Q1 2022 Redfin Corp Earnings Call

May 5, 2022

Good day and welcome to the Redfin Corporation first quarter 2022 earnings call today.

Today's call is being recorded.

At this time I would like to turn the call over to make note of Lee head of Investor Relations. Please go ahead.

Good afternoon, and welcome to Redfin financial results Conference call for the first quarter ended March 31, 2022 Meg.

Meg mentally redfin as head of Investor Relations joining me on the call today is Glenn Kelman, our CEO and Chris Nielsen our CFO .

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.

We use a non-GAAP measure adjusted EBITDA, when presenting our financial results.

Encourage you to review the non-GAAP reconciliation in todays earnings release, which is available on our website at investors Redfin Dot com for a complete understanding of this measure and its purpose all.

All comparisons made in the course of this call are against the same period in the prior year unless otherwise stated 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 I'll turn the call over to Glenn.

Thank you Meg and Howdy everyone.

Redfin performed significantly better in the first quarter than expected overall revenue of $597 million was $37 million above the top of the range. We projected in our last earnings call. Our core business of brokering home sales through our employees and our partner agents generated $177 million in revenue up 5% from the Red Hot.

First quarter of 2021 and $6 million above the top of our range.

Our net loss of $91 million was $24 million better than our most optimistic projections.

And typically has its largest loss of the year in the first quarter as we pay for agents to meet customers, who buy homes in the second and third quarters, we expect our net loss to improve significantly throughout the year gross profit was $73 million up 71% year over year.

After warning investors that we might not grow real estate services revenue in the first quarter of 2022, we gained two basis points a share compared to the first quarter of last year.

Share gains improved from January to February to March with shares reaching a new record of $1 two 5% in March share gains are likely to keep accelerating through 2022 with demand so volatile and now shifting even more rapidly from large coastal cities for the rest of America, we expect those gains to be less predictable.

Quarter to quarter, but to grow at historical rates from year to year.

One reason to believe our share of home sales transactions will keep increasing is that our share of online listing searches has kept increasing.

Year over year gains in average average, let me say that again year over year gains in average monthly visitors accelerated from 1% in the fourth quarter of 2021% to 11% in the first quarter of 2022.

<unk> again grew traffic faster than its two main online rivals Zillow dot com and <unk> Dot com.

Near simultaneous breakthroughs this spring should broaden our reach even more first redfin dot com launched rental search second we hooked up our site to a national listing fee that by year end, we'll let US show substantially every for sale home in America. When today, our coverage is limited to 91% of homes.

Rd massive competitive advantage largely unchecked by competing brokers has widened.

Our engineers aren't just driving demand from redfin dot com to our agents, but also arming those agents with better products to sell the automation to support a 1% listing fee. The machine learning to give homeowners that immediate redfin now offer an on demand tours or buyers to see homes first.

But none of that matters without second to none sales execution, our plan to improve our service is well known to investors, we hired more agents through the winter and limited the number of customers from our site, who each agent could support.

The markets that piloted this approach in 2020, and 2021 delivered better service and gained share faster than their peers. We funded the service improvement by reducing Homebuyers Commission refund keeping margins the same without hurting demand.

Now as the agents hired for a companywide rollout of this initiative sell their first homes, we expect to get that benefit across redfin in 2022.

Share gains will come not only from better sales programs with better salespeople market uncertainty has made agents at other brokers eager to join redfin.

And after two years of scrambling to add more than 1000 agents each year Redfin now has the time and space to invest more in the agents already here.

Managers are training agents in person for the first time in two years, theyre, making better and faster judgments about who will be able to guide our customers to victory in such an uncertain low inventory market.

We expect to execute better in our core business, but it's equally important to discuss how all of our businesses are coming together to drive sales when.

When we last spoke redfin was more pessimistic about the housing market than any of our peers predicting continued rate increases economic pressures in hard times, but.

But we are more optimistic than ever about our strategy, which is to drive customer demand by building redfin Dot com is a complete destination for real estate information and make more money from each customer by becoming a one stop shop for buying or selling a home.

For the first time, we're ready to talk about that strategy as results not just this rationale.

We need to do this because rising rates that put an even higher premium on profits. When redfin is in the midst of a transition to what we believe is a much more valuable company.

At the start of the pandemic about half our agents work in large coastal markets, where home sales are now declining.

In January we abandon a business we built from scratch redfin mortgage in favor of acquiring Bay equity home Loans' revenues from our first acquisition rent path we're declining.

In February we projected our biggest quarterly loss ever.

On March 20, <unk>, we published Redpath rentals on Redfin Dot com immediately generating thousands of inquiries per week for rent past property management customers.

Even prior to this launch Redpath revenues had increased month over month in February then increased again in March.

The number of listing service customers also increased month over month in March.

Redpath Hasnt had simultaneous month over month increases in revenue and customer since 2019.

Even as Redpath decreased first quarter spending on lead generation by 25% year over year rental inquiries for property management customers increased by 6%.

We now expect rent path revenues to increase quarter to quarter, we'll keep investing in rent pass efforts to get more property management customers listing their properties on our network, but only as rent path revenues keep strengthening.

Brent path will be an important contributor in its own right. The profit we can generate from online home shoppers.

But the strategic goal is bigger to challenge the largest real estate sites with traffic of the top 10 U S sites only sites owned by Red spin and Zillow have our own large scale databases of rental listings and with the arrival of a third competitor in Costar Theres now a broad industry consensus that standalone rental sites or Standalone home bank side.

<unk> will struggle to compete rent.

Brent path as how redfin takes our shot not just an incremental growth but to become the number one or number two destination for every search on every listing for rent or for sale in the U S.

The value of more online customers will compound as we make more money from each one we've talked for years about the one stop shop theory, but here again, we have the first results redfin.

Redfin has owned bay equity for a month and already on five different days the rate at which pay equity has locked the interest rate on loans for redfin customers has eclipsed redfin mortgage's five year high.

Based on this data, we expect 11% of the Redfin homebuyers, who closed in June we'll borrow money from a redfin lender.

For all of 2021 that number was 6%.

This success can build on itself as redfin agents, who are cranky about redfin mortgage have raved about bay equity service.

The differences in underwriting efficiency have been equally stark.

Whereas redfin mortgage loss a couple of thousand dollars in gross profit per loan in 2021 pay equity earned thousands even as lending margins compressed in 2022, we expect bay equities gross profits through homebuyer to be similar to our brokerages.

As rapidly rising rates eviscerate other lenders earnings our mortgage business will go from a major source of bread since 2021 losses to a major source of 2020 to profit.

These investments and our broader product portfolio are generating more gross profit not just from homebuyers, but from home sellers to.

Even as the housing market turn redfin now generated almost as much gross profit in the first quarter as our brokerage from the first quarter of 2021 to the first quarter of 2022 gross margins improved from one 7% to five 5%.

This validates our thesis that I buying will be most successful within a brokerage first because were already equipped to sell the homes, we buy but second because we can promote our agents to customers who asked about a cash offer but end up hiring in Asia.

