Q2 2022 Opendoor Technologies Inc Earnings Call

August 4, 2022

The conference will begin shortly to raise.

Okay. Thank you for standing by and welcome to the open door second quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during the session you will.

Need to press Star one one on your telephone please be advised for today's conference is being recorded I would now like to hand, the conference over to your speaker today at least Wang head of Investor Relations. Please go ahead.

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.

<unk> got open door dotcom.

Please note that this call will be simultaneously webcast on the Investor Relations section of the Companys corporate website.

Before we start.

I'd 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 goes financial condition anticipated financial performance business strategy and plans market.

Community 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>.

<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.

And 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 website at investor <unk> Dot com.

I will now turn the call over to Eric We're co founder Chairman and Chief Executive Officer of <unk>. Good afternoon.

On the call with me is carry Wheeler, our Chief Financial Officer, and Angela Walkie, our president.

At <unk>, we strive to empower our customers to make life changing moves to that end I'd like to start our call with a story of jewelry in term of R&D.

Customer of ours.

I am Julie dam of Andy I live in Henderson, Nevada, and I sold my home to open doors I was in my home for 41 years and really we're looking forward to a new fresh start.

I felt a lot of emotional baggage in that in house.

It's really past time to move on and let.

Lot of Banco <unk>.

I was looking to move I found a newbuild that I was excited to be able to pick out all my next stop in and the only hang up whereas I had to sell my house to do that so the sales person actually I'd heard them open door and recommended that I might try that.

At home that night and I just started that process within three days, we had a price agreement and we're in contract right away, which made it possible for me to then sign a contract with the new builder.

Okay, I don't have to pay to refinance my house I don't take the money out.

I don't have the lockbox on my front door and have people traipsing through my house when I call them are not home.

So many good things about open door. This whole new method of doing that so it's kind of new to me.

And it was unbelievably easy and stress free before I moved.

Like there was a big heavy burden on me, but then once the sale was through and once I had moved out of that how I really felt freedom like I could literally fly because I didn't have that weight I didn't have the data.

Bags Audley opened or Matt this whole fresh start possible.

Against the backdrop of the macro and housing market uncertainty, our product that delivers simplicity certainty and speed.

For our customers like Julie now more than ever as such in the second quarter. We helped over 14000 homeowners move with peace of mind and delivered a revenue of $4 2 billion growing over 250% year on year with a record contribution profit of $422 million adjusted EBITDA of 208.

$18 million and adjusted net income of $122 million.

In addition to our financial performance, we took important steps towards our goal of servicing home sellers nationwide and building a better home buying experience, we entered six new markets.

Bringing our total footprint to 51 markets.

Our underwriting capabilities to cover nearly 30% of your at some transactions we.

We have also just announced our multiyear partnership with Zillow to give their hundreds of millions of monthly visitors the ability to instantly request and open to offer and sell their home online.

Where the two market leaders come together and aligned on our vision and we believe this partnership will fundamentally change how people buy and sell a home.

For Homebuyers, we went live with our new open to a financing gap in California, enabling our customers to get pre qualified in less than 60 seconds.

With the adoption that suggests we will achieve our highest attach a financing within just a few months of going live.

And finally, we've officially launched open new exclusive a first of its kind marketplace that lets homebuyers purchased an open door home pre market via e-commerce like experience.

In the words of a recent exclusive customer quote I felt like our shopping for home on Amazon. The process was seamless and uncomplicated and 12 took no surprise that we have already seen tremendous momentum and positive feedback of open door exclusive.

While we are pleased with these results the current market volatility is requiring us to be highly dynamic and rigorous and managing risks and overall inventory health as.

As most of you are aware the housing market has moved rapidly over the second quarter.

We saw a steep slowdown in home transaction velocity and home price appreciation from all time highs caused by a spike in interest rates and subsequently a change in mortgage rates and speed, we have not experienced in 40 years.

As a result, these macro shifts have led to a faster slowdown in housing than we had forecasted.

To navigate this market movement, we have substantially increased our spreads since may which.

Positioning our acquisition cohorts to meet or exceed our margin expectations.

Second we are prioritizing inventory health and selling down our existing inventory with the price reductions that are in line with the speed at which the market is moving.

While this will lead to sequentially lower contribution margin in the second half of the year. These are disciplined actions that will enable strong financial performance beyond this transition period.

We will balance short term risk management with long term transformational investments such as <unk> and our Zillow partnership and continue to build experience that addresses the consumer needs better than anyone else out there.

Importantly, we know this is our opportunity to improve our systems to strengthen our position and emerge as the best marketplace to buy and sell at home I will now turn the call over to Terry to discuss our financial performance in more detail.

Thanks, Eric Q2 was another outstanding quarter, we delivered $4 $2 billion in revenue double digit contribution margin and 100.

$22 million.

Adjusted net income our best proxy for operating free cash flow. We also ended the quarter with a fortress balance sheet with $2 $5 billion in cash and another $700 million in equity invested in homes and over $11 billion of financing capacity.

These results completed a record first half of 2022 as we lean into an exceptionally strong housing market and captured additional earnings in anticipation of greater macro volatility in the second half of the year.

Moving from the second quarter and looking ahead as Eric mentioned, we've seen the macro environment evolve rapidly over the course of Q2 with the fed's aggressive response to curb inflation, resulting in the largest quarter on quarter increase in mortgage rates 40 years.

