Compass, Inc.

Thank you for standing by. And at this time, I would like to welcome everyone to today's Compass Incorporated Q4 and Full Year 2024 Financial Results Conference Call. I would now like to turn the conference over to Sohan Bonsley, Head of Investor Relations. You may begin.

Thank you very much, Operator, and good afternoon, everybody. And thank you for joining the Compass Fourth Quarter and Full Year 2024 Earnings Call. Joining us today will be Robert Refkin, our founder and CEO, and Kalani Riletz, 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 fourth quarter 2024 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 first quarter of 2025 and full year 2025, including comments related to our expected financial results, operating expenses, and free cash flow, as well as our expectations for operational achievements. Our actual results may differ materially from these statements. You can find more information about risks and 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, February 18th. We expressly disclaim any obligation to update this information. I will now turn the call over to Robert Refkin. Robert?

Thank you for joining us today for our fourth quarter conference call. Before we dive into our results, I want to take a moment to recognize all of the hard work from the entire Compass team over the past three years. This team has worked tirelessly to put Compass in the position it is in today, and I am excited to showcase the true earnings potential of our platform as the market makes its way back to mid-cycle transaction levels of 5.4 million to 5.6 million existing home sales. I'm pleased to share that in the fourth quarter, we continued to widen the gap between Compass and the industry. As we increased revenue and adjusted EBITDA, accelerated our market share gains, grew agent count, expanded title and escrow tax rates, continued to retain agents at industry-leading levels, exceeded our OPEX targets, extended our unique inventory advantage, achieved our 2024 goal of keeping stock comp below $130 million, and generated another quarter of positive free cash flow. These results are clear evidence that our playbook is working. As a reminder, our playbook consists of, first and foremost, controlling our organic OPEX at 3 to 4% annual growth. Second, growing market share by adding agents organically, executing accretive M&A, and using the Compass platform to enhance agent productivity. And lastly, expanding margin by increasing attach of mortgage and title, while also incorporating our new higher margin Christie's International Real Estate affiliate business. By sticking to this playbook, we believe we can generate hundreds and hundreds of millions in adjusted EBITDA and free cash flow for our shareholders as the market recovers. In Q4 2024, we generated adjusted EBITDA of $16.7 million, which includes $4.2 million in M&A transaction costs, primarily related to the Christie's International Real Estate Acquisition. Excluding these transaction costs, Q4 2024 adjusted EBITDA would have been $20.9 million. Revenue in the fourth quarter increased by 25.9% year-over-year. Total transactions and organic transactions increased by 24.1% and 15.5% year-over-year, respectively. As compared to the overall market, where transactions increased by 6.8%. So this means growth in Compass's total transaction count was 3.5 times faster than the market, and growth in Compass's organic transaction count was 2.3 times faster than the market. In the quarter, we successfully recruited 659 principal agents organically to Compass, and quarterly principal agent retention remained at a strong 96.9%. For the full year 2024, we grew our net principal agent count by 3,069 agents, or by 21% compared to year end 2023. Our title and escrow business continues to gain momentum. We finished Q4 with another record quarter of T&E attach. Over the past four quarters, we've improved our attach rate by more than 800 base points, and we have nearly quadrupled our profitability in the business year over year. In 2025, We expect to drive a similar level of improvement in our T&E attach rate, which should help us to more than double adjusted EBITDA in this business year over year. Revenue, less commissions, and other related expenses as a percentage of revenue in the fourth quarter was 17.47%. Had the Christie's International Real Estate Transaction been consolidated into our P&L for Q4, we would have expected this metric to be approximately 18.2%. and we believe this metric will be higher than 18.2% in the full year 2025. Over the long term, we can expand our margins for a few reasons. First, we will continue to get credit from our agents on the increasing value we provide to them and their clients through the Compass platform. We will also continue to hire up and coming agents who are productive but also have better economics than the top producing agents. As we stated in early 2022, Agents producing below $150,000 of annual revenue generated approximately 900 base points more margin per compass than million-dollar-plus agents. Second, we continue to increase margin from our ongoing expansion of high-margin integrated services like title and escrow. And lastly, with Christie's international real estate acquisition closed as of January 13th, we now plan to expand the high-margin affiliate business and believe we have a long runway for growth in this business. When compared to the current leader in the luxury real estate franchise business, we believe that we can more than five times the number of domestic Christie's international real estate affiliates over time. And as a reminder, this is a 30 to 35% adjusted EBITDA margin business for us. Now, moving on to our view of 2025 and beyond. On the last call, I shared that whether you have a bearish or bullish view on the housing market, we are building a company that succeeds in any scenario. In Q4, we grew quarterly market share by 65 base points year-over-year, reflecting an increase from 4.41% to 5.06%, and our highest year-over-year increase in quarterly market share in the past 12 quarters. Furthermore, our Q1 revenue guide, excluding Chrissy's International Real Estate, equates to more than 25% growth year-over-year at the midpoint, It implies transaction growth of more than 20% year-over-year versus a pending home sales index that is down 5.5% in December 2024, or NAR, and January single-family pending home sales that are down 5% on average year-over-year per Altus Research. This is evidence that the gap between Compass and the industry is widening. I view our outperformance to the market in Q4 2021. and expected outperformance in Q1 to be a reflection that despite higher mortgage rates and a volatile environment, the company's structural