Q4 2024 Redfin Corp Earnings Call
Greetings and welcome to Redfin Corporation Quarter 4 2024 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation.
Speaker Change: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Meg Nunnally, Head of Investor Relations. Thank you. You may begin.
Meg Nunnally: Thank you. Good afternoon and welcome to Redfin's financial results conference call for the fourth quarter in fiscal year ended December 31st, 2024.
Meg Nunnally: I'm Meg Nunnally, Redfin's Head of Investor Relations. Joining me on the call today is Glenn Kelman, our CEO, and Chris Nielsen, our CFO.
Meg Nunnally: Before we start, note that some of our statements on today's call are forward-looking. We believe our assumptions and expectations related to these forward-looking statements are reasonable, but our actual results may turn out to be materially different.
Meg Nunnally: Please read and consider the risk factors in our SEC filings together with the contents of today's call.
Meg Nunnally: Many forward-looking statements are based on our assumptions today, and we don't undertake to update these statements in light of new information or future events.
Meg Nunnally: On this call, we will present non-GAAP measures when discussing our financial results.
Meg Nunnally: We encourage you to review today's earnings release, which is available on our website at investors.redfin.com, for more information relating to our non-GAAP measures, including the most directly comparable GAAP financial measure and related reconciliations.
Meg Nunnally: All comparisons made in the course of this call are against continuing operations for the same period in the prior year, unless otherwise stated.
Meg Nunnally: Lastly, we'll 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.
Thanks, Meg, and hi, everyone.
Glenn Kelman: Redfin's fourth quarter revenue of $244 million was within our guidance range and up 12% over last year. It was our fourth straight quarter of growth with real estate services growing faster than at any point since the fourth quarter of 2021.
Glenn Kelman: Our adjusted EBITDA loss of $3 million was below our guidance range due to higher than expected pay for our real estate agents.
Glenn Kelman: But still, every business improved fourth quarter adjusted EBITDA from 2023 to 2024.
Glenn Kelman: Our fourth quarter profits were lower due to Redfin Next, which pays our agents entirely on commissions.
Glenn Kelman: but our sales force has also grown faster than expected. Our lead agent census has increased from an average of 1,757 in the third quarter to more than 2,200 today, a 25% increase.
Glenn Kelman: At the most critical points in our sales cycle, meeting new customers and then winning offers, new hires have already been outperforming tenured Redfin agents.
Glenn Kelman: When new hires first customers start closing, we expect sales to grow in the spring.
Glenn Kelman: But a transition of this magnitude also has a one-time effect on sales. As our last set of markets shifted to next just before Halloween, agents who preferred a salary left, and with them some of the sales that were about to close.
Glenn Kelman: The good news is that a few months after a market shifts to next, attrition usually declines below pre-next levels.
Glenn Kelman: But during this transition, our fourth quarter real estate services market share was 0.72 percent, flat year-over-year. We'll gladly forego a quarter of share gains in exchange for the revenue growth that we expect from a larger and better sales force.
Glenn Kelman: The rapid expansion of our sales force is just one of the ways that Redfin plans to go on the attack in 2025. On February 6th, we signed a rentals partnership with Zillow that will double the number of high-quality apartment listings on our sites so we can compete better for traffic.
Glenn Kelman: The $100 million payment Redfin got via the partnership strengthens our balance sheet and partly funds a 38% increase in 2025 advertising.
Glenn Kelman: Due to the increased profits from this rentals partnership and a January layoff of senior Redfin personnel, we can invest more in growth and still earn a significant adjusted EBITDA profit in 2025.
Glenn Kelman: Our first quarter profits are expected to be down about $8 million year over year at the midpoint of our guidance, but we'd be significantly improving profits if not for an incremental $17 million investment in advertising.
Glenn Kelman: January demand is already up five percent and should increase more in future months as the mass media campaign didn't start until January 13th and won't stop until June.
Glenn Kelman: As we grow revenues, we also expect real estate gross margins to approach 30% in 2025.
Glenn Kelman: From the fourth quarter of 2023 to the fourth quarter of 2024, real estate services gross margins declined by 60 basis points, but only because we underestimated the cost of our next pay plan by about $4 million in the fourth quarter and by a slightly smaller amount in the third quarter.
Glenn Kelman: We recognize these costs in 2024 and offset them starting this month by eliminating vacation pay and other entitlements that agents care less about than their bonus.
Glenn Kelman: Already, we expect first quarter real estate services gross margins to be significantly higher than in 2024 because of the February reduction in entitlements. We expect second quarter margins to increase again as the agents hired in winter start closing sales.