Led to a market change in housing market momentum and a faster the typical seasonal shift is waning affordability sidelines many homebuyers.

We had long anticipated a slowdown in transaction volumes and an HPA from record levels. However, the pace with which this occurred it was faster than anticipated.

Absolute level of transactions has been slower it remains in line with 2018 in 2019 and above the 2014 2017 levels.

In other words homes are still selling but at a slower pace than the record high sell through rates seen in Q1 and early Q2.

In terms of HPA.

A consistent seasonal month over month pattern to home price changes throughout the course of the year.

Sharply accelerates in mid February peaks at the end of the first quarter and then gradually move to around zero during the third quarter.

Filtering and low to no HPA in the second half of the year.

In contrast, the speed with which the HPA move from peak levels early in Q2 was faster than our expectation and sharper than typical seasonal home price declines.

We saw one month rolling HPA move from approximately 300 basis points in early may to negative 100 basis points as of mid July .

We are beginning to observe a flattening out of the month over month change in HPA and May continue to see HPA trend in line with normal seasonal patterns for the remainder of the year.

Our performance for the second half of the year will reflect this transition in the housing market to lower transaction velocity, lower HPA and longer holding times beyond normal seasonal trends.

As discussed in our shareholder letter, we have taken and are continuing to take swift and decisive actions to one adjust pricing to sell homes expeditiously and to adjust new acquisition home pricing to reflect market conditions and enable those cohorts performed in line with our target expectations.

Our focus on inventory health and risk management and from three key pricing decisions, we made in the quarter.

First we substantially increased spreads embedding our acquisition offerings beginning in May however.

Given how quickly our spreads increased and the timeline, we have between making an offer and when an acquisition closings. We saw a gap between spreads would offer versus close time.

Our specific cohorts of homes during the quarter, we made the decision to close enough homes and not to reprice our canceled contracts.

We believe that this is a critical brand investment that will pay dividends for years to come.

We have adjusted down listed prices on our inventory to stay in line with the market to drive sell through.

While these price reductions will impact our contribution margins in the second half beyond the impact of seasonality our decision to prioritize earnings in the first half gives us flexibility to take such actions.

Finally, we are continuing to operate with sustained higher spend levels for the new acquisitions, we are making.

Combination of these higher spreads and lower marketing spend will reduce our acquisition pace.

This in turn will shift our resale mix in the coming quarter to longer dated homes that are usually at lower margin.

Our plan is to resume a higher acquisition pace as the market housing market stabilizes.

Our Q3 guidance contemplates the impact of these actions as well as the broader range of outcomes that could arise given uncertain market conditions. Therefore guidance has a wider range than what we've provided in past quarters.

Our revenue outlook is for two two to $2 6 billion.

Which reflects expectations for fewer homes sold in the quarter given the slower resale pace.

As well as the impact of a lower acquisition pace that subsequently impacts resale volumes.

EBITDA guidance for negative 175% to negative $125 million.

This revenue range the impact of our decision not to cancel offers in Q2 price reductions were taking an inventory to clear and anticipated resale mix.

We are managing adjusted operating expenses down versus Q2 at approximately $190 million for Q3.

<unk> reductions will be driven primarily by ramping down third party capacity built into our operations and focusing marketing spend on our most efficient channels.

Finally, our guide implies a contribution margin of approximately one 7% at the midpoint of our range.

In summary, we recognize that market conditions will continue to be fluid in the second half of the year we.

We will continue to be nimble and responsive leveraging our dynamic pricing operational expertise and low cost structure.

We have a very strong balance sheet by design with cash and marketable securities totaling $2 5 billion.

$7 billion of financing capacity.

Clearly, we have the resources and are well positioned to successfully navigate this transition in the housing markets.

We remain steadfast in our pursuit of our long term mission and goal of building a profitable generational company.

I will now open up the call for questions. Thank you.

Thank you if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered or you wish to remove yourself. Please.

Yeah.

Our first question comes from Jason <unk> with Oppenheimer. Your line is open. Please go ahead.

Thanks.

I guess like if your thoughts so one it seems that this is a hard business to forecast on a quarterly basis.

Just given that.

The near term volatility, but as you play this out over a bigger number that's more predictable. So I guess, one would you think about potentially maybe shifting to annual guidance.

And then too.

Obviously, there is a fixed cost base you need to cover and when you don't when you slow down as youre guiding to in the second quarter.

You don't cover that that being said.

This partnership with Zillow was obviously pretty significant what it could save you on marketing. So maybe if you could opine as to how fast that can get up and running and maybe like a magnitude of what you think that could mean for savings on the sales and marketing side. Thank you.

Hey, Jason It's karri I'll take the first part of that I mean.

I think it's hard to forecast as a 40 year move in mortgage rates over a single quarter and that's ultimately what we've been navigating here.

And that has really been the challenge.

As opposed to an ability to forecast quarter to quarter and what we're navigating a very different macro forecast than what we had been embedding in our expectations.

We have been building spreads and increases in those for a long time as you know in anticipation of a housing slowdown that would be in line with other past slowdowns, but what we saw with this very large and very fast moving rates.

Quarter, one out of.

A 40 year type scenario.

And so we've been navigating a much steeper slope.

Outside of that I think our systems are doing exactly what they're designed to do which is responding very very quickly adjusting prices to market and we've been raising spreads on new acquisitions.

And then Jason as Andrew with respect to the Zillow partnership.

We're excited about what's ahead there we do think it has the potential to help us serve meaningfully more customers.

