Q3 2022 Redfin Corp Earnings Call
Good day, ladies and gentlemen, and welcome to the Redfin Corporation Q3, 2022 earnings Conference call. All lines have been placed on a listen only mode and the floor will be opened for questions and comments following the presentation.
You require assistance throughout the conference. Please press Star zero on your telephone keypad for me for liner operator at this time. It is my pleasure to turn the floor over to your host Megan.
Natalie ma'am the floor is yours.
Good afternoon, and welcome to Redfin financial results Conference call for the third quarter ended September 32022.
Meg mentally redken head of Investor Relations.
Joining me on the call today is Glenn Kelman, our CEO and Chris Nielsen our CFO .
Before we start.
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.
On this call we will present non-GAAP measures when discussing our financial results. We encourage you to review today's earnings release, which is available on our website at investors Redfin Dot com for more information related to our non-GAAP measures.
Including the most recently are directly comparable GAAP financial measures and related reconciliation.
All comparisons made in the course of this call are against the same period in the prior year unless otherwise stated lastly.
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 Naughty replay will also be available soon after the call with that I will turn the call over to Glenn.
Thanks, Meg and hi, everyone.
As many of you have now heard redfin today laid off 13% of our employee and announced the closure of redfin now.
The reduction since April 30 has been 27%.
We're grateful for the dedication and ingenuity of the people, leaving and heartbroken that we don't have enough customers to pay for their work.
Our June what's your reaction to slowing 2022 home sales.
Today's layoff assumes a housing downturn that lasts at least through 2023.
Letting us earn adjusted EBITDA next year, even if home sales declined with the levels of the great financial crisis, when the U S population was 10% smaller.
We still plan to generate our first annual net income in 2024.
Red Sands generated $600 million of third quarter revenue compared to a projection of $590 million to $627 million.
From the third quarter of 2021 in the third quarter of 2022, we increased the share of transactions closed by redfin agents and from customers from redfin referred to our partner agents, but only by two basis points.
We had warned investors in our last call that our June of so many agents would be a setback for third quarter market share. So we consider any gain a victory.
We lost $90 million compared to a projection of 87% to $79 million. The adjusted EBITDA loss was $51 million.
The entirety of the earnings shortfall came from Redfin, now, which has been selling its homes at lower than expected prices.
As recently as August we still anticipated full year gross profits from our properties segment, which includes both redfin now and our concierge service.
The properties 2022 gross profits to the third quarter were negative $5 million and we now forecast full year gross profit losses of $22 million to $26 million.
Our inventory of homes has declined from its August peak of $432 million to $265 million as of October 31.
With another $92 million under contract to sell.
Of the purchases that went under contract in the second quarter at 67% had sold or under contract for sale by September 30th.
Tober 31 that number was 82% we expect to complete the liquidation of a redfin now inventory in the second quarter of 2023.
From the end of the third quarter. This will return more than $100 million of cash to our balance sheet.
Our decision to close our <unk> business is only partly due to the challenges we've had selling redfin now homes.
Prices may stabilize in 2023, but the cost of capital, especially the capital coming from our balance sheet is likely to remain higher for the foreseeable future.
That is already lowered how much redfin and other eye buyers can pay for homes, which in turn it to discourage redfin dot com visitors from contacting us about an instant offer.
Those visitors, who still want a cash offer will largely be routed to open door through a partnership that has been in place since 2019 with renewed activity in the first half of 2022.
Hi, Bonnie for Red cell has never been an end in itself, but only a means to meet more homeowners when they first consider moving.
Now that <unk> contributions to listening demand it becomes smaller and less certain it isn't worth the risk.
We can sell more homes over time by focusing on our core business.
Building, our online audience, and giving customers the best brokerage mortgage title and rental service.
And each of these areas our performance is improving even if housing demand has fallen.
We increased our share of listing search traffic in the third quarter and expect those gains to accelerate now that we fixed a bug in our software that from April 22 to August 30th precluded new online visitors from getting listing recommendation.
This bug was the main reason that in the third quarter 'twenty one third.
Third quarter of 2020 to redfin Dot com visitors declined by 5% fixing the bug boosted our traffic in the final month of the third quarter and beyond.
Even with the bug residents your over year decline in third quarter visitors was nine points better than realtor dot com, which we seek to overtake as America's number two real estate site by September the magnitude of our year over year decline was one point better than the top incumbent Zillow Dot com.
We now expect listening search share, which we measured by comparing our visitor growth to that at Zillow dot com and <unk> dot com to accelerate.
In July we began competing significantly better for people who start their home search on Google, which is the main source of new redfin Dot com visitors for.
For Google searches on our home address in the first 10 markets Redfin opened we started appearing first more often than any other competitor.
These homes or excuse me. These home address searches account for about two thirds of the traffic we get from Google.
October traffic from new visitors coming to rich advise search engine had increased 14% year over year.
Since the most reliable earliest indicator of transaction share growth is search share growth our gains in search engine ranking will probably rates are fortunate is more than any other development we discussed today.
The improving sales execution can have a compounding effect on search share gains until recently, our salesforce has struggled to overcome a change in customer behavior since the great financial crisis homebuyers to become more casual and convenience driven and asking for service from the array of agents. They can now meet online.
