Q3 2022 Compass Inc Earnings Call
Non commission based operating expenses are somewhat fixed in nature and have historically increased sequentially from quarter to quarter as opposed to varying in line with revenue.
However, due to our cost reduction initiatives, including our reductions enforced during Q2 and Q3, the $328 million of Opex for the third quarter reflects a $38 million reduction from Q2 of this year and was in line with the Opex level from Q3, a year ago.
Our GAAP net loss for the third quarter was 100 $154 million compared to $100 million in the same period a year ago.
Included in the GAAP net loss for the quarter are noncash charges, which included $50 million of stock based compensation expense and $21 million depreciation and amortization expense.
Included in GAAP net loss this quarter was $29 million in restructuring costs related to our cost saving actions.
Primarily related to the reduction in force we announced in September .
As well as a $10 $5 million of expense related to the settlement of a litigation matter.
Consistent with prior quarters included in the press release issued today is a schedule that reconciles GAAP net loss to adjusted EBITDA.
We have $355 million of cash and cash equivalents on our balance sheet at the end of September .
Free cash flow during the quarter was negative $69 million, which was down over the prior year due to the higher adjusted EBITDA loss as well as approximately $18 million of severance payments related to a reduction in force and the motive exit that we announced last quarter.
Now turning to our financial guidance.
For Q4. This year, we expect revenue of 1.15 to $1 3 billion, which is a reduction to the implied Q4 guidance. We provided in August reflecting the pressure on the real estate market driven by continued increases in mortgage rates and volatility in the equity markets in particular since our August call 90.
Days ago mortgage rates have risen and additional one 5% two percentage points to over 7%.
When combined with our actual results through September . This Q4 revenue outlook translates to full year revenue in the six five to $6 $2 billion range compared to the previously stated guidance range that we gave in August of $6, one five to $6 45 billion.
Our adjusted EBITDA expectations for Q4, or a loss of $50 million to $80 million. This.
This translates into an adjusted EBITDA loss for the full year of 185 million to $215 million, which is within the range of the full year adjusted EBITDA loss guidance, we provided in August reflecting the favorable impact that our cost reductions have had to partially offset the continued weakness we're seeing on the revenue line.
Despite the market challenges we've seen in the second half of 2022 and the expectation for continued market challenges into 2023, the entire management team remains committed to managing the operating expenses of this business through the current challenging macroeconomic environment and delivering on our commitment to build and manage a profitable business.
In the future.
With that let me turn the call back to the operator to start the Q&A portion of the call.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Just for a moment to compile the Q&A roster.
Your first question comes from the line of Matt Do you Lee from Barclays. Your line is open.
Hey, good evening, everyone. Thanks for taking the questions.
I wanted to touch on the cost reductions I know you held the guide to exit 2022 at a one 5 million to $1. One 5 billion range in terms of Opex and I think I heard you say I think I think Greg said that your intention was to what's to come in lower than that in 2023 and please correct me if.
If I misheard, you, but if you could kind of speak to what you're contemplating there is this sort of temporary actions.
Whats the kind of potential range of outcomes for the additional cost reductions. Thank you.
Yes.
The vast majority of actions or for permanent non temporaries on that point.
What we shared is that.
We see industry forecasts between plus 1% to negative 23%.
For 2023.
That no we don't see we don't expect the market to be down 25% next year, but we are.
<unk>.
We've already begun to build a plan to account for that decline magnitude at that level.
That will be implemented over the course of the next three months.
And so.
Im sure Youre looking for more specificity, but we believe that with the numbers that we shared.
You can you can get to what you're looking for it.
Got it Okay no thats helpful. Robert.
Second one.
Zooming into the commission splits.
It looks like if I'm doing the math right that commission splits came down a bit so in your favor.
Sequentially.
There is an argument that in this type of housing market that the sort of share of activity by top producing sort of higher split agents tends to be even more pronounced in the favor of those agents.
Are you expecting to see something like that in your own business or should we expect the commission splits to kind of continue to go in your favor here. Thanks.
Yes, so there is a.
A sentiment that in down markets.
The best agents keep the business in the worst agents leave the business.
And I think that that showed itself to be true over several cycles.
Do you expect a lot of lower producing agents to lead the business.
That said at Compass we.
We focus on top 50% agents, we always have and have continued to and so I don't think the mix shift in.
Our agent population will change as much.
They'll continue to gain market share across.
Across.
The business from the agents that are leaving that other companies.
Got it alright, well thanks, Robert Good luck everyone.
Thank you.
Okay.
Your next question comes from the line of Matt Michael <unk> from Goldman Sachs. Your line is open.
Hey, good afternoon. Thank you very much for the question.
I just wanted to follow up on the prior line of questioning maybe in a slightly different way.
It was encouraging to hear about the.
The goal to get to free cash flow positive in 2023.
It sounds like it might be some mixture of additional cost savings.
So does that also imply positive EBITDA or are there some.
Working capital benefits that might be associated with what sounds like a slight de emphasis on some of the adjacent services stuff.
Maybe some more color there would be helpful. Perhaps like a non-GAAP .
