Redfin Corporation

Greetings, and welcome to the Redfin Corporation Q1 2023 Earnings Conference Call. At this time, our participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during a 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 McNuttley, Head of Investor Relations. Thank you. You may begin.

Thanks, Latoya. Good afternoon and welcome to Redfin's financial results conference call for the first quarter ended March 31st, 2023. I'm Meg Nunnally, Redfin's head of investor relations. Joining me on the call today is Glenn Kelman, our CEO, and Chris Gilson, 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. On this call, we will present non-GAAP measures when discussing our financial results. We encourage you to review today's earnings release, which is available on our website at investors.redfin.com, for more information related to our non-GAAP measures. including the most directly comparable GAAP financial measure and related reconciliation. All comparisons made in the course of this call are against the same period in the prior year unless otherwise stated. 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. In the first quarter of 2023, Redfin generated $326 million in revenue, exceeding the $307 million to $324 million guidance we gave on our last call, largely on the strength of better than expected mortgage and rentals revenues. Our losses were also better than expected with net income buoyed by a $42 million gain from buying $152 million of our own debt at a discount. Setting aside that purchase, profits still exceeded our guidance. Due to stronger mortgage gross profits and lower marketing spending, first quarter adjusted EBITDA was negative $67 million, when our guidance for that loss had been $73 to $84 million. Coming out of the first quarter with profits ahead of our plan, we still expect our full year adjusted EBITDA to be break-even or better in 2023, an improvement of roughly $190 million over 2022. We just have a lot of hay to make when the sun shines. Redfin almost always spends more on the spring, on ads telling customers about Redfin, and on agents to serve those customers. Many of those customers take until the summer to close. With home buyers nervous about the economy and so many starving agents trying to poach our clients, we can't count on these closings until they come through. We'll stay vigilant about the bottom line from week to week. The seasonality of our core business is only one reason we expect profits to improve over the remainder of 2023. Bay equity earnings should continue to strengthen as we complete our adjustment to sharp rate increases. We also expect rent profits to improve as we recognize revenues from the last nine months have increased bookings and due to declining marketing expenses through 2023. Redfin as a whole will in future quarters get the full benefit of cost reductions that have continued through April. We expect second quarter adjusted EBITDA to be between a $9 million loss and a $1 million profit, and third quarter adjusted EBITDA to be much higher than that. Between the end of the third quarter of 2022 and the first quarter of 2023, our competitive position has significantly improved. We retired $295 million in debt and reduced RedfinNow inventory by $291 million. Demand for the agents on our site has strengthened as we've drawn online visitors away from our rivals and, more recently, increased the rate at which those visitors ask an agent for service. We expect real estate services gross margins to improve year over year for the first time since the second quarter of 2021, and overall monetization to improve even more as we generate additional profit from Redfin.com traffic through rent and from brokerage customers through Bay Equity. We've lowered our cost to break even at our current market share, but significant long-term profits depend on returning to market share gains. Accounting for the sales closed by our own agents and from the customers we introduced to our partner agents, our share of U.S. home sales declined by one basis point in the first quarter of 2023. By comparison, we lost two basis points of share in the fourth quarter of 2022. Before then, Redfin had reported year-over-year share gains every quarter since our 2017 public offering. We expect to return to share gains in the second half of 2023 as we recover from layoffs and the closure of Redfin Now. Of the five Redfin Now homes we still own, all are under contract to sell by June. Another reason for optimism about share is traffic to Redfin.com. which is taking visitors from online rivals and now converting more of those visitors into customers who meet our agents. ComScore, which lets us compare Redfin's online visitors to those visiting other sites, reported a 4% first quarter increase for Redfin, compared to a 17% decline for Realtor.com and a 4% decline for Zillow. As a further point of comparison, Google searches on homes for sale declined 20% in the first quarter. This tells us that though there are fewer people looking online, a higher proportion are using Redfin. Over the last half of 2022, we had an advantage against Realtor, not Zillow, but for the time being at least, we seem to be competing well against both. These traffic gains should produce more sales. The