Q3 2024 Redfin Corp Earnings Call
are based on our assumptions today, and we don't undertake to update these statements in light of new information or future events.
On this call, we will present non-GAAP measures when discussing our financial results.
We encourage you to review today's earnings release.
which is available on our website at investors.redfin.com for more information related to our non-GAAP measures, including the most directly comparable GAAP financial measure and related reconciliation.
All comparisons made in the course of this call are against continuing operations for the same period in the prior year, unless otherwise stated.
Glenn: Lastly, we will be providing a copy of our prepared remarks on our website by the conclusion of today's call, and a full transcript and audio replay will also be available soon after the call. With that, I'll turn the call over to Glenn.
Glenn: Thanks, Meg, and howdy, everyone. Redfin's third quarter revenues grew 3% year-over-year to $278 million, in the middle of the range that we discussed on our last call.
Glenn: Our adjusted EBITDA profits of $4 million were at the bottom of our guidance range, in part due to $4 million of one-time expenses that we didn't anticipate in our guidance.
Glenn: From the second quarter of 2024 to the third, the share of home sales brokered by our own agents and through referrals to our partner agents fell by one basis point. Year-over-year third quarter share fell by two basis points.
Glenn: In our previous call, we said we'd be roughly break-even for the full year. And now, our fourth quarter guidance has set the boundaries of that range.
2024 adjusted EBITDA loss between $15 million and $22 million.
Glenn: This whole year loss is larger than we expected. August and September mortgage and brokerage sales were $7 million lower than we forecast. When rates fell in August, we didn't count on a better housing market, but we also didn't expect it to get worse.
Glenn: We didn't forecast about $2 million in one-time costs for the rapid transition to Redfin NEXT, our plan to replace agent salaries with higher bonuses, or $1 million of one-time costs from the integration of REDS.
Glenn: Any year when we believe our competitors' aggregate ad spending hit historic highs while U.S. home sales hit historic lows, we're glad to be coming out of 2024 with likely undiminished market share, a better sales force, and a cost structure that gives us room to go on the attack.
But still, I owe our shareholders an apology.
Glenn: We moved heaven and earth to make money in 2024, but we fell short of our goal. We'll keep driving toward profits.
Glenn: Our 2024 profits will be an improvement of about $125 million over 2022, when US existing home sales were 20% higher than forecast for 2024.
Glenn: Over the past year, almost every dollar of revenue growth has fallen to the bottom line.
and now we're preparing to grow.
Glenn: rising brokerage close rates and what we believe are industry-leading mortgage and title attach rates should let us monetize an online audience better than any other real estate site. Already sales execution is driving what we expect to be significant October share gains with momentum carrying through to November.
Bye!
Glenn: Pairing our sales machine with more advertising should let us grow faster in 2025. Redfin.com's third quarter visitors fell 4% year over year. As the housing market shows signs of life, we plan to increase ad spending significantly from 2024 to 2025.
will also invest in extending our technology's core competitive advantages.
Glenn: at guiding online visitors to listings they'll love, at scheduling home tours for customers ahead of other buyers, at identifying serious home seekers in need of service.
Glenn: Already this month, we started to bid more for online visitors because of our increasing effectiveness at selling homes, mortgages, and title service. Until October, we didn't account for mortgage and title profits when deciding how much to pay to meet a homebuyer.
Glenn: Our confidence that we can deliver better service to online homebuyers is based in part on the rapid expansion of Redfin Next, our plan to pay agents larger bonuses in lieu of salaries, which first launched in January to four markets responsible for 17% of our 2023 brokerage revenues.
Glenn: This percentage grew to 30% in May and to 74% in August, until we completed the rollout last month.
Glenn: Our confidence in Next isn't based on theory, but on results.
Glenn: Comparing 2023 to 2024 and the four initial next markets, the customers we met from January to June 2024 were 21% more likely to buy a home from us than 90 days of that first meeting.
Glenn: Other markets in those months also improved close rates, but only by 7%. In that same time period, close rates for luxury homebuyers increased 79% in the four pilot next markets compared to 28% in other markets.
Glenn: Higher close rates have been one source of share gains in next markets, but another is our agent census.
Glenn: From the announcement of Redfin Next in October 2023 to June 2024, the four original pilot markets increased their agent census 22%.