Opex number that you might be targeting as a quarterly run rate. Thank you very much.
Let me start and then I'll, let Scott add to it yes, we're not giving formal guidance for next year.
But like I mentioned before I think that where with the numbers that we provided you are able to run your models.
It sounds like you'll be able to get to what you need.
But yes, we're not providing formal guidance for next year at this time, Scott please add to that whatever you'd like.
Yes, yes, I would just add and again reiterating we're not providing guidance for next year, but free cash flow and EBITDA do tend to move in sync with each other to a certain degree.
But the primary goal for the business is free cash flow positive period, and that's what we're focused on.
EBITDA.
Alright, thanks, guys.
Your next question comes from the line of Bernie Mcternan from <unk>. Your line is open.
Great. Thank you for taking the question maybe to start just the 15% growth in agents in the third quarter or is that a good run rate to think about going forward or should we expect that deceleration to continue.
Yeah in terms of the 15% year over year growth a couple of things to keep in mind.
If you go back a year ago.
There are two aspects of our agent growth that we purposefully pause from a cost perspective, one is we're still expanding into new markets in Q3, a year ago.
We were also doing M&A brokerages, where we thought it made sense for us.
From a cost perspective, given the environment that we're in now we pause both of those activities.
And so those headwinds on a year over year basis.
Two perspective.
We continue however to recruit agents as we always have.
Strategic growth managers, our agent recruiting team.
We believe the move to zero internal recruiting is off to start.
As I mentioned during the call we had a very strong October we started that effort in the middle of August .
So it's still early days, but we are we are positive on that.
Got it. Thank you and then is there any way to breakout any color in terms of what youre seeing in the U.
You gave in the West you gave kind of like a really wide range of possible outcomes for the broader real estate market just trying to see if there's any geographical diversification within that.
Yes.
Seeing as more weakness in California.
We're starting to see more weakness.
In certain parts of Florida, it's not a one size fits all but as I think a general rule of thumb the markets that had the fastest price increases are seeing the most pain at this time.
But I mean, we all know what happened today mortgage rates went down 60 basis points today one of them.
The most dramatic single day declines in the history of mortgage rates and so that.
Yes, I would expect that.
This will spur a lot of demand.
It's not baked into the things that we're talking about today.
But this is basically a free.
Great calling card for every agent to call their buyers.
Are on the sidelines and say this is a great time to lock in a great rate and so that's what's happening at this moment.
Got it and then just one more if I may just to get some clarity on that.
The new cost cutting initiatives is that is that locked and loaded like if you saw interest.
Interest rates continue to fall and then it looks like the housing market wasn't going to be as bad for 'twenty. Three would you still go forward with those cost cut those updated cost cutting plans or would you pivot the business.
Yes.
If you are referencing.
My My point that we are we do not believe the market will go down 25% next year and that however were.
Beginning to build a plan to account for a decline of that magnitude.
And it will be implemented over the next few months.
That plan will be implemented regardless of what we see over the course of the interim three months because it.
Yes.
We believe thats the right into the business.
Understood. Thank you very much.
Yeah.
Your next question comes from the line of Justin Ages from Bahrenburg. Your line is open.
Alright, thanks for taking the question.
First on the agent growth recruitment as you have made the decision to not expand into new markets is there any thought given to the fact that if you continue to grow agents and agents might be competing with each other and youre going to see some headwinds to efforts there. Thank you.
No that's helpful.
It's not something that <unk>.
<unk> and the impact on comes in the past, we're in a number of markets where.
We have upwards of 20, 30% market share and the reality is agents compete.
<unk>.
There.
Their counterpart agents just as much as they are in the same company, we're at a different company.
And so it hasn't that hasn't been something that has driven the financial went back to the company or they were concerned to buy if there if we continue to get more agents within the same market.
Okay. That's helpful. Thank you Robert and then on the Compass platform itself has the.
Headwinds in the housing market.
Been facing.
Center to an increase in agent usage of the compass platform or is it kind of stayed steady there just trying to get a sense of whether the tools that you are providing are working.
Need more or even less or something along those lines.
Yes, Thank you guys.
The platform continues to see very strong usage from our agents.
In many ways the platform.
Down market can help in Egypt in different ways than in an up market.
Help them generate new business helped them reach back out to pass clients, using our CRM and using our action plans et cetera, and so.
We believe that the benefit of the platform is the fact that to provide the single end to end integrated way for agents to run and grow their business.
And with the rollout.
And what pieces of that over the course of the at the end of the summer.
We remain very bullish on that and we're seeing very strong usage from our agents Ethernet as the market has started this awesome.
Alright thats helpful. Thanks for the color.
Again, if you would like to ask a question Press Star then the number one on your telephone keypad.
There are no further questions at this time I will now turn the call back over to Robert Revkin, Chief Executive Officer for closing remarks.
Okay.
Yes, I just wanted to say thank you to all of our.
Investors.
Sure.
With us on this journey.
Very.
Choppy time in the real estate market and we look forward to continue to work together. Thank you for everything and we'll see you at the next earnings call.
Yeah.
This concludes today's conference call you may now disconnect.
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Okay.