Compass, Inc.

Please stand by. We're about to begin. Good day, ladies and gentlemen. Welcome to the Compass fourth quarter and full year 2021 earnings conference call. My name is Beau, and I'll be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. Rich Simonelli, Vice President of Investor Relations, you may begin your conference.

Thank you operator and good afternoon and thank you for joining Compass's fourth quarter and full year 2021 earnings conference call. Today's review of our actual financials will address the continuing operations of Compass and certain items are presented on a non-GAAP basis. The reconciliations between GAAP and non-GAAP measures for both our fourth quarter and full year financials as well as our near-term guidance and long-term targets are included at the back of the earnings release and on the presentation we posted just recently on our website this evening. Please also see our disclosure on forward-looking statements, which reflects Compass's current view of future financial performance, which may be materially different from our actual performance for reasons that we cite in our Form 10-Q and other SEC filings, including uncertainties posed by the COVID-19 pandemic and the difficulty in predicting its future course and the impact on the housing market and the global economy. Joining us today on the call will be Robert Refkin, who's Compass's founder, chairman, and chief executive officer, and Kristen Enkebrandt, who's our chief financial officer. Robert will provide a brief overview of Compass results and a discussion of our strategy, and then Kristen will cover the financial results and outlook in more detail. I'd like to now turn the call over to Robert Refkin.

