Redfin Corporation (NASDAQ:RDFN) Q4 2023 Earnings Call Transcript February 27, 2024

Redfin Corporation beats earnings expectations. Reported EPS is $-0.2, expectations were $-0.21. Redfin Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Goo day, and welcome to the Redfin Corporation’s Q4 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, that this conference is being recorded. I would now like to turn the conference over to the Head of Investor Relations, Meg Nunnally. Please go ahead.

Meg Nunnally: Thank you, operator. Good afternoon and welcome to Redfin’s financial results conference call for the fourth quarter ended December 31, 2023. I’m Meg Nunnally, Redfin’s Head of Investor Relations. Joining me on the call today is Glenn Kelman, our CEO; and Chris Nielsen, our CFO. Before we start, note that some of our statements on today’s call are forward-looking. We believe our assumptions and expectations related to these forward-looking statements are reasonable, but our actual results may turn out to be materially different. Please read and consider the risk factors in our SEC filings together with the content of today’s call. Any forward-looking statements are based on our assumptions today, and we don’t undertake to update these statements in light of new information or future events.

On this call, we will present non-GAAP measures when discussing our financial results. We encourage you to review today’s earnings release, which is available on our website at investors.redfin.com for more information related to our non-GAAP measures, including the most directly comparable GAAP financial measures and related reconciliations. All comparisons made in the course of this call are against continuing operations for the same period in the prior year, unless otherwise stated. Lastly, we will be providing a copy of our prepared remarks on our website by the conclusion of today’s call, and a full transcript and audio replay will also be available soon after the call. With that, I’ll turn the call over to Glenn.

Glenn Kelman: Thanks Meg. And hi, everyone. Redfin’s fourth quarter earnings were in the middle of the range we gave investors in our last call, a $23 million net loss on $218 million of revenue. Our adjusted EBITDA loss for continuing operations was $13 million, a $27 million improvement over the fourth quarter of 2022. The fourth quarter's only disappointment was a market share decline, the share of home sales brokered by our own agents and through referrals to our partner agents was 0.72%, down from 0.76% in the fourth quarter of 2022 and from 0.78% in the third quarter of 2023. Our market share already recovered in January increasing above the fourth quarter level. We expect share gains to continue in 2024, with much of the revenue from that gain falling to the bottom line.

We ended 2023 having lowered full year operating expenses by $62 million, with fourth quarter gross margins improving from 25% in 2022 to 34% in 2023. And we have ample opportunities to grow. Using Comscore to compare redfin.com's online audience to that of our two main historical rivals, redfin.com grew 13 points faster in 2023. To grow sales alongside traffic, we've advanced three initiatives to attract better agents and deliver better service. In some pilot markets, we shifted our agents to all variable pay. In others, we restored commission refunds for customers who signed a buyer's agency agreement. In still others, we've required our salespeople to meet customers on their first tour. Our agents have embraced these initiatives, and already we're closing more sales.

These initiatives are now being broadened to yield a financially meaningful impact in the summer, with all three likely to be nationwide by early 2025. In the meantime, we're working hard to introduce more customers to our brokerage. According to Comscore, the fourth quarter visitors to redfin.com grew 10% year-over-year, while the growth rates of our two main historical rivals were 1% and negative 1%. One factor driving our growth is expansion. Once limited to home buyers in mostly coastal cities, redfin.com now spans homes for rent and for sale nationwide. The markets we've opened by adding listings give us room to build our audience for years to come. And redfin.com keeps getting better, not just bigger. In the fourth quarter, we became the first major site to use artificial intelligence for home shoppers to visualize how a home could be redecorated.

First, in mid -Atlantic markets, but with plans to expand this spring. Redfin.com is also surfacing more of our agents' local expertise, giving greater prominence to our insights about homes we've toured, and capturing new insights about the neighborhood. Here too, we're exploring the use of artificial intelligence, turning raw notes from an agent's phone into a well-phrased comment. Publishing this proprietary information should draw more visitors to our site, and, we hope, convince more of those visitors to use a Redfin agent. But to compete for sales, not just traffic, we're expanding the three fourth quarter initiatives identified at the outset of our call. Since our sales cycle is six months, we won't know for sure how well these initiatives are working until April at best, but the early indications could hardly be better.

