Q1 2023 Opendoor Technologies Inc Earnings Call

May 4, 2023

Yeah.

Good day and thank you for standing by welcome to the open door Technologies' first quarter 2023 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.

Ask a question during this session you will need to press star one on your telephone you will then hear an automated message advising your hand is raised to withdraw your question. Please press star one again.

Please be advised that today's conference is being recorded.

I would now like to hand, the conference over to your Speaker today, Elise Wang Vice President of Investor Relations.

Please go ahead.

Thank you and good afternoon details of our results and additional one Madison commentary are available in our earnings release and shareholder letter, which can be found on the Investor Relations section of our website at <unk> Dot 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 want to remind you that the following discussion contains forward looking statements within the meaning of the federal Securities laws.

All statements other than statements of historical fact are statements that could be deemed forward looking including but not limited to statements regarding <unk> financial condition anticipated financial performance business strategy and plans.

Code opportunity and expansion and management and objectives for future operations.

These statements I need the promises no guarantees and undue reliance should not be placed on them.

Such forward looking statements 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>. Most recent annual report on Form 10-K for the.

The year ended December 31, 2022.

As updated by our periodic reports filed after that 10-K.

Any forward looking statements made on this conference call, including responses to your questions are based on management's reasonable current expectations and assumptions as of today and.

<unk> assumes no obligation to update or revise them, whether as a result of new information future events or otherwise.

That is required by law.

The following discussion contains references to certain non-GAAP financial measures the.

The company believes these non-GAAP financial measures are useful to investors as supplemental operational measurement.

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 web site at Investor <unk> Dot com.

I will now turn the call over to Kerry Wheeler, Chief Executive Officer, Bret and Joel.

Good afternoon also on the call with me today is Christi Schwartz, our interim Chief Financial Officer, and Todd Frazier President of capital markets and our enterprise business.

I'd open door, our vision to build the most trusted e-commerce platform for residential real estate.

Trillion dollar histories and remains static and broken.

The process of buying and selling a home today remains complicated time consuming stressful and offline.

We are at the forefront of transforming this status quo, so consumers can buy sell and move.

The simplicity and confidence.

Over the last nine years, we've developed a magical product as home sellers want and need our conversion rates continue to exceed our expectations and past performance.

<unk> adjusted basis.

We built unique pricing and operations capability to become one of the largest buyers and sellers of homes in the country.

These are the things that differentiate particularly in times of macro uncertainty.

Well, we are seeing some stabilization following what has been the steepest transmission in housing in 40 years home sellers continue to be on the sidelines.

Number of new merchants within our buy box were down almost 25% in the first quarter versus prior year.

Market clearance is trending higher than expected as a result of this lack of supply.

Outlook for home prices continues to be uncertain.

In light of this macro backdrop, it's imperative that we continue to operate with caution and discipline.

Specifically, we expect to maintain double digit spreads for the rest of 2023 as we grow a new book of inventory to comfortably meet our margin targets.

Given the impact this will continue to have on conversion. We are focused on expanding our low cost partnership channels, including homebuilders agents and online real estate platforms to attract more sellers.

We expect these channels to be highly scalable and allow us to reach more customers in a cost effective way.

We've partnered with over 90 homebuilders across the country, where we facilitate a training for customers of Newbuild homes, enabling a simple and seamless move when their existing home.

We've also partnered with thousands of agents to give them another option neutral okay.

Sell their clients' homes with speed and ease.

We are seeing a growing number of agents may open door, a regular part of their service offering over 50% of contracts sourced via an agent relationship in the past 12 months came from agents, who had previously done business with us.

We are continuing to deepen these partnerships through our improved agent access rewards program and incentivize repeat transactions and a referral offering that agents utilized to introduce sellers directly to us.

And finally, we now have partnerships with the top three online real estate platforms by visitor traffic in the country, Zillow redfin and reload or dot.

Dot com.

We expect to grow acquisition volumes via these platforms as we get to market parity over time.

Are you willing us to reach the hundreds of millions of homeowners that visit these portal every month.

Furthermore, we are continuing to iterate on our marketplace offering exclusive.

And our pilot market of Plano, almost 60% of sellers. We pitched in Q1 agreed to enroll into open door exclusives.

Amongst these seller, we're tapping into a category of customers were calling semi serious.

There are those who are interested in selling at some point depending on price.

Not yet ready to commit to listing their home on the him a lot.

We believe these are largely incremental to the customers we serve with our current cash offering.

We are encouraged by these early signals and will continue to it around this product offering this year to hone the customer experience and drive liquidity in that market.