Over the last year the rate at which we schedule listing consultations with homeowners to reject our cash offers is improved 17%.

Turning I buyer inquiries into consultations with the redfin agent is crucial because our goal isn't to own more homes than pure play I buyers, we want to sell more homes owning properties only as necessary to facilitate a sale.

By making money from the service we offer customers not from big bets on home price appreciation, we hope to earn investors' trust that redfin now can become a steady source of net income.

Heading into a more volatile phase of the housing market, we have curtailed volume, even though market wide inventory is likely to stay low and approach that favors durability of gross profits over riskier gains on sale.

This discipline is part of a larger change at redfin that is the final element of our strategy.

We want to drive demand by building, a larger online presence and improve monetization through a broader product portfolio, but none of that matters without an ironclad commitments of major net income improvements not in the distant future, but now this means that we'll run redfin out of the cash Register with gross profit is growing about twice as fast as overhead expenses, so that more than.

Half our gross profit gains for 2023, followed the bottom line.

Since those gains are unpredictable, we are making changes in the current quarter. So even if growth is low net income can still improve.

Future headquarters in vessels will follow not lead gross profit gains rats, and we will keep investing in advertising and our online audience, but given the progress we've made over more than a decade of building brokerage tools, we can support new products for our agents to sell mostly with the staff we already have.

We're now assigning the cost of employees and programs to businesses like real estate services mortgage title rentals in properties. So we can measure not only each businesses gross profit, but net income we plan to share that segmentation with you in our next call. We expect this is show that real estate services subsidized all of our other businesses.

In 2021, but the mortgage and property businesses will be profitable or roughly breakeven in 2022.

A company that was planned to make money in the distant future will generate cash from operations. This year and net income in 2024.

Okay.

Redfin strategy and competitive position have gotten better over the past year, but the housing market has gotten worse.

We were fashionable and now were unfashionable as we reminded you on the day of our initial public offering were used to that in a way that probably none of our competitors are our exec team came together in the depths of the great financial crisis and built our business on the certainty that another downturn could come.

When talking about our business has ups and downs, it's common to say the endeavors, a marathon not a spread.

But most marathoners are trying to complete the race not compete in it.

And your first marathons, you dread the point at which the suffering will become intense but as you mature as a runner you realize that everyone suffers and the point of maximum suffering is when those best prepared for it we'll win.

Well, you want sort of a suffering time becomes winning time, but only if you seize the moment to leave one version of yourself behind and run towards what you want to be.

Redfin has arrived at this moment in our race at a time when shareholders have suffered grievous losses. It may seem crazy to say that now is redfin is winning time, but it is.

What we're running two is a bigger website more revenue per customer and significant profits, we're running not because of how good it will feel when we stopped but because we were born to run and we plan to win and take.

Take it away Chris.

Thanks, Glenn we posted solid results for the first quarter revenue and net income both came in better than the high end of our guidance top of funnel demand remained strong although getting customers through to a close transaction remains a challenge and rising mortgage interest rates have begun to impact affordability.

Our agents are still going strong, but we are carefully monitoring the macro backdrop.

First quarter revenue was $597 million up 123% from a year ago.

Our rentals business, which we acquired subsequent to the first quarter of the prior year generated $38 million of revenue and contributed approximately 14 percentage points total revenue growth.

State services revenue, which includes our brokerage and partner businesses generated $177 million in revenue up 5% year over year.

Brokerage revenue or revenue from home sales closed by our own agents was up 7% on a 5% increase in brokerage transactions.

Revenue from our partners was down 21% on a 13% decrease in transactions and mix shift to lower value houses the decline in partner transactions as a result of normalizing next between our partner and 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 $380 million in revenue, which was up from $93 million in revenue in the prior year.

Redfin now transactions grew 310%.

In anticipation of the scaling our mortgage business with the acquisition of Bay equity, which closed on April one.

We have begun reporting this business as a separate segment.

Our mortgage segment generated $3 million of revenue in the first quarter, a decrease of 49% year over year.

Finally, our other segment, which now includes title and other services contributed revenue of $4 million, an increase of 20% year over year.

Total gross profit was $73 million up 71% year over year.

Real estate services gross margin was 13, 4% down 10, six percentage points year over year. This was driven by a 10 five percentage point increase in personnel costs and transaction bonuses. This decline was anticipated and was due to a steeper ramp in agent hiring against lower seasonal volumes.

Property is gross margin was up 380 basis points year over year in the first quarter and this marked our fifth consecutive quarter of positive gross profit for the segment.

The improvement was primarily attributable to the 320 basis point decrease in personnel costs as the business scaled.

And an 80 basis point decrease in home selling expense. This improvement was offset by a 30 basis point increase in purchase maintenance and capital improvement costs.

Rental gross margin was 81, 1% mortgage gross margin was negative 89, 1% for the first quarter down from a negative two 8% a year ago. Other segment gross margin was negative six 9% down from positive <unk> 14, 5% a year ago.

Operating expenses were up $88 million year over year and represented 26% of revenue down from 29% of revenue one year ago.

$47 9 million of the increase was attributable to the acquisition of rent now.

Technology and development expenses increased by $22.0 million compared with the same period in 2021.

The increase was primarily attributable to a $12 8 million increase from rent path.

The remaining increase was primarily attributable to a $5 $9 million increase in personnel costs due to increased head count.

Total technology and development expenses represented 8% of revenue down from 10% one year ago.

Marketing expenses increased by $31 5 million as compared with the same period in 2021 the.

The increase was primarily attributable to an 11.0 million increase from rent path. The remainder was primarily attributable to a $16 two $2 million increase in marketing media as we were not running any mass media campaigns in the prior year, but we were in the first quarter of 2022 total.

Total marketing expenses represented 7% of revenue up from 4% one year ago Jen.

General and administrative expenses increased by $21 $6 million compared.

Compared with the same period in 2021.

The increase was primarily attributable to a $22 $5 million increase from Renata.

Excluding these expenses from rent costs general and administrative expenses decreased by 1.0 million.

Total G&A expenses represented 10% of revenue down from 14% one year ago.

Restructuring expenses included in total operating expenses were $5 $7 million and there are no such expenses in the period in 2021.

These expenses were attributable to $4 2 million in severance and other costs associated with our mortgage restructuring and $1 5 million in severance cost associated with our rentals restructuring.

Net loss of $91 million beat the better end of our $120 million to $115 million guidance range.

Diluted loss per share attributable to common stock was 86 as compared with diluted loss per share attributable to common stock of <unk> 37 per.

Per share one year ago.

As a supplement to our GAAP based financial reporting we are now also providing adjusted EBITDA, which is a non-GAAP financial measure. We believe adjusted EBITDA is useful for investors because it enhances period to period comparability of our financial statements on a consistent basis provides investors with useful insight into the underlying <unk>.

<unk> of the business.