The yield the same number of sales our website and mobile applications have had to generate more and more customers both for redfin agents and especially for partner agents.
That started to change this year and a 2020 pilot that didn't expand all of red cent until the 2022 home buying season, we reduced the number of customers each agent serves and close rates start up.
Of the resin customers, who end up buying a home, 37% stuck with a redfin agent or purchase on this.
Excuse me of the redfin customers end up buying a home, 37% stuck with a redfin agent for purchase in the second quarter of 2022 up from 28% in the second quarter of 2021.
This was the first significant year over year gain across a full quarter. Since 2019, when we started measuring how many redfin customers, who end up buying a home stick with redfin the sale.
Loyalty deals, which we define as repeat referral customers as well as customers from a redfin agents personal network also kept growing it's a fraction of our brokerage as total deals up from 31% in the third quarter of 2021% to 33% in the third quarter of 2022.
A new discipline in managing agent performance should bolster both loyalty sales and especially close rate. This in turn can develop the brokerage into a second engine of residents growth with redfin dot coms traffic gains as our first engine.
In each of our top 20 markets over the last six months the brokerage share of homebuyer sales grew faster than our share of home buying demand.
But we also need to improve the brokerages gross margins our July six price increase in which we eliminated commission refund averaging well more than $1000 for homebuyers in 22 markets has had almost no sales impact we now plan to eliminate the commission refund in all markets starting with the customers writing off on December one.
Pilot data indicates this will lower the total number of brokerage transactions by a miniscule, 0.13%, while lifting gross margin five points.
Read says bedrock principle is that Americans deserve a better deal from brokers, but our focus now is on saving customers money, where they value most and listing fees and mortgage rates.
Improving close rates driving loyalty sales and increasing revenue per se. It will increase the efficiency of <unk> main gross profit engine, but we've also lowered the brokerage cost our November lay off has reduced the number of field personnel to match lower levels of U S housing demand.
Also increased the ratio of revenue producing agents to support personnel field management training the.
The 2023 ratio will be higher than in 2022, but also higher than in 2021, when real estate services had 33% gross margin since the housing market is expected to keep worsening we may not be able to get all the way back to 33% margins in 2023, but we can get close.
When a balanced market returns and real estate services can even kind of an even higher gross margins.
With Redfin Dot Com is the first engine of our growth in the brokerage network of loyal customers second the mortgage and title services. We can offer brokerage customers is the third.
In the five years that we spent trying to build our own lender from the ground up our attach rate for any given month never exceeded 8%.
Since redfin acquired bad equity home loans and April the percentage of Redfin homebuyers using redfin for a mortgage has kept increasing from 12% in June to 17% for the third quarter.
From here may be more gradual and occasionally uneven, but mostly we expect increases to continue in the three markets, where we have been especially focused on integrating the <unk> funded by equity sales forces attach rates over the last three months have been between 23, and 25% and are still rising.
With title services, we're doing even better in the third quarter title forward to attach rate was 40% of eligible brokerage transactions up from 29% in the second quarter in the third quarter of 2021, the attach rate with only 8%.
<unk> investment and its agents as employees, which gives everyone a stake in selling our entire product suite is one reason for our success.
The other is the quality of our mortgage entitled service, among Redfin brokerage customers Bay equities third quarter net promoter score was 12 points higher than other lender.
But that investment in employing agent is still controversial.
On the day of the layoffs were painfully aware than employing our agents limits redfin is resilient to extreme volatility.
Employing agents is magnified red pen losses in the 2020 to bust and limited our share gains in the 2020 boom.
If redfin, where a portal or even a traditional brokerage with contractors on 100% Commission.
Idleness would mostly be a problem for our agents not our company.
And our identity isn't binary we decide from month to month, and sometimes a week to week, whether its staff, our brokerage to handle 50% or 75% of the demand generated by redfin Dot com.
The rest of the demand is routed to partner agents, who often passed a third or more of their commission on a closed sale nearly all of which is gross profit.
To make our business more resilient with higher gross margins, we could staff to send more demand partners limiting the number of agents left idle in the downturn.
It will always be more profitable for our brokerage to employ an agent busy with million dollar customers and to use partner agents for occasional sales of $200000 homes.
What happens in between is where we use our judgment balancing margins and share growth risk and reward.
Best to make those calculations not a priori, but based on what will deliver the most profit in the current market. Our focus is squarely on 2023 earnings.
But that focus won't tilt the balance far from employees.
<unk> partners, our employees closed sales at a higher rate build customer relationships that lead to repeat and referral sales for our benefit and drive higher mortgage entitled attach rates. This gap between employee and partner performance is only widening the.
The judicious allocation of opportunities to our own agents is how we make the most profit per home buyer and Thats why our growth is more durable than if we were purely dependent on increasing online traffic or recruiting agents.
Improving the performance of our brokerage model excuse me mortgage entitled business is the most well established way to increase the gross profits we earn from each online visit to redfin Dot com.
But we're also investing aggressively in digital services with gross margins above 70% are referrals to partner agents has been the first example of that approach rent a rentals marketplace that we acquired in April 2021.