Another focus area for us in 2023 is the strengthening of our operating pricing platform. So we can deliver greater efficiencies and higher unit economics over time.

Q1, we have all their in person home assessment process to gather additional home condition at home feature Dana.

We also implemented technology to better capture and action on the home condition feedback, we collect per home across multiple sources throughout our ownership cycle.

Together these improvements enable us to better understand home condition with pre acquisition and her own home and optimize acquisition and resale pricing on a per home level.

We've also expanded our repair and renovation capabilities through platform and process investments in <unk>.

Tabling us to perform targeted renovations.

Beginning in the fourth quarter of last year, we applied selected home condition improvements and almost 2500 of our longer sell homes, which is internal loud us to drive faster sell through rates on these homes implant.

These are just some examples of platform improvements we are executing against with a goal of delivering at least 100 basis points of contribution margin improvements next year incremental to our current annual target range of 4% to 6%.

And finally, we have further rightsize, our operating capacity to reflect the overall decline in market transaction volume and a reduced pace of acquisitions in April we announced a workforce reduction of approximately 22% or 560 employees.

Merrily focus on volume based roles across operations transactions and G&A groups.

We expect this to deliver savings of approximately $50 million in annualized expenses well. This was a difficult decision. It was necessary to ensure that we can continue to deliver on our long term vision and serve customers for years to come.

And we look forward to next quarter and beyond we remain as focused as ever on improving the lives of customers and building a durable generational company.

You know we have the right product.

Any capabilities the capital and the best team not only weather this cycle, but emerge stronger and more resilient than we've ever been.

With that I'll pass the call over to Christie to discuss our financial highlights.

Thank you Carrie our first quarter results reflect the progress we've made and selling through our old bucket.

While building into a new book of healthy inventory. The continued reduction of our cost structure and our focus on capital and book value preservation we.

We delivered $3 1 billion of revenue, which exceeded our guidance as overall market sell through rates outperformed our expectation due to a significant decline in new listing volume and therefore limited supply.

These macro dynamics, coupled with our success in completing targeted home condition improvements allowed us to pull forward sales of old back home.

In particular, 92% of the Q2 cohort, which is held as he made offers on between March and June of last year is sold or in contract as of quarter end.

On the acquisition front, we purchased 1747 homes in the first quarter down 81% versus the first quarter of 2022 three.

The reduction in acquisition has been driven by two primary factors.

First with sellers in a holding pattern, we observed an increasing decline in new market lifting versus last year from a 17% decline in January to a 27% declined by March.

Second we saw a decline and offered a contract to sell or conversion due to higher spreads year over year. Although it is worth noting that conversion has improved from approximately 10% going into the first quarter to 15% as of March as a result of a modest reduction with that.

In response to these two factors, we pulled back on marketing spending by 45% versus prior year.

Our contribution margin was negative seven 7% in the first quarter, which is a reflection of the retail performance of our old book of inventory these longer dated lower margin home comprised 75% of our re sales in the quarter and contract sales from our new book of poems generated a contribution margin of eight.

5% in the quarter.

Continue to expect these newer acquisition cohorts to deliver margins in excess of our annual contribution margin target of 4% to 6% once fully sold through.

Adjusted EBITDA loss was $341 million in the first quarter, which is inclusive of previously recorded inventory valuation adjustments of $295 million on homes sold in the period.

As a reminder, over the last nine months, we've been reducing our operational capacity marketing spend and fixed expenses in response to the macro environment and the intentional slowdown in our purchasing activity.

As such our adjusted operating expenses, which we define as the delta between contribution profit or loss and adjusted EBITDA totaled 100 million for the quarter down from $156 million in the first quarter of 2022, and a peak of $204 million in the second quarter of 2022.

Turning to our balance sheet, we ended the quarter with $1 3 billion in unrestricted cash cash equivalents and marketable securities and $459 million of equity invested in our home.

<unk> had $10 7 billion and non recourse asset backed facilities.

Additionally, in March we invested $101 million to repurchase $189 million of our outstanding convertible note at a substantial discount reducing our total future debt obligations.

Looking ahead, we plan to continue to operate with a cautious approach via home pricing expense management and capital discipline, given the uncertainty of the near term macro environment.

Given typical holiday seasonality, we expect spreads to remain relatively elevated throughout the remainder of the year.

Turning to guidance, we expect our Q2 revenue to be between 175, and 185 billion and adjusted EBITDA loss to be between 180 and $200 million.

Adjusted Opex is expected to be around $90 million, which generally reflect savings from the April reduction enforced.