fraction of our online visits that lead to an agent inquiry had been declining since last spring, but that trend reversed in March 2023. after we increased the pace of online optimizations to drive demand. We also redesigned our website and mobile applications to promote Redfin Premier Service to luxury homebuyers. This redesign launched on February 15th, and since then, the growth rate in luxury inquiries to buy a home has been significantly higher than growth in overall demand. This gives us confidence that we can increase demand more broadly through similar design improvements. highlighting the top producing agents, on-demand service, and low fees of our standard service. Our website and mobile applications are the most immediate source of new customers, but the long-term arbiter of success is the quality of our service, which depends in turn on retaining and recruiting the best agents. To that end, we're focusing more of our resources on the salespeople who directly serve our customers. On April 11th, we laid off approximately 200 employees, mostly in the brokerages support organization. From June 30th, 2022 to April 30th, 2023, the ratio of brokerage managers to lead agents declined by 28%, the ratio of support staff to lead agents declined by 15%, and the ratio of trainers to lead agents declined by 55%. By eliminating our photography department in favor of vendors, We also project that we'll reduce our cost to photograph a listing by 17%. In aggregate for 2023, these structural changes should reduce our cost to close a transaction by 10%, excluding the money spent on our lead agents and on the contractor network of associate agents for hosting tours and open houses. Coupling these cost reductions with increases in revenue per transaction will improve real estate services profitability this year and long term. Because it can take months to close on a home, especially if it's still being built, it won't be until the summer that we get the full benefit of our December 1, 2022 decision to eliminate the commission refund we once offered homebuyers. Another way to increase revenue for brokerage transactions is by more narrowly focusing our agents on the transactions that drive the most profits, leaving the rest for partners. This is part of a larger strategic shift toward revenues with a digital margin, where Redfin doesn't bear many personnel costs. Redfin.com routed 40% of customers' first quarter requests for service to our partner agents compared to 39% in the first quarter of 2022. Since we usually shift demand to partners in a boom, a small shift toward partners now should get much bigger as the market recovers. This shift will improve Redfin's corporate income and, we hope, our agents' personal income. Already among the US's top 20 largest brokers, Redfin rose from number four in agent retention in the fourth quarter of 2022 to number two in the first quarter of 2023. What makes this comparison especially impressive is that at times about 20% of the Redfin agents who leave are asked to do so for performance reasons, which is unheard of at many traditional brokers. And even though we've mostly stopped hiring agents until the housing market recovers, we've launched a new program to hire at least 50 experienced agents over the course of 2023, each with 20 or more sales in the last two years or 50 lifetime sales. Learning how to compete for the most sought-after salespeople in our industry can, in future years, let us hire hundreds of agents who can quickly drive profits. As of May 1st, we've hired 39 agents at this level of seniority. The increasing quality of our sales force is one reason that, for the fourth quarter in a row, we've had year-over-year gains in customer attention. Of the Redfin customers who started with Redfin in the fourth quarter of 22 and went on to buy a home, we project that about one in three stuck with Redfin for the purchase, when a year before that number had been closer to one in four. The sales impact of this service improvement has been offset by market-driven factors like longer sales cycles, and more customers who have had to give up their home search due to high rates. But for customer, excuse me, but customer retention is the best measure we have of improving sales execution in a deteriorating market. These gains should improve gross margins as the market stabilizes. Our first quarter sales execution improved on one other crucial front. The rate at which our brokerage home buyers used Bay equity for a mortgage increased from 17% in the fourth quarter of 2022 to 20% in the first quarter of 2023. Attach rates have now increased in three out of the last four quarters. What's even more encouraging is Bay Equity's improving margins. From the fourth quarter of 2022 to the first quarter of 2023, gross margins improved from negative 9% to 20%, and net income improved from negative $12 million to negative $1 million, when all of these measures had declined from quarter to quarter throughout the 2022 downturn. Part of the reason for improving profits is BayEquity's expense reductions, carried out every quarter since the acquisition closed on April 4th. More recently, competition has started to ease, especially from mid-market banks, which can no longer afford to offer jumbo