Q3 2023 Opendoor Technologies Inc Earnings Call

November 2, 2023

[music].

Good day, and thank you for standing by.

Welcome to the open door third quarter 2023 earnings conference call.

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I would now like to turn the conference over to your Speaker today, Kimberly Niehaus Investor Relations Officer.

Please go ahead.

Thank you and good afternoon detailed them, our adult 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 investor that open door dotcom.

Please note that this call will be simultaneously webcast on the Investor Relations section of the company's 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.

All statements other than statements of historical fact are statements that could be deemed forward looking including but not limited to statements regarding open doors financial condition anticipated financial performance.

This strategy and plans market opportunity expansion and Madison and objectives for future operations.

These statements are neither promises nor 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.

Aided 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 open door assumes no obligation to update or revise them, whether as a result of new information future events or otherwise except as required by law.

Following discussion contains references to certain non-GAAP financial measures. 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, an investor Dot open door Dot Com I will now turn the call over to Kerry Wheeler Chief Executive Officer of open door.

Good afternoon also on the call with me today is Christopher Schwartz interim Chief Financial Officer, and Don Fraser, President, who has capital and open exchange.

As the market leading platform that is leveraging technology to transform and simplify the way people buy and sell their home open door has the opportunity to build a generational company and disrupt the massive market.

Over the past year, our team has been hard at work scaling our customer acquisition channels and improving our pricing systems and cost structure. We believe we've laid the foundation to Reaccelerate revenue next year as we build for future sustained profitable growth.

In the third quarter open door purchased 3136 homes. This is an increase of 17% quarter over quarter. Despite the fact that average new listings were down 8% within our buy box and our markets demonstrating our ability to gain share despite lower market transaction volumes.

Throughout 2023, we made cost structure and pricing accuracy improvements and pass those through to spread reduction, which in turn enabled us to increase acquisitions quarter over quarter.

These spreads improvements combined with our growing partnership channels and plans to increase your advertising spend in the first half of 2024 should allow us to accelerate home acquisitions next year.

Our third quarter results demonstrate continued execution in what remains an uncertain U S housing market.

Mortgage rates had a 22 year high of 8% in October up over 100 basis points. Since we reported Q2 results in August.

Market clearance rates will still at historically healthy levels have declined more than expected with higher rates further depressing buyer demand.

While these market moves to have implications for our business. We continue to operate within our risk management framework and focus on controlling what we can control.

Based on current conditions and signals, we're observing our plans to increase acquisition volumes next year have not changed.

We continue to closely monitor leading indicators so that we can respond to shifts in the market.

Acquisitions from our partnership channels increased 33% sequentially in Q3 and are up over 76% compared to Q1, we.

We continue to make progress on expanding our partnership channels across online real estate platforms agents and homebuilders.

Our exclusive partnership with Zillow continues to scale and is live in 45 markets as of this week with more opportunities for customer Reengagement with channel and our previously launched markets continue to mature we saw meaningful transaction growth in the quarter.

In early October we announced a partnership with ESB reality, the largest independent real estate companies in the world.

This agreement enables esp's agents to request a cash offer on qualifying properties on behalf of the clients directly within their E X P dashboard all.

Ultimately, we believe open door enables agents to better serve our clients and improve productivity.

By leveraging AI and other technologies, we continue to drive operational excellence across our platform, including pricing inventory management and home operations.

In terms of pricing our proprietary home data asset that we built over the last decade, coupled with deep human expertise is enabling open door to build proprietary real estate specific AI models. For example, we use AI to extract home conditions from customer provided inputs such as chat.

<unk> images and videos.

These inputs are used by a centralized pricing team and improve our pricing accuracy with the objective of durably reducing spreads.

For inventory management, we continue to develop technology and improved processes to centralize operations and conduct quality control remotely.

We had real time home specifics signals from our proprietary home security system and customer and agent feedback from each home visit which enhances our ability to quickly and cost effectively respond to issues.

We leverage AI to automatically categorize feedback and extract data points.

Maintenance quality has improved significantly with 99% of work meeting our quality standards of our statements of work.

Additionally, agent feedback has indicated it listed hong quality improve by over 10% throughout the year.

Finally, we continue to enhance our transactions and operations platforms in Q3.

We piloted automated operator work assignment successfully to more effectively load balance work across operators and are expanding it to all operating groups over the next two quarters.

We also recently revised our end to end CRM changes to the platform have enabled us to respond to customers faster capture more useful structured data and ensure that each step of the transaction is completed on time.

Switching gears for a minute I wanted to make a comment on potential disruptions in the real estate industry regarding the buyer broker Commission.

Just this week a jury ruled against <unk> and other brokerages in one of several losses that are challenges in the practice of listing agents and there for home sellers.

Are you required to pay the buyer brokerage Commission.

Very clear open towards core business does not derive revenue from the buyer broker Commission on the contrary the buyer broker commission as a cost that we pay when we resell our homes.

The BBC currently represents approximately two five points of our overall cost structure, which is meaningful.

If the buyer broker commission will reduce or went away those cost to us will be reduced.

And open door, we built our entire platform with a focus on giving customers transparency and choice in how they sell their home.

Such we believe we are well positioned to improve the experience of sellers and buyers is changes in the real estate ecosystem materialize.

Before I turn the call to Christy I'd like to thank the open door team for their continued hard work to reshape the real estate industry and fix a broken process. We believe we built the foundation for our future profitable growth as we exit the year with improved cost structure strong balance sheet and scaled customer acquisition channels.

We remain steadfast in our mission to power lines progress one move at a time.

Christie will now review guidance and the financial results.

Thank you.

Thank you Carey our third quarter results reflect increased acquisition volume the growing mix of our new book of inventory and our continued focus on cost discipline.

We remain focused on delivering healthy risk adjusted contribution margins and preserving capital through disciplined cost management.

We delivered $980 million of revenue in the third quarter slightly exceeding the midpoint of our expected guidance range. We have continued to sell through our longest haul at home with less than 150 old book home not in retail contract at quarter end.