Consistent with this guidance, we expect the second quarter to Mark the last quarter of negative contribution margin with positive contribution margin levels beginning in Q3, when our fresh book of inventory comprises the majority of our retail.

With that I will now open the call for questions.

Thank you.

As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced.

To withdraw your question. Please press star one again, please stand by what we compile the Q&A roster.

Yeah.

Our first question comes from the line of Nick Jones with JMP Securities. Your line is now open.

Great. Thank you for taking the questions maybe one just around outlook.

This contribution profit improves after <unk> should we expect this to sequentially improve through.

Through the remainder of the year and then I guess does that kind of trickled down to EBITDA as well because it looks like there's a pretty good step up from.

<unk> results of <unk> guide on EBITDA, So how should we think about that I guess.

As we kind of get.

Get through the rest of 'twenty three.

Hi, Nick its Christy here and thank you for the question for contribution margin you know as you know right now and in Q2, we're still selling through the old book of homes, but once those clear out you will see improved margins and as we said we expect them to be positive starting in Q3, there is a slight tail, we expect to be mostly.

Sold or in contract by the end of Q2, but the ones that are in contract will sell through in Q3 and be a little bit of a drag on contribution margin. So I think it's correct for you to think about it as increasing in the second half of the year, and then that will flow down to EBITDA.

It's also important to note that EBITDA contains the release of our impairment adjustments or inventory valuation adjustments that we recorded in prior periods and so as those homes that have those inventory evaluation adjustments sell through which is the old book of inventory you won't see those in EBITA anymore.

Got it makes sense and then maybe one on the balance sheet as inventories come down.

Restricted cash has remained relatively high could you remind us kind of the dynamic between the restricted cash position and the inventory position.

Yes.

The majority of you are right. The restricted cash has gone up the majority of the restricted cash increase relates to our term debt facilities. So they don't revolve so either they are collateralized by inventory or they're collateralized by restricted cash in our 10-Q, there's a good breakdown that shows the entities, but it's really just collateralized in the asset backed debt and on that.

Cash we do earn interest income.

So you can think about that excess cash is earning interest income to offset the interest expense.

Great. Thank you for taking the questions.

Thank you.

Our next question.

It comes from the line of daily with J P. Morgan Your line is now open.

Okay.

Oh, great. Thanks for taking my question.

And I apologize if I missed this on your prepared remarks.

How should we think about your own home acquisition pace going forward.

Follow normal seasonality or do you expect that to accelerate as you go.

Going to the back half.

Yeah, I mean I its carrying value I think for the question I would I would guide you to a couple of things. One is what we tried to indicate in my remarks is we've seen our spreads come down meaningfully from the back half of the year into the first part of this year and conversion has followed our conversion has improved and we have been able to increase our pace of <unk>.

Acquisitions sitting here today, I would think about as being on a pace of around a thousand acquisitions per month, and that's a pretty good baseline for you to think about for the balance of the year and that's under the assumption that as we indicated in our remarks, we expect right now our spread to be pretty much at this level for the back half.

Got it and I guess I'll follow up.

Well, what do you need to see for the.

Acquisition pace to pick up higher.

I mean first acquisition pace has a lot to do with where we are in France, because that drives conversion for us and for us to decreased spreads really looking for is stabilization or said another way, we need a lot less volatility in the system.

Implicit in our spreads right now what we're baking in as a modest amount of home price appreciation for the back half of the year.

So we went mortgage rates to stabilize we think that'll lead volume stabilization in turn that will lead to a little more stabilization on pricing and that allow us to compress spreads but for the balance of the year just given the range of uncertainty around how.

Q3, Q4 could play out.

We continue to hold spreads pretty high.

Understood. Thank you.

Thank you.

As a reminder to ask a question at this time, Please press star one one oriented tone telephones.

Our next question comes from the line of Ryan Tomasello with <unk>. Your line is now open.

Hi, everyone. Thanks for taking the questions just on the expense efficiencies it sounds like the $90 million of Opex in the quarter is what youre thinking about as a full run rate of the $50 million of expense savings just wanted to clarify that piece and then as you ramp.

Volumes.

Into 2024 to the $10 billion breakeven level do you feel like you can achieve that with the same level of opex or should we be modeling some additional investment in marketing spend and just general.

Overhead to support that volume increase.

Sure.

Brian This is Chris do you think your further question.

On the $90 million for operating expense I think that that does contemplate the reduction enforce that.

That we just had in April and so that is a relatively safe.

Safe amount to model forward.