Over the midterm the teams given that we've just announced the deal today.

And we're putting that together and we expect we expect it to be live in the coming months.

For us it's a major milestone on our.

Our journey every homeowner and the countries start to remove what's been opening doors.

We're combining the lowest category leading audience over 200 million monthly uniques with our leading platform and solution and we're excited about the potential that that offers.

Thank you.

Thank you and our next question comes from the line of.

Robert <unk> with <unk>. Your line is open. Please go ahead.

Hi, Thanks for taking the question. This is Robert Geller on front of Ed Tom.

Tourists.

So if we're just comparing the environment and volatility today versus <unk> of 2021, I think when you guys first started widening your spreads.

I think you mentioned in the letter you're starting to see flattening out of the month over month changes in HPA. So would you would you say the highest volatility period is likely now behind us and you think it might be easier to forecast.

Great changes HPA inventory levels heading into the back half of the year or into 2023.

And then.

Sticking with mortgage rates I mean, we've seen them starting to come down recently, so do you think that that could provide a catalyst or a tailwind too.

That homebuyer demand starting to come back in the back half of the year or early 2023.

Yeah.

Hey, Robin I'll take I'll take that as well I mean with respect to the spread increases.

Again as you mentioned, we have been increasing spreads going all the way back to last fall, but we move them up to what has been record levels really starting in may on the heels of all the changes we saw in mortgage rates move quickly we move materially and we continue to operate today to a sustained higher level.

The spreads.

In part because of the housing market continues to be quite fluid and we want to make sure that we're building substantial conservatism and we are appropriately managing per risk over the back half of the year.

The second part of your question about mortgage rates will be coming down again.

And load the forecast that I think what we want to do right now is focus on clearance mismanagement and build into fresher inventory.

And as we acquire new homes, we're doing that with substantially higher spreads.

And feel very good about our ability to create new cohorts that will perform in line with our expectations and I would say the spreads operating with now.

We would have been frankly, a more negative macro outlook and what we're seeing in this very moment, but again thats a risk management decision.

Thank you.

And our next question comes from the line of Dae Lee with Jpmorgan. Your line is open. Please go ahead.

Great. Thanks for taking my question back to so the first one kind of following up on the prior question.

So this pullback in demand are you seeing just across all of your markets and do you think this is a temporary pullback.

Okay. Then what do you think that this amount is flowing and then secondly could you talk a little bit more about copel <unk>, what's your long term vision for this product.

Do you think this could be as a percentage of the possibilities.

Yes.

Andrew I can take the first part of that and then Eric can you speak to exclude this.

In terms of what we're seeing across markets, we are absolutely seeing different performance and trajectory across our market footprint.

On the East coast, our markets are tending to perform well, particularly in the southeast in Florida are central markets are a bit more mixed in.

Western markets.

<unk> Phoenix Vegas, Sacramento, Tucson are a bit more challenged broadly I think it highlights the importance of having a 50 plus market footprint and the geographic diversification that that offers.

Eric do you want to talk to them.

Yes, with regards to the long term vision around exclusives, what I can say is that we know how broken the processes to buy a home and it feels more like craigslist with Amazon and we're going to change that we're going to make it simple seamless experience and we really believe this is a win for customers and a win for open door. A few features that we launched.

One there is a buyout price and thats really removes multiple counterparties and the need for negotiations and you probably bought a home and there's a lot of back and forth and a lot of uncertainty.

We provide a appraisal price match guarantee which removes the issue around price and gives our customers peace of mind that paying a fair price and then lastly, we built an e-commerce like experience.

Magical open door, we actually found that by providing these homes exclusively exclusively on open door. It drives us audience. So said another way, we're using our unique supply to aggregate direct buyer demand.

And that can have significant positive impact on your economics, obviously, because with a direct demand funnel, we can lower the transaction costs and fees closed times and increased services attach. So we think the impact can be substantial over time.

I would say that to the part of your question how beaten this Scott I do view this as an important start of a fundamental shift in why and how direct buyers work with open door and then it does unlock a tremendous amount of opportunity in the medium term for us.

Great. Thanks for color.

Okay.

Thank you and our next question comes from the line of Nick Jones with JMP Securities. Your line is open. Please go ahead.

Hi, Thanks for taking the questions I guess, just revisiting that zillow.

Partnership it.

It sounds like that's going to attract a significant amount of volume I mean, how do you think about managing the amount of I mean, I guess people requesting quotes versus what you can.

Phil.

And then I guess the second question is that with with Zillow as upper funnel.

Does that change the pace at which will enter new markets from here. Thanks.

Sure.

So we are excited about the potential volume I think one of the things that is unique about the open door platform in that.

We built the flexibility we've embedded we've obviously been able to scale up significantly.

The last 24 months and equally.

As we're looking at the third quarter and lower volumes were able to take some of that flexible capacity out of the system and so our ability to support a meaningful partner like Zillow is absolutely there and it's one of the things that differentiates our platform.

In terms of in terms of the pace of market launch.

50 markets or 50, plus markets across the country covering 30% of all transactions. So we feel very good about that footprint. We are still opening markets, but our focus given the dynamic market environment right now is really on managing the existing footprint that we have.

Got it thank you.

Okay.

Thank you and our next question comes from the line of Justin <unk> with Bahrenburg. Your line is open. Please go ahead.

Hi, Thanks for taking the question.

Just looking ahead and given the volatility I understand that this might be difficult to answer but.

