Q2 2023 Compass Inc Earnings Call
Good day, everyone and welcome to the Compass second quarter 2023 earnings call I would now like to turn the conference over to Richard Simonelli and V. P of Investor Relations. Please go ahead.
Thank you operator, we appreciate your time today folks.
Good afternoon, and thank you for joining the company's second quarter 2023 earnings call joining us today will be Robert Raskin, our founder and Chief Executive Officer, Greg Hart, Our Chief operating officer.
Columbia, <unk>, our Chief Financial Officer.
In discussing our company's performance, we will refer to some non-GAAP measures you can find the reconciliation of these non-GAAP measures.
And the most directly comparable GAAP measures in our second quarter 2023 earnings release posted on our Investor Relations website, we will make forward looking statements that are based on our current expectations forecasts and assumptions and involve risks and uncertainties.
Because these statements include our guidance for the third quarter and full year 2023, and comments related to our operating expenses and cash flow levels as well as our expectation for operational achievements. Our actual results may differ materially from these statements.
You can find more information about risks uncertainties and other factors that could affect our results on our most recent annual report on Form 10-K, and quarterly reports on Form 10-Q.
Filed with the SEC and available also on our Investor Relations website, you should not place undue reliance on any forward looking statements all information in this presentation today is based upon.
Our time at August seven 2023.
Expressly disclaim any obligation to update this information.
Now I'll turn the call over to Robert Rescue Robert.
Thank you rich.
Thank you for joining us today for our second quarter results Conference call.
I am pleased to share that in the second quarter. We grew market share grew agent counts and grew margin, while delivering positive free cash flow and strengthening our cash position.
We achieved strong financial results in line with guidance in the midst of a quarter that was impacted by mortgage rates, increasing 100 basis points to 7% and unexpected Margaret Thomas resulting from the debt ceiling standoff in Congress.
We will continue to take a disciplined approach to our operating expenses and run our business efficiently, while still investing in our agent platform in growth.
We continue to launch new products into our platform such as performance tracker Congress GBT integration and one click title and escrow.
We will be rolling out more team workflow functionality for agent teams over the next two quarters and next year, we expect to launch our client portal, which over time will become the clients' single destination for everything home before during and after the transaction for both buyers and sellers.
We are seeing a positive trend on agent retention.
Every month in the first half of the year. The number of principal agents, we loss was less than the month before July while not yet closed looks to continue the trend and we believe this trend is being driven by fundamental changes in the competitive landscape, where the congress value proposition relative to competitor.
Yours is strengthening.
There is a critical shifts happening in the brokerage industry that is resulting in structurally weaken competition and a key differentiator for compass.
The Companys business model always has been and always will be focused on providing the best tools and services to agents. So they can best grow their businesses.
We are seeing many traditional brokerages that historically competed for agents with value added support and services now significantly reducing the investments in these areas, which for the most part was already much less than would come is provided.
We believe this is driven by competitors facing any combination of factors that Congress doesn't face specifically rising debt service call.
Increases in EG departures.
<unk> market share and margin.
Worsening in free cash flow and for some VC backed companies a pullback in the VC funding market.
As an example include.
Including equity compensation, we have invested over one 5 billion in our technology platform over a 10 year period in.
And continue to invest approximately $100 million in R&D, a year, which makes it very challenging for competitors to catch up in a meaningful way.
In the peak of the pandemic real estate boom, many competitors were talking about investing significant dollars in R&D.
But with the shift in the market.
We are not seeing that come to fruition.
The current pressure on competitors is all going into positive transfer campus, one youre seeing competitors reduce the financial incentives they were using to attempt to recruit compass agents to a race to the bottom environment, where many traditional brokerages that historically competed on value added support and services for example supports.
<unk> training coaching in person office culture attempts to integrate third party Tac.
We are now seeing them cut back on these areas and in many cases are adding themselves to the already crowded low cost low value brokerage service landscape a model that is defined by charging to it is the lowest parcel amounts and providing them the lowest possible amounts.
Quite simply companies is going the other direction, we are strengthening our in person culture and investing heavily in tools and technology for agents capitalizing on the downturn to widen our competitive advantages as the high value brokerage space is becoming much less crowded.
It would not surprise me to see in the years to come.
As the only major national brokerage competing to serve agents with high value products and services and universally known for creating more tangible value for agents than any other company.
Our financial results demonstrate that our aggressive stance and cost discipline in a reset of operating expense levels throughout 2022 and continue into 2023 is working.
In a moment Cumani will discuss the details of our second quarter results.
But here are some important highlights.
We generated our second best quarter of adjusted EBITDA in company history, with adjusted EBITDA of $30 million.
We delivered on our commitment to be free cash flow positive in the second quarter with $51 million of free cash flow.
This almost completely makes up for the first quarter of free cash flow deficit and positions us to achieve our goal of being free cash flow positive for all of 2023.
We ended the second quarter with $335 million in cash and cash equivalents.
Given our ability to generate strong free cash flow ongoing improvement in operating expenses and positive free cash flow outlook, we repaid the $150 million draw on our revolving credit facility in July .
