Compass, Inc.

Good afternoon. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Compass, Inc. first quarter 2023 earnings conference 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 ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again press the star one. Thank you. Richard Simonelli, Vice President of Investor Relations. You may begin your conference.

Thank you, Operator, and good afternoon, and thank you, everyone, for joining the Compass First Quarter 2023 Earnings Call. Joining us today will be Robert Refkin, our Founder and Chief Executive Officer, Greg Hart, our Chief Operating Officer, and Kalani Relitz, our Chief Financial Officer. In discussing our company's performance, we will refer to some non-GAAP measures, and you can find the reconciliation of these non-GAAP measures to most directly comparable GAAP measures in our first quarter 2023 earnings release that just went out. And in the case of free cash flow in the presentation, each are posted on our investor relations website. We will be making forward-looking statements that are based on our current expectations, forecasts, and assumptions, and involve risks and uncertainties. These statements include our guidance for the second quarter of 2023 and comments related to our continued operating expenses. Our actual results may differ material from these statements. You can find more information about risks, uncertainties, and other factors that could affect our results on our most recent annual report filed on Form 10-K and quarterly report filed on Form 10-Q filed with the SEC and also all available on our investor relations website. You should not place any undue reliance on any forward-looking statements. And all information in this presentation today, or as of today's date, May 9th, 2023, we expressly disclaim any obligation to update this information. So without further ado, I'll now turn the call over to Robert Refkin. Robert?

Thank you for joining us today for our first quarter results conference call. We achieved strong financial results for Q1 2023 and revenue and adjusted EBITDA were better than both our guidance and consensus estimates. Compass revenue was just over $957 million in Q1 2023. Our transactions outpaced the industry down 24% compared to 26% for the market. In the midst of a very difficult real estate market, we improved both market share and splits. In each of the last two quarters, we have grown quarterly market share over the prior quarter. We also improved our non-GAAP commissions expense as a percentage of revenue by approximately 27 basis points from Q1 of last year to 81.4% when excluding the impact of the 18 Equity Program, which we sunset in 2022. Adjusted EBITDA was negative $67 million for Q1 2023. This is an improvement of nearly $30 million compared to Q1 2022, despite revenue being down $440 million in the same period. We ended the first quarter with $364 million in cash and cash equivalents and significantly slowed our use of cash in Q1. We expect to be free cash flow positive in each of the three remaining quarters of 2023 and for the full year as we continue to execute on our plan. This demonstrates our aggressive stance on cost discipline and that the reset of operating expense levels throughout 2022 and continuing into 2023 is working. In a moment, Kalani will walk you through the details of our financials. At these levels, we are still able to focus on the future growth of the business, and we expect to generate significant profit as market conditions improve. Here are some examples. We continue to grow our agent base. Our average agent count grew 6% year-over-year in Q1 2023, and over 1,000 agents have come to Compass since August for no cash or equity sign-on bonuses. The majority of these agents have told us they are paying Compass more than their previous brokerage. This demonstrates that agents come to Compass for the benefit of the technology platform, the referral network of clients, and strong culture, ultimately allowing them to be the best and most profitable agents they can be. We continue to invest meaningfully in the platform to ensure that we maintain our significant technology advantage. having invested over a billion dollars in the platform today. As you know, we offer the only proprietary end-to-end technology platform for agents in the country. And it is our belief that for the real estate industry, similar to other industries, end-to-end digital platforms are the best way to monetize transactions and the most scalable way to empower the professionals that execute those transactions. We are adding features to the platform to enhance the revenue and profitability of these transactions. We know from experience that agents are more inclined to use our services when they are directly in the platform, increasing both our attach rate and our take rate per transaction. I'm excited to announce that we successfully integrated title and escrow services directly into the Compass platform, an industry-first experience that agents cannot find anywhere else. Our agents in Southern California can now seamlessly order title and escrow from our owned affiliates directly from the tools they already use every day in the Compass platform. We expect to continue to roll out this valuable feature across our entire title and escrow coverage area over the course of the next 12 months. We expect our title and escrow integration to accelerate our path to industry-best attach rates and financial performance and look forward to sharing additional metrics over the coming quarters. Looking ahead for the remainder of 2023, we remain consciously optimistic until we gain more certainty from the unpredictable macroeconomic environment and future action by the Fed. While we have seen some positive signs of more foot traffic at open houses and the return of multiple offers, inventory remains low. and there is still upward pressure on prices. Steady mortgage rates have been helpful. A future decline in rates would mean we would likely see more transactions. Most importantly, the market performance in Q1 and what we already are seeing for Q2 adds to our confidence that we have set the right office targets to generate positive free cash flow in 2023. I want to emphasize two important points as it relates to OPEX. First, if the market should worsen beyond 25% down, we are prepared to take additional steps to reset OPEX levels lower. Keep in mind, the most recent estimates for the year from NAR, Fannie Mae, and the NBA are for a decline in the range of 12.6% down to 22.5% down. As I previously said, we are confident that we've set the right OpEx targets range of $850 million to $950 million. We have taken permanent actions, not temporary ones. We expect to stay within this range over the next two to three years. We will be just at $900 million annualized by year end, and our management team is committed to actioning continued efficiencies with a goal of operating towards the midpoint of our OpEx range over the next couple of years, even as the market improves to more normalized levels. As a result, when the market improves in the future, we will be well positioned for generating significant long-term profits. As the number one real estate brokerage by sales volume for the past two years in the United States, we have built a highly desirable company for attracting and retaining the best agents in the industry. We provide our agents with a powerful brand, an unparalleled proprietary technology platform, and an inspiring culture where agents are supported by incredible people and technology to grow their business. The best agents are able to shine in difficult markets. In the first quarter, our agents and employees deliver. We are going to continue to be laser-focused on what we can control and remain diligent in our desire to achieve positive free cash flow in 2023. I remain incredibly excited about the future, and I want to end by thanking the entire Compass team of employees and agents. Their incredible dedication in these difficult times has allowed us to start 2023 with the confidence that we have a strong foundation for future success.