To get to $10 billion I would expect some increase in marketing probably more in the first half of the year.

<unk>.

But yeah. That's a that's a good place to start I mean, everything I want to point you to is we tried to provide a little more color on our letter Ryan around partnerships and the fact that we are leaning heavily into the fact that we have a number of low cost channels.

Across channels.

Our online real estate, we're in the very early days of our <unk> partnership.

We're now across all of our markets with redfin and real dotcom.

And we have a lot of optimism for how those are going to play out over time.

We're also very enthusiastic what we're seeing out of the agent channel right now again, it's a low cost highly scalable channel for us and we're seeing lots of activity on the homebuilder side, where we partner with senior <unk> Big ones 90, plus homebuilders and as you know new builds right now is a pretty active part of the home category. So well of course, you're totally right.

To get back to $10 billion, we're going to spend a little bit more money on marketing.

Also leaning into these into these channels that we think are quite scalable and again come to us with very attractive CAC economics attached to them.

Okay got it. Thanks, Thanks for that color and then I believe on the last call you talked about exclusives continuing to ramp through next year and targeting more material volume potentially in 2025 is that still the timeline that you think is achievable here as you continue to iterate the platform.

Just any updates around your expansion targets therapy on your initial test markets. Thanks.

Yeah, I think the most daily and update on exclusive we can give right now is that we're really encouraged by the early signs we're seeing.

If you think about what we're doing right now which is focusing on a single market iterating learning and testing.

Had some incredibly good signal right.

Tapping into this customer segment called the late and seller, which is a seller that wants to sell at some point timeline to be determined but they don't want to list it right, but they do want to sell it and if it's easy they love the offers and they wanted to do in the way of the seamless.

And what's interesting about that to us as those customers are incremental to what we're seeing on the sell direct side. That's number one and two we believe run roofing category is appointed we wouldnt access otherwise. So that's encouraging and then we're seeing borrowers engaged with the platform because they are getting these homes. They can't get anywhere else and I was sitting on MLS and in a very short period of time within the.

Quarter, we're driving too I think north of 3% listing share and Plano alone. So that's not the 2025 metric I know you want but I'd say well the numbers are small in absolute basis, what's really encouraging are the growth that we're seeing in a number of sellers and buyers come to the platform and we're going to stay focused on making sure that we are protecting the customer experience, we're going to drive it.

Quiddity in that market and then we're going to look to expand it over time.

Yes.

Great. Thanks for taking the questions.

Great.

Thank you.

Reminder, to ask a question at this time, Please press star one one on your Touchtone telephone.

Our next question comes from the line of Jay Mccanless with Wedbush. Your line is now open.

Alright, Thanks for taking my questions. The first one I had.

Little surprised to hear that you are starting to bring the spreads down already could you talk about maybe I know you don't like to give the percentage, but maybe the magnitude of how much those spreads have come down since the fall of 'twenty two.

Yes, so since the fall, they're down approximately 500 basis points.

So basically off of peak were down about 500 basis points.

I think we part of that was done this year.

On the back of seeing the stabilization and how prices. So one of my favorite chart. That's on the back of the shareholder letter is our month over month home price appreciation when we talked about this a bit last quarter, but we saw improve.

Improvement there and that's carried through the full first quarter. So we actually saw positive home prices in the first quarter.

That said in the back half normal seasonality is basically flat to slightly negative home prices and so given the uncertainty on rates. We have continued to maintain a higher above average spreads for this time of year.

Okay.

And then when you talked about the homebuilding channel.

I know you have been in Lenoir sales offices for a long time important et cetera, I guess, maybe what have you done this quarter or recently, that's above and beyond what we've seen out in the field previously and maybe talk to the economics of it if you can.

So.

I can't comment on the economics, specifically, but that is cary alluded to a very low cost carrier channel for us I think the piece piece. There is really the trade in product, which has been a staple of ours for six years now to your point, we started with the largest and we continue to have an on the ground marketing team.

Is out there in the field, helping sale.

New home sales consultants.

Explain the product to customers and really help us create and allow for that trade in product that makes it so seamless for every customer.

Okay.

And then just one other question.

Why not print the contribution margin after interesting more is there a reason that's been removed from some of the disclosures.

Yeah. Jay this is Christy so we removed it last quarter and that's because we've really kind of changed the way that we're financing our homes.

A lot has changed to be senior term loans and we have some items that are not fully utilized right now and so it kind of reflects our current capital market structure, Scott do you want to add anything.

Good example is what I alluded to earlier, which is we have senior term facilities today, where we have deposit interest expense and interest income offsetting each other because of that restricted cash balance for Karen.