With the exception of the $30 million used to fund our very successful campus Concierge program.
We have no corporate debt.
This is an extremely solid footing with over 450.
$50 million of liquidity today.
For the third quarter in a row, we improved market share our market share is now four 6% an increase of 45 basis points over the last three quarters.
I want to emphasize that we have successfully improved operating expenses by $500 million on.
On a run rate basis in the last 12 months.
We said, we would cut opex from an annualized run rate of over $1 4 billion to $950 million and we did it we said we would be free cash flow positive in Q2, we did it we are very strong and we are still investing in growth and the platform.
Excellently positioned for the cyclical upturn that will come when the market normalizes in.
And when the market returns.
We will work to ensure that our opex does not specifically, we expect to exit 2023 at a $900 million Opex run rate and are committed to a path we have outlined to maintain our opex at $900 million in 2024.
Our focus on maintaining that level in 2025 as well.
We are confident that this approach insurers.
<unk> operating discipline, while enabling us to continue to invest in the future growth of our business.
Growing and retaining agents and building upon our competitive advantage with the only proprietary end to end technology platform for agents in the industry.
When the market improves in the future. We believe the company will be well positioned to generate substantial free cash flow over the long term.
We continue to be laser focused on what we can control.
And remain diligent in our desire to achieve positive free cash flow in 2023.
I remain incredibly excited about the future and I want to end by thanking the entire compass team of employees and agents. They are incredible dedication in these difficult times has allowed us to make it through the first half of 2023 with the confidence that we have a strong foundation for future success.
I'll now turn it over to Greg.
Thank you Robert we believe Compass has the best most experienced connected and supported agents in the industry.
As a result, they have been.
Been able to capitalize in a tight inventory environment, allowing companies to continue to outperform our competitors by growing market share for the third consecutive quarter.
In the second quarter, we processed just over 54000 transactions a decline of 19% from a year ago, which compares favorably to the 21% decline in transactions for the entire residential real estate market in the second quarter as reported by the National Association of Realtors, although.
Many agents have left the industry as evidenced by declining nor membership since its peak in October 2022, our market share for Q2, 2023 was $4 six 3% up 13 basis points versus Q1, 2023, and up 45 basis points from Q3 2020.
Two.
Our growth team is having increasing success and we continue to grow our principal agent count since we eliminated cash and equity side on incentives last summer.
Fast majority of agents tell us the compass platform as their number one reason for coming to compass.
For Q2 2023, our average number of principal agents increased to 13633 principal agents.
3% year over year, and an acceleration from Q1.
We also saw more agents returning to compass from other brokerages then in Q1.
We call these win backs and the primary reason these agents site for returning the compass for our technology platform.
Sure and the caliber of our agent network and the referrals that drives.
These factors also contributed to our strong agent retention with agents are staying at compass at higher rates for Q2, we continued to maintain high levels of retention of principal agents with over 90% annualized retention in the second quarter of 2023.
And when agents have less compass. Most of this attrition has come from agents, who are less productive in terms of both transaction count and gross transaction volume.
Agents have decided to leave the industry entirely during this prolonged market downturn.
Going forward, we will continue to be opportunities to mystic and our approach to adding to our agent base via selective M&A, while pursuing deal structures that allow us to utilize the minimum upfront cash and limit equity dilution.
We are proud of the fact that the majority of the agents come into campus tell us that one of the primary reasons. They are doing so as for the platform and we continue to invest to make this platform better.
We recently released Compass performance tracker, a powerful addition to our integrated platform that helps agents and team leaders to be more productive by allowing them to better monitor their activity and how that translates to business performance.
This comprehensive but simple to use dashboard helps agents to set goals and create activity targets for actions like <unk> made calls placed an E mail sent to achieve those goals that can then monitor that activity and track production in one place. This.
This enables agents to use data driven insights to help them make more efficient decisions and take more intentional action to improve their business performance.
As the rest of our platform performance truckers fully integrated with the other tools within the platform, which increases efficiency and accuracy by eliminating the need for agents to pay for third party tools or manually enter redundant data on their production.
Our title and escrow business has been outpacing our internal targets throughout the first half of 2023 as the business is generating positive adjusted EBITDA and increasing attach rates. After a successful launch of title and escrow integration and the compass platform in Southern California.
Since that March launch platform integration has delivered new and repeat users, resulting in an acceleration in our attach rate at chartwell escrow and consumer title, our <unk> entities in southern California.
Chartwell escrow the platform is driving increased users and contributing to the highest attach rate on record in Q2.
And since launching 28% of Chartwells conference transactions opened in southern California originated on the Compass platform.
But consumer title, 48% of their compass orders originated on the platform, resulting in a significant increase in our attach rate.
We continue to focus on strategically expanding market coverage for our compass platform integration to accelerate the margin accretion driven by our team and the portfolio, we expect to add title and escrow integrations, and Philadelphia, Washington, D C, Virginia, and Maryland by the end of the year.
