Compass, Inc.

Good day, everyone, and welcome to the Compass Second Quarter 2023 Earnings Call. I would now like to turn the conference over to Richard Simonelli, VP of Investor Relations. Please go ahead.

Thank you, Operator. We appreciate your time today, folks. Good afternoon, and thank you for joining the Compass Second 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. You can find the reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in our second quarter 2023 earnings release posted on our investor relations website. We will make 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 third quarter and full year 2023 and comments related to our operating expenses and cash flow levels, as well as our expectations for operational achievements. Our actual results may differ materially 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 on Form 10-K and quarterly reports on Form 10-Q filed with the SEC and available also on our investor relations website. You should not place undue reliance on any forward-looking statements and all information in this presentation today is based upon our time at August 7th, 2023. We expressly disclaim any obligation to update this information. I'll now turn the call over to Robert Refkin.

Robert? Thank you, Rich. And thank you for joining us today for our second quarter results conference call. I'm pleased to share that in the second quarter, we grew market share, grew agent count, and grew margin, while delivering positive free cash flow and strengthening our cash position. We achieved strong financial results in line with guidance in the midst of a quarter that was impacted by mortgage rates increasing 100 base points to 7%. and unexpected market turmoil resulting from the debt ceiling standoff in Congress. We will continue to take a disciplined approach to our operating expenses and run our business efficiently while still investing in our agents, platform, and growth. We continue to launch new products into our platform such as Performance Tracker, Compass GPT Integration, and OneClick Title and Escrow. We will be rolling out more team workflow functionality for agent teams over the next two quarters. And next year, we expect to launch our client portal, which over time will become the client's single destination for everything home, before, during, and after the transaction for both buyers and sellers. We are seeing a positive trend on agent retention. Every month in the first half of the year, the number of principal agents we lost was less than the month before. July, while not yet closed, looks to continue the trend, and we believe this trend is being driven by fundamental changes in the competitive landscape where the Compass value proposition relative to competitors is strengthening. There is a critical shift happening in the brokerage industry that is resulting in structurally weakened competition and a key differentiator for Compass. The Compass business model always has been and always will be focus on providing the best tools and services to agents so they can best grow their businesses. We are seeing many traditional brokerages that historically competed for agents with value-added support and services now significantly reducing investments in these areas, which for the most part was already much less than what Compass provided. We believe this is driven by competitors facing any combination of factors that Compass doesn't face, specifically rising debt service costs, increases in agent departures, declining market share and margin, worsening free cash flow, and for some VC-backed companies, a pullback in the VC funding market. As an example, including equity compensation, we have invested over $1.5 billion in our technology platform over a 10-year period and continue to invest approximately $100 million in R&D a year. which makes it very challenging for competitors to catch up in a meaningful way. In the peak of the pandemic real estate boom, many competitors were talking about investing significant dollars in R&D. But with a shift in the market, we are not seeing that come to fruition. The current pressure on competitors is resulting in two positive trends for Compass. One, we're seeing competitors reduce the financial incentives they were using to attempt to recruit Compass agents. Two, a race to the bottom environment where many traditional brokerages that historically competed on value out of support and services, for example, support staff, training, coaching, in-person office culture, attempts to integrate third-party tech, we are now seeing them cut back on these areas and in many cases are adding themselves to the already crowded, low-cost, low-value brokerage service landscape, a model that is defined by charging agents the lowest possible amounts and providing them the lowest possible amounts. Quite simply, Compass is going the other direction. We are strengthening our in-person culture and investing heavily in tools and technology for agents, capitalizing on the downturn to widen our competitive advantages as the high-value brokerage space is becoming much less crowded. It would not surprise me to see in the years to come, Compass as the only major national brokerage competing to serve agents with high-value products and services, and universally known for creating more tangible value for agents than any other company. Our financial results demonstrate that our aggressive stance in cost discipline and our reset of operating expense levels throughout 2022 and continuing into 2023 is working. In a moment, Kalani will discuss the details of our second quarter results, but here are some important highlights. We generated our second best quarter of adjusted EBITDA in company history with adjusted EBITDA of $30 million. We delivered on our commitment to be free cash flow positive in the second quarter with $51 million of free cash flow. This almost completely makes up for the first quarter of free cash flow deficit and positions us to achieve our goal of being free cash flow positive for all of 2023. We ended the second quarter with $335 million in cash and cash equivalents. Given our ability to generate strong free cash flow, ongoing improvement in operating expenses, and positive free cash flow outlook, we repaid the $150 million draw on a revolving credit facility in July. With the exception of the $30 million used to fund our very successful Compass Concierge Program, we have no corporate debt. The business is on extremely solid footing with over $450 million of liquidity today. For the third quarter in a row, we improved market share. Our market share is now 4.6%, an increase of 45 base points over the last three quarters. I want to emphasize that we have successfully improved operating expenses by $500 million on a run rate basis in the last 12 months. We said we would cut OpEx from an annualized run rate of over $1.4 billion to $950 million, and we did it. We said we would be precashable positive in Q2. We did it. We are very strong, and we are still investing in growth and the platform. We are excellently positioned for the cyclical, upturn that will come when the market normalizes. And when the market returns, we will work to ensure that our OpEx does not. Specifically, we expect to exit 2023 at a $900 million OpEx run rate and are committed to a path we have outlined to maintain our OpEx at $900 million in 2024 and are focused on maintaining that level in 2025 as well. We are confident that this approach ensures ongoing operating discipline while enabling us to continue to invest in the future growth of our business. Growing and retaining agents and building upon our competitive advantage with the only proprietary end-to-end technology platform for agents in the industry. When the market improves in the future, we believe the company will be well positioned to generate substantial free cash flow over the long term. We 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 make it through the first half of 2023 with the confidence that we have a strong foundation for future success.