Thank you for standing by. And welcome to the Compass Inc. Q4 2023 Earnings Call. I would now like to welcome Richard Simonelli, VP, Investor Relations to begin the call. Richard, over to you.

Thank you, operator, and good afternoon, and thank you for joining the Compass fourth quarter and full year 2023 earnings call. Joining us today will be Robert Reffkin, our Founder and Chief Executive Officer; and Kalani Reelitz, our Chief Financial Officer. In discussing our company's performance, we will refer to some non-GAAP measures. You can find the reconciliation of these GAAP measures to the most directly comparable GAAP measures in our fourth quarter earnings release. That was posted on our Investor Relations website a few minutes ago. We will be making forward-looking statements that are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. These statements include our guidance for the first quarter of 2024 and comments related to our operating expenses and free cash flow for the full year of 2024, as well as our expectations for operational achievements. Our actual results may differ materially from these statements. You can find more information about risks, uncertainties and other factors that could affect our results on our most recent annual report on Form 10-K and also our quarterly reports on Form 10-Q filed with the SEC and available on our Investor Relations website. You should not place undue reliance on any forward-looking statements. All information in this presentation today is as of today’s date February 27, 2024. We expressly disclaim any obligation to update this information. So, I will now turn the call over to Robert Reffkin. Robert?

Thank you, Rich, and thank you for joining us today for our fourth quarter and full year 2023 results conference call. Before I get into our Q4 and 2023 results, I want to begin with the big picture, why I am optimistic about Compass and what we can accomplish over the next several years. I am incredibly excited about the opportunity we have to take advantage of our $1.5 billion investment in our technology platform and scale as the market comes back. Assuming we continue to add net agents annually, maintain or modestly improve our agent economics, and keep our $600 million of cost savings with minimal inflationary growth of 3% to 4%, we believe that Compass will generate hundreds and hundreds of millions of dollars in EBITDA and free cash flow as the market recovers to a more normalized mid-cycle home sales level of 5.3 to 5.5 million annual home sales. I want to be clear that our target OpEx for 2024 is the reset of OpEx, not a temporary reduction of expenses. Importantly, our future success is not reliant on new product offerings or expanding into new markets. We have already built an unrivaled technology platform that attracts and retains the best agents while allowing us to uniquely scale compared to our competitors. Even at these new OpEx levels, we continue to invest in agent growth, increasing market share, expanding our technology advantage with approximately $100 million in annual R&D, and continuing our integrated services expansion. We have successfully navigated two consecutive years of very large declines in industry-wide transactions. U.S. home sales dropped 18% year-over-year in 2022 and declined 19% year-over-year in 2023, resulting in the lowest level of home sales since 1995. And the population in the U.S. is 27% larger now than in 1995. Despite…

Thank you, Robert. I am extremely proud to be a part of a great team of people working with the best agents in the industry. Before getting into the financials, I wanted to give you some details on our operations. In the fourth quarter, we processed 40,621 transactions, a decline of 4.9% from a year ago, which compares favorably to the 9.2% decline in transactions for the entire residential real estate market in the fourth quarter, as reported by the National Association of Real Estate. Our market share for Q4 2023 was 4.41%, up nine basis points year over year versus Q4 2022, and up 10 basis points sequentially from Q3 2023. For Q4 2023, our average number of principal agents increased to 14,689, which is an increase of 7.7% year over year and up 4.5% quarter over quarter. In the fourth quarter, we managed out approximately 50 principal agents and 400 total agents, each with an average GCI of less than $10,000, which had the additional benefit of freeing up resources for the rest of our producing agents. As Robert mentioned, we are focused on bringing in successful agents that produce results. Since the elimination of cash and equity sign-on incentives in August of 2022, we have recruited more than 2,000 agents. Agent retention remains high as our principal agent quarterly retention was 97%, a number we have consistently reached since becoming a public company in April 2021. Our title and escrow businesses generated positive adjusted EBITDA in 2023, and attach rates continue to increase, benefiting from the successful launch of T&E integration in the Compass platform in Southern California. We have completed the rollout of the T&E integration in Philadelphia, Southern New Jersey, and the Washington, D.C. area, including Maryland and Virginia, as planned. By the end of…

[Operator instructions] Our first question comes from the line of Soham Bonsale with BTIG. Please go ahead.