The compass platform is built to save our agents' time and to help them achieve better business results and we leverage AI to help accomplish both objectives.
As the leading technology enabled brokerage and the number one brokerage in the U S. Our agents have been benefiting from our investments in artificial intelligence for a number of years. This isn't.
Isn't a new area for us.
As I mentioned that our Q1 call we've been leveraging AI across our platform. Since 2020 through features like are likely to sell recommendations search.
Suggestions similar homes, our CMA generation tools and in our video studio.
We recently launched the beta for our integration of opening is chat GPT for capabilities directly into the <unk> platform to help agents save substantial time with tasks, such as writing listing descriptions, creating marketing collateral and automating outreach with clients we.
Have seen tremendous interest in this technology from our agents.
Had very positive response to our data.
We're excited to roll these capabilities out to all of our agents over the coming months.
We believe that we'll see an outsized return on our investments because of our integrated platform that AI tools can build upon and enhance by its nature all artificial intelligence depends on data to drive its performance.
Our end to end platform provides more touch points, where we can apply machine learning to improve the tools our agents views and our platform delivers more data to help us enhance the performance of those machine learning models. This.
This in turn drives more usage of agency better results, which then generates more data to improve the models compass.
<unk> is unique in this regard brokerages that don't offer their agents and integrated platform won't benefit from this virtuous cycle.
In June we launched our global affiliate referral program with Barnes <unk> International Realty.
Will enable our agents to place luxury listings in front of a global affluent audience. We've seen strong interest in this program from compensations across the country in dozens of referrals have already been made.
From a $25 million referral to a $20000 monthly rental.
I am proud of the major strides we've taken and the transformation of Compass and what has been a very challenging market over the past 12 months, our agents and our employees continue to demonstrate that they are the best in the industry, which is quite complex as the number one brokerage in the country.
I will now turn it over to our CFO <unk> <unk>.
Thanks, Greg today, I will review, our second quarter financial results in more detail and then I'll provide an update on our guidance expectations for the third quarter.
We continued to perform with focus and discipline in the midst of this historical low housing market.
We continue to be focused on controlling what we can control, namely our cost base and our ability to attract and attract and retain the best agents.
As our Q2 results show the strong focus on controlling our cost base resulted in the generation of adjusted EBITDA and strong free cash flow despite the extremely challenging market.
For the fourth quarter in a row, we continue to reduce our operating expenses.
Turning to our detailed financial results, our second quarter revenue was $1 5 billion falling within our guidance range of $1 45 to $1 6 billion.
This compares to $2 billion of revenue in the prior year period, representing a 26% reduction year over year.
Revenue came in on the lower end of our expectations as we saw pressure from continued increases in mortgage rates since the time, we put out our guidance back in May.
Gross transaction value was $56 8 billion in the second quarter, a decline of 26% from a year ago, reflecting a 19% reduction in total transactions as well as the decrease in average selling price of about 9%.
Our non-GAAP Commission expense as a percent of revenue improved by approximately 38 basis points from Q2 of last year to 80 193, when excluding the impact of the agent equity program on the year ago period.
As a reminder, 2022 was the last year, we offer the agent equity program, which allows our agents to exchange a portion of their cash commission for equity.
Page 14 of the Q2 Investor deck includes additional details on the agent equity program impact on the commission line in the prior year periods.
You will continue to see this differential through each quarter in 2023 until we anniversary the sunset of the agent equity program in Q1 2024.
Our total non-GAAP operating expense, excluding commissions were $238 million for the second quarter or $953 million on an annualized basis.
As we've talked about previously many of our non commission based operating expenses are somewhat fixed in nature and have historically increased sequentially from quarter to quarter as opposed to bearing in line with revenue. However, due to our cost reduction initiatives implemented over the past year, the $238 million of Opex for the second quarter reflects a 128 million.
The reduction from our Opex at $366 million in the second quarter of last year.
On an annualized basis. This reflects a reduction of over a $5 billion.
To the same quarter, just one year ago or.
Our management team remained disciplined and focused on our operating expenses as Robert mentioned, we are focused on maintaining our operating discipline that allows us to sustain our new cost base.
As a reference point the non-GAAP operating expenses, we referred to include the expense categories of sales and marketing operations and support research and development and G&A and exclude stock based compensation expense and other expenses that are excluded from adjusted EBITDA.
We have included tables on page 12, and 13 in our Q2 investor deck that reconcile these amounts.
Our adjusted EBITDA for the second quarter was $30 1 million.
While within our guidance range. It was at the low end of our expectations, primarily due to the challenging market conditions, which negatively impacted our second quarter revenue and the resulting flow through effect to adjusted EBITDA.
Our GAAP net loss for the second quarter was $48 million compared to a loss of $101 million in the same period a year ago.
Included in the GAAP net loss for the quarter are noncash charges, which include $39 million of noncash stock based compensation expense and $22 million of depreciation and amortization expense.
Additionally, during the second quarter, we incurred a restructuring charge of $16 million related to continued efficiency improvements.