As the market transitions to more of a.

More of a <unk>.

Buyer market is there an opportunity for you guys too.

Seem to see this through an increasing inventory because you have the ability to to buy what are good houses just not at the right time to sell them.

Yes, Justin Hey, it's Eric.

<unk>.

I mean, the short answer is yes.

We fundamentally believe that we're providing a tremendous amount of value for sellers and we've built that experience the system over the course of eight years and work ethic near best in class at that.

And we're also becoming very good at servicing buyers and understanding.

Teresa homes efficiently improving that experience for agents and buyers and launching exclusive on top of that.

And so if you take a step back if the marketplace for managing and we wanted to make sure that we have sellers coming to the platform and delighting them and we are buyers coming to the platform and delighting them.

<unk> touched around open door homes so to.

To your question do we view this as opportunity to grow inventory. The answer is yes, we're managing that growth with.

Proper spreads.

Ensure that we hit our contribution margin targets, while also managing risk.

So those are the dynamics that play in and we're continuing to invest our platform. So we can grow.

Great. Thanks for that and then one follow up if I could can you give us any insight into the early returns in the northeast market. As you know there's been a few questions bouncing around of how translatable. The model is two markets, where the homes, maybe arent as similar.

We're still in early days.

And the northeast markets all of those markets launched relatively recently over the course of the first half of this year and so it's early days and our playbook for market launch is very focused early on making sure. We feel really good about the quality of our underwriting and as we are proactively managing against.

The dynamic macro that we've been talking about we're looking at each and every market, but as you would expect in a more complex markets were slowing our pace as we as we manage that book of inventory.

Alright Thats helpful. Thank you for taking the question.

And our next question comes from the line of Brian Thomas <unk> with <unk>. Your line is open. Please go ahead.

Hi, everyone. Thanks for taking the questions can.

Can you provide some color around the impairment.

Many homes that related to and if that was concentrated in specific markets and then a follow up question on your spread can you say what your service T stands on average today is if you feel like <unk>.

Stronger expected conversion that you mentioned could actually can tell you to take those service fees higher as you look to take your foot off the gas a bit here in terms of the acquisition piece.

Okay.

Sure I will take that hey, Brian so on the impairment, we don't break out by.

By geography or by monthly cohort, but I would say is just meant to reflect.

June 30, our expectations for foreign HPA and resale policies at the time.

Certainly something we continue to respond to the rapidly changing macro environment, and we have and will continue to adjust our pricing to reflect that.

With respect to your second question around conversion and feed I think.

One of the things we've been talking about for a while and it's become.

More significant as of late is that notwithstanding higher spreads we have seen conversion output.

Outperformed our expectation on a spread adjusted basis. So just impact your comment we have a service fee.

Static in all our markets, it's 5%, we manage spread via value, we provide to the customer and that is what have we have increased.

Presumably particularly in may on the heels of the mortgage rate move.

Notwithstanding the fact that spreads have increased I would say, we still see conversion performing quite nicely on a spread adjusted basis and importantly, as we see the housing market started to stabilize.

Our expectation is that we can start to adjust spreads over time and you have to endure for us will be able to grow back into the acquisition volumes.

Thanks, and if I could just squeeze one more in on the expense levers you're pulling.

In relation to that I think the $190 million, you're guiding to for <unk>, how much more room is there for efficiencies to the extent.

The market does continue to deteriorate.

If we should.

Spectrum additional sequential moderation into the fourth quarter.

Please thanks.

We're aggressively managing down our costs.

Third $90 million that you referenced is call it a high single digits quarter over quarter decrease and we expect to exit the quarter on a run rate at an even lower level than that there's really three main levers we're pulling to do that the first is we're flexing down our third party capacity pretty aggressively as we scale them up.

We're very deliberate about leveraging third party labor versus hiring.

So for example in the FERC have nearly 40% of our own operations passed were carried out by third parties third party labor.

We're in process of dialing that capacity capacity back.

Second we're focusing our marketing spend on our most efficient highest return channels given the highest spread environment and then finally the team is really scrubbing.

Every aspect of our spending and we expect that to continue to come down over the course of the year.

Great. Thanks for taking the questions.

Thank you and our next question comes from the line of Jason Weaver with Compass point. Your line is open. Please go ahead.

Hi, good evening, thanks for taking the question.

As it pertains to just broad consumer adoption trends I Wonder what you are seeing regarding offer request rate as a percentage of your average site visitors.

Given the uncertain environment.

In Q2, I think we talked about seeing record.

Record offers which was was.

Obviously, good to see we've made meaningful investments in our brand and what we know is that as we grow awareness.

Of our solution.

We grow the business ultimately over time, and so certainly we are seeing those investments.

Move the needle.

Okay, and if I could follow up with just one more bridging off one of the prior question the $82 million Mark.

I'm curious about that against the language that.

You've stated that you may look to reduce prices to be able to clear out some inventory going forward. So we should expect to see.

Valuation marks the similar like magnitude and fourth in third and fourth quarter.

I can't sit here today and give you a forecast for 930 in terms of impairment, but we will go through that same methodology again my comment was just.

In parallel.

We value them based on what we know at the time, they can afford expectation of where home prices are going and the Russo policies, we have in place.

Given how dynamic the market is right now we're going to continue to adjust pricing and resale policy as we work to drive clearance across entire portfolio and that'll that'll be the basis for where we mark homes as of 930 I can't sit here today and give you give you a number.

