Compass, Inc.

Thank you very much, operator, and good afternoon, everybody. And thank you for joining the Compass second quarter 2025 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 second quarter 2025 earnings release posted on our investor relations website. Any discussion regarding organic revenue, organic transactions, or organic GTV excludes any activity from businesses we acquired since April 1, 2024. 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 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, uncertainties, and other factors that could affect your 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, July 30th. 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 second quarter conference call. In what remains a trough level housing market, I am pleased to share that the Compass team produced the strongest quarterly results in our history with 10 quarterly records. In Q2, Compass delivered all-time high revenue, delivered all-time high adjusted EBITDA, delivered record adjusted EBITDA margins, delivered all-time high gap net income, delivered all-time high free cash flow, increased market share to an all-time high, delivered the best organic principal agent recruiting corridor ever, in the company's history, grew our title and escrow revenue to an all-time high, grew our title and escrow attach to an all-time high. And lastly, the Compass platform hit a record 24 average weekly sessions per agent in Q2, representing 37% growth compared to Q2 of last year. Revenue in the second quarter increased by 21.1% year over year. Total transactions increased by 20.9%. And organic transactions were up 6.3% year over year, respectively. as compared to the overall market where transactions decreased by 0.9%. So this means Compass's total transaction count growth outpaced the market's growth by close to 22%, and Compass's organic transaction count growth outpaced the market growth by 7%. For 17 consecutive quarters, spanning our entire history as a public company, Compass has outperformed the market on an organic basis. There has never been a quarter since we started measuring this metric where Compass hasn't grown faster than the market. In Q2, 2025, we generated adjusted EBITDA of 126 million, up 63% from the 77 million in the year ago quarter. Quarterly principal agent retention improved by 20 basis points year-over-year to a solid 97.5% in Q2. In the quarter, we also successfully recruited 832 gross principal agents organically to Compass, which is up 53% year-over-year and again represents our best recruiting quarter in the company's history. The consistent new theme we are hearing from agents that join this quarter is that they want to be at a company that stands up for agents and stands up for their clients. No agent wants to be told by a portal or an MLS how they must work. And none of their clients want to be limited in when, where, and how they market their home. The reality is the intention of the portal and MLS listing policies is control. The purpose of control is to get the homeowner's listings from agents for free and to monetize those listings on their platforms. And the mechanism for control is banning and fining agents that market off their platforms. And so when there is a company that's advocating for agents to and their clients to have choice and to not be controlled by these third-party platforms that want to make money off their listings. That is and will continue to be the winning recruiting strategy. I continue to be amazed by the silence amongst brokered COs who have been acquiescing to the portals and MLSs that are dictating how their agents work. and how homeowners market properties. I hope more brokerage CEOs see our results as a signal that they will attract more agents if they fight for them and not simply acquiesce to portals and MLSs that ban and fine agents for marketing listings outside their platforms. Now, beyond our record agent recruiting quarter, our M&A pipeline, which consists of term sheets, both signed and actually negotiated, is also larger than it has ever been. As we said previously, a slowing housing market or a move higher in rates will likely hurt our competitors more than Compass, as they don't have the capital, the technology, or the operational resources to scale. And this is exactly what we are seeing play out today. So taking a step back, what do our record recruiting results in M&A Pipeline show? They show that the demand for Compass is stronger than it has ever been. And we are particularly pleased to be delivering these results in one of the toughest housing markets in history. Moving to the T&E business. As I shared earlier, we posted record quarterly revenue and attach in Q2. And our attach rate was up close to 700 base points year over year. In some of our largest and most mature markets, our attach rates today are consistently in the 40% range. And for users of our one-click title function that goes through our platform, we are seeing attach rates closer to 75%. This gives us confidence that over the long term, we can attach T&E at a 50% plus rate in most of our markets. Given the mounting evidence that our efforts in T&E are bearing fruit, we continue to invest in our T&E business and are excited to share that last week we entered one of our largest markets, New York. By year end, we expect our T&E business to have a presence in 70% of our markets and expect contribution from this business to increase meaningfully over the coming years. The Christie's international real estate business also continues to grow with three new affiliates. Join the network in the quarter and six affiliates in the pipeline. Additionally, I am pleased to report that our financial results for the business are moving ahead of plan and integration efforts are on track with plan in Q2 2021. We also added Gavin Sportsman to the Christie's International Real Estate Leadership Team as president to help grow our affiliate network. Gavin previously led Peerage Realty Partners, the 10th largest real estate company in the U.S. per T360, which is also the largest global franchisee in the Sotheby's International Realty Network. We continue to believe that we can more than 5X 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. Revenue, less commissions, and other related expenses as a percentage of revenue in the second quarter was 18.2%, which is 80 base points above the 17.4% reported in the year-ago quarter. Non-GAAP OpEx was $250 million in Q2, which now includes a full quarter from the Christie's International Real