Q4 2024 Compass Inc Earnings Call
Soham Bhonsle, Richard Simonelli, Robert Reffkin
Speaker Change: Thank you for standing by. And at this time, I would like to welcome everyone to today's Compass Incorporated Q4 and full year 2024 financial results conference call. I would now like to turn the conference over to Soham Bhonsle, Head of Investor Relations. You may begin.
Speaker Change: Thank you very much, Operator, and good afternoon, everybody. And thank you for joining the Compass Fourth Quarter and Full Year 2024 Earnings Call. Joining us today will be Robert Reffkin, our Founder and CEO, and Kalani Reelitz, our Chief Financial Officer.
Speaker Change: We will make forward-looking statements that are based on our current expectations, forecasts and assumptions, and involve risks and uncertainties.
Speaker Change: These statements include our guidance for the first quarter of 2025 and full year 2025, including comments related to our expected financial results, operating expenses, and free cash flow, as well as our expectations for operational achievements.
Our actual results may differ materially from these statements.
Speaker Change: You can find more information about risks and uncertainties and other factors that could affect our results in our most recent annual report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC and available on our Investor Relations website.
Speaker Change: You should not place undue reliance on any forward-looking statements. All information in this presentation is as of today's date, February 18th. We expressly disclaim any obligation to update this information.
Speaker Change: I will now turn the call over to Robert Reffkin. Robert?
Speaker Change: Thank you for joining us today for our fourth quarter conference call.
Speaker Change: Before we dive into our results, I want to take a moment to recognize all of the hard work from the entire CUMMIS team over the past three years.
Speaker Change: This team has worked tirelessly to put Compass in the position it is in today, and I am excited to showcase the true earnings potential of our platform as the market makes its way back to mid-cycle transaction levels of $5.4 million to $5.6 million existing home sales.
Speaker Change: I'm pleased to share that in the fourth quarter, we continued to widen the gap between Compass and the industry.
Speaker Change: As we increased revenue in adjusted EBITDA, accelerated our market share gains.
Roo Agent Count, Expanded Title and Escrow Task Rates
Speaker Change: continued to retain agents at industry-leading levels, exceeded our OPEC targets,
Speaker Change: Extended our unique inventory advantage, achieved our 2024 goal of keeping stock comp below $130 million, and generated another quarter of positive free cash flow.
These results are clear evidence that our playbook is working.
Speaker Change: As a reminder, our playbook consists of, first and foremost, controlling our organic OPEX at 3-4% annual growth.
Speaker Change: Executing a Creative M&A and using the Compass Platform to enhance agent productivity. And lastly, expanding margin by increasing attach of mortgage and title, while also incorporating our new Higher Margin Christie's International Real Estate Affiliate Business.
Speaker Change: In Q4 2024, we generated adjusted EBITDA of $16.7 million, which includes $4.2 million in M&A transaction costs, primarily related to the Christie's International Real Estate Acquisition.
Speaker Change: Excluding these transaction costs, Q4 2024 adjusted EBITDA would have been $20.9 million.
Speaker Change: Revenue in the fourth quarter increased by 25.9% year-over-year. Total transactions and organic transactions increased by 24.1% and 15.5% year-over-year, respectively. As compared to the overall market, where transactions increased by 6.8%.
Speaker Change: So this means, Growth Encompass' total transaction count was 3.5 times faster than the market. And Growth Encompass' organic transaction count was 2.3 times faster than the market.
Speaker Change: In the quarter, we successfully recruited 659 principal agents organically to COMPASS. And quarterly principal agent retention remained at a strong 96.9%.
Speaker Change: For the full year 2024, we grew our net principal agent count by 3,069 agents, or by 21% compared to year-end 2023.
Speaker Change: Our title and escrow business continues to gain momentum. We finished Q4 with another record quarter of T&E attached. Over the past four quarters, we've improved our attach rate by more than 800 base points, and we have nearly quadrupled our profitability in the business year over year.
Speaker Change: In 2025, we expect to drive a similar level of improvement in our T&E attach rate, which should help us to more than double adjusted EBITDA in this business year-over-year.
Speaker Change: Revenue less commissions and other related expenses as a percentage of revenue in the fourth quarter was 17.47%.
Speaker Change: Have the Christie's International Real Estate Transaction been consolidated into our P&L for Q4, we would have expected this metric to be approximately 18.2%, and we believe this metric will be higher than 18.2% in the full year 2025.
Speaker Change: Over the long term, we can expand our margins for a few reasons. First, we will continue to get credit from our agents on the increasing value we provide to them and their clients through the Compass platform.
Speaker Change: We will also continue to hire up-and-coming agents who are productive but also have better economics than the top producing agents.
Speaker Change: As we stated in early 2022, agents producing below $150,000 of annual revenue generated approximately 900 base points more margin per compass than million-dollar-plus agents.
Speaker Change: Second, we continue to increase margins from our ongoing expansion of high-margin integrated services like title and escrow.
Speaker Change: And lastly, with Christie's International Real Estate Acquisition closed as of January 13th, we now plan to expand the high-margin affiliate business and believe we have a long runway for growth in this business.
Speaker Change: When compared to the current leader in the luxury real estate franchise business, we believe that we can more than five times the number of domestic Christie's International real estate affiliates over time. And as a reminder, this is a 30 to 35% adjusted EBITDA margin business for us.
Now, moving on to our view of 2025 and beyond.