So allocating it to a home level loaded in the contribution margin was something that was.

We could be its not theres not.

Clean mapping of that so that's where we did remove that disclosure.

I think one of the things that is helpful. If you're if you're trying to understand the interest cost, though it is given where our inventory balances are now.

And given that those are fixed rate lending facilities, we have $2 9 billion in fixed rate term facilities. Those are very model from a cash interest perspective interest expense perspective, because they are fixed there is no LIBOR attachment no volatility.

Okay sounds good thanks for taking my questions.

Thank you I will now turn the conference back over to Cary Wheeler for closing remarks.

Thanks, I just want to thank everyone for joining us today and I wanted to score that we remain extremely focused on operating with a ton of excellence and discipline in this moment.

Macro aside there is if there is no doubt that real estate continues to move online and that customers want to certainly you can use of our products. So we're focused on continuing to innovate make investments that position us to come through this with greater resilience and on the path to market leadership in building a profitable business.

Thank you shadowed by the way to all our opened European teammates who are making this happen every day and we look forward to talking with you next quarter.

This concludes today's conference call. Thank you for participating you may now disconnect.

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Good day, and thank you for standby and welcome to the open door Technologies' first quarter 2023 earnings conference call.

At this time all participants are in a listen only mode.

The speaker's presentation, there will be a question and answer session.

To ask a question. During this session you will need to press star one on your telephone.

We will then hear an automated message advising your hands raised.

To withdraw your question. Please press star one again please.

Please be advised that today's conference is being recorded.

I would now like to hand, the conference over to your Speaker today, Elise Wang Vice President 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 <unk> Dot open door Dot com.

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

Before we start I would like to remind you that the following discussion contains forward looking statements within the meaning of the federal Securities laws.

<unk> strategy and plans.

Opportunity and expansion and management and objectives for future operations.

These statements I need the promises no guarantees and undue reliance should not be placed on them.

Such forward looking statements 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>. Most recent annual report on Form 10-K for the year ended December 31 2022.

As updated by our periodic reports filed after that 10-K.

Any forward looking statements made on this conference call, including responses to your questions are based on management's reasonable current expectations and assumptions as of today and.

<unk> assumes no obligation to update or revise them, whether as a result of new information future events or otherwise.

As required by law.

The following discussion contains references to certain non-GAAP financial measures the.

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 Kerry Wheeler, Chief Executive Officer of Evercore.

Good afternoon also on the call with me today is Christi Schwartz, our interim Chief Financial Officer, and Todd Frazier President of capital markets and our enterprise business.

I'd open door, our vision is to build the most trusted e-commerce platform for residential real estate.

Trillion industry that remains static and broken.

The process of buying and selling a home today remains complicated time consuming stressful and offline.

We are at the forefront of transforming this status quo, so consumers can buy sell and move between home with simplicity and confidence over.

Over the last nine years, we've developed a magical product this home sellers want and need our conversion rates continue to exceed our expectations and past performance.

<unk> adjusted basis.

We built a unique pricing and operations capabilities to become one of the largest buyers and sellers of homes in the country.

These are the things that differentiate us, particularly in times of macro uncertainty.

While we are seeing some stabilization following what has been the steepest transition in housing in 40 years home sellers continue to be on the sidelines.

A number of new merchants within our buy box were down almost 25% in the first quarter versus prior year.

Market clearance is trending higher than expected as a result of this lack of supply.

For home prices continues to be uncertain.

In light of this macro backdrop, it's imperative that we continue to operate with caution and discipline.

Specifically, we expect to maintain double digit spreads for the rest of 2023 as we grow a new book of inventory to comfortably meet our margin targets.

We expect these channels to be highly scalable and allow us to reach more customers in a cost effective way.

Partnered with over 90 homebuilders across the country, where we facilitate a training for customers of Newbuild homes, enabling a simple and seamless move when their existing home.

We've also partnered with thousands of agents to give them another option neutral kit to solve our clients' homes with speed and ease.

We are seeing a growing number of agents may open door, a regular part of their service offering over 50% of contracts source via an agent relationship in the past 12 months came from agents, who had previously done business with us.

We are continuing to deepen these partnerships through our improved agent access rewards program and incentivize repeat transaction and the referral offering that agents utilized to introduce sellers directly to us.

And finally, we now have partnerships with the top three online real estate platforms by visitor traffic in the country, Zillow Redfin and reload our dotcom.

We expect to grow acquisition volumes via these platforms as we get to market parity over time, enabling us to reach the one hundreds of millions of homeowners that visit these portal every month.

