Compass, Inc.

gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the Compass, Inc. fourth quarter 2022 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 at that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, Again, press star one. Thank you. It's now my pleasure to turn today's call over to Mr. Richard Ciminelli, Vice President of Investor Relations. Sir, please go ahead.

Thank you, Operator. We appreciate it. Good afternoon, and thank you for joining the Compass fourth quarter and full year 2022 earnings call. Joining us today will be Robert Refkin, our Founder and Chief Executive Officer, Greg Hart, our Chief Operating Officer, and Kalani Grelitz, our Chief Financial Officer. In discussing our company's performance, we will refer to some non-GAAP measures, and you can find a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in our fourth quarter and full year 2022 earnings release. A case of free cash flow in the presentation, each posted on our investor relations website. We will make forward-looking statements that are based on our current expectations, forecasts, and assumptions that involve risks and uncertainties. These statements include our guidance for the first quarter of 2023 and comments related to our operating expenses. 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 in our most recent annual report on Form 10-K. and quarterly report on Form 10-Q filed with the SEC and available also on our investor relations website. You should not place any undue reliance on any forward-looking statements. All information in this presentation is as of today's date, February 28, 2023, and we expressly disclaim any obligations to update this information. I'll now turn the call over to Robert Refkin. Robert?

Thank you for joining us today for our fourth quarter and full year results conference call. I want to start by thanking the entire Compass team of employees and agents. Their incredible dedication in these difficult times allows us to go into 2023 and beyond with the confidence that we have a strong foundation for future success. 2022 was a very difficult year in residential real estate, with the industry seeing one of the sharpest declines in transaction volume in decades. I am pleased to report that Compass revenue for 2022 was just over $6 billion, down 6% compared to 2021, which was our best revenue year ever and the best year in the industry on a volume basis. This is a major accomplishment when you consider transactions declined industry-wide 18% year over year. The 2022 industry decline in units was as bad as the great financial crisis when the number of units fell by 18% year-over-year from 2007 to 2008. While 2022 was a tough year for the housing market, particularly in the fourth quarter, we responded to the challenging market conditions by taking the initiative to reset our cost base. We took decisive steps throughout 2022 to reduce expenses and drive operating efficiencies in the business with a very specific goal to become free cash flow positive for 2023, starting with being free cash flow positive in the second quarter of 2023. As the market deteriorated fast, we moved quickly to respond and initiated cost-cutting actions that reduced our non-GAAP operating expenses by $338 million, which is 23% less on an annualized basis from the second quarter of 2022 to the fourth quarter of 2022. We shared on our third quarter call that we intend to develop and implement a plan to further reduce our non-GAAP operating expenses to a range of $850 million to $950 million. As we reported in early January, we believe our actions make it possible to achieve below the middle of the $850 million to $950 million range of annualized operating expenses by the fourth quarter of 2023. As a result of investments in prior years, even at this reduced level of operating expenses, we continue to invest in growth and technology to further strengthen the company during this downturn in the market. We are seeing industry forecasts for negative volume of 22.6% from Fannie Mae, negative 18.6% from MBA, and negative 12.6% from NARC. We expect to achieve our goal of being free cash flow positive in 2023 at each of these levels. We are confident that this is the right level of non-GAAP operating expenses. However, as we have demonstrated throughout 2022 and into 2023, we are prepared to move swiftly to implement additional cost cuts if the markets turn out to be worse than expected. Our employees have worked incredibly hard to reset our cost base over the last 12 months. We believe it's the right cost base and we are committed to maintain our OpEx levels even if and when the market goes up. We continue to differentiate ourselves through our technology platform. It is an asset for Compass because it helps us attract and retain agents and helps make them more productive. It also gives us the ability to attach other services which will further monetize the platform. Greg will share with you later what we are doing with title and escrow platform integration in Southern California. In 2022, our agents continue to demonstrate they are the best in the industry and are using the technology platform more and more over time. The value of the technology platform is the most common reason agents tell us they come to Compass and the most common reason they tell us they stay at Compass. We are clearly not out of the woods as an industry. 2023 is still filled with a lot of uncertainty and choppiness resulting from an unpredictable macroeconomic environment. While we have seen some positive signs with more foot traffic at open houses and return of multiple offers, inventory remains low and mortgage rates have continued to rise over the last few weeks. With so much uncertainty, no one can accurately predict what will happen with revenue this year. As a result, Today, we are only providing non-GAAP operating expense guidance for the full year 2023. 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 of Compass for our agents, for our employees, and for shareholders.