Free cash flow during the second quarter was positive $50 7 million, which compares favorably to a negative $29 9 million of free cash flow a year ago.
Driven primarily by the improvements in adjusted EBITDA lower capital expenditures and other favorable changes in working capital in.
In particular capital expenditures with just $2 $6 million in the current quarter compared to $20 6 million a year ago, driven by our cost.
And the intentional slowing of expansion to new markets and new offices.
Cash flow can be impacted by the timing of cash collections from our clients and the payments of cash to our agents and vendors and the timing of our payroll cycles in relation to the calendar quarter end.
We had $335 million of cash and cash equivalents on our balance sheet at the end of June which reflect the payback of $75 million of our revolver during the quarter and therefore as of June 30, the outstanding balance.
On our revolver was $150 million.
Even the continued relative stability in the market and our strong cash flow during the second quarter. We made the decision to repay this remaining outstanding balance of our revolver of $150 million in July to save on interest costs.
We have access to liquidity of over $450 million to the cash on our balance sheet and the capacity on our revolving credit facility and therefore, we believe we are well positioned to react to continued market challenges.
Now turning to our financial guidance.
Our results for the first half of 2023 confirm that our operating expense discipline creates meaningful performance improvement.
As we look forward to Q3, we continue to see mixed signals in the market and while some trends have improved we have also seen additional market risks for.
For Q3 of 2023, we expect revenue in the range of $1 3 billion to $1 4 billion and positive adjusted EBITDA of $15 to $35 million.
We do expect the revenue lift from the impact of net new agent additions over the last year. However, similar to the first half we anticipate this will be offset by mixed drag, particularly from declines in California, which is our largest market and experienced record sales last year.
Importantly, we are on schedule to be free cash flow positive again in the third quarter, given our continued cost discipline, assuming transaction stay in line with industry expectations for the year, we remain on schedule to be free cash flow positive for the full year.
Additionally, we are reaffirming our expectation for our full year non-GAAP operating expenses to be in the range of $850 million to $950 million.
We expect to be at the midpoint of this range on a run rate basis by year end.
For the last year, we've spoken about our commitment to reduce our cost base and have proven that commitment through our results.
It is clear to us that our strong commitment to cost control is working and led directly to our solid adjusted EBITDA results in Q2.
Despite declining revenue.
And we expect our continued commitment to cost control to drive favorable results over the remainder of the year and beyond.
While we are excited with the results to date, we are even more committed today to our cost discipline as we maintain our operating expense levels over the next couple of years.
Thank you again to our agents and team members for all you do for Compass I would now like to turn the call over to the operator to begin Q&A.
Thank you. Thank you I would like to ask a question on the phone lines. Today, you can press star one on your telephone keypad to remove yourself from the queue that is star one again, we will take our first question from Bernie Mcternan with Needham.
Great. Thank you for taking the questions maybe to start with just love to get your thoughts in terms of what the guidance contemplates to the broader real estate market in <unk> and when you think the industry can get back to positive year over year growth.
In terms of the overall market.
We will continue to see more buyers and sellers, we see buyers have accepted these mortgage rate at 7% as the new normal.
I think the evidence that theres more buyers and sellers to every month this year.
<unk> prices have increased throughout the month before.
And.
When you're all seeing more cash offers in places like Manhattan city without incentives.
Officers are all cash.
And the country its around 40%, which had historically around 25% that said as of course as you know this is not enough inventory and so.
We still believe that.
That the market over the course of this year will be down approximately 20% and we've shared down 15 to 20 in the past.
Say more towards the.
The 2000 and now then the <unk> given the inventory just chosen coming to market at the pace that we would have liked.
Understood helpful commentary, Thanks, Robert and then just on you provided some helpful commentary on agent retention and agent churn.
It seems like you guys had some meaningful agent acquisition towards the end of the second quarter and early third quarter, but just love to get your comments in terms of how you guys thinking how you guys are thinking about gross adds for the remainder of the year.
Yeah, we did see some positive momentum sort of referenced that in my scripted remarks.
And we've been really encouraged by the team's performance in the second quarter. It was one of our most productive quarters, we've ever seen in terms of the number of principal agents that we recruited per recruiter strategic growth manager.
We hope to continue that and so the challenge for the team as to how to not just continue with that level, but to take that up over time in terms of net agent adds on a go forward basis, we don't have a formal and haven't ever provided a formal forecast for net agent ads, but we definitely expect the trends that we've seen to continue and we're trying to do so.
To be even more positive and that's the challenge we have set for the team.
Great and maybe last one for Connie.
As we think about as we think about Opex seasonality.
Should there be Opex seasonality you says we're sharpening our pencils for 2024, if you guys are able to hit the $900 million run rate.
By the end of the year should we just expect quarterly Opex should be 900 divided by four or is there some seasonality we should be taking account.
Yeah. Thanks, Thanks for the question.
We are a business that kind of moves sequentially by quarter versus say that variable.
In line with revenue, so I would expect there'll be some small seasonality aspects to it but overall, we should keep relatively the same amount of opex, so materially I think it.