Robert? Thank you, and welcome to everyone joining our earnings call today. I hope everyone is safe and well. Today, we are sharing our financial results for the fourth quarter, the full year of 2021, and our outlook for 2022 and beyond. I couldn't be more excited or more thankful to be building this business with our outstanding team of Compass employees and 26,000 world-class agents. We are executing on our plan to drive strong revenue growth by being the best company in the world at empowering real estate agents to grow their business. Moreover, the management team and I are committed to executing our plan to deliver strong EBITDA and free cash flow. We recognize that free cash flow is the ultimate arbiter of financial success and value creation. I want to be explicit about our financial priorities. We are committed to increasing profitability and prioritizing free cash flow in 2022 and beyond. We expect to be free cash flow positive in 2023, and we are committed to reaching by 2025 the medium-term 10% adjusted EBITDA margin goal that we set at the IPO. This would imply more than $1.2 billion in adjusted EBITDA by 2025. We also expect that free cash flow will be 8% to 9% of revenue by 2025. We will do this as we continue to develop the most differentiated productivity enhancing technology for our agents and to significantly grow market share. We have added a presentation in our investor relations site that walks through our margin path in more detail and provides new insights on the KPIs and model drivers. We did this to provide more transparency on margin drivers and other questions we receive about our business model. We will reference this in our remarks today. As we have discussed before, we also see a path to long-term EBITDA margins that are more than double the 10% level. We walked through our medium-term margin drivers on page 19 of the investor presentation I just referenced. Chris and Anchor Brandt, our CFO, will discuss our financial results and expectations later in the call. But I want to share what we expect to deliver in 2022 first. We respect that all constituents will make their own assumptions about near-term market growth rates. But let me share with you what we are seeing from our unique vantage point, given the markets we serve and agents we have. While inventories are tight, demand has remained extremely strong into 2022, as evidenced by prices continuing to increase in 2022 above and beyond a year where home prices increased 19%. We foresee strong market growth for the rest of this year. For perspective, even if prices are flat for the rest of the year, given that 19% home prices was the improvement we saw in 2021 and the continued momentum that we're continuing to see in 2022, there is a strong level of embedded growth for the rest of 2022. And actually, the supply-demand dynamics we see in the market every day suggest that prices will continue to increase even further in 2022. As we see the benefits of being prudent, the 2022 revenue expectations we provided today do assume some market growth moderation, but they also reflect the modeled impact of Compass market share gains due to three factors. One, the annualized impact of the 2021 agent recruits that have already joined Compass. Two, strong visibility on new 2022 agent recruits. And three, a low single-digit increase in agent team productivity. In other words, we expect to continue to gain market share and significantly outperform the market regardless of how fast the market grows. We have a multi-year track record of rapidly gaining share by adding agents and increasing their productivity. Our market share was 1.1% three years ago, 4% in 2020, and 5.6% in 2021. That reflects an increase of 40% year-over-year and a 50% three-year CAGR. Despite our strong gains, our 5.6% market share remains relatively small, and we model that it will grow meaningfully from here. In markets in which we have operated for more than five years, our market share averages over 20%, which shows what we can achieve. In summary, What we see in the market every day makes us optimistic about revenue growth, but we have haircut certain assumptions to arrive at the 2022 revenue expectation we presented today. We are also committed to managing our business to achieve our 2022 and long-term EBITDA goals. Our splits are improving, and by summer, our agents will be able to service the entire real estate transaction on the Compass platform, which drives agent productivity. As we turn our product development attention toward lowering the cost of server agents and integrating adjacent services that drive margin, we expect to get more leverage against our tech spending. We also have discretion to manage certain expenses going forward, and we'll do so. I want to get specific on our five agent-related KPIs that we focus on every day, which are also driving operating efficiency improvements and are key to driving toward our margin goals these kpis are one agent recruiting two agent retention three technology adoption four lowering our cost to serve and five growing our adjacent service businesses so first agent recruiting we continue to be successful with recruiting agents we grew the total number of agents from 7 400 in q4 2018 by a multiple of three and a half times to 26,300 in Q4 2021. We expect to add a similar number of agents in 2022 as we did in 2021. Higher productivity, not splits, is why new agents join Compass, and our splits are improving. In the fourth quarter of 2021, 62% of agents who came to Compass told us that they did so for a less favorable split than at their previous brokerage firm. In the fourth quarter of 2021, we recruited agents who reported historical annual revenue consistent with our prior record recruiting quarter in Q4 2019, but with 31% fewer incentives and 50 base points better commission economics to compass. The payback period on our average incentive contract is now less than 12 months. We also are winding down the use of equity to recruit agents. In January, for example, less than 9% of the agents we recruited received equity. 60% of commission revenue comes from principal agents that make more than $1 million a year at Compass, compared to the national average of 14%, which is a key reason why our average splits are higher than some in the industry. We have demonstrated that our model can succeed at all market levels and will continue to shift our agent mix away from agents that command the highest splits. Given that the difference in splits between the highest producing cohorts and the lower producing ones can be as high as 900 base points, we expect significant margin benefit to result as our agent mix normalizes to more closely resemble the industry's. We provide more information on this on page 13 of the investor presentation. We improved commissions as a percentage of revenue by 130 base points in 2021 versus 2020. And we model approximately 250 base points of margin improvement by 2025, resulting from a combination of our agent cohorts maturing and agent mix normalizing. We provide more information on this on pages 14 and 19 of the investor presentation. Second, agent retention. Our strong technology platform, the strength of the Compass brand, and the attraction of Compass referrals are clear drivers of our ability to successfully recruit agents and are key to the industry-leading agent retention that we have. Our principal agent retention rates are consistently above 90%, in an industry that averages 68% retention. And our retention rates have strengthened since the IPO. These retention rates stay strong over time, including well after our agents come off their initial contracts. In our three oldest markets, New York City, Washington, D.C., and Boston, the percentage of agents off their initial contracts are 77%, 83%, and 75% respectively. And the agent retention is 95%, 95%, and 93%, respectively. I want to rearticulate that in the case of, let's say, the 95% agent retention, the 5% that is reduced to get to 95% is including the burden of people that retire, people that are asked to leave, or people that move industries altogether, reflecting a very high integrity number. See page nine of our presentation for more detail. On to number three, technology adoption. A key area of focus for me in 2022 is agent technology adoption. Our technology is a key driver of agent productivity and is going to be the key driver of improvement in operating efficiency and margin in the future. By this summer, Compass agents won't have to leave the Compass platform or pay for third-party real estate software to complete a transaction. This stands in stark contrast to the industry which still combos together a large number of third-party solutions and where tech adoption is low. In a 2021 study covering 75% of our agent teams, we found that the top quartile of agents who use our technology platform the most grew their business two and a half times more than those who use it the least. When you consider that most of an agent's day is in the field, it is impressive that the top 25% of our agent teams use our platform two hours and 14 minutes per day, and multi-agent teams are using it four hours and three minutes per day. This drives revenue, operational efficiency, and margin, which is why we want to drive further adoption of our platform. In 2022, we launched Compass Corps focused on coaching agents on how to grow their business with the Compass technology platform. In Q1, we've seen nearly 7,000 agents engage in the program, and the feedback has been nothing short of outstanding. A primary example of how we connect our coaching investments with business outcomes for agents is the likely-to-sell AI tool, which is particularly important in this low inventory environment. The likely to sell tool uses advanced AI to evaluate attributes of the home, the market, and the owner to recommend the most likely to sell prospects from the agent's CRM. In 2021, 151 million gross commission revenue was from listings that the likely to sell tool recommended to our agents before the listing was created. We expect this number to exceed 400 million in 2022. Fourth, lowering our cost to serve our agents. Now that we are close to being able to support the whole transaction on our platform, the next stop on the technology and operational efficiency roadmap is to use our own technology platform to lower the cost to serve our agents, which will drive even more leverage from our tech spending. No one else in the industry is even trying to do this at scale. We look forward to the next few quarters this year when we can share with you metrics proving that using the technology ourselves to serve agents is lowering our cost to serve and increasing our adjacent services attached. And finally, number five, adjacent services. The winner in the space will be the company that can best monetize the real estate transaction. The clear path to achieve this result is to integrate adjacent services into the transaction flow. At $140 billion annually, the market opportunity in adjacent services is larger than the $100 billion in commissions generated in the whole industry each year. Agents play a key role in helping their clients with navigating the adjacent services landscape. For example, the majority of the mortgages in the U.S. result from an agent referral. To be clear, all of our adjacent revenue is still nascent. at only 1% of 2021 revenue because we just began. Our Q4 end annualized revenue run rate was $85 million, which has already helped our margins. But more importantly, our initial uptake rates are very promising. We have already seen strong attach rates for our title and escrow services. Attach rates for KVS title business quickly grew from 19% in acquisition in Q1 2021 to 39% in q4 2021 you can see page 16 of the investor presentation for more detail we now offer title and escrow in nine states and washington dc up from just two at the start of 2021 we plan to grow our teeny business in our existing markets and plan to expand into additional markets in 2022 also in 2021 we launched our mortgage business with a joint venture in mortgage with guaranteed rates. I am happy to say that we underwrote our first mortgage in December in the Chicago market. We expect to offer mortgages in the majority of our markets by the end of 2022. In summary, we are committed to driving growth in revenue, EBITDA, and cash flow by giving our agents the technology platform and tools they need to be more productive and to drive more profitable revenue for Compass. We have a significant technology advantage. It is also not lost on us that recent developments in the public and private capital markets, particularly with growth companies and real estate companies, should lead to less innovation capital for potential competitors and therefore widening our competitive moat. I will now hand the call over to Kristen.