Please see our press release or the MD&A section of our 10-Q for more information as well as a reconciliation of adjusted EBITDA and net loss.

We're also providing nine quarters of historical reconciliation calculations in our quarterly earnings slides, which are available on our Investor Relations website.

Now turning to our financial expectations for the second quarter of 2022.

Consolidated revenue is expected to be between $613 million and $615 million.

Representing year over year growth between 30% and 38%.

We expect our real estate services segment to account for $249 million to $256 million of that revenue in the property segment to be between $256 million and $281 million rent.

Rentals revenue is expected to be $38 million and rentals contribution to net loss is expected to be approximately $21 million.

Mortgage revenue is expected to be between $68 million and $73 million.

Reflecting a full quarter of bay equity ownership and the contribution to net income is expected to be approximately $4 million.

We're still determining the proper split between cost of revenue and operating expense, but our current expectation is that for approximately $47 million for mortgage cost of revenue and $22 million of operating expenses in the second quarter.

Going forward, we expect mortgage revenues will be impacted by industry wide volume as well as our ability to drive attach rates with our brokerage business, but we generally expect the business to follow seasonal patterns in line with our brokerage business.

Turning back to consolidated guidance for the second quarter. Our consolidated net loss is expected to be between $72 million and $60 million compared to a total net loss of $28 million in the second quarter of 2021.

We expect real estate services gross margin to decrease in the second quarter as compared with the same period in 2021.

This compression is primarily due to the changes, we're making that lower agent loads and adjust compensation as described in our November earnings call on a consolidated basis. This guidance includes approximately $61 million and total company marketing expense $21 million of stock based compensation $17 million of depreciation.

Amortization of $4 million of interest expense and $4 million of restructuring expenses in.

In addition, we expect to pay a quarterly dividend of 30640 shares of common stock to our preferred stock holder.

This 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.

Yeah.

Ladies and gentlemen, if you would like to ask a question. Please signal by pressing star one on your telephone keypad.

Please ensure that the mute function of your telephone switched off to allow your signal to reach our equipment again. It is star one to ask a question.

And the first question today comes from Mark Mahaney of ISI.

Okay.

Mr. Mahaney your line is open.

Sorry about that I got two questions, but first Glenn you really should get a music soundtrack to back you up when you. When you go through your prepared remarks, you've got so much enthusiasm that's actually wonderful.

I Love the idea of a music soundtrack next quarter, let's guide to that.

You could do it is you are cutting over to Chris and then you just tone it down.

The.

Market share increase of two bps year over year.

That sounds really low to me, but it was that a comps issue and.

And I know you talked about how it was accelerating as you left just talk through that I assume that there is nothing unusual in that but that number just seemed low and then spend a little time, please talking about the rental opportunity and and why you think redfin is well positioned for that thanks a lot.

Sure well first of all on share that is low compared to our traditional rate of 10 to 15 basis points per quarter or per year excuse me regain that year over year every quarter.

Is that the most confusing statements I have ever made our year over year gain is usually around 10% to 14 basis points, maybe 10% to 15 and this time it was too.

But we expect we expect it to accelerate as you noted through the year. There are two reasons for it one is that we're just ramping a large number of new agents and the second is the demand is shifting from coastal markets, where you've traditionally had more share more presence.

To the south in the Sunbelt.

So we think that we will gain share as these agents season, and that's especially true in the places where we have hired the most agents like the southeast.

As far as rentals.

The rationale for rentals is pretty simple we can't have people build a relationship with other web sites through the first 30 years of their life, then start searching redfin dot com when it's time to buy a home.

So the most reliable way to increase traffic has been to add rental listings.

We are confident that we're going to keep increasing inventory and that revenues are also going to increase that was not the case through 2021, but it now seems to be headed in the right direction and the fact that that happened even before we added redfin dot com as a distribution source for this rental inventory is even more encouraging because the immediate <unk>.

The action when we did launch rentals on redfin Dot com was to get thousands of inquiries every week to the property management customers rent Pathet recruited so I think the synergies are pretty straightforward that we have an audience that wants to see more inventory and rent path AD inventory that wanted to reach a broader audience.

Okay. Thank you Glenn.

And the next question comes from.

Al <unk> of Wedbush.

Hey, good afternoon guys.

So first question I guess.

Surprise.

By your tone I mean.

Maybe expecting a little bit more.

Cautiousness given.

What we've seen.

And the macro and rates and so maybe you can just expand on your view a little bit last quarter you guys were.

More.

Inventory levels, what are you seeing there and then your thoughts on on affordability.

And how that might impact the market.

As we go through the rest of the year so start there.

Well I think we've largely been vindicated in our view of the housing market, we were probably more dour on it than anyone else and that has come to pass we are still very cautious about the housing market overall, but we think we're going to take significant share as we progress through 2022, and we feel the same way.

About mortgage attach rates and redfin now sales. So that's more of a reflection of our business and our ability to progress through headwinds than anything else. What we're seeing consumers do in response to interest rate increases is sometimes stepping back there's less homebuyer demand than there was there were still inventory constrained.

It often is not they're shifting their search so we now have people who are looking at three or four different markets. Each at a different price tiers. So we used to think of those people as investors if someone's looking at both Raleigh, North Carolina, and Shreveport, Louisiana and in Tampa Bay, Florida, clearly that must be an investor, but really it's a regular consumer.

Who is completely agnostic about location as interest rates go from 3% to 4% to 5% and beyond instead of being able to afford less house. They go to a place where home prices are lower generally so that has provided significant liquidity in the market. It used to be that when housing became less affordable.

Someone in San Francisco would look further afield by commuting 60 minutes 90 minutes and at some point. They were just unwilling to take the dry but now there is no commute. So I think that provides some buffer in the market, but there is no question that there are headwinds and there is no question that the housing market is going through some.

Correction, it's just that we think inventory.

Inventory will still be the main issue, except in a handful of markets and just based on our own data about tours and offers and mortgages and everything else.

We can beat the rap and keep taking share.

Okay. So.

During the quarter you guys put out a bunch of blogs E press releases about.

And signals.

Just kind of slowing of weakening, but then your traffic actually accelerated.

It looks to be stepping up can you talk about.

And maybe a little bit more detail.

Around the traffic.

Presumably the rentals rental sit in April so it was really an impact yet.

What are you seeing on the traffic side.

That's putting you in a better place.

On the traffic side. Some of this is just an improvement in rank against our competitors. So the same number of people might be searching for real estate, but redfin is getting more of them. It is worth, noting however that traffic decelerated through the quarter. So even though we went from 1% in Q4.

4% to 11% in Q1.

I Shouldnt quoted from memory, but it kind of went down from 11 to 10 to nine or something like that.

Through the quarter.

So there will be a slowing of traffic for redfin dot com and for the industry. Overall, we just think one reason, we'll take brokerage share is because we've been taking search share. So we've been getting more than our fair share of demand and we just needed agents in the right places within North America, just season and get ready to handle that level of demand.

So.