It should look the same there might be some give and takes us into Q2 as a kind of a higher revenue quarter, but overall, we tend to be more of a kind of straight line through the year versus the variable in line with revenue.
Understood. Thanks, Rob Thank you all.
Yeah.
We will take our next question from Sam parcel with BPH.
Hey, good evening, everyone. Thanks for taking the questions.
Klein and maybe wanted to dive in a little bit.
The underlying assumptions for the guidance <unk>. So the 135 billion midpoint is it fair to say that youre, assuming sort of flattish asps next quarter and assuming similar market share there I take I guess on a year over year basis, and then on EBITDA at $25 million the mid point, it's sort of.
Looks like would take your non-GAAP opex to that 900 range by <unk> <unk>.
So does that mean and there is potential to maybe go below that 900 million run rate by by <unk>.
Yes, sure I'll ask answer the last one I think we are as we mentioned we continue to move kind of on that 950, where we're at today and annualized down to 900.
I think overall, we we are working hard as we've always said.
The majority of the actions to get to 900 have been identified in actions already and so it's about timing.
<unk> vendor contracts and timing of those coming up.
I think we will kind of glide into the fourth quarter run rate. We continue to look for opportunities on cost and continue to look for opportunities to be more efficient. So we'll keep working there, but I think I think our guide where we are right at that 900 at the end of Q4 as it is right for us and I think that's the right level of operating expense right now.
Okay.
On recruiting thanks for the color earlier, but just wondering on the on the competitive environment I guess could you, maybe bifurcate, where youre seeing for full service models versus.
Other cloud based or discount based models because one of the things that we're hearing is.
Agents might be moving to some of these cloud based models because they can just keep more of their share of their split today, but just wondering here from you what youre seeing on the ground.
Yeah, So what we're seeing on the ground.
At the extreme there is on one side discount brokerages that charge nothing you didn't give very little to say it lightly another hand, theres brokerages that have historically charge more and provided more.
<unk>.
What I'm seeing is a lot of the brokerages in the latter group that historically competed in hiring into agent and retaining them offers value added support services culture.
Training coaching trying their best on integrating technology that Dave in this environment massively pulling back closing offices, reducing support.
And then the agents coming back to them next year and saying hold on I know you don't even have an answer why are you charging the 20% 25%.
And I'm not going to tell you that some of the I'm going to go to the discount brokerage unless you.
Unless you charge me less and so it's kind of foreseeing this downward spiral with some of the traditional competitors.
Moving towards a discount brokerage model as you coined it and so yes, there is discount brokerages out there they're all there had been for all of the company's existence.
But I think it's a zero sum game.
And there's only so many <unk>.
<unk> agents that would want to be at a discount brokerage because generally speaking the people that are best at what they want to do the people that are best at what they do want to have the best to help them do it.
And Thats really where combos for Jim.
Great. Thank you.
Okay.
We'll take our next question from Jason <unk> with Oppenheimer.
Hi, Thanks, just first for Connie maybe talk about why that revenue is closer to the lower end of the guide versus the midpoint was it share coming in lower than you thought or industry trends. We can later in the quarter a combination and then second question, maybe Robert just kind of continuing to focus on share.
You just how do we think about it I mean sure you guys are gaining share, but albeit kind of less than last year is there an acceleration at some point to levels more similar that we've seen maybe.
Last year, and then just how youre thinking about your strategy for market expansion from here. Thanks.
Yes so.
Yes, I think when we provided our guide for Q2 mortgage rates were close to 6% and then.
Unexpectedly with you get a combination of the debt ceiling showdown.
Handoffs as well as the mortgage was going to 7%.
Unexpected.
And I think that was the primary market share.
Trend was not the driver of where revenue ended up.
It was the it was the change in real estate market.
Yes, yes.
The declining do you want answer the second question.
Yes.
Sure Jason can you just repeat the second question to make sure I heard it right.
Yes.
Either one of you guys, but basically I think like investors are trying to look at kind of share in obviously.
We look at volume you look at.
<unk> gross transaction value, but I mean, the share gains that youre seeing this year are less than the share gains that you saw last year like if youre looking on a year over year basis.
Do we think that share gains can accelerate more to the levels that you saw last year.
And then how much of that is a function of kind of continuing market expansion yes.
Greg why don't you take the first part of that Greg I think you are right.
Alright, one.
Yes, so it's a great question, Jason the way that I'd think about that is if you think about our market share last year. The first two quarters reflected the strength of our business in California, and California has been substantially impacted for everybody in the industry over the last year.
And because we were very heavily weighted towards California, our share gains relative to that have moderated, but we still we continue to gain share over the last three quarters. Despite that so I would expect that over time, particularly as the market recovers in California recovers that youll see our market share gains over time hopefully increase.
Rather than just stay at the current levels.
We continue to grow share through two primary drivers one continuing to grow our agent count and to our agents outperforming their competitors in all of their markets and we believe our platform is a huge driver of their ability to outperform their competitors along with the fact that our agents are typically among the best agents in their <unk>.
