What happened
Shares of Compass (COMP -2.35%), one of the nation's largest real estate brokerages, were falling today after the company missed estimates in its second-quarter earnings report and issued weak guidance for the rest of the year.
As of 10:48 a.m. ET, the stock was down 15.1%.
So what
In a challenging environment in the residential real estate industry, Compass, which bills itself as a tech-forward real estate disruptor, posted revenue growth of just 4% to $2.02 billion -- just short of estimates at $2.12 billion. Transactions increased 2%, and gross transaction value was flat at $76.8 billion. The company gained 50 basis points in market share over the past year to reach 4.6%.
With revenue growth screeching to a halt, the company's losses significantly expanded as it had to absorb its increased investments in the business. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in the quarter fell from $71 million to $4 million. And its net loss according to generally accepted accounting principles (GAAP) expanded from $7 million in the quarter a year ago to $101 million, or $0.24 per share, compared with estimates at a loss of $0.14 per share.
The slow growth wasn't entirely surprising as conditions in the real estate industry have changed substantially over the past year with mortgage rates spiking and the pandemic-driven housing boom coming to an end.
CEO Robert Reffkin acknowledged the headwinds, saying, "Compass continued to grow revenue in the second quarter despite extremely challenging market conditions. This performance highlights the strength of our agents and our commitment to enabling their success through superior technology and other programs."
The company also announced a significant cost-reduction program with a goal of becoming free-cash-flow positive by 2023. It aims to have all cost reductions completed by the end of this year.
Now what
Management slashed its full-year revenue guidance from $7.6 billion-$8 billion to just $6.15 billion-$6.45 billion, or a year-over-year decline of 2% at the midpoint. Additionally, it lowered its adjusted EBITDA forecast from at least breakeven to a loss of $150 million-$225 million.
Those numbers help explain why the stock is down double digits, or 80% since its initial public offering last year, and why it's implementing a cost-cutting program. With flat growth and wide losses at Compass, expect investors to remain skeptical until the company proves it can turn a profit.