Estate Acquisition. OpEx discipline in driving savings inefficiencies has become a strategic advantage for Compass in the current environment. With over $600 million in OpEx savings delivered over the last three years in our discipline OpEx growth of 3% to 4%, we have proven our ability to deliver on stated goals. even as revenue grows at a much faster rate than our OpEx. Kalani will share more in his prepared remarks, but I'm excited to share that we now have a new program already underway that will drive $50 to $75 million of incremental adjusted EBITDA, with at least $50 million of adjusted EBITDA improvement in 2026. We will achieve these results through continued focus on cost efficiencies and opportunities to offset the inflationary increases we have seen recently. So as you can see from our results, we are not standing still at Compass. Regardless of where the housing market goes, we will continue to execute against our long-term strategy, which consists of one, managing our off-ex prudently, two, recruiting and retaining agents at high levels, three, building a platform that empowers agents to be more productive and gain market share, four, pursuing a creative M&A, And five, growing our high margin T&E and affiliate businesses. By sticking to this core strategy alone, we believe we can generate a level of adjusted EBITDA and free cash flow that will significantly reward our shareholders over time. Now, I would like to close with an update on the next iteration of the Compass platform and why we are so excited about the future. Ever since we started our journey to build the Compass platform 13 years ago, the goal was always to provide agents with the best in class workflow platform to run their business on. And in many ways, we've now achieved that goal. Just ask our agents. But as we think about the next iteration of the Compass platform, we envision a platform that is made more seamless as we leverage AI to be the connective tissue for all the wonderful tools we've created for agents so far. What is particularly exciting about the direction we are going in is one, we don't need a big team or increase investment to harness the power of AI. We have the team we need. Two, there are clear benefits from AI that extend even beyond the productivity benefits we drive for agents, as it will make our software engineers and our broker support operations more efficient. And three, We believe we're the only brokerage today with a platform that is truly end-to-end, which is what's required to harness agentic AI. And we believe that most of our competitors' agents are on third-party software platforms that do not allow them to connect all the various parts of an agent's workflow. This ultimately will take value away from these brokerages while increasing the value of brokerages like ours in the eyes of the agents because we'll be able to help them save even more time and make even more money. Last month, I demoed the next iteration of Compass AI at our all company gathering. There's a two minutes standing ovation from our agents. Thousands of them were present. It was great to demonstrate the potential of AI to our agents, which we're going to improve over time. And this fall, we will be beta testing Compass AI 2.0, which will initially be focused on improving agent productivity, but over time be deployed across the organization to make us more efficient. Before I hand it over, I want to take a moment to thank Kalani Riletz, who has informed us of his decision to pursue a new and exciting opportunity for him and his family. We are fully supportive of his decision to take this new opportunity outside of our industry and are grateful for all of his contributions over these last three years. Kalani has been an incredible partner and leader. helping strengthen our financial foundation driving our operational rigor and in positioning the company for long-term success i'm also pleased to share that we will be promoting scott wallers our chief accounting officer to cfo many of you are familiar with scott who joined compass seven years ago as chief accounting officer and has also been leading our fba function for the past two years Importantly, he has been Kalani's partner in executing our OpEx initiatives over the past three years, which he will continue to do in his new role. Scott brings deep institutional knowledge, outstanding execution, and strong alignment with our strategy. Kalani will remain on through the end of August to ensure a smooth handoff, and we're confident in our continued momentum moving forward. I'll now turn it over to Kalani.

Thanks for the kind words, Robert. As Robert mentioned, I've made the personal decision to pursue a new opportunity outside of the brokerage industry that I am excited about. I'm incredibly proud of what we've accomplished together over the last three years and continue to be excited for Compass's future. I am leaving Compass in a position of strength with a winning strategy and zero concerns with our financial and accounting operations, internal controls, and business operations. I am proud of the work we've done here at Compass, and I'm especially confident knowing that Scott Wallers, who has been my partner since I've arrived here, will be stepping into the CFO role. With that, let me walk you through the financial results for the quarter. As Robert stated earlier, our Q2 results were the strongest quarterly results in Compass's history and set a series of new records, both financially and operationally. Our second quarter revenue was $2.06 billion, an increase of 21.1% from the year-ago period, and an all-time quarterly record for Compass. While M&A contributed to the year-over-year growth in revenue, even excluding M&A, revenue increased 8.7% on an organic basis. Transactions for the quarter increased 20.9% or 6.3% on an organic basis. which compares very favorably to the overall market where transactions declined by 0.9%. This outperformance to the industry is also reflected in our market share, which was 6.09% in the quarter, an increase of 96 basis points from the year-ago period, and an 8 basis point increase from Q1. Gross transaction value was $78.3 billion in the second quarter, an increase of 20.3% from a year ago. reflecting the 20.9% increase in total transactions combined with a slight decrease in average selling price of about 1%. Our average selling price was higher by about 3% on an organic basis. However, our acquisitions over the past year have lower average selling prices compared to our overall ASP, which