Markets the caliber of our agents is a big asset for us from a market share perspective.
Just any thoughts about market expansion.
Yes in terms of margin expansion.
I wouldn't expect any major new market expansion.
<unk>.
<unk> expanding to new markets within our <unk>.
And an example of that would be we're moving more into Santa Cruz in the Bay area than we hadn't been in the past and you will see more of those sub market expansions and further.
For further investments.
Thank you.
We'll take our next question is from Matthew Bouley from Barclays.
Good afternoon, everyone. Thanks for taking the questions.
Let me just on the on the commission split the $81 nine.
non-GAAP expenses as a percentage of revenue.
Obviously down year over year as you've been alluding to maybe sneaking up a little bit sequentially, which I think is normal seasonally is that the kind of peak commission split for the year.
Or how do you think about that metric trending going forward given everything what.
Youre, saying on the competitive side. Thank you.
Yes, Hey, Matthew with declining.
Just just to be clear the commission split.
Will decrease over 2023.
Primarily driven by the non comparable of our agent equity program right. So absent our Asian equity program. It provides roughly a 90 basis point drag absent of that quarter over the last two quarters. We have increased market share between 30, and 40 basis points I expected that trend to continue I believe it's.
Slide.
12 in our deck.
<unk> kind of the reconciliation you can see the AEP or the agent equity program drag.
From last year on the commissions and so you can do that math, but I.
I would say kind of an apples to apples, we should be at that 30% to 40 basis point margin accretion on a quarterly basis for this year.
Okay.
Alright got it thank you for that Connie and then.
Secondly, Super high level on the topic of generative AI, great color at the top around sort of commerce head start are.
Are you worried at all that some of that could actually level, the playing field a little bit.
And I guess really my question is how do you kind of stay ahead of the pack to the extent some of your competitors could have access to some of that thank you.
While our competitors for the most part don't actually have their own platforms. So the tools that their agencies are going to be spread across a diaspora of third party licensed software and so while each of those individual.
The vendors might leverage AI to improve what they do it's not all integrated into one platform. So an agent could use AI to do something for marketing in one place.
The benefit of that is limited to that tick if they want to get to another part of the business day. After the copier pace to put it into that and so the benefit of our platform is it's all together in one place and so as an example for the integration that we've done with chat CPD for encompass.
Create a listening descriptions Melissa inscriptions pulling all the information from the MLS data that we have so it's leveraging all of the meta data that we have been pulling that directly in the.
The way that we've talked about it with our agents is because one of the other questions that people, sometimes ask as well.
AI disenfranchise or disintermediation agents and my perspective is absolutely not it will make the best agents better but want to leverage AI will get better at what they do they will save time.
Better able to focus on where they truly provide value to their customers.
Listing descriptions don't get you to perfect. They don't do the job for you, but they do 80% of the job in one second.
And then the agent can put the final touches on it to have it reflects their brands in a way that they want to present themselves and their clients listening to the market. So my belief is that AI will actually increase.
The differentiation that compass offers versus others, we've seen that with likelihood so no other brokerage if anything like likely to sell it's generated more than $100 million of incremental revenue. The last two years, we only get that benefit because our agents are using our CRM on a daily basis, the contact information in there we're able to.
To create an AI driven model that scores all of that and then recommend two agents the past clients. They should reach out to you because we believe with that home has a higher likelihood of going on the market in the next year and we've had amazingly positive responses from agents. So my perspective is that will actually increase our competitive differentiation over time.
That's great color. Thanks, Greg Good luck everybody.
Thanks, Bob.
We'll take our next question from Matthew cost with Morgan Stanley .
Hi, everybody. Thanks for taking my questions I have two just starting with the commentary at the beginning of the call about launching a consumer facing portal next year I guess can you talk to.
What do you think will distinguish that offering from your competitors and some of the key execution hurdles to building that and then secondly, just on the expansion of the <unk> business outside of Southern California, You mentioned, a couple of more markets coming by the end of the year.
You see that driving.
Measurable margin impact if not this year then in 'twenty four at the company level. Thank you.
How about I'll start on the client portal and then Greg.
Feel free to add in <unk>, either greater planning please take it away.
On the client portal.
We're the number one reason why agents have kind of come back to convince when we when I read and it goes back to campus I asked them why.
And the number one thing that I've heard them say is my clients Miss collections, which is.
Our collaborative tool, where an agent works with a buyer on the portfolio of listings that there they're reviewing.
You had a price down as changes real time.
So look in E mails for email updates any of all your comments in there with not just our client, but whoever the client or two people with you people searching with the client.
It's all there and in perpetuity, so when an agent leaves they're trying to go.
After we start my entire search Where's all the history now to go back and forth by email and text message I cant I don't see when there's a price or status change.
Yes.
I'm not as happy as a client and so.
And then the second was towards sheets in more client tools now where the Aegean is actually working with the client and by background. The vast majority will be built for agents the client can see it's hidden.
On the agent view only in the agent will just shared by text Mr email with the client and so the goal is how can you get everything that an agent does with their client.