Glenn: And it isn't hard to see why. Bigger bonuses let us compete for talent with fewer financial constraints because we no longer pay agent salaries. Entering 2025, our brokerages focus is on adding hundreds of high-quality agents.
Glenn: Our third quarter agent census, which averaged 1,757 agents, grew 1% year-over-year. In October already, that year-over-year growth accelerated to 8%.
Glenn: The flexibility that Next gives us to hire more agents at different commission splits based on their sales experience is letting us form agent teams around our top producers.
Glenn: These teams give our best agents the capacity to cultivate sales from their network of hundreds or even thousands of past Redfin clients. Already in the past four months, we've hired agents into more than 50 teams and begun recruiting teammates for another 40 top producers.
Glenn: As we add hundreds of more entrepreneurial agents for the 2025 home buying season, we don't plan on adding any significant manager or support staff, which should lift gross margins.
Glenn: And as agents host more of their own tours and improve close rates, we can also allocate a lower percentage of revenue to the thousands of contractors who take customers on tour when a lead agent is busy.
Glenn: We expect gross margins to start increasing year over year in the fourth quarter, though some of that will be because gross margins are also becoming less seasonal. Next agent's earnings are more volatile, limiting Redfin's margins in the summer selling season and improving margins in the winter.
Glenn: Since spring 2024, investors have asked us if we expect lower fees and lower margins due to the settlement of a class action lawsuit against the National Association of Realtors.
Glenn: When the reforms imposed by the settlement took effect in July and August, the multiple listing services that agents use to share listings stopped showing the commission offer to a buyer's agent for each listing.
Glenn: Most homeowners are still willing to pay the buyer's agent, but many aren't setting that agent's fee in advance, instead planning to negotiate it alongside other offer terms. This by itself has been a major change.
Glenn: But to our surprise, the fee that is negotiated often seems nearly identical to what buyers' agents were earning before the settlement.
Glenn: Seas may fall when a new and potentially more competitive home buying season begins. Many of the buyers and sellers closing a sale this fall had hired an agent in the summer, before the settlement had taken effect.
Speaker Change: Redfin has already sought to offer our home buying customers lower fees than other brokers. If more consumers seek better value from their broker in 2025, Redfin may expect larger share gains.
Speaker Change: And if homebuyers become more sensitive to brokerage fees, bundling mortgage and title services will become even more important.
Speaker Change: Of the brokerage customers who financed their third quarter home purchase, 27% used Redfin Blender, down from 28% in the second quarter, but up from 22% in the third quarter of last year. Again, more than 60% of eligible customers used our title services.
Speaker Change: which has become a significant source of profit. In January 2025, we're trying new policies to increase mortgage attach rates further.
Speaker Change: Before concluding with the discussion of the housing market, let's turn to our rentals business, which is now competing aggressively for traffic.
Speaker Change: From April to October of this year, listings on our rentals websites, rent.com and apartmentguide.com, increased from 262,000 to about 440,000.
Speaker Change: After the rentals and for sale traffic teams combined at the outset of the year, in August rental traffic was flat after 17 months of decline.
Speaker Change: We saved $10 million in 2024 expenses on personnel and technology services, which is now funding more consumer advertising.
Speaker Change: From 2023 to 2024, we expect that our rentals media spending will have increased by $3 million, with an even larger increase planned for 2025. Our net bookings rose from $2.7 million in the second quarter to $6.0 million in the third.
Speaker Change: On the strength of improving traffic and better sales execution, we expect most of our 2025 growth to come from market share gains. But if the market keeps improving, we can grow faster.
Speaker Change: Home buying demand significantly strengthened since September 18th when the Federal Reserve cut rates by 50 basis points.
Speaker Change: Mortgage rates had already fallen in anticipation of the red excuse me of the feds cut but home buying demand had nonetheless been dreadful leading to a new September low in the annualized rate of existing home sales 3.8 million
Speaker Change: What has been even more bizarre is that since September 18th, and even through last weekend, homebuyers have been mostly undeterred by an October increase in mortgage rates.
Speaker Change: has made debt investors anxious. In my 19 months, excuse me, my 19 years of running Redfin, I've never seen homebuyers react so slowly to a rate drop that lowered monthly payments by hundreds of dollars, then so unflinching as those savings disappeared.
