growth rental listings on redfin dot com better customer service and profits from high buying and mortgage will get more than our fair share of customers and deliver more value to each one.
With inventories solo customers need a broker who can get them into homes at a moment's notice and make their offers more competitive with financing that won't fall through.
New listing started to slow in January with the average number of Lunesta excuse me new listings per day dropping 13%.
Mostly due to east coast Snow and ice this was exactly when even more hot homebuyers were rushing into the market to beat rising mortgage rates.
The listings that debuted in the middle of January 58% went off the market in under two weeks, an all time high.
We thought the market was wild in mid January last year, when that number was 51%.
The problem is with individual homeowners not builders.
Despite builders supply chain problems more than a third of the single family homes for sale in December where new a record.
The year prior it was 25% also and then record and the bubble years before the great financial crisis, New construction never accounted for more than 20% of U S home sales.
And it's not just the sellers who are increasingly institutions. It's also the buyers investors accounted for 18% of fourth quarter U S home purchases yet another record prior to the housing market's decade long Bull run investors really accounted for more than 10% of home purchases with inventory scare some sellers eager for the certainty of cash offers.
Retail homebuyers have been struggling to compete with investors, we expect inventory to ease in the spring.
The housing market has become more seasonal almost every year over the past decade with a lower proportion of the year's listings in the winter and a higher proportion in the summer.
Because mortgage reform has made it hard to have two mortgages the families moving have had to buy one home and sell another and increasingly narrow windows.
And another group of homeowners, who can afford to front the cash for their next home are increasingly deciding against ever selling last one.
The great unintended consequences of loaning money at rates fixed below 3% over 30 years is a landlord nation.
Many of our home buying customers are people, who would once never have considered renting out their old place, but now plan to hang onto that home and its mortgage for the rest of their lives.
For all these reasons, we believe that the inventory crunch will ease in the summer as rates rise that may not go away in 2022, we're well aware of the economic pressures on homebuyers, but so many people are still so desperate to move the sales for now are still mostly constrained by inventory.
Prices are even mortgage rates.
Of course, there are also economic pressures on property technology companies like ours.
Even on the day, we launched our public offering redfin reminded the world that we were born in the dark of the great financial crisis.
Since those early days our website has become one of the top 50 online destinations in the U S brokerage expanded nationwide, we built a profitable <unk> business and our rentals title and mortgage businesses are now poised to deliver strong long term growth.
Hard times come we believe we'll take share faster than ever.
Drawing on our culture is strong and will strive to seek to find and not to yield.
The way Chris.
Thanks Glenn.
Closed out 2021 on a solid note.
Revenue and net income both came in better than the high end of our guidance.
Top of funnel demand remains strong although customer conversion has been impacted by low inventory and we're carefully monitoring the macroeconomic outlook heading into 2022.
Fourth quarter revenue was $643 million up 163% from a year ago.
We acquired <unk>, our rental segment business in April 2021.
Rentals generated $39 million of revenue and contributed approximately 16 percentage points to total revenue growth.
Real estate services revenue, which includes our brokerage and partner businesses generated $225 million in revenue.
14% year over year.
Brokerage revenue or revenue from home sales closed by our own agents was up 16% on a 15% increase in brokerage transactions.
Revenue from our partners was down 16% on a 7% decrease in transactions and mix shift to lower value homes.
Decline in partner transactions as expected as we are now sending a more normalized ratio of transactions to a fully staffed brokerage business.
Real estate services revenue per transaction was up 4% year over year.
The property segment, which consists primarily of homes sold through redfin now generated $377 million in revenue, which was up from $39 million in revenue in the prior period.
As a reminder, during 2020, we paused our redfin now home buying activities and then restarted the business from a standstill. So that's part of what's driving strong year over year transaction growth of 857%.
In anticipation of scaling our mortgage business with the pending acquisition of pay equity.
Now reporting this business as a separate segment.
Our mortgage segment generated $4 million of revenue in the fourth quarter of <unk>.
Increase of 22% year over year.
Finally, our other segment, which now includes title and other services contributed revenue of $3 million, an increase of 9% year over year.
Total gross profit was $108 million up 35% year over year.
Real estate services gross margin was 33, 5% down 740 basis points year over year.