Now the centerpiece of our strategy to expand it.
We told investors that it would take us six months defined ramped new leader and that this leader with nearly 12 months to turn right around.
John Ziegler started as rents CEO in August 2021, we added rental listings to redfin dot com in March 2022, and.
And relaunched the company, formerly known as rent path under the rent name in June 2022.
By August sales were growing fast net bookings, which are the annualized revenues from new customers less the annualized revenues from departing customers were negative 4 million to $5 million in every quarter of 2021 and the first two quarters of 2022 net bookings were already positive, but only barely so for the third quarter.
Net bookings were plus $5 million and we expect an even larger gain for the fourth quarter on the strength of these bookings in the fourth quarter of 2022 rent will generate its first quarterly year over year revenue growth in years, we expect rent to start generating it generating adjusted EBITDA by the fourth quarter of 2023.
From September 21 to September 2022 sales productivity more than doubled.
And we've now assembled a team of account manager focused on customer retention and add on sales in the third quarter. The revenue lost due to churn as a percentage of total revenue fell 15% year over year.
But the most important change has been in the development of a second product line to complement rents listings marketplace digital tools for property managers to market their communities on search engines, and social media sites and to respond to inquiries from potential residents.
Rents listings marketplace began adding more clients than at loft in August 2022, but that trend began for digital tools six months earlier in February .
As a result digital tools account for <unk> excuse me as a result of digital tools accounted for 25% of Brent third quarter revenue compared to 22% in the third quarter of 2021.
Selling property managers, both the fish and the fishing pole less is more and more lasting client partnerships with more than double the revenue per client.
One recent rent has been able to focus on these tools and spend the increasing contribution of rentals visits from redfin Dot com in June redfin Dot com added 12% of rental visits above and beyond the visits to rent site.
By September this contribution had grown to 18%.
Before I turn the call over to Chris Let's talk about the housing market, which more people are worrying may collapse as it did in 2008.
This concern has seemed to only have right to us.
23 sales may decline to levels similar to the great financial crisis. The U S population has grown 10% since 2008.
But outside of pandemic boom towns like Boise, we expect prices to be more stable because homeowners have more equity today than in 2008, allowing many to set up this downturn.
Mortgage purchase applications in the last week of October fell 41% year over year. The number of homes for sale is starting to pile up with the 7% year over year increase through the end of October .
That is compared to historically low 2021 levels.
The number of new listings that October actually fell 18% year over year.
This is the season when redfin listing customers take their homes off the market for the holidays, but what's different in 2022, if customers caution about re listing next year. Our agents report that this inventory may not be coming back anytime soon.
The problem with demand is that housing has become an affordable from October 2022 October 2022, the monthly payment for an American family buying the median priced home increased by 71%.
For that same family to rent a median price department the monthly payment increased by 24% still far faster than income growth.
Wait the rate of household formation in late 2022 was less than one quarter. What it was at its summer 2020 peak.
It will remain that way until the cost of housing decline substantially.
Over the summer home prices East only slowly in response to higher interest rates. Almost every other that are in the American economy immediately felt the fed staying but homeowners have been reluctant to sell their homes when that involves giving up a 30 year mortgage at a fixed two 8% rate.
If every homeowner had a fixed rate mortgage the pricing log jam might never have broken, but builders ni buyers space higher holding cost and are now the ones, forcing prices down in an otherwise deadlocked market.
This is a major reason why the seasonally adjusted case Shiller home price index, which increased two 4% from January to February fell one 3% from July to August August data came out on October 25th the magnitude of both the gain and the drop or nearly unprecedented.
Low liquidity adds to the volatility created by massive rate swings in places like Phoenix, and Atlanta more than 10% of the sales are from home flippers.
Builders are more creative than the buyers about pricing, but almost as motivated one of our Houston agents has seen builders offer at $10000 check or closing cost of $3000 gift card and a free refrigerator.
Dallas area builders offering agent $10000 in extra commissions and a chance to win a Mercedes.
More commonly builders are subsidizing, a lower mortgage rate, sometimes by as much as one five points. These incentives, which don't show up in pricing data are why I buyers hate holding homes near a new development.
Falling prices will eventually spur sales, but the immediate effect on buyers will be discouraging. What this means for redfin is the only growth will get next year is what we take from others.
Higher fees and offer slower service with a customer experience that often breaks the moment of online visitor asked for help.
Taking share in a falling market is always hard but there is a reason we told investors on the eve of our public offering that we were born in the dark we've run a mid margin business through terrible ups and downs after years of competing against companies with billions in cumulative losses austerity can feel like a relief.
The overriding concern our investors have is whether we can get through this downturn without running out of money.
We'll pay our debts come hacker high water and will keep growing.
<unk> still regional listing search side can gain on its rivals for years to come our rental business can double our brokerage as progress on close rates and loyalty sales concerned our share through the route or lending entitled business can print money.
Got to be a long night, but redfin can still thrive in the darkness, and when the sunrises will be stronger than ever take.
Take it away Chris.
Thanks, Glenn third quarter revenue was $601 million up 11% from a year ago and within our $590 million to $627 million guidance range.
