Q1 2022 Opendoor Technologies Inc Earnings Call

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Yeah.

Good day and thank you for standing by welcome to the open door first quarter 2022 earnings Conference call.

At this time all participant lines are in listen only mode.

After the presentation, there will be a question and answer session.

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Please be advised today's conference maybe recorded.

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I would now like to hand, the conference over to your host today at least Wang head of Investor Relations.

Thank you and good afternoon.

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 at <unk>.

Vesta don't open door Dot com.

Please note that this call will be simultaneously webcast on the Investor Relations section of the Companys 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 open dose financial condition anticipated financial performance business strategy and plans.

Market opportunity and expansion and management objectives for future operations.

These statements are neither 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> most recent annual report on Form 10-K for the year ended December 31st 2021.

Any forward looking statements made in this conference call, including responses to your questions are based on management's current expectations and assumptions as of today and open door assumes no obligation to update or revise them, whether as a result of new developments or otherwise except as required by law.

The following discussion contains references to certain non-GAAP financial measures.

The company believes these non-GAAP financial measures are useful to investors as supplemental operational measurements to evaluate the company's financial performance.

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 don't open door Dot com.

I will now turn the call over to Eric.

<unk> founder Chairman and Chief Executive Officer of <unk>.

Good afternoon on the call with me is carry Wheeler, our Chief Financial Officer, and Andrew Milwaukee, Our President.

Our customer experience is the focal point of what we do here at open door. So as always I want to start this call by sharing for one of our recent customers the blasting game family.

My name is Stefan Boston game.

<unk>, Arizona.

The biggest challenge of moving.

We're going to need to sell our home to buy another home not only do we have to do that but we have to compete against the possibility of all cash offers another big challenge for us with our family is the logistical side, so selling at home and buying a home at the same time when I first found out about open door.

Of trying it out do we schedule that you were I got to schedule that.

One is where we're able to close yet there was no pressure with it open doors gave us the ability from our own home to be able to find a new home sell our current home and make it all happen at one time and the most simple process ever without having to go through the traditional methods of.

Feeling overwhelmed with it all would open doors for us to know that we can move on our own terms.

The blasting games alongside more than 100000 happy customers are the reason why we know we will transform the broken offline process into a digital seamless experience.

As we reshape the consumer experience. We are also building a durable generational company.

It means not only driving rapid growth, but also a sustainable margin improvements and a reduction in our cost structure and enable us to grow and be profitable across economic cycles.

Our first quarter results are a testament to this effort, we surpassed our expectations delivering record revenue of $5 2 billion gross profit of $535 million in contribution profit of $332 million we.

We also demonstrated profitability with adjusted EBITDA of $176 million and adjusted net income of $99 million.

These past eight years of investments and hard work on our cost structure automation technology platform and pricing engine are enabling us to deliver a durable margin improvements as we scale.

Alongside our progress and our key financial metrics. We also continue to make improvements against our consumer flywheel.

For home sellers adoption continues to accelerate with offer requests up threefold versus prior year and our engagement strategy is also successfully fueling growth.

Most encouragingly, we've been able to maintain real silicon version at over 35% and NPS north of 80%.

For homebuyers, we hit all time highs for purchase offers driven by the adoption of open nor best offers an open door complete we have also continued to make progress on our financing offering, including adding lower dot com as a strategic partner, which will enable us to offer a broader suite of products serve more customers across our market footprint and.

Fulfillment flexibility as we launch our digital opened our financing app in coming weeks.

And finally, we continued to take major steps towards our goal of servicing every home seller and homebuyer across the country. We recently entered some of the largest markets, including San Francisco Bay Area, New York, and New Jersey, and we continue to demonstrate that we can operate in all markets in the U S.

Before I turn the call over to Kerry I wanted to touch based on some of the macro dynamics impacting the short to medium term outlook for housing.

While rising interest rates and waning affordability are factors, we monitor very closely we're confident in our ability to hit our financial targets across cycles.