Good morning direction fair enough. Thanks, Thank you for that works.

Okay.

Thank you and I'm showing no further questions and I would like to turn the conference back over to Eric <unk> for any further remarks.

Thank you to close us out I want to I want to say that we're focused on our long term and I do want to remind us of a few things.

We spent the past eight years, improving and making efficient how we buy homes.

And this has made us best in class at that.

Thanks.

The past eight years, improving and making efficient how we buy homes and this has made us best in class at that.

We have shifted a tremendous amount of resources and focus and now becoming the best seller in the world of homes.

Are the only company vertically integrated as a principal with incentive alignment with incentive alignment to improve and optimize that system.

It means we will become the best buyer and the best selling homes and this capability will underpin our platform.

Thank you for attending.

This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

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Good day, Thank you for standing by and welcome to the open door second quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a <unk>.

<unk> and answer session to ask a question. During this session you will need to press star one on your telephone. Please be advised for today's conference is being recorded.

I'd now like to hand, the conference over to your Speaker today Elise Wang head of Investor Relations. Please go ahead.

Thank you and good afternoon.

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.

Investor.

<unk> Dot com.

Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website.

Before we start.

This strategy and plan.

<unk> 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>.

<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.

And 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 it was 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 website at investor <unk> Dot com.

I will now turn the call over to Eric.

<unk> founder Chairman and Chief Executive Officer of Avondale, Good afternoon all.

On the call with me is carry Wheeler, our chief financial Officer, and <unk> our president.

I'd open door, we strive to empower our customers to make life changing moves to that end I'd like to start our call with a story of Julie <unk>.

Customer of ours.

I am Julie dam of Andy I live in Henderson, Nevada, and I sold my home to open doors.

And my home for 41 years, and really we're looking forward to a new fresh start.

I felt a lot of emotional baggage in that in house.

It's really past time to move on and let.

A lot of back go when I was looking to move I found that newbuild that I was excited to be able to pick out all my notes stop in and the only hang up whereas I had to sell my house to do that so the sales person actually unheard of open door I'd recommended that I might try that.

Got it home that night and I started that process within three days, we had a price agreement and we're in contract right away, which made it possible for me to then sign a contract with the new builder.

Okay, I don't have to pay to refinance might have I don't take the money out.

I don't have the lockbox on my front door and have people traipsing through my house when I'm column are not home.

There was just so many good things about open door. This whole new method of doing that so it's kind of new to me.

And it was unbelievably easy and stress free before I moved I was feeling like there was a big heavy burden on me, but then once the sale was through and once that had moved out of that how I really felt freedom like I could literally.

Fly because I didn't have that weight and didn't have the <unk>.

Bags Audley open door made this whole fresh start possible.

Against the backdrop of the macro and housing market uncertainty our product that delivers simplicity certainty and speed is needed for our customers like Julie now more than ever as such in the second quarter. We helped over 14000 homeowners move with peace of mind and delivered a revenue of $4 2 billion growing over.

250% year on year with a record contribution profit of $422 million adjusted EBITDA of $218 million and adjusted net income of $122 million.

In addition to our financial performance, we took important steps towards our goal of servicing home sellers nationwide and building a better home buying experience, we entered six new markets.

Bringing our total footprint to 51 markets and expanding our underwriting capabilities to cover nearly 30% of U S. Some transactions we.

We have also just announced our multiyear partnership with Zillow to give their hundreds of millions of monthly visitors the ability to instantly request and open to offer and sell their home online.

Where the two market leaders come together and aligned on our vision and we believe this partnership will fundamentally change how people buy and sell a home.

For Homebuyers, we went live with our new open door financing App in California, enabling our customers to get pre qualified in less than 60 seconds.

With the adoption that suggests we will achieve our highest attach financing within just a few months of going live.

And finally, we've officially launched open to exclusive a first of its kind marketplace. Let homebuyers purchased an open door home pre market via e-commerce like experience.

In the words of a recent exclusive customer quote I felt like a shopping for home on Amazon. The process was seamless and uncomplicated and 12 took no surprise that we have already seen tremendous momentum and positive feedback of open door exclusives.

While we are pleased with these results the current market volatility is requiring us to be highly dynamic and rigorous and managing risks and overall inventory health as.

As most of you are aware the housing market has moved rapidly over the second quarter we.

As a result, these macro shifts have led to a faster slowdown in housing than we had forecasted.

To navigate this market movement, we have substantially increased our spread since may <unk>.

And our acquisition cohorts to meet or exceed our margin expectations.

We are prioritizing inventory health and selling down our existing inventory with price reductions that are in line with the speed at which the market is moving.

While this will lead to sequentially lower contribution margins in the second half of the year. These are disciplined actions that will enable strong financial performance beyond this transition period.

We will balance short term risk management with long term transformational investments such as open to our exclusive and our Zillow partnership and continue to build experience that addresses the consumer needs better than anyone else out there.

Importantly, we know this is our opportunity to improve our systems to strengthen our position and emerge as the best marketplace to buy and sell a home I will now turn the call over to Terry to discuss our financial performance in more detail.

Thanks, Eric Q2 was another outstanding quarter, we delivered $4 $2 billion in revenue double digit contribution margin and $120 million of adjusted net income our best proxy for operating free cash flow. We also ended the quarter with a fortress balance sheet with $2 $5 billion in cash.

Another $700 million in equity invested in homes and over $11 billion of financing capacity.