Real estate services revenue, which includes our brokerage and partner businesses generated $212 million in revenue, which was down 18% year over year, while coming in above the high end of our guidance.
Brokerage revenue or revenue from home sales closed by our own agents was down 17% driven by transaction volume decreases of 17%.
Revenue from our partners was down 37% on a 26% decrease in transactions and mix shift to lower value houses.
Overall real estate services revenue per transaction was up 1% year over year.
The properties segment, which consists primarily of homes sold through redfin now generated $300 million in revenue up 26% from a year ago, driven by a 37% increase in homes sold.
Our rentals business generated $39 million down 4% from a year ago, but up slightly from the second quarter of 2022, marking our second consecutive quarter of sequential rental revenue growth.
Our mortgage segment generated $48 million in revenue, which was at the high end of our guidance range.
Our other segment, which now includes title and other services contributed revenue of $7 million, an increase of 122% year over year, driven by increased attach rates for our title and closing services.
Total gross profit was $58 million down 54% year over year.
With a total gross margin of nine 7%.
Total operating expenses were down $4 1 million or 3% year over year.
Decreases in operating expenses in our organic business were offset by a $9 1 million increase attributable to the acquisition of Bay equity our mortgage business as a percentage of revenue total operating expenses represented 24% down from 27% one year ago.
Technology and development expenses increased by $4 $4 million or 10% year over year.
Included in the increase was zero point $6 million from Bay equity.
The remaining increase was primarily attributable to a $3.0 million increase in personnel costs.
Total technology and development expenses represented 8% of revenue flat from 8% one year ago.
Marketing expenses decreased by $15 4 million compared with the same period in 2021.
The decrease was primarily attributable to reduced advertising spending as we were still running mass media advertisements in the third quarter of 2021.
Shifting the timing of our campaign earlier in 2022.
This decrease was offset by an increase of $1 $6 million from Bay equity.
Total marketing expenses represented 6% of revenue down from 9% one year ago.
General and administrative expenses increased by $6 6 million or 12% as compared with the same period in 2021 the.
The increase was primarily attributable to a $6 8 million dollar increase from Bay equity.
Total G&A expenses represented 10% of revenue flat from 10% one year ago.
Turning to segment level profitability real estate services gross margin was 26.0% down 1140 basis points year over year. This was driven by a 970 basis point increase in personnel costs and transaction bonuses.
Total net loss for real estate services was $9 $8 million down from a net income of $23 $3 million in the prior year.
The decrease was primarily attributable to lower revenue and gross margins as the housing market slowed.
Set by an $8 $3 million year over year decrease in operating expenses.
Properties gross margin was minus 10, 9% down 1090 basis points year over year.
This was driven by a 1110 basis point increase in home purchase and related capitalized improvements.
Total net loss for properties was $44 million down from a net loss of $8 million in the prior year.
The increased loss is attributable to lower gross margins for the segment as we sell through inventory purchased last spring at unfavorable prices for the quarter. We recorded a net charge of $13 $435 million as a result.
The lower <unk>.
Cost of our market analysis for the inventory that we earned on September 30th.
At the end of the quarter the cumulative balance of these write downs was $18 3 million.
This reflects what we observed on pricing to sell homes that we bought earlier in the year.
Rental gross margin was 77, 6% down 410 basis points year over year.
This was driven by a 230 basis point increase in personnel costs as we've expanded the services that Glenn mentioned.
Total net loss for rentals was $24 million down from a net loss of $17 $9 million the.
The increased loss was primarily attributable to year over year declines in revenue as discussed earlier, while operating expenses remained roughly flat at $58 million compared to $51 2 million in the prior year.
Mortgage gross margin was nine 7% for the third quarter down from 12, 8% in the second quarter of 2022. This is driven by lower refinancing volumes total net loss for mortgage was $5 2 million.
Other segment gross margin was 15.0% an improvement from the negative 12% one year ago total.
Total net loss was less than $5 million compared to a net loss of $1 5 million in the prior year.
Turning back to consolidated results total net loss of $90 million just below the low end of our $87 million to $79 million guidance range.
Previously mentioned lower of cost or market charge was the driver of our forecast Smith.
Adjusted EBITDA loss was $51 million.
Diluted loss per share attributable to common stock was <unk> 83, compared with diluted loss per share attributable to common stock of 20 cents per share one year ago.
Now turning to our financial expectations for the fourth quarter of 2022.
<unk> revenue is expected to be between $430 million and $459 million.
Representing a year over year decline between 33% and 29%.
We expect our real estate services segment to account for $136 million to $144 million of that revenue.
Property revenue is expected to be between $228 million and $240 million.
Rentals revenue is expected to be between $39 million $40 million mortgage revenue is expected to be between $29 million $32 million.
Turning to segment gross profit, we expect real estate services gross margins to decrease both year over year and sequentially consistent with typical seasonality.
For property as we expected gross profit loss of $21 million $17 million for mortgage we expect a gross profit loss of 1 million $3 million.
Total net loss is expected to be between $134 million and $118 million compared to a total net loss of $27 million in the prior year adjusted EBITDA loss is expected to be between $71 million and $58 million.
