Q3 2024 Opendoor Technologies Inc Earnings Call
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Speaker Change: Good day, and thank you for standing by. Welcome to the Open Door 3rd Quarter 2024 Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kimberly Niehaus, Investor Relations. Please go ahead.
Kimberly Niehaus: 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.opendoor.com. Please note that this call will be simultaneously webcast on the investor relations section of the company's corporate website.
Kimberly Niehaus: Before we start, I would like to remind you that the following discussion contains forward-looking statements on the meaning of the federal securities laws.
Kimberly Niehaus: All statements, other than statements of historical fact, are statements that could be deemed forward-looking, including, but not limited to, statements regarding Opendoor's financial condition, anticipated financial performance, business strategy and plans, market opportunity and expansion, and management objectives for future operations.
Kimberly Niehaus: 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.
Kimberly Niehaus: Additional information that could cause actual results to differ from forward-looking statements can be found in the risk factors section of Open Door's most recent annual report on Form 10-K for the year ended December 31, 2023, as updated by our periodic reports filed after that 10-K.
Kimberly Niehaus: The 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.
Kimberly Niehaus: For a reconciliation of each of these non-GAAP financial measures to the most directly comparable GAAP metric, please see our website at investor.opendoor.com. I will now turn the call over to Carrie Wheeler, Chief Executive Officer of Opendoor.
Carrie Wheeler: Good afternoon. Also on the call with me today is Christy Schwartz. Before we get started, I'd like to take a moment to welcome two new leaders to our leadership team.
Carrie Wheeler: Celine Freja joined us earlier this week as our new Chief Financial Officer and Shreesha Radhakrishnan will be joining as our new Chief Technology and Product Officer this month. These leaders will bring fresh perspectives and deep expertise and a track record of discipline growth and innovation will help shape our path ahead.
Carrie Wheeler: I'd also like to thank Christy, who has served as our interim CFO since September of 2022. Christy joined Opendoor in 2016 and has helped guide the company these last eight years, including leading our finance function for the past two. I'm deeply grateful for her partnership and her many lasting contributions to Opendoor.
Carrie Wheeler: At Opendoor, we continue to see tremendous opportunity to redefine how consumers transact within the massive residential real estate market.
Carrie Wheeler: Millions of transactions, well over $1 trillion worth, are done offline, moderated process that is complex, uncertain, stressful, and time-consuming.
Carrie Wheeler: We're focused on developing innovative products that leverage our purpose-built platform to transform home selling, bringing simplicity, clarity, and ease to consumers. This is no small task, but we're making meaningful progress, having already helped hundreds of thousands of customers move with confidence.
Carrie Wheeler: Despite a challenging housing market in the third quarter, we delivered acquisition volumes, revenue, contribution profit, and adjusted EBITDA ahead of our guidance, driven by strong execution across the business.
Carrie Wheeler: We also continue to make progress in developing innovative, seller-focused products.
Carrie Wheeler: OpenDoor is widely recognized for our all-cash offer which provides sellers with simplicity and certainty.
Carrie Wheeler: Well, many sellers come to us for a cash offer. There are others who want the opportunity to test the market for price discovery.
Carrie Wheeler: We've developed our list of Open Door and our exclusive products that we can address these sellers. Our long-term vision is that every seller starts their journey with Open Door. We believe these offerings extend our reach, enabling many more sellers to come to us first when selling their home.
Carrie Wheeler: Both Listed Open Door and Exclusives are products of economics, both for sellers and for open door, that are not sensitive to our spread levels and are thus less macro-dependent and are largely capital light.
Carrie Wheeler: Additionally, we observe an increase in our Net Promoter Score when these options are surfaced to sellers, an additional proof point that we're addressing a previously unmet consumer need. While all of this is early, we are optimistic about the long-term potential of lists with open doors and exclusives.
Carrie Wheeler: Practice changes stemming from the recent National Association of Realtors settlement were implemented during the quarter, enhancing transparency and options for consumers when buying and selling their homes.
