Opendoor Technologies Inc. (OPEN) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to Opendoor’s Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. [Operator Instructions] It is now my pleasure to introduce, Whitney Kukulka with Investor Relations.

Thank you, operator. Good afternoon ladies and gentlemen. Thank you for joining us for Opendoor’s fourth quarter and full year 2020 financial results conference call. Joining me on the call today are Eric Wu, Founder and Chief Executive Officer, and Carrie Wheeler, Chief Financial Officer. All details of our results and additional management commentary are available in our earnings release, which can be found on the Investor Relations section of the website at investor.opendoor.com. Please note that this call will be simultaneously webcast on the Investor Relations section of the company’s corporate website. Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meaning of the Federal securities laws, including but not limited to statements regarding Opendoor’s future financial results and management’s expectations and plans for the business. These statements are neither promises nor guarantees and involves risks and uncertainties that may cause actual results to differ materially from those discussed here. Additional information that could cause actual results to differ from forward-looking statements can be found in the Risk Factors section of Opendoor’s annual report on Form 10-K for the year ended December 31, 2020 and Opendoor’s other SEC filings. Any forward-looking statements made in this conference call including responses to your questions are based on current expectations as of today and Opendoor assumes no obligation to update or revise them whether as a result of new developments or otherwise, except as required by law. The following discussion may contain non-GAAP financial measures. For a reconciliation of each of these non-GAAP financial measures to the most directly comparable GAAP metrics, please see our website at investor.opendoor.com. Now, I will turn the call over to Eric. Eric?

Thank you, Whitney. Welcome and thank you all for joining our first earnings call. Before we get to the results the momentum we are seeing, I would like take a few moments to ground us on the importance of the problem we are solving. At Opendoor, our first quarter value is the start and end with the customer and we are relentlessly focused on improving the customer experience. We share customers’ story at every Board Meeting and every on hand and I want to start on the same tradition with a story about the coming family and their experience with Opendoor in their own words. [Advertisement] And special thanks to Dominic and Rhonda for sharing their story with us and we are inspired by the impact we can have for the families just like the coming and Chief Mom Officers nationwide. That being said, for the vast majority of the 5.6 million people who buy and sell a home every year, this process is still far too complex stressful and time consuming. Less than 1% of the transactions are online involves dozens of steps and span multiple months. So I founded Opendoor in 2014 to build what consumers crave and deserved, a simple, certain and fast online experience. We are making it possible to buy and sell a home at the tap of a button. As the inventor, leader in this category, we have helped over 80,000 families move, totaling over $20 billion in transaction volume and as we have scale to over 20 markets, we have done so with profitable unit economics. We pride ourselves in doing the hard things first. Vertically integrating the entire experience in rebuilding each component from the ground up is not easy. But it is necessary to remove the friction and cost that exists in the transaction today and deliver on what we believe to be the best customer experience. So, for the past seven years, we’ve done the hard work to refine the product, pricing engine, technology platform and operational systems, so homeowners can buy and sell in just a few taps. As I reflect on 2020, it was a turbulent and unprecedented year, but I am proud of how our teammates supported each other, focus on our mission and continued to invent and build for our customers. In terms of results, we finished 2020 with $2.6 billion of revenue. While this is lower than our 2019 levels, due to our pausing acquisitions at the onset of COVID, we saw strong margins with adjusted gross margins of 8.2% and contribution margins of 4.3% in 2020. In Q4, we delivered $249 million of revenue with gross margins at 15.4% and contribution margins at 12.6%. As we enter 2021, I feel like we’ve been building Opendoor for many years behind the scenes for this very moment. First, COVID has reset how consumers think about their home. Home is now also the office, the gym, the school, and if you are lucky, your favorite restaurant and date night. Before the pandemic, 12% of full time employees worked from home. That share is now up to 42%. Additionally, in a recent survey, 20% of respondents decided to leave their city as a result of COVID-19 and an additional 25% are accelerating their plans to move for the same reason. The ability to work from almost anywhere, wanting additional space, and low interest rate has created historical demand for residential real estate. Second, the adoption of digital product is rising sharply, while the impact on food delivery, transportation, and ecommerce is most visible for us day-to-day, real estate is no exception. In a recent survey we conducted, 71% of sellers said they would consider selling their home to an iBuyer. These two seismic shifts have created significant tailwinds for us. First off, more and more home sellers are coming to Opendoor to request an offer to sell online. So far this year, we were sending over a 50% more offers per month, compared to this time last year and exceeding previous highs. What’s more exciting is that, we are converting more and more of these home sellers. A question we often get is that homeowners will choose Opendoor when the markets are hot, like we are seeing right now. The answer to that is, yes. Our seller conversion is exceeding historical highs. And most importantly this year, our seller net promoter score is trending over 80, which is up 10 points from 2020. We believe this is the future of real estate and is coming faster than expected. Next, let’s talk about our upcoming plans. Our goal is to be the best place to sell a home online and seamlessly move. That means we are focused on; one, driving market share of sellers in our existing market; two, expanding to many more markets nationwide; and three, building our digital one-stop-shop to seamlessly move. First, we continue to expand our ability to address a wider range of sellers in our existing markets. In Q4, we expanded our buy box by 35%, increasing coverage and price, zip code and home type. These buy box improvements, plus the increasing offer requests, plus record high conversion give us confidence in our ability to exceed historical market share level. Second, we plan to double our market footprint this year from 21 to 42. Our operational systems, pricing models and large playbooks have been tested at scale and are underpinned by our technology platform that automates and centralizes the transaction. Thus, we are positioned to rapidly and profitably expand nationwide and we are well on our way with six market launching in Q1, including a recently announced Ashville and San Diego. Long-term, we plan on being live in more than a 100 markets and servicing over 70% of the homes in the U.S. Finally, we will be making progress on our goal to build these digital one-stop-shops to move. We’ve already enabled homeowners to sell online in a few minutes and provide tech-enabled title insurance, escrow and mortgage services. Yes, we know that two-thirds of sellers are also buyers. So, we are building a one tap buying experience. So customers can buy and sell seamlessly. Accordingly, we’ve recently launched cash offers for home buyers, which enable home shoppers to submit an all cash offer backed by Opendoor, flex their preferred closing date in light up their moves. We know the market is competitive. We know buyers want to improve their chances of getting their dream home and we know sellers want certainty and speed. This feature, and more to come, demonstrate our ability to innovate quickly based on what we are seeing in the market and leverage our expertise and technology, pricing and operations. In closing, we are relentlessly focused on building a frictionless and digital experience for consumers. It is this focus, coupled with our technology platform, operational scale and seasoned team that will enable us to be the pace setter and deliver an online delightful experience for millions of homeowners nationwide. With that, I’ll hand it over to Carrie.