This was driven by a 620 basis point increase in personnel costs and transaction bonuses.
And a 100 basis point increase in towards fuel costs.
This compression was expected as the business was running at unsustainable levels in the fourth quarter of 2020.
Furthermore, as discussed on our last earnings call. We started hiring lead agents earlier than normal with our first significant cohorts starting in late November instead of January .
And this weighed on our fourth quarter margins.
Even with these operational changes compared to the fourth quarter of 2019 before the pandemic hit gross margin is up 130 basis points.
Properties gross margin was up 580 basis points year over year in the fourth quarter and this marked our first full year of positive gross profit for the segment.
The improvement was primarily attributable to a 610 basis point decrease in personnel costs and transaction costs.
Business scale.
160 basis point decrease in home selling expense.
This improvement was offset by a 280 basis point increase in purchase maintenance and capital improvement costs.
<unk> gross margin was 82, 6% for Q4 2021.
Mortgage gross margin was negative 67, 4% for the fourth quarter down from a positive 10, 8% one year ago.
Other segment gross margin was negative 17, 7% down from a positive 19, 7% a year ago.
Operating expenses were up $79 million year over year and represented 21% of revenue down from 22% of revenue one year ago.
Proximately $47 $6 million of the increase was attributable to the acquisition of Redpath.
Technology and development expenses increased by $20 million as compared to the same period in 2020.
The increase was primarily attributable to a $12 $8 million increase from that pack. The remaining increase was primarily attributable to a $5 $4 million increase in personnel costs due to increased head count.
Total technology and development expenses represented 7% of revenue down from 10% one year ago.
Marketing expenses increased by $15 million as compared to the same period in 2020 the.
The increase was primarily attributable to a $9 4 million increase from that path.
The remainder was primarily attributable to a $5 3 million dollar increase in marketing expense.
Total marketing expenses represented 3% of revenue, which is roughly flat compared to one year ago.
General and administrative expenses increased by $43 million as compared to the same period in 2020.
The increase was primarily attributable to a $25 3 million increase from that path.
The remaining increase is primarily attributable to an $8 $2 million increase in personnel costs due to increased head count.
In addition, we had approximately $2 9 million in expenses related to a legal settlement $1 1 million and acquisition advisory expenses related to the equity deal and $2 $6 million related to our annual company of that which we Fortunately had to cancel in December due to rapidly rising.
That counts.
Total G&A expenses represented 10% of revenue, which is roughly flat compared to one year ago.
Net loss of $27 million beat the better end of our $31 million to $36 million guidance range.
Diluted loss per share attributable to common stock was minus 27 cents compared with diluted income per share attributable to common stock of <unk> 11 per share one year ago.
Now turning to our financial expectations for the first quarter of 2022.
Consolidated revenue is expected to be between $535 million and $560 million.
Representing year over year growth between 99% and 109%.
We expect our real estate services segment to account for $165 million to $171 million about revenue.
The property segment to be between $330 million and $350 million.
<unk> revenue is expected to be between $37 million and $38 million and Red Hat's contribution to net loss is expected to be approximately $19 million.
Mortgage revenue is expected to be approximately $3 million.
This outlook does not include any contribution from the equity because we expect that transaction to close in the second quarter of 2022.
Our consolidated net loss is expected to be between $122 million and $115 million compared to a total net loss of $36 million in the first quarter of 2021.
We expect real estate services gross margins to decrease in the first quarter compared with the same period in 2021 as well as the same period in 2020. This compression is primarily due to the changes, we're making to lower agent loads and adjust compensation as described in our last earnings call.
Also worth noting that in the first quarter is historically, our lowest volume quarter typically accounting for 16% to 17% of full year revenue. So.
So we're leveraging our higher cost base against small volumes.
On a consolidated basis. This guidance includes approximately $45 million in total company marketing expense $19 million of stock based compensation.
$10 million of depreciation and amortization and $5 million of interest expense associated with our convertible senior notes and other credit obligations.
In addition, we expect to pay a quarterly dividend of 30000, and 640 shares of common stock to our preferred stockholders.
As a result of the Bay equity acquisition will also incur $5 million of restructuring expenses in the first quarter.
Most of which is for severance.
