Redfin Corporation

Good day, ladies and gentlemen, and welcome to Redfin Corporation Quarter 3 2024 Earnings Conference Call. All lines have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation. If you should require assistance throughout the conference, please press star zero on your telephone keypad to reach a live operator. At this time, it is my pleasure to turn the floor over to your host, Meg Nunnally, Head of Investor Relations. Ma'am, the floor is yours.

Thank you. Good afternoon, and welcome to Redfin's Financial Results Conference Call. The third quarter ended September 30th, 2024. I'm Meg Nunnally, Redfin's Head of Investor Relations. Joining me on the call today is Glenn Kellman, 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 and 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 relief 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 reconciliations. 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 howdy, everyone. Redfin's third quarter revenues grew 3% year-over-year to $278 million, in the middle of the range that we discussed on our last call. Our adjusted EBITDA profits of $4 million were at the bottom of our guidance range, in part due to $4 million of one-time expenses that we didn't anticipate in our guidance. From the second quarter of 2024 to the third, the share of home sales brokered by our own agents and through referrals to our partner agents fell by one basis point. Year over year, third quarter share fell by two basis points. In our previous call, we said we'd be roughly break even for the full year. And now our fourth quarter guidance has set the boundaries of that range. 2024 adjusted EBITDA loss between 15 million and $22 million. This full-year loss is larger than we expected. August and September mortgage and brokerage sales were $7 million lower than we forecast. When rates fell in August, we didn't count on a better housing market, but we also didn't expect it to get worse. We didn't forecast about $2 million in one-time costs for the rapid transition to RedfinNext, our plan to replace agent salaries with higher bonuses, or $1 million of one-time costs from the integration of rent. Any year when we believe our competitors' aggregate ad spending hit historic highs while U.S. home sales hit historic lows, we're glad to be coming out of 2024 with likely undiminished market share, a better sales force, and a cost structure that gives us room to go on the attack. But still, I owe our shareholders an apology. We moved heaven and earth to make money in 2024, but we fell short of our goal. We'll keep driving toward profits. Our 2024 profits will be an improvement of about $125 million over 2022, when U.S. existing home sales were 20% higher than forecast for 2024. Over the past year, almost every dollar of revenue growth has fallen to the bottom line, and now we're preparing to grow. Rising brokerage close rates and what we believe are industry-leading mortgage and title attach rates should let us monetize an online audience better than any other real estate site. Already, sales execution is driving what we expect to be significant October share gains, with momentum carrying through to November. Pairing our sales machine with more advertising should let us grow faster in 2025. Redfin.com's third quarter visitors fell 4% year over year. As the housing market shows signs of life, we plan to increase ad spending significantly from 2024 to 2025. We'll also invest in extending our technology's core competitive advantages at guiding online visitors to listings they'll love, at scheduling home tours for customers ahead of other buyers, at identifying serious home seekers in need of service. Already this month, we started to bid more for online visitors because of our increasing effectiveness at selling homes, mortgages, and title service. Until October, we didn't account for mortgage and title profits when deciding how much to pay to meet a home buyer. Our confidence that we can deliver better service to online home buyers is based in part on the rapid expansion of Redfin Next, our plan to pay agents larger bonuses in lieu of salaries, which first launched in January to four markets responsible for 17% of our 2023 brokerage revenues. This percentage grew to 30% in May and to 74% in August. until we completed the rollout last month. Our confidence in Next isn't based on theory, but on results. Comparing 2023 to 2024 on the four initial Next markets, the customers we met from January to June 2024 were 21% more likely to buy a home from us than 90 days of that first meeting. Other markets in those months also improved close rates, but only by 7%. In that same time period, close rates for luxury homebuyers increased 79% in the four pilot next markets compared to 28% in other markets. Higher close rates have been one source of share gains in next markets, but another is our agent census. From the announcement of Redfin Next in October 2023 to June 2024, the four original pilot markets increased their agent census 22%. And it isn't hard to see why. Bigger bonuses let us compete for talent with fewer financial constraints because we no longer pay agent salaries. Entering 2025, our brokerage's focus is on adding hundreds of high-quality agents. Our third quarter agent census, which averaged 1,757 agents, grew 1% year over year. In October already, that