The market may be cooling, but we hope to take more share.

Okay.

Just real quick then.

My follow up on that.

Yeah.

The ability of some sort of central.

Where we are now we are somewhere maybe close to it if rates.

<unk> keep going up from where we are right now thanks.

Could you repeat the question.

Did you hear the question.

Sure just on a forward looking basis.

If you kind of.

If rates go up.

That shot up a lot if they go up a little bit more from here, if HBA goes up a little bit more from here.

Okay.

Where we are.

Bubble territory and become kind of potential type of prices for the housing market are we close to that or do you not think that that's the case because of course mobility. Thank you.

I do think that mobility buffers, some that wynn homes become too expensive in Austin, Texas people look in San Antonio and when San Antonio becomes too expensive. They look at El Paso that is a legitimate phenomenon that we're seeing where.

The range of places that people are looking has broadened significantly the other factor you should consider is how much rents are going up so normally if the spread between buying a house and renting one gets too large people just decide you know what I'm going to rent for one more year, but.

With rents going up to people feel the pressure behind them to find a place to live even if it's not in the city. They originally had in mind. So I'm not here hyping the market I've never done that I never will we are worried about the overall economy. We are worried about the housing market. We think there will be a significant step.

Back.

The number of homes sold in the United States in 2022 compared to 2021.

And we've been careful about a redfin now purchases because we know that it's a fool's gambit trying to figure out where prices are going to land. This summer, especially because the home buying season is probably going to be short.

But if you're asking about what's happening now we are still inventory constrained theres only a few markets like Seattle Denver Takoma.

Parts of California.

Where homes are sitting on the market and there are only sitting just a little bit.

The final thought is just that when.

When people talk about a bubble they talk about speculation where youre not buying the asset because you actually want it.

But this is not a bubble and that strict sense because the need for housing is profound emotional and deep people want to live in their own home.

These are not just investors buying a house and so I don't think people are over their skis on their mortgage I don't think we're going to see a major increase in foreclosures that means that inventory is probably going to stay low for structural reasons.

And youre not going to see a massive collapse in prices there is always that possibility, but it would be very surprising to me.

Alright, Thanks, Glenn I appreciate all the color and commentary.

Okay.

Add to that.

Go ahead.

The next question comes from an avid fan of truth.

Hey, guys. This is Robert Zeller on from Nevada, Thanks for taking the questions.

And then in your prepared remarks, I think you spoke about.

Youre going to be integrating a new listing fee to show most of the homes available for sale in the U S versus you guys just being able to show 91% today, if I heard that correctly.

Can you just expand on that a little bit I mean can you guys turn this on like.

Like immediately and do other brokerages have access to that as well.

And then how do you how does the shift from coastal markets to maybe two more.

Markets in the south in the Sunbelt region's effect.

<unk> growth and margin implications for the rental and <unk> units do you guys kind of see this as Cvs headwinds or tailwind for rented thank you.

Got it well I'll talk about the first question and Chris I'd Welcome your comments on the second one.

It is a national feed with prior to this we had gone from one city to another each city has a cooperative of real estate agents, who decided to share listings. It's called the multiple listing service each has its own rules about what you can publish and we would integrate with that multiple listing services programming interface.

Now with this national feed we still have to observe different local rules about what can and can't be displayed but this provider of listings.

<unk> some of the technical integration. So we expect it will take us still the balance of the year to get the last 9%, but that was a very long tail. It first you start integrating with the Washington D. C. Multiple listing service, which is massive but eventually youre going to Wyoming and its onesie twosies and this makes that process much easier and.

If we've learned anything the most reliable lever for increasing traffic is adding inventory there are two ways to add inventory by adding a new type of inventory such as rental listings or by expanding to new places, but when you do that you get a new entry in the index, you're competing for listings, where before you had <unk>.

And if I were running another website and that wasn't available to me, where we were trying to accelerate.

Traffic without being able to expand anywhere new or add any new type of inventory that would be hard. This is a major lever for growth and so we think that part of it is just very direct that adding listings at it adds traffic and the other part.

Is more over the top that we just haven't been completely national brand and there is a premium to being a national brand wherever you go you can look on redfin dot com and the listing will be there that hasnt been true and we need to make a trip.

And I think there's a real benefit to that right now per your question about a shift in customer interest from our coastal markets to broader places, which is were just really glad to have this inventory in smaller markets where people have been looking we will be looking for homes, maybe even more so than they have in the past.

That shift just as it relates to the business is probably most impactful in terms of where we're hiring agents and where we will be hiring agents and that's just that.

That's where the biggest opportunities are probably means we will have more hiring in what have been smaller markets for us in more central markets in the south as opposed to these larger markets. There is not much of an impact here, though as it relates to our redfin now business.

That business is nationwide spread out and there is not a meaningful difference in terms of how we would think about the margins.

Location by location that is more related to.

Our execution in those local markets as opposed to something specific on market conditions, and Thats something thats changed.

One concern I had about redfin, five or 10 years ago. It works in San Francisco, but how are we going to make it work in San Antonio, Texas with home prices are so much lower.

And now mobility has partially solve that problem equalizing prices across the United States to a degree.

But we've also just figure it out.

<unk> staffing models for those markets, our close rates are higher in these smaller markets than they are in the major coastal markets. So even though it's still a lower priced home.

The margins are more similar than you'd expect.

Okay, great. Thank you.

The next question comes from John Campbell of Stephens, Inc.

Hey, guys good afternoon.

The lead agent Count maybe this is for Chris but on our lead agent Count I don't think a bit ahead of us.

What we have modeled the real estate services or the real estate revenue guidance was a little bit below us and I am guessing based on Glen's commentary I think you guys, probably factoring in a little bit more of a negative housing outlook. So I'm just hoping you could maybe unpack that maybe start off with how youre thinking about transactions per agent and then maybe also just high level thoughts on.

How the real estate Rev per transaction is going to grow.

Yeah, so yes.

We certainly hired into the year with an expectation of how the market was going to play out and pro glad commentary with mortgage interest rates.

That that has had any impact on the guidance that we provided in the second quarter of that.

You just can't plow through as much uncertainty as to some potential homebuyers might have at this point in time and so really that's the combination I think that I would call out there Glenn is there anything you'd add Brian no.

Okay, and then on the on the lawsuit settlement I know you guys really can't get into that much but I felt like that was a kind of unfair development for you guys. I mean your model is basically designed to only serve a certain price points with your lead agents and there is nothing else to read into that I think we all get that I guess, the regulators didn't but coming away from all that Glen did you foresee any changes in how the business.

Just in regards to maybe how your direct customers between the core brokerage and partner channel.

Well first of all the regulators didn't have an opinion on it it was settled before.

They reached a verdict.

We feel that it's very clear across a free market prices, the only fair way to decide which customers you can in cancer, where someone walks into a grocery store with 89. They can buy a can of beans, and if they don't have the 89. They can't it's nothing to do with the color of the shirt or the color of their skin.

