Compass, Inc.

Thank you for standing by. My name is Kathleen and I will be your conference operator today. At this time, I would like to welcome everyone to the Compass first quarter 2024 financial results. 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, press the star one again. Thank you. I would now like to turn the call over to Richard Simonelli, Senior Vice President, Investor Relations. Please go ahead.

Thank you, Operator, and good afternoon to all of you. Thank you for joining the Compass First Quarter Earnings Call. Joining us today will be Robert Refkin, our Founder and Chief Executive Officer, and Kalani Relitz, our Chief Financial Officer. In discussing our company's performance, we will refer to some non-GAAP measures. You'll find the reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in our first quarter 2024 earnings release 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 2024 and full year 2024, including comments related to our operating expenses and free cash flow, as well as our expectations for operational achievements. Our actual results may differ material from these statements. You can find out 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 reports on Form 10-Q filed with the SEC and available on our Investor Relations website. You should not place undue reliance on any forward-looking statements. All information in this presentation is as of today's date, May 8th, and we expressly disclaim any obligation to update this information. I'll now turn the call over to Robert Refkin. Robert?

Thank you for joining us today for our first quarter 2024 results conference call. We had strong first quarter results with revenue towards the higher end of our guidance range and adjusted EBITDA that exceeded our guidance range and with our agents continuing to outperform the market. I am pleased to say that in Q1 2024, in a historically challenged market in the slowest quarter of the year, Compass generated positive free cash flow. This proves that our focus on cost reductions and cash generation while still investing in agent growth in our proprietary technology platform are working. We grew revenue considerably. In Q1 2024, we generated an increase in revenue of 10% year over year as we increased transactions 7.1% from a year ago. This compares favorably to the 3.5% decline in transactions for an entire market in the first quarter. We grew market share considerably. In Q1, 2024, our quarterly market share increased 26 basis points year over year and 35 basis points on a sequential basis compared to Q4, 2023. This is a testament to our agent productivity, which is further enhanced by a proprietary technology platform. I have shared repeatedly that Compass has the best agents in the industry, and they are demonstrating their skill and experience navigating this difficult market. We continue to grow our agent base considerably. Our principal agent count has increased by nearly 1,000 agents between Q1 2023 and Q1 2024. This is a 7.3% increase, which is in stark contrast to industry trends. The vast majority of agents that come to Compass tell us that the platform is the number one reason that they join. Originally, we organically in Q1 2024, we recruited 518 principal agents, the highest quarterly count since we ceased using cash and equity sign-on bonuses. Just last month in April, we added more than 1,000 principal agents with our creative acquisition of Ladder and Bloom, the largest agency in the Gulf South and New Orleans. We are growing total agents faster than the market. At Compass, the number of total agents increased 2.1% year-over-year, while our three largest public company competitors by agent count reported decreases of 2%, decreases of 5%, and decrease of 6% in the same period. Moreover, this includes a reduction of over 1,000 non-productive agents in the last two quarters. As a reminder, ladder and bloom is not in these numbers. Our balance sheet is strong. We ended Q1 with $165 million in cash and cash equivalents and no outstanding draws on our credit facility. We continue to drive cost improvements internally. We remain laser focused on driving efficiencies and reducing costs using technology. These improvements are also positively contributing to free cash flow. We reduced our OpEx in the first quarter to $211 million, an increase of $32 million from Q1 2023 OpEx of $243 million. We also reduced OpEx sequentially from Q4 2023 OpEx of $224 million. As always, Kalani, our Chief Financial Officer, will walk you through the financials later on this call. Moving on to the market, I still believe 2024 will be better than 2023. and that 2025 will be better than 2024, with the mid-cycle coming in 2026. My opinion is influenced by the following. One, inventory is up 33% from a year ago. More inventory leads to more sales. Two, the percentage of all cash homebuyers is at the highest level in over two years, with the stock market near an all-time high. Homebuyers are less reliant on mortgages. Three, the percentage of sellers with 4% mortgage rates or below is approaching 50% after dropping from approximately 75% at the peak. At this rate, we believe in two years, only approximately 25% of people may still have 4% mortgage rates or below, nearly eliminating the biggest bottleneck to the mid-cycle real estate market. And four, we now have over two years of pent-up demand. assuming 2024 is just modestly better than 2023. This will end up being a three-year housing downturn, forcing many people to live and remain in homes that they don't want to be in. We believe when rates come down, it will create a massive surge in transactions. The longer this lasts, the stronger the market bounce back will be. As I mentioned on the last call, Assuming we continue to add net agents annually, maintain or modestly improve our agent economics, and keep our $600 million of annual cost savings with minimal inflationary growth of 3% to 4% in 2025 and beyond, we believe that is a formula for generating hundreds and hundreds of millions of dollars in adjusted EBITDA and free cash flow as the market recovers to a more normalized mid-cycle annual home sales level of 5.4 to 5.6 million homes. But in the meantime, as I mentioned on our last earnings call, we have conservatively budgeted for a flat