Thanks, Eric. As Eric just discussed, we had a solid financial 2020 and we are pleased with the momentum going into 2021. We reported revenue of $249 million and an adjusted EBITDA loss of $27 million for Q4 and revenue of approximately $2.6 billion and an adjusted EBITDA loss of $98 million for the full year exceeding the targets we provided last fall we went public. As we’ve discussed, our results for fiscal 2020 were surely impacted by COVID. The onset of the pandemic caused us to pause some acquisitions beginning in March with unprecedented uncertainty and safety concerns and to actively manage our balance sheet and sell down a vast majority of homes we owned over the second and third quarters. We sold almost $1 billion of inventory in that time at constant margins demonstrating the agility and resiliency of our resale systems. However, given that, inventory is the fuel for revenue that sell down impacted our top-line in Q4. Declines notwithstanding, we did exceed revenue expectations that we put out for the year. Q4 revenue performance was driven by strong market demand for housing and the strength in our resale processes. Q3 mark our low point for inventory and we have been aggressively acquiring homes since that time. We purchased more than 2,000 homes in Q4, which reflected a strong acquisition ramp throughout the quarter. We ended the year with $466 million of inventory, representing 1827 homes, which is up over 3x on September’s balance. On the margin front, home-adjusted gross profit and contribution profit were strong for the full year and particularly strong for the fourth quarter. Adjusted gross margins were 8.2% for 2020, up 190 basis points from 6.3 in 2019. Contribution margins were 4.3% for 2020, up 230 basis points from prior year. And on a per home basis, we generated adjusted gross profit per home of $21,000, contribution profit per home of approximately $11,000. For Q4, we saw adjusted gross profit per home of approximately $45,000, contribution profit per home of $37,000. These higher margins were largely driven by having healthy inventory mix weighted to recently acquired homes, as well as some strong home price appreciation in our markets. From an adjusted EBITDA perspective, we had a loss of $27 million for the quarter and a loss of $98 million for the year. We saw gains in adjusted EBITDA, driven primarily by the increase in contribution profit, but also as a result of the cost controls and expense reductions we undertook in response to the pandemic. Our operating expenses, which comprise a delta between contribution and adjusted EBITDA were $59 million in Q4, and $208 million for the full year, down 24% and 33% respectively. While absolute spend declined, we did see the leveraging of OpEx in both periods given the low revenue base. I’d also note that Q4 OpEx was down year-over-year, it grow 43% sequentially as we resumed operations across all the markets and accelerated investment in the sales and marketing, operations and product development to support our 2021 growth objectives. I’ll now turn to our quarterly guidance. We are now providing updated annual guidance. However, I can say we are comfortable with our previous outlook for 2021. We’ve also previously talked about the cadence for this coming year as we rebuild our inventory, we expect our top-line to follow meaning that our revenue will be weighted to the back half of the year. For Q1, we expect revenue of $600 million to $625 million. Adjusted EBITDA losses are expected to range from negative $33 to negative $28 million. On the revenue side, we are encouraged by volume trends in our business due to both our increasing acquisition pace, and increasing top of funnel demand. In addition, we expect the strong market home price appreciation or HPA will continue to positively impact revenue in Q1. With respect to unit economics, the strong margin performance we realized in Q4 should be considered to improve, while we do expect margin tailwinds to persist into Q1, it will moderate throughout the year beginning this next quarter. Let me tell you but why. First, as we build up our inventory balance, our resale mix of homes will normalize throughout the course of this year. Second, while our pricing models were responsive to the very strong housing macro we saw in Q4, we did realize upside relevant to our underwriting, particularly for homes that we underwrote in Q2, and early Q3 and in terms of homes we sold in Q4. Going forward, we expect that our margins will moderate as we move throughout the year. I also wanted to note that we do expect to see a significant increase in non-cash stock-based compensation expense in Q1, estimated at approximately $235 million, which is much larger for us in a typical quarter and is due to our recent public offering. The expense is primarily related to historical equity grant to employees, as well as for additional performance-based equity grants. We expect to continue to recognize additional stock-based compensation expense going forward over the remaining time-based vesting territories warrant. Now turning to the balance sheet. As of the end of Q4, we had approximately $1.5 billion of cash and marketable securities. The follow-on offering that added another $860 million, bringing us to approximately $2.3 billion. We are well capitalized and have substantial firepower to invest in market expansion and at our opportunities we see to accelerate our business and products roadmap. In conclusion, while 2020 certainly presented many challenges, we are proud of how our team managed through a very difficult year and we are pleased with how we wrapped up Q4. In addition, we are encouraged by the momentum we are seeing going into Q1 propelled by this undeniable shift in real estate from offline to online. We’ll continue to build the product track record of posting positive unit economics as we drive growth over the course of the coming year. And with that, operator would you please open up the lines for some Q&A? Thank you.