More and more, we live in our own reality.
Speaker Change: And that reality is increasingly political. In September and even in October, a common source of anxiety among homebuyers has been the election, not just higher rates. With the election now over, many people who put off plans to buy or sell a home over the last two years may have run out of reasons to wait.
Speaker Change: Home sales may increase in 2025, but the housing market and the world are so volatile
Speaker Change: Given that uncertainty, Redfin's glad to have made our core brokerage business more flexible and to have lowered our overall employee census so we can quickly invest in advertising when we see more growth opportunities. With that, I'll turn the call over to Chris.
Chris: Thanks, Glenn. Third quarter revenue was $278 million, up 3% from a year ago. This marks our third straight quarter of organic revenue growth. Gross profit of $102 million was up 4% year-over-year, and total gross margin was unchanged at 37%.
Chris: Total operating expenses were $129 million, up $5 million year-over-year. The increase was primarily attributable to a $4 million increase in marketing media costs and a $3 million increase in restructuring costs.
Chris: These increases were partially offset by a $4 million decrease in amortization expense as the intangible technology assets acquired with a rentals business completed their amortization.
Chris: Our adjusted EBITDA was $4 million, down from $8 million in the prior year. As Glenn discussed, this result was impacted by one-time costs totaling approximately $4 million.
Chris: Net loss was $34 million compared to a net loss of $19 million in the prior year. This was slightly worse than our last guidance range of $30 million to $22 million, primarily due to $3 million in restructuring expenses that were not contemplated at the time of guidance.
These restructuring expenses resulted from closing our home repair service.
Chris: Diluted loss per share attributable to common stock was 28 cents compared with 17 cents one year ago.
Chris: Now, turning to our segment results, real estate services revenue was $175 million, down 1% year over year.
Chris: brokerage revenue or revenue from home sales closed by our own agents was down 1% on a 2% increase in brokerage transactions and a 3% decrease in brokerage revenue per transaction.
Chris: Revenue from our partners decreased 11% on a 21% decrease in transactions offset by a 13% increase in partner revenue per transaction.
Chris: Real estate services gross margin was 27.8% down 260 basis points year-over-year.
Chris: partially offset by 220 basis point decrease in home touring and field expenses as we've eliminated compensation for home touring and field expenses and replaced it with transaction bonuses for some employee agents.
Chris: Total net loss for real estate services was 9 million dollars compared to a net loss of 1 million dollars in the prior year and our adjusted EBITDA was positive 5 million dollars down from 13 million dollars in the prior year.
Chris: Our rental segment posted its eighth straight quarter of growth with revenue of 52 million dollars and growth of 9%.
Chris: Rentals gross margin was 76.1% compared to 77.2% a year ago.
Chris: Total net loss for rentals was nine million dollars, up from a net loss of thirteen million dollars in the prior year.
Chris: Adjusted EBITDA for the second, third quarter was a loss of $436,000 down from a positive $624,000 in the prior year.
Chris: Our mortgage segment generated $36 million in revenue, up 8% year-over-year.
Chris: Mortgage gross margin was 15.2% up from 10% a year ago. Net loss for mortgage was $5 million, roughly unchanged from the prior year.
Chris: Adjusted EBITDA loss was $1 million, up from the loss of $4 million in the prior year.
Chris: Our other segment generated revenue of $60 million, compared to $11 million in the prior year, as both our title and digital revenue businesses grew.
Chris: Other segment gross margin was 54.2% up from 40.4% a year ago.
Chris: Total net income was $7 million compared to $2 million in the prior year. And adjusted EBITDA was $7 million compared to $3 million in the prior year.
Chris: $237 million and $247 million, representing year-over-year growth between 9% and 13% compared to the fourth quarter of 2023.
Chris: included within total revenue are real estate services revenue between 144 million dollars and 150 million dollars.
Chris: Rentals revenue of $51 million. Mortgage revenue between $28 million and $32 million. And other revenue between $13 million and $14 million.
Chris: Real Estate Services gross margin is expected to be approximately 29% up more than 600 basis points compared to the fourth quarter of 2023 due to the positive impact our Redfin NEXT program has on seasonality.