The guidance assumes among other things that no additional business acquisitions investments restructurings or legal settlements are concluded that there are no further revisions to stock based compensation estimates and now let's take your questions.
Thank you.
Like to ask a question. Please signify pressing star I'm wondering your telephone keypad.
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Once again that is star one if you'd like to ask a question.
Our first question from <unk> Khan with <unk> Securities. Please go ahead.
Hi, Thanks, a lot.
A question, maybe one on rent that.
Then on brokerage on the rent side, Glenn you said.
We are at the start of the <unk>.
The improvement.
Not not at the end of it so if I kind of look out into 'twenty, two and 'twenty three.
How should we think about the path to growth.
Along with EBITDA profitability I know that when I started the integration.
Q1 is going to deliver some synergies how should we think about it from the outside looking in and then maybe quickly on the on the brokerage side our revenue per transaction was down sequentially and just wondering what.
What's the other kind of puts and takes there.
Great I'll, let Chris answer the second question, but about rent paths. The first order of business is to get sales going in the right direction.
Traffic you usually leads and in this case organic traffic is up by double digits, but customers are still leaving the platform. Some of that is because occupancy rates are really high.
But we should be gaining customers trust back, especially as we add redfin dot com traffic, we will be delivering significantly more inquiries to read past property management customers. So.
The name of the game in 'twenty two is to get sales going but we also need to improve EBITDA and that will happen over the course of 'twenty two and into 'twenty. Three we understand that this is a company coming out of bankruptcy that there is still some restructuring to do but.
Before we do that we have just wanted to make sure that John Ziegler, the CEO of rent path. When we hired to turn this business around has had time to figure out what he wants to prioritize and what he wants to de prioritize so in the coming months you will see more from us on how we are going to get operating leverage over the next two years.
Sure and then in terms of revenue per transaction revenue per brokerage transaction and revenue per partner transaction.
The relatively close.
The third quarter and the third fourth quarter, Theres, a little bit of a mix shift towards a bit more partner transactions in the fourth quarter and so that may have influenced the total figure.
But otherwise things are stabilized.
The stabilized there and running pretty naturally.
Understood. Thank you Glenn Thank you Chris.
Thank you. Thank you.
Thank you and then take our next question from Tom White with D. A Davidson.
Hi, This is <unk> on for Tom Thanks for taking my questions. Two if I may 1st one on rent path.
Just wanted to know how we should think about the long term margin targets once it like more fully integrated within your business and then next on eye buying I just wanted to updated thoughts on your eye buying appetite like ticket meaningfully bigger, especially after the pull out of one of your biggest players in that space.
Sure I can comment on the first one with regard to Reg path, we haven't laid out long term targets for sure. Those externally. We do you think of the path there importantly, as being launching that inventory or the redfin dot com that provides a very important way.
For apartment buildings to meet customers, who are already on red seal and that provides a catalyst.
To make some longer term changes in that business, including thinking about customer acquisition costs.
It will just be that much more traffic to be able to leverage from the website itself.
And just to address the second question.
We are committed to eye buying added existential level, we know that it's part of every homeowner's consideration set when deciding how to sell the property and we want to be in the living room.
At the beginning of that process, which usually involves just asking well what can I get from a cash offer but like all of our businesses. We are going to continue to develop a partner program. So that we can be selective about the properties. We buy if the only way to grow that business is to buy every house condo at every price point.
Enter summer spring and fall.
We know that we can't run that business at the margin and risk profile that we want so we're going to run it on our terms, which means that when we have the capacity to renovate those homes and get them back on the market and when we know this is a property that we have the expertise to trade at a good margin we'll buy it.
But other times, we're going to get demand, where someone else could handle that better than we do and today, we sometimes refer that but often when we turn it away over time.
We may.
Just look at other partners we could involve.
That's just spend the long term direction for the brokerage which has the partner program. It's something we are developing for mortgage even though we've made this massive investment in bay equity. It's something we're developing for title. This is a boom and bust business and we want to deliver a very consistent customer experience. So the only way to do that is to sometimes call on partners.
You end up hiring people, who become idle and that isn't the way we want to go.
Great. Thank you so much.
Thank you we'll take our next question from Jason <unk> with Oppenheimer.
Everybody. Thanks for taking the question so I'm glad to see you acquiring.
