Q4 2022 Compass Inc Earnings Call
In one of the sharpest declines in transaction volume in decades.
I am pleased to report that <unk> revenue for 2022 was just over $6 billion.
Down 6% compared to 2021, which was our best revenue year ever and the best year in the industry on a volume basis.
This is a major accomplishment when you consider transactions declined industry wide, 18% year over year.
The 2022 industry decline in units was as bad as the great financial crisis, when the number of units fell by 18% year over year from 2007 to 2008.
While 2022 was a tough year for the housing market, particularly in the fourth quarter. We responded to the challenging market conditions by taking the initiative to reset our cost base.
We took decisive steps throughout 2022 to reduce expenses and drive operating efficiencies in the business with a very specific goal to become free cash flow positive for 2023, starting with being free cash flow positive in the second quarter of 2023.
As the market deteriorate fast we moved quickly to respond and initiated cost cutting actions that reduced our non-GAAP operating expenses by $338 million.
Which is 23% less on an annualized basis from the second quarter of 2022 to the fourth quarter of 2022.
We shared on our third quarter call that we intend to develop and implement a plan to further reduce our non-GAAP operating expenses to a range of $850 million to $950 million.
As we reported in early January we believe our actions make it possible to achieve below the middle of the $850 million to $950 million range of annualized operating expenses by the fourth quarter of 2023.
As a result of investments in prior years, even at this reduced level of operating expenses, we continue to invest in growth and technology to further strengthen the company during this downturn in the market.
We are seeing industry forecast for negative volume of 22.
6% from Fannie Mae negative 18, 6% from MBA and negative 12, 6% from north.
We expect to achieve our goal of being free cash flow positive in 2023 at each of these levels.
We are confident that this is the right level of non-GAAP operating expenses. However, as we have demonstrated throughout 2022 into 2023, we are prepared to move swiftly to implement additional cost cuts if the markets turn out to be worse than expected.
Our employees have worked incredibly hard to reset our cost base over the last 12 months. We believe it's the right cost base and we are committed to maintain our opex levels, even if and when the market goes up.
Okay.
We continue to differentiate ourselves through our technology platform. It is an asset for compass, because it helps us attract and retain agents and helps to make them more productive.
It also gives us the ability to attach.
Other services, which will further monetize the platform Greg will share with you later that we are doing what we are doing with title and escrow with platform integration in southern California.
In 2022, our agents continue to demonstrate they are the best in the industry.
And are using the technology platform more and more over time.
The value of the technology platform is.
Is the most common reason Intel as they come to campus and the most common reason they tell us they stay at compass.
We are clearly not out of the woods as an industry 2023 is still filled with a lot of uncertainty and choppiness, resulting from an unpredictable macroeconomic environment.
While we have seen some positive signs with more foot traffic at open houses and return a multiple offers inventory remains low and mortgage rates have continued to rise over the last few weeks.
With so much uncertainty no one can accurately predict what will happen with revenue this year.
As a result today, we are only providing non-GAAP operating expense guidance for the full year 2023.
We're going to continue to be laser focused on what we can control and we remain diligent in our desire to achieve positive free cash flow in 2023.
I remain incredibly excited about the future of compass for our agents for our employees and for shareholders.
I'll now turn it over to Greg.
Thank you Robert.
The challenging economic headwinds facing the residential real estate industry grew stronger in the fourth quarter of 2022.
But as Congress has done throughout our history. Our core business has continued to outperform the industry based on our ability to continue to add agents improve.
To improve our technology advantage and maintain our industry, leading principal agent retention of over 90%.
The good news is that with our expense reductions taking hold we are operating in the business more efficiently today, and we will continue to drive further efficiencies as part of our everyday go forward strategy.
We believe we can accomplish this while still maintaining our highly capable technology and agent recruiting teams to further grow our business.
And build upon our technology advantage versus the competition.
Okay.
After a great 2021 and.
Unfortunately, and unexpectedly 2022 turned out to be the worst year for residential brokerages in decades.
Breasted fed action drove mortgage rates from an all time low of about 3% to a 20 year high in excess of 7% and a matter of months.
Premium transaction activity down sharply.
As a result, we had to bring our cost structure in line with reduced topline revenue, making 2020 to a challenging year from a personnel standpoint.
When the revenue growth that we and the rest of the industry expected for 2022 does not materialize we.
We had to make the difficult decision to reduce head count.
Taking actions in June September and at the beginning of January of this year.
Columbia will talk about the impact of these reductions on our operating expenses a bit later.
Turning to our agent growth strategy before 2022, we grew our agent base rapidly through acquisition.
And by hiring the top agents and new market with cash and stock sign on bonuses.
This strategy was successful with compass built the number one independent brokerage and sales volume and less than 10 years with <unk>.
With a strong network and excellent brand and now have an agent roster that featured 18% of the top thousand agents in the industry.
Over the years, our use of incentives as an agent recruiting tool has decreased and now that we achieve scale in the business. Our agent acquisition strategy has evolved further.
When it became apparent early in 2022.
Revenue growth could be challenged we paused our expansion into new markets and also halted all M&A activity.
As the year progressed.
We eliminated cash and stock agents sign on bonuses of any kind driving more profitable approach to growth.
We always intended to move deeper into our existing market by attracting new agents in the top 50% in those markets.
This would allow us to evolve the mix of agents over time to improve our gross margins.
The market conditions of 2022 accelerated that move.
Since August we have been successful in attracting more than 1000 agents, who have come to accompany without cash or stock sign on bonuses.
To put this in perspective, the number of agents in the industry is now contracting according to lock in some of our competitors are reporting that they are losing region.
Competition for agents with spheres with some of our competitors still willing to pay a large incentives to attract agents.
Yet we also see it in the midst of these difficult economic times. Many agents are delaying to new agency.
In Q4 2022 in the midst of a very difficult quarter for the industry. Our average number of principal agents increased by 112 principal agents.
Our average number of principal agents increased to 13426, representing a 10% growth year over year in the fourth quarter for the full year. We grew our average number of principal agents by 18% compared to 2021.
Yeah.
Our technology platform is a differentiator and our agents' ability to run their business and in our ability to attract agents we.
<unk> to invest in our platform and believe this strategy will continue to deliver competitive advantage for our company.
Our priorities for 2023 include improved team functionality.
The integration of title and escrow into the platform, which has been launched in beta in southern California.
We also plan to continue to improve popular features like agent search encompass collection.
And last but not least our client dashboard, which will give consumers an excellent platform for them to interact with their compensation.
Our technology continues to make our agents more productive.
We know that the agents who use the platform the most have greater success.
The top quartile of team by one platform now account for 63% of our transaction and these teams have an annualized retention rate of 99%.
Keep in mind that retention rate accounts for every principal Egypt, including those that retire or leave the industry altogether.
In spite of lower transaction volume for the industry in 2022 on a full year basis, we processed more than 211000 transactions.
This represents a decline of 6% year over year.
This was three times better than the industry, which saw transactions down nearly 18% for the full year as reported by <unk>.