On a consolidated basis. This guidance includes approximately $25 million and total company marketing expense 17.
$17 million of stock based compensation $18 million in depreciation and amortization.
<unk>, 3% to $21 million in restructuring expenses and.
<unk> 5 million to $4 million of interest expense.
In addition, we expect to pay a quarterly dividend of 30640 shares of common stock to our preferred stock holder.
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.
Before we open the call for questions I, just wanted to take a moment to acknowledge the difficult but necessary decisions, we announced today.
Regarding our employee reductions and the wind down of Redfin now.
Glenn and I, both firmly believe that we have the right long term strategy for the business, but we also acknowledge the need to remain focused on driving profitability in the short term and allocating capital wisely as we navigate a challenging housing market.
And now let's open the line for your questions.
Thank you the floor is now open for questions. If you do have a question. Please press star one on your telephone keypad at this time questions will be taken in the order they were received.
Anytime Youre question has been answered you can't remove yourself from the queue by pressing one.
Again, ladies and gentlemen, if you do have a question. Please press star one on your telephone keypad at this time.
Our first question comes from.
Tom White with D. A Davidson please state your question.
Great. Good evening, everyone. Thanks for taking my question Glenn.
Glenn I had thought this question was going to be a bit of a left fielder, but you kind of touched on this in the prepared remarks a bit.
I'm curious, whether you guys have given any consideration to turning or leaning more into kind of the digital media lead Gen parts of your business.
Maybe reducing kind of your brokerage footprint or even exiting brokerage completely as a way to kind of have less fixed overhead.
Higher margin accelerate kind of the timetable for meaningful profits. It seems like you have got.
Great portal that gets a lot of traffic.
Both for kind of listings and for rentals, you've got a partner network.
<unk> built already.
Realize that it's kind of a pivot away from maybe.
The original focus of the business around lowering kind of <unk>.
Expenses for consumers, but would just be curious to hear your comments or thoughts on that.
Well first of all we definitely invested in digital revenue streams as we already talked about rent in the partner program, but we haven't mentioned the mortgage marketplace, we stopped using zillow for that built our own so that we could monetize.
Directly and that is going to increase gross profit per visit were running display ads on the website, we're adding them to mobile applications. We have the fit between our key to monetize every pixel on the side as aggressively as we can and we think that the employee model is entirely consistent with that.
It is crazy to turnover, a $2 million opportunity to a partner agent when an employee will close out at a higher rate, we'll keep the customer relationship for light and we'll return more gross profit dollars from that sale.
Only thing we can afford to do is have employees, who are idle and so when we discussed the balance between demand going to partners and demand going to employees, especially on the day of the layout. We just wanted to be clear that we set staffing level to a point, where even if demand declines we can still keep our employees busy and.
<unk>.
And take that demand away from partners, we've run that closer to the bone and past years, because we wanted to take share and when employees closed sales at a significantly higher rate.
But long term I just think that.
You will get more durable growth if you give people a better <unk>.
Proposition, where it's a seamless customer experience the services faster the fees are lower real estate is more efficient and short term. If we're just trying to squeeze as much profit out of 2023 as we can we do that with employees. We just have to be judicious about it because we over higher than their idle it totally rose our margins.
So we're just being careful in setting staffing levels. After this layout to make sure. We can keep everybody busy because when we do that the way to make the most money.
And online inquiry.
That makes sense I appreciate it thanks, thanks for the color.
Thanks, Tom our next.
I'm sorry.
Our next question comes from Brian .
Okay. Our next question comes from Jason <unk> with Oppenheimer. Please state your question.
Thanks.
I have just a question what type of testing have you done on pricing I mean, we've heard that consumers like the product but.
It just seems like you don't charge enough to make enough profit at the corporate levels right I mean, thats kind of what we've all been talking about so why keep the fees to consumers. This low given that you are kind of the only brokerage firm who is trying to do this with them with brokers as employees right.
The downside that we've all talked about yi.
While our charge more on what sensitivity testing have you done on that Jason I just wanted to acknowledge that it has been upside to capture more gross profit per inquiry.
As long as you keep the agents busy but to address the fee.
We have just eliminated the Homebuyer Commission refund.
We tested that in the summer, we're eliminating wholesale on December one.
It will add five points of gross margin.
We've been running this business for 16 17 years, except where we are caught in the downdraft like this has a 30 plus percent.
Margin for real estate services, if you're generating $1 billion in revenue and a 30% gross margin.
You can decide whether or not you want to be profitable and the cuts we've made in headquarters costs to lower our fixed costs.
Indicate that we are deciding to be profitable that we are titrating, our headquarter spending too.
Our gross profit now we may take further steps to raise prices, even more but we have determined through extensive testing that buyers are not price sensitive and sellers are price sensitive and if you look at all of the portals trying to generate sell side demand they have failed.
And we have succeeded because it turns out that people who come to our website respond to either a cash offer or to a 1% fee and so if we want to take share in a durable way, we still think that offering customers a better deal on the sell side will drive share.
And we can do that profitably because we can run a business at a 30% plus gross margin.
$1 billion scale, and still have that generate 10% to 15% operating margins over time.