We have made significant progress in our margins driving 240 basis points of structural improvements via cost reduction in services attach since 2018, which gives us the necessary margin of safety in our unit economics.

Second if you study the data housing recessions have been historically slow.

And last we hold highly illiquid homes for short periods of time aiming to turn our inventory every 90 to 100 days.

Setting aside the fact that our forecast incorporate risk and volatility the combination of very healthy margins driven by structural price and cost improvements and our short duration sale already inventory makes navigating market turbulence very manageable in.

In summary, this quarter marked another step along our journey to transform the real estate industry.

While I am encouraged by our financial performance I'm, most proud of how we delivered these results.

We focused on delivering system level changes that enable us to drive sustainable margin improvements.

We focused on our company culture, and ensuring that we show up as one team combining the best technology with operational excellence and.

And last we are focused on the consumer experience building and innovating on products and services that will delight customers for decades to come.

I will now turn it over to Carrie to discuss our financial performance in more detail.

Thanks, Eric before I discuss our Q1 results I wanted to note that we've updated our annual Investor presentation, you can find that on our Investor Relations website and as always please refer to our shareholder letter and our upcoming 10-Q for full details on the corner.

Moving on now to some key highlights as Eric mentioned, we delivered another record quarter, we significantly outperformed our expectations on growth and profitability. We saw all time highs in our quarterly revenue gross profit contribution profit and EBITDA. In addition, we generated nearly $100 million and adjusted net income.

Which for US is a good proxy for operating free cash flow and a strong testament to our growing scale margin sustainability and ongoing cost structure improvements.

Just on the momentum we're seeing across the business, we expect to continue to drive exceptional year over year growth through the rest of 2022.

I'd like to focus now on a few areas that are topical in today's environment, namely our margin sustainability and our expectations for housing will trend over the coming quarters.

It's important to reiterate that what is core to our business model and frankly, what is most misunderstood is that our systems and margin structure are designed to be durable across different housing environment.

Not to say, we're immune housing dynamics are a key input to our business and we've custom built our pricing and operational systems to give us a deep understanding of the underlying drivers and to be able to dynamically adjust to changing conditions.

They have to fucking dinner offers and those account for the level of certainty in our home acquisition pricing inclusive of forecasted HPA.

An environment of high volatility our models are designed to be more conservative.

Buying this with holding liquid sale ready homes and haven't updated views on home pricing on a daily basis gives us the confidence that we can deliver against our baseline annual contribution margin targets of 46%.

Across market cycles.

To that end with respect to what we're seeing in the macro environment. Our expectation is that the housing industry may begin to experience a slowing in HPA and transaction volumes beyond what is normal from seasonal trends beginning in the second half of this year, the pace of which should be gradual and consistent with the typical slowdown.

There's a reasonable chance that housing is going to continue to be stronger for longer.

Notwithstanding that we have been and continue to be conservative in our home valuations in light of greater macro uncertainty and at the same time as <unk> been adjusting our pricing to be more conservative we have not seen an impact on our conversion.

Our macro viewpoint is underpinned by what's happening on the supply side, we continue to operate and historically low inventory market, which has been the predominant driver of home price increases over the last few years. This supply dynamic differentiates current conditions from what led to the last housing downturn, which was during the global finance.

A crisis at that time, we saw very high levels of consumer leverage and willingness to take on debt at high rates that all resulted in a demand driven bubble, even though housing supply was high and increasing this led to multi year delevering behavior as well as the forced selling of assets during the GSE and subsequent recovery.

In contrast, the significant delevering higher savings rates and lower household formation rates post GST have resulted in debt to income ratios today that are well under those observed prior to the GSE.

While affordability is wayne with increasing prices over the last few years. There is currently little risk for selling given the strength of consumer balance sheets.

Notwithstanding real estate prices have tended to move slowly and market declines.

Outside of the GSE.

Only six quarters of HPA declines out of 188 since 1975.

Very modest at around 1% or less this further renders a sharp housing downturn likely in our view.

