Compass, Inc. (COMP) Q3 2021 Earnings Call Transcript

Compass, Inc. (COMP -2.64%)
Q3 2021 Earnings Call
Nov 10, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the Compass third quarter 2021 earnings conference call. My name is Bo, and I'll be your conference operator today. [Operator instructions] Ben Barrett, vice president of investor relations, you may begin.

Ben Barrett -- Vice President, Investor Relations

Good afternoon, and thank you to everyone for joining Compass' third quarter earnings conference call. Today's review of our actual financials will address the continuing operations of Compass, and certain items are presented on a non-GAAP basis. The reconciliations between GAAP and non-GAAP measures for both our third quarter financials as well as their guidance are included at the back of the earnings release and the shareholders' letter. Please also see our disclosure on forward-looking statements, which reflects Compass' current view of future financial performance, which may be materially different from our actual performance for reasons that we cite in our Form 10-Q and other SEC filings, including uncertainties posed by the COVID-19 pandemic and the difficulty in predicting its future course and impact on the housing market and the global economy.

Joining us today will be Robert Reffkin, Compass' founder, chairman, and chief executive officer; and Kristen Ankerbrandt, Compass' chief financial officer. Robert will provide a brief overview of Compass this quarter and a discussion of our strategy, and then Kristen will cover the financial results and outlook in more detail. With that, I would like to turn the call over to Robert.

Robert Reffkin -- Founder and Chief Executive Officer

Thank you, Ben, and thanks to everyone for joining the call. We're excited to be back with you today to talk about Compass in our outstanding third quarter results. Thanks to all the hard work by our agents and employees, we delivered another exceptional quarter. As a result, Compass is in the strongest position we've ever been in.

And since going public, we've done everything we said we would do, and we've done it faster. We accelerated our top and bottom line more than expected. We accelerated our path to adjusted EBITDA profitability by a year. We expanded to 23 new markets year to date, more than double our pre-IPO pace.

We expanded our Title and Escrow business to nine states plus Washington, D.C., up from three at our IPO. And we're launching mortgage a year sooner than we said we would. Our ability to exceed these operational and financial expectations is a direct result of our intense focus on the agent as our customer. Recent turbulent seen by alternative models looking to replace the traditional agent is an important reminder that the agent is not going away.

The agent will continue to be at the center of the transaction, controlling $100 billion in annual commissions and being the primary source of referrals for an additional $140 billion in real estate-related spend. The question is, who is going to be the company that best helps agents realize their entrepreneurial potential because that's the company that will win. I believe Compass with our 1,500-person technology team as well as a support organization dedicated to serving agents is the best in the world at listening to agent feedback and turning those ideas into software and services that help agents save time, grow their business and serve their clients best. That's the secret sauce of Compass.

We recognize that agents are one of the largest group of underserved business owners in the country. So we built a model dedicated to agent success. We only succeed when agents succeed, and we put our money where our mouth is. In fact, no one in real estate is investing more in the success of real estate agents than Compass.

At Compass, we've always been laser-focused on improving the traditional agent model rather than disrupting it. The market hasn't always agreed with us, but we've been consistent over the long term in our belief that technology can make agents even better at their jobs. 90% of homebuyers and sellers rely on agents to help guide them through the real estate process. And the data shows that this is not changing anytime soon.

Now on to the quarterly results. On the financial side, we posted record third quarter revenue of nearly $1.75 billion, up 47% year over year and at the high end of our guidance. Adjusted EBITDA was a positive $12 million, exceeding our guidance. Notably, for the trailing four quarters, we generated $45 million of adjusted EBITDA.

This is the second consecutive quarter we've had positive trailing four quarters of adjusted EBITDA, and we did it while continuing to invest in expansion into new and existing markets, improving the Compass platform, and growing our adjacent services business. These investments will continue into Q4 as we use the profits from our more mature markets to fuel these key growth drivers. The heart of Compass is our agents. And this quarter, we saw a continued growth in our agent community and our biggest-ever week of adding new principal agents.

Our average principal agent count increased to just over 11,600 with 987 principal agents added during the third quarter alone. Those new principal agents represent a 214% increase over the new principal agents in 3Q 2020. More and more, agents are seeing the value of the Compass platform, enabling it to be a powerful recruiting and retention tool. Our experienced agents have seen at all in the business.