We settled the case for less than it would have cost us to litigate. It if I sound pugnacious about it I am I care very much about the mission of this company part of that mission is to make housing more fair. We have always been committed to that and we always will be now having said that I do not think this is going to change the economics of the business.

Much we did agree that in certain neighborhoods, we would sell homes at a loss we have always done that as part of our mission, we will do it a little bit more.

It's a good thing to suck it up for a more just society, but we just had to be careful about how much we suck it up because we're also trying to make money.

Thanks, guys. Thanks, Scott.

As a reminder, if you'd like to ask a question. Please signal by pressing star one.

Our next question comes from Tom Champion of Piper Sandler.

Hi, Good afternoon, guys. Thanks for taking the questions maybe.

Maybe dovetailing with.

The prior question.

Can you talk a little bit about.

Okay.

Agent compensation and how much is his salary based and fixed relative to.

Transaction based and success based just in light of the kind.

Kind of.

Agency and greater priority around.

Profits in.

The size of the agent count.

That it's gotten too.

With the market at this point and then.

Okay.

I'm curious if you could just share any any thoughts about.

What John particular, he has been doing at run path maybe.

The changes that he has instilled in the business and.

And any additional expectations for for.

What we might see out of the rental side of the business going forward. Thanks.

Sure. So the first question about agent compensation, maybe 20% of the agents' compensation is salary and the rest is upside and that provides ample opportunity for the agents to earn hundreds of thousands of dollars a year some of our top agents earned $7 $800000 a year. So we.

Feel like they have every incentive to go out and get it and right now other agents are very anxious to work for US. We have had no problem recruiting top talent that was a real issue last year and we were straight up with you about it but it sure isn't now.

So we expect our agents to be absolutely hungry for the business and to do whatever it takes to put the customer first and get the deal done.

As for John Ziegler and his plan of attack, it's really had two pronged.

One is to get sales going again.

And it took them a few months to do that but that's pretty darn fast. He started in August or September and here. We are February and March were getting month over month increases for the first time in three years.

That makes every other decision easier but at the same time. He has just been really aggressive about.

Understanding where we allocate our resources. So there have been some restructuring costs that you see some of those are related to rent path. Some of the restructuring was because we bought bay equity.

Key has wasted no time whatsoever is a competitive monster and he is someone we know.

We'll just keep driving sales.

Thank you.

Yeah.

And by the way that's important just to add some color to that because.

Building, an enterprise sales force isn't something that many people here at redfin Knowhow to do we are a consumer company.

Rent path and just a different way is running a two sided marketplace, where not only do they have to talk to.

Consumers looking for rentals, but they have to talk to businesses running apartment buildings. So it's a really valuable skill.

There are no further questions at this time.

Thanks, Kevin We can go ahead and wrap up the call now.

Thanks, everybody see you next quarter.

Sure.

Ladies and gentlemen that concludes today's conference call. We thank you for your participation you may now disconnect.

Yes.

[music].

Yes.

[music].

Good day and welcome to the Redfin Corporation first quarter 2022 earnings call.

This call is being recorded.

At this time I would like to turn the call over to Mike Nally head of Investor Relations. Please go ahead.

Good afternoon, and welcome to the Redfin financial results Conference call for the first quarter ended March 31 2022.

Meg mentally redfin as head of Investor Relations joining me on the call today is Glenn Kelman, our CEO and Chris Nielsen our CFO .

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 content 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.

We use a non-GAAP measure adjusted EBITDA, when presenting our financial results.

Encourage you to review the non-GAAP reconciliation in todays earnings release, which is available on our website at investors don't Redfin Dot com for a complete understanding of this measure and its purpose all.

Thank you Meg and Howdy everyone.

First quarter of 2021 and $6 million above the top of our range.

Our net loss of $91 million was $24 million better than our most optimistic projections.

After warning investors that we might not grow real estate services revenue in the first quarter of 2022, we gained two basis points a share compared to the first quarter of last year.

Quarter to quarter, but to grow at historical rates from year to year.

One reason to believe our share of home sales transactions will keep increasing is that our share of online listing searches has kept increasing.

Year over year gains in average average, let me say that again year over year gains in average monthly visitors accelerated from 1% in the fourth quarter of 2021% to 11% in the first quarter of 2022.

<unk> again grew traffic faster than its two main the online rivals Zillow dot com and realtor Dot com.

Rd massive competitive advantage largely unchecked by competing brokers has widened.

Our engineers arent, just driving demand from redfin dot com to our agents, but also arming those agents with better products to sell the automation to support a 1% listing fee the machine learning to give homeowners and immediate redfin now offer an on demand towards or buyers to see homes first.

Now as the agents hired for a companywide rollout of this initiative sell their first homes, we expect to get that benefit across redfin in 2022.

Share gains will come not only from better sales programs that better salespeople market uncertainty has made agents at other brokers eager to join redfin.

And after two years of scrambling to add more than 1000 agents each year Redfin now has the time and space to invest more in the agents already here.

Managers are training agents in person for the first time in two years, then making better and faster judgments about who will be able to guide our customers to victory in such an uncertain low inventory market.

We expect to execute better in our core business, but it's equally important to discuss how all our businesses are coming together to drive sales when.

When we last spoke redfin was more pessimistic about the housing market than any of our peers predicting continued rate increases economic pressures and hard times, but.

But we are more optimistic than ever about our strategy, which is to drive customer demand by building redfin dot com into a complete destination for real estate information and to make more money from each customer by becoming a one stop shop for buying or selling a home.

For the first time, we're ready to talk about that strategies results not just this rationale.

We need to do this because rising rates that put an even higher premium on profits. When redfin is in the midst of a transition to what we believe is a much more valuable company.

At the start of the pandemic about half our agents work in large coastal markets, where home sales are now declining in January we abandon a business, we built from scratch redfin mortgage and favor requiring bay equity home Loans' revenues from our first acquisition rent path were declining and.

In February we projected our biggest quarterly loss ever.

On March 20, <unk>, we published Redpath rentals on Redfin Dot com immediately generating thousands of inquiries per week for rent past property management customers.

Even prior to this launch rent path revenues had increased month over month in February then increased again in March.

The number of listing service customers also increased month over month in March.

Redpath Hasnt had simultaneous month over month increases in revenue and customer since 2019.

Even as Redpath decreased first quarter spending on lead generation by 25% year over year rental inquiries for property management customers increased by 6%.

We now expect redpath revenues to increase quarter to quarter, we'll keep investing in rent past efforts to get more property management customers listing their properties on our network, but only as rent path revenues keep strengthening.

Brent path will be an important contributor in its own right. The profits we can generate from online home shoppers.

But the strategic goal is bigger to challenge the largest real estate sites with traffic of the top 10 U S sites only sites owned by Redfin and Zillow have our own large scale databases of rental listings and with the arrival of a third competitor in Costar Theres now a broad industry consensus that standalone rental sites or Standalone home bank side.

<unk> will struggle to compete rent.