These results completed a record first half of 2022 as we've leaned into an exceptionally strong housing market and captured additional earnings in anticipation of greater macro volatility in the second half of the year.

Led to a market change in housing market momentum and a faster the typical seasonal shift as leaning affordability sidelined many homebuyers.

We had long anticipated a slowdown in transaction volumes and an HPA from record levels. However, the pace with which this occurred was faster than anticipated.

The absolute level of transactions has been slower it remains in line with 2018 in 2019 and above the 2014 2017 levels and.

In other words homes are still selling but at a slower pace than the record high sell through rates seen in Q1 and early Q2.

In terms of HPA.

A consistent seasonal month over month pattern to home price changes throughout the course of the year.

Sharply accelerates in mid February peaks at the end of the first quarter and then gradually move to around zero during the third quarter.

Filtering and low to no HPA in the second half of the year.

In contrast, the speed with HPA move from peak levels early in Q2 was faster than our expectation and sharper than typical seasonal home price declines.

We saw one month rolling HPA move from approximately 300 basis points in early may to negative 100 basis points as of mid July .

We are beginning to observe a flattening out of the month over month change in HPA and May continue to see HPA trend in line with normal seasonal patterns for the remainder of the year.

Our performance for the second half of the year will reflect this transition in the housing market to lower transaction velocity, lower HPA and longer holding times beyond normal seasonal trends.

Our focus on inventory health and risk management and farm three key pricing decisions, we made in the quarter.

First we substantially increased spreads embedding our acquisition offerings beginning in May.

However, given how quickly our spreads increased and the timeline, we have between making an offer and when an acquisition closing.

GAAP between spreads it offer versus closed time for specific cohorts of homes during the quarter.

We made the decision to close on the phone and not to reprice, our cancel contracts. We believe that this is a critical brand investment that will pay dividends for years to come second we have adjusted down listed prices on our inventory to stay in line with the market can drive sell through well.

These price reductions will impact our contribution margins in the second half beyond the impact of seasonality our decision to prioritize earnings in the first half gives us flexibility to take such actions.

Finally, we are continuing to operate with sustained higher spread levels for the new acquisitions, we are making the.

The combination of these higher spreads.

Lower marketing spend will reduce our acquisition pace.

This in turn will shift our resale mix in the coming quarter to longer dated homes that are usually at lower margin.

Our plan is to assume a higher acquisition pace as the market housing market stabilizes.

Our Q3 guidance contemplates the impact of these actions as well as a broader range of outcomes that could arise given uncertain market conditions. Therefore guidance has a wider range than what we've provided in past quarters.

Our revenue outlook is for two two to $2 6 billion.

Which reflects expectations for fewer homes sold in the quarter, given the slower resale pace as well as the impact of a lower acquisition pace subsequently impacts resale volumes.

EBITDA guidance for negative 175% to negative $125 million.

This revenue range the impact of our decision not to cancel offers in Q2 price reductions were taking an inventory to clear and anticipated retail mix.

We are managing adjusted operating expenses down versus Q2 at approximately $190 million for Q3.

<unk> reductions will be driven primarily by ramping down third party capacity built into our operations and focusing marketing spend our most efficient channels.

Finally, our guide implies a contribution margin of approximately one 7% at the midpoint of our range.

In summary, we recognize that market conditions will continue to be fluid in the second half of the year.

We will continue to be nimble and responsive leveraging our dynamic pricing operational expertise and low cost structure.

We have a very strong balance sheet by design with cash and marketable securities totaling $2 5 billion and $11 billion of financing capacity.

Clearly, we have the resources and are well positioned to successfully navigate this transition in the housing market.

We remain steadfast in our pursuit of our long term mission and goal.

Building a profitable generational company.

I will now open up the call for questions. Thank you.

Thank you if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered or you wish to remove yourself. Please.

Okay.

Our first question comes from Jason <unk> with Oppenheimer. Your line is open. Please go ahead.

Thanks.

I guess, thank you for your thoughts so one it seems that this is a hard business to forecast on a quarterly basis.

Given the near term volatility, but as you play this out over a bigger number this more predictable. So I guess, one would you think about potentially maybe shifting to annual guidance.

And then too.

Obviously, there is a fixed cost base you need to cover and when you don't when you slow down as youre guiding to in the second quarter.

You don't cover that that being said.

Hey, Jason It's karri I'll take the first part of that.

It's hard to forecast as a 40 year move in mortgage rates over a single quarter and that's ultimately what we've been navigating here.

And that has really been the challenge.

As opposed to an ability to forecast quarter to quarter and what we're navigating is it very different macro forecast than what we had been embedding in our expectations.

We had been building spreads and increases in those for a long time as you know in anticipation of a.

Housing slowdown that would be in line with other past slowdowns, but what we saw with this very large and very fast moving rates for.

Quarter, one at a 40 year type scenario.

And so we've been navigating a much steeper slope.

Outside of that I think our systems are doing exactly what they're designed to do which is responding very very quickly adjusting prices to market and we've been raising spreads on new acquisitions.

And then Jason as Andrew with respect to the Zillow partnership we're.

We're excited about what's ahead there we do think it has the potential to help us serve meaningfully more customers over that over the mid term. The teams given that we've just announced the deal today are hard at work putting that together and we expect we expect it to be live in the coming months.

For us it is a major milestone on our journey every homeowner and the countries start there with an open door.

We're combining the lowest category leading.