Everything they send them to live in a single place their place for all things home. So examples would be for a seller the evaluation and call. The CMA, we already have that digital CNA, but again, it's static and its fits with it sent in a in a single way it doesn't live.
In a single place that the client can see deferred to see an updated they have to go back to the agents. Another example for a seller would be all of the digital marketing and digital ads, Google ads Instagram ads.
Facebook ads whether.
The listing insights for all on all the major aggregator sites as well as companies, how many hits or you're getting on these different sites for my listing we have all those tools, but again, they only get sent to the clients.
One at a time and so just taking the stuff we've already built for the agent and linear live in a single place the transaction timeline and.
The title escrow process and more and then for the buyers it's extending with collections is it is moving in into the negotiation with the forms files.
Esignature and beyond again, all in one place and so the goal is that buyers and sellers.
To the client portal before during and after the transaction.
And it will help us.
Build more.
Our adjacent related.
Services.
Not just mortgage title, but overtime home insurance home warranty home security et cetera into the.
Into the client portal to create more monetization benefit.
Greg maybe just to build rubber on that slightly.
Slightly one of the key things that we think the client portal can do in addition to providing value to the client as they are working with an agent on a transaction, whether they're buying or selling a home is to also provide value to the client after that transaction.
The time that they own their home, but always in a way that reinforces the value of the compensation, who assisted them with that transaction and so title and escrow integration is actually an interesting thing to talk about.
With respect to that because title and escrow integration, obviously title and escrow are important parts of transactions. There is a lot of stuff that happens that you need to attract the best update Jeff to provide documents et cetera, we want the client portal to be a repository for all of those things. Both the date, some tracking that and who owns the next step on them, but also all the documents that get created.
The client can always access them for tax season et cetera, after they purchased or sold the home.
And the integration that we've done right now within business the business Trucker area of our platform is just in Egypt facing integration, but the goal over time is to have pieces of that open up to the client and to other third parties, obviously always in a secure fashion. So.
So thats one of the reasons that we're excited about the title and escrow integration not just for the incremental attachments driving but also for the opportunity to continue to improve the client experience as well with that I'll pass it to quantity to speak to the integration and what impact we might see from a margin perspective over time.
Yes, Thanks, Ragan, Matthew I think just to finish it off I think from.
From the financial side of it we are excited about our adjacent services all of our adjacent services come with.
Very favorable margins to us and to our run rate I think what you should expect us over the next few years that two to three years as we continue to grow our adjacent services and spread and spread beyond where we are today youll start to see it become more meaningful.
Percent of our total.
Total dollars and then Youll start to see so I think you should expect over over the next few years for it to start to help and add some margin accretion.
Great. Thank you.
We will take our next question is from Ryan <unk> with Zelman.
Hey, Thank you for taking the question.
Also on the TNF side.
You called out reaching positive adjusted EBITDA in the accelerating attach in southern California.
I think Philly D C, Maryland makes sense I think you've got a pretty good footprint there already.
Already so maybe the natural extension of where to go next.
Any thoughts on expansion beyond those markets and.
High level, I know that opex and cash flow.
Is the target.
What's important at the moment, but it does feel like the success Youre seeing in Socal.
Could justify a faster rollout to drive more attached drive more EBITDA contribution with the TNT. So maybe just talk to us about bigger picture roadmap of.
The puts and takes behind how quickly you want to kind of ramp <unk> into more markets.
Going forward. Thank you.
In the new year, we will.
Extend the title integration into our Colorado operation as well as our.
Our Texas operation.
And we expect to be able to launch title.
Likely in Florida.
As well over the course of this year.
Yes.
The Opex reality, we have to make tradeoffs and so where we.
We're moving as fast as Opex.
Opex discipline allows.
That's helpful and Robert just.
California.
Recognizing the share gains youre seeing despite that headwind is obviously good.
Just any thoughts more recently on how how.
California generally is performing.
We've all seen some of the headlines around the home insurance companies pulling back I guess any year.
Any incremental impact there or just your high level view on on California.
I haven't seen the home insurance issue in California, and Florida have an impact on transactions and of course I have heard the noise and it is a serious issue, but I haven't seen an impact transactions yet.
And maybe that's just because there's more buyers and sellers.
Jim will tell.
In California, but really it's across the country. This is.
When most agents are described as the most inconsistent market that they remember.
There is one property, which had no offers and no one does it it for three weeks and has similar properties probably do it in just a couple of miles away that had <unk>.
X amount of people at the open house and multiple offers.
In part it.
So it really there is no consistent story right now.
And that said, it's an opportunity market, where there is opportunity for any agent.
We're a buyer or seller if there.
If they are creative and it's a market where the best.
<unk> generally gain market share and so we're thankful that we are a company that has historically been focused on the best agents and we will continue to be big.
Theyre going to ride out the storm.
And gain market share through it.
Got it thank you very much.
We'll take our next question from Mike <unk> with Goldman Sachs.
Hey, good afternoon, and thank you for the question Robert <unk>, It was encouraging to see the <unk>.