Equity.
So just given that.
Between that as well as kind of the improvements.
Around title.
Now offer a more complete offering you can just help us think about how we should maybe think about this over the medium term like the next two years, obviously, the the real estate.
Guidance for the first quarter is less than kind of we were looking for youre not giving full year guide, but should we think about.
Perhaps I don't know the medium term being more about investing to get the whole portfolio of services, where you want it to be.
Just how are you thinking about how all of these things play together from maybe margin standpoint, and like the medium term. The next like 12 to 18 months. Thanks.
Yeah.
We do not see this as an investment phase, but it's an execution phase.
We need to invest in rent path that is the one business that is not on track to generating significant gross profit gains year on year the way the other businesses are.
But we expect the brokerage to take share every single quarter I've been doing this for something like 64 quarters. There was only one quarter, where we didn't gain share and that was in the third quarter of 2020, because we were flat footed on agent hiring and we have an employee model, but the website is generating significantly more demand it is going to pull through at some point the.
Guidance is based on just the closings that we can see now.
There is no structural reason that our competitive advantage won't play very well this year people need to get into homes at a moment's notice.
To use a broker that gives them better value. So we expect the brokerage to keeps taking share and growing the business.
Quarter after quarter, we expect that lower loads is going to lead to more gross profit from the same number of customers because it's going to increase close rate.
In our pilot it increased it by about 15% over two years, that's a very well founded result, and then on mortgage we actually just see this as much better leverage on two fronts first of all we're not building our own loan origination system, which was costing us more than $10 million every year. So that's immediately going to fall to the bottom.
Line and then the second advantages the Bay equity is just a much more efficient underwriter of loans. So the amount of gross profit that day equity generated from a homebuyer in 2020 and excuse me 2021 was similar to the amount of gross profit that we generate from our homebuyer now theyre pricing may change this year.
Specially because redfin customers want value and we want to make sure that we deliver that.
But.
There is a significant opportunity to generate significantly more gross profit, especially as we drive a much higher attach rate because we've got a full product suite and because we've got full geographic coverage. We just didn't have enough loan officers to even begin to cover the territory with redfin. So we see the bay equity deal as very accretive not as a source of investment, but as a source of.
Leverage.
Great that's very helpful. Thanks, Mike.
Yeah.
Thank you we'll take our next question from Brian Kevin <unk> with Zelman Associates.
Hey, Thank you very much.
Glenn I wanted to follow up on your last comment about the market share gains and the consistency <unk> had over time.
So if I look back on an annual basis, let's call it something in the 10% to 15 basis points per year has been the trajectory. So I guess my question is where you guys sit today in terms of market share and that trajectory in the past is that where you would have envisioned in the business to be today. If we were to say go back five years and talk about the future and goes.
Forward are there are there specific factors, we should be thinking about to potentially.
Accelerate that growth, whether it's web traffic conversion number of agents I think it would be helpful. For you to talk through kind of the potential drivers that could actually.
Post stronger incremental share gains going forward. Thank you.
Sure well first of all we never promised you a rose garden on market share. We promised you solid sequential growth.
I've been asked so many times on these calls by you and by the media about whether we can do better than 10 to 15 basis points of share gain and I've always said.
But right now what we see is 10 to 15 basis points of share.
The prospect of accelerating that is tantalizing to us and it's what we're investing in by lowering customer loads on our agents.
Adam Weiner, who now runs the brokerage was our chief growth officer. He is an analytical beast and also an inspirational figure. We are excited to have him in that role because he has a growth mindset. We are in patient with 10 to 15 basis points a share I'm not promising that we can deliver that in the first or the second quarters of this year, but as.
We get the benefit from lowering the number of customers. Each agent supports we should be able to take more share by driving improved customer success rates. The problem Redfin has had its never been that we cant get people to try our service folks love clicking the button the Sia home at a moment's notice, we just have to pull through on the sales execution and the second lever.
Here, we're the brokerage can become not just a fulfillment service, but a true engine of growth is this idea that we can build our loyalty business. Our principal agents. The senior most agents at Red funds are in some ways. These hybrid agents, where they are still handling demand from the website, but about half their business.