They know that Compass is the only company making the necessary investments to meet their needs today and tomorrow. We saw this belief manifest itself once again in our principal agent retention metric, which remains above 90%. What was particularly pleasing to see, though, was that our agent retention improved year over year even as non-GAAP C&O margin improved 180 basis points as well. Our agents recorded over 62,000 transactions on the Compass platform in the third quarter.

We beat our prior third quarter record by over 16,000 transactions. Despite all the talk in the past of a slowing real estate market, this was our second-best quarter for transactions ever. On a year-over-year basis, transactions were up 36%. And we again outpaced the industry, which declined by 1%.

Consistent with the step down in revenue in last quarter's guidance, we saw transactions declined 5% from the second quarter, reflecting a return to more normal seasonality post-COVID. On average, each of our principal agents closed 5.4 deals in the quarter. Transactions per principal -- per average principal agent was up 3% compared to the prior year and is continuing to outpace the industry where transactions were down 1%. The results this quarter show that Compass agents can continue to outpace the industry in a variety of economic cycles.

Over the last few years, we have consistently increased this number from 12.8 in full year 2019 to 16.7 in 2020, and we expect it to be around 20 at the end of this year. The combination of our agents' performance on completed transactions and the 6% increase in average home prices drove GTV to a third quarter record of $69 billion in the quarter, up 45% year over year. We also expanded our footprint in mid-tier markets in the quarter. We launched five new markets, including Kansas City, Missouri; Hartford, Connecticut; and Derm, North Carolina, bringing our total market count to 67, covering approximately 47% of the U.S.

population. We will continue to expand our business both within existing markets and to new markets in future quarters. Now let's move to our adjacent services, which comprised 1% of revenue today but will continue to be a bigger percentage of revenue each year. Adjacent services is accelerating as we continue to scale Title and Escrow and start writing mortgages in the near future.

As I said before, we are more than just a brokerage. Yes. I'm proud that we have built one of the fastest-growing brokerages in the country, but our strategy at Compass is to be much more than that. And I believe the key to creating a long-term sustainable financial advantage is our platform.

Unlike any other traditional brokerage, adjacent services will be fully integrated and embedded in the entirety of the agent workflow through the platform. As a result, Compass will be able to recommend the right products and services at the right point in the life cycle of the transaction. The platform will serve as the foundation on top of which we will layer a myriad of new products and services that give us the capacity to increase value for agents, drive higher attach, and uniquely position us to capture more of the agent and client spend in the real estate ecosystem. The platform we're creating will serve agents in residential real estate transactions, as well as the adjacent spend that's around those transactions.

This is important for three reasons. First, these adjacent services will enhance our long-term profitability profile. Second, integrating these services into the platform will empower agents to deliver a more integrated seamless experience to their clients, contributing to higher attach rates. And third, the best thing about the adjacent service business model is that there is little to no incremental customer acquisition cost for Compass because our agents already have the client relationship.

We see a clear path to facilitating and monetizing a large number of adjacent services on our platform over the next two years. In T&E, since the close of the second quarter, we set up operations in Texas, Pennsylvania, New Jersey, and Colorado, and we are now covering half of our total transactions, which is where we said it would be by year end. Our land-and-expand strategy is well underway in these markets we're growing attach. But keep in mind that in many of these markets, our T&E business is still small and can't yet serve the full agent base.

In mortgage, we currently are doing all the background work to get ready to launch, hiring loan officers, receiving regulatory approvals, and establishing warehouse lines of credit. We recruited loan officers and are expected -- and have also been approved to operate in six states. We're on track to write our first mortgages in the fourth quarter and can't wait to show you what we put together. I'm now going to hand it over to Kristen, who will go through the financials in more detail, but I just want to say once again how pleased I am with the performance this quarter in our outlook for what is still to come.

And one plug before I leave. We're going to Austin, Texas next week for our annual agent conference. It's like the South by Southwest for real estate agents. Tune in if you want to see what is likely around by thousands of passionate Compass agents who are excited to build the future of real estate.

We'll be webcasting the main event on the afternoon of the 16th, where we'll be talking about the future product releases that we're going to give to our agents. We're all really excited about these products and hope you can see what we have in store for them. I'll be back at the end to answer Q&A, but now let me pass it on to Kristen to take the floor.

Kristen Ankerbrandt -- Chief Financial Officer

Thanks, Robert. I'm excited to share our third quarter results. We delivered an outstanding third quarter where we met and in several areas exceeded our expectations and guidance. This is the third quarter in a row where we've done just that.

Our year-over-year results were strong, proving again that Compass can compete effectively in a variety of macro environments. And we're excited to yet again raise our full year revenue and EBITDA guidance. Here are some of the financial highlights for the quarter. Revenue grew 47% to $1.74 billion.

