Good day and welcome to the Compass Second Quarter 2021 Earnings Conference Call. My name is Catherine and I will be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Ben Barrett, Vice President of Investor Relations, you may begin your conference.

Good afternoon and thank you to everyone for joining Compass' second quarter earnings 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 second quarter and year-to-date financing as well as our guidance are included at the back of the earnings release from the shareholder 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 the 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' 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.

Thank you, Ben and thanks to everyone for joining the call. We are excited to be back with you today to talk about Compass and our second quarter results. Thanks to our agents' and employees' hard work throughout the quarter, we were able to deliver record results in terms of transactions, gross transaction value, revenue, and adjusted EBITDA. I can confidently say we are in the strongest position we have ever been in as a company. On the financial side, we delivered all-time record quarterly revenue of nearly $2 billion, which is up 186% year-over-year. Non-GAAP commission and other transaction-related expenses as a percentage of revenue improved by 100 basis points year-over-year, better than the 80 basis point improvement we saw in the first quarter. Adjusted EBITDA for the quarter was a positive $71 million. And if we look at our trailing four quarters, we generated $44 million of adjusted EBITDA. In the second quarter, our national market share almost doubled from the prior year as share increased to 6.2% up from 3.3%, primarily driven by our agents growing their transaction counts and our increase in the Compass agent base. The strong housing market was certainly a tailwind, but we outperformed the industry by a wide margin. Year-over-year our transaction growth was 140% compared to industry transaction growth of 32%. Due to the combination of our agents' ongoing outperformance, the strength of the housing market, and the impact our platform is having as an accelerant to business growth, we now believe that we'll be profitable on an adjusted EBITDA basis for the full fiscal year 2022, a year earlier than we previously expected. We are particularly excited that this financial success was driven by Compass making agents more productive on the platform. On average, each of our principal agents closed…

Thanks, Robert. I'm excited to be here today to share our second quarter results. I'm also going to go a bit deeper into Compass' path to adjusted EBITDA profitability and provide some updated guidance for the remainder of the year. Before we dive in, I want to start by reiterating how outstanding our Q2 year-over-year results were across the board. Revenue grew 186%. Transactions grew 140%, and that's compared to the industry average of 32%. We nearly doubled our national market share to 6.2%. We generated $71 million of adjusted EBITDA, an improvement of $128 million year-over-year. Our average principal agents grew 25%. We launched 15 new markets. We generated $81 million of free cash flow, and we have over $800 million of cash and an untapped $350 million revolver. So our balance sheet is healthy. The strength, breadth and persistence of these results showed momentum that exceeded our expectations coming in well ahead of our financial guidance on both revenue and adjusted EBITDA. Our extraordinary agents, armed with our tech platform delivered outsized results on both the top and bottom lines, and these results truly were outsized. Revenue in the quarter was a record coming in at $1.95 billion, more than $700 million better than our next best quarter. Adjusted EBITDA was a positive $71 million bringing us to adjusted EBITDA profitability of $44 million over the last 12 months. And we closed 65,000 transactions in the quarter, which equates to over 700 transactions per day. We expect continued strength in our business, but the comps will get harder now that we have lapped Q2 2020, the quarter most negatively impacted by COVID. We saw 82% of revenue growth in the back half of 2020 compared to the prior year, but we see a lot of underlying strength in…

Operator, first question, please?

Our first question comes from the line of Brian Nowak with Morgan Stanley.

Hi. This is Alex Wong on for Brian. Thanks so much for taking the question. First one just on number of principal agents added. Can you maybe help parse out what was leading that in terms of either new markets versus existing markets? And Robert, you talked about the 6.1 transactions per agent in the quarter, which is really impressive. Maybe what's driving that and how sustainable do you think that's going forward? And the second question around profitability. Kristen, I think the new EBITDA guidance assumes a roughly 20% drop-through on the incremental revenue and the pull-forward by year. Can you maybe parse out of the three areas you're talking about which ones are sort of maybe pushing that more in terms of ancillary services new tech and new markets? Thank you.

Great. So, how about I'll start with highlighting the driver of that 6.2 number and then I'll pass on to Kristen. Okay. We've seen very consistently, not just this quarter and this past -- the prior quarter, our agents outperforming the market. And this quarter, it was 93% growth in transactions for an average principal agent versus the industry going at 32%. But it's been consistent over many years. And so, the number of transactions per year increased per agent from 2018 to 2019 from 2019 to 2020 and then further in 2021 and it all gets back to that -- to the 19% number that we've talked about in the past where the average agent at Compass across five years of cohort data across geographies is growing their business 19% between year one and year two and then further on top of that in subsequent years. And that's -- what you're seeing now is the impact of that at scale. And when you have a company of now over 1,000-person technology team all focused on the goal of helping agents grow their business and a larger company on top of that where we're all here to help agents grow their business and have a better quality of life more money to support their family more time to be with their family this is -- these are the results you get. And we're bringing people across many, many different industries to bring their unique talent and their unique insights to that goal.