On the acquisition front, we purchased 3136 homes in the third quarter, a 17% sequential increase despite a decline in market new listings within our buy box.

We returned to positive contribution margin in the third quarter generating positive four 4% versus negative four 6% in Q2 2023.

These results were ahead of our implied guidance range of three 2% to 4%.

The outperformance reflects both the strong performance of our new book of home as well as slightly higher mix of new book versus the old Buckley sales than expected.

Our new book of homes generated gross margins of 12% and contribution margin of nine 2% in the third quarter.

Adjusted EBITDA loss was $49 million in the third quarter inclusive of our previously recorded inventory valuation adjustments of negative $29 million.

This beat the high end of our guidance range and is an improvement from an adjusted EBITDA loss of 168 million in the second quarter of 2023.

Adjusted operating expenses, which we defined as the Delta between contribution profit and adjusted EBITDA were $92 million in Q3 up from $78 million in Q2, 2023 and down from $189 million in Q3 2022.

The sequential increase reflects the fact that we began rebuilding inventory in the third quarter, while the decline versus the prior year period reflects our improved cost structure.

Adjusted operating expenses outperformed our prior guidance of 100 million due primarily to the timing of certain expenses that we now expect to incur in <unk> 'twenty three we.

We expect adjusted operating expenses to be approximately $120 million in the fourth quarter, which reflects both the shift in some expenses from three two to four to you as well as our expectation to continue rebuilding inventory, while continuing to prioritize cost discipline.

Turning to our balance sheet, we ended the third quarter with 1 billion in total shareholders' equity, which is a decrease of 66 million from the second quarter of 2023.

We ended the third quarter with $1 5 billion and total capital, which includes $1 2 billion in unrestricted cash cash equivalents and marketable securities at $182 million of equity invested in homes unrelated asset net of inventory valuation adjustment.

At quarter end, we had $8 4 billion of nonrecourse asset backed borrowing capacity composed of $3 9 billion of senior revolving credit facility.

$4 5 billion of senior and mezzanine term debt facilities of which total committed borrowing capacity was $3 billion.

As Carey mentioned mortgage rates reached 8% in October the highest level in over 20 years and up over 100 basis points reported second quarter results in August.

This increase in rates softened a buyer demand amplifying the typical seasonal decline in market clearance rates.

The impact of this is reflected in our outlook for the balance of the year.

First as market clearance rates slowed our pace of retail is likewise reduced impacting projected fourth quarter revenue.

Second we reduced home level list prices in order to meet our clearance objectives, which flows through to lower revenue and contribution margins.

And third as a result of slower retail clearance rate some sales from the old book shifted out of the third quarter we.

We expect the impact of those killed home will be a drag on the overall fourth quarter contribution margin given their margin profile.

Responding to seasonality and market changes is a normal part of our portfolio management process, including balancing the pace of inventory inflows and outflows.

With that in mind, we expect fourth quarter revenue to be between $800 million and $850 million.

Contribution profit between $15 million and $25 million, which implies a contribution margin of one 9% to two 9%.

Adjusted EBITDA loss between $105 million to 95 million.

And adjusted operating expenses of approximately $120 million.

In line with the expectations outlined back in May we continue to expect fourth quarter home purchases to be about 3000, and roughly flat quarter over quarter.

With less than 150 order book homes, not under contract as of quarter end, we expect to return to more normalized inventory turns of three to three and a half times per year.

There are other factors that may cause inventory turns to vary quarter to quarter, most notably seasonality, but we believe it's helpful to keep in mind as you model, our inventory acquisition and resale pace throughout the year.

We continue to manage our business to return to positive adjusted net income our best proxy for operating cash flow and believe we have the cost structure and balance sheet in place to do so.

I'd now like to turn the call over to the operator to open up the line for Q&A.

Thank you.

A reminder to ask a question. Please press star one on your telephone and boyfriend name to be announced towards draw. Your question. Please press star one again.

We ask that you please limit yourself to one question and one follow up please stand by 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. Thanks for taking my questions I guess I guess the way I saw the comments on the NAR lawsuit.

A recent judgment in our Missouri.

If conditions were to come down.

And I realize maybe.

It lowers your costs, a little bit, but does that then change the value proposition and the spread dynamic.

And your go to market and how you can expect to have the convert I guess, if we if we kind of tease this out longer term.

Yeah, Hey, Nick It's Gary I mean short answer is no it doesn't mean.

We're here to serve someone who are looking to sell their home with simplicity and certainty and that's the fee we charge today and as I said earlier in my comments the buyer broker Commission for US is the cost that we pay out every retailer Hollister that comes down.

And where if it's a great. It's a neutral in terms of our overall margin to us overtime.

Great and then.

And then as we think about I guess.

2024.

How much of an overhang will afford to be affordability continued today I mean, do we really need to see.

Transaction volumes kind of normalized satellite historic level.

For things to kind of improve in growth to kind of reaccelerate and largest come through because it kind of a longer term view or do you think the expansion of the buy box.

You talked to and that was in the shareholder letter is enough Dakota.

Grow and navigate the current environment.

Yes.

Feel really comfortable with our ability to grow and navigate.

As we've talked about in past calls I think it's important to distinguish between price stability and volumes.

From a we really care most about price stability because that allows us to reduce our spreads from a volumes perspective, as we mentioned in the letter our addressable market. Today is 600 billion and so we just need a small fraction of that addressable market to scale back to profitable cash flow breakeven.

He gets carried only I would add onto that a good answer is that we.

We have been showing throughout the course of the year as we're gaining share and we're gaining share against a declining market I think that's evidence of the value prop and what we're putting into the market for customers.

That's good.

To do so.

Yeah.

Great. Thanks, Kevin Thanks, Todd.

Thank you.

Our next question comes from the line of Yugo Iranian with Citigroup. Your line is now open.

Hey, good afternoon guys.

Wanted to.

Focus on person spreads for a little bit.

So we're not surprised about that.

So.

On this call right now.

Talked about seeing some signals of home prices softening in their view that's a good thing.