loans at a loss in order to acquire high net worth customers. We expect BayEquity to earn full year net income in 2023 and to become a major source of profits in future years. Our title business has had similar improvements. with year-over-year revenue growth of 51% in the first quarter and rising margins. Our larger ambition is to increase the gross profit we earn from each online visit to our websites and mobile applications. This depends not only on improving monetization from Redfin's brokerage customers, but also on building new digital businesses. In the past year, we've launched ads on Redfin.com and built a mortgage marketplace for Redfin.com visitors to meet direct-to-consumer lenders. These new digital businesses doubled year over year, albeit off a still small base. The centerpiece of our strategy to improve online monetization is rent, which in the fourth quarter of 2022 had its first quarter of year-over-year revenue growth since 2012. That year-over-year growth accelerated from 5% in the fourth quarter of 2022 to 13% in the first quarter of 2023. anticipate second quarter revenues to grow at a rate between 18% and 20%. Revenue gains can be slow to reflect the value of new longer-term contracts. So the best measure of our sales momentum is net bookings, which are the annualized revenues rent added through sales to new customers, less the annualized revenues lost from departing customers. From the fourth quarter of 2022 to the first quarter of 2023, net bookings increased 18%. In the years spanning the first quarter of 2022 to the first quarter of 2023, net bookings grew by a factor of 10. We expect sales to keep growing on the strength of products for property managers to market their communities on Google, Facebook, and TikTok, but also because a new partnership with Realtor.com has broadened the reach of our own marketplace. Our rental listings went live February 28th on Realtor.com, According to Comscore data, our March rentals traffic was 39% higher than it would have been without Realtor.com. Realtor.com's rentals audience was already well-established from its long CoStar partnership, which ended in 2022. The rent partnership with Realtor.com should increase sales, as our property management customers have expressed early excitement about accessing a broader audience. Surfacing listings from rent onto Redfin.com has already increased the average number of online visits we can deliver to a customer's listing. Even without Realtor.com's contribution, rent and Redfin together grew rental traffic 29% from the fourth quarter of 2022 to the first quarter of 2023 per Comscore data. This was faster growth than any major listings marketplace. As rent revenues accelerate through 2023, we expect the losses from the rental segment to narrow in each of the next three quarters, leading to positive adjusted EBITDA for the rental segment in the fourth quarter of 2023. Before we turn the call over to Chris, let's discuss the housing market. When we last spoke, we said that sales volume would decline significantly from 5.0 million existing home sales in 2022. to 4.3 million in 2023, but that prices would hardly decline at all. Our overall outlook is unchanged. In March, sales volume fell 22% year-over-year to an annualized rate of 4.4 million existing home sales, and the median home price dropped only 3%. Inventory increased by about 5% compared to the calamitously low levels of March 2022, but is at roughly two-thirds the levels from this time of year in 2016, 2017, 2018, and 2019. Homeowners have been careful about giving up a 30-year mortgage below 3%. Some couldn't afford to buy the home they live in now, let alone a larger home. Others don't want to sell when so few homes are available to buy. One of Redfin's LA customers delisted her home after getting a full-priced offer because she couldn't find another home to buy. Low inventory begets low inventory. The unsurprising result is that sales are slow and bidding wars are still common in many parts of the country, especially the southeast. Demand from both buyers and sellers modestly improved in April, but most of this is seasonal. Our experience from past housing downturns is that the public usually sours on housing altogether. But this time around, it seems that folks still want to move. Demand for affordable turnkey homes is the one constant in the U.S. housing market. If rates ease by late in the year without causing a recession, we may see a break in the stalemate between buyers and sellers. One of our Boise agents, Shauna Pendleton, said that if rates end one week down, buyers come out of the woodwork. But if rates tick up the next week, buyers just disappear. Right now, there's no seasonality, Shauna said. All activity is based on rates. Redfin isn't planning for a second spring in the fall, especially since bank failures, the debt ceiling, and consumer confidence are this economy's lions, tigers, and bears. But it's common now for our managers to talk to their teams about being ready for a rebound whenever it may come. Whereas in the winter, we were mostly gnawing on bones and worrying about our survival. It's good to be alive. It will be even better to go back on the attack, leaner, hungrier, and in many ways, better than ever. Take it away, Chris.