advantages and initiatives around OpEx containment are working. As we look to 2025 and beyond, the gap between Compass and the industry will only accelerate, driven by what I see is the beginning of a structural change in the brokerage industry that will favor Compass. The structural change is driven by the fact that NAR will no longer be able to have anti-competitive rules that prevent large brokerages and top agents from competing freely and gaining market share. Specifically, since NAR's revenue model is based on the number of agents in the industry paying dues, I believe they don't want large brokerages and top agents to gain market share because it would result in less agents in the industry and less revenue from agent dues. NARS rules artificially prompt up the least experienced agents and the smallest brokerages, resulting in the number of agents in the U.S. increasing nearly 100% since the year 2000, while during the same time period, the U.S. population grew only 20%, and the number of annual home sales declined by 20%. However, post-NARS settlement, as of August 17th, with the MOSs no longer requiring listing agents, to pay buyer agents, and NARS clear cooperation policy no longer being enforced in nearly half of our markets as MLS CEOs increasingly realize the liability they face from enforcing this anti-competitive policy. The artificial market restraints that limited market share gains for the best agents and the best brokerages are now gone. As a result, the cream will rise to the top faster than ever before in our industry. which should disproportionately benefit Compass because we have the best agents in the industry. Let me share some data that illustrates this point. As reported recently by RIS Media, the gap in income between an agent with less than three years of experience and 10 plus years of experience is 20% larger post the MLS rule change. Per this study, before August 17th, the commission delta between an agent with less than three years of experience and an agent with 10 plus years of experience was relatively flat at just 12 basis points. But post the settlement, it has now moved to 85 basis points. This makes sense. Just think about other professional advisory businesses, like law, for example. Lawyers with one year of experience don't get paid the same as lawyers with 10 years of experience. And lawyers at small law firms don't get paid the same as lawyers at big national law firms. To highlight this point in a different way, before August 17th, an agent with one year of experience at a small brokerage firm could go to a buyer and say, quote, let me take you out to see properties. You don't need to sign anything. You don't need to pay me anything because the listing agent who tends to work at a large brokerage firm has negotiated my compensation, and I can show you the same properties as everyone else. This is the reason why new agents almost always work with buyers over sellers, because buyers, unlike sellers, didn't have to sign anything and weren't asked to pay their agents anything directly. But post-August 17th, that same inexperienced agent now must say to the buyer, quote, you need to sign a buyer representation agreement before I can show you properties. We need to agree on my compensation up front. And if asked, they would have to tell their client that they don't have access to the same properties as the larger brokerages that have access to a larger pool of listings. As a result of this, and with experienced agents disproportionately working at the larger brokerages, as opposed to the over 60,000 small brokerages, I expect the market share of large brokerages to increase going forward. In the future, the free market will reward the best agents and the best brokerages with the highest pay, just like it does with the best lawyers and law firms. The best agents are going to thrive in the new future. They're going to gain more market share and earn more money, which is ultimately best for the consumer. Because unlike NAR, which gets paid per agent, the consumer doesn't want an industry of over 1.5 million agents. The consumer just wants to work with the best agents. This is good. This is right. This is not unfair. Letting agents and brokerages compete freely is ultimately in the best interest of the consumer. Now moving on to our structural advantages. As discussed in the past, Compass has invested in four structural advantages, and these advantages play to the broader changes that are occurring in the industry, which position us to accelerate share gains in the years to come. These structural advantages include, one, our end-to-end platform, where we recently launched tools like reverse prospecting, Make Me Sell, and Compass One, the industry's first all-in-one client dashboard that gives 24-7 transparency into every step of the transaction for buyers and sellers. Two, our national scale. Three, our network of top agents. And four, our depth of inventory in local markets. Given how important inventory is to our strategy going forward, I want to close with a few minutes on this last advantage. First, it's important to understand that depth of inventory, not breadth, is what's critical as we create unique inventory through programs such as the Compass three-phase marketing strategy that benefits our agents and their clients. Second, by growing our unique inventory and marrying that with our end-to-end platform, which has agent-level search and consumer search at a level that no other brokerage firm in the industry has, we believe More and more buyers will search Compass.com and use Compass agents, as it will be known that Compass has more inventory than any other website or brokerage. As an early proof point that consumers are seeing value in the Compass three-phase marketing strategy, here are a few data points to consider. As of February 16, 2025, homeowners are marketing more than 7,500 listings as a Compass private exclusive or a Compass coming soon, which are only available by working with a Compass agent or by searching Compass.com. Roughly half of the Compass private exclusives and Compass coming soon listings were above a $1 million list price, with the other half being below the $1 million list price. This shows that this strategy is resonating with homeowners across all price points. Of Compass's 22,138 listings, approximately 35% currently are Compass private exclusive or Compass coming soon. And we have several markets where this is above 50%. Moreover, we are seeing rapid adoption of the Compass three-phase marketing strategy with 55% of new listings so far this month of February starting off as a Compass private exclusive or a compass coming soon. The 35% we cited is consistent with other data points, because even