So is that just need to see if we're going to generate profit in 2023, I think we've reiterated several times.
That come Hell or high water and Thats, what we want to do.
So without giving long term guidance basically the $1 billion.
Real estate revenue that the Northstar to make the real estate brokerage business.
Economics work.
I don't care, what the revenue volume is the North star is to generate adjusted EBITDA in 2023.
Okay. If we were in a situation where it was $800 million of revenue or $1 $4 billion of revenue, we would still generate adjusted EBITDA and I wasn't making a segment prediction on my revenues I was giving you a gross.
Of where our revenues are.
And it's about $1 billion when you add everything up.
No.
We're not trying to provide forward guidance, we're just saying that.
These acts essential anxiety about how do you make.
Our business work when you have $1 billion in revenue and 30 plus percent gross margin.
I think you would decide to spend too much and headquarters where you cut those costs back and today, we cut them back.
Thank you.
Okay.
Our next question comes from Navin <unk> withdrew its securities. Please state your question.
Yes.
Thank you very much two questions from me, maybe just on the on the gross margin and how we should think about.
<unk>, that's a part of the overall equation so.
And I mean real estate.
Gross margin so and then Glenn you talked about how you pointed to 22021 gross margin of 33% then maybe.
Won't get them, there wouldn't get get close to those.
That's been the.
Elimination of the of the World.
The cash back to the buyers is that is that fair.
And then.
How should we be thinking about the.
Sort of.
Improvement in gross margin throughout the year given the all the uncertainty that we have.
With respect to housing.
The market evolves into next year.
So there are several drivers of gross margin first of all as I said, we've run this business for many many years, where the gross margin has been around 30% or better.
And.
It's very hard to do that when rates increase at an unprecedented rate, but we're still we ran this business at 22.
Plus percent gross margin.
The drivers are raising prices, which we just did.
And so that had a minimal impact on demand for rolling that out enterprise wide second lowering field costs.
That means that.
Not only are we just reducing the number of agents to match the demand that we have coming.
Coming into 2023, but also that we structurally change the brokerage so that there are fewer managers fewer trainers here support staff per revenue producing agents.
So we are going to get more efficient and charge a higher price at the same time, while being very judicious about how we allocate opportunities to employees versus partners, because we want to make sure that we have enough demand to keep our employees busy at all times and nine leased our margin when that doesn't happen.
So those are the three prongs of.
Driving higher gross margin.
So maybe just on that so.
Can I just pause Chris do you have anything to add to that.
Chris you may be on mute.
Yeah.
Thank you sorry about that.
Just a comment here in terms of timing of gross margin changes so.
Glenn gave an overall description of how we're thinking about gross margins going into 2023, and then just in terms of how you might think about it quarter to quarter. We do expect something that would be more consistent with the normal seasonality of gross margins that we've seen in the business where gross margins are lowest in the first quarter they tend to <unk>.
Into the second quarter, and then into the third quarter a bit higher than that and then pull back into the fourth quarter as volumes decline. So that's the general shape of what we would expect in any normal year 2023 included where we do expect volumes to be down, but we don't expect the same amount of in year volatility we've seen this year.
Understood and then the followed by high is around.
Liquidity, so I guess you guys deciding to exit.
Hi buying.
And given you're still holding some inventory just trying to figure out how much cash that would add to the balance sheet.
When you want to come out of this.
Give us a sense of $100 million when that looks like.
It's a $100 million in cash out in the balance sheet.
Understood. Thank you.
Okay.
Thank you.
Our next question comes from.
Mike <unk> with Goldman Sachs. Please state your question.
Hey, good afternoon. Thank you very much for the question.
I was just wondering given the improvement and momentum that you have in rentals.
The exit of properties and.
The cost savings.
Do you feel more or less confident or about the same.
Regarding your 2023.
EBITDA positive target.
And then as a follow up I was just wondering.
On rental specifically it was good to hear that you expect to see profitability in the fourth quarter of 'twenty three.
Does that suggest we might be at.
Breakeven profitability for the full year or is there a little bit too early for that thank you very much.
Too early to be breakeven for the full year on rent we are not guiding to that the business is doing extremely well, it's getting better week by week and month by month.
But.
We're going to stick to the guidance its going to breakeven in the fourth quarter not for the full year.
And then obviously having rent.
Even by the end of the year really makes it easier to have the overall EBIT.
That business has in some ways and a liability at least in 2021 and coming into 2022 and it was just losing money.
Hand over fist, and now are raking it in there as a tailwind and rentals, but theyre also executing really well and they have a unique product suite.
I had to describe in the call.
It gives us great confidence that we're going to keep.
Increasing sales, while holding costs steady.
Thank you very much for the thoughts.
Yes.
Our next question comes from John .
John Campbell from Stephens, Inc. Please state your question.
Hey, guys.
With the reductions you've made I know, it's never an easy thing markets kind of left you with little choice there, but just zero in on the market kind of how you guys are viewing the market.
At this new staffing level and just overall opex I'm, just curious what kind of market you're positioned for that something similar to what we've seen of late or is it are you being proactive in kind of reducing costs ahead of us.