And even during the GSC the largest price decline sustained in a single quarter was down 3%.

On the interest rate front.

Market expectations for fed rate increases have translated to higher mortgage rates.

It's worth noting that real rates today remain reasonable at around 2% compared to the pre pandemic average of two and a half and a pre GMC average of four and a half.

Based on the long term relationship between real rates in demand again, it would suggest a gradual softening in for purchase mortgage applications as rates rise rather than a sharp downturn.

What's the upshot of all of us.

First we expect the housing industry to gradually slow and two we're confident in our ability to respond to changing conditions and to deliver on our stated margin goals.

Furthermore, as homeowners have to navigate the changing housing market the simplicity certainty and speed that we offer relative to the traditional listing process will only become more valuable to consumers, allowing us to be a share gainer across cycles.

Turning now to our guidance for Q2, we expect to continue to deliver substantial year on year growth.

Revenue is expected to be between four 1% to $4 3 billion.

Representing over 250% growth at the midpoint.

This amounts to revenue of nine 3% to $9 5 billion for the first half of this year versus our prior expectations for $8 billion.

We expect adjusted EBITDA to be between $117 million to $190 million, which represents an EBITDA margin of four 3% and a year over year increase of over 600% at the midpoint of the range.

Adjusted operating expenses are expected to increase sequentially by approximately $35 million.

Contribution margins are also expected to increase sequentially in the second quarter.

We are continuing to manage our business against a baseline annual contribution margin range of 4% to 6%. However, we are going to be opportunistic from time to time and choose to capture additional margin when market conditions are exceptionally strong and we expect that dynamic to be the case in Q2.

Before I open the call for questions I want to thank all of our teammates at open door.

Proud of all that we continue to achieve together and delighting our customers. We are building a durable generational company.

And with that I will now open up the call for questions.

Mainly driven by the fact that if he commented nausea with a letter we have been.

Increasing our spreads since late last fall in line of what we perceive to be increasing market volatility and.

And we're leaning into margin and you'll see that show up in our queue two numbers.

Okay, great. Thank you and then how should we think about inventory for the rest of the year is that still kind of building through the back half.

Yeah, No. We said that you know Q1 should Martha locally for inventory for the year that $4 $6 billion can we expect to grow inventory through the balance of the year.

Okay, great. Thank you.

Our next question comes from Nicole Ronan with Wedbush.

Hey, guys.

Personal follow up on the inventory.

Is there anything to read into.

Commentary about the expectations and.

The housing market and you swung HPA in some transactions and the.

The number of transactions you adhere and one coke.

Okay.

Why you purchase I guess.

Yeah, I mean, a couple of comments I'll make some first of all Q1, and we talked a little bit about the cadence of the quarters already in the prior quarter, but Q1 really for US was the fact that we showed up with a really healthy basis inventory and we met very strong elevated demand for housing we expected to see really high sell through rates for inventory and we did.

But we'd probably somewhere else and even has guided you. In addition, we saw a little bit of pull through demand and we would expect to see some of that we'd size at around $300 million of what we saw in Q1 was a function of people closing homes faster than we otherwise would have expected pulling those homes from what would have fallen into Q2 Q1, so that was a bit of a drive.

As a result, but certainly.

Not a major one.

I think your question also speaks to like what are we what.

What are we getting for the rest of the year with respect to housing.

As we said in our comments we were seeing right now are we still have our managing a gas is an assumption that the housing market will call towards the back half of the year.

It'd be a gradual swelling of HPA volumes.

In light of rising interest rates and the pressures we are seeing an affordability, but.

We also said we expect to grow through that.

We offer shows up with certainty and what we think is increasing value proposition and this kind of market.

Alright, So I guess, what I was trying to get at was.

You tied to go with that view of your transactions with you.

Uhm.

Or if you're buying fewer homes and you might because you think they're I fully understand that and agree with your views on the market overall.

A collapse.

Plenty of fundamental.

Structurally positive things in the market, but you would just.