Speaker Change: In Q4, we grew quarterly market share by 65 base points year-over-year, reflecting an increase from 4.41% to 5.06%, and our highest year-over-year increase in quarterly market share in the past 12 quarters.
Furthermore,
Speaker Change: Our Q1 Revenue Guide, excluding Christie's International Real Estate, equates to more than 25% growth year-over-year at the midpoint and implies transaction growth of more than 20% year-over-year.
Speaker Change: versus a pending home sales index that is down 5.5% in December 2024 for NAR, and January single-family pending home sales that are down 5% on average year-over-year per ALCES research.
Speaker Change: This is evidence that the gap between Compass and the industry is widening.
Speaker Change: I view our outperformance in the market in Q4 and expected outperformance in Q1 to be a reflection that despite higher mortgage rates and a volatile environment, the company's structural advantages and initiatives around objects containment are working.
Speaker Change: As we look to 2025 and beyond, the gap between COMPASS and the industry will only accelerate, driven by what I see is the beginning of a structural change in the brokerage industry that will favor COMPASS.
Speaker Change: The structural change is driven by the fact that NAR will no longer be able to have anti-competitive rules that prevent large brokerages and top agents from competing freely and gaining market share.
Speaker Change: Specifically, his NARS revenue model is based on the number of agents in the industry paying dues. I believe they don't want large brokerages and top agents to gain market share because it would result in less agents in the industry and less revenue from agent dues.
Speaker Change: NARS rules artificially prompt up the least experienced agents in the smallest brokerages, resulting in the number of agents in the U.S. increasing nearly 100 percent since the year 2000, while during the same time period the U.S. population grew only 20 percent.
and the number of annual home sales declined by 20%.
However...
Post-Nard Settlement as of August 17,
Speaker Change: With the MLS no longer requiring listing agents to pay buyer agents, and NAR's clear cooperation policy no longer being enforced in nearly half of our markets as MLS CEOs increasingly realize the liability they face from enforcing this anti-competitive policy.
Speaker Change: The artificial market restraints that limited market share gains for the best agents and the best brokerages are now gone.
Speaker Change: As a result, the cream will rise to the top faster than ever before in our industry, which should disproportionately benefit Compass because we have the best agents in the industry.
Let me share some data that illustrates this point.
Speaker Change: As reported recently by RIS Media, the gap in income between an agent with less than 3 years of experience and 10 plus years of experience is 20% larger post the MLS rule change.
Per this study,
Speaker Change: Before August 17, the commission delta between an agent with less than 3 years of experience and an agent with 10 plus years of experience was relatively flat at just 12 basis points. But post the settlement, it has now moved to 85 basis points.
Speaker Change: This makes sense. Just think about other professional advisory businesses, like law, for example. Lawyers with one year of experience don't get paid the same as lawyers with ten years of experience, and lawyers at small law firms don't get paid the same as lawyers at big national law firms. To highlight this point in a different way,
before August 17th.
An agent with one year of experience.
Speaker Change: at a small brokerage firm could go to a buyer and say,
Speaker Change: Let me take you out to see properties. You don't need to sign anything. You don't need to pay me anything, because the listing agent, who tends to work at a large brokerage firm, has negotiated my compensation. And I can show you the same properties as everyone else.
Speaker Change: This is the reason why new agents almost always work with buyers over sellers. Because buyers, unlike sellers, didn't have to sign anything and weren't asked to pay their agents anything directly. But post-August 17,
Speaker Change: That same inexperienced agent now must say to the buyer, quote, You need to sign a buyer representation agreement before I can show you properties.
Speaker Change: We need to agree on my compensation up front. And, if asked, they would have to tell their client that they don't have access to the same properties as a larger brokerages that have access to a larger pool of listings.
Speaker Change: As a result of this, and with experienced agents disproportionately working at the larger brokerages as opposed to the over 60,000 small brokerages, I expect the market share of large brokerages to increase going forward.
Speaker Change: In the future, the free market will reward the best agents and the best brokerages, with the highest pay, just like it does with the best lawyers and law firms.
Speaker Change: The best agents are going to thrive in the new future.
Speaker Change: They're going to gain more market share and earn more money, which is ultimately best for the consumer. Because unlike NAR, which gets paid per agent, the consumer doesn't want an industry of over 1.5 million agents. The consumer just wants to work with the best agents.
Speaker Change: This is good. This is right. This is not unfair. Letting agents and brokerages compete freely is ultimately in the best interest of the consumer.
Now moving on to our structural advantages.
Speaker Change: As discussed in the past, Compass has invested in four structural advantages, and these advantages play to the broader changes that are occurring in the industry, which position us to accelerate share gains in the years to come.
These structural advantages include, one, our end-to-end platform.
Speaker Change: where we recently launched tools like Reverse Prospecting, MakeMeSell, and CompassOne, the industry's first all-in-one client dashboard that gives 24-7 transparency into every step of the transaction for buyers and sellers.
to our national scale.
Speaker Change: 3. Network of Top Agents 4. Depth of Inventory in Local Markets Given how important inventory is to our strategy going forward, I want to close with a few minutes on this last advantage.
Speaker Change: First, it's important to understand that depth of inventory, not breadth, is what's critical as we create unique inventory through programs such as the COMPASS three-phase marketing strategy that benefits our agents and their clients.