Furthermore, we are continuing to iterate on our marketplace offering exclusive.

And our pilot market a plan now almost 60% of sellers. We pitched in Q1 agreed to enroll into open door exclusives.

Amongst these seller, we're tapping into a category of customers were calling semi serious.

They are those who are interested in selling at some point depending on price.

Yet ready to commit to listing their home on the MLR.

We believe these are largely incremental to the customers we serve with our current cash offering.

We are encouraged by these early signals and will continued around this product offering this year to hone the customer experience and drive liquidity in that market.

Another focus area for us in 2023 is the strengthening of our operating pricing platforms. So we can deliver greater efficiencies and higher unit economics over time.

Q1, we have all of our in person home assessment process to gather additional home condition at home feature Dana.

We also implemented technology to better capture and action on the home condition feedback, we collect per home across multiple sources.

Our ship cycle.

Together these improvements enable us to better understand home condition with pre acquisition and her own home and optimize acquisition and resale pricing on a per home level.

We've also expanded our repair and renovation capabilities through platform and process investments, enabling us to perform targeted renovations.

Beginning in the fourth quarter of last year, we applied selected home condition improvements and almost 2500 of our longer sell homes, which is internal allowed us to drive faster sell through rates on these homes implant.

These are just some examples of platform improvements we are executing against with a goal of delivering at least 100 basis points of contribution margin improvement next year incremental to our current annual target range of 4% to 6%.

And finally, we have further right size, our operating capacity to reflect the overall decline in market transaction volume and a reduced pace of acquisitions.

In April we announced a workforce reduction of approximately 22% or 560 employees, primarily focus on volume based roles across operations transactions and G&A groups.

We expect this to deliver savings of approximately $50 million in annualized expenses. While this was a difficult decision. It was necessary to ensure that we can continue to deliver on our long term vision and serve customers for years to come.

As we look forward to next quarter and beyond we remain as focused as ever on improving the lives of customers and building a durable generational company.

We have the right product.

<unk> capabilities, the capital and the best team not only weather this cycle with <unk>.

We're stronger and more resilient than we've ever been.

With that I'll pass the call over to Christie to discuss our financial highlights.

Thank you Carey, our first quarter results reflect the progress we've made and selling through our old bucket.

Building into a new book of healthy inventory the continued reduction of our cost structure and our focus on capital and book value preservation.

We delivered $3 1 billion of revenue, which exceeded our guidance as overall market sell through rate outperformed our expectation due to a significant decline in new listing volume and therefore limited supply.

These macro dynamic coupled with our success in completing targeted home condition improvements allowed us to pull forward sales of old Buckhorn.

In particular, 92% of the Q2 cohort, which is held as he made offers on between March and June of last year is sold or in contract as of quarter end.

On the acquisition front, we purchased 1747 homes in the first quarter down 81% versus the first quarter of 2022.

The reduction in acquisition has been driven by two primary factors.

First with sellers in a holding pattern, we observed an increasing decline in new market lifting versus last year from a 17% decline in January to a 27% declined by March.

Second we saw a decline an offer to contract through seller conversion due to higher spreads year over year. Although it is worth noting that conversion has improved from approximately 10% going into the first quarter to 15% as of March as a result of a modest reduction in spreads.

In response to these two factors, we pulled back on marketing spending by 45% versus prior year.

5% in the quarter, we continue to expect these newer acquisition cohorts to deliver margins in excess of our annual contribution margin target of 4% to 6% once fully sold through.

Adjusted EBITDA loss was $341 million in the first quarter, which is inclusive of previously recorded inventory valuation adjustments of $295 million on homes sold in the period.

As such our adjusted operating expenses, which we define as the delta between contribution profit or loss and adjusted EBITDA totaled a $100 million for the quarter down from $156 million in the first quarter of 2022, and a peak of $204 million in the second quarter of 2022.

Turning to our balance sheet, we ended the quarter with $1 3 billion in unrestricted cash cash equivalents and marketable securities and $459 million of equity invested in our homes. We also had $10 7 billion and non recourse asset backed facilities.

Additionally, in March we invested $101 million to repurchase $189 million of our outstanding convertible note at a substantial discount reducing our total future debt obligations.

Looking ahead, we plan to continue to operate with a cautious approach via home pricing expense management and capital discipline, given the uncertainty of the near term macro environment.

Given typical holiday seasonality, we expect spreads to remain relatively elevated throughout the remainder of the year.