And I'm happy to talk to your other two questions. So in terms of the agent additions that we saw in Q2, as we mentioned, we launched 15 new markets in Q2 at different points throughout the quarter. So our expansion team is working throughout the quarter to launch those markets. And generally, you see announcements as we launch those markets. In any quarter, where we have new markets that we're launching, we do have our sales team focused on ensuring that we're bringing new additions in those markets. But we have salespeople across all of our markets who are recruiting new agents into the base. So, I would say, as we look at those new adds, it's really split between our new markets and our existing markets. And we haven't seen anything unusual or any different -- anything different in terms of our ability to recruit agents in either the new markets or the existing markets. In terms of your last question, as we look at the increase in spend in the back half of the year, there were really three areas that I highlighted. And the first is expansion. And those 15 markets that we launched in Q2 and the three markets that we launched in Q1, those really are driving about a third of the incremental spend in the back half of the year. The tech investment is driving another third. And then the remaining third is mostly related to adjacent services although there are a few other small items in there as well.

Great, thanks.

Our next question comes from the line of Mike Ng with Goldman Sachs.

Hey. Good afternoon. Thank you very much for the question. It was really helpful to see the market-level margins over time for the 2018 launches. Would you talk a little bit about the key drivers of that margin improvement and how those leverage over time? Is it primarily C&O expenses or adjacent services attached that drive that margin for instance? Any detail there will be incredibly helpful. Thank you.

Sure. Well, glad you enjoyed the new disclosure. For a major market and these are really new markets where we don't already have a presence, as I've talked about it, generally takes three years from launch to get to double-digit market share and profitability at the market level. And in the first and second year of a market launch, we're focused on adding agents and building out our operations. We generally have to invest ahead of the revenue in those major markets. And we typically cross over to profitability in the third year as we build a strong agent and transaction base from which we can expand further. As you look at the -- what's really driving that it is leveraged across literally all cost categories. And the specific data that we showed was markets that were launched in 2018. At various points within 2018, there was little to no adjacent services reflected in the numbers that you saw. So that is all opportunity to come. Probably worth noting also roughly half of our markets are still in the investment phase and they're moving to profitability at some point within the next three years. So even within the markets that we have already launched there's a lot of opportunities for additional growth and profitability.

Great. Thanks Kristen.

Your next question comes from the line of Jason Helfstein with Oppenheimer.

Well, all of I guess the key metrics work in the right direction. Maybe help us understand just a little more detail. So, on agent productivity obviously this is I think a peak that 6.1 6.2. Do you -- how should we think about that going forward? Kind of stay at this level? Does it need to come down? I think we also saw a decline in commission and transaction as a percent of revenue. Maybe explain kind of on a year-over-year basis kind of why that was down. And then you also saw very nice gains in marketing efficiency. Maybe just talk about that a little bit more?

Maybe I'll talk about the agent productivity and pass on to Kristen to talk about the other two items. Look we -- there may be fluctuations in agent productivity quarter-to-quarter but the -- we're very confident that the trend line of agent productivity will increase year-over-year. Remember 10 transactions per year in 2018; 13 in 2019; in 2020 it was 17. So, we feel very confident in that ongoing number going up into the right. And again that's just because we have clear insight into the productivity tools that we're building for agents. We're making sure that anything that can help an agent grow their business that Compass over time will be able to provide if not today definitely over time. And we are constantly looking at everything out there that is helping agents grow and be more productive and bring them to our agents.

And Jason, I'm happy to talk through your question on commissions and other. So, we did see commissions and other as a percentage of revenue improve 100 basis points year-over-year. And we saw a similar trend in Q1 where we saw an 80 basis point improvement year-over-year. So we did even better than that this quarter. And this is primarily the result of three things: first, improving agent economics as our cohorts mature; the recovery of New York City post COVID which we think will continue as international buyers reenter the market as Robert mentioned in his comments; and then we have been focusing our expansion in markets where the margin structure is more attractive to Compass. And so, as we prioritize those markets for expansion, you're really starting to see the benefit of that roll through the financials. When it comes -- as far as the leverage we saw in the sales and marketing line -- first of all I mean, we were thrilled to see operating leverage across all categories. We touched on commissions and other, but we saw it down the entire P&L. About 680 basis points came from sales and marketing and that was really related to economies of scale given some offset by costs associated with a greater number of average principal agents and some price increases. We do have occupancy in that line and so that is one big chunk along with a couple of other things that are essentially fixed costs in that category. And so that's what drove the outsized operating leverage in that line.