From loyal customers. They served in years past so in past trends, we have talked about the increasing contribution from loyal customers and so if you are getting the same amount of demand from the website, but closing at a higher rate and you are having an increasing proportion of sales come from loyal customers that is going to take its toll.
And when you add to that increasingly effective media campaigns at higher dollar amounts in 2020, we paused. The campaign 2021 was the first year.
In two years, so we've really been running significant media all of that should lead to higher gains we don't see that in the first or the second quarter's we know it's going to be a wild ride, but long term, we want to take more share than just 10 to 15 basis points, a year and thats something I wasn't talking about two or three years ago.
That's very helpful. Thank you. Thank you for all the detail in the discussion there Glen.
One follow up question would be on the productivity side of things. So I think we all kind of look at the productivity stats and make a connection to gross margin and.
With the business moving forward you made a comment that agent hiring for the future home buying seasons will be mostly in line with our growth I guess is there any implication of that comment about productivity or is that separate from the productivity discussion.
In terms of kind of growing via adding agents versus growing expanded productivity. Thank you.
Well being acquisitive about market share comes at a potential gross margin cost, we have mostly offset that by reducing the homebuyer refund.
We are very clear on one point that sellers are price sensitive, but when we have raised prices on sellers. There has been a marginal trade off with volume, but homebuyers have not been price sensitive because of course, they are not the ones paying their buyer's agent, they're not the ones setting that price and so we do think that Egypt productivity will decline slightly what we <unk>.
<unk> more than an agent's time is a customer's trust and so we are trading Egypt productivity for more gross profit more market share higher growth in the second half of the year, because we will drive close rate.
To improve the quality of customer service and pay for the decline in Egypt productivity, which will be marginal.
By raising prices and so you will see slightly higher revenue per transaction because the commission refund I think is declining by a few hundred bucks.
Chris do you have anything to add on that.
When you said in a meeting it's alright.
Okay great.
Over you might grant.
Thank you well go and take our next question from Hugo <unk> with Wedbush.
Hey, good afternoon guys.
I want to.
Focus on the real estate services guidance at the low end, it's down year over year slightly at the high end, it's up it's up slightly but.
Glenn you are.
Me your macro commentary, there's certainly a lot of moving pieces inventory, but.
It feels like there's still a lot of demand.
Still bidding wars prices those thing.
Relatively strong essentially increasing.
I know the inventory coming into the market, maybe a little bit later in the year, but it feels like the overall health of the market.
We have some tough comps, but on the medical side feels strong.
Strong in <unk>. So just wanted to maybe start on on the puts and takes in the guidance and how maybe tie the macro views with the guidance.
Churches.
Well I'll start here and see if Chris has anything to add the first point is the one that you already made for us which is that.
2021 was a sizzling year. If you were to say that we just pulled forward some demand and look at the compound annual growth rate over a couple of years, it's been the mid Twenty's, which is exactly where we want to be.
One.
Just <unk>.
<unk> for us might be that the west is not doing quite as well as the rest of the country people are moving from the message from the west to the Midwest and the east and so if you look at California cities in particular.
We are concentrated there. We're also concentrated in Seattle and those are the markets that are really suffering the most from inventory declines and price shocks. So.
That's why we're fairly cautious.
We do think that will take share.
Pending home sales are down year on year.
And we just have a ton of demand <unk>. The question is how much of it is going to pull through and whether some of the people who are trying to make bids right now are actually going to end up saying screw. It rates went from three 1% to three 9%. So it's hard to bet that there is a pot of gold at the end of every rainbow when the weather is changing so fast.
Yes.
So that's why our guidance here has been cautious obviously, we believe we're going to take share in Q1, we believe we're going to take share in every quarter in 2022.
The only issue for us on share is just that there is slight concentration in the west.
Most of the home buying in the United States is happening in other parts of the country.
Chris do you have anything to add.
No that's a good summary.
Okay great.
Maybe this metal and then for Chris.
Glenn will give you a break.
On the equity under totally understand strategies or anything you could share.
On integration plans I know it hasn't closed yet, but timeline exactly how you think about integrating how it impacts.
You put it in the funnel.
On the website things like that if anything we can think about as you.
And to build that business into resin.
Yeah sure so the.