[Operator Instructions] And our first question comes from the line of Yoni Yadgaran with Credit Suisse.

Hey guys. Thanks for the question. So, two from me. The first is around just the kind of cadence in getting factors for the rollout of maybe new services and as well as potentially expanding your footprint within home loans, et cetera. That’s how you are thinking about that. What are the kind of, the main kind of factors that go into that between investing in the engineering et cetera versus getting licenses or anything else that might be involved on the partners’ side to kind of roll out incremental services? Secondarily, with respect to your, what are kind of the puts and takes that might impact the quarterly cadence of gross margins in particular throughout the year, particularly on your comments around, appreciating home prices? How much of that is a factor when you look back historically versus maybe new market roll outs and initial services and how you price homes when you go into a new market? Thanks.

Thanks, Yoni. Hey, this is Eric. So, I’ll address the first part of your question and then, I’ll let Carrie address the second part of your question. As I mentioned in the remarks, we are really focus just here on investing in three big areas. So the first is to deepen our market penetration and expand in our existing cities. The second is to expand nationwide and we are launching six cities in Q1 and we are aiming to be at 42 by the end of this year. And the third big vector is, is building the one-stop-shop. We know that, two-thirds of sellers are also buying their house and we want to make that transaction extremely seamless online and digital. In terms of added resources, we have the capabilities and the staff to invest in all three vectors and we are going to be driving additional improvements down all three this year.

Okay. And if I can take the second part of that question, just around expectations for the cadence of margins over the course of 2021 I think was the question you asked. If you think about what drove margins first of all in Q4 will help us talk about what’s going to happen for the coming year. Really two main drivers of margins, one was, having a very fresh book of inventory, consisting almost entirely of newly acquired homes, that was one. Second driver of margin in Q4 was around a combination of the underlying market trends we are seeing today, coupled with the timing of home acquisitions. So, the homes that we sold in Q4, just as a reminder, are actually homes that we offered on and we acquired in Q2 and in early Q3 and so that gap in timing drove we realize better than anticipated HPA gains. You are seeing that benefit in margins. Both those drivers will not persist at the same rate for the balance of 2021, which is why our caution in my comments was to call it the fact that we expect margins to moderate over the course of this year. Certainly, as we acquire more inventory throughout the year, that distribution of homes in terms of aging will just look more normal. And in addition to that, there are underwriting today of homes really reflects what we are seeing in the market. We weren’t moved and are intentionally conservative in our underwriting late last year just given the volatility in the market due to COVID and other reasons. Today, we’ve adjusted to the environment we feel very good about the drivers to HPA that we are seeing right now and our underwriting reflects that. So you will see that margins that will come down over the course of the year from where we are today.