Brent path as how redfin takes our shot not just an incremental growth but to become the number one or number two destination for every search on every listing for renner for sale in the U S.

The value of more online customers will compound as we make more money from each one we've talked for years about the one stop shop theory, but here again, we have the first results Redfin has owned pay equity for a month and already on five different dates the rate at which bay equity has locked the interest rate on loans for redfin customers has eclipsed red.

Mortgages five year high.

Based on this data, we expect 11% of the Redfin homebuyers, who closed in June we'll borrow money from a redfin lender.

For all of 2021 that number was 6%.

This success can build on itself as redfin agents, who are cranky about redfin mortgage have raved about bay equity service.

The differences in underwriting efficiency have been equally stark.

As rapidly rising rates eviscerate other lenders earnings our mortgage business will go from a major source of <unk> 2021 losses to a major source of 2020 to profit.

These investments and our broader product portfolio are generating more gross profit not just from homebuyers, but from home sellers to.

This validates our thesis that <unk> will be most successful within a brokerage first because were already equipped to sell the homes, we buy but second because we can promote our agents to customers who asked about a cash offer but end up hiring in Asia.

Over the last year the rate at which we schedule listing consultations with homeowners to reject our cash offers is improved 17%.

By making money from the service we offer customers not from big bets on home price appreciation, we hope to earn investors' trust that redfin now can become a steady source of net income.

This discipline is part of a larger change at redfin that is the final element of our strategy.

We want to drive demand by building, a larger online presence and improve monetization through a broader product portfolio, but none of that matters without an ironclad commitment to major net income improvements not in the distant future, but now this means that we'll run redfin out of the cash Register with gross profit is growing about twice as fast as overhead expenses, so that more than.

Half our gross profit gains for 2023, followed the bottom line.

Since those gains are unpredictable, we are making changes in the current quarter. So even if growth is low net income can still improve.

Future headquarters investments will follow not lead gross profit gains rats, and we'll keep investing in advertising and our online audience, but given the progress we've made over more than a decade of building brokerage tools, we can support new products to our agents to sell mostly with the staff we already have.

We're now assigning the cost of employees and programs to businesses like real estate services mortgage title rentals in properties. So we can measure not only each business's gross profits, but net income we plan to share that segmentation with you in our next call. We expect this is show that real estate services subsidized all of our other businesses.

In 2021, but the mortgage and property businesses will be profitable or roughly breakeven in 2022.

A company that was planned to make money in the distant future will generate cash from operations. This year and net income in 2024.

Okay.

Redfin strategy and competitive position have gotten better over the past year, but the housing market has gotten worse.

We were fashionable and now we are unfashionable as we reminded you on the day of our initial public offering were used to that in a way that probably none of our competitors are our exec team came together in the depths of the great financial crisis and built our business on the certainty that another downturn could come.

When talking about our business has ups and downs, it's common to say the endeavors, a marathon not a spreads.

But most marathoners are trying to complete the race not compete in it.

And your first marathon Dread the point at which the suffering will become intense but as you mature as a runner you realize that everyone suffers and the point of maximum suffering is when those best prepared for it we'll win.

What you want sort of a suffering time becomes winning time, but only if you seize the moment to leave one version of yourself behind and run toward what you want to be.

Redfin has arrived at this moment in our race at a time when shareholders have suffered grievous losses. It may seem crazy to say that now is red fence waiting time, but it is.

What we're running two is a bigger website more revenue per customer and significant profits, we're running not because of how good it'll feel when we stopped but because we were born to run and we plan to win and take.

Take it away Chris.

Thanks, Glenn we posted solid results for the first quarter revenue and net income both came in better than the high end of our guidance top of funnel demand remains strong although getting customers through to a close transaction remains a challenge and rising mortgage interest rates have begun to impact affordability.

Our agents are still going strong, but we're carefully monitoring the macro backdrop.

First quarter revenue was $597 million up 123% from a year ago.

Our rentals business, which we acquired subsequent to the first quarter of the prior year generated $38 million of revenue and contributed approximately 14 percentage points total revenue growth.

Real estate services revenue, which includes our brokerage and partner businesses generated $177 million in revenue up 5% year over year.

Brokerage revenue or revenue from home sales closed by our own agents was up 7% on a 5% increase in brokerage transactions revs.

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 $380 million in revenue, which was up from $93 million in revenue in the prior year.

Redfin now transactions grew 310%.

In anticipation of scaling our mortgage business with the acquisition of Bay equity, which closed on April one.

We have begun reporting this business as a separate segment.

Our mortgage segment generated $3 million of revenue in the first quarter, a decrease of 49% year over year.

Finally, our other segment, which now includes title and other services contributed revenue of $4 million, an increase of 20% year over year.

Total gross profit was $73 million up 71% year over year.

Properties gross margin was up 380 basis points year over year in the first quarter and this marked our fifth consecutive quarter of positive gross profit for the segment.

The improvement was primarily attributable to a 320 basis point decrease in personnel costs as the business scaled and an 80 basis point decrease in home selling expense. This improvement was offset by a 30 basis point increase in purchase maintenance and capital improvement costs.

Rental gross margin was 81, 1% mortgage gross margin was negative 89, 1% for the first quarter down from a negative two 8% a year ago.

Other segment gross margin was negative six 9% down from positive 14, 5% a year ago.

Operating expenses were up $88 million year over year and represented 26% of revenue down from 29% of revenue one year ago.

$47 9 million of the increase was attributable to the acquisition of retinal <unk>.

Technology and development expenses increased by $22.0 million compared with the same period in 2021.

The increase was primarily attributable to a $12 8 million increase from rent path.

The remaining increase was primarily attributable to a $5 $9 million increase in personnel costs due to increased head count.

Total technology and development expenses represented 8% of revenue down from 10% one year ago.

Marketing expenses increased by $31 5 million as compared with the same period in 2021 the.

Total marketing expenses represented 7% of revenue up from 4% one year ago.

General and administrative expenses increased by $21 6 million compared with the same period in 2021.

The increase was primarily attributable to a $22 $5 million increase from Rentech.

Excluding these expenses from Revpar general and administrative expenses decreased by 110 million.

Total G&A expenses represented 10% of revenue down from 14% one year ago.

Restructuring expenses included in total operating expenses were $5 $7 million and there are no such expenses in the period in 2021.

These expenses were attributable to $4 2 million in severance and other costs associated with our mortgage restructuring and $1 $5 million in severance cost associated with our rentals restructuring.

Net loss of $91 million beat the better end of our $122 million to $115 million guidance range.

Diluted loss per share attributable to common stock was 86 as compared with diluted loss per share attributable to common stock of $37.

Per share one year ago.

As a supplement to our GAAP based financial reporting we are now also providing adjusted EBITDA, which is a non-GAAP financial measure. We believe adjusted EBITDA is useful for investors because it enhances period to period comparability of our financial statements on a consistent basis and provides investors with useful insight into the underlying <unk>.