Glenn Kelman: Beyond the year-over-year gains in real estate services margin and market share that we expect from rising demand and a larger sales force, we also plan to improve monetization.
increasing profits, and every other business segment.
Glenn Kelman: To earn more money from our brokerage customers, we'll keep selling mortgage and title services. Mortgage attach rate sagged in the fourth quarter to 26%, but surged to 29% in January, after we announced that high attach rate agents would get more customers from our website.
Glenn Kelman: These ancillary sales should fuel more demand. In the fourth quarter of 2024, we were, for the first time, able to profitably invest in broader homebuyer campaigns on Google and Facebook based on mortgage and title revenues, not just home sales.
Glenn Kelman: On top of increasing our rentals audience by publishing more listings, we also plan to monetize that audience better.
Glenn Kelman: Even without a traffic increase driven by more listings, and even setting aside Zillow's $100 million upfront payment, we believe that the money the Zillow-Redfin partnership pays us for each rental lead will increase our profits.
Glenn Kelman: Between February 21 and June 30, we plan to lay off roughly 450 REN employees, many in sales and sales support.
We're grateful for their heroic efforts.
Glenn Kelman: We can profitably invest in rent.com and apartmentguide.com, technology and real estate sites, large, lucrative audience of apartment seekers, whom we can now more easily connect to property managers.
Glenn Kelman: Over the past year, we were forced to prioritize the apartment seeker's search experience over monetization, with our site showing about 20,000 apartment listings that our audience couldn't easily ask about, and it generated no revenue.
Glenn Kelman: But the Zillow partnership gives us so many listings from paying property management customers that we no longer need to show unpaid listings.
Glenn Kelman: And earning a set amount for every inquiry about every apartment on our sites makes it easier to scale our audience through direct marketing campaigns and search site improvements.
The final element of our monetization strategy is the broadest.
Glenn Kelman: Continued profitable growth from digital advertising to both for sale and rentals audiences.
Glenn Kelman: Beyond display ads hosted on our sites, digital advertising includes revenue from promoting new construction listings on Redfin.com and from letting lenders connect with the mortgage seekers we can't serve ourselves.
Glenn Kelman: This digital advertising segment, once combined with our title business in the other segment, is now known as monetization.
Glenn Kelman: Monetization earned $15 million in 2024 adjusted EBITDA, up 46% from 2023, with further growth expected to come from direct sales to advertisers who previously accessed our audience through ad networks.
Glenn Kelman: Few investors seem likely to argue with our plans to monetize our audience better and to get more traffic and more agents.
Glenn Kelman: But our prepared remarks are briefer than usual, because we understand that what really matters now is our execution of these plans, so we can deliver shared gains and profits.
Glenn Kelman: We'll discuss the housing market, then Chris will lay out our first quarter guidance.
Speaker Change: One reason Redfin is focused on gaining market shares that home sales are unlikely to significantly recover in 2025.
Speaker Change: Demand increased after the November election, but interest rates seem likely to remain relatively high, making it hard for the homebuyers turning out now to afford a home.
Speaker Change: Pressure on year-over-year growth and home sales should ease after the first quarter just because 2024 started with an annualized rate of 4.3 million existing home sales last February compared to an idea of 3.9 million in September.
Speaker Change: As these year-over-year comparisons get easier, we expect growth in U.S. home sales to strengthen across the summer, especially if inventory continues to increase and sellers become less aggressive on pricing.
Speaker Change: The balance between buyers and sellers has been volatile and mixed.
Speaker Change: For example, our Cincinnati agents report bidding wars across a wide range of prices, whereas the Jacksonville market has shifted, quote, 100% to a buyer's market, unquote.
Speaker Change: For U.S. home sales over the four weeks ending last Sunday, the number of days a listing took to sell increased 15% year over year.
Speaker Change: Even if a sharp rebound is unlikely in 2025, the worst of the downturn is probably behind us. We expect the recovery to be similar to the one that ended the great financial crisis.
Speaker Change: Slow in coming, initially gradual, but because home ownership is so important to American culture. Hopefully very long.
Take it away Chris
Chris Nielsen: Thanks, Glenn. Fourth quarter revenue is $244 million, up 12% from a year ago.
Speaker Change: Gross profit of 82 million dollars was up 12% year-over-year and total gross margin held steady at 34%.
Chris Nielsen: Total operating expenses were $112 million, down $5 million year over year.