This will be relatively integration light and the reason is that they equities loan officers are already set up to do exactly what we want and that is meet customers and so the main way that we will kick start the mortgage business is introducing a equities loan officers.
Two the redfin agents. So that then our redfin agents can make introductions to our customers.
Over time, there will be pieces on the website for people to come straight through but we do think the main point is to leverage the main point of introduction will be from redfin lead agents to those loan officers and so that does mean that there's less technical integration theres less backend integration.
And this is really just about creating those connection points.
Okay. Thank you.
Thank you, we'll now take our next question from Ed <unk> with Keybanc.
Hi, This is Amanda Hanley on for Ed. My first question is how has relocation demand trended versus the strength. We saw earlier this year and to go along with that how is.
Demand for consumer or customers looking for a second home trending and then separately can you just give us an update on the concierge services option.
And are there are an increasing number of opt into service and are you still focused on growing the business longer term.
Sure.
Great questions.
Relocation has softened somewhat.
It dropped to a lower rate in Q4.
Back to early 2020 level.
Second home demand is still off the hook and I'm trying to remember the third part was about <unk>.
Concierge is such a conundrum for us because.
Our customers love it our agents want it we've.
We've had some fulfillment challenges because it's just hard to get somebody to show up to redo the long the paint the wall to get the work done and that's our calling card is that it's on demand service you need a listing agent from redfin and she promises to get your home on the market in a few weeks and have it unrecognizable.
<unk> from where it is today.
And getting it done fast drive massive returns for the customer.
We've already seen that with redfin now when we own the property. The same thing happens when our customers on the property and giving them that upside is so important to everything that we do you can only do so much marketing our home digitally or through sales person's individual efforts, what really drives a premium insulin homebuyer drives up and it just.
Looks gorgeous when homebuyer walks in and she's blown away and so.
Fulfillment has been the challenge there.
Especially with Redfin now growing so fast and competing for some of the same people the swinging hammers with paint walls.
Got it thank you.
Thank you we'll move on to our next question from Curtis Nagle with Bank of America.
Good afternoon, thanks, very much for taking the question.
I guess I just wanted to refocus on the real estate services gross margin and <unk>.
I, just got I guess, something like a high level, how to think about how that trends through the year right. You guys gave obviously a number of short for <unk>.
Obviously some.
Pressures there.
As we move through the year volumes as you mentioned increase right I guess compensation still sticks in there.
Where do you think we should.
Where should it end up I guess for the rest of the year in Q3 for Q or at least Directionally.
How should we think through that.
Yes. So this is similar to what we were expecting when we talked about it a quarter ago and that is we do think that real estate services gross margins will be down in the first half of the year on a year over year basis.
We will see improvements in the second half of the year.
As some of the initiatives that Glen talked about come online as we start to see some of the more significant benefits of having reduced the number of customers that each of our agencies meeting.
The trend that we're expecting us.
And just just clarify that back half improvement would that be.
Quarter over quarter year over year.
Yes.
Yes, good presentation. So that's yeah.
Yes, good clarification thats compared in the same quarter of 2022 against the same quarter of 2021.
Understood. Okay, and then maybe just a quick one on <unk>.
Hi, buying so I guess, if I heard you right. It sounds like you guys are making.
Higher bids I think for some of the homes.
Your checking on.
What's the risk perhaps.
Rising rate environment declining affordability.
But that could theoretically increase.
I don't know the probability of where at least the chance that you may get stuck with a house.
Longer or you know.
Price, how you want to yes.
How are you thinking about that.
Well the color we gave in the prepared remarks was that we bid more in December .
And the reason we talked about that is because we can already see that that was the right that inventory is very low in part for cyclical reasons in part for structural reasons that we discussed.
But.
We are running on a nice edge with AD buying and we know it.
And when we're not sure which way to go.
Hello.
Because we don't need that volume.
Okay.
Thanks for the clarity and yeah, good luck with the quarter.
Thanks.
Thank you we'll move on to our next question from Brad Erickson with RBC capital markets.
Hi, Thanks, I guess, two so Glenn I think going back a little earlier in the call you mentioned traffic, obviously being a leading indicator for your business I think overall traffic on the site has been flat if the past couple of quarters.