Taste of your purchases based on on that view and so maybe you should take a little bit of step back you think we're headed in that in that kind of market over the next six months.

No.

Not at all I mean, what we have been doing some platforms, we have an increasing our spreads.

But that hasn't that hasn't inhibited either a conversion or a pace of acquisition growth and.

Can we expect to continue to grow acquisition volumes will be up in Q2, and so long as we can meet our margin targets, we're going to continue to grow our acquisition volumes I think that's a really important takeaway within a rut with increasing spread he at the same time, we have not seen a real market impact of conversion and we've been growing acquisition volume back to this comment that in this environment.

Our value prompts should only increase in times of greater volatility.

Okay.

Sure.

I'd love to add on top of that which is.

Great.

Set a different way the value of delivering to consumers is seeing the value of capturing.

And as we've increased spreads we haven't seen a material impact our conversion, which is an incredible find that again, if we deliver certainties and pushing speed to consumers. They will convert and so we're excited to see that not only have our margins improved.

We've also seen conversion.

Health study through this period, which gives us a lot of confidence that we continue to grow through the back half of this year.

Okay Awesome, that's really helpful and then maybe just.

Any color on the so far notes early but the movement to the Bay area in New York New Jersey.

Anything you are staying in those markets.

Different.

The other is just any kind of science from where I got it.

Happy with the progress of that thank you.

Hey, Andrew that early indications and it's still really early early obviously on the Bay area in New York, New Jersey are strong and in fact, I would extend that statement to all of the markets that will be launched in 2021, where we added twenty-three markets over the course of the year.

Those markets continue to perform in a very predictable way as we execute our playbook against them and we are pleased with New York New Jersey. We're also pleased with the with the twenty-three loss last year.

Great. Thanks.

Our next question comes from Ryan the Kevin Eva Zellman.

Okay. Thank you and congrats on the results and appreciate the the added details on the.

The business the cost structure in the embedded macro views. It's definitely helpful to see you guys lay that lay that out given the answer.

Uncertainty that is out there. So so Eric I wanted to dig into a topic you got into last the last couple of quarters on the the longterm ecosystem being a two sided local marketplace for sellers and buyers and I think it's interesting to think through so on the buy side. It's obviously great to hear that the purchase offers with buyers said and all.

Hi.

But I guess more broadly on this kind of flywheel opportunity with buyers and sellers if we.

If we look at it as the aggregation of local supply is important to aggregating and capturing that high and demand.

Is there is there a threshold of market share at the local level that we should think about as to when you get to a certain level of market share of supply that that by side really starts to.

Flourish or is that still kind of early days to get too much into that.

Hey, Ryan it's it's a valid question the way that I think about it is that if we're able to aggregate.

Supply in our case, it's actually unique supply, it's our inventory, we're going to build a differentiate experience on top of that supply.

And state.

And we're building a that we wanted to get possible there'll be able to buy a home with peace of mind with just your mobile device.

And we're using our inventories to build that experience is the first step in terms of aggregating demand with that unique supply. We are seeing really good progress in signal that we are able to do that when the market tips and maybe to try to define that term where every single buyer and market is looking downloading.

And using our App.

To shop, we're not certain but we do see really good correlation with if we increase supply that we have and build a different experience on top of that supply.

Or actually.

Using open door directly.

Got it that's very helpful Eric and.

One more on the topic of the acquisition underwriting and obviously the spread dynamic.

Kerry really helpful to hear commentary on how how the adoption and conversion has remained strong but I guess, if we do think about a period in the housing market, where some geography is maybe do see price weakness or at least have greater risk of Chris weakness in others.

Should we think about your approach as kind of continuing to bake that risk into underwriting, but still making offers in all locations or is there a scenario, where you have a big enough footprint of 50 markets and maybe the market dictates you leaning into certain geography, as in and pulling back or pausing even in potentially <unk>.

Ask your areas, maybe just comment on that geographic.

Kind of balancing act that that's out there.

Hey, Gary.