Turning to guidance, we expect our Q2 revenue to be between $1 75, and 185 billion and adjusted EBITDA loss to be between 180 and $200 million.

Adjusted Opex is expected to be around $90 million, which generally reflects savings from the April reduction in force.

With that I will now open the call for questions.

Thank you.

As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced.

To withdraw your question. Please press star one again, please standby, while we compile the Q&A roster.

Our first question comes from the line of Nick Jones with JMP Securities. Your line is now open.

Great. Thank you for taking the questions maybe one just on our own outlook.

Contribution profit improves after <unk> should we expect this to sequentially improve.

Through the remainder of the year and then I guess does that kind of trickled down to EBITDA as well because it looks like there's a pretty good step up from.

Kind of once you resolve the <unk> guide on EBITDA. So how should we think about that I guess.

As we kind of.

Get through the rest of 'twenty three.

Hi, Nick its Christy here and thank you for the question for contribution margin as you know right now and in Q2, we are still selling through the old book of homes, but once those clear out you will see improved margins and as we said we expect them to be positive starting in Q3, there is a slight tail, we expect to be mostly.

Ah sold or in contract by the end of Q2, but the ones that are in contract will sell through in Q3 and be a little bit of a drag on contribution margin. So I think it's correct for you to think about it as increasing in the second half of the year, and then that will flow down to EBITDA.

Also important to note that EBITDA contains the release of our impairment adjustments or inventory valuation adjustments that we recorded in prior periods and so as those homes that have those inventory evaluation adjustments sell through which is the old book of inventory you won't see those in EBITDA anymore.

Got it makes sense and then maybe one on the balance sheet as inventories come down.

Restricted cash has remained relatively high can you remind us kind of the dynamic between the restricted cash position and the inventory position.

Yes the.

The majority of the you're right. The restricted cash has gone up the majority of the restricted cash increase relates to our term debt facilities. So they don't revolve so either they are collateralized by inventory or they're collateralized by restricted cash in our 10-Q, there's a good breakdown that shows those entities, but it's really just collateralized the asset backed debt and on that.

Cash we do earn interest income.

So you can think about that excess cash is earning interest income to offset the interest expense.

Great. Thank you for taking the questions.

Thank you.

Our next question.

Comes from the line of daily with J P. Morgan Your line is now open.

Oh, great. Thanks for taking my question.

If I missed this on your prepared remarks.

How should we think about your own home acquisition pace going forward.

Ill follow normal seasonality.

Or do you expect that to accelerate.

I just wanted to without cost.

Yes.

Its carrying value I think for the question I would I would guide you to a couple of things. One is what we tried to indicate in my remarks is we've seen our spreads come down meaningfully from the back half of the year into the first part of this year and conversion has followed your conversion has improved and we have been able to increase our pace of acquisitions sitting here today.

I would think about as being on a pace of around a thousand acquisitions per month and Thats a pretty good baseline for you to think about for the balance of the year and that's under the assumption that as we indicated in our remarks, we expect right now our spreads to be pretty much at this level for the back half.

Got it and I guess I'll follow up.

I mean, what what do you need to see for the.

Acquisition pace to pick up higher.

I mean first acquisition pace has a lot to do with where we are in spreads because that drives conversion for us and for us to decrease spreads were really looking for is stabilization or said another way, we need a lot less volatility in the system.

Posted in our spreads right now what we're baking in as a modest amount of home price appreciation for the back half of the year.

Mortgage rates to stabilize we think that'll lead volume stabilization in turn that will lead to a little more stabilization on pricing and that allow us to compress spreads but for the balance of the year just given the range of uncertainty around how.

Q3, Q4 could play out.

We're going to continue to hold spreads pretty high.

Understood. Thank you.

Thank you.

A reminder to ask a question at this time, please press star one one oriented tone telephones.

Our next question comes from the line of Ryan Tomasello with <unk>. Your line is now open.

Okay.

Volumes into 2024 to the $10 billion breakeven level do you feel like you can achieve that with the same level of opex or should we be modeling some additional investment in marketing spend and just general.

Overhead to support that volume increase.

Brian This is Chris do you think you further question.

The $90 million for operating expense I think that that does contemplate the reduction enforce that.

We just had in April and so that is a relatively safe.

Safe amount to model forward.

To get to 10 billion I would expect some increase in marketing probably more in the first half of the year.

But yes, that's a good place to start yes, I mean, one thing I want to point you to is we tried to provide a little more color on our letter Ryan around partnerships and the fact that we are leaning heavily into the fact that we have a number of low cost channels.

<unk> channel.

Our online real estate, we're in the very early days of our Zillow partnership.