year over year growth accelerated to 8%. The flexibility that Next gives us to hire more agents at different commission splits based on their sales experience is letting us form agent teams around our top producers. These teams give our best agents the capacity to cultivate sales from their network of hundreds or even thousands of past Redfin clients. Already in the past four months, we've hired agents into more than 50 teams and begun recruiting teammates for another 40 top producers. As we add hundreds of more entrepreneurial agents for the 2025 home buying season, we don't plan on adding any significant manager or support staff, which should lift gross margins. And as agents host more of their own tours and improve close rates, we can also allocate a lower percentage of revenue to the thousands of contractors who take customers on tour when a lead agent is busy. We expect gross margins to start increasing year over year in the fourth quarter, though some of that will be because gross margins are also becoming less seasonal. Next, agents' earnings are more volatile, limiting Redfin's margins in the summer selling season and improving margins in the winter. Since spring 2024, investors have asked us if we expect lower fees and lower margins due to the settlement of a class action lawsuit against the National Association of Realtors. When the reforms imposed by the settlement took effect in July and August, the multiple listing services that agents use to share listings stopped showing the commission offered to a buyer's agent for each listing. Most homeowners are still willing to pay the buyer's agent, but many aren't setting that agent's fee in advance, instead planning to negotiate it alongside other offer terms. This by itself has been a major change. But to our surprise, the fee that is negotiated often seems nearly identical to what buyer's agents were earning before the settlement. Fees may fall when a new and potentially more competitive home buying season begins. Many of the buyers and sellers closing a sale this fall had hired an agent in the summer before the settlement had taken effect. Redfin has already sought to offer our home buying customers lower fees than other brokers. If more consumers seek better value from their broker in 2025, Redfin may expect larger share gains. And if homebuyers become more sensitive to brokerage fees, bundling mortgage and title services will become even more important. Of the brokerage customers who financed their third quarter home purchase, 27% used Redfin's lender, down from 28% in the second quarter, but up from 22% in the third quarter of last year. Again, more than 60% of eligible customers used our title services. which has become a significant source of profit. In January 2025, we're trying new policies to increase mortgage attach rates further. Before concluding with the discussion of the housing market, let's turn to our rentals business, which is now competing aggressively for traffic. From April to October of this year, listings on our rentals websites, rent.com and apartmentguide.com, increased from 262,000 to about 440,000. After the rentals and for sale traffic teams combined at the outset of the year, in August, rental traffic was flat after 17 months of decline. We saved $10 million in 2024 expenses on personnel and technology services, which is now funding more consumer advertising. From 2023 to 2024, we expect that our rentals media spending will have increased by $3 million with an even larger increase planned for 2025. Our net bookings rose from $2.7 million in the second quarter to $6.0 million in the third. On the strength of improving traffic and better sales execution, we expect most of our 2025 growth to come from market share gains. But if the market keeps improving, we can grow faster. Home buying demand significantly strengthened since September 18th, when the Federal Reserve cut rates by 50 basis points. Mortgage rates had already fallen in anticipation of the Fed's cut, but home buying demand had nonetheless been dreadful, leading to a new September low in the annualized rate of existing home sales, 3.8 million. What has been even more bizarre is that since September 18th, and even through last weekend, home buyers have been mostly undeterred by an October increase in mortgage rates. The increasing likelihood of larger tariffs and government deficits has made debt investors anxious. In my 19 months, excuse me, my 19 years of running Redfin, I've never seen homebuyers react so slowly to a rate drop that lowered monthly payments by hundreds of dollars, then so unflinching as those savings disappeared. More and more, we live in our own reality, and that reality is increasingly political. In September and even in October, a common source of anxiety among homebuyers has been the election, not just higher rates. With the election now over, many people who put off plans to buy or sell a home over the last two years may have run out of reasons to wait. Home sales may increase in 2025, but the housing market and the world are so volatile that no one can say for sure. Given that uncertainty, Redfin's glad to have made our core brokerage business more flexible and to have lowered our overall employee census so we can quickly invest in advertising when we see more growth opportunities. With that, I'll turn the call over to Chris.