Chris Nielsen: The decrease was primarily attributable to a $4 million decrease in Reynolds amortization and a $4 million decrease in software expenses.
Chris Nielsen: The lower software expenses were driven by the recognition of vendor credits that we don't expect to recur in future periods.
Chris Nielsen: These decreases were partially offset by a $3 million increase in marketing expenses.
Bye.
Chris Nielsen: Our adjusted EBITDA loss of $3 million was up from a loss of $13 million in the prior year.
Chris Nielsen: The adjusted EBITDA improvement was broad-based and carried across every segment of the business.
Chris Nielsen: Net loss was $36 million compared to a net loss of $23 million in the prior year.
Glenn Kelman: This is below our $32 million to $25 million loss guidance range, primarily due to higher than expected transaction bonuses in our brokerage business as Glenn discussed earlier.
Glenn Kelman: Diluted loss per share attributable to common stock was $0.29 compared with a loss of $0.20 one year ago.
Glenn Kelman: Turning to our segment results for the fourth quarter, real estate services which includes our brokerage and partner businesses generated 149 million dollars in revenue up 12% year-over-year.
Glenn Kelman: Brokerage revenue was up 13% on a 13% increase in brokerage transactions while brokerage revenue per transaction was flat.
Glenn Kelman: Revenue from our partners increased 3% on an 8% decrease in transactions while revenue per transaction increased 13%.
All right.
Glenn Kelman: Real estate services gross margin was 21.9 percent, down 60 basis points year over year. This was primarily driven by a 700 basis point increase in personnel costs and transaction bonuses, partially offset by a 380 basis point decrease in home touring and field expenses.
Glenn Kelman: as we've eliminated compensation for these activities and instead made compensation contingent on closed transactions.
Glenn Kelman: In addition, there was a $110 basis point decrease in home improvement costs incurred on behalf of home sellers.
Glenn Kelman: Net loss for real estate services in the fourth quarter was $16 million, up from a net loss of $21 million in the prior year. An adjusted event loss was $3 million, up from a loss of $7 million in the prior year.
Glenn Kelman: Rentals gross margin was 76.2% down from 77.5% a year ago.
Speaker Change: Net loss for Reynolds was $5 million, up from a net loss of $10 million in the prior year.
Speaker Change: Adjusted EBITDA for the fourth quarter was four million dollars up from three million dollars in the prior year.
Speaker Change: Our mortgage segment generated $30 million in revenue, up 15% year over year.
Speaker Change: Mortgage gross margin was 10.9% up from 4.6% a year ago.
Speaker Change: Net loss for mortgage was $5 million, roughly flat from the prior year.
Speaker Change: Adjusted EBITDA loss was $3 million compared to a $5 million loss in the prior year.
Speaker Change: For the quarter in the year we've broken out more detail in our segment reporting showing results.
from both our title and monetization businesses.
Speaker Change: Our title segment generated $9 million in revenue, up 58% year-over-year.
Speaker Change: title gross margin was 26.2% up from 2.2% a year ago.
Speaker Change: Net income per title was $2 million up from a loss of $500,000 in the prior year.
Speaker Change: Adjusted EBITDA was $2 million up from a loss of $400,000 in the prior year.
Our monetization segment generated revenue $4 million, up 9% year-over-year.
Speaker Change: adjusted you but that was three million dollars also up slightly from a year ago
Now turning to our financial expectations for the first quarter.
Speaker Change: Total revenue is expected to be between $214 million and $225 million, representing a year-over-year change of down 5% to roughly flat compared to the first quarter of 2024.
Speaker Change: included within total revenue or real estate services revenue between 126 million dollars and 131 million dollars.
Speaker Change: Rentals revenue between $49 million and $51 million. Mortgage revenue between $27 million and $30 million.
Speaker Change: title revenue of approximately eight million dollars and monetization revenue approximately four million dollars.
Speaker Change: Real estate services gross margin is expected to be between 17% and 18% up approximately 150 to 290 basis points compared to the first quarter of 2024.
Speaker Change: Total marketing expenses are expected to be approximately $40 million, up $15 million year-over-year due to higher mass media spending.
Speaker Change: We don't expect such large year-over-year increases in total marketing expense for the remainder of 2025, as savings on Reynolds marketing spending should help offset the mass media increase.
Speaker Change: In the first quarter, we'll have $21 million to $24 million of restructuring charges, of which approximately $18 million to $21 million is associated with our Zillow partnership, and approximately $3 million is associated with the reduction in forest completed in January.