reduced the overall increase in average selling price. Our commissions and other related expenses as a percent of revenue was 81.84%, an improvement of 80 basis points compared to Q2 of last year at 82.64%. Consistent with our comments last quarter, we expected the acquisition of Christie's International Real Estate to favorably impact this metric, which is reflected in the results. Excluding M&A, our commissions and other related expenses as a percent of revenue was were flat with the prior year quarter as some modest growth in T&E revenue was offset with some of the highest producing agents and therefore higher split agents taking more of the market share gains. This is consistent with our comments last quarter, and we are okay with this tradeoff today given that our highest producing agents are also taking share in the current environment. Over the long term, we remain focused on recruiting the up and coming agents that come at a much better split than our highest producing agents. Our total non-GAAP operating expenses were 250 million in Q2, an increase from 217 million of OPEX in the year ago period, which was driven by M&A, including the OPEX we assumed from the January 13, 2025 acquisition of Christie's International Real Estate, the Washington Fine Properties acquisition in February 2025, and the acquisition of Ladder & Bloom and Parks Real Estate in the second quarter of 2024. Adjusted EBITDA was $125.9 million, a strong improvement of 63% versus adjusted EBITDA of $77 million a year ago, and also represents a new all-time record for quarterly adjusted EBITDA. Gap net income was $39.4 million in Q2 compared to the gap net income of $20.7 million a year ago, an improvement of 90%. It also represents a new all-time record for quarterly gap net income. As for cash, we generated $68 million in free cash flow in the second quarter, which was not only an improvement over the $40.4 million of cash flow from Q2 2024, but also a new record level of quarterly free cash flow. Last quarter, I mentioned that in both Q4 of 2024 and Q1 of 2025, our free cash flow exceeded adjusted EBITDA levels, and therefore we expected to give back some of that favorable timing of working capital changes in Q2, We also paid for the second and final installment of our class action settlement payment in Q2 in the amount of $28.75 million, which negatively impacted free cash flow. We ended the second quarter with $177 million of cash and cash equivalents on our balance sheet and $50 million outstanding on our revolver. As we discussed last quarter, the $50 million balance on the revolver was drawn to fulfill the cash portion of the purchase price for Christie's International Real Estate. Our basic weighted average share count for the first quarter was $560.3 million, which was in line with our guidance. Additionally, because we reported gap net income, we are required to present a fully diluted share count, which was 591.4 million shares. Turning now to financial guidance. For Q3 of 2025, we expect revenue in the range of $1.725 billion to $1.85 billion and expect adjusted EBITDA to be in the range of $60 to $80 million. We expect our weighted average share count for the third quarter to be between 566 to 569 million shares. We expect our stock-based compensation expense to be in the 55 to 60 million range for the third quarter, which is a slight increase from the 55 million level for Q2. We expect the Q3 level of stock-based compensation expense to be the high point, and you'll see decreases sequentially into Q4 and 2026. As you can see from our results, we remain maniacally focused on OPEX, efficiency improvements, and driving profitable growth. Additionally, we have also been making good progress on the integration of our 2024 and 2025 acquisitions. As a result of these efforts, we are now pacing ahead of the OPEX range we previously laid out for 2025. Specifically, last quarter, we announced that our OPEX for 2025 would be in the range of $1.017 billion to $1.042 billion, but we now expect OPEX to be in the range of $1.01 to $1.02 billion which reflects a reduction of $25 million off the high end of the range when considering the incremental effects from the two small brokerage acquisitions announced this month. Finally, as Robert mentioned earlier, we have a new program underway that improves our profitability incrementally starting in 2026 by $50 to $75 million. We intend to keep the majority of the 2025 OPEX favorability permanent going into next year, and we'll see even further benefit from areas including process efficiencies in our end-to-end transaction flows, continued support optimization that lowers costs while improving agent service levels, and increasing efficiencies from a reduction in costs driven by use of AI across various areas of our technology and operational functions. Additionally, we believe there are opportunities to directly offset some of the inflationary pressures we have experienced, including opportunities to leverage learnings from our recent acquisitions. We believe these actions will drive $50 to $75 million in incremental adjusted EBITDA, with at least $50 million of direct adjusted EBITDA benefit in 2026. In my three years here at Compass, I am proud of the DNA and discipline we've built. We have developed a proven track record of stating our intent and delivering on our goals. I am confident we will achieve at least our stated goal of 50 to 75 million as we deploy the same teams and processes that we have been successful with in the past. And finally, as I close out my final earnings call here at Compass, I want to thank Robert, the management team, and the Compass board for the opportunity they gave me three years ago. As I depart, Compass has never been stronger. We are well positioned financially, strategically, and operationally to continue to lead the industry. Scott is the right leader for our next chapter, and I'm excited to see him partner with Robert. For the last 10 quarters, I've had the honor of presenting the record-breaking outcomes that are created by the incredible work of our agents and our employees. At Compass, our agents are our customers, and it's been a true honor to work for and serve our roughly 38,000 agents. I'll end by sending a mahalo to our Compass leadership team that I've been able to work side by side with every day, and a giant mahalo to all of our team members who work every day to make Compass a special place. Thank you for all that you do for Compass. With that, I'll turn over the call to the operator for Q&A.