Thank you.

Our next question comes from the line of Ross Sandler with Barclays.

Hi, guys. Just a follow-up on that market disclosure data and then one other new question. So the data looks great. And is the breakeven point happening sooner today than it was maybe in your first dozen or so markets because of the role that adjacencies or Compass Anywhere is playing in flipping those markets to EBITDA-positive? Any color on like -- that's obviously new over the last couple of years compared to back in the day. So can you get to breakeven a lot quicker on these new markets I guess is the question? And then just a high-level question. So you're seeing some softening in the market not as much at the high end where you guys operate, but just kind of across the board. Is the value prop for agents moving to Compass higher or the same if we're in a softening market versus the strong one that we've seen? Any color on your ability to recruit agents from other platforms when things start to cool off a little bit? Thanks a lot.

All right, Ross. Good to hear from you. In terms of the market-level profitability we have -- we've just gotten better at launching these markets over time. The 2018 cohort is one that really reflects, sort of, our newest expansion playbook, but we have continued to evolve it since then. We are -- we did see an improvement when it came to those 2018 cohorts in terms of the time line to profitability relative to the markets that we launched before 2018. And that's coming from a whole host of things. Compass Anywhere plays a role in that. Essentially that creates incremental capacity in the market that doesn't require associated office space. So that's certainly a factor there. Adjacent services really does not impact those numbers. We are so new in adjacent services that most of the opportunity from a profitability perspective on a market level is to come. So as we continue to roll-out title and escrow and mortgage across all of our markets and we've got a pretty healthy expansion plan for title and escrow by the end of this year of course we want to have mortgage operational across all of our markets by 2022. That will be another catalyst for reaching profitability potentially even quicker.

And on your second question about what happens to Compass if the housing market cools I think it's what we're seeing that we have again a very positive outlook on the market. But if the market does cool, we have built a business that has performed very successfully throughout many different market environments, particularly when you look at it at a local level. And we have a very large buffer of growth on top of the market because our transactions have consistently outgrown and outperformed the market with our transaction growth this past quarter at 140% versus the industry at 32%. So even if there is flat or decline in the market, we will still have a significant buffer to allow us to grow aggressively. That said there are two unanticipated consequences of a slowing market which help Compass. The one is it makes it easier to talk to agents. When things are really, really busy agents don't have enough time in the day and they're focused on just meeting their client needs and after that their family not having conversations with new companies. But when things slow down they have more time to talk to our enterprise sales team. The second is when their business goes down or slows they're looking for growth. And Compass is the answer for that. While a lot of brokerage firms are focused on charging less and how to split the pie and in different kinds of ways we are uniquely focused on how to create more value for agents and help them grow their business. That's where all of our energy lies. And the result of that is again when things slow down we're the best answer for growth. Operator….

Your next question comes from the line of Mayank Tandon with Needham.

Thank you. Good evening. Congrats on the quarter. Kristen, I think, you touched on this a little bit in response to a previous question. But could you -- maybe for the 3Q guide and the full year guide, could you provide a little bit more clarity or granularity in terms of the underlying drivers your expectations on the average principal agents growth, the productivity going forward? And then also any concrete on commission rates? Will they be resilient around these levels, or do you expect any sort of fluctuation over the back half of the year? What's embedded in your guidance?

Sure. Well, we were needless to say very pleased with our revenue growth in Q2 up 186%. We provided guidance of $1.65 billion to $1.75 billion for Q3, reflecting continued strength in the real estate market. And we expect to generate more revenue in the second half of the year than we did in the first half of the year. In the second half, we expect that price will grow year-over-year, but at a lower rate than it did in Q2. And this is good actually because lower prices will bring back buyers into the market. Some buyers dropped out of the market in Q2 for fear of overpaying just given where prices were going. Transactions, we also expect will continue to grow year-over-year, partially as a result of the better pricing trends I talked about, but also as a result of the loosening of supply in the market. When it comes to the commission rates, we don't expect any significant changes there. We expect for that -- for the commission rates to remain in line with levels that we've seen over the last several quarters actually pretty steady. And as we are thinking through the business, we really are the most focused on transactions. So the more transactions on our platform, the more opportunities we have to attach adjacent services.