And so over 200 million monthly unique with our leading platform and solution and we're excited about the potential that that offers.

Thank you.

Thank you and our next question comes from the line of.

Robert Zellner with Truest. Your line is open. Please go ahead.

Hi, Thanks for taking the question. This is Robert Geller on front of Ed Tom.

From tourists.

So if we're just comparing the environment and volatility today versus <unk> of 2021, I think when you guys first started widening your spreads.

Great changes HPA inventory levels heading into the back half of the year or into 2023 and then.

Sticking with mortgage rates I mean, we've seen them starting to come down recently, so do you think that that could provide a catalyst or a tailwind too.

That homebuyer demand starting to come back in the back half of the year or early 2023.

Hey, Robin I'll take I'll take that as well I mean with respect to the spread increases.

Again as you mentioned, we have been increasing spreads going all the way back to last fall, but we moved them up too.

It's been record levels really starting in may on the heels of all the changes we saw in mortgage rates move them quickly and we moved them up materially and we continue to operate today at a sustained higher levels of spreads.

The second part of your question about mortgage rates will be coming down again.

And load the forecast that I think we want to do right now is focus on clearance mismanagement and build into fresher inventory and as we acquire new homes, we're doing that with substantially higher spreads Susan and feel very good about our ability to create new cohorts that will perform in line with our expectations and I would say the spreads.

Operating with now.

We would have been frankly, a more negative macro outlook and what we're seeing in this very moment, but again thats a risk management decision.

Okay.

Thank you.

And our next question comes from the line of Dae Lee with Jpmorgan. Your line is open. Please go ahead.

Great. Thanks for taking my question back to so the first one kind of following up on the prior question of so.

So this pullback in demand are you.

James This is across all of your markets and do you think this is a temporary pullback.

Yes.

What do you think that this amount is flowing okay. And then secondly could you talk a little bit more about copel <unk>, what's your long term vision.

Uh huh.

How large do you think this could be as a percentage of the pump.

Andrew I can take the first part of that and then Eric can you speak to exploit this.

In terms of what we're seeing across markets, we are absolutely seeing different performance and trajectory across our market footprint.

On the East coast, our markets are tending to perform well, particularly in the southeast and Florida are.

Central markets are a bit more mixed in our western markets, notably DNA Vegas, Sacramento Tucson are a bit more challenged broadly I think it highlights the importance of having a 50 plus market footprint on the geographic diversification of that offers.

Eric do you want to talk to.

Sure.

Yes, with regards to the long term vision around exclusives, what I can say is that we know how broken the process is to buy homes and it feels more like craigslist at Amazon and we're going to change that we're going to make it simple seamless experience.

And we really believe this is a win for customers and our Windows open door. A few features that we launched our one there the buyout price in this really removes multiple counterparties and the need for negotiations and you probably bought a home and there's a lot of back and forth and a lot of uncertainty.

We are providing appraisal price match guarantee which removes the issue around price and gives our customers peace of mind that paying a fair price and then lastly, we built an e-commerce experience.

Magical open door, we actually found that by providing these homes exclusively exclusively on open door. It drives us audience. So said another way we are using our unique supply to aggregate direct buyer demand.

And that can have significant positive impact on unit economics, obviously, because with a direct demand funnel, we can lower the transaction cost. It gets close times and increased services attach. So we think the impact can be substantial over time.

I would say that to the part of your question how beaten this Scott.

We view this as an important start of a fundamental shift in why and how direct buyers work with open door and then it does unlock a tremendous amount of opportunity in the medium term for us.

Great. Thanks for color.

Yes.

Okay.

Thank you and our next question comes from the line of Nick Jones with JMP Securities. Your line is open. Please go ahead.

Hi, Thanks for taking the questions I guess, just revisiting that zillow.

Partnership it.

It sounds like that's going to attract a significant amount of volume I mean, how do you think about managing the amount of I mean.

I guess people requesting quotes versus what you can.

Phil.

And then I guess the second question is that with kind of Zillow as upper funnel.

Does that change the pace at which you'll enter new markets from here. Thanks.

Sure.

So we are excited about the potential volume I think one of the things that is unique about the open door platform that we've built is the flexibility we have embedded we've obviously been able to scale up significantly.

Over the last 24 months and equally.

In terms of in terms of the pace of market launch.

50 markets 50, plus markets across the country covering 30% of all transactions.

So we feel very good about that footprint, we are still opening markets, but our focus given the dynamic market environment right now is really on managing the existing footprint that we have.

Got it thank you.

Okay.

Thank you and our next question comes from the line of Justin <unk> with Baron Burke. Your line is open. Please go ahead.

Hi, Thanks for taking the question.

Just looking ahead and given the volatility I understand that this might be difficult to answer but.

As the market transitions to more of a.

More of a buyer market is there an opportunity for you guys too.

Seem to see this through an increasing inventory because you have the ability to to buy what are good houses just not at the right time to sell them.

Yes, Justin Hey, it's Eric.

<unk>.

I mean, the short answer is yes.

We fundamentally believe that we're providing a tremendous amount of value for sellers and we've built that experience the system over the course of eight years and work ethic.

And class of that.

And we're also becoming very good at servicing buyers and understanding how to resale homes efficiently improving that experience for agents and buyers and launching exclusive on top of that.

Take a step back if the marketplace for managing and we wanted to make sure that we have sellers coming to the platform and delighting them and we are buyers coming to the platform and delighting them and really touched around open door homes. So.