<unk> of the business. Please see our press release or the MD&A section of our 10-Q for more information as well as a reconciliation of adjusted EBITDA and net loss.

We're also providing nine quarters of historical reconciliation calculations in our quarterly earnings slides.

It's you are available on our Investor Relations website.

Now turning to our financial expectations for the second quarter of 2022.

Consolidated revenue is expected to be between $613 million $615 million.

Representing year over year growth between 30% and 38%.

We expect our real estate services segment to account for $249 million to $256 million of that revenue in the property segment to be between $256 million and $281 million rent.

Rentals revenue is expected to be $38 million and Reynolds contribution to net loss is expected to be approximately $21 million.

Mortgage revenue is expected to be between $68 million and $73 million.

Reflecting a full quarter of bay equity ownership and the contribution to net income is expected to be approximately $4 million.

Turning back to consolidated guidance for the second quarter. Our consolidated net loss is expected to be between $72 million and $60 million compared to total net loss of $28 million in the second quarter of 2021.

We expect real estate services gross margin to decrease in the second quarter as compared with the same period in 2021.

This compression is primarily due to the changes, we're making that lower agent loads and adjust compensation as described in our November earnings call.

On a consolidated basis. This guidance includes approximately $61 million and total company marketing expense $21 million of stock based compensation $17 million of depreciation and amortization $4 million of interest expense and $4 million of restructuring expenses.

In addition, we expect to pay a quarterly dividend of <unk> 30.

640 shares of common stock to our preferred stock holder.

This guidance assumes among other things that no additional business acquisitions investments restructurings or legal settlements are concluded and that there are no further revisions to stock based compensation estimates and now let's take your questions.

Ladies and gentlemen, if you would like to ask a question. Please signal by pressing star one on your telephone keypad.

Please ensure that the mute function of your California switched off to allow your signal to reach our equipment again. It is star one to ask a question.

The first question today comes from Mark Mahaney of ISI.

Yes.

Okay.

Mr. Mahaney your line is open.

I Love the idea of a music soundtrack next quarter, let's guide to that.

You could do it as youre cutting over to Chris and then you just tone it down.

The market share increase of two bps year over year.

That sounds really low to me, but it was that a comps issue and I know you talked about how it was accelerating as you left just talk through that I assume that there is nothing unusual in that but that number just seemed low and then spend a little time, please talking about the rental opportunity and and why you think redfin is well positioned for that.

Thanks, a lot.

Sure well first of all on share that is low compared to our traditional rate of 10 to 15 basis points per quarter or per year, excuse me regained that year over year every quarter.

Is that the most confusing statement I have ever made our year over year gain is usually around 10 to 14 basis points, maybe 10 to 15 and this time it was too.

To the south in the Sunbelt.

So we think that we will gain share as these agents season, and that's especially true in the places where we have hired the most agents like the southeast.

As far as rentals.

So the most reliable way to increase traffic has been to add rental listings.

Action when we did launch rentals on redfin Dot com was to get thousands of inquiries every week to the property management customers rent Pathet recruited so I think the synergies are pretty straightforward that we have an audience that wants to see more inventory and rent path AD inventory that wanted to reach a broader audience.

Okay. Thank you Glenn.

And the next question comes from.

Al <unk> of Wedbush.

Hey, good afternoon guys.

So first Glenn I guess.

Surprise.

By your tone.

Maybe expecting a little bit more.

Cautiousness given.

What we've seen in the.

<unk> and rates and so maybe you could just expand on your view a little bit last quarter you guys were.

More.

Inventory levels, what are you seeing there and then your thoughts on affordability.

And how that might impact the market.

As we go through the rest of the year, so let's start there.

About mortgage attach rates and redfin now sales. So that's more a reflection of our business and our ability to progress through headwinds than anything else. What we're seeing consumers do in response to interest rate increases is sometimes stepping back there's less homebuyer demand than there was there were still inventory constrained.

Someone in San Francisco would look further afield by commuting 60 minutes 90 minutes and at some point. They were just unwilling to take the drive but now there is no commute. So I think that provides some buffer in the market, but theres. No question that there are headwinds and Theres no question that the housing market is going through some.

The correction, it's just that we think inventory.

Inventory will still be the main issue, except in a handful of markets and just based on our own data about tours and offers and mortgages and everything else.

We can beat the rap and keep taking share.

Okay. So.

During the quarter you guys put out a bunch of blogs press releases about.

And signals.

Just kind of slowing of weakening, but then your traffic actually accelerated.

It looks to be stepping up can you talk about.

And maybe a little bit more detail.

Around the traffic.

Presumably the rentals rentals hit in April so it was really an impact yet.

What are you seeing on the traffic side.

That's putting them in a better place.

On the traffic side. Some of this is just an improvement in ranks against our competitors. So the same number of people might be searching for real estate, but redfin is getting more of them. It is worth, noting however that traffic decelerated through the quarter. So even though we went from 1% in Q.

4% to 11% in Q1.

I Shouldnt quote it from memory, but it kind of went down from 11 to 10 to nine or something like that.

Through the quarter.

There will be a slowing of traffic for redfin dot com and for the industry. Overall, we just think one reason, we'll take brokerage share because we've been taking search share. So we've been getting more than our fair share of demand and we've just needed agents in the right places within North America to season, and get ready to handle that level of demand. So.

The market may be cooling, but we hope to take more share.

Okay.

Just real quick then.

One last follow up on that.

<unk>.

The ability of some sort of central.

Where we are now we are somewhere maybe close to it if rates.

In HPA keep going up from where we are right now thanks.

Could you repeat the question.

Did you hear the question.

Sure just on a forward looking basis.

If you kind of.

If rates go up.

That shot up a lot if they go up a little bit more from here of HBA goes up a little bit more from here.

Okay.

Where we are.

Bubble territory, it becomes kind of.

<unk> type of prices for the housing market are we close to that.

I think that that's the case because of because of mobility. Thank you.

I do think that mobility buffers at some that Wynn homes become too expensive in Austin, Texas people look in San Antonio and when San Antonio becomes too expensive they look in El Paso.

It is a legitimate phenomenon that we're seeing where the range of places that people are looking has broadened significantly. The other factor you should consider is how much rents are going up so normally if the spread between buying a house and renting one gets too large people just decide you know what I'm going to rent for.

One more year, but.

And the number of homes sold in the United States in 2022, compared to 2021, and we've been careful about a redfin now purchases because we know that it's a fool's gambit trying to figure out where prices are going to land. This summer, especially because the home buying season is probably going to be short.

But if you are asking about what is happening now we are still inventory constrained theres only a few markets like Seattle Denver to coma.

Parts of California.

Where homes are sitting on the market and they are only sitting just a little bit.

The final thought is just that when.

When people talk about a bubble they talk about speculation where youre not buying the asset because you actually want it.

But this is not a bubble and that strict sense because the need for housing is profound emotional and deep people want to live in their own home.

And youre not going to see a massive collapse in prices there is always that possibility, but it would be very surprising to me.