Carrie Wheeler: In response to the ruling, Open Door has begun transitioning from directly paying buyer-broker commissions to a model that provides buyers with concessions, allowing them to choose how to use those funds, including the option to pay their buyer agents.
Carrie Wheeler: We anticipate that the impact of this ruling on the broader market is going to evolve over time and we will adapt our strategy accordingly to best meet the needs of our customers.
Carrie Wheeler: We continue to contend with a challenged housing market and are making spread decisions with risk management top of mind.
Carrie Wheeler: Although the Fed implemented a 50 basis point rate cut in September, mortgage rate relief has been short-lived. The combination of elevated rates and near-record high home prices is prolonging affordability concerns, keeping buyers and sellers on the sidelines.
Carrie Wheeler: We saw further deterioration in key housing market indicators in the third quarter. Delisting rates continued to decline, and clearance rates declined more than seasonally typical. Overall, the housing market is on track to experience the lowest level of existing home sales since 1995 for a second consecutive year.
Speaker Change: One of our strengths is our ability to respond to market signals and balance growth versus risk by dynamically adjusting our spread levels.
Speaker Change: We remain intently focused on reducing net losses and ultimately achieving adjusted net income profitability.
Speaker Change: To this end, we are committed to taking steps to operate more efficiently.
Speaker Change: Over the course of this year, we've made significant improvements to our cost structure.
Speaker Change: In August, we announced the separation of Maine State, which is expected to provide approximately $35 million in annual cost savings. And today, we announced a headcount reduction of about 300 people, or roughly 17% of our workforce. In addition to reducing our costs, we are flattening our org structure to allow us to move faster and more efficiently.
Speaker Change: This is a difficult decision and not taken lightly, but it is the right choice for our business. And I'd like to thank all of our departing team members for their hard work and dedication in building Open Door into what it is today.
Speaker Change: Well, the housing environment remains challenging. We are proactively strengthening our business and our offering. We are undeterred by current market conditions and believe that, as the market normalizes, we are well positioned to benefit and seize the opportunity to build a generational company.
Speaker Change: With that, Chrissy will now review our financial results and guidance.
Chrissy: Thank you, Carrie. Our third quarter performance reflects strong execution and cost discipline while continuing to navigate a challenging housing environment.
Chrissy: We delivered $1.4 billion of revenue in the third quarter, exceeding the high end of our guidance range. On the acquisition side, we purchased 3,504 homes in the third quarter, ahead of our expectations and down 27% sequentially.
Chrissy: This decline was a result of our elevated spread levels alongside a pullback in marketing spend beginning in late May as we observed signals that the macroenvironment was deteriorating, particularly clearance rates, delistings, and monthly home price appreciation.
Chrissy: Contribution margin was 3.8% in the third quarter, ahead of the high end of our guidance range. This performance was aided by slightly higher resale clearance than expected, coupled with a small impact from lower concessions and buyer-broker commissions, which are reflected in revenue and direct selling costs respectively.
Chrissy: Adjusted operating expenses totaled $90 million for the quarter, lower than our guidance of $105 million, and down from $100 million in the second quarter of 2024.
Chrissy: This outperformance was due to a pullback in advertising spend, which was $15 million in the quarter, coupled with lower than expected fixed and variable expenses as we continue to exercise cost discipline throughout the business.
Chrissy: Finally, adjusted EBITDA loss was $38 million, significantly outperforming the high end of our guidance range due to contribution margin outperformance and ongoing cost discipline.
Chrissy: Turning to our balance sheet, we ended the quarter with $1.2 billion in total capital, which primarily includes $837 million in unrestricted cash and marketable securities, and $218 million of equity invested in homes and related assets.
Chrissy: We also had $7 billion in non-recourse asset-backed borrowing capacity composed of $3 billion of senior revolving credit facilities and $4 billion of senior and mezzanine term debt facilities, of which total committed borrowing capacity was $2.3 billion.