That's helpful color. And then just as a quick follow-up on the OpEx line. Where do you see the most sort of leverage in the model, not only in the back half of this year to sort of hit your targets, but really as you mentioned the 2022 profitability targets? On the OpEx side, where do you see the most potential for scale benefits to play out? Thank you.

Sure. The place where we see probably the most leverage is in the commissions and other line, and we will see it really across all of the other expense categories. We won't go into a lot of detail today on that, that's going in a level deeper in terms of 2022 guidance, but that's how I would think about it.

Got it. Thank you so much.

Your next question comes from the line of Akaash Agarwal with UBS.

Hi. Thank you so much for the question. I was wondering if you guys could talk more about the puts and takes of rolling out and getting to profitability in the mortgage JV. And then if you guys could give any more color on the economics within the JV as well that would be super helpful. Thank you.

Well, look, we are really excited about mortgage. It's a big opportunity for us. It's a $50 billion TAM. And it's also -- mortgage is a natural extension of our core business. We announced the JV with Guaranteed Rate about a month ago. Guaranteed Rate is an experienced partner for us with operational expertise and our view is that it really derisks our ability to get to market quickly to grow this business and ultimately to be successful there. As we look ahead we expect to be able to drive attach rates for mortgage at levels in line with the industry. And we think we should be -- we could even do better than that as a result of being able to integrate the offering directly into our platform. Of course, the most important element there is to have a compelling offering, one that our agents are proud to recommend to their clients. And so we are really focused on that right now. In addition, as we're getting the operations for the JV set up, we are working to get the warehouse line set up. We are pursuing various regulatory approvals. And we hope to originate our first mortgage before the end of the year and hope to cover all of our markets with our mortgage offering by the end of 2022. Ultimately, mortgage has a lot of potential financially. But within 2021, it's going to be I think a very small contributor to revenue, but one with a lot of long-term potential.

Great. Thank you.

Operator, final question please.

Yes, sir. Your last question comes from the line of Matthew Gaudioso with Compass Point.

Hey, good afternoon, and thanks for taking the question. Robert, you mentioned having the first end-to-end platform in place next summer. Just wondering what pieces are remaining to develop there? And then just following up on the adjacent services and expanding to maybe some beyond the traditional mortgage title escrow. Just wondering how Compass' platform might provide an opportunity to capture those services that maybe traditional brokerages might not be able to? Thanks.

I think Robert may have been disconnected unfortunately. I think the operator is calling him back. Give us just a minute.

Just holding for technical difficulty, yeah. Go ahead.

We do have him reconnecting. So just hold, just one moment, I apologies.

Thank you.

Hello.

And Robert has rejoined.

Matt, perhaps you can ask your question again, if you don't mind.

Yes. No problem. This is the first for me, but hi, Robert just two quick questions. You mentioned having that end-to-end platform in place next summer. I was just wondering what pieces are remaining to develop there. And then on the adjacent services beyond the traditional mortgage title escrow, just wondering how Compass' platform might provide an opportunity to capture those services that traditional brokerages might not be able to? And thanks for rejoining the call, Robert.

Yeah. Absolutely. So let me start by sharing some of the key components. One there's listing search that's good enough that agents don't have to look at multiple websites. And that's both on data quality as well as functionality. There's two third-party transaction management software. That's including the forms e-signatures disclosures. There's third-party marketing tools things about content creation, digital ads, digital newsletters, organic social posts, creating the sign, sign creation. So all that stuff has to get created somewhere and being created through our platform, not through a third-party. All that exists today and then CRM as well as market reports. The key areas of opportunity are to continue the transaction management with forms e-signatures. That's one of the reasons, why we acquired Glide, which is transaction management and a software company based out of California and then on some collaborative functionality for CRM. The -- this decade is going to be defined by collaborative workflow and hybrid work environment requires it. By the way what we're doing right now is an example of hybrid workflow and of course Zoom Google Meet et cetera. Now when you look at professions out there, who is the most collaborative profession? It's really the agent. The agent to get a transaction done, has to coordinate with a third -- with a designer, with an assistant on our team, with a transaction coordinator, with a photographer, with the home appraiser, a home inspector, with a loan officer, a title officer. And so the investment in collaborative, sharing, permissioning, functionality throughout every aspect of the platform, is a key area of investment and opportunity. In terms of the advantage that we get for attach of adjacent services, both the traditional ones but also the ones that traditional brokerages can't realize the way I would…

Okay Great. Thank you everyone for joining us for the 2Q call. And please reach out if we can be of any assistance in the future. Thank you.