Chris: Total net loss is expected to be between $32 million and $25 million compared to a net loss of $23 million in the fourth quarter of 2023.
Chris: Adjusted EBITDA is expected to be between positive $1 million and positive $8 million compared to negative $13 million last year.
Now let's open the line to your questions.
And our first question comes from you, Gail.
Arunian from Citi, go ahead.
Speaker Change: Hey guys, good afternoon. Maybe just to start with the profitability and if we could...
Speaker Change: I guess a few things. If you look at the 4Q guidance, even if you had the guidance in 3Q it would have implied, I believe, that the full year outlook would have missed. Just want to think through, you know, what's...
Speaker Change: what's in the EBITDA number for this year, and as we translate into next year, is it for breakeven profitability next year? How do we think about the roadmap on that?
Speaker Change: And I think with maybe tying in the increase in marketing spend, how we should be thinking about that with the target of profitability as well.
Speaker Change: Sure, this is Chris. I'll start. So the primary difference from the way we were thinking about the second half of the year is related to third quarter results.
Speaker Change: where, as Glenn mentioned, volumes were lower than we expected. That led to less revenue. And then, on top of that, we had additional costs that we hadn't anticipated.
particularly related to the NEXT program. We've already addressed
Thank you.
Speaker Change: extra costs that we had in the next program and made program changes so those won't be continuing into the fourth quarter and into next year. So that's a piece that we've already addressed just in terms of the profitability, but again most of the variance from what we were expecting in the second half of the year really did occur in the third quarter.
Speaker Change: And just to comment on next year, we're not going to be issuing 2025 guidance, especially not now, but it's a fair question how we're going to be able to afford more marketing when we obviously want to make money.
Speaker Change: and the answer is that we are going to continue to find efficiencies in the business.
We have come to the conclusion that
Speaker Change: At some level, you do have to invest in growth, and that the best investment in growth is in part going to be in media. Obviously, we're also continuing to enhance our website, trying to draw more organic traffic. But we are going to need to...
Speaker Change: Get further enhancements in our cost structure so that we can invest in growth and then we're going to need market share
Speaker Change: We benefit somewhat because we made all these cost reductions in the second half that we'll get a full year benefit from in 2025.
Speaker Change: So we ended our concierge service, we're running more efficiently in our support organization, we eliminated sales managers, we've made some other cuts, and we just think we can continue to get more efficient.
Okay, great. That's really helpful.
Speaker Change: and just on Redfin Next and the expansion from the pilot markets and into every market now.
Speaker Change: Any early indications of what you're seeing in those markets and are they kind of following?
the trends that you saw in the earlier markets.
Speaker Change: And as you think about the expectations for share gain next year, what do you expect or contemplating from the ResinNext expansion that's needed to reach the share gain that you're looking for? Thanks, guys.
Speaker Change: Well, we're fairly optimistic about it for a few reasons. The first being close rate where
Speaker Change: a better agent, has closed sales at a significantly higher rate.
given the same number of opportunities, and that's especially true
Speaker Change: for luxury customers. So we often report on unit market share, but on a dollar basis, we think we're doing, we're going to do even better.
Speaker Change: over the past six months, we were actually understaffed. And so those markets are recruiting really successfully right now. And it's a different profile of talent than we've been able to get before. So we don't want to count our chickens until they're hatched, but
Speaker Change: It's been a long time since Redfin has been adding hundreds of agents and we've never done that where the agents have been so experienced, some of them bringing sales to the company, albeit at lower margins.
Understood. Thank you, guys.
Speaker Change: And our next question comes from Curtis Nagel from Bank of America. Go ahead, Curtis.
Great, thanks very much.
Speaker Change: So, maybe a question for you, Glenn, just, I don't know, any of you that, in terms of this, you know, bump in activity that, you know, we've seen, I guess, through
Speaker Change: October that you know could perhaps be temporary just kind of given the dynamic with rates and yeah just kind of interesting to review there and then curious your thoughts on 2025 existing home volumes do we grow how much you know what are your thoughts there
Speaker Change: Well, it's been shocking, as I said. I've been doing this for a long time, and usually there's a very strong and harsh relationship between mortgage rates and sales activities.
but even on election day, November 5th.