Hey guys, good evening. Hope you're doing well. Robert, maybe this one's the first one for you. I wanted to get your thoughts on what seems to be sort of the core concern here and sort of the statement of interest, which is this idea around buyers being able to negotiate their commission on their own. Specifically, what are your thoughts on sort of the broader rollout of buyer-agent agreements, right, which could allow sort of this clearer communication up front? And then secondly, you know, the broader use of maybe seller concessions as a way to sort of offer, you know, up front what the seller is willing to pay, the other side. How do you think these two items, like, do they help assuage some of the concerns out there today?

Yes. So I think it's worth noting that at Income is, we had many agents that only worked with buyers before all this. We only worked with buyers with buyer representation agreements that clearly outlined compensation. As an example, the way that it works is it would outline, this is what I get paid, whatever percentage they negotiate independently. And to the extent the seller doesn't cover any portion of that, you as the buyer, you would make up the difference. We, with the help of those agents and our internal coaching and training arm, we implemented the largest training program that Compass has ever executed, where we had over 20,000 of our agents go through training on the buyer representation agreements. And now that is becoming the standard practice for our agents going forward.

Do you think that is enough to alleviate some of the concerns that the DOJ or these guys may have?

From what I have seen of the successful use of those agreements within Compass, it alleviates my concern on any financial risk related to on the topic. I just have not seen, I have not, the way you would know and the way I would know is agents would be coming to the market complaining, coming to us complaining. And that has not happened.

Got it. Okay. And then Kalani, I know there's some puts and takes here on the commission split line, but if I just sort of look at the non-GAAP number, first half versus the second half here, at a high level, the first half was down and the back half was kind of up. So I'm just wondering, is there sort of increased competition here for agents that is requiring to maybe offer a bit more? Or are there any sort of other incentives that are being required to just keep agents on the platform? Can you just throw out a little bit of color there?

Yeah, sure. Hey, Soham, thanks for the question. I think a few things overall related to gross profit. First, I think we have seen and we continue to know kind of in the industry, when the market's the worst, the best creates and the best continue to produce. And they do have more favorable economics to them. I think that's one piece. I think the other piece is just looking at the mix of folks as we brought more. We are bringing more folks on at that kind of the 50% level, which is better economics, but it takes time to add on. So I think it's more of the timing of it. Keep in mind, second half, we had 8% rates. And so I think it was more of the production mix. There was a little geo mix in there as well, compared half to half, but more mix. And I think more of that production mix.

Got it. And then just a quick one on the OpEx guide. Is it fair to think about it? Hey, look, 850 is sort of what you communicated last time. We're staying there, but the incremental like $15 million or so to get this 865 is really acquisitions and all that sort. Or is there any core expense that's increasing there as well? Thank you.

So we have worked and I'm really proud of the team. There's a lot of heavy lifting that has occurred. We've done most, if not all the heavy lifting to get our organic SG&A and OpEx down to 850. The delta between 850 and 865 is purely the M&A that we've closed in September of last year, second half, as well as the attorney fee title in Florida that we did in Q1. That's the bridge.

Our next question comes from the line of Jason Helstein with Oppenheimer. Please go ahead. Your line is open. Please go ahead.

Hey, how are you guys? Just want to ask a question just on the expense guide. I mean, you've updated. It's only $15 million from the last update, but you're still going to positive free cash flow for '24. You kind of didn't give us that before. You said positive. We kind of don't know what it was. Is it something you're seeing that's giving you more confidence to lean into kind of expenses, or is it just like this is kind of like where you shook out now that you have more visibility on the full year of expenses? Maybe just tie that back to what you're just broadly seeing in the business. Thank you.