Speaker Change: Of that total, we expect about $14 million to $17 million of cash charges, and the rest to be non-cash charges associated with write-offs no longer needed for the go-forward business.
Speaker Change: Total net loss for the first quarter is expected to be between 94 million dollars and 83 million dollars.
Speaker Change: Adjusted EBITDA loss is expected to be between $39 million and $32 million.
Speaker Change: Before we take your questions, I'd like to provide a little more color on the expected impact of a recently announced Zillow partnership to rentals segment financials.
Speaker Change: Once the partnership is fully implemented which we expect to occur by July 2025, our rental segment revenue will be comprised primarily of payments from Zillow for apartment seeker leads as well as the amortization of our deferred revenue from a hundred million dollar initial payment.
Speaker Change: Our first quarter rentals revenue guidance includes approximately $2.5 million in deferred revenue from that initial payment, but doesn't include any revenue from Zillow for LEADS because the partnership has not yet been implemented.
Speaker Change: As we make this transition, we expect rentals revenue will decrease, but expenses will decrease even more. The result is we expect adjusted evens out for this segment to be more than triple over 2024 on a run rate basis.
And now, let's take your questions.
Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue.
Speaker Change: You may press star 2 if you would like to remove your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.
Speaker Change: Our first question comes from Navid Ken with B Reilly. Please proceed with your question.
Navid Ken: Great. Thank you very much. I have two questions. One on the ad spending, the $40 million that you're planning to spend in the first quarter.
Navid Ken: Is there a timing in Target I should think about versus...
Navid Ken: in terms of why you decided to maybe do it earlier or how should I think about maybe marketing spend in the remaining quarters? And then the other question I had is just around.
Navid Ken: Full year EBITDA and free cash flow profitability, what's the right way to think about it now that you have this partnership in place in addition to all of the other changes you've made including NEXT and some other things. Thank you.
Speaker Change: Sure, so I'll start and Chris, if you have any color to add, please do, but...
Speaker Change: So far, that ad is producing the expected lift in demand, which is great news.
Speaker Change: We saw increases in demand in January even ahead of the mass media campaign.
Speaker Change: And now that interest rates are rising, we're glad to have that lift from mass media expense. It should run through June, so we will have
Speaker Change: more leverage in the second half of the year than the first.
We expect to be significantly profitable in 2025.
Speaker Change: We've gone through several restructurings in 2024 and then we had an especially painful one at the beginning of 2025 because we wanted to put all the chips in the table on growth and to spend less on staffing.
coupling that with the Zillow partnership.
Speaker Change: has just given us more room to invest in driving demand. And when you pair that with 25% more agents, when we think those agents are better, we've got good prospects here to make money and to take share.
Speaker Change: I would just add that in terms of marketing expenses, we do have marketing expenses up about $15 million in the first quarter of the year, but we don't expect as large increases as we get into the second, third, and fourth quarters of the year.
Thank you for your time. Thank you.
Speaker Change: Okay, but there would be increases on a year-on-year basis, is that a fair assumption then?
Speaker Change: It'll depend on the mix of advertising, but generally, yes, that's what you should expect.
Speaker Change: Okay, and then in terms of the four-year profitability, you know, even the Africa Astro, any guideposts there in terms of the magnitude or what's the right way to think about that?
Speaker Change: Well, we've characterized it as significant adjusted EBITDA, so we're not looking to make $300,000 in adjusted EBITDA. We want to make millions in adjusted EBITDA.
Thank you, Glenn.
Thank you.
Speaker Change: Our next question comes from John Campbell with Steven Sink. Please proceed with your question.
John Campbell: Hey guys, good afternoon. So it looks like on the lead agent count metric, I mean that's obviously a quarterly average. If I take the 4Q number and compare it to 2Q, that's up like 12%. Glenn, I think you mentioned in the press release
John Campbell: agents were up 25% from a six months ago period. I think that's probably that you ended the year a good bit higher amount of agents. Hoping you can maybe expand on this maybe for this one time to kind of help square us up what your current lead agent count is today and kind of where that stood or maybe where that stood exiting last year.
Yeah.
John Campbell: So, in our prepared remarks, we were citing numbers hot off the press, so as of the end of this past week.
John Campbell: the end of last week to our average in Q3. And the reason we did that is just because, yes, we hired significantly in Q4,
John Campbell: But that continued through the first two months of Q1. And we've just been more successful than we'd hoped at bringing on agents, and especially at bringing on really good agents. They're outperforming our tenured agents.
John Campbell: at key points in the funnel, the two most important being meeting customers and getting winning offers.