I know that obviously has an impact on how you think about the world and so.

I may have missed some of the some of the commentary, but just your thoughts on spreads right now as we get through the end of this year and into next year.

And what you're factoring in or thinking about in terms of.

Home prices as we kind of work through.

What's been a.

We're challenged environment that last time, we spoke.

Yep.

So first.

First of all let's just sort of step back and look at what the Euro has been like so 2023.

Still seeing 4 million homes being sold in the U S annually.

To your point, we have observed low supply, but we've also paired that with resilient buyer demand and so what we've seen in supply and demand largely staying imbalance, which has resulted in home price stability.

The metric, we really focus a lot on is market clearance or the <unk>.

Based of retails.

At that because it really helps reflect the balance of supply and demand and if you look at the back of our shareholder letter market clearance continues to be above historical periods.

For the homes are buying today, we will be selling those into the spring selling season next year.

<unk> acquisitions for us have historically been some of our strongest cohorts given the month over month home price tailwind that start to show up in mid February.

So we will continue to monitor our leading indicators monitor clearance and be disciplined about balancing gross margin and risk.

But this has no.

Thus far been.

Table, how is price market and that is in part why we've been able to take those prices up.

Yeah.

Got it maybe just a follow up on that how does what all year. We're talking about here are aligned with the lower clearance rates youre seeing in lowering the prices right now is it more of a seasonal factor or just wanted to make sure I understand.

And make that bridge.

Yes, very much a seasonal factor and part of our risk management framework. So we saw that softening I wanted to stay in line with our clearance targets and so to your point that is a short term effect.

And if you sort of roll forward the clock another month or two in November and December at a very youll see market New listings go down 50% between October and December and so both supply and demand shift.

Significant way for November and December if people don't want to move during the holidays. So.

So it is very much a short term near term phenomenon.

And I think if you look again at those strikes me back from a price perspective, a nominal home price perspective that continues to show stability really in line with what we've seen in prior years.

Okay. Thank you very much.

Okay.

Thank you.

Our next question comes from the line of Curtis Nagle with Bank of America. Your line is now open.

Great. Thanks, very much maybe just kind of talking on.

We'll go next points just in terms of thinking about.

I guess the setup for 24.

So clear.

Clearance rates slower I guess some of that seasonal but why not.

Just back the bonds.

Just a little bit so look things are obviously super volatile so.

Maybe lower inventory risk and again, just such a soft market.

And then just as a follow up could you give a little more color on the marketing spend it.

It sounds like Thats to Europe I think.

Spring selling season next year.

But yes mortgage all of that is that what drove the shift I guess into <unk>.

Yeah.

Well just on the <unk> acquisition that we said was they would be sort of approximately 3000, which is flat quarter over quarter.

As I mentioned, a moment ago <unk> acquisitions, historically, our some of our strongest cohorts I think it's really important to remember that the homes that we're buying right now will be selling early next year into that very positive spring selling season.

So I think starting with that I think the I mean, I couldn't quite tell if youre asking if we work with we should be decreasing or increasing from an increasing perspective given those.

Lifting volumes in the market increase.

Increasing volumes it is hard given what I've mentioned about just new lifting being down significantly in months like November and December.

It was decreasing just again.

Potential inventory. This question on a volatile market right. You know three months is a long time I don't know if that's sort of the point.

Yes.

Hi.

Thats, where if you can sort of track through too.

Pricing did you see in February March.

Those are 100 200 basis point positives.

And so I think thats, where we.

We are setting our spreads so that we feel comfortable we will hit those.

That annual contribution margin target that we've guided to that 5% to 7%. So that those new acquisitions will perform in line with our targets.

Okay.

But if you have a follow on question is related to marketing.

So yes I do.

So.

It sounds like marketing spend was either increasing or shifting.

From <unk> to <unk> I couldn't quite tell where it is.

Just the fixed costs are going up a bit quarter to quarter. So.

Just hoping to square that.

<unk>.

What type of marketing reporting to the market.

Hi, Curtis as Christie.

On marketing you know basically our adjusted Opex, There's three main components marketing fixed cost variable SG&A. Those are all relatively flat between Q3 and what we're guiding to for Q4 in the letter and I think in the prepared remarks as well I mentioned that there was some shift between <unk> and threep.

Three Q4, Q and that's just some expenses that we had expected at <unk> that are going to actually commentary with <unk>, it's not specific to marketing.

Other thing about the guy to the $120 million in fixed.

Adjusted Opex total adjusted Opex.

That's the dynamic that we've seen in the past, which is when we rebuild inventory, especially at a high rate compared to resales holding costs that will eventually move to contribution profit when that inventory is sold through burden adjusted Opex.

Inventory is growing and so that's some of the uptick youre seeing in Q4, we plan to lean into paid marketing a bit starting in Q1.

Yes, I mean, just to add onto that I mean.

Emotional for us during the course of the year given with God said earlier about listing volumes in Q4, I think youre relatively quiet marketing quarter for us and we lean into more marketing spend in Q1, we expect to do so next year along with the fact that our spreads are at a level right now and we can make those investments and cost effective way. So that's a pretty natural motion for us.

Okay. Thanks, very much I appreciate it.

Thank you.

Our next question comes from the line of Daily with Jpmorgan. Your line is now open.

Great. Thanks for taking the questions I'm sorry.

If this is already doing that.

On the <unk> is it right to think about.

By raising commission changes there there'll be contribution profit dollar neutral for you guys.

And then secondly, I know you guys gave some color on your plans for our recently appointed four I'm just curious what kind of macro environment and you guys are embedding.

Betting in your plan.

If current rate environment.

The whole discipline from your four do you still.

Targa, achieving $10 billion revenue and net income positive sometime in 'twenty going forward.

Yes.

Hey, Dave So let me take the first part on the newer stuff in that regard.

What about the macro and maybe.

Maybe Christie will public breakeven.

What do you prefer here.

On the first part which is the number part.

Your question was would it be margin neutral to us if the buyer broker commission were to come down and that's our view.