Maybe I'll let Kalani add on to it. Yeah, look, as we mentioned, we brought down expenses by $600 million. And in Q3, we saw the second highest agent retention quarter as a public company. And we continue to bring on agents, and they're happy, and they continue to stay. And we see the benefits of the platform consistently for them and the company. And so I think we've realized that the strength of the company vis-à-vis the agents is very strong. I think it's what's given us the confidence to continue on this path of OpEx. But Kalani, I'll let you take it from here.

Yeah, I think you hit the big rocks there, Robert. I mean, overall, we're affirming free cash flow for a few reasons. One, I think, you know, we're looking at the market. We do see kind of market flats are modestly improving. We've kind of proven our ability to bring costs down last year and continuing with our guide. Our guide, as Robert mentioned in his preparatory remarks, our guide this year for OpEx on last year's revenue would allow us to be free cash flow positive and EBITDA positive. And so, Jason, I think it's just conviction of seeing that we think the market is where it is. We've adjusted our costs, and I think we are driving that free cash flow as a result. And I think we feel good about where we're at. We're not cutting to the bone. We've made, as Robert mentioned in our remarks, a ton of investments already. And so we have some more if we need to, but I think we just feel good about where we're at, and we've built a really scalable model, and we're taking advantage of that.

Our next question comes from a line of Bernie McTernan with Needham & Company. Please go ahead.

Great. Thanks for taking the question. Maybe just a follow-up on OpEx. For Matt's right, it seems like you're pretty close to the 865 for OpEx in 1Q. Is there any seasonality we should be contemplating throughout the year, or do you think it's pretty flat from here?

Yeah, Bernie, I think seasonality, because of the model we've built, we're not a linear with revenue. We're pretty stair-stepped. So we shouldn't see a ton of seasonality. As I mentioned with Sohan's question, we've done a ton of the heavy work. We're pretty much there at the 850 level organically, with obviously the M&A being added on. So I think what you're seeing is about right, which is the activity has been taken. And so I don't expect a ton of seasonality. Obviously, with Q2 being as big as it normally is, there might be very small amounts. But for the most part, you should think about it sequentially, not seasonality.

Understood. And then the comments of how much seller activity was up early in the year, is that purely market-driven, or anything that you guys are doing on the product and technology side to maybe drive additional share gains of seller leads?

I think there are two things that are happening. One is the market, and one is us. On the market side, what's driving more inventory, and we had 7% more inventory in the market going into January than prior year, and 5% more homes under contract. In February, we had 13% more homes under contract, and 9% more homes under contract. So the trends continued. But on the market side, what's driving the trend isn't low mortgage rates that are reducing the amount of people that are locked out of their homes. What I believe is just that people are tired of waiting. It's been over a year and a half where they've delayed and deferred their life from moving on. We call it the 5 Ds, diapers, diplomas, diamonds, divorce, death. And they're just tired of waiting. So unlike last year, just compare this year to last year. Here are the differences. One, there's another year of pent-up demand to both the buy and sell, but to move on with your life in a way that there wasn't last year because it's been an extra year. Mortgage rates aren't actually that much higher than it was this time last year. It's about 25 base points higher. You have less people locked out of selling their homes. Going into last year, you had 72% of homeowners at 4% mortgage rates or below. Going to this year, you had 59% of homeowners at 4% mortgage rates or below. So you have less people with the lock-in effect. And so I think those are some of the markets, what's different in the market. And of course, you have all-time high stock market. So people can sell and move into their new home, not caring as much about a low mortgage rate because they can use all cash. Of course, we're seeing more all cash. For Compass specifically, what I think is driving more seller activity, and I believe we talked about this at the last earnings call, is we launched the Back to Basics Challenge, which is a 100-day challenge for those first 100 days of the new year to meet and speed up the process of meeting and speaking with more of your clients in person. The number one way that agents grow their business is by meeting their clients in person and connecting. Whoever connects the most grows the most, we like to say. And there's a big contest locally, nationally, with all types of awards. And we believe that this is what has allowed us to outperform a little bit more in January. But we believe it will continue to allow us to outperform.

Yeah, Bernie, if I could just add to the third piece of what, and it goes to what Compass is doing, is we have done a good job. I'm really proud of our growth team. We've added net new agents, which is coming through as well. So those three parts that Robert just mentioned, the market, our kind of same-store sales improvement through our Back to Basics, and then the wraparound of our new agent ads in 2023 and early 2024.

