Redfin Corporation

Greetings and welcome to the Redfin Corporation first quarter 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. And as a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host, Meg Nunnally, head of investor relations. Thank you, Meg. You may begin.

Good afternoon and welcome to Redfin's financial results conference call for the first quarter ended March 31st, 2024. 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. 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 strictly comparable GAAP financial measure and related reconciliation. All comparisons made in the course of this call are against continuing operations for 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. Redfin's first quarter earnings exceeded the guidance we gave investors on our last call. An adjusted EBITDA loss of $28 million compared to guidance of $29 million to $36 million. On revenues of $225 million compared to guidance of $214 to $223 million. Each of our four business segments was at or above the top of our revenue guidance compared to the first quarter of 2023, gross profits grew 22%. The share of home sales brokered by our own agents and through referrals to our partner agents increased from 0.72% in the fourth quarter of 2023 to 0.77% in the first quarter of 2024. We expect a year-over-year share gain in the second quarter of 2024. These results put Redfin in a good position to earn a full year adjusted EBITDA profit despite the recent increase in mortgage rates. Since 2015, our largest quarterly loss has always been in the first quarter when we invest in serving customers who close in the summer. Compared to a first quarter adjusted EBITDA loss of $67 million in 2023, we're nearly 40 million bucks ahead of where we were a year ago. Beyond turning an adjusted EBITDA profit this year, our goal isn't just to reduce costs or to break even, but to offer shareholders the largest growth opportunity in real estate. We'll do that by pairing a thriving online marketplace with a disruptive broker and best-in-class lender. After a year of unprecedented investment from a new rival, we're competing effectively for traffic and adding customers to our rentals marketplace, which is now a source of profit. Our brokerage restructuring has generated immediate share gains. Our lending attach rate hit an all-time high. Best of all, our mission to redefine real estate in consumers' favor has prepared us for the lives on industry change. According to Comscore, first-quarter visitors to Redfin.com grew 2% year-over-year, the same rate as Realtor.com and slightly faster than Zillow.com. Keeping pace with other major real estate sites is remarkable given that Redfin ran television ads in the first quarter of 2023, but not in the first quarter of 2024. As Redfin has added listings over the years by expanding our brokerage and supporting rentals, we expect more online visitors from search engines. Projects to publish more commentary from our agents about listings and neighborhoods should also increase traffic. But to engage that audience, we're increasingly turning to artificial intelligence. Artificial intelligence has long been effective at bringing visitors back to redfin.com, listing recommendations for home buyers and home value updates for homeowners. In the fourth quarter of 2023, we first began using generative artificial intelligence to imagine how the rooms in a home for sale could be redecorated. This capability is available in five markets. More recently, on March 7th, we piloted Ask Redfin, an online chat tool for our iPhone application. Ask Redfin uses large language models for instant answers to visitors' questions about a listing. Since more online visitors have as a result scheduled meetings with our agents, our iPhone application began offering chat nationwide on April 24. We plan to offer Ask Redfin on our website and our Android application later this year. As acquisitive as Redfin has been about our online audience, we're moving even faster to improve sales execution. In our last call, we outlined three sales initiatives. Redfin Next, which replaces agent salaries with higher bonuses. All You Can Meet, which assigns a home buyer to an agent only if the agent can host the first tour. And Sign and Save, which refunds commissions for customers who sign an exclusive buyer's agency agreement. Of these initiatives, the most transformational is RedfinNext. In the first quarter, the four California markets piloting RedfinNext grew market share, luxury sales, and loyalty sales significantly faster than the rest of Redfin. The aggregate gross margins across the four markets were better in the first quarter of 2024 than in the first quarter of 2023. We've been concerned that agents who lost their salaries would quit, hurting our culture and our market share. but attrition so far in Next Markets has been only slightly higher than our national rate. We expanded Redfin Next to seven additional markets on May 5, with a much larger third wave of markets planned for the summer. We're also broadening other sales initiatives. All You Can Meet, which expanded nationwide except to a handful of small markets on April 1, has lifted the percentage of home buyers who meet their Redfin agent on our first tour