One of the beauties of being in now 40 market is we really have a diversified portfolio that we can make tradeoffs again, and we really do manage the business in that way.

We can may train us across markets across some types of economic capital differently, depending on what's going on so we would look to do so if that was the that was paramount.

But I would say today, though is we we are positioned we believe really well for the back half of the year for the reason is that one graduate slowdown we can respond to that too with an increasing scratching proposition for that and three we've operated across all different environments historically jokes into the CHP moderate comfortable the ability to Friday.

Ireland.

Great. Thank you very much.

Ryan to add on top of that just provide some more context there the way we think about it if there's additional volatility obviously are spreads would increase now the the promising signal that we're seeing is that the market also perceives the volatility and we've seen conversion not materially changed as a result.

Would that information and May mean that we can be market share gainers.

All markets, even it spreads fluctuate.

Yes, that's very helpful. Thank you.

We exited market I, just don't I don't see that as a realistic scenario for us and we can price to that.

Right. It makes sense, okay. Thank you very much.

Our next question.

Question comes from David Milanowski with Bank of America.

Hey, Thanks for taking the question, it's Dave on for Kurt I guess, we're curious principally about pricing mechanisms I know it was coming down earlier.

Just wanted I guess to think about for modeling velocity why you might think it's sustainable going for particularly as affordability is decreasing our largest markets like just a quick follow up prices are going up how should we were thinking about.

Modeling interest expense for their thanks.

Hey, there's two parts to that question. One is just how do we respond to changing HPA environment for the balance of the year, if I got that right I'll come back to the interest rate one.

I think it's consistent with the comments, we made earlier about our expectations for housing may perform to be clear that is a very good scenario that housing is going to be stronger for longer just given the fact that structurally new supply out there right now that being said, we're going to prioritize margins in this moment and make sure more uncertain time that we're meeting a margin targets and so we're assuming notes.

Scenario is gradual slowing of HPA grabbed referring the volumes and we feel really good about our ability to respond to that.

So in the second half question, which is around right I guess there is.

As it relates to our P&L I'd say a couple of things.

We are certainly modeling rising rates into our forecast understandably, we expect to alert at the overall impact of Rping now it should be quite manageable.

This is consistent with the comments made last quarter and just to parse it through if you look at our senior loans.

And how we finance our homes today that cautious about 70 basis points on a per home basis, just based on the turns we have and if you extend that look through to the end of the year, we'd expect that to increase on the order of 2100 basis points and that's based on a combination of things certainly the foreign curve is this today and how we.

Assume we're going to mix in different senior facilities over the course of the year.

The date of that increase maybe 30 basis points is pretty modest relative to our overall cost structure.

And perhaps more importantly, it's important to understand that we pass on the full cost of interest to the customer Dnr's brands are objective is we're going to manage to contribution margin after interest to be neutral.

Okay. That's helpful. Thank you.

Our next question comes from Ryan Tomasello with K B W.

Hi, everyone. Thanks for taking the questions.

Just following up on the seller conversion nice to see that still holding and stronger sprite.

Strong feller environment, but curious if you've noticed any initial signs of benefit to conversion rates in many markets that you may already be <unk>.

Starting to call I.

Where do you think that 35% plus conversion could go into more.

Normalize environment and do you have you put any long term internal targets around that metric.

Hey, Ryan it's Eric.

Again like I mentioned.

Quite pleased with some of the early evidence we're seeing that as we have increased spreads obviously, it's reflective.

R and R gross margin contribution margins.

We have not seen a material damage to the conversion rates.

And again, we had a hypothesis going into this.

Back when we founded the company that when there is the most of uncertainty that's what opened doors needed. The most which means that we're creating the most value when there's times of uncertainty.

And subsequently, we can add to capture that value.

That we're creating for consumers.

We don't have.

Viewed today on what that could look like through any softening in the back half of this year, but we're certainly.

Optimistic that our conversion rates will be steady at the very least.

And so as we think about interesting spreads throughout the year.

Thanks, and then.

The geographic expansion that continues.

Can you say what level.

