Redfin Corporation

Greetings, and welcome to Redfin Corporation Quarter 4 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Meg Nunnally, Head of Investor Relations. Thank you. You may begin.

Thank you. Good afternoon and welcome to Redfin's financial results conference call for the fourth quarter and fiscal year ended December 31st, 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 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 contents 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 relating to 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'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. RedSense fourth quarter revenue of $244 million was within our guidance range and up 12% over last year. It was our fourth straight quarter of growth with real estate services growing faster than at any point since the fourth quarter of 2021. Our adjusted EBITDA loss of $3 million was below our guidance range due to higher than expected pay for our real estate agents. But still, every business improved fourth quarter adjusted EBITDA from 2023 to 2024. Our full year adjusted EBITDA loss was $27 million, an improvement of $53 million over 2023 and $165 million over 2022. Our fourth quarter profits were lower due to RedfinNext, which pays our agents entirely on commissions. One-time transaction, excuse me, one-time transition costs were higher than expected, but our sales force has also grown faster than expected. Our lead agent census has increased from an average of 1,757 in the third quarter to more than 2,200 today, a 25% increase. At the most critical points in our sales cycle, meeting new customers and then winning offers, new hires have already been outperforming tenured Redfin agents. When new hires' first customers start closing, we expect sales to grow in the spring. But a transition of this magnitude also has a one-time effect on sales. As our last set of markets shifted to next just before Halloween, agents who preferred a salary left, and with them some of the sales that were about to close. The good news is that a few months after a market shifts to next, attrition usually declines below pre-next levels. But during this transition, our fourth quarter real estate services market share was 0.72%, flat year over year. We'll gladly forego a quarter of share gains in exchange for the revenue growth that we expect from a larger and better sales force. The rapid expansion of our sales force is just one of the ways that Redfin plans to go on the attack in 2025. On February 6th, we signed a rentals partnership with Zillow that will double the number of high-quality apartment listings on our sites so we can compete better for traffic. The $100 million payment Redfin got via the partnership strengthens our balance sheet and partly funds a 38% increase in 2025 advertising. Due to the increased profits from this rentals partnership and a January layoff of senior Redfin personnel, we can invest more in growth and still earn a significant adjusted EBITDA profit in 2025. Our first quarter profits are expected to be down about $8 million year-over-year at the midpoint of our guidance, but we'd be significantly improving profits if not for an incremental $17 million investment in advertising. January demand is already up 5% and should increase more in future months as the mass media campaign didn't start until January 13th and won't stop until June. As we grow revenues, we also expect real estate gross margins to approach 30% in 2025. From the fourth quarter of 2023 to the fourth quarter of 2024, real estate services gross margins declined by 60 basis points, but only because we underestimated the cost of our next pay plan by about $4 million in the fourth quarter and by a slightly smaller amount in the third quarter. We recognized these costs in 2024 and offset them starting this month by eliminating vacation pay and other entitlements that agents care less about than their bonus. Already, we expect first quarter real estate services gross margins to be significantly higher than in 2024 because of the February reduction in entitlements. We expect second quarter margins to increase again as the agents hired in winter start closing sales. Beyond the year-over-year gains in real estate services margin and market share that we expect from rising demand and a larger sales force, we also plan to improve monetization. increasing profits in every other business segment. To earn more money from our brokerage customers, we'll keep selling mortgage and title services. Mortgage attach rates sagged in the fourth quarter to 26%, but surged to 29% in January after we announced that high attach rate agents would get more customers from our website. Title attach rates are also increasing to 63% in the fourth quarter, up from 60% a year ago. Our title business, now reported separately from our other segment, generated $8 million in 2024 adjusted EBITDA, an improvement of $9 million over 2023. These ancillary sales should fuel more demand. In the fourth quarter of 2024, we were, for the first time, able to profitably invest in broader homebuyer campaigns on Google and Facebook based on mortgage and title revenues, not just home sales. On top of increasing our rentals audience by publishing more listings, we also plan to monetize that audience better. Even without a traffic increase driven by more listings, and even setting aside Zillow's $100 million upfront payment, we believe that the money the Zillow Redfin Partnership pays us for each rental lead will increase our profits. Between February 21 and June 30, we plan to lay off roughly 450 rent employees, many in sales and sales support. We're grateful for their heroic efforts. We can profitably invest in rent.com and apartmentguide.com technology and sites, large, lucrative audience of apartment seekers whom we can now more easily connect to property managers. Over the past year, we were forced to prioritize the apartment seeker's search experience over monetization, with our site showing about 20,000 apartment listings that our audience couldn't easily ask about, and it generated no revenue. But the Zillow partnership gives us so many listings from paying property management customers that we no longer need to show unpaid listings. And earning a set amount for every inquiry about every apartment on our sites makes it easier to scale our audience through direct marketing campaigns and search site improvements. The final element of our monetization strategy is the broadest, continued profitable growth from digital advertising to both for sale and rentals audiences. Beyond display ads hosted on our sites, digital advertising includes revenue from promoting new construction listings on redfin.com and from letting lenders connect with the mortgage seekers we can't serve ourselves. This digital advertising segment, once combined with our title business in the other segment, is now known as monetization. Monetization earned $15 million in 2024 adjusted EBITDA, up 46% from 2023 with further growth expected to come from direct sales to advertisers who previously accessed our audience through ad networks. Few investors seem likely to argue with our plans to monetize our audience better and to get more traffic and more agents. But our prepared remarks are briefer than usual because we understand that what really matters now is our execution of these plans so we can deliver share gains and profits. We'll discuss the housing market, then Chris will lay out our first quarter guidance. One reason Redfin is focused on gaining market share is that home sales are unlikely to significantly recover in 2025. Demand increased after the November election, but interest rates seem likely to remain relatively high, making it hard for the homebuyers turning out now to afford a home. Pressure on year-over-year growth in home sales should ease after the first quarter, just because 2024 started with an annualized rate of 4.3 million existing home sales last February compared to an year of 3.9 million in September. As these year-over-year comparisons get easier, we expect growth in U.S. home sales to strengthen across the summer, especially if inventory continues to increase and sellers become less aggressive on pricing. The balance between buyers and sellers has been volatile and mixed. For example, our Cincinnati agents report bidding wars across a wide range of prices, whereas the Jacksonville market has shifted, quote, 100% to a buyer's market, unquote. For U.S. home sales over the four weeks ending last Sunday, the number of days a listing took to sell increased 15% year over year. Even if a sharp rebound is unlikely in 2025, The worst of the downturn is probably behind us. We expect the recovery to be similar to the one that ended the great financial crisis. Slow in coming, initially gradual, but because homeownership is so important to American culture, hopefully very long. Take it away, Chris.