above 90% in April. The historical range for this metric, which accounts only for customers new to Redfin, has mostly been between 60% and 65%. The balance of customers meet contractors whom Redfin pays to provide short notice property access. Redfin still uses these contractors frequently for subsequent tours, but we need our best salespeople to treat the first tour like a listing consultation in which we tell customers about our credentials, then ask for a sale. That's where the third initiative comes in, sign and save. Homebuyers who sign a buyer's agency agreement before their second Redfin home tour have gotten a commission refund between 0.25% and 0.5% of the home's value. This commission refund has been easily offset by more sales. Comparing close rate gains in pilot markets and control markets indicates that customers in sign and save markets are about 20% more likely to close with Redfin on a sale. Such an increase, if it does in fact pull through across the whole year, would be Redfin's first full year buyer close rate gain in a decade. We began piloting sign and save in September, 2023. Since March 7, it has been available in all but the handful of markets where commission refunds are still somehow illegal. The discipline of presenting a buyer's agency agreement to our customers will serve us well later this year when rule changes proposed by the National Association of Realtors are scheduled to take effect. The first major rule change requires agents to document our fees before every first tour, though as of last week, it became unclear if the fee at issue is just for the tour or for the entire purchase of a home. In June, Redfin will start adding these disclosures to our online forms for requesting a first tour, likely testing one version that says the tour is free with another explaining the fee for the ultimate purchase of that home. We'll leave it to our agents to present a full buyer's agency agreement after that tour. We'll have the whole summer to learn how best to explain our fees without confusing prospective customers. The second, much larger change will prevent a listing from promising a fee to the buyer's agent by the multiple listing services, or MLSs, used by agents to share listings, though brokers may still share fees via other channels. If the home buyer has to include the fee for a buyer's agent in an offer, that could over time reduce how much that agent earns, because a lower buyer's agent fee will make an offer more competitive. Beyond the rule changes themselves, the press coverage of these changes seems likely to raise consumer awareness of brokerage fees. That, in turn, could benefit Redfin. For nearly our entire history, our low fees have been poorly understood by homebuyers who believe their own agent is free. If, later this year or next, buyer's agents are going to compete on price, we hope the world will beat a path to Redfin's door. We believe we can serve those customers profitably. Redfin's original service prepared offers, negotiated inspections, and handled closings using software and agents based in a sales center at less than half the CN dollars that we charge today. Later, we built a network of contractors for on-demand property access. These competitive assets are still in place and let Redfin thrive at a price other brokers may struggle to match. If the fees do start to fall, many listing agents may seek to represent the buyer of that listing as well as the seller, lowering the total fee for selling a home while still protecting that agent's income. This is where Redfin's online audience, the largest by far of any broker, gives us a competitive advantage in recruiting both listing customers and listing agents because we can connect potential buyers of the listing directly to the listing agent. Since October 2023, We've also been preparing software to let agents at other brokerages get the same routing for their own listings on Redfin.com, a for-fee service we expect to launch this summer. Redfin's preparation for the possibility of lower fees goes beyond our efforts to make our brokerage more efficient. Our fundamental belief is that a brokerage as a standalone entity will be replaced over time by businesses that combine online search with agents, lenders, and title services. The cost of meeting a home buyer and earning her trust is too high to be paid for by the fees from a single sale. Lenders and title companies waste too much money courting the agents who build that initial relationship with the buyer. This is why Redfin bought Bay Equity in 2022 and why we've worked so hard to increase the rate at which our home buying customers use Bay Equity for a mortgage. Those efforts are now paying off. Of the Redfin home buyers who got a mortgage in the first quarter, 28% used Redfin for the loan, up from 25% in the fourth quarter and 22% in the third. In March, this number hit 30%, which is a major reason why Bay earned adjusted EBITDA in the first quarter of 2024. Some of the attach rate gains are the result of integrating Redfin and Bay Equity customer communication systems. But the gains mostly due to our having bought the right lender, with fantastic customer service and a never-say-die management team that is, two years into the acquisition, entirely