Speaker Change: Second, by growing our unique inventory and marrying that with our end-to-end platform, which has agent-level search and consumer search at a level that no other brokerage firm in the industry has.
Speaker Change: We believe more and more buyers will search Compass.com and use Compass Agents as it will be known that Compass has more inventory than any other website or brokerage.
as of February 16, 2025.
Speaker Change: Homeowners are marking more than 7,500 listings as a Compass Private Exclusive or a Compass Coming Soon, which are only available by working with a Compass agent or by searching compass.com
Speaker Change: Roughly half of the Compass Private Exclusives and Compass Coming Soon listings were above a $1 million list price, with the other half being below the $1 million list price. This shows that this strategy is resonating with homeowners across all price points.
Speaker Change: Moreover, we are seeing rapid adoption of the COMPASS three-phase marking strategy with 55% of new listings so far this month of February starting off as a COMPASS Prize Exclusive or a COMPASS Coming Soon.
Speaker Change: The 35% we cited is consistent with other data points, because even without marketing the benefits of off-MLS listing today, third-party studies show strong homeowner demand for starting off-MLS.
For instance,
Speaker Change: The largest private listing network in the country is actually Emirates, the MLS of Illinois. And 21% of all their closed listings between 2022 and 2024 started in their private listing network, largely to test price privately.
Speaker Change: Furthermore, a recent study from Zillow showed that 31% of respondents initially said they would prefer to have their property listed on a private listing network if they were selling a home.
Speaker Change: And lastly, another recent study from research firm 1000Watts showed that 35% of prospective sellers
Speaker Change: who were offered a choice between listing directly on the MLS or initially listing off the MLS said they would choose to list their property off MLS.
Speaker Change: We believe the Compass three-phase marketing strategy delivers better outcomes for homeowners including fewer days on market and fewer price jobs Once on the MLS and available on the portal website
Speaker Change: To test this thesis, we looked at all closed-combit sell-side residential transactions that were ultimately marketed on the MLS from January 1, 2024, through the end of December 2024.
Speaker Change: And we compared Compass listings that were pre-marketed as Compass 5 Exclusives or Compass Coming Soon to Compass listings that were not pre-marketed.
Speaker Change: What we saw was that for closed sell-side residential transactions across all price points and all property types nationally.
Speaker Change: Properties where the homeowner chose to pre-market as a Compass Private Exclusive or Compass Coming Soon before going active on the MLS.
Speaker Change: received an accepted offer 20% faster on average, or eight days faster on average once active on the MLS.
Speaker Change: And it created value for homeowners, as only 13% of Compass listings on average that were pre-marketed had a price drop, compared to 19% for Compass listings without pre-marketing, which means approximately 30% fewer listings took a price drop once active on the MLS.
Speaker Change: I want to emphasize that these trends also held at lower price points, as we saw consistent improvements when looking at closed prices below $1 million as well.
Well, these findings are encouraging.
Speaker Change: Compass's team of data scientists, which is led by Dave Crosby, a 20 year Microsoft veteran, also completed a study to better understand the relationship between closed price and pre-marketing as a Compass Private Exclusive and or Compass Coming Soon before going active on MLS.
Speaker Change: This analysis examined all COMPAS residential closed sell-side transactions in 2024, nationally and for all residential property types.
Speaker Change: What we found was that homes pre-marketed as Compass Private Exclusives and or Compass Coming Soons before going to the MOS
Speaker Change: This means that homeowners who chose to pre-market their home with a Compass agent at Compass's average price point of roughly $1 million were likely to have realized a $29,000 premium in the sale of what is often the most valuable asset in people's lives compared to those who listed directly on the MLS.
Speaker Change: We believe this is a strong proof point that homeowners who choose to market with the Compass three-phase marketing strategy see better results.
Speaker Change: These results are not a surprise to us, as the Compass three-phase marketing strategy is based on what homebuilders and residential developers do every day, and they are the most sophisticated and profit-driven sellers of homes in the industry.
Speaker Change: The reason homebuilders list off the MLS is to protect their listings from days on market and public price drop history, and to ensure that all buyer inquiries are directed to the listing agent that they hired.
Speaker Change: Cummins Coming Soons and Cummins Private Exclusives provide these same advantages to homeowners as well.
Speaker Change: So, it's not a surprise that home listings that were protected from having negative insights on them, like dates on market and price drop history, sell for more than homes that have negative insights on them.
Speaker Change: And it's also not a surprise that listings that are able to direct buyer inquiries to the listing agent who knows the home the best.
Speaker Change: sell for more than listing that direct buyer increase to the highest bidder. In fact, sell the leads to the highest bidder, an agent who doesn't know the property as well, and who may redirect that buyer to another home.
Speaker Change: Home builders and developers sold hundreds of thousands of homes off the MLS last year to ensure that negative insights aren't on their listings, and ensure all buyer inquiries go to listing agents, neither of which happens when the homeowners list on the portals.
Speaker Change: You're going to hear all of these stakeholders say that homes sell for more on the MLS. How is it possible that homes could sell for more on the MLS?
Speaker Change: If home builders and developers are selling hundreds of thousands homes, aren't them less? Again, they are the smartest, most sophisticated, most profit-driven people in real estate.
As a reminder,
Speaker Change: NAR's Clear Cooperation Policy carves out homebuilders and developers from having to comply so they can market their properties off the MLS freely as they see fit.
