Redfin Corporation

Good day and welcome to the Redfin Corporation's first quarter 2022 earnings call. Today's call is being recorded. At this time, I would like to turn the call over to Meg Nunnally, Head of Investor Relations. Please go ahead.

Good afternoon and welcome to Redfin's financial results conference call. The first quarter ended March 31st, 2022. I'm Meg Nunnally, Redfin's Head of Investor Relations. Joining me in the call today is Glenn Kelman, our CEO, and Chris Nielsen, our CFO. 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. Please read and consider the risk factors in our SEC filings together with the content of today's call. Any 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. We use a non-GAAP measure, adjusted EBITDA, when presenting our financial results. We encourage you to review the non-GAAP reconciliation in today's earnings release, which is available on our website at investors.redfin.com for a complete understanding of this measure and its purpose. All comparisons made in the course of this call are against the same period in the prior year unless otherwise stated. Lastly, we will be providing a copy of our prepared remarks on our website by the conclusion of today's call And a full transcript and audio replay will also be available soon after the call. With that, I'll turn the call over to Glenn.

Thank you, Meg. And howdy, everyone. Redfin performed significantly better in the first quarter than expected. Overall revenue of $597 million was $37 million above the top of the range projected in our last earnings call. Our core business of brokering home sales through our employees and our partner agents generated $177 million in revenue. up 5% from the red-hot first quarter of 2021, and $6 million above the top of our range. Our net loss of $91 million was $24 million better than our most optimistic projection. Redfin typically has its largest loss of the year in the first quarter, as we pay for agents to meet customers who buy homes in the second and third quarters. We expect our net loss to improve significantly throughout the year. Gross profit was $73 million, up 71%, year over year. After warning investors that we might not grow real estate services revenue in the first quarter of 2022, we gained two basis points of share compared to the first quarter of last year. Share gains improved from January to February to March, with shares reaching a new record of 1.25% in March. Share gains are likely to keep accelerating through 2022. With demand so volatile and now shifting even more rapidly from large coastal cities to the rest of America, We expect those gains to be less predictable from quarter to quarter, but to grow at historical rates from year to year. One reason to believe our share of home sales transactions will keep increasing is that our share of online listing searches has kept increasing. Year-over-year gains in average monthly visitors accelerated from 1% in the fourth quarter of 2021 to 11% in the first quarter of 2022. Redfin again grew traffic faster than its two main online rivals, Zillow.com and Realtor.com. Near simultaneous breakthroughs this spring should broaden our reach even more. First, Redfin.com launched rental search. Second, we hooked up our site to a national listing feed that by year end will let us show substantially every for sale home in America, when today our coverage is limited to 91% of homes. an already massive competitive advantage largely unchecked by competing brokers has widened. Our engineers aren't just driving demand from Redfin.com to our agents, but also arming those agents with better products to sell, the automation to support a 1% listing fee, the machine learning to give homeowners an immediate Redfin Now offer, and on-demand tours for buyers to see homes first. But none of that matters without second to none sales execution. Our plan to improve our service is well known to investors. We hired more agents through the winter and limited the number of customers from our site whom each agent could support. The markets that piloted this approach in 2020 and 2021 delivered better service and gained share faster than their peers. We funded the service improvement by reducing homebuyers' commission refund, keeping margins the same without hurting demand. Now, as the agents hired for a company-wide rollout of this initiative sell their first homes, we expect to get that benefit across Redfin in 2022. Share gains will come not only from better sales programs, but better salespeople. Market uncertainty has made agents at other brokers eager to join Redfin. And after two years of scrambling to add more than a thousand agents each year, Redfin now has the time and space to invest more in the agents already here. Managers are training agents in person for the first time in two years, then making better and faster judgments about who will be able to guide our customers to victory in such an uncertain low inventory market. We expect to execute better in our core business, but it's equally important to discuss how all our businesses are coming together to drive sales. When we last spoke, Redfin was more pessimistic about the housing market than any of our peers. predicting continued rate increases, economic pressures, and hard times. But we are more optimistic than ever about our strategy, which is to drive customer demand by building Redfin.com into a complete destination for real estate information, and to make more money from each customer by becoming a one-stop shop for buying or selling a home. For the first time, we're ready to talk about that strategy's results, not just its rationale. We need to do this because rising rates have put an even higher premium on profits when Redfin is in the midst of a transition to what we believe is a much more valuable company. At the start of the pandemic, about half our agents worked in large coastal markets where home sales are now declining. In January, we abandoned a business we built from scratch, Redfin Mortgage, in favor of acquiring Bay Equity Home Loans. Revenues from our first acquisition, Rent Path, were declining. In February, we projected our biggest quarterly loss ever. On March 23rd, we published RentPath Rentals on Redfin.com, immediately generating thousands of inquiries per week for RentPath property management customers. Even prior to this launch, RentPath revenues had increased month over month in February, then increased again in March. The number of listing service customers also increased month over month in March. RentPath hasn't had simultaneous month-over-month increases in revenue and customers since 2019. Even as