without marketing the benefits of off-MLS listings today, third-party studies show strong homeowner demand for starting off-MLS. For instance, the largest private listing network in the country is actually Emirates, the MLS of Illinois. And 21% of all their closed listings between 2022 and 2024 started in their private listing network, largely to test price privately. Furthermore, a recent study from Zillow showed that 31% of respondents initially said they would prefer to have their property listed on a private listing network if they were selling a home. And lastly, another recent study from research firm 1000Watt show that 35% of prospective sellers who were offered a choice between listing directly on the MLS or initially listing off the MLS said they would choose to list their property off MLS. We believe the Compass three-phase marketing strategy delivers better outcomes for homeowners, including fewer days on market and fewer price drops once on the MLS and available on the portal website. To test this thesis, we looked at all closed Compass sell-side residential transactions that were ultimately marketed on the MOS from January 1, 2024 through the end of December 2024. And we compared Compass listings that were pre-marketed as Compass private exclusives or Compass coming soon to Compass listings that were not pre-marketed. What we saw was that for closed sell-side residential transactions across all price points and all property types nationally, Properties where the homeowner chose to pre-market as a Compass private exclusive or Compass coming soon before going active on the MLS received an accepted offer 20% faster on average or eight days faster on average once active on the MLS than Compass listings without pre-marketing. And it created value for homeowners as only 13% of Compass listings on average that were pre-marketed had a price drop. compared to 19% for Compass listings without premarketing, which means approximately 30% fewer listings took a price drop once active on the MLS. I want to emphasize that these trends also held at lower price points, as we saw consistent improvements when looking at closed prices below $1 million as well. While these findings are encouraging, Compass's team of data scientists, which is led by Dave Crosby, a 20-year Microsoft veteran also completed a study to better understand the relationship between closed price and pre-marketing as a Compass private exclusive and or Compass coming soon before going active on the MLS. This analysis examined all Compass residential closed sell-side transactions in 2024 nationally and for all residential property types. What we found was that Homes pre-marketed as Compass private exclusives and or Compass coming soon before going to the MOS were associated with a 2.9% higher average close price compared to Compass sold properties that were not pre-marketed in 2024. This means that homeowners who chose to pre-market their home with a Compass agent at Compass's average price point of roughly $1 million we're likely to have realized a $29,000 premium in the sale of what is often the most valuable asset in people's lives compared to those who listed directly on the MLS. We believe this is a strong proof point that homeowners who choose to market with the Compass three-phase marketing strategy see better results. These results are not a surprise to us as the Compass three-phase marketing strategy is based on what home builders and residential developers do every day. and they are the most sophisticated and profit-driven sellers of homes in the industry. The reason homebuilders list off the MLS is to protect their listings from days on market and public price drop history, and to ensure that all buyer inquiries are directed to the listing agent that they hire. Compass Coming Soons and Compass Private Exclusives provide these same advantages to homeowners as well. So, it's not a surprise that home listings that were protected from having negative insights on them, like dates on market and price drop history, sell for more than homes that have negative insights on them. And it's also not a surprise that listings that are able to direct buyer inquiries to the listing agent who knows the home the best sell for more than listings that direct buyer inquiries to the highest bidder. In fact, sell the leads to the highest bidder. an agent who doesn't know the property as well and who may redirect that buyer to another home. Home builders and developers sold hundreds of thousands of homes off the MLS last year to ensure that negative insights aren't on their listings and ensure all buyer agrees go to listing agents, neither of which happens when the homeowners list on the portals. You're going to hear all of these stakeholders say that homes sold for more on the MLS. How is it possible that homes could sell for more on the MLS if home builders and developers are selling hundreds of thousands of homes off MLS? Again, they are the smartest, most sophisticated, most profit-driven people in real estate. As a reminder, NAR's clear cooperation policy carves out home builders and developers from having to comply so they can market their properties off the MLS freely as they see fit. What we are doing with the Compass three-phase marketing strategy is simply giving individual homeowners the same marketing playbook of the home builders and developers and giving additional support to agents to act in the best interest of their clients. Given the improvement in price we have observed from pre-marketing, we believe this puts more pressure on NAR and MLSs to avoid liability. by ending clear cooperation immediately. NAR's clear cooperation policy harms homeowner value by taking away homeowner choice to publicly pre-market their homes off the MLS with their agent. In the United States of America, a trade group should not be allowed to force every homeowner in the country to sell their most valuable asset at a discount. This fact pattern gives the active DOJ investigation into clear cooperation even more merit. Consumer protection requires consumer choice, and clear cooperation takes away consumer choice. Over the coming months, as we continue to activate the Compass three-phase marketing strategy more broadly across our markets, we expect to be able to show the ability to create positive outcomes for homeowners, as well as better agent retention, higher agent productivity, more agent growth from recruiting, and more traffic to Compass's website. Ultimately, our North Star is to use our depth of inventory to create better outcomes for sellers, buyers, and our agents, which should translate to better outcomes for Compass and our shareholders. Now, let me hand it over to Kalani to go through our financials in more detail.