Speaker Change: What we are doing with the Compass 3-phase marketing strategy is simply giving individual homeowners the same marketing playbook of the homebuilders and developers, and giving additional support to agents to act in the best interest of their clients.
Speaker Change: Given the improvement in price we have observed from pre-marketing, we believe this puts more pressure on NAR and MLSs to avoid liability by ending clear cooperation immediately.
Speaker Change: NAR's clear cooperation policy harms homeowner value by taking away homeowner choice to publicly pre-market their homes off the MLS with their agent.
Speaker Change: In the United States of America, a trade group should not be allowed to force every homeowner in the country to sell their most valuable asset at a discount.
Speaker Change: Consumer protection requires consumer choice and clear cooperation takes away consumer choice.
Speaker Change: Over the coming months, as we continue to activate the Compass three-phase marketing strategy more broadly across our markets.
Speaker Change: We expect to be able to show the ability to create positive outcomes for homeowners as well as better agent retention, higher agent productivity, more agent growth from recruiting, and more traffic to Compass's website.
Speaker Change: Ultimately, our North Star is to use our depth of inventory to create better outcomes for sellers, buyers, and our agents, which should translate to better outcomes for Compass and our shareholders. Now, let me hand it over to Kalani to go through our financials in more detail.
Kalani Reelitz: Thank you, Robert. Summarizing our financial results for the quarter. Our fourth quarter revenue was $1.38 billion, an increase of 25.9% from the year-ago period, which exceeded the high end of our original guidance range of $1.225 billion to $1.325 billion.
Kalani Reelitz: And just above the midpoint of the updated guidance we issued on January 15th.
Kalani Reelitz: 20.9% of this revenue growth was attributed to organic growth, while 5% came from M&A.
Kalani Reelitz: Gross transaction value was $54 billion in the fourth quarter, an increase of 29.2% from a year ago, reflecting the 24.1% increase in total transactions combined with a 4% increase in our average selling price.
Kalani Reelitz: Our commissions and other related expenses as a percent of revenue was 82.53%, an increase of 82 basis points compared to Q4 of last year at 81.71%.
Kalani Reelitz: In year, M&A drove about a quarter of this change, and the balance came from geographic, product, and agent mix.
Kalani Reelitz: It's important to note that total agent economics on a per-agent level improved in 2024.
Kalani Reelitz: and we're flat in Q4 year over year. However, higher producing agents are gaining market share in the current environment, and since they are on the better end of the split schedules, we may see some split degradation in that cohort offset by integrated services and affiliate revenue.
Kalani Reelitz: However, the split is only the percentage. The net dollar amount we retain after paying out commissions will be higher as we take more share.
Kalani Reelitz: Turning to OPEX, our total non-GAAP operating expenses were $224.4 million in Q4, a slight increase of $800,000 from $223.6 million of OPEX from the year-ago period.
Kalani Reelitz: While a slight increase, keep in mind that the current year amount of OPEX is after considering added expenses we assume from the M&A completed since the year-ago period.
Kalani Reelitz: Additionally, we incurred about $4 million of M&A transaction expenses in Q4.
Kalani Reelitz: So adjusting for these two items, our Q4 OPEX was actually lower than Q4 a year ago by around 12 million or 5%, reflecting continued strong cost discipline.
Kalani Reelitz: For the full year, I am pleased to share that we not only met, but exceeded our original OPEX guidance range.
Kalani Reelitz: with our full year OPEX coming in $8 million below the low end of our guidance range of $876 to $896 million and $56 million lower year over year.
Kalani Reelitz: Notably, the year-over-year improvement in our full-year 2024 OPEX was achieved in a period where we grew transactions by 14.7% year-over-year, principal agent count grew 21% year-over-year.
Kalani Reelitz: For 2025, we remain steadfast in our focus around OPEX and are guiding to 3-4% OPEX growth, excluding M&A, consistent with our stated goals last year.
Kalani Reelitz: Consistent with my comments last quarter, it's worth a reminder that we've used some of the room created from our overperformance on OpEx reductions to invest in our key growth areas of technology and title and escrow entities.
Kalani Reelitz: Gap net loss was $40.5 million in Q4 compared to the gap net loss of $83.7 million a year ago.
Kalani Reelitz: This improvement was driven by the increase in adjusted EBITDA, but also lower stock-based compensation expense, which was $31 million in the quarter, compared to $36 million in Q4 of last year.
Kalani Reelitz: As a reminder, the non-GAAP operating expenses we refer to omit certain expenses that we exclude from the calculations of adjusted EBITDA, including stock-based compensation and depreciation and amortization. And as always, we've included tables on pages 13 and 15.
Kalani Reelitz: in our Q4 Investor Deck that reconcile these amounts to our GAAP operating expenses.
Kalani Reelitz: Because of our OPEX discipline, which as we've said previously is permanent, not temporary, we delivered free cash flow in every single quarter in 2024.
Kalani Reelitz: I have now been free cash flow positive for six of the last seven quarters during a period of time that reflect a trough level transaction environment of four million annual existing home sales.
Kalani Reelitz: We generated $26.7 million in free cash flow in the fourth quarter. And importantly, we are guiding to another year of solidly positive free cash flow in 2025.
Kalani Reelitz: Our free cash flow during the fourth quarter was extremely strong compared to the negative free cash flow of $41 million last year.