Speaker Change: We were surprised to see how many people were touring home So we just have really good real-time data throughout the funnel because of our vertical integration and it's been
Speaker Change: really strong. And both Chris and I sit there pinching ourselves because sooner or later, it's going to take a toll if rates keep climbing above 7%.
Speaker Change: There are people, regardless of what they read in the media or how long they've been waiting, are just priced out.
Speaker Change: So I do expect the laws of physics to still apply to the housing market, and it's really hard to predict what's going to happen, I think.
Speaker Change: It's really hard to say what's going to happen to interest rates. Mortgage-backed securities investors are worried about it. That's why rates have traded up on really no Fed news, even including today. Rates have just gone up some because of geopolitical anxiety. So it's really hard to say.
Speaker Change: you're asking me I do think 2025 is going to be better than 2024 especially kind of the September low hitting 3.8 and that's a number that's just
Speaker Change: way outside the strike zone of what we've seen over the past 20 years.
Speaker Change: got it and then just kind of a quick follow-up in terms of the market share dynamics in 3Q dropped a little bit I think a couple bits year-over-year what drove that maybe due to the transition the next or just kind of what's going on there
Speaker Change: Yeah, well, you win some, you lose some. We expect to get back to a cadence of taking share every quarter. Maybe it won't be by leaps and bounds, but there should be a steady gain of share every quarter. That's been the long history of Redfin. And in this case, I think,
Some of it is that earlier in the year ...
Speaker Change: We had less traffic growth. Homes.com was advertising so aggressively. It's been an unprecedented level of advertising.
Speaker Change: We had actually pulled back, and that's part of the conclusion that we've drawn about 2025, that we've just got to get our cost structure to a place where we can increase advertising.
Speaker Change: Some of what's going on for full-year profits is that we're actually leaning into direct marketing because we've got more mortgage-entitled profits from every customer. We're more confident that we can buy that at a profit. It won't be in-year, but it'll be over.
Speaker Change: the course of the season, which stands or straddles 2024 and 2025. So, I just think we have to get one step more aggressive about demand generation, because we really believe that we can close those sales better than ever before.
Speaker Change: I guess just, you know, with all due respect, and just kind of a natural follow up, if, you know, I don't know how aggressive homes.com is being in the market right now, but, you know, if that sounds like impacted your return hurdles.
Speaker Change: Picking about 25 and a big step up, you know, do you think that, you know, perhaps that could be tricky if they're still spending so aggressively?
Speaker Change: Yeah, I mean, look, it's a competitive market. We're not asking for any forbearance from investors.
because we're bigger or smaller than one company or another.
Speaker Change: But I do think that, you know, having a new entrant in the market affected us somewhat. So I don't expect them to increase their budget from 2024 to 2025. I think they've been clear on that point, that they don't expect to do that.
and we expect to increase ours.
Thank you. Bye.
Speaker Change: you know spending more on growth and less on other areas.
Speaker Change: to growth and it would be sort of a speculative investment if our traffic weren't growing right now. You know, we've got year-over-year growth in October and November, and that's not even based mostly on marketing expense. That's just getting back on the horse.
on organic traffic growth.
Okay, appreciate the comment. Thank you, Glenn.
Speaker Change: Thank you. And our next question comes from John Campbell from Stevens. Go ahead, John.
John Campbell: That makes sense and then I wanted to touch on Seattle, just maybe the broader.
John Campbell: Puget Sound area I mean, obviously, that's your top market so.
Speaker Change: So maybe if you could talk to October you know from what were seeing it looks like a bit of a break out I think across <unk> spending home sells listing price celebration like wait a minute. John are you are you clearing the northwest MLS about our Seattle market share.
Speaker Change: Exactly.
Speaker Change: So yes, if you could talk to whether youre seeing that within your system or just any kind of broad commentary on Seattle.
Speaker Change: Yeah.
Speaker Change: I'm not going to comment on one market. After another because I'll just encourage more analysts to be like you John and then where would we be.
Speaker Change: And markets that have transitioned to redfin next we are adding agents.
Speaker Change: A pretty straight line when you have enough demand.
Speaker Change: You add agents, you're going to get more sales.
Speaker Change: So that has been the dynamic.
Speaker Change: It should have transitioned to redfin next a long time ago.
Speaker Change: Makes sense Thanks man.
Speaker Change: Yeah, well done John.