The expectation that housing continues to drop from these levels.
The ladder.
We think that the housing market could get worse.
We haven't seen.
U S home sales dip below 4 million units a year.
In decades, and the U S population has grown so we looked at what happened between 2008, and 2011 and took that as a baseline even though since then the population has grown about 10%.
Now, we're not just going to be a boat without a sale or a motor that floats with the tides in and out we need to take share we need to kick butt.
But.
We just got the pretty strong traction, especially at the top of the funnel right now are.
Our website is really really taking search share from its competitors.
<unk> and that is the best and most reliable indicator of topline growth.
Yes, that's very helpful and then I mean to your point.
You've got a lot of kind of noise. This quarter a lot of moving parts here, but that was a very good outcome for you guys I mean with the reduction in demand overall and you guys seeing growth of top of funnel. That's that's a very good outcome, but I thought maybe the bigger thing here was exceptional the attach rate, 17% that was I think double over double what you guys saw last quarter, what do you attribute.
Attribute to that degree of lift does that.
Is that bringing on and better integrating the equity or what's what's the main call out there.
Frankly, it's a great lender it delivers fantastic service, but we also employ our real estate agents and when you employ the agents you can ask them to sell more than themselves you can ask them to sell every product company Scott.
So we think that we can continue to drive attach rates higher we're not getting much credit for it and we shouldn't until bay equity generates a profit, but no lenders are generating a profit right now.
So I just wanted to be clear that.
We can make more money per homebuyer, because we can sell them more products and we can sell every single one of those products at a profit theres not going to be a loss leader where.
We're buying houses just so we can sell someone a mortgage or we're doing the mortgage so we can make money on title. We want every single one of these products to be profitable.
Absolutely. Thank you and then basically John just to make sure that I'm clear, we expect the market to be about 30% smaller in 2023 than it was in 2021. So there were $6 1 million units in 2021, and maybe there'll be 424 3 million.
Units in 2023.
Okay. That's great color. Thank you Glenn.
And.
I can't help but you got to keep clarify if there is less than that we're going to have to adjust to that too.
We're taking 2 million units out is already a lot.
Okay. Our next question comes from Mark Mahaney with Evercore. Please state your question.
Okay.
Thanks.
You talked a little bit about you gave your macro housing outlook and I think one of your simple points was that.
Home balance sheets.
Essential balance sheet, so just much stronger than they were back in <unk>, but what's your thought on that.
The duration of.
The.
Housing challenge that we're likely to see is this something that you think resolves itself within six months to 12 months. What do you think are the odds that it could take much longer to resolve.
Hope is not a strategy Mark we don't know how long it will take the results. So we have to assume that the sun will never come up that it will be night always and plan for our business. It can make money in that environment trying to predict.
When the war in Ukraine will end when inflation pressures what needs when the fed will backhaul is a fool's errand for US all we can do is prepare for the markets that we're in and to have the discipline to make money in that market instead of saying its not its going to come out tomorrow.
So I.
I don't know nobody can predict the future.
Okay, Alright, Glenn that's a very fair point, Chris one question for you on <unk>.
Gross margins.
The business has sustained 30% gross margins in the passenger real estate real estate services segment.
When the Sun is back out just talk again about where those gross margins can go long term is there is there a reason that that is that it's always going to be bound in that low 30% range is there something that would change in a model that would allow us to kind of go materially higher than that not 40%, but kind of mid to high thirty's.
I'm going to build off of Glen's comments in the script here and we talked about getting back to the 33% levels that we saw in 2021 and we do believe margins can continue to rise from there. The biggest lever. We have is also the one that Glenn talked about and that's continuing.
Indeed improve customer success rates that we're meeting a lot of customers and a better service, we provide to those customers to more of them that we could close the more we improve gross margins. It's the best lever in the business and we're really excited about some of the progress we are already seeing on that front. So.
That's the way, we think things continue to March up from there.
Okay. Thank you Chris So that's the five point lever from raising prices.
Okay. Thank you.
Our next question from Tom.
Mccanless with Wedbush. Please state your question.
Hey, good afternoon, everyone. So with the actions you've taken today.
Any sense of what base opex, either on a quarterly or an annual dollar basis should be going forward.
It's not something that we've broken out for people.
So that's.
That's not more detail that I don't want to add there there are a variety of levers we still have on opex and decisions. We will make during the course of the year, including I'm, probably most prominently.
Any kind of marketing that we do how much we spend both SaaS and media and regular online advertising. That's a variable that will continue to assess during the year based on the kinds of results, we see from marketing campaigns.
And then.
Referring to the 8-K this morning.
With redfin now.
It looks like from the end of October to the end of January you want to reduce the dollars outstanding, thereby about two thirds and then be completely out of that business by the end of <unk>.
I guess, it's kind of hard for me to believe we can move through the inventory that fast given how bearish view on the overall housing market, maybe could you walk us through that progression that you lined out the 8-K this morning.
Good morning.
Sure I'll comment here, which is just that this is the kind of sell through that we've actually been seeing in the third quarter and continued to see into the fourth quarter. We provided revenue guidance for that segment between $220 million and $240 million. So that's an indication.