Kalani Reelitz: We did not expect to deliver positive free cash flow in the fourth quarter, due to seasonally weaker periods. However, as a result of the overperformance of revenue and adjusted EBITDA, combined with some favorable timing of working capital changes in the quarter, we converted 160% of our adjusted EBITDA to free cash flow in Q4.
Kalani Reelitz: We were very pleased with this performance, although we generally consider 70-80% to be the normal free cash flow conversion range after considering CapEx and some other items.
Kalani Reelitz: Since it's the fourth quarter, I'll summarize a few of our full year financial data points before moving into Q1 guidance.
Kalani Reelitz: First, revenue for the full year of 2024 was $5.6 billion, an increase of 15%.
Kalani Reelitz: That's an additional $740 million of revenue in what has been a very challenging market.
Kalani Reelitz: Adjusted EBITDA for the full year of 2024 was $126 million, which is a new compass record for this metric.
Kalani Reelitz: and an improvement of $165 million over negative adjusted EBITDA of $39 million in 2023.
Kalani Reelitz: And finally, free cash flow is $106 million for the full year, which is not only an all-time high for free cash flow, but importantly, this March the 1st year encompasses history where we delivered positive free cash flow for the full year.
Kalani Reelitz: Free cash flow, excluding our NAR settlement this year, would have been $135 million.
Kalani Reelitz: We ended the fourth quarter with $234 million of cash and cash equivalents on our balance sheet. And as of December 31st, we had no outstanding draws on our revolving line of credit.
Kalani Reelitz: During January, we did draw $50 million off of our revolver and used $100 million of our balance sheet to fund the $150 million cash portion of the Christie's International Real Estate Purchase Price.
Turning now to financial guidance.
Kalani Reelitz: For Q1 of 2025, we expect revenue in the range of $1.35 billion to $1.475 billion, which includes the incremental revenue from Christie's International Real Estate acquisition that closed on January 13.
Kalani Reelitz: As a reminder, when we announced this transaction, we expected to see about $500 million of annual revenue contribution.
Kalani Reelitz: from this transaction on a run rate basis. And we expect that revenue to follow a similar quarterly distribution to Compass's base business, where Q1 is the seasonally weakest quarter and Q2 is the seasonally strongest.
Kalani Reelitz: For Christie's International Real Estate Business, the revenue less commissions and other related expenses as a percent of revenue line is higher compared to our base business.
Kalani Reelitz: We expect this to improve our consolidated results as we incorporate the acquisition.
Kalani Reelitz: As a reminder, our OPEX formula is our base OPEX plus M&A.
Kalani Reelitz: As a result, we are targeting a range of $1.005 billion to $1.03 billion in total OPEX for 2025.
Kalani Reelitz: which has our base OPEX growing 3-4%, plus $10 million of wraparound OPEX from 2024 acquisitions, and the addition of $105 million of OPEX from the January 2025 acquisition of Christie's International Real Estate.
Finally, a few thoughts on free cash flow for 2025.
Kalani Reelitz: First, for the avoidance of doubt, we will be free cash flow positive for the full year 2025.
Kalani Reelitz: As we've commented previously, we generally expect to convert about 70% to 80% of adjusted, even at a free cash flow over the long term.
Kalani Reelitz: However, this percentage will fluctuate quarter-to-quarter and even year-to-year as a result of timing of working capital, seasonality, and other items such as the second NAR-related settlement payment of $29 million will make in the second quarter of 2025.
Kalani Reelitz: Excluding the impact of our NAR-related settlement payments in 2024, we converted 107% of adjusted EBITDA to free cash flow for the full year of 2024, and 160% in the fourth quarter.
Kalani Reelitz: This higher-than-average conversion was due to several working capital timing items which you moved in our favor during 2024, but which will likely reverse in 2025.
Kalani Reelitz: So in modeling cash flow, you should consider a two-year stack to adjust for these timing items.
Kalani Reelitz: As a last point of guidance, we expect our weighted average share count for the first quarter to be between 549 to 552 million shares. This reflects an increase of 38 million shares in January related to the minimum equity portion of the Christie's International real estate purchase price.
Kalani Reelitz: Additionally, we expect incremental share count related to the settlement of employee equity awards to average about 1% of our outstanding shares each quarter.
Kalani Reelitz: Stock-based compensation for Q1 is expected to be in line with Q4 at about $31 million.
Kalani Reelitz: As I wrap up my prepared remarks, I'd like to once again extend a sincere thank you to our agents and employees for their hard work and dedication that resulted in another great quarter of results where year over year
Kalani Reelitz: We meaningfully grew market share, agent count, attach, and at the same time, we closed out the full year 2024 with a record level of adjusted EBITDA and free cash flow.
Kalani Reelitz: We look forward to continuing our momentum in 2025 with our recent acquisitions that adds brokerage operations in Chicago and Atlanta, a new title operations in Chicago, and for the first time, a franchise operations through Christie's International Real Estate.
Kalani Reelitz: I would now like to turn the call over to the operator to begin Q&A.
Speaker Change: We will now begin the question and answer session. If you have dialed in and would like to ask a question, simply press star 1 on your telephone keypad to raise your hand and join the queue.
Speaker Change: If you would like to withdraw your question, simply press star 1 again.
Speaker Change: And your first question comes from the line of Jason Helstein with Oppenheimer. Please go ahead.
Hey, thanks. First, Robert.
I really appreciate all the color around.
Speaker Change: to Initiatives, exclusive and coming soon. Are you starting to see...