Again, as a cost item for us it's not a revenue item.

So we think worst case neutral to us from a margin perspective.

How much easier.

<unk> taken a macro question.

I think on the on your macro question I think there's a couple of points that I mentioned, a moment ago, which are from a market clearance perspective or the pace of retail that is still above historical norms, excluding 21, and 'twenty, two which are out layers.

We are still seem very healthy pace of resellers and a balance of supply and demand I think the place that we are focused.

<unk> is really monitoring for supplier demand shocks that would then translate through the home price changes we have not seen this but one of the advantages of our business model and the ability to adjust spreads rapidly.

Exactly that which is if we see a change we can adapt quickly.

And then just to close things off with Eni breakeven framework hasn't changed the whole organization is focused on returning that cash flow breakeven.

Line depends on what we're seeing in the housing market, which continues to be dynamic and we will continue to respond to market signals and therefore, we arent going to commit to a specific months.

The business, we're always balancing growth margin and risk in 2023, we are focused on risk, which led to reduced growth that outperformance on new boat margins in 2024 will continue to balance gross margin and risk and we will track leading real time metrics that said sitting here today, we do believe that doubling volumes from here is achieving.

Given current spreads are growing partnership channels and plans for cost effective marketing investment in the first half of 2024.

Great that all makes sense. Thank you.

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

Yes.

Hi, everyone. Thanks for taking the questions just to drill down again on Opex.

Any chance you can just provide some absolute guardrails for the level of opex needed to support.

Perhaps a wide range of purchase volume assumptions next year.

I guess the $120 million in the fourth quarter is that something.

That obviously doesn't include the marketing spend but as you mentioned is certainly being burdened by higher holding costs. So any just general guardrails relative to the $120 million <unk> for what is a reasonable expectation for next year.

Hi, Ryan its Christy thanks for the question.

For sure.

From Eni breakeven.

Expect that to happen at $10 billion.

Steady state revenue, meaning acquisitions are roughly equal to re sales and so at 10 billion with 4% to 5% adjusted Opex that that's what we're marching towards as I discussed earlier as we are building around the nail you can have one building inventory you can have buildup in operating expense.

For the holding costs that you're incurring in as as.

Your inventory is kind of outpacing your revenue.

Yeah.

Okay.

Yes, I think the one other point to add on to that is if you think about our operating cost and sort of <unk> versus <unk>.

But taking that aside this time insurance adjustments those are basically flat quarter to quarter. So we are I think trying to continue to be disciplined about cost management.

And to your point, the real change would be in marketing spend.

Got it.

And then a follow up just not belabor the point on the commission lawsuits, but in addition to the one question that Nick posed earlier.

Another question that we're getting is around the potential disruption to the MLS system and the impact that that could have to open on the <unk>.

One hand, you could argue that a weaker value proposition to use the MLS could provide more flexibility for sellers to consider an alternative innovative models like open door and on the other it's possible is it possible that a disruptive of disruption to the MLS could pose a risk to any data that you rely.

I on for.

Those databases to power your pricing models.

Obviously, a dense topic, but just trying to unpack all the different moving pieces here and the puts and takes.

Yep.

<unk>.

If you think about our business model, we're trying to give customers choice we arent.

We're focused on giving transparency to the process and letting them pick the best solution for them.

If you look at our NPS scores and sort of how customers have reacted to the product. They love our product. So I think we're very well positioned to continue to offer these products to customers.

On the data side.

Obviously, we have been building our home data story now for 10 years.

And so we feel I think we earned almost one of the best positioned to capitalize on any data components, especially.

So I think we are well positioned on all fronts.

Whatever unfolds I do think as Terry mentioned, these things likely to unfold slowly but in either a slow unfolding of our fast unfolding I think we're well positioned for it.

Great. Thanks, Scott.

Thank you as a reminder to ask a question at this time. Please press star one one are you touched on telephone.

Our next question comes from the line of Jason <unk> with Oppenheimer <unk> Company. Your line is now open.

Hey, Thanks. This is Chad on for Jason can you can you maybe help us quantify the slowdown from rates coming out of the quarter as it relates to the fourth quarter guidance.

It kind of sounds like in the letter you're still confident in hitting the 10 billion run rate target at sometime in 'twenty four or so just kind of trying to understand how you ramp to kind of three times, what the fourth quarter revenue is going to be thank you.

Yeah.

There are a series of charts in the back of the shareholder letter actually if you want you can take a look at sort of like the pace of market clearance I think Tommy just commented on hey remains healthy by any historical measure, but and we always always disclose it seasonally in the back half of the year, but there was a little extra slowdown starting in October on the back of seeing mortgage rates spike okay.

Per cent, maybe 10, 15% worse than we anticipated. So we react to that we took some of those skills.

I would like to show in Atlanta, and you're seeing that show up our guide for Q4.

I think the more important point is like where do we go from here and what does that look like spreads between 20, Florida. We are on pace to Mike hit the volume targets, we've been talking about which is how do we demo Mcdonnell.

Mcdonald's and you kind of talk 2000 plus per month.

Sitting here today.

Really nothing I've seen would suggest that you change course as I mentioned earlier, we are looking for price stability and you're actually seeing that this year, we've seen a very constrained supply people reluctant to list their homes previously borrowed demand relative to that constrained supply and that dynamic has persisted in need frankly, our forecast internally we will continue.

For 2024, and that's a good setup for us to value homes be able to acquire them and then selling them against that backdrop.

Secondly, we've got seasonality.

Coming up here in a sort of a seasonal doldrums on residential real estate right now those headwinds turn into a tailwind starting in the first part of next year. So that's one party doesn't make it any thoughts have you kind of like this a lot and we will be looking that was in a stronger spring selling season, I think good thing for volumes.

And then it builds on top of a different model worked on this using spreads down a lot of cost work lot of work done to improve price accuracy.

That's what a lot of those gains back into spreads that can come down to a level. We feel is appropriate for where the market is today.

Many level, we're able to invest more into marketing on a cost effective basis again that will help amplify volumes in Q1.

