Redfin Corporation

Good day, ladies and gentlemen, and welcome to the Redfin Corporation second quarter 2023 earnings conference call. Our host for today's call is Meg Nunley, head of investor relations. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. I would now like to turn the call over to your host. Meg, you may begin.

Good afternoon, and welcome to Redfin's Financial Results Conference Call for the second quarter, ended June 30th, 2023. I'm Meg Nunnally, Redfin's Head of Investor Relations. Joining me on the call today is Glenn Kellman, our CEO, and Chris Wilson, 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 regarding our non-GAAP measures, including the most directly comparable GAAP financial measure and a 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 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.

Thanks, Meg, and hi, everyone. In the second quarter of 2023, Redfin generated $276 million in revenue and an adjusted EBITDA loss of $7 million, both within the ranges we had forecast in our last earnings call. Our net loss of $27 million was better than our forecasted loss between $35 and $44 million due to a $20 million gain from purchasing our 2025 notes at a discount. But even as our share of online demand has increased sharply, we're unlikely to get enough second half sales to earn the full year adjusted EBITDA profit that we had forecast coming into 2023. We now expect 2023's adjusted EBITDA loss to be about $45 million. This is an improvement of more than $140 million over 2022's adjusted EBITDA loss with similar gains planned for future years. From July 2023 to June 2024, we plan to generate a full year adjusted EBITDA profit. We still expect between 4.2 and 4.3 million existing homes to sell in 2023. The RedSense market share has been lower than expected. After year-over-year share gains in every quarter since our 2017 public offering, we lost two basis points of share in the fourth quarter of 2022, and one point in the first quarter of 2023. In the second quarter of 2023, our year-over-year share loss widened to eight basis points, mainly due to one-time setbacks. Agent layoffs forced us to reassign about a third of our active customers, and the closure of Redfin now eliminated about 12% of our listing demand. We expect market share to improve from quarter to quarter by the fourth quarter and perhaps as early as the third quarter. Throughout the year, demand largely met or exceeded our expectations, but closed sales haven't. From 2017 to 2022, between 6.3% and 7.2% of the people who contacted Redfin or our partner agents had closed a sale with us by this point in the year. In 2023, that number is 5.5%. We expect closed rates to return to historical norms for two reasons. As customers adjust to higher mortgage rates, our sales will become more predictable. And our plan to recruit and retain a more sales-driven agent, which we'll discuss later in this call, will help us compete better against brokers who have been hungrier than ever before. Our real estate gross margins have improved from 29% in the second quarter of 2022 to 31% in the second quarter of 2023. Once we stop hosting tours for so many people who canceled their home-buying plans, gross margins will go up more. Eliminating the home buyer commission refund is one source of margin gain, but we've also lowered the ratios of managers and support staff to agents and switched from employees to contractors for listing photography, improving our long-term unit economics. One factor that will keep lifting margins but at the expense of share is the shift of partners. We estimate that in 2024, as many as 55% of our customer inquiries will be served by a partner agent, up from 45% so far this year and 37% in 2022. A sale, whether from a partner or an employee, has the same contribution to share, but our employees yield 40-plus percent more sales from the same home buying traffic. Since the sales we're shifting to partners are only marginally profitable for employees to handle, we can't worry about how many more closings an employee could have gotten. The share we're focused on is our share of significantly profitable sales. And regardless of how much demand we shift to partners or how much we limit spending, our growth can continue because its primary source has never been low-cost capital. but building a better listing search site and then using that to offer online visitors better service. Even with a drastic reduction in advertising, Redfin.com has been drawing visitors away from rival sites. According to Comscore, which we use to compare our traffic growth to others, second quarter visitors to Redfin.com increase year over year by 9%. compared to a 5% decline for the largest for sale search site and a 13% decline for the second largest. The gap in year-over-year visitor growth between Redfin and these competitors averaged 12 points in the first quarter and 17 in the second. We know that this online traffic growth gives our sales force more bona fide opportunities to gain share because we track the demand from our site all the way through to a sale, whether the customer closed with Redfin or switched to another broker. Comparing the first half of 2023 to the first half of 2022, a higher proportion of the people who bought a home had contacted a Redfin agent 12 months prior to their purchase. Our investment in artificial intelligence is one reason we're confident RedSense traffic can keep growing. The software we've already built for estimating a home's value or recommending a listing is based on artificial intelligence. Artificial intelligence is why our engineers don't have to update that software to recognize the growing importance of air conditioning in Seattle or the increasing likelihood that post-pandemic home buyers are looking further afield. The software updates itself. We're now extending this software from for-sale listings to rental listings in October 2022 for estimating the amount of home we'll rent for, and in the third quarter of 2023 for recommending apartments that we think our visitors will like. We've also been at the forefront of conversational real estate search via OpenAI, Google, and Microsoft technologies. But since our company spends so much on labor to interact with customers, prepare offers, and underwrite closings, the larger opportunity may be in helping home buyers who have contacted us for service. We have explored uses of this technology to make the Redfin employees who book home tours more efficient or to host conversations with customers years away from a purchase, letting our agents spend more time with the people about to complete a sale. We believe the efficiency gains that a technology-powered brokerage can get through the engineers we already have, accessing low-cost, generative artificial intelligence via the Internet, will, over time, give us a competitive advantage commensurate with the first disruption in real estate, when