Compass, Inc.

Ladies and gentlemen, thank you for standing by. And welcome to the Compass, Inc. first quarter 2022 earnings call. 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. If you would like to withdraw your question, again, press star one. Thank you. Rich Simonelli, Vice President of Investor Relations, you may begin your conference.

Thank you, operator, and good afternoon, everybody. Thank you for joining the Compass first quarter 2022 earnings 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 first quarter financials, as well as our near-term guidance and long-term targets, are included at the back of our Q1 earnings release, as well as the presentation posted on our website. 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 reasons that we cite in our Form 10-K and other SEC filings. Joining us today will be Robert Refkin, Founder, Chairman of Compass, and Chief Executive Officer, and Kristin Ankerbrandt, our CFO. Robert will provide a brief overview of Compass's results and a discussion of our strategy. And then Kristen will cover the financial results and outlook in more detail. Now I'll turn the call over to Robert.

Thank you, Rich, and thank you to everyone joining our earnings call today. I hope everyone is safe and well. Today we are sharing our financial results for the first quarter of 2022 and our outlook for the rest of 2022. Before we get into the numbers and our view of the market, I want to take this opportunity to say I am so thankful for continuing the journey, growing this amazing business with our outstanding team of Compass employees and over 27,000 world-class agents. Through their hard work, we are now the number one brokerage in the United States based on sales volume in 2021. We achieved the number one ranking in less than 10 years, displacing long-time incumbent brokerages, some that have been in the business for more than a century. What makes us even more exciting is that we became the number one brokerage with considerably fewer agents than our competition and covering significantly less geography, about half the population of the United States. We have entered these difficult times as the number one agency in the United States, and we plan on coming out of this turbulent time even stronger. Our momentum for 2021 continues into the first quarter as we achieve strong Q1 financial results. We beat the upper end of our first quarter revenue diamonds by generating $1.4 billion in revenue. We also beat our expectations for adjusted EBITDA, coming in at a loss of $97 million. Kristen Akerbrand, our CFO, will go through the numbers in more detail in a few minutes. In turbulent times like these, our cash position is an increasingly top priority. I am pleased to report our balance sheet is strong, and we ended March 2022 with $476 million in cash, and we have access to a $350 million credit facility. We have virtually no debt. As we said on our last financial results call, our revenue increases with seasonality in Q2 and Q3, resulting in expected positive EBITDA, which fortifies our cash position. We have a number of levers we can pull to manage our cash outlays, including the rate of expansion, the pace of M&A, in recruiting investments. This means we can regulate and control cash as necessary. While the real estate market outlook is uncertain, we have modeled out various negative industry scenarios. And in all cases, we believe we will have significant liquidity while still gaining market share. We are managing the business to ensure we will not require additional capital. To further emphasize the points, We are managing the business to ensure we will not require additional capital. We have been actively engaged in setting our strategic roadmap and will slow the rate of investment based on our priorities. We will do more with less. We will continue to drive cost efficiencies as we adjust our cost structure. We believe this will strengthen the company even more. I see this time as a tremendous opportunity. Our past investments have given us a significant technology lead over the rest of the industry, and these economic conditions give us an even wider moat. Most importantly, we have significant leverage to reduce spending and still continue to strengthen Compass and our cash position as we drive to positive free cash flow. We have proven throughout our history that we can be nimble, pivot, and adapt quickly. Being nimble is in our DNA. While current market conditions are having an effect on second quarter revenue, it does not alter how we feel about our plans for the future. We are committed as an organization to do what it takes to ensure that we continue to drive toward being free cash flow positive in 2023 with adjusted EBITDA margins of 10% in 2025 and 8% to 9% free cash flow conversion. We are committed to driving market expansion from the cost side of the business, and we will continue to take market share because of our superior position in the market. For example, over time, we have already driven down the cost to serve our agents. Since 2018, we have reduced the average cost to serve an agent by 35%. We are targeting a further 9% reduction in cost to serve per agent in 2022. As we apply technology, we will lower our cost to serve even further. We will drive costs down more aggressively on all aspects of our business in order to achieve our objectives. We will continue to invest in strengthening the Compass platform, but understand we will have to prioritize investment dollars. We remain confident that we are a long-term market share gainer, because we have the top agents and the top technology platform in residential real estate. I believe that if the real estate market experiences a prolonged downturn, agents will be even more interested in coming to Compass. This will help Compass gain even more market share. Agents are coming to Compass and staying because we are helping them grow their business, which in turn collectively grows the Compass business. We are able to significantly increase our business we were able to significantly increase our market share to 6.1% in the first quarter of 2022 and 5.8% on an LTN basis. Our market share increased from 5.6% market share in the fourth quarter as a result of the increase in the number of agents we have added and the productivity the Compass platform has driven. Even with these market share gains, our 6.1% market share in the quarter means there is significant share of the market left to be earned for Compass. As I mentioned earlier, we operate in geographies that cover less than half of the U.S. population, which gives us more opportunity to grow. We will also grow as the ad agents in the markets in which we already operate. Adding in historically proven productivity gains gives us the confidence as to why we can continue to gain market share. I would like to highlight the five agent-related KPIs that we discussed last quarter. We focus on these KPIs each and every day to drive market share gains while also delivering operational efficiencies that move us toward our margin goals. First, agent recruitment. We recruited as much growth commission in Q1 2022 as we did in Q1 2021, but we did so with substantially improved economics with fewer incentives while improving non-GAAP CNO as a percentage of revenue. In Q1 2022, 63% of the agents who came to Compass told us they did so for a less favorable split than at their previous brokerage. Why would an agent take less split to join Compass? Quite simply, they believe they can grow their business better at Compass. Here are specific reasons why. They are coming to Compass because of our growing stature in the market. Winning