Speaker Change: As Carrie mentioned, while we started the year off expecting to be operating in a macro-neutral environment, what we've witnessed is a housing market that remains under pressure.
Speaker Change: Homeowners remain locked in to existing low-rate mortgages and buyer affordability constraints are still prominent. This dynamic has translated into a seasonally adjusted annual sales pace of under 4 million homes.
Speaker Change: In response, our third quarter spreads were higher than those seen in the third quarter of last year. These actions put pressure on our fourth quarter acquisitions, which we expect to be just north of $2,200.
Speaker Change: As we've previously discussed, during the fourth and first quarters, home price seasonality generally enables us to embed lower spreads into our offers, given these homes will be sold into the spring selling season.
Speaker Change: We will continue to acquire homes that spreads we believe are appropriate as we manage our business for growth, margin, and risk, and we will respond to market signals including potential improvements in clearance rates, delisting rates, and HPA as a result of rate reductions.
Speaker Change: We expect 4th quarter revenue to be between $925 million and $975 million, contribution profit between $15 million and $25 million, which implies a contribution margin of 1.6% to 2.6%, and adjusted EBITDA loss between $70 million and $60 million.
Speaker Change: We expect adjusted operating expenses, which we define as the delta between contribution profit and adjusted EBITDA, to be approximately $85 million.
Speaker Change: Our fourth quarter contribution margin guidance reflects lower home price appreciation during the hold period due to the softer housing environment. Additionally, margins are under pressure due to slower acquisition rates, which lead to a resale mix that favors older, lower margin homes over newer, higher margin homes.
Speaker Change: To note, the midpoint of our revenue and margin guidance implies a full year contribution margin of 4.5%, just 50 basis points shy of our annual target margin range while operating in an incredibly difficult housing market environment.
Speaker Change: We expect to see approximately $50 million in annualized savings from the reduction in force we announced today, and an additional $35 million in annualized savings from the separation of mainstay that we announced in August.
Speaker Change: The company expects to incur a total of approximately $17 million in restructuring expenses in the fourth quarter related to our reduction in force and other restructuring costs.
Speaker Change: We are pleased with our third quarter performance and will continue to focus on the things we can control. We are committed to operating as efficiently as possible in order to offer the most attractive offers to our customers, while also strengthening our financial performance in service of reaching our breakeven milestone. I'd now like to turn the call over to the operator to open up the line for questions.
Speaker Change: Thank you. As a reminder to ask a question please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question please press star 1 1 again. We ask that you please limit yourself to one question and one follow-up.
Speaker Change: Our first question comes from the line of Yigal Aranyan with Citigroup. Your line is now open.
Hey everyone. I guess just.
Speaker Change: First, taking kind of a big picture view of where we are in housing market in the year where I think, you know, like you guys said, well below where we expected rates have moved up again.
Speaker Change: Looking into next year, which, you know, at least where we are today, it looks like it'll continue to be a challenging market. And then tying that to the $10 billion run rate, you guys have kind of that framework that you've laid out for
you know, get into just another break even.
Speaker Change: if the market continues to be challenged next year or is there more cost efficiencies, just how to think about where we are today and how we get to that target.
Speaker Change: Hi EGLE, it's Christy here. Thank you for the question. We continue to remain focused on achieving positive adjusted net income. The actions we've taken today alongside the mainstay separation announced last quarter are in service of reducing our cost structure to reach ANI break even sooner.
Speaker Change: That said, there's a number of factors that impact our ability to get to ANI positive, including the macroenvironment, our spreads, CM performance, etc.
Speaker Change: And so while we are not giving an update on the framework today, we have taken meaningful steps to reduce our cost structure and will continue to look for other efficiencies.
Speaker Change: One thing I do want to note is that the actions we've taken today were primarily in our fixed cost structure and will not impair our ability to rescale the business. We are focused on growing the business when the housing market turns, and we're intent on doing that in a sustainable way.
Okay, and so, a follow-up and...
probably related to the framework and just.