Alright, Thanks, Glenn I appreciate all the color and commentary.

Okay.

Add to that.

Go ahead.

The next question comes from an avid fan of trust.

Hey, guys. This is Robert Zeller on from Nevada, Thanks for taking the questions.

And then in your prepared remarks, I think you spoke about.

Youre going to be integrating a new listing fee to show most of the homes available for sale in the U S versus you guys just being able to show 91% today, if I heard that correctly can.

Can you just expand on that a little bit I mean can you guys turn this on.

Like immediately and do other brokerages have access to that as well.

And then how do you how does the shift from coastal markets to maybe two more.

Markets in the south in the sunbelt regions affect volume growth and margin implications for the rental and Eyebar units do you guys kind of see this as Cvs as headwinds or tail winds for rented.

Sure.

Got it well.

I'll talk about the first question and Chris I'd Welcome your comments on the second one.

Now with this national feed we still have to observe different local rules about what can and can't be displayed but this provider of listings.

Simplified some of the technical integration. So we expect it will take us still the balance of the year to get the last 9%, but that was a very long tail.

First you start integrating with the Washington D. C. Multiple listing service, which is massive but eventually youre going to Wyoming and its onesie twosies and this makes that process much easier and if we've learned anything the most reliable lever for increasing traffic is adding inventory there are two ways to add inventory by adding a new type of inventory.

Such as rental listings or by expanding to new places, but when you do that you get a new entry in the index, you're competing for listings, where before you had.

And if I were running another website and that wasn't available to me when we were trying to accelerate.

Moreover, the top that we just haven't been completely national brand and there is a premium to being a national brand wherever you go you can look on redfin dot com and the listing will be there that hasnt been true and we need to make a trip.

That shift just as it relates to the business is probably most impactful in terms of where we're hiring agents and where we will be hiring agents and that's just that.

That's where the biggest opportunities are probably means we'll have more hiring in what have been smaller markets for us in more central markets in the south as opposed to these larger coastal markets theres not much of an impact here, though as it relates to our rent and now business.

That business is nationwide spread out and there is not a meaningful difference in terms of how we would think about the margins.

Location by location that is more related to.

Our execution in those local markets as opposed to something specific on market conditions, and Thats something thats changed.

One concern I had about Red 10, five or 10 years ago. It works in San Francisco, but how are we going to make it work in San Antonio, Texas when home prices are so much lower.

And now mobility has partially solve that problem equalizing prices across the United States to a degree.

But we've also just figure it out.

<unk> staffing models for those markets, our close rates are higher in these smaller markets than they are in the major coastal markets. So even though it's still a lower priced home.

Margins are more similar than you'd expect.

Okay, great. Thank you.

The next question comes from John Campbell of Stephens, Inc.

Hey, guys good afternoon.

The lead agent Count maybe this is for Chris but on our lead agent count that was a good bit ahead of us of.

What we had modeled the real estate services or the real estate revenue guidance was a little bit below us and I am guessing based on Glen's commentary I think you guys, probably factoring in a little bit more of a negative housing outlook. So I'm just hoping you could maybe unpack that maybe start off with how youre thinking about transactions per agent and then maybe also just high level thoughts on.

How the real estate Rev per transaction is going to grow.

Yes so.

We certainly hired into the year with an expectation of how the market was going to play out and for glass commentary with mortgage interest rates I do think that that has had any impact on the guidance that we've provided in the second quarter that you just can't plow through as much uncertainty as some potential homebuyers might have at this.

And in time and so.

That's the combination I think.

Good call out there Glenn is there anything you'd add to that.

No.

Okay, and then on the on the lawsuit settlement I know you guys really can't get into that much but I felt like that was a kind of I'm sorry development for you guys. I mean your model is basically designed to only serve a certain price points with your lead agents and there's nothing else to read into that I think we all get that I guess, the regulators didn't but coming away from all that Glen did you foresee any changes in Alberta.

Business operators just in regards to maybe how your direct customers between the core brokerage and partner channel.

Well first of all the regulators didn't have an opinion on it it was settled before.

They reached a verdict.

We feel that it is very clear across the free market prices, the only fair way to decide which customers you can in cancer, if someone walks into a grocery store with 89. They can buy a can of beans, and if they don't have the 89 they can't.

Nothing to do with the color of the shirt or the color of their skin.

So we settled the case for less than it would have cost us to litigate. It if I sound pugnacious about it I am I care very much about the mission of this company part of that mission is to make housing more fair. We have always been committed to that and we always will be now having said that I do not think this is going to change the economics of the business.

Much we did agree that in certain neighborhoods, we would sell homes at a loss we have always done that as part of our mission, we will do it a little bit more.

It's a good thing to suck it up.

For a more just society, but we just had to be careful about how much we suck it up because we're also trying to make money.

Okay. Thanks, Scott.

As a reminder, if you'd like to ask a question. Please signal by pressing star one.

Our next question comes from Tom Champion of Piper Sandler.

Hi, Good afternoon, guys. Thanks for taking the questions maybe.

And maybe dovetailing with.

The prior question.

Can you talk a little bit about.

Okay.

Agent compensation and how much is salary based and fixed relative to.

Transaction based and success based just in light of the kind of.

Urgency and greater priority around.

Profits in.

The size of the agent count.

That it's gotten too.

With the market at this point and then.

Okay.

I'm curious Glenn if you could just share any thoughts about.

What John <unk>, who has been doing at run past maybe.

The changes that he has instilled in the business and.

And any additional expectations for for what we might see out of the rental side of the business going forward. Thanks.

Sure. So the first question about agent compensation, maybe 20% of the agents' compensation is salary and the rest is upside and that provides ample opportunity for the agent to earn hundreds of thousands of dollars a year some of our top agents earned $7 $800000 a year.

So we feel like they have every incentive to go out and get it and right now other agents are very anxious to work for US. We have had no problem recruiting top talent that was a real issue last year and we were straight up with you about it but it sure isn't now.

So we expect our agents to be absolutely hungry for the business and to do whatever it takes to put the customer first and get the deal done.

As for John Ziegler and his plan of attack, it's really had two pronged.

One is to get sales going again.

That makes every other decision easier but at the same time. He has just been really aggressive about.

Key has wasted no time whatsoever. He is a competitive monster and he is someone we know well.

We'll just keep driving sales.

Thank you.

And by the way that's important just to add some color to that because.

Building, an enterprise sales force isn't something that many people here at Redfin know how to do we are a consumer company.

And rent path and just a different way is running a two sided marketplace, where not only do they have to talk to.

Consumers looking for rentals, but they have to talk to businesses running apartment buildings. So it's a really valuable skill.

There are no further questions at this time.

Thanks, Kevin We can go ahead and wrap up the call now.

Thanks, everybody see you next quarter.

Ladies and gentlemen that concludes today's conference call. We thank you for your participation you may now disconnect.

Q1 2022 Redfin Corp Earnings Call

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