John Campbell: So, that's the color, is that we're in excess of 2,200 as of last Sunday, and in Q3 it averaged 1,757, and if you do the math on that, it comes out to about a 25% increase.
Speaker Change: Okay, that's very helpful. Thank you for that and then just help remind us typical turnaround time. I know as you heard
Speaker Change: agents in the past, you had to go through the training. I mean, there was there was a longer ramp-up cycle. It seems like with these agents, these are hot and ready to go, but it seems like maybe even in that sense, you would still have to have maybe a couple months before they actually start to generate revenue. Is that broadly correct?
It is.
Speaker Change: So there were two factors that led to long ramp times for agents. One is if you hire novice agents, they just need to learn their craft. That is less relevant now because
Speaker Change: We are hiring such a high proportion of experienced successful agents. We can recruit agents from any brokerage at any level of tenure.
The second factor is just the sales cycle being.
Speaker Change: six months. So, you know, those agents will bring a few deals over on their own, but they're going to connect to our website and all the demand that brings. And that takes time, just because those customers have to find a house.
Speaker Change: get an offer won and then close on it. So, it just takes four to six months.
Chris Nielsen: Okay, that's great. If I could squeeze in one more. Chris, on the on the rentals business...
Speaker Change: You mentioned 3x profit relative to last year, that's I think north of $13.5 million, $14 million, something like that. So that's great. On the revenue side, I'm hoping that you can maybe help square us up there as well. I just don't know, I mean you're sitting here at $200 million or so of revenue exiting the year. If that's a 90% drop or if it's something far larger than that, any kind of sense at this point?
Chris Nielsen: Yeah, I'll try and give you at least a direction here.
Chris Nielsen: The main reason to be a little bit cautious is, of course, we haven't fully launched the partnership, so we'll learn a lot once things are up and running.
Chris Nielsen: But the digital services portion of our revenue, which was about a third of that overall revenue, those businesses are being shut down entirely. And then, just in terms of the remainder of the business, the core advertising business.
Chris Nielsen: You should expect, because we're being paid on a per lead basis, it's also down meaningfully from where it was before. So, I know that's not a lot of detail here, but you should expect revenue down meaningfully, but not 90%. And we do think...
Chris Nielsen: And what's the most important thing here is that we do think that this is going to end up being better for consumers because we'll be able to show more inventory, but we'll also help drive more profit dollars.
Excellent. Thank you. Can I just add to that, Chris?
Speaker Change: I just want to be clear on one point, that yes, it will be less revenue because
Speaker Change: Zillow is the one handling the cost of sale, but we expect to run a larger marketplace generating more leads.
Speaker Change: You know, if we just wanted to squeeze the business where it's a declining business, but we're going to get more profit out of it, we could have done that on our own. But getting more rental listings on our site, building a larger marketplace on apartmentguideandrent.com, we really think there's growth there.
Speaker Change: So it'll be on a smaller basis, but going forward we expect those sites to grow, the leads they generate to grow, and the revenue to grow, and with that the profit.
Thanks.
Speaker Change: Our next question comes from Daley with JPMorgan. Please proceed with your question.
Daley: Great, thanks for taking my question. I have one. You talked about market share being slightly over here in 4Q, but I'm curious if your next market shows different trends, especially the relatively older next markets?
Daley: And when you compare the new NEX markets that you launched later in the year versus the older ones, are there any key differences across those two cohorts? And if you're gaining share in the older NEX markets, would that be a good indication of how much share you could gain in the new markets as well?
Speaker Change: Chris, do you want me to do that or do you want to take it?
Sure, why don't you take it and I'll add commentary.
Speaker Change: Yeah, I think the answer here is going to be frustrating that we're generally encouraged by that.
Speaker Change: success that the first next markets have had especially in the high end but we aren't
Speaker Change: reporting different segments of market share, where we say here's the market share of San Francisco, here's the market share of LA. Those were two of the first markets that
that transitioned, but it's fair to say that
We're really glad we shifted and it's worked out well.
Speaker Change: The only comment I'd add is just that the agents we've been hiring through that program appear to have even stronger metrics to close customers and that'll be fuel for shared growth going forward.
For more information, visit www.FEMA.gov
Speaker Change: Just as a quick follow-up then, is it safe for us to assume that the marketing ramp you guys are planning for 2025 is more reflective of your confidence in the next program more so than in the macro environment? Is that the right way to think about it then?
That's not exactly how I think about it.