I assume drag that these new markets are actually happy.

[noise] holiday business, maybe in terms of.

The Delta between your most mature markets and you're ramping markets. If that's the way you look at it maybe on a on a contribution profit basis.

Yes.

It's Andrew here the reality is pretty small in terms of the dragon accurate or updated investor presentation, we actually shared some of the cohort profiles of what margin looks like in those markets and they are all positive and they're moving actually profitability, even more quickly than any of our prior cohorts have.

Got it thanks for taking the credit.

Our next question comes from just an agent with Bahrenburg.

Hi, Thanks for taking my questions.

Just wanted to follow up on the.

Entry into the New York, New Jersey, San Francisco markets can you talk about.

Any additional oversight that you guys take into account, giving some of the uniqueness of the houses in those areas. If any and then I followed one after that.

Sure.

I think first of all what I'd call out as our ability to enter.

The San Francisco Bay area in New York, New Jersey is actually a testament to eight plus years of investment in our pricing and investment platforms.

Our ability to underwrite a market is the fundamental gaming item for us to enter a market and that's what we look at and we rigorously rigorously test that before we launch and that actually after we launched our focus is not on growth in those markets are focused shortly after launch is making sure the model.

Performing the way, we expect them and what we've seen so far is but that's what happens and.

We monitor every market launch very very carefully and very closely and it's only once we feel comfortable with.

With the risks were taken on that we actually begin to our prior go to market playbook and ramp right volume in those markets.

Alright that makes sense. Thank you.

And then the vendor management system that you guys called attention to in the letter.

Have you seen any improvement in Canada. The inventory turnover I know you mentioned 92 100 days, but is there reason to believe that that that system can bring those numbers lower and improved significantly.

Or reduce the holding times.

We're relentless in our pursuit of operational excellence and.

The team is hard at work constantly turning over rocks looking for opportunities embedding.

Process improvements into technology into platform. So that we can continue to drive down our cost structure I think one of the things you saw is that over a three year period.

Have you been able to drive 240 basis points of structural margin improvement and a big portion of that is cost and so yes, we do believe.

Continuing to invest in our technology and operations platform I'm, sorry, our transaction and operations platform will continue to yield.

Cost savings.

I appreciate the additional color. Thank you.

As a reminder, if you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone.

Our next question comes from Stevens, you with credit Suisse.

Great. Thank you. So I was wondering if you can give us an update on the uptake rate of some of your <unk> services I think some time ago at least with the title escrow product I mean, there was a high pretty high uptake in those markets, where they were rolled up first so where are the most mature markets now and.

Is there any reason to believe why there should be some sort of structural ceiling.

Below 100%.

Full adoption.

And are those markets that are a bit newer.

In terms of these products.

Being rolled out.

Are you still seeing a supplemental adoption path somebody original slash order one thank you.

Specific to our title business, we continue to see strong attach rates overall, we do see different attach rates market to market as we launch, particularly as we entered newer different states one of the things we're very conscious of.

Particularly early in our markets lifecycle is that we are flexible capacity. We can go up and we can go down as needed.

So we're prioritizing that flexibility in some ways in the early early and markets over at just the absolute highest attached because we actually think that leads to better system level of profitability over time, and so we I would say very very strong attach overall in our title business, we don't think.

It goes to 100% per se, but we we think where it is is a pretty good indicator and we think that we will see that in all of our markets.

Thank you.

That concludes today's question and answer session I'd like to turn the call back to Eric Blue for closing remarks.

Thank you I just want to say that I'm incredibly proud of the Q1 results as Kerry mentioned prompts a entire team for working.

Hours and hours on service, our customers and delighting them.

We are managing our business with a great deal of discipline around our margin the cost structure and more importantly, we believe we're going to be net beneficiaries in market share gainers from any upcoming volatility.

Our future is very bright when we are reshaping the entire real estate marketplace with a far superior digital product and a 35 trillion dollar market.

This concludes today's conference call. Thank you for participating you.

You may now disconnect.

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