We're continuing to see those homes move.
We are.
Pricing homes to sell them, we wanted to make as much profit as we can and of course I'm doing that but we've also told the team that a little bit to glenn's earlier commentary hope is not a strategy here, we're not waiting for prices to improve and so we have that.
The prices marks where we think they are to be really competitive yourself.
Okay and last one also worth noting.
Okay.
Oh, sorry, I just wanted to note that other eye buyers have sold 40% of the inventory that they bought in Q2, and we sold 67%. So we have a really large head start on liquidating our inventory.
Okay, great. Thank you Glenn.
And then just kind of walk us through with the $100 million.
<unk> cash coming back to the balance sheet, where does that get deployed or is that a rainy day fund.
We don't have a specific need or desire or investment area that we want to build in the business. So you should think about it is rainy day, but you should also think about it is us continuing to be really thoughtful about our capital structure about the dollars we haven't.
Play about the best investments the company could make.
And so.
All of that's on the table, but you Shouldnt think of that as I was taking those dollars and wanting to put them into opex or acquisitions or anything else.
Okay, great. Thanks, Thanks for the questions.
Thank you.
Our next question comes from.
Tom Champion with Piper Sandler Please state your question.
Hi, This is Jim on for Tom Thanks for taking the question. So I guess first on marketing.
Is there any sort of change in strategy or any new channels that could be more compelling in a downturn.
And second on Redfin now I guess could you discuss what the tradeoffs might be for site traffic. If we look out say two to three quarters.
Thanks.
So the shift in marketing strategy is mostly from a national buy to more local we've gone back and forth over the years.
And it just makes more sense to advertise locally because we're not like a taco Bell, where we make the same margin on Taco sold in Louisville, Our one sold in Manhattan, we make far more money when we sell more expensive houses, which are concentrated in coastal areas. So we're just going to deploy our advertising dollars more selectively.
See the highest margin markets.
And then.
What was the second question.
The just trade offs for retro.
Yes, with Redfin now zero.
It may affect conversion.
So this is something that we've said many times before that having a cash offer on the website got more of the visitors that we did have to contact us about selling their home, but what we noticed over the past six months is that.
Once the offers really came down in a higher cost of capital was factored into the <unk> price.
The conversion started to suffer so.
When you are at 2025% went below below what the consumer believes to be market value. The phones don't ring in the same way and you might make more money and take more share just by advertising a 1% fee.
So it certainly wont affect traffic and we don't even think it'll affect conversion that much.
Got it okay. Thanks.
Our next question comes from.
Tom comment Tony with Jefferies. Please state your question.
Hi, This is Chris who check in for John Thanks for taking my question can you just dig in a little more to the market share number you gave US is there anything more to call out about kind of drivers of that moderation from the last quarter and then how are you thinking about share going into 2023.
Any levers you can pull there to kind of offsetting headwinds. Thank you.
Well, we thought there were two offsets to share one, which we had warned investors about in the last call, which is just that when 5% of your salesforce walks out the door in a June layoffs.
Going to be harder to take share just because some of the customers are left an alert for those agents are actively trying to bring their customers over to a different brokerage. So we knew it would be hard to take share with that kind of disruption but.
We also were just affected by this dang listing recommendations, but where new visitors came to the site and we weren't recommending listings to them, which has been instrumental in engaging visitors getting them to stick with our site.
Contact our agents and so now the website is cranking again better than ever because we've seen this significant increase in Google ranks to the top of the funnel should be better we're going to have another layout here.
Disrupting our ability to take share.
But we're fairly bullish about share because we have this top of funnel gain and then we're also executing better in the middle of the funnel with higher close rates.
Okay, great. Thank you.
Okay. Our next question comes from Curtis Nagle with Bank of America. Please state your question.
Good evening, thanks for taking the question.
So Glen just wanted to refocus a bit more on these.
Elimination of the buyer refund.
So.
Look I think this has been sort of this kind of a long future in terms of marketing sort.
Should we think about it as a customer acquisition tool right.
For you guys over the years and I understand you guys have done.
At least a quarter or two of testing here in results.
Not been detrimental in terms of loss, but.
I just wonder if.
Taking it out kind of over a longer period of time that that might be just hard to see in terms of what.
The impact to customer acquisitions or market share gains.
Just maybe how to seeing or we're not been able to see over short period of time.
I guess, how would you look at that.
Well on the net job who is one of the commission refund, even though every time, we've tested eliminating yet.
<unk> had no reaction is different on the sell side. We've also raised prices on the sell side from one to one 5%.
When the customer doesn't also by our house with Us and there we did see a tradeoff in share but on the buy side. We haven't I think some of the long term effects that you're asking about are possible.
Read that the reason agents don't leave redfin is because they'd have to offer their customers that buy side refund at another brokerage I've worried that it helps with customer loyalty as well that customers come back for that refund.
But we really haven't been able to pull that apart.
We've run no refund in markets like Portland.
And in Missouri, where a refund is illegal and they have the same agent retention the same customer retention over many many years and so I'd just love saving customers money, but right now we've got to make money and so I'm. So glad we did this I should've done it a long time ago I kick myself every morning.