Partnership channels that are growing there will also be enabled by that so.

So all of those things frankly make us feel good about the volume assumptions were making for 2024.

We're always going to operate within our risk framework right, we're always going to be responsive to what is going on in housing is a very dynamic.

Our risk management framework is imperative to us, we're always going to balance the inflows and outflows like we did in fourth quarter in reaction to the mortgage REIT space, but.

At a high level, we're still on track to continue to increase our volumes.

Thank you.

And I'm currently showing no further questions at this time I'd like to hand, the call back over to Cary Wheeler for closing remarks.

Great. Thank you.

First of all thank you for joining us today as we exit 2023, just wanted to say I'm proud of the work and the opening of the teams are doing.

To be just a stronger more resilient company the housing market for sure continues to be challenging, but I am confident the changes have been working on this year, we have implemented with benefits for years to come.

No doubt about it we are very focused on getting back to positive cash flow and we're committed that we're going to manage our cost structure and our balance sheet to ensure we get there because we obviously we have in front of US is massive and we are going to deliver against it. So thank you for listening to us today and we look forward to speaking with you all next quarter.

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

Everyone else has.

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Good day, and thank you for standby and welcome to the open door third 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.

To 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 turn the conference over to your Speaker today, Kimberly Niehaus Investor Relations Officer. 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 Investor Dot <unk> Dot com.

Note that this call will be simultaneously webcast on the Investor Relations section of the company's 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.

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 market opportunity expansion and management objectives for future operations.

These statements are neither promises nor 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.

Aided 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 opened <unk> assumes no obligation to update or revise them, whether as a result of new information future events or otherwise except as required by law.

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 that open door Dot com.

I will now turn the call over to Carey Wheeler, Chief Executive Officer of open door.

Good afternoon also on the call with me today is Christopher Schwartz interim Chief Financial Officer, and John Fraser President Capital an open exchange.

Over the past year, our team has been hard at work scaling our customer acquisition channels, and improving our pricing systems and cost structure.

Believe we've laid the foundation to Reaccelerate revenue next year as we build for future sustained profitable growth.

In the third quarter opened our purchased 3136 homes. This is an increase of 17% quarter over quarter. Despite the fact that average new listings were down 8% within our buy box and our markets demonstrating our ability to gain share despite lower market transaction volumes.

Throughout 2023, we made cost structure and pricing accuracy improvements and pass those through to spread reductions, which in turn enabled us to increase acquisitions quarter over quarter. These.

These spreads improvements combined with our growing partnership channels and plans to increase advertising spend in the first half of 2024 should allow us to accelerate home acquisitions next year.

Our third quarter results demonstrate continued execution in what remains an uncertain U S housing market.

Mortgage rates had a 22 year high of 8% in October up over 100 basis points. Since we reported Q2 results in August.

Market clearance rates will still at historically healthy levels have declined more than expected with higher rates further depressing buyer demand.

While these market moves do have implications for our business. We continue to operate within our risk management framework and focus on controlling what we can control.

Based on current conditions and signals, we're observing our plans to increase acquisition volumes next year have not changed.

We continue to closely monitor leading indicators so that we can respond to shifts in the market.

Acquisitions from our partnership channels increased 33% sequentially in Q3 and are up over 76% compared to Q1, we.

We continue to make progress on expanding our partnership channels across online real estate platforms agents and homebuilders.

In early October we announced a partnership with ESB reality, the largest independent real estate companies in the world.

This agreement enables esp's agents to request a cash offer on qualifying properties on behalf of declines directly within their ESP dashboard Ulf.

Ultimately, we believe open door enables agents to better serve our clients and improve productivity.

By leveraging AI and other technologies, we continue to drive operational excellence across our platform, including pricing inventory management and home operations.

In terms of pricing our proprietary home data asset that we've built over the last decade, coupled with deep human expertise is enabling open door to build proprietary real estate specific AI models. For example, we use AI to extract home conditions from customer provided inputs such as chat.

Invitations images and videos.

These inputs are used by a centralized pricing team and improve our pricing accuracy with the objective of durably reducing spreads.

For inventory management and continued to develop technology and improved processes.

Centralize operations and conduct quality control remotely.

We get real time homes specific signals from where our proprietary home security system and customer and agent feedback from each home visit which enhances our ability to quickly and cost effectively respond to issues.

We leverage AI to automatically categorize feedback and extract data points.

Maintenance quality has improved significantly with 99% of work meeting our quality standards of our statements of work.

Additionally, agent feedback has indicated that listed Hong quality improved by over 10% throughout the year.

Finally, we continue to enhance our transactions and operations platforms in Q3.

We piloted automated operator work assignments successfully to more effectively load balance work across operators and are expanding it to all operating groups over the next two quarters.

Switching gears for a minute I want to make a comment on potential disruptions in the real estate industry regarding the buyer broker Commission.

Just this week a jury ruled against <unk> and other brokerages in one of several losses that are challenges in the practice of listing agents and therefore wholesalers.

Required to pay the buyer brokerage commission.

To be very clear open doors core business does not derive revenue from the buyer broker Commission on the contrary the buyer broker commission as a cost that we pay when we resell our homes.

The BBC currently represents approximately two five points of our overall cost structure, which is meaningful.

If the buyer broker commission will reduce or went away.

The cost to us will be reduced.

And open door, we built our entire platform with a focus on giving customers transparency and choice as to how they sell their home and such we believe we are well positioned to improve the experience of sellers and buyers is changes in the real estate ecosystem materialize.

Before I turn the call to Christy I'd like to thank the opener team for their continued hard work to reshape the real estate industry and fix a broken process. We believe we built the foundation for our future profitable growth as we exit the year with improved cost structure strong balance sheet and scaled customer acquisition channels and we remain steady.

Fast and our mission to power lines progress one move at a time.

Christie will now review guidance and the financial results. Thank.

Thank you.

Thank you Carey our third quarter results reflect increased acquisition volume the growing mix of our new book of inventory and our continued focus on cost discipline.