agents want to be with a winning company. They are coming to Compass for our outstanding expanding network which increases their ability to give and receive client referrals which earns them commissions. They are coming to us for our advanced Compass platform which saves them time and money. Our platform helps them grow their business and reduce their expenses on assistance support and third-party tools and services. Ultimately, agents are small business owners looking to increase their profits. I believe in these turbulent times, more agents will look to strengthen their business by coming to Compass. Second, agent retention. Our strong technology platform, the strength of the Compass brand, and the large amount of Compass referral coming from our network are clear drivers of our ability to successfully recruit agents. They are also key to our industry-leading ability to retain agents. As mentioned last quarter, our principal agent retention rates have consistently been above 90% in an industry that averages 68% retention. Third, technology adoption. Further agent adoption of the Compass platform is a key focus in 2022. Adoption drives retention and revenue. Our technology is a key driver of the agent's productivity and margin in the future. We launched two new professional coaching programs in the first quarter of 2022. One-third of our agents opted into the programs, and for 10 weeks, they spent three hours a week being trained on ways to grow their business using the Compass platform. The goal of these programs is to demonstrate to our agents the main tools available to them, in the platform and to train them on how to incorporate proven ways of using them in their daily workflows. One area we emphasized was the likely-to-sell tool. This AI-powered compass software tool is particularly important in this low inventory environment. We are surfacing over 14,000 likely-to-sell recommendations per week to our agents. In some cases, these likely-to-sell recommendations serve as clients that agents may not have spoken to in some time. In other words, we are converting cold and warm client leads into active clients. We have a significant technology advantage which will allow us to increase monetization from our powerful commerce platform. With limited R&D investment from our competitors, the moat around our business continues to widen as we move further away from the rest of the industry. Fourth, lowering our cost to serve our agents. As we mentioned on our last earnings call, now that we are close to being able to support the whole transaction on our platform, we're spending more time developing ways to use our software and technology to lower the cost to serve our agents and improve our margins. This will drive even more leverage from our tech spending. No one else in the industry is even trying to do this at scale. We are focused on delivering high leverage on cost by driving automation and standardization. that allows us to serve many more customers with the same number of people. We are using two key levers to accelerate cost to serve improvements. The first is people. We are simplifying our organizational design to remove management layers and to improve the customer experience with fewer points of contact. Fifth, adjacent services. As you know, we have just begun to build our adjacent services business, so it is still in the early stages of development and represents a small fraction of our revenue today, about 1%. As a result, the recent sharp downturn of the refi business that others are having to contend with is not having a material impact on our financials. We continue to see strong attach rates for our title and escrow services, and I am excited about our recent acquisition of Consumer's Title, which gives us license coverage in all of California's 58 counties in active operations in three California markets. It's great to have another first rate title and escrow team join the Compass family. And we continue to increase our mortgage footprint by adding markets and loan officers. We believe that the company that is the best at increasing profitability for agents will be the winner in the real estate industry. We built the Compass platform having looked at everything the agents spend to operate and grow their business. As a result, we listened to our agents and learned. We now believe we are the best in the industry at driving agent sales up while driving their operating costs down. This benefits the agent, which in turn drives profits for Compass. Revenue growth may slow due to market environments, but we are confident that our market share will continue to grow. as we attract more agents, increase their productivity, and cover more of the United States. It is the reason that agents come to Compass, stay at Compass, and why they are outperforming the industry year after year. They become part of Compass because they believe that they can grow their business here faster than anywhere else. As a result, we have more than tripled the total number of agents since Q4 2018, and we added nearly 400 average principal agents and approximately 1,100 average total agents in the first quarter of 2022, just as we had planned. I have enormous faith in the Compass agent's ability to navigate all kinds of market environments, as they have done brilliantly in the past, and they are doing so again in this market. Our employees continue to develop and deliver the most comprehensive agent-focused platform in the history of the United States. We remain committed to driving growth in revenue and delivering positive adjusted EBITDA and free cash flow for our investors. We will achieve this by providing our agents with the tools and the technology platform they need to be more productive, which will drive more profitable revenue for Compass. On a final note, as many of you have already seen in the press release earlier today, we are making some leadership changes over the coming months. Gray Hart will be taking on an expanded role as our chief operating officer. In his new role, Greg will add leadership of the operations organization to his current oversight of the Compass product organization, bringing more closely together the teams that work with the customers each day with the organization working to build tools and platforms to make customers more successful. Greg started at Compass two years ago. After 23 years at Amazon, where among other roles, He led the creation and launch of Echo and Alexa, managed million-dollar retail businesses, and led Prime Video globally. Alongside Chief Technology Officer Joe Soros, he has overseen the development of Compass's integrated technology platform designed to help agents grow their businesses. Additionally, Kristen has decided to lead Compass in September. I'd like to thank her for the incredible leadership and her impact at Compass. Kristen has an incredible impact at Compass in helping us to grow the business, deliver on our path to profitability, and guide us through COVID and the IPO. Her work formed the foundation for the 2025 margin targets and put us on a strong financial footing. Kristen's leadership over the past four years is a key reason I believe we are well prepared to continue to grow, outperform the industry, and take share while delivering on our commitments to profitability and cash flow, regardless of market conditions. Kristen has had a long passion to start and lead her own company. And as a founder and CEO, I understand that passion and fully support her. We've retained one of the world's leading search firms to find our next CFO, and Kristen will partner with us on that search. I'll now pass it over to Kristen.