Speaker Change: In your metrics more agents wanting to join Compass because of
Speaker Change: this factor or potentially lower attribution? You did talk about retention being quite high, but just is it actually, are these products starting to attract more agents yet? And then just also, do you expect to grow the number of
I guess, how do we think about...
Gross and Christie's and App Properties agents in 2025.
Speaker Change: Question 1. And then Kalani, just from housekeeping, I think you called out there'd be nine points of positive acquisition impact in first quarter. Should we think about a similar impact for all 25? Thanks.
Speaker Change: It's good to speak with you. Thanks for the question. On private exclusives and coming soon and impact on agents.
I would say that their clients, for buyers, buyers
Speaker Change: if a developer works with an agent and a home builder.
Speaker Change: they often will say, can you show me what's off the MLS? And they're the most sophisticated buyers and sellers in the industry. And so whether it's with
a buyer that's a developer or an individual buyer.
Speaker Change: who will say things like, please don't show me what everyone else can see. Show me what's something that's unique. And so agents are always looking for an edge.
Speaker Change: because they want to give their clients an edge. And so, yes, coming soon and private exclusives give an edge for agents to give to their buyers.
as well as an edge for their sellers.
Speaker Change: The Edge for the Sellers, you know, we've talked a lot about it, protects them from the negative insights.
Speaker Change: such as dates and marketing price drop history. It allows all the buyer increase to go to the listing agent they hired, not sold off as a third party lead to the highest bidder. Again, just like the developers do. So you're giving that edge that developers use for themselves to their seller.
Speaker Change: And so, yes, because Compass is able to give an edge to our buyer agents and seller agents, which they can pass on to their clients, we are finding this as
Speaker Change: is now a top reason why agents want to come to Compass.
Speaker Change: I believe this year Compass will be known as the company that protected
a homeowner value.
seller of homes.
Speaker Change: And that's something that really resonates with listing agents because they have a fiduciary duty.
to do it from the bedrooms to their cellars.
Speaker Change: And that fiduciary duty is being compromised by rules like clear cooperation that forces them to a one-size-fits-all approach as opposed to a one-size-fits-one approach. On Christie's International Real Estate, when you look at the largest luxury brokerage,
Speaker Change: in the affiliate space. They're five times our size. We are giving guidance on how fast it's going to grow, but I can tell you that we already launched two new international markets. And we have signed up
Speaker Change: a new domestic market. It's already signed and should be announced in the next, I think, next month in March, and we're close to signing another. And so we feel that the momentum is moving in such a path that it's meeting, if not exceeding, our initial expectations.
Lani?
Lani: Hey Jason, can you just, just to make sure I answer the question, can you repeat the question? Sure. So I think you, you, you basically helped us understand that in the guidance for the first quarter, there's nine points of acquisition impact, not under basis points.
Lani: Should we think about a similar impact for the rest of 2025 as far as the tailwind from acquisitions?
Yeah, yeah. Okay. Thank you.
Lani: I think overall when we think about acquisition volume, obviously we're going to finish the lapping of our parks and LMB.
Lani: which is included in Q1. And then we'll have Christie's International Real Estate. I think we had mentioned there that it's around 500 million of overall revenue. I expect the I expect the gating of that to be consistent with kind of our legacy compass.
Lani: with Q1 being the weakest quarter, Q2, Q3 being the strongest. So that's how I would think about the modeling of M&A, Jason.
Thank you.
Speaker Change: And your next question comes from the line of Chris Kontarek with UBS Securities. Please go ahead.
Great, thanks for taking the question.
Chris Kontarek: Can we just talk a bit about the, really the opportunity around CompassOne and driving this three-phase marketing approach and doing it within the context of that three to four percent organic expense growth? How should we be thinking about your marketing expense and driving awareness around this to potentially accelerate agent growth? I have a follow-up after that. Thanks.
Chris Kontarek: And so at Compass we don't have corporate marketing because we have
Chris Kontarek: 30 plus thousand agents, with on average 3,000 people in their contacts, so 100 million people.
are agents or...
Chris Kontarek: are a natural way to market The Message of Compass directly with their clients. So we have, again, over 100 million people.
or contacts that they have in their combined database.
Chris Kontarek: and our platform allows them, with a click of a button, to send digital newsletters.
Chris Kontarek: I'm sure you've probably seen some of them, social media posts, organic.
Chris Kontarek: or page social posts, again, through the platform, as well as.
Chris Kontarek: postcards, mailers, brochures, and much more, even video. And so we put in Compass One marketing material through the platform, and we were in the process of up-leveling our Compass Two-Phase marketing material. And the numbers that we outlined today about the
Chris Kontarek: about the 2.9% as well as the reduction in days on market as well as the reduction in price drops. We're adding that content in over the next week, so the agents can then share that with their clients in their sphere of influence.
Chris Kontarek: Now, we do see value of doing something potentially at the corporate level that we're exploring, but first we want to maximize the full value of doing it in a free way that aligns us with our agents, where they can build their client relationship.
Speaker Change: Got it. That's helpful. And just on free cash flow, how should we be thinking about uses of it here? Could we potentially be thinking about share buybacks, any sort of framework to be thinking about SBC as well for this year? Thanks.
Yeah, hey Chris
Chris Kontarek: On overall free cash flow, we expect meaningful free cash flow.
Chris Kontarek: in the year, as we think about our framework, we really have three buckets. The first is just fortifying our balance sheet, right?