Speaker Change: general question. The Asset Light products, and I know they're early, but if you could just share a little bit more color on what you're seeing there.
Speaker Change: you know, how you think about expanding those, what pace, and over time, how important or how big a piece of the overall business do you expect those or want those to be? Thanks.
Thank you very much. Thank you.
Carrie Wheeler: Yeah, hey, it's Carrie. A couple of comments. One, so this is Open Door, that's nationwide now, and it's performing within our expectations, probably even better than that. And we think it's incremental, largely, to our CoraCell Direct business. This is a customer who has...
Carrie Wheeler: market FOMO. They want to make sure that they understand the full market value potential of their home. They still want the assurance of the cash offer, but they'd like to have both, and we can enable that through the listing product.
Carrie Wheeler: and I'm going to be talking about the new web app called List. So, you know, simple, certain, fast, via cash offer, you can sell it via listing. It's higher net promoter score, it's higher conversion, it's created to our overall business. We've got other things to do to make it more seamless and more magical for the customer. We're going to continue to work on that for the balance of the year. So that's List.
which we're encouraged by.
The other piece of it is Marketplace.
Carrie Wheeler: This is actually timely because this is the week that we actually went from being in one market to launching this week in the Carolinas, which is great.
Carrie Wheeler: And that's because we continue to see pretty good green shoots.
Carrie Wheeler: for what we've been trialing in Dallas, which is customers saying yes to Marketplace. These are customers who...
Carrie Wheeler: would like to think about selling their home, but for whatever reason, cannot access the MLS in the traditional way. They are not list ready, potentially. And we can provide them with alternative solutions. So we're going to continue to work on Marketplace. I would say it's very small right now, but we're encouraged enough to want to bring it to other markets and continue to work on it.
Carrie Wheeler: The goal over time is to diversify the mix of the business, to be less capital intensive, and we think these are two really solid proof points that we're going to focus on in 2025.
Thank you for watching!
Thank you.
Welcome.
Speaker Change: Thank you. Our next question comes from the line of Ryan Tomasello with KBW. Your line is now open.
Speaker Change: Hi, everyone. Thanks for taking the questions. Appreciate the prepared remarks, Carrie, on
Speaker Change: NAR settlement and your approach there. I was hoping just to unpack that a bit more.
Speaker Change: in terms of, you know, how Opendoor is approaching offering these concessions if you're if you're taking a blanket approach and
Speaker Change: making concessions up to a certain limit of buyer agent commission. And then just looking at, you know, your direct selling costs, it looks like they came down pretty meaningfully, about 50 bps of a decline from where they've been running. Is that essentially, you know, what we should view as...
The benefit you've seen thus far from from lower commissions
Carrie Wheeler: Hey Ryan, it's Carrie. That's a good question. A couple things. So we have begun transitioning from paying a blanket buyer-broker commission to offering concessions to buyers.
Carrie Wheeler: If you bring us the best offer we get, we're going to offer concessions. It is not formulaic. It can vary, and that buyer gets to decide how they want to deploy those concession dollars, whether that's in their pockets or they're going to use that to pay for the agent they brought to the transaction. We're agnostic. We just want to make sure that we are.
Carrie Wheeler: solving for the best outcome for us on a resale basis.
Carrie Wheeler: So what you're seeing today for us right now is that the combination of buyer-broker commission and what we're spending money on in terms of concessions, that has come down a little bit quarter on quarter.
Carrie Wheeler: Q2 to Q3, I think it was like 2.8% of revenue.
Carrie Wheeler: down to 2.4% of revenue. That is the decline we're seeing in buyer broker commission. But the way buyer concession shows up, it's like an offset to revenue. So you actually can't see that today. So we're going to have to start to think about those costs in total and how those evolve over time. And they're down a smidge. I think it's too early to draw a straight line and say this is the trend.
Carrie Wheeler: And I think if it gets more meaningful over time and we have more proof points, like we're two months into this really, right? But if we have more proof points, then we can provide you all with more transparency and how to think about those costs on a combined basis. But.