We remain focused on delivering healthy risk adjusted contribution margins and preserving capital through disciplined cost management.

We delivered $980 million of revenue in the third quarter slightly exceeding the midpoint of our expected guidance range.

Continued to sell through our longest haul at home with less than 150, <unk> not in retail contract at quarter end.

On the acquisition front, we purchased 3136.

In the third quarter, a 17% sequential increase despite a decline in market, we let things within our buy box.

We returned to positive contribution margin in the third quarter generating positive four 4% versus negative four 6% in Q2 2023.

These results were ahead of our implied guidance range of three 2% to 4%.

Outperformance reflects both the strong performance of our new book of home as well as slightly higher mix of new book versus the old Buckley sales than expected.

Our new book of homes generated gross margins of 12% and contribution margin of nine 2% in the third quarter.

Adjusted EBITDA loss was $49 million in the third quarter inclusive of our previously recorded inventory valuation adjustments of negative $29 million.

This beat the high end of our guidance range and is an improvement from an adjusted EBITDA loss of 168 million in the second quarter of 2023.

Adjusted operating expenses, which we define as the delta between contribution profit and adjusted EBITDA were $92 million in Q3 up from $78 million in Q2, 2023 and down from $189 million in Q3 2022.

The sequential increase reflects the fact that we began rebuilding inventory in the third quarter, while the decline versus the prior year period reflects our improved cost structure.

Adjusted operating expenses outperformed our prior guidance of $100 million due primarily to the timing of certain expenses that we now expect to incur in <unk> 'twenty three we expect.

Adjusted operating expenses to be approximately $120 million in the fourth quarter, which reflects both the shift in some expenses from three to four to you as well as our expectation to continue rebuilding inventory, while continuing to prioritize cost discipline.

Turning to our balance sheet, we ended the third quarter with $1 billion in total shareholders' equity, which is a decrease of $66 million from the second quarter of 2023.

We ended the third quarter with $1 5 billion and total capital, which includes $1 2 billion in unrestricted cash cash equivalents and marketable securities and a $182 million of equity invested in homes and related assets net of inventory valuation adjustment.

At quarter end, we had $8 $4 billion of nonrecourse asset backed borrowing capacity composed of $3 9 billion of senior revolving credit facility and $4 5 billion of senior and mezzanine term debt facility of which total committed borrowing capacity was $3 billion.

As Carey mentioned mortgage rates reached 8% in October the highest level in over 20 years and up over 100 basis points. Since we reported second quarter results in August.

This increase in rates softened buyer demand amplifying the typical seasonal decline in market clearance rates.

The impact of this is reflected in our outlook for the balance of the year.

First as market clearance rate slowed our pace of retails as likewise reduced impacting projected fourth quarter revenue.

Second we reduced home level list prices in order to meet our clearance objectives, which flows through to lower revenue and contribution margin.

And third as a result of slower retail clearance rate some sales from the old book shifted out of the third quarter we.

We expect the impact of those tail home will be a drag on the overall fourth quarter contribution margin given their margin profile.

Responding with seasonality and market changes is a normal part of our portfolio management process, including balancing the pace of inventory inflows and outflows.

With that in mind, we expect fourth quarter revenue to be between $800 million and $850 million.

Contribution profit between 15 million and $25 million, which implies a contribution margin of one 9% to two 9%.

Adjusted EBITDA loss between $105 million to 95 million and adjusted operating expenses of approximately $120 million.

In line with the expectations outlined back in May we continue to expect fourth quarter home purchases to be about 3000, and roughly flat quarter over quarter.

With less than 150 order book homes, not under contract as of quarter end, we expect to return to more normalized inventory turns of three to three five times per year.

We continue to manage our business to return to positive adjusted net income our best proxy for operating cash flow and believe we have the cost structure and balance sheet in place to do so.

I'd now like to turn the call over to the operator to open up the line for Q&A.

Thank you.

Reminder, to ask a question. Please press star one on your telephone and wafer your name to be announced to withdraw your question. Please press star one again.

We ask that you please limit yourself to one question and one follow up please stand by 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. Thanks for taking my questions I guess I guess, what I saw the comments on the NAR lawsuit.

Recent judgment on our Missouri.

If conditions were to come down.

And I realize maybe.

It lowers your costs, a little bit, but does that then change the value proposition and the spread dynamic.

And your go to market and how you can expect to have the convert I guess, if we if we kind of see this out longer term.

Hey, Nick It's Gary I mean short answer is no. It doesn't mean we're.

We're here to serve someone is looking to sell their home with simplicity and certainty in the fee we charge today and as I said earlier in my comments and the buyer broker Commission for us as a cost that we pay out as a retailer hall just that comes down.

Sure.

And where if it's a great. It's a neutral in terms of our overall margins overtime.

Great and then.

And then as we think about I guess.

2024.

How much of an overhang will afford to be affordability continued to be I mean, do we really need to see.

Transaction volumes kind of normalized satellite historic level.

For things to kind of improve in <unk>.

Growth to kind of Reaccelerate and largest to come through is there kind of a longer term view or do you think the expansion of the buy box that you talked to and that was in the shareholder letter is enough to kind of.

Can you grow and navigate the current environment.

Yes, I mean, I think we feel really comfortable with our ability to grow and navigate.

As we've talked about in past calls I think it's important to distinguish between price stability and volumes.

Hey, Nick it's Gary the way I want to add on to Doug Good answer is that.

We have been showing throughout the course of the year that we're gaining share and we're gaining share against a declining market and I think that's evidence of the value prop and what we're putting into the market for customers.

Our focus is continue to do so.

Great. Thanks, Dara Thanks, Todd.

Thank you.

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

Hey, good afternoon guys.

Just wanted to.

Focus on prices and spreads for a little bit.

So we're not surprised about that.

So.

On the call right now.

<unk> talked about seeing some signals of home prices softening in their view that as a good thing.

That obviously has an impact on how you think about the world and so.

I may have missed this some of the some of the commentary, but just your thoughts on spreads right now as we get through the end of this year and into next year.