The most significant of these initiatives is Redfin Next, which replaces agents-based salaries with higher commissions. We launched this program as Redfin Max, but changed its name to avoid any confusion with RE/MAX. As of February 22, the revenue closed for January and February in the four California markets piloting next is up 32% year-over-year, while the rest of the brokerage is down 1%. In May, we plan to expand Redfin Next to seven more markets, out of more than 100 Redfin markets total. With the expansion, Next will reach markets that accounted for about a third of Redfin's 2023 brokerage revenues. If the second stage of the pilot goes well, Redfin Next could become our Redfin-wide agent pay plan in early 2025. The next agents we're hiring are coming in large part for the opportunity to meet more customers, but will earn traditional splits on the customers they source themselves.

Hiring agents who aren't entirely dependent on our site makes Redfin more resilient to housing market volatility, especially now that we've replaced salaries with larger bonuses. In the four pilot markets, a Next agent is profitable after closing four Redfin-sourced sales per year, compared to seven previously. As we gather more data on how many customer introductions our Next agents need to be productive, we can be even more aggressive about hiring in 2025. This gives us room to gain share coming out of downturns, while limiting our fixed cost headed into downturns. We've had the most success bringing on agents who already know how to be systematic about online opportunities. Our one Next agent who had been paying a portal $10 ,000 to $15, 000 per month, said he planned to see how it went here at Redfin for a couple of months, but within a few weeks, I started bringing over my team.

Another said she'd never had so much support to run my business. I'm busy and getting good customers from the site. Beyond Next, the brokerage's other two initiatives work together to earn a sale from the first meeting between a customer and an agent. All you can meet requires a Redfin agent to meet customers on their first home tour and sign and save, restores commission refunds to home buyers who hire us after that first tour. We tested each in different pilot markets in part to understand if an emphasis on meeting customers could drive sales gains by itself without a commission refund. The problem these two initiatives address is that portal visitors use agents as a home touring service. Consumers who were once likely to hire the first agent they met, now use Redfin, another website, to schedule three different tours with three different agents.

To honor so many tour requests, Redfin uses contractors to handle tours when our employees are unavailable. All you can meet assigns customers only to lead agents who make themselves available to host the customer’s first tour. Agents with more availability get more customers. We still use contractors for subsequent tours, but in the event a lead agent can't break free to host the first tour, we route the customer to a partner agent at a different brokerage, which pays us a referral fee. Since we launched the All You Can Meet initiative on November 15, 2023, Redfin agents in the four pilot markets have gone from hosting 60% to 65% of first tours to hosting virtually all of them. Just last week, we expanded this initiative to reach more than 50 markets.

Our Atlanta market manager says that his restored lead agent has the face of Redfin. Meeting customers on their first tour sets up a Redfin agent to offer a commission refund of 0.25% to 0.5% to customers who hire us before their second home tour. We memorialized the hiring decision and the refund amount in a buyer's agency agreement. Restoring refunds is a reversal for Redfin, as we concluded in the fall of 2022 that refunds weren't an effective sales tool. But we believe that was because many agents didn't use the refund as a sales tool, rarely mentioning it to customers and never asking customers for a commitment in exchange for the refunds. We now expect agents to discuss the refund on the first tour so customers can decide whether it's worthwhile to sign the buyer's agency agreement before the next tour.

Our guess is that about half our sales will come from customers who signed the agreement and get the refund, and half will from come customers who later decide to work with us without a refund. This customer incentive, known as Sign and Save, launched in four markets on September 21st and is already increasing sales. By comparing close rate gains in pilot markets and control markets, we concluded that pilot market homebuyers are 24% more likely to write a [inaudible] offer via Redfin within 60 days of their first tour. The 24% increase spanned customers who signed the agreement to get a refund, and those who didn't, it's easily large enough to offset the cost of the refund to those customers who got it. In March, we planned to expand the pilot to almost every market, excluding only markets in the handful of states that outlawed commission refunds.