Our non-GAAP C&O margin improved by 180 basis points year over year. We generated positive adjusted EBITDA of $12 million, exceeding our guidance, and $45 million of adjusted EBITDA on an LTM basis. And at quarter end, we had $791 million of cash and an untapped $350 million revolver, giving us significant flexibility to execute our plan. Our $1.74 billion of revenue was at the high end of our guided range despite a difficult comp in the prior year when revenues were up 80%.

Last quarter, we talked about looking at two-year CAGRs to normalize for the unusual seasonal trends we saw in 2020. This quarter, our two-year CAGR was 62%, in line with the two-year CAGR of 65% we saw in 2Q 2021. What drove the revenue in Q3? It was the combination of more agents and more markets, more transactions, higher average transaction values, and a stable commission rate. We continue to drive transaction growth for our agents, outpacing industry growth by 37 percentage points.

We saw transactions per principal agent grow 3% year over year to 5.4, in line with our expectations. It's worth noting that transactions per principal agent was impacted by the large number of new agents who came onto the platform in the quarter and who have not yet ramped to normal productivity. We nearly tripled the number of agents we brought on this quarter compared to the same quarter last year. As those agents fully ramp, we will see the benefit of their production in our future financial results.

We grew our national market share to 5.4% in the third quarter, up 130 basis points year over year, reflecting the 45% increase in our GTV. We did see a sequential decline from 6.2% share in the second quarter due to the lower end of the market catching up with the luxury segment. This is not the start of a long-term trend. And in fact, in October, we've seen market share returning to levels well above those seen in Q3.

We also continue to make progress on our profitability goals faster than expected. Our non-GAAP C&O margin increased by 180 basis points year over year, which was an acceleration from Q1 and Q2. The improvement reflects our focus on driving margin as we improve our agent cohort economics and continue to scale adjacent services. The renewed strength in New York also contributed to this improvement in margin.

Our adjusted EBITDA of $12 million exceeded expectations as leverage in C&O and sales and marketing offset planned investments in the platform and adjacent services. We continue to expand to new markets and benefit from the TAM opened up by the 23 markets we've launched year to date. And we continue to make progress in growing our adjacent services business, a TAM of $140 billion that we're just beginning to attack. Opening up these TAMs will help to grow our top and bottom lines in the future.

Now let me provide some context on the housing market. Activity may have normalized some from the frenzy of the second quarter, but demand remains high. Inventory remains tight, and our revenue and transactions remain at near-record levels. There is new demand coming from millennials entering the market and foreign buyers returning to the market as COVID-related travel restrictions ease.

Americans continue to express an interest in moving homes as remote work creates new flexibility, and prospective buyers have record levels of home equity to fund new purchases. As we talked about last quarter, continued strong demand for homes simply cannot be met by the current low supply. As a result, we expect continued strength in the housing market and the remainder of '21 and beyond. Now we're watching interest rates, just like everybody else, but we're much more focused on the controllable growth drivers of our business.

We continue to successfully add agents to our platform and grow their transactions. We continue to expand to new markets, and we're moving into new revenue streams adjacent to the core transaction. Despite our success to date, we have significant runway to grow. Our positive view of the market and the momentum that we've seen in the quarter so far is reflected in our updated guidance for fiscal year 2021.

On our last earnings call, we increased our annual guidance to $6.15 billion to $6.35 billion in revenue. Today, we are again increasing our revenue expectations to $6.375 billion to $6.425 billion. This reflects a year-over-year growth rate of 72% at the midpoint or an increase of $150 million compared to our prior guidance. Our prior adjusted EBITDA guidance for full year 2021 was a loss of $45 million to $85 million.

We now expect a loss of $5 million to $25 million with an adjusted EBITDA margin of negative 0.2% at the midpoint. This reflects an improvement of $50 million at the midpoint compared to prior guidance and $141 million improvement compared to our loss of $156 million for the full year of 2020. For the fourth quarter, we expect revenue of $1.575 billion to $1.625 billion. At the midpoint, this implies year-over-year growth of 30% and a two-year revenue CAGR of 55%.

We're seeing healthy activity across our markets in Q4 so far. Year over year, we expect 4Q transactions to be up by roughly 20%. For the fourth quarter, we expect adjusted EBITDA to be a loss of $55 million to $75 million. This implies an adjusted EBITDA margin of negative 4% at the midpoint.