And what you're factoring in or thinking about in terms of.

Home prices as we kind of work through.

What's been a more.

More of a challenged environment that last time, we spoke.

Yes.

So first.

First of all I'd like to sort of step back and look at what the euro has been like for 2023.

Still seeing 4 million homes being sold in the U S annually.

To your point, we have observed low supply, but we've also pair that with resilient buyer demand and so what we've seen in supply and demand largely staying imbalance, which has resulted in home price stability.

The metric, we really focus a lot on is market clearance or the pace of refills.

We look at that because it really helps reflect the balance of supply and demand and if you look at the back of our shareholder letter market clearance continues to be above historical periods.

For the homes are buying today.

We'll be selling those into the spring selling season next year.

<unk> acquisition for US has historically been some of our strongest cohorts given the month over month home price tailwind that's starting to show up in mid February.

So we will continue to monitor our leading indicators monitor clearance and be disciplined about balancing gross margin and risk.

But this has.

Thus far.

Table, how is price market and that is in part why we've been able to take our spreads.

Okay.

Got it maybe just to follow up on that.

What will be a year, where you're talking about here.

With the lower clearance rates youre seeing in lowering the prices right now is it more of a seasonal factor or just want to make sure I understand.

Make that bridge.

And if you just sort of roll forward the clock another month or two in November and December.

Youll see market new listings go down 50% between October and December and so both supply and demand shift.

I can't wait for November and December people don't want to move during the holidays.

So it's very much a short term near term phenomenon.

And I think if you look again at those charts in the back from a price perspective, a nominal home price perspective that continues to show.

<unk> really in line with what we've seen in prior years.

Okay. Thank you very much.

Okay.

Thank you.

Our next question comes from the line of Curtis Nagle with Bank of America. Your line is now open.

Great. Thanks, very much maybe just kind of talking on.

We go next points just in terms of thinking about.

I guess the setup for 24.

So Rick with higher clearance rates slower I guess some of that seasonal but what was that.

Back the bonds.

Just a little bit so let me look things are obviously super volatile so.

Maybe lower inventory risk and again, just such a soft market.

And then just as a follow up could you give a little more color on the marketing spend it.

It sounds like Thats to Europe, I think spring selling season next year.

But but yeah mortgage all of that is that what drove the shift I guess into <unk>.

Well just on the <unk> acquisition that we said they would be.

Approximately 3000, which is flat quarter over quarter.

Starting with that I think the I mean.

I couldn't quite tell if youre asking if we work with we should be decreasing or increasing from an increasing perspective given those.

Lithium volumes in the market increase.

Increasing volumes.

Hard given what I've mentioned about just new listings being down significantly in months like November and December.

It was decreasing just again.

Central inventory risk question on a volatile market right three months is a long time.

Through the port.

Yes.

Alright.

Thats, where if you can sort of track through too.

Pricing did you see in February and March.

Those are 100 200 basis point positives.

And so I think thats, where we.

We are setting our spreads so that we feel comfortable we will hit those.

Annual contribution margin target that we've guided to that 5% to 7% so that those new acquisitions will perform in line with our targets.

Okay.

You have a follow on question is related to marketing.

So yes.

So.

Marketing spend was either increasing or shifting from.

<unk> I couldn't quite tell where I guess, the fixed costs are going up a bit quarter to quarter. So.

Just hoping to square that.

And.

What type of marketing reporting to the market.

Hi, Curtis with Christy.

So.

On marketing basically our adjusted Opex, There's three main components marketing fixed cost variable SG&A. Those are all relatively flat between Q3 and what we're guiding to for Q4 in the letter and I think in the prepared remarks as well I mentioned that there was some shift between <unk> and threep.

<unk> and <unk> and Thats, just some expenses that we had expected at <unk> that are going to actually come through in <unk> is not specific to marketing.

The other thing about the guy to the $120 million in fixed adjusted Opex total adjusted Opex.

<unk> is growing and so that some of the uptick youre seeing in Q4.

Plan to lean into paid marketing a bit starting in Q1.

Yes, I mean, just to add onto that I mean, the consistent motion for us during the course of the year given the guide said earlier about listing volumes in Q4, as if youre relatively quiet marketing quarter for us and we lean into more marketing spend in Q1, we expect to do so next year along with the fact that our spreads are at a level right now we can make those investments and cost effective way. So that's a pretty natural motion for us.

Okay.

Yes, very much I appreciate it.

Thank you.

Our next question comes from the line of Daily with Jpmorgan. Your line is now open.

Great. Thanks for taking the questions I'm sorry.

If this is already doing that.

On the <unk>.

Thanks.

By raising commission changes there there'll be contribution profit dollar neutral for you guys.

And then secondly, I know you guys gave some color on your plans for early selling points for them.

I'm, just curious what kind of macro environment and you guys are.

Adding in our plan.

Sure.

Yes, correct rate environment.

Just a question on your forward do you still.

Targa, achieving $10 billion revenue and net income positive sometime in 'twenty going forward.

Yes.

Hey, Dave Let me take the first part on the first half and then I'll hand over now to talking about the macro and maybe Christine will public breakeven.

Well do a preferred here.

On the first part which is the number part.

Your question was would it be margin neutral to us if the buyer broker commission were to come down and Thats our view.

Again, as a cost item for us it's not a revenue item.

And so we think worst case neutral to us from a margin perspective.

How much easier that you want to take take the macro question.

Including 21, and 'twenty, two which were outliers.

We're still seeing very healthy piece of resellers and a balance of supply and demand.

The place that we are focused.

Is really monitoring for supplier demand shocks that would then translate through the home price changes, we have not seen that one of the advantages of our business model and the ability to adjust spreads rapidly.

Is exactly that which is if we see a change we can adapt quickly.

Yeah.

And then just to close things off with Eni breakeven framework hasn't changed the whole organization is focused on returning that cash flow breakeven the timeline depends on what we're seeing in the housing market, which continues to be dynamic and we will continue to respond to market signals and therefore, we aren't going to commit to a specific months.