We believe a more motivated Next agent, set up by our system to meet every customer with an offer few other brokerages can match, will deliver significantly better results. Bay Equity, the lender we acquired in April 2022, is also improving sales execution. In the fourth quarter, a higher proportion of our brokerages' homebuyers used Bay equity for a mortgage. Attach rates had declined from 19% in the second quarter to 18% the third before bouncing back to 19% in fourth, excluding cash buyers, Bay Equity's fourth quarter attach rate was 25%, up from 22% in the third quarter and 24% in second. Projected attach rates for the first quarter of 2024 are even higher. We expect that growth to continue through the rest of 2024, driven by simpler manager incentives and, in markets where the law allows it, new agent incentives.

We've also integrated Bay Equity deeper into our sales process, automatically alerting loan officers not only when a customer first asked the tour to home, but also now when her offer has been accepted. Another basis for optimism is the lending industry itself, which has reduced staff to the point that competitors have been less willing to lose money on loans, giving us room in 2024 for improving gains on sale. If rates ease further in the back half of the year, we also expect to refinance more mortgages with demand coming from our website but also from our database of past customers. Potential improvements in the for sale market may buoy our brokerage and lending businesses, but the customers of our rentals business are under pressure from higher vacancy rates.

Even so, Rent generated $3 million of fourth quarter adjusted EBITDA on 20% year-over-year revenue growth with positive net bookings. This is the second consecutive quarter of adjusted EBITDA profits for a business that is recently as the first quarter of 2023 lost $9.7 million in adjusted EBITDA. To grow revenue and earn a full year adjusted EBITDA profit in a more challenging market, we are now integrating rents and Redfin, human resources, finance and legal departments, as well as technology infrastructure. Starting this summer, continuing through the first quarter of 2025, we expect significant savings from migrating to one cloud platform, one HR system, one finance system, one benefits plan. These efficiency gains will let us invest more in rent.com and apartmentguide.com and more in rent sales and industry marketing which will still run from Atlanta.

Redfin and Rent will work together to increase tenant inquiries for Rent’s customers, drawing on Redfin's expertise in attracting visitors from search engines, using machine learning to engage those visitors, and experimenting at scale to generate more leasing demand from our audience. These efforts will take months to bear fruit, but should lead to a larger, more profitable rentals marketplace. Rent is part of a larger initiative to generate more revenue from digital sources. Our other business segment, which consists of title forward and digital channels grew fourth quarter revenues to $10 million, up 54% year-over-year. Title Forward grew fourth quarter revenues 32% and is generating its first full year gross profit since 2019. Our digital businesses, which include a mortgage marketplace, display ads on redfin.com, lead generation for builders, and syndicating Walk Score to other real estate sites, grew fourth quarter revenue 101%.

We've now hired an experienced leader to build our display ads business and expect further revenue increases in 2024. Before turning the call over to Chris, let's discuss the housing market, which is still almost entirely driven by mortgage interest rates. Our concern has been that 2024 will turn out like 2023, when rates approach 6% in January, then rose, peaking above 8% on October. Rates subsequently declined, approaching 6.5% in mid-December until climbing again to above 7% in February 2024. This recent rate increase has dampened 2024 demand. But the people now coming into the housing market know what they're getting into, having become more accustomed to mortgage rate volatility. Some also seem to recognize that when rates do ease, the market is likely to get more competitive.

Already, our agents have reported a mostly seasonal resurgence in bidding wars. At one extreme, a Fremont, California listing got 50 Hoffers last week. Redfin's listing demand increased sharply coming into 2024 but moderated in February. Home buying demand wasn't as strong, but it's held up better. From customers asking to tour their first listing with Redfin, all the way through to book sales. Industrywide, seasonally adjusted existing home sales increased in January to an annualized rate of $4.0 million after being below $4.0 million since September. If there isn't a significant further increase in mortgage interest rates, we expect 2024 home sales to remain at or above the $4.0 million level through the first half. If there is any mortgage rate relief in the spring, the second half could be much stronger.

We aren't counting any chickens until they hatch. To minimize the first quarter losses, we usually incur in anticipation of our busy season. Redfin deferred mass media advertising until the second quarter, posted our sales kickoff virtually and limited first quarter business travel to employees in sales. Rather than waiting for a major housing market recovery, Redfin plans to grow, at least modestly through market share gains by competing better for traffic and for sales. And then much faster when the housing market recovers. Take it away, Chris.