To your question do we view this as an opportunity to grow inventory. The answer is yes, we're managing that.

That growth with <unk>.

Proper spreads.

Sure that we hit our contribution margin targets, while also managing risk.

Those are the dynamics that play in and we're continuing to invest our platforms that we can grow.

Great. Thanks for that and then one follow up if I could.

You give us any insight into the early returns in the northeast markets. You know there's been a few questions bouncing around of how translatable to model is two markets, where the homes, maybe arent as similar.

We're still in early days.

All of those markets launched relatively recently over the course of the first half of this year and so it's early days and our playbook for market launch is very focused early on making sure. We feel really good about the quality of our underwriting and we're proactively managing again.

The dynamic macro that we've been talking about we're looking at each and every market, but as you would expect in a more complex market, we're slowing our pace as we as we manage that book of inventory.

Alright Thats helpful. Thank you for taking the question.

And our next question comes from the line of Ryan Tomasello with <unk>. Your line is open. Please go ahead.

Hi, everyone. Thanks for taking the questions.

Can you provide some color around the impairment.

Many homes that related to that was concentrated in specific markets and then a follow up question on your spread can you say what your service fee stands on average today, if you feel like <unk>.

Stronger expected conversion that you mentioned could actually compel you to take those service fees higher as you look to take your foot off the gas a bit here in terms of the acquisition piece.

Sure I will take that hey, Brian so on the impairment, we don't break out.

By geography or by month of cohort, but I would say is just meant to reflect as of June 30, our expectations for foreign HPA and resale policies at the time.

Certainly something we continue to respond to what is a rapidly changing macro environment and we have joseph prices reflect that.

With respect to your second question around conversion and feed I think.

One of the things we've been talking about for little while it has become.

More significant as of late is that notwithstanding higher spreads we have seen conversion output.

Outperformed our expectation on a spread adjusted basis. So just unpack your comment we have a service fee.

Static in all our markets, it's 5%, we manage spread via value, we provide to the customer and that is what have we have increased.

<unk>, particularly in May on the heels of the mortgage rate move.

Notwithstanding the fact that spreads would increase I would say, we still see conversion performing quite nicely on a spread adjusted basis and importantly, as we see the housing market start to stabilize.

Our expectation is that we can start to adjust spreads over time and you have to endure for us will be able to grow back into acquisitions volumes.

Thanks, and if I can just squeeze one more in on the expense levers you're pulling.

In relation to that I think the $190 million you are guiding to for <unk>, how much more room is there for efficiency to the extent the.

A market does continue to deteriorate and if we should.

The additional sequential.

Iteration into the fourth quarter and the expenses.

We're aggressively managing down our costs the $190 million that you referenced is call. It a high single digit quarter over quarter decrease and we expect to exit the quarter on a run rate at an even lower level than that there's really three main levers we're pulling to do that but first is we're flexing down our third party capacity per day.

Aggressively as we scale up.

Very deliberate about leveraging third party labor versus hiring.

So for example in the FERC staff.

40% of our home operations passed were carried out by third party.

Third party labor.

In the process of dialing that capacity capacity back.

Second we're focusing our marketing spend on our most efficient highest return channels given the highest Brent environment and then finally the team.

Really scrubbing.

Every aspect of our spending and we expect that to continue to come down over the course of the year.

Great. Thanks for taking the questions.

Thank you and our next question comes from the line of Jason Weaver with Compass point. Your line is open. Please go ahead.

Hi, good evening, Thanks for taking the question as it pertains to just broad consumer adoption trends I Wonder what you are seeing regarding offer request rate as a percentage of your average site visitors is that right and given the uncertain environment.

In Q2, I think we talked about seeing record.

Record offers which was it was.

Obviously, good to see we've made meaningful investments in our brand and what we know is that as we grow awareness.

Our solution.

We grow the business ultimately over time and so.

Labour seeing those investments.

Move the needle.

Okay, and if I could follow up with just one more bridging off one of the prior question the $82 million Mark.

I'm curious about that against the language that you have.

David that you may look to reduce prices to be able to clear out some inventory going forward. So we should expect to see.

<unk> marks the similar magnitude in the fourth third and fourth quarter.

I can't sit here today and give you a forecast for 930 in terms of impairment, but we will go through that same methodology again my comment was just.

<unk>.

We value them based on what we know at the time, they can afford expectation where home prices are going and the resale policies we have in place.

But given how dynamic the market is right now we're going to continue to adjust pricing and resale policy as we work to drive clearance across entire portfolio and that'll that'll be the basis for where we mark homes as of 930 I can't sit here today and give you give you a number.

Our direction fair enough. Thanks, Thank you Mark that works.

Okay.

Thank you and I'm showing no further questions and I would like to turn the conference back over to Eric <unk> for any further remarks.

Thank you to close it out I want to I want to test that we're focused on the long term.

I do want to remind us of a few things.

We spent the past eight years, improving and making efficient how we buy homes and this has made us best in class at that.

Thanks.

The past eight years, improving and making it efficient how we buy homes.

And this has made US best in class of that we have shifted a tremendous amount of resources and focus and now becoming the best seller in the world of homes, where.

We are the only company vertically integrated as a principal with incentive alignment with incentive alignment to improve and optimize that system. Because it means we will become the best buyer and the best selling homes and this capability will underpin our platform.

Thank you for attending.

This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.

Q2 2022 Opendoor Technologies Inc Earnings Call

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