We're now across all our markets.

<unk> and realtor Dot com.

And we have a lot of optimism for how those are going to play out over time.

We're also very enthusiastic we're seeing out of the agent channel right now again, it's a low cost highly scalable channel for us and we're seeing lots of activity on the homebuilder side, where we're partnered with eight of the 10 Big ones 90, plus homebuilders and as you know new builds right now is a pretty active part of the home category, So well, Chris you're totally right.

To get back to $10 billion, we're going to spend a little bit more money on marketing.

Also leaning into these into these channels that we think are quite scalable and again come to us with very attractive CAC economics attached to them.

Okay got it. Thanks, Thanks for that color and then I believe on the last call you talked about exclusives continuing to ramp through.

Through next year and targeting more material volume potentially in 2025 is that still the timeline that you think is achievable here as you continue to iterate the platform.

Just any updates around your expansion targets therapy on your initial test markets. Thanks.

Yes, I think the most daily and update on exclusive we can give right now is that we're really encouraged by the early signs we're seeing if.

If you think about what we're doing right now we're just focusing on a single market Iterating learning and testing with <unk>.

Had some incredibly good signal.

Tapping into this customer segment called the latest seller, which is a seller that wants to sell at some point timeline to be determined but they don't want to list it Greg, but they do want to sell it and if it's easy they love the offers and they want to do in the way of the seamless and what's interesting about that to us as those customers are incremental to what we're seeing on the sell direct side that's number one.

Two we believe we are unearthing a category is appointed we wouldnt access otherwise so.

That's encouraging and then we're seeing borrowers engaged with the platform because they are getting these homes they can't get anywhere else and I was sitting on MLS and in a very short period of time within the quarter, we're driving too I think north of 3% listing share and Plano alone. So that's not the 2025 metric I know you want but I'd say well the numbers are small in absolute basis, what's really encouraging are the group.

What we're seeing in a number of sellers and buyers come to the platform and we're going to stay focused on making sure that we are protecting the customer experience, we're going to drive liquidity in that market and then we're going to look to expanding over time.

Great. Thanks.

For taking the questions.

Correct.

Thank you.

Reminder, to ask a question at this time, Please press star one one on your Touchtone telephone.

Our next question comes from the line of Jay Mccanless with Wedbush. Your line is now open.

Hey, Thanks for taking my questions. The first one I had.

Yes, so since the fall, they're down approximately 500 basis points.

So basically off of peak were down about 500 basis points.

I think we part of that was done this year on the back of seeing the stabilization and house prices. So one of my favorite chart. That's on the back of the shareholder letter is our month over month home price appreciation when we talked about this a bit last quarter, but we saw.

Improvement there and that's carried through the full first quarter. So we actually saw positive home prices in the first quarter.

Okay.

And then when you talked about the homebuilding channel.

I know you all have been in Lenoir sales offices for a long time, Horton et cetera, I guess, maybe what.

Have you done this quarter or recently, that's above and beyond what we've seen out in the field previously and maybe talk to the economics of it if you can.

So.

New home sales consultants.

Explain the product to customers and really help us create and allow for that trade in product that makes it so seamless for every customer.

Okay.

And then just one other question.

Why not print that.

Contribution margin after interesting words there.

Reason, that's been removed from some of the disclosures.

Yes, Davis as Christy so we removed it last quarter and that's because we've really kind of changed the way that we're financing our homes.

A lot has changed to be senior term loans and we have some items that are not fully utilized right now.

And so it kind of reflects our current capital market structure, Don do you want to add anything.

Yes.

So allocating to a home level loaded in the contribution margin was something that was just.

We could be its not theres not.

Clean mapping of that so that's where we did remove that disclosure.

I think one of the things that is helpful. If you're if you're trying to understand the interest cost, though is given where our inventory balances are now.

Okay sounds good thanks for taking my questions.

Thank you I'll now turn the conference back over to Cary Wheeler for closing remarks.

Thanks, I just want to thank everyone for joining us today and I want to underscore that we remain extremely focused on operating with a ton of excellence and discipline in this moment.

Macro aside there is if there is no doubt that real estate continues to move online and that customers want the <unk> of our product.

We're focused on continuing to innovate make investments that position us to come through this with greater resilience and on the path to market leadership in building a profitable business. So that's it. Thank you shadowed by the way to our opened European teammates who are making this happen every day and we look forward to talking with you next quarter.

This concludes today's conference call. Thank you for participating you may now disconnect.

Q1 2023 Opendoor Technologies Inc Earnings Call

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