[Operator instructions]. Again, the floor is now open for your questions. To ask a question at this time, simply press star followed by the number one on your telephone keypad. Our next question comes from a line of Ryan McIverney with Zelman & Associates. Please go ahead.

Hi, guys. Thank you. So, Robert, one of the debates that's been percolating a bit in the industry and with investors is about the general value of buy-side agents to homebuyers. But also how different brokerages innovate and differentiate. So I was hoping maybe you could talk to us about what you guys are doing at Compass to help your agents provide a strong value proposition to homebuying customers. I think you've talked about things like collections in the past. So maybe just what's the big picture on how Compass is helping its agents differentiate from others, again, when it comes to the buy-side agents? What's the upside of the equation? Thank you.

Well, look, let's take a step back. One of the reasons that I think we are in the place we are where not all buyers understand the value is that as an industry, we created listing presentations for sellers. But as an industry, we did not create buyer presentations for buyers. And as a result, we created a buyer presentation this past fall that our agents can go to buyers and outline the value proposition. On the sell side, when you go to a seller, hey, we have a national network. Here's how many agents we have. The majority of the time, a buyer comes through their agent, not from the internet. That's why that matters. We have Compass concierge to help make your home move-in ready, on and on and on and on. Those are some of the examples we have in a listing presentation now. On our buyer presentation, we have access to off-market inventory, one of the largest off-market listing databases in the country, which is great for you for access as a buyer. We have collections, which is our flagship technology tool for any of our clients, which is a buyer tool. It's like a Pinterest board for all of the real estate that you are interested in with real-time status updates. We can comment back and forth. You can add your spouse or your significant other or your mother or your daughter. You can all collaborate in one place. We have digital tours, which persist, and so you can always go back to the things you've looked at. We can comment and make notes on them on and on and on on the buyer value. I'm confident because of our platform, our company, for certain, because of collections. If we were nothing but collections, our agents, and off-market inventory alone, we provide buyers with more value than any other brokerage, for sure. Now we're just outlining that, which is a great thing for Compass, a great thing for our agents. It will ultimately be a great thing for the industry as all agents start sharing and communicating their value to buyers in the same way we have for decades with sellers. In addition to that, as mentioned earlier, we launched the buyer representation agreement where, again, people independently negotiate what they charge, but there are those out there. There are those out there that say commissions can increase as people independently, as buyers. Historically, there was only one person negotiating. There were sellers. Now you have seller agents and buyer agents, so you have twice the negotiation. Time will tell, but there's nothing I've seen that makes me worry about this. I think the headlines seem to be bigger and more dramatic than the trend lines.

Very helpful, Robert. I really appreciate that. Second question, a lot of talk on one-click title and the T&E expansion. I guess I'm going to go back to the question about the T&E expansion. I guess just any updates on origin point on the mortgage side just in terms of the rollout or where things stand on that side of things? Thank you.

We can share that we continue to hire more loan officers. We continue to be in more markets. This most recent month was one of our most successful months on record in terms of mortgage rate locks, which is a lot of money and is an indication of future demand as it converts over the next one to two months. It just continues to be something that is important to the company. We have more coverage of mortgage than we do in title and escrow in terms of the different markets that we're in.

I am showing no further questions at this time. I would now like to turn the call over to Robert Reffkin for closing remarks.

Thank you all for joining today's call. I want to thank all of the Compass employees and agents for their hard work and commitment to making Compass the number one real estate brokerage by sales volume in the United States for two years in a row. In a difficult market, our agents continue to outperform the market. As we enter 2024, we continue to successfully manage our expenses down and navigate this unprecedented market. We believe that 2023 was the bottom of the new year and not the downturn, and we are cautiously prepared for a better 2024. Eventually, the real estate market will get to more levels of transactions in the mid-cycle. And when it does, I'm confident that Compass is well-positioned for success. Thank you.

This concludes today's call. You may now disconnect. Confident that Compass is well-positioned for success. Thank you.