intact and completely all-in. As competitive pressures ease even slightly and our gains on sale increase, Bay Equity can become a major source of rent and profits, especially when rates fall far enough to create refinancing opportunities for the millions of homebuyers in our database. For many of the same reasons, we also feel enthusiastic about our title business, which is included in our other segment. The other segment also comprises digital businesses like a mortgage marketplace, display ads on Redfin.com, lead generation for builders, and the syndication of walk score data to other real estate sites. Since the downturn began, Redfin is focused on generating high-margin revenues from digital channels. As a result of this focus, adjusted EBITDA from the other segment improved. From about $400,000 in the first quarter of 2023 to $3.3 million in the first quarter of 2024. Almost all of our executive hiring has been to bring in digital monetization talent. Within real estate services, an industry veteran to run our partner business. In our other segment, a leader of our display ads business. In our rental segment, a new sales-driven president of Rent, the marketplace we acquired out of bankruptcy in 2021. As these bets pay off, Redfin shareholders should reap the full value of an online real estate audience of approximately 50 million monthly visitors. The most important of these digital bets is on rentals, which earned its third straight quarter of adjusted EBITDA of about $500,000 on 16% year-over-year revenue growth. In the first quarter of 2023, this segment's first quarter adjusted EBITDA was a $9.7 million loss. First quarter net bookings were $5.2 million compared to $11.3 million a year ago. But the quality of revenue has been higher in 2024. More of our sales were high margin marketplace sales. We also sell digital marketing solutions in which we use software and staff to run our customers' Google, Facebook, and TikTok campaigns. But marketplace growth is more lucrative and more important to our competitive position. Even better, more of our marketplace sales were year-long rather than month-to-month contracts, which should lead to steadier growth. Despite higher industry marketing expenses in the second quarter, we expect full-year profits from rent, driven not only by revenue gains but also cost savings. Integrating rent with Redfin has let us operate both businesses more efficiently with one group, not two, running an apartment like HR, finance, legal, or technology infrastructure. Already, expenses in the first quarter of 2024 were $51 million compared to $57 million in the first quarter of 2023. These efficiency gains should continue through the first quarter of 2025, giving us more money for growth or profits. The benefit from integrating the two companies isn't just cost savings. We can also draw on one another's expertise in attracting and engaging online visitors to our sites. Rent's largest sites, which include rent.com and apartmentguide.com, ranked higher in Google searches in March than in February, their first combined month-over-month gain in years. Rank slid back in April, but we expect more gains than losses in the months ahead, just because search engine optimization and visitor engagement are such long-standing areas of Redfin expertise. As our rentals marketplace adds more listing customers and draws more online visitors, rent can drive much bigger long-term revenue gains. change in the shape of Redfin's overall business to be more profitable and less cyclical. Before turning the call over to Chris, let's discuss the housing market, which suffered another setback when mortgage rates rose from 6.85% on March 8 to 7.50% on April 16. Since then, growth and new listings have slowed, a factor which, perhaps more than any other, may limit sales this summer. Over the last two weeks, our agents have reported less foot traffic in open houses and fewer offers, even for desirable listings. The number of Redfin.com visitors asking to tour homes has, from the start of 2024, been below 2023 levels. But this comparison hasn't been entirely fair. Low rates in the first four months of last year encouraged many people to tour homes who didn't close. Our hope has been that sales have held up better than demand so far in 2024 because some of the same buyers who deferred moving in 2023 will be more determined in 2024. Redfin has also been better prepared for a rate increase this year. After a rate increase broke our hearts in 2023, Redfin limited hiring and spending through the first quarter of 2024 to see how many sales actually closed later this year. The song I've been singing to Chris since January is won't get fooled again. More of our agents are exclusively paid on sales. And since more of our sales are coming from returning customers, we're less dependent on first time home buyers. Our initiatives to meet our customers face to face have made it easier to guide them through this volatile market. We're earning more money from digital channels and we're spending less. Our bet isn't that the market will get better. The reason Redfin will win this year is because we've gotten better. We still have a long way to go, but the direction we're going is, we think, mostly up. Take it away, Chris.