Cost initiatives and commitment to maintain.
$900 million of Opex in 2024 and 2025.
Two related questions first I was just wondering if you could talk a little bit about the confidence level in that $900 million of opex. Other other areas, where you can continue to cut if needed to fund inflation or respond to competition.
Then second.
I can appreciate the free cash flow outlook as macro dependent but is it also.
Your current assumption that free cash flow will be positive and 24% and 25. Thank you.
Yes.
Hey, Mike It's <unk>.
Let me start with the first one I think we are.
We are we are confident that we are going to be exiting this year at 900 run rate again I've mentioned them.
Prior question I think importantly, we've actions much of the work to get to 900.
And we continue to focus on opportunities to drive.
Efficiencies and to make sure that we're delivering.
On on the best platform with the right cost.
I think as we think about 'twenty four we continue we continue to see opportunities like low cost labor. We continue to see the opportunities are just operating.
Efficiencies.
Transformation in the way that we service are our agents to give them better service, but at a more efficient opportunities and so I think in 2024, we do see and we are.
<unk> created a path to get to two and stay at that 900 and as we see 25 I think we continue to look at opportunities around very similar things.
Again, low cost labor continue to look at vendor expenses and.
Look at occupancy and how we can make sure that we are using our offices to bring the best energy too often but sometimes that means the ability to consolidate and so we'll continue to look at those.
Those options overall I think as we think about free cash flow for the next year I think what Youre seeing is we're focused on controlling what gets us there, which is cost and our ability to stay at 900, I think the big variable will be revenue for next year and how fast the market recovers I think as we've talked about the 900 is both optimistic that set us up for the future.
But it's also.
Allows us to be ready for a market that continues to stay at that level. So we will continue to drive that cost and continue to work to free cash flow, but im really feeling good about where we're at with our cost base for 2024.
Thank you Connie.
We'll take our next question from Lloyd Walmsley with UBS.
Thanks, two questions first just appreciate the color on California.
Can you share any color on other big markets, where you guys over indexed geographically or maybe.
By price point like what are what are some things going on.
And those markets are at those price points relative to the broader market.
Impact of business positive or negative I guess, especially with rates doing what they're doing.
And then second one just.
You guys have been I think exploring some more asset light sort of deals and potential for technology licensing any of anything moving on that front that could help bring in.
New high margin revenue streams without a lot of investment.
Maybe you could share there would be great.
Yes.
Turns of what's happened in different geographies I'd say on balance the markets that moved up the most in COVID-19.
<unk> been.
Been impacted than most of the downside.
Now.
In terms of the last quarter.
We have a very strong presence in the D C, Maryland, Virginia area.
By far number one there.
And the debt ceiling standoff has a real impact in that market for the obvious reasons, because so many of the people that would be potentially impacted live in that community.
So I think it's good to see that can behind us and normalizing, but that that was.
Yes that was unfortunate that period of time.
Say the.
Florida in the low tax warm weather states are still doing well.
And.
I'd say some of the markets where.
People have been more aggressive on return to office are doing better than markets that have not been aggressive enough on return to office and so you see in Seattle downtown for example, when Amazon brought everyone back.
The prices come back with a downtown because it's you know prices are driven by people.
And demand.
But again, it's the most and inconsistent market.
You know that I can recall in any of the agents that I speak too I can recall.
And the biggest issue constrained our market is not buyer demand is lack of inventory because of the 30% of homeowners are Martin and mortgage rates are 3% or below.
70% of homeowners are locking in mortgage rates and Forbes and are below 85% of homeowners and watching and mercury to <unk> and below and the delta between four and 700 a lot.
My belief is that when mortgage rates get.
Below 6% and a sustainable level that there'll be a lot of not just more demand, but more inventory and there is pent up inventory.
And then Dennis brewing because of the re class.
Rate lock issue.
In terms of asset light.
Tech licensing expansion.
There is always that opportunity in front of us, but we're focused on.
Focus and the main thing is keeping the main thing the main thing and that is our agents are making sure that in this period of time that we give them the best support and service that we build the best platform for them that we bring back or in person culture.
At our historic levels, when our competitors have not.
And then we make this the best place to be and Adrian.
And so things around.
Tech licensing or not a focus at this time.
Alright, thank you.
Thank you and that does conclude the question and answer session I would like to turn the call back over to Robert Revkin CEO for closing remarks.
Well. Thank you everyone for joining today's call I want to take these final moments of this call to thank all of the company's employees and agents for their hard work and commitment to making Congress. The number one real estate brokerage in the U S for the second year in a row together, we're proving that in the worst of times Thomas <unk>.
Generate free cash flow the real estate market will come back and when it does I am excited to show how much free cash flow regenerate as we keep our cost base at these new levels I am confident that <unk> is well positioned for the cyclical upturn that will come when the market normalizes. Thank you.
Yeah.
Thank you that does conclude todays presentation. Thank you for your participation and you may now disconnect.
Yeah.
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Yeah.
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Yeah.
Yeah.