Chris Nielsen : Thanks, Glenn. The fourth quarter closed a challenging year for the housing industry. Still, we're pleased with the work we've done to improve profitability and position the business to capture growth when the market begins to recover. Fourth quarter revenue was $218 million, down 2% from a year ago. At the same time, gross profit of $73 million was up 32% year-over-year, and total gross margin expanded from 25% to 34%. Each of our segments increased gross margin year-over-year, and our higher margin rentals and other segments grew faster than the rest of the business. Our adjusted EBITDA loss of $13 million was up from a loss of $40 million in the prior year. For the full year 2023, our adjusted EBITDA loss was $76 million, up from $145 million in the prior year.

We've been saying for several quarters that we're working towards a goal of trailing 12 -month adjusted EBITDA breakeven by the first half of 2024. This is still possible, but less certain now, given how mortgage interest rates have started this year, but we're on track for full year profits. Turning to our segment results for the fourth quarter, real estate services, which includes our brokerage and partner businesses, generated $133 million in revenue, down 9% year-over-year. Brokerage revenue was down 11% on a 20% decrease in brokerage transactions, partially offset by a 12% increase in brokerage revenue per transaction. The increase in revenue per brokerage transaction was driven by the reduction of our home buyer commission refund, revenue from concierge renovations, and a 4% increase in average home prices.

Revenue from our partners increased 19% on a 16% increase in transactions and mixed shift to higher value houses. Real estate services gross margin was 22.5%, up 450 basis points year-over-year. This is primarily driven by a 590 basis point decrease in personnel costs and transaction bonuses, and a 100 basis point decrease in home touring and field expenses, partially offset by a 190 basis point increase in seller home improvement expenses, each as a percentage of revenue. Net loss for real estate services in the fourth quarter was $21 million, up from a net loss of $28 million in the prior year. An adjusted EBITDA loss was $7 million, up from a loss of $16 million in the prior year. The increase is attributable to higher gross margin and lower operating expenses, which more than offset lower revenues.

Our rental segment posted its fifth straight quarter of growth, with revenue of $49 million, a 20% year-over-year increase. Rental's gross margin was 77.5%, up from 76.4% a year ago. Net loss for rentals was $10 million, up from a net loss of $22 million in the prior year. Adjusted EBITDA for the fourth quarter was $3 million, our second straight quarter of positive adjusted EBITDA for the rental segment. Our mortgage segment generated $26 million in revenue down 8% year-over-year. Mortgage gross margin was 4.6%, up from a negative 8.9% a year ago. This is primarily driven by a decrease in personnel costs as a percentage of revenue. Net loss for mortgage was $5 million, up from a loss of $12 million in the prior year. Adjusted EBITDA loss was $5 million compared to a $10 million loss in the prior year.

Our other segment generated revenue of $10 million, up 54% year-over-year as both our title and digital revenue businesses grew. Other segment gross margin was 40.6%, up from 7.4% a year ago. Net income was $2 million compared to a $1 million loss in the prior year. And adjusted EBITDA was positive $3 million compared to a negative $1 million in the prior year. Turning back to our consolidated results, total operating expenses were $117 million, down $25 million a year-over-year. The decrease was primarily attributable to $13 million in lower restructuring expenses, $3 million in lower marketing expenses, and $2 million in lower personnel expenses. Net loss was $23 million compared to a net loss from continuing operations of $27 million in the prior year, or $62 million including discontinued operations.

This was within our $27 million to $18 million loss guidance range and includes a $25 million gain on the extinguishment of notes, which was anticipated in our guidance. Our adjusted EBITDA loss was $13 million in line with our guidance range. Diluted loss per share attributable to common stock was $0.20 compared with the loss of $0.25 one year ago. Now turning to our financial expectations for the first quarter. For the first quarter of 2024, total revenue is expected to be flat on the low end or grow 4% on the high end. Real estate services revenue is expected to decline 1% on the low end or grow 3% on the high end with gross margin around 14% to 17%. We do not expect a material change in revenue per brokers transactions as a result of the home buyer refund that Glenn mentioned earlier.

Rentals revenue is expected to continue to grow between 13% and 16%. Mortgage revenue is expected to decline between 20% and 11%. Finally, other segment revenue is expected to grow between 28% and 29%. Total net loss is expected to be between $72 million and $65 million. Adjusted EBITDA loss from continuing operations is expected to be between $36 million and $29 million. And with that, let's take your questions.

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