As we discussed previously, our strong future outlook has given us the confidence to make investments in our business to drive profitability over the long term. This year, we launched 23 new markets versus our typical pace of eight to 10 markets per year. We're also investing to expand Title and Escrow markets and launch our mortgage business a year sooner than planned. And there's costs associated with these investments that will show up in Q4 before driving to sustainable adjusted EBITDA profitability next year.

We continue to invest in our platform, which is what we believe drives Compass' outperformance relative to the industry. Since the IPO, we've grown the business ahead of our expectations and generated significantly more adjusted EBITDA than anticipated as we effectively managed the expense base. That has allowed us to accelerate our time line to adjusted EBITDA profitability, and our updated annual guidance shows a continued trend of shrinking EBITDA losses. We believe that sets us up well to deliver on our commitment to adjusted EBITDA profitability in 2022.

We have more conviction in our agent-focused strategy than ever before. Agents are not going away. In fact, we see their importance growing as they sit at the center of the ecosystem that drives 90% of real estate transactions as well as all the adjacent services around the transaction. We're not looking to disrupt and replace agents but to empower them with the software and services to transform the $2 trillion residential real estate industry.

And our business model is directly aligned with our agents' success. As we deliver on our promise to empower our agents, we also deliver on our financial and operational goals, setting strong expectations and exceeding them consistently. Make no mistake about it. At Compass, we have the same steadfast commitment to deliver for you, our investors, that we have to deliver for our agents.

Now with that, we are happy to take your questions.

Questions & Answers:

Operator

Thank you very much, and thank you, Ben. [Operator instructions] Take our first question this afternoon from Ross Sandler with Barclays.

Ross Sandler -- Barclays -- Analyst

Hey, guys. Kristen, I think you just said that you expect transaction growth year-on-year in the fourth quarter. I just want to clarify that. And can you also just talk about the linearity that you're seeing that would put you at about 57,000, I believe, for the fourth quarter? So what's the linearity that you're seeing across your largest markets? And if we get something like higher SALT caps, Do you expect that to be a net positive? Or how should we think about something like that playing out in terms of your business? And the second question is on T&E.

You said mid-single-digit penetration of total. So I think we're probably twice that on the coverage zone. So how quickly do you guys expect that to get up to where you are in SoCal, which I think is north of 40% at this point? What else do you have to put in place to get at least the coverage zone cranked up?

Kristen Ankerbrandt -- Chief Financial Officer

Sure. Thanks, Ross. So yes, you are correct. We are expecting year-over-year transaction growth of about 20%.

And as indicated in our guidance, we have seen -- we are starting to see a return to more normal seasonality following quite a different 2020 as a result of COVID. We started to see a little bit of that return in Q3, and we expect to see a mid-single-digit decline in revenue sequentially in Q4. And so our transactions will likely come down as a result of that as well. In terms of your second question on T&E, we have -- at this point, we're looking at that attach rate as an attach rate across all of our transactions in the U.S.

So that's really a measure of the total transactions in our base that have Title and Escrow services attached. Over time, we expect to grow that in a few different ways. First, we'll look to further penetrate the markets where we already have a presence, right? And we talked about having a presence in nine states for our Title and Escrow business. We're at different levels of penetration across those different states.

So we'll continue to look to penetrate those markets further. We'll also look to expand our Title and Escrow services into new states. And we'll -- we've got plans to do that through the course of the remainder of this year into '22. And then, of course, we're also launching our mortgage business at the end of this year, and we'll expect to see real momentum there starting in 2022.

And so we look at that adjacent services attach rate across both Title and Escrow and mortgage and across all of our transactions. It will take us some time to get to the attach rates that we saw with our Chartwell business in Southern California. But we think that those rates or industry average rates are achievable within certainly the next three to five years. We think there's a possibility we can do even better than that over time.

Ben Barrett -- Vice President, Investor Relations

Next question, please, operator.

Operator

Thank you. We'll take our next question now from Jason Helfstein of Oppenheimer.

Jason Helfstein -- Oppenheimer and Company -- Analyst

Thanks. I'll ask two. So how do you incentivize your agents to push your Title and Escrow and mortgage versus alternatives given kind of rest rules? And then secondly, there's obviously been numerous technical factors that have weighed on the stock. As you get past the lockup, the earnings lag out, I mean, the stock cannot get more support.

I mean, are you willing to consider a buyback or kind of more aggressive opex reductions? And maybe kind of just give us your perspective there.