Carrie Wheeler: So far, I'd say, you know, some compression probably, how sustainable it is. I think everyone in the system is still trying to figure this out. Agents, consumers, ourselves included.
Thank you for watching!
Speaker Change: Got it. That's super helpful, Collar, in terms of triangulating the concessions and where that shows up. And then sticking with just general industry practices, it seems like the debate...
Speaker Change: have shifted to the next thing away from commissions and other MLS policies like clear cooperation. So I was just hoping you can share your thoughts around how, you know, any changes there or a repeal or rollback of clear cooperation, please.
Speaker Change: into the open-door story and value proposition. I guess, you know, said another way, would an industry where the MLS has a weaker stronghold on listings be a net positive or a negative for your business over the long run? Thanks.
Speaker Change: And I guess I would say at a high level is like anything that is consumer first is something we're aligned with I mean That's sort of the ethos of what we've built and what we stand for
Speaker Change: And if you think about clear cooperation at the highest level, it's about giving people full access, availability, and transparency through the MLS, and like we're all for that. Obviously, that's good for our business too.
Speaker Change: And at the same time, there is room for evolution because there are people for whom the MLS doesn't work.
Speaker Change: And so, you know, the extent that there's innovation that's happening in the traditional system, we're in favor of that too. So ultimately we're gonna align with consumer choice. We see a lot of reasons why MLS should exist in their current form. There could be other things that stand up alongside that that are good for consumers that we'll be supportive of.
Great. Thanks for taking the questions.
Speaker Change: Thanks Ron. Thank you. As a reminder to ask a question at this time please press star 1 1 on your touchtone telephone.
Speaker Change: Our next question comes from the line of Nick McAndrew with Zellman & Associates. Your line is now open.
Speaker Change: Hey guys, thanks for taking my questions. Carrie, you might have mentioned this briefly, but just on the continued rollout of Lyft with open door going from
Speaker Change: 17 markets at the beginning of the year to nearly all of them. Anything, you know, you can add in terms of the type of sellers that are choosing to use lists with Open Door? I'm just curious for their particular demographics or customer segments that are showing higher engagement with that option versus, say, the traditional cash offer model?
Speaker Change: You know loves the assurance that they know exactly when they can sell but also wants to test their value of their home on the market and This gives them 30-day window to do that and if for whatever reason they have some time pressures or a time they need to meet They can fall back on that offer within a certain window of time But you know the extent that they want to go ahead and list it We're happy to have them do that too and just have that you know
Speaker Change: Safety Net alongside them. So nothing really distinct in terms of demo.
Speaker Change: Got it. That's that's helpful. And then just curious to so I know brand awareness and top of funnel growth been key focus points in the past
Speaker Change: and any color you can add just on what you're seeing from shifting marketing dollars more toward brand media, leveraging partnership channels, and if you're seeing any differences in conversion rates between maybe more mature markets versus newer ones.
Thanks.
Speaker Change: Yeah, I mean I'd say at a high level, we're going to continue to invest in marketing because exactly what you said, which is like, we have found that driving higher brand awareness for us drives higher trust, and that drives higher conversion. So in those markets where we have more time and awareness, we just naturally convert higher on a like-for-like basis, and so we're going to continue to invest in brand.
Speaker Change: I would say in Q3 we pulled back a little bit on our marketing spend just in light of where spreads were. I think in Q4 we'll look to invest opportunistically as we think about leaning into the spring selling season. But we're going to continue to drive.
Speaker Change: into brand because we think it's just a rising tide to lift all boats for us.
Great, thank you.
Speaker Change: Thank you and I'm showing no further questions at this time. I'd like to hand the call back over to Carrie Wheeler for closing remarks.
Carrie Wheeler: Great. Thanks, Operator. Thanks, everyone, for your time this quarter. We appreciate the questions, as always, and we look forward to speaking to you in Q4.
Speaker Change: This concludes today's conference call. Thank you for your participation. You may now disconnect.
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