RentPath decreased first quarter spending on lead generation by 25% year-over-year, rental inquiries for property management customers increased by 6%. We now expect RentPath revenues to increase quarter-to-quarter. We'll keep investing in RentPath's efforts to get more property management customers listing their properties in our network, but only as RentPath revenues keep strengthening. RentPath will be an important contributor in its own right to the profits we can generate from online home shoppers. But the strategic goal is bigger, to challenge the largest real estate sites for traffic. Of the top 10 U.S. sites, only sites owned by Redfin and Zillow have our own large-scale databases of rental listings. And with the arrival of a third competitor in CoStar, there's now a broad industry consensus that standalone rental sites or standalone home buying sites will struggle to compete. RentPath is how Redfin takes our shot, not just in incremental growth, but to become the number one or number two destination for every search on every listing for renter for sale in the U.S. The value of more online customers will compound as we make more money from each one. We've talked for years about the one-stop shop theory, but here again we have the first results. Redfin has owned Bay Equity for a month. And already, on five different days, the rate at which Bay Equity has locked the interest rate on loans for Redfin customers has eclipsed Redfin Mortgage's five-year high. Based on this data, we expect 11% of the Redfin homebuyers who close in June will borrow money from a Redfin lender. For all of 2021, that number was 6%. This success can build on itself as Redfin agents who were cranky about Redfin Mortgage have raved about Bay Equity's service. The differences in underwriting efficiency have been equally stark. Whereas Redfin Mortgage lost a couple thousand dollars in gross profit per loan in 2021, Bay Equity earned thousands. Even as lending margins compress in 2022, we expect Bay Equity's gross profits from a home buyer to be similar to our brokerages. As rapidly rising rates eviscerate other lenders' earnings, our mortgage business will go from a major source of Redfin's 2021 losses to a major source of 2022 profit. These investments in a broader product portfolio are generating more gross profit, not just from home buyers, but from home sellers too. Even as the housing market turned, Redfin now generated almost as much gross profit in the first quarter as our brokerage. From the first quarter of 2021 to the first quarter of 2022, gross margins improved from 1.7% to 5.5%. This validates our thesis that iBuying will be most successful within a brokerage. First, because we're already equipped to sell the homes we buy. But second, because we can promote our agents to customers who ask about a cash offer but end up hiring an agent. Over the last year, the rate at which we schedule listing consultations with homeowners who reject our cash offers has improved 17%. Turning iBuyer inquiries into consultations with the Redfin agent is crucial because our goal isn't to own more homes than pure play iBuyers. We want to sell more homes, owning properties only as necessary to facilitate a sale. By making money from the service we offer customers, not from big bets on home price appreciation, we hope to earn investors' trust that Redfin now can become a steady source of net income. Heading into a more volatile phase of the housing market, we have curtailed volume even though market-wide inventory is likely to stay low, an approach that favors durability of gross profits over riskier gains on sale. This discipline is part of a larger change at Redfin that is the final element of our strategy. We want to drive demand by building a larger online presence and improve monetization through a broader product portfolio, but none of that matters without an ironclad commitment to major net income improvements. not in the distant future, but now. This means that we'll run Redfin out of the cash register, with gross profits growing about twice as fast as overhead expenses, so that more than half our gross profit gains for 2023 fall to the bottom line. Since those gains are unpredictable, we're making changes in the current quarter so that even if growth is low, net income can still improve. Future headquarters investments will follow, not lead, gross profit gains. Redfin will keep investing in advertising and our online audience, but given the progress we've made over more than a decade of building brokerage tools, we can support new products for our agents to sell, mostly with the staff we already have. We're now assigning the cost of employees and programs to businesses like real estate services, mortgage, title, rentals, and properties, so we can measure not only each business's gross profits, but net income. We plan to share that segmentation with you in our next call. We expect this to show that real estate services subsidize all of our other businesses in 2021, but that mortgage and properties businesses will be profitable or roughly break even in 2022. A company that once planned to make money in the distant future will generate cash from operations this year and net income in 2024. Redfin's strategy and competitive position have gotten better over the past year, but the housing market has gotten worse. We were fashionable and now we're unfashionable. As we reminded you on the day of our initial public offering, we're used to that in a way that probably none of our competitors are. Our exec team came together in the depths of the great financial crisis and built our business on the certainty that another downturn could come. When talking about a business's ups and downs, it's common to say the endeavor is a marathon, not a sprint. But most marathoners are trying to complete the race, not compete in it. In your first marathon, you dread the point at which the suffering will become intense. But as you mature as a runner, you realize that everyone suffers. And the point of maximum suffering is when those best prepared for it will win. What you once thought of as suffering time becomes winning time. But only if you seize the moment to leave one version of yourself behind and run toward what you want to be. Redfin has arrived at this moment in our race. At a time when shareholders have suffered grievous losses, it may seem crazy to say that now is Red Fence winning time, but it is. What we're running to is a bigger website, more revenue per customer, and significant profits. We're running not because of how good it'll feel when we stop, but because we were born to run, and we plan to win.