Chris Kontarek: making sure that we are prepared for the cyclical business that we are in. Second is investment back into our business. Our key focus from that perspective is going to be on technology and deepening our inventory in our key markets through M&A and organic growth. And then our third bucket, as we think through and see continued free cash flow, will be shareholder return. And so as we think about free cash flow this year, it'll be focused on the first two buckets.
looking at opportunities long term for shareholder value.
Speaker Change: Got it. And anything off that run rate for your SBC to be thinking about?
Speaker Change: I think Q1 will look very similar to Q4, and then we'll continue to maintain, you know, around those levels. There's some step-ups as we normally have for investments in our employees, but overall we should be relatively the same.
Got it. Super helpful, Kalani. Thank you. Thanks, Chris.
Speaker Change: Thanks for taking questions. Maybe just to start, is there a difference for commissions to agents based on private listings or coming soon? Or are they more likely to represent both sides of the transaction in areas that they're able to? And certainly it just seems like from the anecdotes,
Speaker Change: They're using it, they're leveraging it to win listings. Just any commentary on the economics agents with private listings are coming soon.
Speaker Change: And I think you're right on the last point that it seems like you're hearing as well. Agents are saying that the Compass three-phase marketing strategy is helping them win listings.
Speaker Change: And there are many people that say it's one of the best listening tools that they've ever had.
because it meets, obviously, the seller demand.
In terms of commissions, there's no different commission structure for...
a private exclusive worth coming to you versus a
an active listing.
Speaker Change: And so, we don't, and I personally don't even know how much more we...
Speaker Change: how much more listings are sold in-house or not. That is not the reason why we do this. The reason why we do things is because
Speaker Change: We want to give our agents an edge. And so how do you give your agents an edge? You give them tools that their clients want. And this is just one of the greatest tools that you can give. And what's great about this tool as well is it doesn't cost more money.
Speaker Change: An agent can go to their clients and walk through the three-phase marketing strategy. They're going to sound more sophisticated, they're going to sound like they have a plan, they're going to sound professional, and it's not, hey, I'm going to spend more money on an ad or on marketing dollars. Their clients want someone who has a plan. This is a plan that is free and it works uniquely within Compass because of our network of 33,000 top agents
without the risk of portal sites and MLS exposure.
Understood. Thanks, Robert. And for Kalani...
Speaker Change: You know, we won't give the pieces out, Bernie, but I do think we've given some of the information. I think overall 500 million of revenue, I think those pieces we gave out that you just mentioned are going to, we're going to grow and have those hosts have some real good opportunities. But I think, I think you can add just the continued growth there, but that's probably
Speaker Change: The bigger piece of the $500 million will be brokerage as well.
Okay, got it. Thanks, Lani.
And your next question. One moment, please.
You're next.
Speaker Change: Your next question comes from the line at Brian McEvaney with Zelman & Associates. Please go ahead.
Thank you. Congrats on the results.
Brian McEvaney: and thanks, as always, for the commentary. I guess a two-part question around growth expectations. First, on the organic side, I guess using 4Q as an example, you know, about 670 gross agent ads, dropping down to about 210 on a net basis.
Brian McEvaney: I guess I'm just curious on an organic basis, you know, what do you think is a reasonable run rate to think about going forward? Like, was 4Q
Brian McEvaney: a decent proxy. I know you called out kind of managing out non-producers, so presumably not the best proxy for future quarters, but any commentary around just, you know, your thoughts on aging additions on an organic basis going forward?
Brian McEvaney: And then secondly, on the inorganic side, you know, following the app properties and Christie's deal, obviously a large and important transaction.
Brian McEvaney: I guess I'm curious, you know, what about the pipeline of incremental M&A? You know, does the focus shift a bit to just the integration, you know, drawing out synergies from that deal?
Or could we expect to see further?
Brian McEvaney: maybe smaller opportunities down the pike. And yeah, just generally your view on incremental M&A going forward post the deal. Thank you.
Hey Ryan, it's Kalani.
Ryan: Thanks for the question. For agent ads, I think we've seen a ton of momentum. I'm really excited by the work the team's done. We are targeting and we should expect to add between 600 to 700 gross agents, and we should expect to maintain that industry-leading retention at 90% annualized or somewhere around 97.5% per quarter. And so I would suspect Q4, Q3 is a good proxy for gross ads.
Ryan: Q4 had about 150-175 non-producing agents that we cleaned up, so 210 is probably a little understated is my guess.
Ryan: Overall, but but I think you can use the gross as a proxy. I think we're seeing a ton of momentum agents are really Coming over for technology coming over for our depth of inventory and culture are kind of the big three reasons And so I don't see that momentum stopping In fact, I see us only getting stronger with the team and and I do see our retention rate kind of holding holding strong there So I think you can use q3 but for the the bit of the cleanup that we did for non-producing agents
And then I will...
Ryan: You know, on the M&A, I think we'll continue, we're working well with our Christie's International Real Estate Partners to integrate driving synergies, you know, achieving those $30 million. We'll continue to focus on that, but the pipeline remains.
Richard Simonelli, Robert Reffkin
Got it. Thank you very much. Appreciate it.
Real time transcripts provided by Transcription Outsourcing, LLC.
Speaker Change: And once again, if you would like to ask a question, please press star one. Your next question comes from the line of Michael Ng with Goldman Sachs. Please go ahead.
