There was a lot of information to unpack from tech-forward real estate brokerage Redfin's (RDFN 0.57%) final earnings report of 2019 -- most of it very positive. The company continues to chip away at market share, even though a housing market dominated by soaring prices (now even in rural areas) and a supply shortage of home listings is creating challenges.
Redfin is winning new customers in spite of the bumps and new services are helping it deepen its relationship with home buyers and sellers. After a strong showing in 2019, the new year looks just as promising.
Higher sales, narrowing losses
First, let's recap the headline numbers. Fourth-quarter 2019 revenue was $233 million, 88% higher compared with the same period in 2018, and net losses narrowed to $7.8 million compared with a net loss of $12.2 million in Q4 2018. U.S. market share of existing home sales grew 0.13 percentage points to 0.94% during the fourth quarter.
Image source: Getty Images.
Fast growth in new services (we'll talk about that in a minute) were again primarily responsible for the big top-line gains, while the company's core real estate brokerage service grew at a 31% clip. Added to results from the rest of 2019, the accelerating growth at Redfin during the final quarter of the year tallied up to some impressive results for the small brokerage technologist.
|
Metric |
12 Months Ended Dec. 31, 2019 |
12 Months Ended Dec. 31, 2018 |
Change |
|---|---|---|---|
|
Revenue |
$780 million |
$487 million |
60% |
|
Cost of revenue |
$636 million |
$367 million |
73% |
|
Operating expenses |
$223 million |
$163 million |
37% |
|
Net income (loss) |
($80.8 million) |
($42.0 million) |
N/A |
Data source: Redfin.
Fee changes and new services
Net losses were high but included $27.8 million of non-cash stock-based compensation to employees, and most of the cash losses were realized early in 2019 from the rollout of new services. RedfinNow -- the company's tool to purchase homes directly from sellers, which then get renovated and resold by Redfin -- is available in 13 cities, Las Vegas being the latest market. Management doesn't expect to add any new cities until at least the second half of 2020, focusing instead on getting better at profitably bidding on houses and letting partners such as instant cash offer site Opendoor handle deals Redfin doesn't feel comfortable with. RedfinNow generated $99 million in revenue in Q4, up from $22 million a year ago, and gross margins were homing in on break-even.
Redfin Direct was another area of growth for the company. The service that allows unrepresented buyers to prepare and submit offers on Redfin listings (thus saving sellers higher real estate agent fees) was launched in Texas and California, and now nearly 30% of Refin's homes-for-sale listings support the feature. Other services such as Mortgage and Title added $4 million in revenue in Q4, a 67% increase, and are available to nearly half of Redfin's listings.
Now on to the really big change for 2020: the standardization of listing fees. Redfin had been testing either a 1% or 1.5% fee on the value of a home sale, depending on the city. Those variable fees are going away, with Redfin now charging a 1% listing fee to all home sellers who also buy their next home with Redfin within a year and a 1.5% listing fee to sellers who only sell their home with Redfin. The increase was justified as even at 1.5% on a sale, the higher fee is still far less than what a traditional broker charges (usually 2.5% to 3%). Management said the standardization will result in half of listings getting a fee bump of 0.5%, with about a third of listings seeing no change as the pricing was being tested already since last April.
Does it sound like Redfin is backpedaling on its mission to lower the cost of getting into a home? Not exactly. Here was CEO Glenn Kelman's rationale:
The most encouraging finding from last year's pilot markets was that more sellers chose to use Redfin for the purchase of their next home. These customers who both sell and buy still pay 1% and Redfin makes more money by brokering two sales instead of one.
Put simply, most sellers are looking to purchase again shortly after offloading their homes, and a 1% fee to do each simply can't be beaten. The move could thus help Redfin drive more market share to its ecosystem and drive down the real estate industry's take of home sales.
Other plans in the works include qualifying home buyers before allowing them to take a virtual tour of a home on Redfin's site (which management said so far has "deterred only the most casual of looky-loos") and increasing the accuracy of Redfin's artificially intelligent home value estimator software. For Q1 2020, management forecasts a 63% to 71% year-over-year revenue rise, and a net loss of $68 to $72 million (which should moderate substantially after that).
With $305 million in cash and equivalents in the bank at the end of 2019, Redfin remains a well-funded real estate investment worth a look.