Robert Reffkin -- Founder and Chief Executive Officer

Yes. So I'll answer the first question. I'll let Kristen answer the second. Yes.

So of course, there are rest of rules that we follow and the entire industry follows, where you can't economically incentivize an agent for referring title and mortgage to their clients or any other product or service that's required at the transaction complete. And so we follow that. And so we have to be able to compete by having the best title officer, the best loan officers. You go in the good old-fashioned way with the best service.

And what's unique about what we our building is the platform is going to integrate the actual title and mortgage solutions through the agent workflow. It will be embedded in the workflow and integrated into the workflow, making it easier for the agent and their clients to complete the transaction. And so good old-fashioned, again, a better service on the human side but also on the software side.

Kristen Ankerbrandt -- Chief Financial Officer

And in terms of your second question, Jason, we -- look, we remain very confident in our strategy here. So what we are focused on, first and foremost, is execution. Even -- we see some of the technical challenges that you're pointing to. And of course, we'll be open to evaluating different options there.

But at this point, we don't have any plans or any commitments to a buyback or any similar strategy right now. We're really focused on executing our strategy. But we'll -- we are open-minded and always evaluating different alternatives.

Jason Helfstein -- Oppenheimer and Company -- Analyst

Thank you.

Ben Barrett -- Vice President, Investor Relations

Operator, next question, please.

Operator

Thank you. We'll take our next question now from Daniel Adam of Loop Capital Markets.

Daniel Adam -- Loop Capital Markets -- Analyst

Hi. Good afternoon. Thanks for taking my question. Just one for me.

You noted that your October market share was tracking well above what you saw in Q3. Can you quantify how much above? And was your share in October tracking above or below the 6.2% you saw in the second quarter?

Robert Reffkin -- Founder and Chief Executive Officer

The -- I think just taking it to back first, I just want to reiterate that the Q3 market share sequential is not a decline over Q2, is not part of any long-term trend. As Kristen mentioned, in October, it was up from that Q3 level. We don't share those month-to-month numbers, but it was meaningfully up. Also, I think it's worth noting that historically, we have seen the third quarter relative to the second quarter market share decline in the past and due -- that's due to seasonality.

In this circumstance, it's really being driven by the low end taking off relative to the high end in the third quarter. What we see in the market is that there's a sense of buyer urgency in the low end as rates were rising to get ahead of that rate increase. We're comforted that our business did what we said it would do or we thought it would do in the third quarter. And you can actually see, if you look at other comparable brokerages, the higher they are in the luxury space, they saw similar trends.

And the lower people are -- and the more people are in the low-end space that they saw offsite trends. So you can really see that it was driven by there's incredible momentum in the low end in this quarter.

Daniel Adam -- Loop Capital Markets -- Analyst

OK. Great. That makes sense. Thank you.

Operator

[Operator instructions] And we do have a follow-up question now from Jason Helfstein of Oppenheimer.

Jason Helfstein -- Oppenheimer and Company -- Analyst

Hey. I figured why not? Does it get easier to hire agents if the market slows? Just philosophically, maybe talk about that. Thanks.

Robert Reffkin -- Founder and Chief Executive Officer

Yes. No. It absolutely does. It's one of the benefits of a slowing market.

When things are incredibly busy, agents don't have the time to have a conversation. They're too busy with their clients, which, of course, is their priority. So they don't have time to learn about Compass and to see what we can provide with our platform. And so that's definitely one of the benefits.

And it's also worth noting, though, that we've seen extraordinary levels of retention. One thing we did not mention in the call is that retention in the last 2 quarters was the highest it has been in the past two years. And so we hear a strong indication that agents are seeing value from the platform, and they continue to want to -- they continue to see that this is a place where they can best grow their business, save time and best serve their clients.

Jason Helfstein -- Oppenheimer and Company -- Analyst

Thank you.

Operator

[Operator instructions]

Ben Barrett -- Vice President, Investor Relations

OK. Operator -- Sorry. If there are no more questions, we'd like to thank everyone for coming. And please reach out, and have a great day.

Robert Reffkin -- Founder and Chief Executive Officer

Thank you, everybody.

Operator

[Operator signoff]

Duration: 38 minutes

Call participants:

Ben Barrett -- Vice President, Investor Relations

Robert Reffkin -- Founder and Chief Executive Officer

Kristen Ankerbrandt -- Chief Financial Officer

Ross Sandler -- Barclays -- Analyst

Jason Helfstein -- Oppenheimer and Company -- Analyst

Daniel Adam -- Loop Capital Markets -- Analyst

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