year on transactions and have brought our optics to that level. We expect to be free cash flow positive in 2024, even after the cost of the first payment related to our litigation settlement, which we agreed to in April 24, and which we expect to make in the second quarter. The number one question we are getting from investors is, what is the settlement having on the business? What effect is it having? To help with this question, let me share with you five facts as well as five beliefs. Let's start with the facts. One, buyers are using buyer agents now more than ever. In 2023, 89% of buyers use an agent. which is up from 75% just 20 years ago in 2003. Two, buyer agreements are not new and are already required in half of the states in which Compass operates. Thousands of Compass agents have been getting buyer representation agreements signed for years with no issue. Three, 90% of our agents have been trained and are prepared for the rules. Since the verdict, we have provided our agents with 57 national training sessions and hundreds of local training sessions. With these efforts, I've seen our agents transition from initially being worried to now being confident. Four, per NAR and RealTrends, commissions were 5.5% in 2023. That compares to 5.1%, just 20 years earlier in 2003. Five, the industry has not seen a noticeable change in either the percentage of sellers that offer a buyer agent's commission, nor in the average commission amount they are paying the buyer's agent. We reviewed the MLS data in the markets generating the majority of our revenue. since the announcement of the NAR settlement on March 15th. Here's what we found. More than 99% of new listings since March included offers to pay the buyer agent. Furthermore, more than 96% of all listings included offers to pay 2% or more, and more than 67% are offering to pay 2.5% or more. To date, we are not hearing from agents that any of these numbers are coming down. We believe the sensational press has caused significantly more reaction than what we expect to see from the actual rule changes. Specifically, the headlines since the March 15th NAR settlement have led to sellers asking if they need to pay a buyer agent more than ever before. And the result of those conversations is that sellers felt more than 99% of the time that it was still in their interest to provide a commission to buyer's agents. Now, here are some of our beliefs after conversations with hundreds of our agents across the country. One. we believe there will be little impact on the professional full-time agents. And Compass is composed of experienced full-time agents with very strong repeat and referral business. Two, we believe that agents will increasingly need to be able to sell their brokerages value proposition to communicate that to buyers. And that Compass has the best value proposition for buyers of any brokerage firm. For example, Compass has access to off-market inventory through Compass private exclusives and Compass coming soon, which is particularly important in a low inventory environment. Another example being buyer technology tools like Compass collections, like Compass digital tour sheets, like Compass CNA, and the client dashboard launching in less than a year. Three, we believe real estate agents are project managing a highly complex, multi-month process where they can often be coordinating between over a dozen different parties, loan officers, title officers, home inspectors, home appraisers, painters, stagers, photographers, videographers, agents on the other side, and so on. We do not believe this important role will be displaced or discounted. Four, we believe the percentage of buyers and sellers that will use an agent will continue to be at the 90% level. Buying and selling a home is the biggest financial decision that most people make in their lifetime. However, for decades, people have been declaring that there'll be a decline in the use of the real estate agent. In the last 20 years, since the rise of the internet, we've seen so many attempts to replace the agent, such as for sale by owner companies. And then you had the aggregators, and then you have the discounters, then you have the iBuyers, and then the power buyers. Yet despite all of these attempts to disrupt the real estate agent, buyers and sellers are using agents more than ever before. In the last 20 years, the percentage of buyers using an agent has increased from 75% in 2003 to 89% in 2023. And finally, We believe the vast majority of buyers and sellers prefer to pay for value over receiving a discount. If saving money on commission was the most important thing to a seller, the majority of home sales would be for sale by owner. Obviously, that is not the case. In every market we know of, there are countless agents and brokerages that offer low commission rates. Discounters are not new and have been operating the market for decades. Many of these discount firms have either gone out of business or have not gained traction. In fact, one of the largest public companies in residential real estate today is a professional discounter, offering the majority of the country discounted commissions with salaried agents for decades. This company can go to every seller and say, we have more than 50 million visitors on our site a month. More internet exposure than every other brokerage firm in the country combined for your listing. And we only charge 1%. However, after 20 years of offering discounts, they have only 0.8% market share. That is the proof that buyers and sellers are speaking with their checkbooks in that they prefer professional advice over a discount. In closing, I believe Compass is approaching an inflection point. We have done the hard work. We have brought expenses down and continue to grow our agent count and inventory advantage. The market will inevitably come back, and when the Fed cuts rates, we will be in a position to thrive. I want to thank the entire Compass team of employees and agents. I see their commitment to making Compass successful with their incredible dedication and determination. It has allowed us to be named the number one real estate brokerage by sales volume in the United States for three years in a row and to have a strong foundation for the future. I will now pass it over to Kalani.