As a business, we're always balancing growth margin and risk in 2023, we are focused on risk, which led to reduced growth that outperformance on new boat margins in 2024 will continue to balance gross margin and risk and we will track leading real time metrics that said sitting here today, we do believe that doubling volumes from here or is it <unk>.

Bulk given current spreads are growing partnership channels and plans for cost effective marketing investment in the first half of 2024.

Great that all makes sense. Thank you.

Thank you.

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 to drill down again on Opex.

Any chance you can just provide some absolute guardrails for the level of opex needed to support.

Perhaps a wide range of purchase volume assumptions next year.

I guess the $120 million in the fourth quarter is that something.

That obviously doesn't include the marketing spend but.

As you mentioned is certainly being burdened by higher holding costs. So any just general guardrails relative to the $120 million <unk> for what is a reasonable expectation for next year.

Okay.

Hi, Ryan its Christy thanks for that question.

Sure.

From Eni breakeven.

Expect that to happen at $10 billion steady state revenue, meaning acquisitions are roughly equal to resales and so at 10 billion with 4% to 5% adjusted Opex that that's what we're marching towards.

As I discussed earlier as we are building in revenue you can have one building inventory you can have buildup in operating expense for the holding costs that you're incurring in as as you are.

Inventory is kind of outpacing your revenue.

Yeah.

I think the one other point to add on to that is if you think about our operating cost and sort of <unk> versus <unk>.

But taking that aside at this time.

That's those are basically flat quarter to quarter.

So we are I think trying to continue to be disciplined about cost management.

And to your point, the real change would be in marketing expense.

Got it and then ill follow up just not belabor the point on the commission lawsuits, but in addition to the one question that Nick posed earlier.

Another question that we're getting is around the potential disruption to the MLS system and the impact that that could have to open.

One hand, you could argue that a weaker value proposition to use the MLS could provide more flexibility for sellers to consider an alternative innovative models like open door and on the other it is possible is it possible that disrupted disruption to the MLS could pose a risk to any data that you really.

Ireland from those databases to power your pricing models.

Obviously, a dense topic, but just trying to unpack all the different moving pieces here and the puts and takes.

Yes.

<unk>.

If you think about our business model, we're trying to give customers choice. We arent man, we're trying and we're focused on giving transparency to the process and letting them pick the best solution for them.

If you look at our NPS scores and sort of how customers have reacted to the product. They love our product. So I think we're very well positioned to continue to offer these products to customers.

On the data side.

Obviously, we have been building our own data story now for 10 years.

And so we feel I think we earned almost one of the best positioned to capitalize on any data components, especially.

So I think we are well positioned on all fronts.

Whatever unfolds I do think as Kerry mentioned these things Michael.

Michael unfold slowly, but in either a slow unfolding and we're fast unfolding I think we're well positioned for it.

Yeah.

Great. Thanks, Scott.

Thank you as a reminder to ask a question at this time. Please press star one one you touched on telephone.

Our next question comes from the line of Jason <unk> with Oppenheimer <unk> Company. Your line is now open.

Hey, Thanks. This is Chad on for Jason can you can you maybe help us quantify the slowdown from rates coming out of the quarter as it relates to the fourth quarter guidance.

Yeah.

There are a series of charts in the back of the shareholder letter actually if you want you can take a look at sort of like the pace of market clearance dominated.

Tommy just commented on hey remains healthy by any historical measure.

And we always are disclosing seasonally in the back half of the year, but there was a little extra slowdown starting in October on the back of seeing mortgage rates spike up to 8%, maybe 10, 15% worse than we anticipated. So we react to that we took some scale.

The shareholder letter Youre seeing that show up our guide for Q4.

I think the more important point is like when we go from here and what does that look like some adequate going forward and we are on pace to hit the volume targets, we've been talking about which is how do we go from.

Mcdonald's into kind of total 2000 plus per month.

Sitting here today.

Nothing I've seen with Jeff as you change course, as Don mentioned earlier, we are looking for price stability that you're seeing that this year, we've seen very constrained supply people reluctant to list their homes pretty resilient borrower demand relative to that constrained supply and that dynamic has persisted and we frankly, our forecast internally we will continue.

Our sales for 2024, and that's a good set of for us to value homes be able to acquire them and then sell them against that backdrop.

Second we've got seasonality.

Coming up you were in a sort of a seasonal doldrums on residential real estate right now those headwinds turn into a tailwind starting in the first part of next year. So that's one part of it as you make your day as Todd said, we tend to like to have a lot and we will be looking that was in a stronger spring selling season, that's a good thing for volumes.

And then it builds on top of a different model worked on this new takes brookdale a lot of cost work lot of work done to improve price accuracy.

And a lot of those gains back into spreads to take them down to a level. We feel is appropriate for where the market is today.

Robert we're able to invest more into marketing.

Cost effective basis again that will help amplify volumes in Q1.

Partnership channels that are growing there will also be enabled by that so.

So all of those things frankly make us feel good about the volume assumptions were making for 2024.

He is going to operate within our risk framework right, we're always going to be responsive to what is going on in housing is a very dynamic the risk management framework is imperative to us we're always going to balance the inflows and outflows like we did in fourth quarter reaction to the mortgage rates might mean.

I mean at a high level, we're still on track to continue to increase our volumes.

Thank you.

And I'm currently showing no further questions at this time I'd like to hand, the call back over to Cary Wheeler for closing remarks.

Great. Thank you.

First of all thank you for joining us today as we exit 2023, I just wanted to ask I'm proud of the work of the Duke and our teams are doing.

To be just a stronger more resilient company.

The housing market for sure continues to be challenging, but I am confident the changes have been working on this year, we've implemented with benefits for years to come.

No doubt about it we are very focused on getting back to positive cash flow and we're committed that we're going to manage our cost structure and our balance sheet to ensure we get there because the options. We have in front of us is massive and we're gonna be delivering yesterday. So thank you for listening to us today, and we look forward to speaking with you all next quarter.

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

Q3 2023 Opendoor Technologies Inc Earnings Call

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