Hey, good afternoon. Thank you for the question.
I just had one for Robert on the inventory strategy.
Speaker Change: I was wondering if you could just speak to, if you look out to a couple of years, what does this look like in success for Compass?
Speaker Change: Is this about attracting more agents and gaining market share that way?
given private exclusives and coming soon is a tool that
Compass is obviously doing very well, and
Speaker Change: cross posting to real estate portals at some point down the road and perhaps charging for access while keeping the negative insights off those listings. Any thoughts there would be great. Thank you.
Speaker Change: Michael, any other questions? Well said, coming from you, my alma mater, my alum, Goldman Sachs, which for many years was known as...
Speaker Change: the bank that you would go to if you wanted to sell a company and get maximum dollar because you were in the best process.
Speaker Change: and the best people and tools to do so. So where's this look in the long run? In the long run, hopefully not too many years from now, every homeowner in the country knows, if you want to sell your most valuable asset on the average person's life,
Speaker Change: that this company called Compass can help you maximize that value.
That's what this is all about.
Speaker Change: And if we do that, of course, you can imagine all the wonderful, beautiful things that come with it because you can't buy what's not for sale.
Speaker Change: And that would, of course, it would allow to more transactions, helping more, not just sellers. Remember, every time you help a seller, you're also helping a buyer. And you become a place, if we are the place that's known.
Speaker Change: to maximize the value of a home sale, clearly the best real estate professionals would want to be there as well. And you're giving them an edge.
Yeah, the ...
I would like to see this as a place where
Speaker Change: are no longer being forced by a trade group and being told by a trade group.
Speaker Change: that how to market their client's properties. I just don't think that's right. And we talked about it on the call, but the trade groups business is a volume business.
Speaker Change: It's how do I make as much money from volume per agent dues. My estimate is the trade groups plus the MLS associations generate over $2 billion of agent dues a year. There's real money there.
Speaker Change: A lot of people, 600 MLSs, a lot of people that are making money off the agent. And I'm the one who these agents come to and say, why is it that the pain are?
Speaker Change: You know, why is it I can't watermark my own photos? But then the MLS watermarks it. Why is it that I can't put in a listing description, I'm the listing agent? So the buyer sees it on the portal.
Speaker Change: that they know they can actually reach out to me, the listing agent. And look, ultimately, I just, I close your question saying, I want the future of this industry, not to be created by companies that are trying to devalue discount and displace and control the agent instead to be created by.
Speaker Change: The agent, the person who's at the center of the transaction, who is talking with the client every single day, the buyer and seller, and saying, what are your needs? How can I meet them? They should be the ones that are creating the future of the industry and Compass is the company that will listen to them better than any other company and then build their ideas into reality.
Speaker Change: Great. Thank you for all that color, Robert. Really appreciate it.
Speaker Change: And your next question comes from the line of Ben Black with Deutsche Bank. Please go ahead.
Jeff: Hi, this is Jeff. I'm for Ben. Thanks for taking my question.
Speaker Change: We're just wondering if you could give a little bit of color on how commission rate is trended for agents. I mean, you talked about.
Speaker Change: kind of the difference between the underperforming and the high performing agents, which seems like it might imply that you're seeing some more commission compression on the lower end side of the agents. Is there anything you can tell us just on how that's trended and maybe, you know, different mix or different geographies or where you're seeing more or less of an impact?
Thank you.
Speaker Change: It, we haven't looked at this in detail. Um, however, what I can see anecdotally and from what I read, uh, the, the top agents are outperforming the, um,
Speaker Change: not just in gaining market share but also on commission than the inexperienced agents. And it's similar to what I said on the call, like, you know, why is it, you know, that in this industry, a
Speaker Change: buyer agents, regardless of their experience, were getting paid the same from the listing agent.
commission paid to the buyer agent.
Speaker Change: Well, in another industry, would it be like that? Lawyers, one year in the business, don't get paid. Lawyers, 10 years in the business. So I think that the structural change, and that's why I know I spent some time on the call, I really believe that's the biggest thing happening right now.
Speaker Change: This industry of large brokerages and top agents has been held back.
Speaker Change: by rules that, you know, would be claimed as leveling the playing field, but really meant is, how do we get as many agents as possible? How do we have an industry of almost 1.6 million agents where 70% of them didn't do one transaction last year? Because that's how all those stakeholders can make as much money, being the NAR, the associations, and the MLS.
And so with these rules being pulled out,
I just think these top agents are going to thrive.
Speaker Change: 1.7 billion in tech platform, hundreds of millions of dollars in other stuff. So we have, I think we will thrive more because we invested more. But it's it's a great thing for top agents, large brokerages, and ultimately the consumer, because the consumer wants an industry where more people are investing on the in their behalf.
Speaker Change: non-industry where there's no incentive to invest on your behalf, on their behalf. But yeah, long story short is we're not seeing a change for the top agents.
Got it. Thank you.
Speaker Change: Thank you. And I'm showing no further questions at this time. I would like to turn it back to our founder and CEO, Robert Reffkin, to close this out. Robert?
Robert Reffkin: Well, thank you everyone for joining our call today. I just want to express my gratitude to all our agents, all of our employees, as well as to all of our shareholders.
Robert Reffkin: Your commitment to Compass has driven our success so far and has positioned us to outperform the market in 2025 and beyond. With that, thank you and have a great rest of your day.
Robert Reffkin: Thank you. And ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.