Speaker Change: I think part of it is that we think we've got great agents who can handle the demand well, just as you said, but the other part of it is that
Speaker Change: We just lowered our spending on staffing. You know, we've been through some restructuring because we wanted to spend more of our money on media than people, more of our money on growth.
Speaker Change: And so we felt that we wanted to compete more aggressively. I don't think the macro is meaningfully better from 25 to 24. We do think that our ability to fulfill the demand will be meaningfully better because of NEXT. But the other factor, even if we didn't have NEXT,
is just that we wanted to compete harder for traffic.
So, thank you.
You go through a year like 2024.
Speaker Change: where you see how much competitors are advertising and you just decide we've got to restructure the business to make sure that we can go toe-to-toe with anybody.
Thank you.
Thank you.
Speaker Change: Our next question comes from Jason Helfstein with Oppenheimer and Co. Please proceed with your question. Thanks. So, just first, Glenn, just your thoughts on clear cooperation and if you have anything around strategy that you're...
Speaker Change: kind of, I guess, planning to, you know, leverage your platform and, you know, your...
Speaker Change: of Redfin. And then I have just two others. Chris, any color on the mortgage gross margin in the quarter and kind of why it was weaker sequentially? And then also I think there was...
Speaker Change: a step up in non-advertising or in the other OPEX. I don't know if that had to do with non-advertising or just any color on that. Thanks.
Sure, so I'll start with Clear Cooperation.
Speaker Change: The industry is obviously trying to figure out what to do about it, but what's notable to me is that the primary proponent of clear cooperation runs a website that a few years ago was 13th in the real estate category for traffic and has since fallen to
21st.
Speaker Change: I think the argument that withholding inventory and just publishing it on one website runs counter to...
the scale that
Speaker Change: you see large websites having. That trend is only moving in one direction.
a small number of websites that
Speaker Change: audiences are going to. And so it may be that, you know, we find new ways to be more accommodating to sellers so that they want to post their listings on our websites. I think the MLSs have already been fairly aggressive about that where
Speaker Change: You can put a listing up coming soon. You can withhold the photos. You can say you want it visible only to brokers.
I still think that, you know, this is just...
Speaker Change: not in consumers best interest and as the market softens where it gets harder to sell a house we already noted in our remarks that days on market is up 15%
Speaker Change: It just seems harder to make the argument that you want to debut a listing without getting maximum exposure.
Chris, do you want to comment on mortgage management?
Chris Nielsen: Sure, so mortgage gross margin was down sequentially up year over year and that's generally what I would expect into the fourth quarter. The year over year increase was from about 4.6 percent to 10.9 percent.
Chris Nielsen: Typically what we see is a decrease sequentially there just because with lower volume in the fourth quarter, the fixed costs even in the operations of that business weigh on gross margin and so that's what keeps things down.
Chris Nielsen: And then, specifically, I think you were asking about mortgage G&A expenses, and on a year-over-year basis, those were up. But mostly, that's a comparison to Q4 20.
Chris Nielsen: 23, where we had a reduction in stock-based comp in the fourth quarter of that year, and so things are more flat than they would appear. It's just that we had received a benefit last year as we had a reduction in stock-based comp in that period.
Okay, thank you. Thank you, Jay.
Speaker Change: As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad.
Speaker Change: Our next question comes from Egal Arunian with Citi. Please proceed with your question.
Egal Arunian: Good afternoon, guys. First, just on the Zillow partnership and traffic for rentals. On Redfin.com, since you've integrated rentals onto your site...
Egal Arunian: How much share of the traffic is towards rentals if there's a way to break that out and
Egal Arunian: How much of a benefit do you think you could see
there specifically as you make this.
Egal Arunian: transition and get more more rental inventory. And then on on the agent count
Egal Arunian: Do you expect any further attrition? Do you think that the attrition issue is just kind of finished at this point?
Egal Arunian: You know, great to see the strength in the hiring coming through so far. What are the plans for the remainder of the year in terms of hiring? Or do you think you're kind of closer to where you want to be at the moment? Thanks.
Egal Arunian: Sure, so we haven't released segmentation on rentals audience versus for sale audience but about one in five homebuyers is also looking at rentals and I think the larger issue for us is just that
when Google and other search engines evaluate real estate websites.
Egal Arunian: We think that it has been a significant issue in 2024 that other real estate websites had more rental listings.
Egal Arunian: We could see that very clearly when Realtor.com signed a Zillow partnership.
Egal Arunian: And so, you know, just looking at that hockey stick in 2024 made us feel like we've got to do something about our inventory. And it makes us fairly bullish about what will happen in 2025.