Speaker Change: And our next question comes from Jay Mccanless from Wedbush Go ahead, John J sorry.
Speaker Change: Thank several questions that I was giving us first if you're thinking about just the average home sale I mean, how much more are you paying out to a redfin next agent for the same dollar sale that you would have paid last year.
Speaker Change: Twice as much just the agent sourced that himself.
But most of our sales are sourced by the web site. So we have no competitive advantage.
Speaker Change: With agents.
Speaker Change: Agent source sales no brokerage does that's why it's a low margin business.
Speaker Change: But when we source the sale ourselves, which is the overwhelming majority of our sales.
Speaker Change: It is at the same or better margins than what we did with our classic pay plan.
Speaker Change: We actually modeled it to be the same but what we've.
Speaker Change: Cover it is first that the agents closed sales at higher rates.
Speaker Change: And when you have a higher close rate it actually improves gross margins because we're paying.
Speaker Change: Other support staff to handle touring.
And then second they're doing better at the high end.
Speaker Change: And then third there more independence.
Speaker Change: All of those let us get leverage over margin. So in August we did a cut where we transitioned some sales managers to be individual contributors. So they could carry revenue for us or they left the company.
Speaker Change: Some of that's just driven by an early experience we had in San Francisco one of the first next markets where agents said.
Speaker Change: The worst part about this job is meeting my manager.
And Chris said I'm only too happy to solve that problem for you you.
Speaker Change: You can meet them once a month.
Speaker Change: If you have questions.
Speaker Change: Okay.
Speaker Change: And then I know you don't want to talk about 25 guidance, but.
Speaker Change: Is 600 basis points improvement something that might be realistic as we think about modeling 25 under this new plan.
Speaker Change: Chris what 600 basis points since you're talking about this.
Speaker Change: This is for real estate services in the fourth quarter and to answer that question. Obviously, you should think about the shift.
Speaker Change: Our business to Redfin next as being neutral on gross margin. So Glenn described that on a per transaction basis, we do pay higher bonuses under next than we did previously.
Speaker Change: We've reduced the fixed compensation salary for the agents and so really this is about taking dollars that were previously fixed salary and moving on to transaction.
Speaker Change: The Q4 gain is in part seasonal and we tried to emphasize that in the script.
Speaker Change: So our margins were lower in the summer.
Speaker Change: And that's because it's more volatile for the agents so they make.
Speaker Change: Well the Sunshine.
But then in the winter when we used to sustain.
Speaker Change: Significant maher.
Speaker Change: Margin damage paying agent salaries, we don't have to anymore.
Speaker Change: So.
Speaker Change: We hope that you can see that across four quarters. When we start lapping the full rollout of next in October of 2025.
Speaker Change: Okay sounds good thank you.
Speaker Change: Thank you again, ladies and gentlemen, its star one to ask a question on the phone please hold while we poll.
Speaker Change: And our next question comes from John kind of Boule from Jefferies Go ahead John.
Speaker Change: Hey, Thanks for taking the question. This is Vincent on for John just a quick one here on maybe some examples of areas in the business, where you could look to source some of those further efficiencies for funding the ramp in advertising that you have planned for 2025.
Speaker Change: For a question when the call is open to the general public but.
Speaker Change: Hum.
Speaker Change: Sacred to US is our investments in growth. So we're going to continue to fund building a better search experience, having it be engaging engaging funding artificial intelligence to drive better lifting recommendations, which brings users back to the site and.
Speaker Change: It drives overall traffic.
Speaker Change: And we're also going to fund.
Investments in technologies that can help us with a fairly long sales cycle improved close rates. So when we invest in artificial intelligence to.
Speaker Change: Contact customers who've been out of touch with us and identify which ones are most likely to transact that's a good bet.
Speaker Change: Everything else is on the table.
Speaker Change: Got it I appreciate the answer thanks.
Speaker Change: Again, ladies and gentlemen that star one.
Speaker Change: And there appear to be no further questions at this time I would now like to turn the floor back to Glenn.
Speaker Change: For any closing remarks.
Glenn: Only that we appreciate all of your questions. Thank you so much for listening to me and Chris Rattle on CN three months.
Speaker Change: Thank you. This does conclude today's conference. We thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
Speaker Change: [music].