Obviously, it seems like it's set up just from a comps perspective to grow again in the back half kind of in line with some of you've heard the commentary you just talk about the love to get back to or sorry to get beyond some of the prior ceilings you've hit on traffic, but what may be marketing dollars needs to be applied or where do you need to spend incrementally around that and then.
One more on the gross margin my my apologies I know this is Ben.
Well addressed but I guess just in the context of some of that linearity.
You just gave Chris how important is the partner business mix playing in that given the agent hiring you've talked about thanks.
Well why don't I answer the first question, Chris and then you can handle the second is that fair.
Okay.
So.
Traffic and marketing dollars are correlated but only weekly at redfin most of our ads.
So really trying to recruit brokerage customers directly and so it improves conversion rates or it just in a direct marketing campaign recruits customer straight into a form where that person can ask for service.
What's driving our traffic.
Number one.
So theres just a sequential improvement from October to November to December to January and beyond where we think that traffic will continue to improve there might be some kind of macroeconomic headwind as well.
Home affordability gets pressured but we've just been confident that traffic will continue to grow in part because of improved comps, but the other factors are that we just have a broader geographic footprint, we're adding new inventory rentals inventory, which will obviously bring renters to the website, but also broaden our authority as a real estate destination and improved Google.
Thanks.
And then the final factor is that we've just been adding data.
Restaurants parks amenities climate Theres, a bunch of layers that are coming in over the next few quarters and right now.
Different search engines are rewarding that and they're doing so correctly because consumers want that information and so that was a deficiency. We had in the first half of 2021 that we were scrambling to correct. We did it ahead of schedule and so we expect not only to take.
Search share.
But also.
To be able to convert it better.
Yeah.
And then in terms of what that looks like.
Yeah in terms of the partner mix impact on real estate services gross margin that will have a little bit of a depressing impact and that we do expect a few more transactions to move to the brokerage and away from partners, but it's not a significant change it's not a meaningful change overall and so.
We will continue to have that.
The kinds of transactions the percentage of transactions going to partner agents that we have in house.
Got it thank you.
Thank you, we'll now take our next question from Mark Mahaney with Evercore.
Okay. Thanks, two questions one.
Glenn I always appreciate your.
Commentary, especially your views on the market you made a comment I think that you expected inventory to start loosening up I think sometime in 'twenty two and just you made the statement, but just put the why behind that why do you think thats going to be the case and then Chris if I could just ask on the Q1 guidance just on the top line for the real estate services.
Revenue segment.
May have touched on this before but please double click the guidance implies something like 24% sequential decline in revenue at the high end of the guidance and that's that's a steeper decline than I think I can find in your model even worse than the beginning of 2020. So why is there such a sharp decline in revenue in the March quarter. Thank you.
Chris do you want to take that one first because it's such a humdinger or do you need time to think about it [laughter].
No I'm happy to comment on it but we do see the real estate services revenue down more than we would typically expect from Q4 to Q1, we do see an awful lot of customer activity on the website and reaching out for service, but the piece of the funnel that has been.
Sharp so far is the one that Glenn mentioned on the call and Thats that in terms of booking of transactions. It's been slower than you would expect given those other two factors and believe the low inventory levels connects to the other part of your question Mark.
As at least one contributor.
So that and we're working hard to get customers all the way through the closed deals, but mostly what you should expect from us in terms of providing guidance is to give you. The best view, we have the information that's come in in and including all the other factors that Glenn mentioned.
That's the dynamic we're seeing from the website forward.
And we do think we have better visibility on what's going on with deals.
Other brokerages wait for real estate agents to send in the closing paperwork, but we track it from tour to offer.
The contingency to close.
But to speak to inventory I want to be careful because.
My overall comment was that inventory constraints are long term and structural.
But I do think that inventory will get better over the next few months for two reasons number one we.
We just had a bunch of consult where people have talked about what they need to do to the house to get it ready.
And anecdotally, we hear from agents that it's coming I am not sure how much weight to give that because real estate agents are always saying that at this time of the year.
But that's definitely been a theme in my conversations with our people number two I do think that as people start feeling like hey, if I wait it's not going to get better for me prices arent just on enlist escalator up in up enough that creates some urgency and then the last point is just that the market does get more seasonal.