Egal Arunian: matching another competitor, you may not get the same gain, but we do feel like we've been competing with one hand tied behind our back. So we're excited about the traffic benefit.
Egal Arunian: We think it'll be immediate for rentals and over time we think we will also do better just generally in traffic. Coupling that with advertising it should be a good year for traffic.
Speaker Change: On attrition, it's always hard to predict, but there is a pronounced effect when you tell hundreds of agents that you're not getting a salary anymore. I think it was especially strong in our most...
Speaker Change: long-established markets just because you give agents a 3% raise every year so people who had been in say a market like Seattle had really high salaries relative to the rest of our workforce.
Speaker Change: And when we transition those markets, some of the agents are more likely to leave and with them their customers.
Speaker Change: We have not seen much attrition since. It's a good pay plan. We are able to recruit agents quite effectively.
Speaker Change: And the agents who have remained have been our highest performing agents, many of whom just say, I am so excited about this plan. So, sure, there's a one-time disruption in our sales force. It's such a big change. You have to expect that.
Speaker Change: But no, we do not expect much go-forward attrition. You know, absent some major competitor move, we think the economics are fairly stable in the traditional brokerage industry and that we've just got a good advantage here. And then your final question was about hiring.
We're going to keep hiring.
Speaker Change: Some of that is because we still feel like our for sale demand is under monetized and that
Speaker Change: If we had more agents and fewer customers per agent, we would increase close rate and having an all-variable plan gives us some latitude to do that. I think it also just gives us some latitude to, you know, continue to curate our agents.
Speaker Change: You know, the whole reason you have a website that decided to hire its own agents is because we think we can be the only brand, the only real estate destination, where when you come to the website, you know you're going to get somebody good. It's not...
Speaker Change: You know, some random dingbat, it's someone we have hired to be the absolute best for that particular neighborhood.
Speaker Change: So, continuing to hire just lets us be really aggressive about monitoring performance and making sure that every agent is delivering on the Redfin promise.
Speaker Change: Great, thanks. If I could squeeze in one follow-up on that. Yeah. You talked about the already seeing better demand even before you stepped up on the marketing spend in January. We also saw January I think was the lowest month on record of
of home sale, of pending home sales.
I think the NAR started keeping track of that.
Speaker Change: So, you know, you kind of put those two points together, the stronger, bigger sales force, the step up in marketing, and it does feel like this is going to be a year with much kind of bigger, more meaningful share gain. Is that the right way? You guys thinking about it that way?
Speaker Change: Thanks. Well, we've learned to be careful about counting chickens before they hatch, but that's definitely the plan. And just to provide more color, I think this will also give Jason some comfort since he asked about clear cooperation. Listing demand has been especially strong for us.
So that gives us more leverage in the industry.
Speaker Change: We're not just a peer website. We have our own listings. If other brokers want to withhold listings at some level, you can only fight fire with fire.
Speaker Change: but it also just speaks to I think there's some secular affinity for the brand quite apart from just macroeconomics.
Speaker Change: You know, people who are feeling the pinch want a lower listing fee. And so for whatever reason...
Speaker Change: Buy side demand is mostly tracked with website traffic, but sell side demand seems to track more just with whether consumers are more aggressive about wanting to get a better deal.
Thank you, everyone.
Thank you.
Speaker Change: Our next question comes from John Colantoni with Jeffries. Please proceed with your question.
Speaker Change: Thanks so much for the questions. I wanted to ask about the economics of Redfin NEXT. Can you talk a little bit more about what portion of these agents are closing Redfin-generated leads versus leads they generated themselves?
Speaker Change: how that ratio has impacted gross margins, if at all, and any adjustments you plan on making to the incentive structure to help bring real estate economics back to your targeted range. And I have a follow-up, thanks.
Sure, I'll start Chris, you can finish.
We've already made the only adjustment.
Speaker Change: that we anticipate for this year. We said we eliminated some entitlements like vacation pay, and that was just to offset...
Speaker Change: some other costs that were slightly higher than expected that resulted in You know one time adjusted EBITDA impacts in Q4
Speaker Change: But generally, agents earn a much higher split when it's self-sourced business. We basically operate like a traditional brokerage there, where we don't offer much competitive advantage to the agent, and therefore...
We don't generate much gross profit from those sales.
Speaker Change: The mix between self-sourced sales and Redfin sourced sales has mostly been as expected. The gross margin has, as a result, mostly been as expected, sort of accepting.