Redfin first published those things on an online map. Even as we expect increasing yields from our technology investments, sales performance should also improve. We expect that our low listing fees coupled with our unrivaled ability to get online real estate shoppers out for in-person home tours can drive share gains for years to come in most U.S. markets. But in higher-priced coastal markets, starting with a pilot in San Francisco and L.A., we're entering 2024 with a different approach to hiring agents. In the San Francisco Bay Area, our share is below 2%, but the share of people who bought a home and who had earlier contacted our agents for service is nearly 30%. It's even higher for purchases above $1 million. Anyone launching a brokerage today with that much demand would have a massive advantage in recruiting or retaining the best agents. Entering 2024, we plan to give San Francisco and L.A. agents the lion's share of the commission on self-sourced sales while keeping for ourselves the high margins on red-pen sourced sales. Our goal is to hire and keep agents who can deliver better service with higher close rates for Red Fence Source customers buying homes above a million dollars and incremental profits from their own sales too. If this model works in California, we'll extend it to other coastal cities with higher home prices, driving share gains in our largest, most profitable markets. Coupling these changes with a normalizing housing market, whether that happens in 2024 or beyond, could have a transformative impact on revenues, gross margins, and net income. Beyond the improvements in our core brokerage business, we're making progress at broadening our online marketplace with for-sale and for-rent listings and at broadening the products we sell to the people using that marketplace with mortgage and title service. It's hard to be expansive through a downturn, but the result will be a more valuable company able to compete at the scale needed to win. The rental listings we've added to Redfin.com are one reason overall traffic growth has accelerated. From June 2022 to June 2023, the number of Redfin.com sessions that included a visit to a rental property nearly doubled, all with virtually no ads promoting Redfin's rental search. Aided in part by this new source of consumer demand, and even more so by an expanded product offering strong value proposition and rejuvenated sales force, Rent's second quarter revenues increased 19% year-over-year. More growth is ahead. Rent's second quarter net bookings, which are the annualized revenues rent added through sales to new customers, less the annualized revenues lost from departing customers, increased more than tenfold from 2022 to 2023, and also grew from the first quarter to the second. Since the price increase boosted first quarter bookings, topping that number in the second quarter has been especially impressive. From quarter to quarter, rents adjusted EBITDA losses narrowed from $9.7 million to $8.7 million, keeping it on track to break EBIT in the fourth quarter. But our investment in a larger vision isn't just limited to our online presence. We also want to offer our customers more service so that Redfin can earn more income from a visitor than any other real estate company. This will take time to pay off just because Bay Equity, the lender we acquired in April 2022, is the Redfin business most affected by rising rates. The percentage of Redfin homebuyers who used Bay Equity to finance their purchase increased from 8% in the second quarter of 2022 to 20% in the first quarter of 2023. But that attach rate dipped to 19% in the second quarter of 2023. We've now entered a second, slower stage in the integration between Bay Equity and Redfin, requiring us to address problems market by market to get attach rates to the 28% to 32% levels of places like Atlanta, Salt Lake City, or Maryland. Redfin and Bay Equity execs are visiting low attach rate markets, and Bay Equity is hiring loan officers in capacity-gated areas. It'll take time to increase attach rates from here, but we believe we'll keep making progress. Bay Equity sales through brokers other than Redfin are projected to increase from the first half to the second, but Bay Equity is now likely to report a small adjusted EBITDA loss for the year. We feel good about its long-term future. Bay Equity's leaders are disciplined and entrepreneurial, and its service is excellent, so this business will earn significant profits in all but the most severe rate environments. Our title business is one reason we're confident that, as pricing pressure eases on lenders, we can keep lifting attach rates for ancillary services. From the second quarter of 2022 to the second quarter of 2023, title revenues grew 54% with an attach rate exceeding 60% in markets launched prior to 2023. Beyond title service, the second major component of our other segment is digital revenue, which in the second quarter grew more than 150% year over year, validating our plan to make more money from our online audience. About half of this money came from the ads we run on Redfin.com. Much of the rest came from a mortgage marketplace for connecting homebuyers to lenders other than Bay Equity, which doesn't have the National Sales Center to handle online demand. By the end of the year, we expect a significant increase in the revenue we get from builders who want to promote their listings on Redfin.com. Rather than hiring our own sales force to sign up builders, we formed a Zillow partnership to add tens of thousands of new construction listings to our online marketplace. Redfin will get only a portion of the revenues generated from the addition of these listings to our site, but that revenue will be almost pure profit. Over several years, Redfin will continue to prioritize digital revenue projects. We expect our digital revenue to grow faster than any of our other businesses, improving overall margins and reducing earnings volatility. Before turning the call over to Chris, let's discuss the housing market. We should be careful in the months ahead about claiming victory from any year-over-year gains, as we'll now be comparing the second half of 2023 to a period in 2022 when the market was in full flight. Sales volume is near rock bottom. Home prices are stable or even rising due to low inventory, which is likely to remain low. July's year-over-year drop in active listings was the largest in nearly 18 months. There is enough inflation risk that the Federal Reserve will have to maintain the possibility of another hike through the fall, keeping mortgage rates near 7%. But the almost miraculously good news is this. Most economists once viewed a recession as unavoidable and now see it as unlikely. When rates come down, the housing market will be poised to grow again. For now, the only way Redfin plans to grow is by returning to our long history of methodical, glorious share gains. Take it away, Chris.