Every year and this goes back to problems with liquidity and credit basically people have to be like that person <unk> in college, who could never break up with somebody until he or she had lined up the next one so you've got to find a home to buy that means that you are.
Not listing until.
Okay.
Later in the season when you found that property it used to be that we met more people who wanted to put their home on the market first and then start looking.
Not many folks wanted to do that and so it just compresses the listening season.
Two later in the spring and early summer.
Okay. Thanks, a lot I may have been that guy in college, but thanks a lot.
Oh man.
Are you married now Mark.
Yeah.
Tony answer that so let me answer that.
Is that appropriate question I apologize.
Just kidding.
Alright. Thank you those are my questions Im done thank you.
Thank you we'll take our next question from Tom Champion with Piper Sandler.
Hi, good afternoon.
Can you talk a little bit about touring Glenn It seems like this is a very strategic.
Stage of the transaction process and I think you talked about it maybe last quarter with completions picking up <unk>.
Does this continue to.
Improved perhaps you could just talk about touring a little bit and then I wanted to ask about.
The property segment in in the fourth quarter.
Solid volume and gross margins hanging in there.
How did renovation days trend.
I guess I'm, just curious if you're more optimistic on the margin potential in that business.
Then maybe you were at the outset.
If it's the recent profitability is just a result of good execution.
Thoughts would be really helpful.
I'll talk about touring and leaf hi, buying to Christmas time.
So our focus with Turing in 2021 was really about adding capacity because we had so many people trying to get into properties. It was such a competitive market that being able to see the home first and buy it before other people even knew it was for sale was so crucial.
And we're still focused on that but honestly.
We have made so much progress there and we still have so much work to do in the second part of the funnel that we're really now much more focused not on the quantity of tourists, but the quality of tourists.
We meet our customer and we really earn her trust we understand why she is moving with build a relationship with that customer we drive through to closing because people are freaked out.
And they need advice on whether to buy this house or that house whether to wait.
For the summer.
Or to do it now before rates go up so just the amount of attention that our customers need.
Means that speed still really matters.
But theres just more emphasis on getting our absolute best people out to the first tour and winning that customers Trust.
Christine was all about.
Good.
Ideas renovation programs were.
As I mentioned times were better in the fourth quarter than they were in the third quarter. We just had fewer places where we got bottleneck. It all seems a really good job of inventory through the whole quarter. Some of that probably is just being more organized having the right capacity in the right places to match up with the homes coming through in May.
A little bit of it has to do with availability of labor also but overall, we were pleased with how that worked and just in terms of the profitability on that business. It has now come up to the kinds of levels. We had talked about a little bit longer term margins, we do think that theres more operational improvement from here.
This is probably continued to balance that a little bit from rising home prices and so it's a combination of things that are leading to those results.
Got it thank you.
Thank you we'll take our final question from John Campbell with Stephens.
Hey, Glenn Hey, Chris Thanks for taking my question here. This is James Hello stepping in for John Campbell. So just have two for you guys here on the pace of lead agent hiring we're seeing horizon that count is there any insight that you can give us as far as what's driving that ramp is it something shifting internally like pricing or is it more market related than driven by.
Driven by that and then on the second question diving in just a little bit deeper into the tours can we get latest on the degree or the percent of virtual tours that youre seeing and how that's changed over the last several quarters.
Sure so quickly.
And hiring ticked up because we lowered the number of customers. Each agent supports this improvement in service quality.
Pilot increased close rates compared to the control by about 15%.
And so on that basis, we just decided to have more agents serve the same number of customers because we will get more closings from the same number of customers and we think we can make that gross margin neutral or close to it overtime through price increases of course, Chris are you talked about how that can get even better in the second half of 2020.
<unk>.
And then.
What was the second question.
The degree of virtual tours that Youre seeing now essentially level recorded up a little.
Yes.
It got above 20% of our tours when the pandemic first hit.
Then it came back down closer to 10, and then omicron it ticked up but also because I think.
People were relocating and there is a convenience factor and all the rest so it's in the teens.
Got you thanks, guys I appreciate it.
Yeah. Thanks, everybody we had fund.
We appreciate all your insightful questions, you've clearly studied the business.
Thank you and that does conclude today's conference with you. Thank you all for your participation you may now disconnect.
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