Speaker Change: some of the transition costs that we already discussed. So, we're happy with that. And the way that we think about it is, if this lets us recruit an agent who's better at closing Redfin sourced...
Speaker Change: business who can do that segment of the business at a higher margin. We're basically earning more gross profit from our online audience and then we would treat any other self-sourced sales that the agent brings as doing no harm. Our goal is
Let them do those deals.
Speaker Change: We should make a few shekels from it, but otherwise, what we're really after is maximizing the amount of gross profit we can generate from a given online audience on Redfin.com.
Chris, what would you add to that?
Chris Nielsen: I agree with everything you said and I would just add that
Chris Nielsen: We've also continued to look for expense reductions outside of agent pay. We have fewer managers this year than we did last year. We're expecting continued improvements in terms of the support staff efficiency. That will help drive gross margin improvements there also.
I can.
Chris Nielsen: enumerate a couple of others in a similar kind of vein. But we're really focused on making sure we have great economics for customers and agents, but then also saving where we can to drive profits for the business.
Chris Nielsen: And just to build on that, I know you have a follow-on, but...
Chris Nielsen: That's been maybe an unanticipated benefit. We don't anticipate doing anything in 2025, but when you recruit more entrepreneurial agents,
Chris Nielsen: And, you know, they see the level of support they get so that they can double or triple their volume. They appreciate that. Yet, still...
Chris Nielsen: the incentives are so well aligned that they have asked could we lower the per transaction support cost. I'm not sure I need a manager who's only managing ten other people. I'm not sure I need this deal coordinator at this level.
Chris Nielsen: And so over time, we just expect that we will get more leverage over our support costs, which is great.
Chris Nielsen: And it used to just feel that our agents weren't aligned with that and now they very much are and it just gives us confidence on a go-forward basis about long-term growth margin.
What's your follow-on though? I'm sorry.
Speaker Change: Yeah, I just had a quick one about, and sorry if I missed this, maybe you could unpack the transition costs a bit more and the main areas of upside and cost relative to your expectations.
Sure. Chris, do you want to go first?
Sure.
Chris Nielsen: I think the simplest description is the costs were higher than we expected. This is just mostly related to program mechanics as we rolled that program out across the whole country. We could see that just some of the base costs associated with agents month to month, quarter to quarter, were somewhat higher than we expected. And so that's what you see reflected in.
Chris Nielsen: in those measures in the fourth quarter. And as we could see that coming on, as Gwen mentioned earlier, we made additional adjustments in terms of the program to drive to the kinds of profits we wanted for 2021.
club.
Okay, thank you so much.
Speaker Change: Our next question comes from Tom White with D.A. Davidson. Please proceed with your question.
Tom White: Great, thanks. Just one for me. Glenn, maybe a follow-up to your comments about your market share trends in your earliest Redfin NEX markets. It seemed maybe you sort of implied that in kind of the higher-end markets, maybe your share gains were most pronounced. I was just curious if, you know, as you look kind of across the country and the more recently rolled-out markets, are there any...
you know, kind of structural factors.
Tom White: or sort of unique elements about those other markets. Maybe it's different home values, maybe just awareness of the Redfin brand. I don't know, that might cause them to have a different kind of share trajectory than the first four markets or whatever, thanks.
Tom White: Sure, well I already mentioned one which is markets where Redfin has been a long time tended to have agents with higher salaries.
Tom White: and at some level that had become economically irrational and so
having those agents turn over.
Tom White: was in part unavoidable. So there's going to be a one-time transition impact on market share in those markets.
The other factor is just about low home price markets.
Tom White: Redfin prior to NEXT was a good deal for agents selling $400,000 homes and it wasn't as good of a deal for agents selling $4 million homes.
Tom White: So, in a market like Chicago, there was more concern about Redfin Next than there was in a market like San Francisco.
And yet, I just have to tell you that...
Tom White: agents were so upset about it six months ago and they're so happy about it now. You know, no general statement is universally true. There were people who were fine six months ago. There are people who are probably still grumpy now.
Tom White: But, man, what a difference just getting a few commission checks has made, even in markets that have lower home prices.
Tom White: I know that life is unpredictable, you can't count your chickens, as we said, until they hatch.
It felt pretty good, man. It felt pretty good.
Thank you.
Tom White: We've reached the end of our question and answer session. Now I'd like to turn the floor back over to Glenn Kelman for closing comments.
Glenn Kelman: We're going all out, baby. Thanks for coming to the call. We appreciate how many of you show up. And now we're gonna get back to selling houses.
Have a great February and March.
Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.