Got it. Appreciated. Thanks guys.

Thanks.

Thank you. And our next question comes from the line of Jason Helfstein with Oppenheimer.

Thanks. Two questions. And I apologize in advance for the comparison with Zillow. You should be compared – or you should be analyzing on an absolute basis. But we are living in a very relative world right now in the stock market. So, when I think about your first quarter revenue guidance, very similar to Zillow, should we be thinking about this as a duopoly? And just generally, when you – if you think about the experience you are giving consumers versus Zillow, do you see differences today? And then, I guess, second, your margins are much better than Zillow. Could you grow faster if you extended losses or push down margins? And just how are you thinking about margins versus growth over the next two years? And I know, we have obviously your previous guidance. So maybe just give us some color how you are thinking about the balance between those two? Thank you.

Yes. Appreciate the question, Jason. Maybe, I’ll start by reminding that less than 1% of transactions are online and when categories are performing raising consumer awareness is a net benefit, especially when the product is much better and we do see really great conversion right now. So, my view and our view is that, as more and more transactions with online, just given what we’ve built to-date in our personal prophecies and the platform we’ve built we feel very well positioned to be a market share gainer in the coming years. With regard to competition, where we need to compete over time, sure. But again, we are focused on building the best consumer experience and very confident in our ability to compete. Carrie, do you want to speak about the margin?

Yes. No. Yes, Jason, your question is about the trade-offs between growth and margin. What I would say, at a high level is, really first and foremost, our focus is on maximizing the growth we have right in front of us and to take advantage of the enormous market opportunity. That’s a number one objective. And we want to invest aggressively behind that growth objective. As evidence of that, I’d point to the fact that we just recently announced we are going to double the markets we are going to be into 2021. But we were continuing to do as we have historically with a disciplined approach to unit economics in building a sustainable durable business. This continues to be important to us. So, I am going to achieve a little bit and say, the answer to your question is again a question for us and growth number one, but always in light of making sure that we are disciplined on our margin objective at the same time.

Thank you.

Thank you. And our next question comes from the line of Ygal Arounian with Wedbush Securities.

Hey. Good afternoon, guys. Thanks for taking the questions. I wanted to ask, Eric, on your comments about conversion. Conversion being stronger now than it has been historically and kind of improving there. And I think that question makes a lot of sense. So maybe we could talk a little bit more about what’s driving that and where home sellers can kind of go and expect to sell their homes much quicker than they normally would. And like, we see the bidding war on it and sell it above the asking price. So, maybe just some of the dynamics there. And then, second, we’d love to hear your comments on, there has been some commentary in the market that you got paused listings for about a month from mid-November to mid-December. So, just is there any accuracy to that? And if that is, what happened maybe just some insights into why you made those decisions? Thanks.

Got it. Appreciate the question. So, with your first question is, what’s driving conversion, I’ll let Carrie speak to the second part of your question. But from what we are seeing is really two things. There are some macro factors on I mentioned and then some things we are doing on our side. The macro factors as I actually already mentioned was, there is a bit strong desire for a digital contactless experience and I’ll talk about why in a second and there is also just more demand to move. So if we can reduce that friction from the experience and you can go forward and demand to move. But, the other thing, we are seeing an increase in organic sellers coming into the site as I mentioned, we are seeing strength in our partnership channels and those have grown nicely. We are lowering our fees to the market conditions and we continue to make confident improvements on our seller experience and products and those things are driving the increase in conversion. And when you think about the behavior itself, why your seller is selling at Opendoor versus listing on the markets. And I would highlight two things; one is that, even if it’s a hot market, you still have to list the home, put in capital for repairs, have open houses and waste of time and that timing can be not necessarily flexible; and the second piece of that, again, two-thirds of sellers are going to buy another home. And so, they need to be ready to move on the next home at a moment’s notice. So having an Opendoor offer in their back pocket gives them flexibility to buy the next home on their time line. And so, those are the two driving factors into the increase in conversion.

Part two of your question, just around the pause we took in listing late last year. I mean, without getting into the specifics, what I could say is, we actually did that. We took that opportunity at that time to experiment with some of our owned homes in terms of the listing and some of the good times and frankly be doing it just given seasonality. And I think you can expect us to once in a while experiment what the cadence of when we list and how we list. But nothing that I would over rotate on with respect to that, that short time is that we took. Short term it’s.

Thanks so much.

Thank you. [Operator Instructions] And our next question comes from the line of Edward Yruma with KeyBanc Capital Markets.

Hey. Good afternoon guys. Thanks for taking the questions. I guess, first, just any commentary on any kind of change in behavior that you are seeing going forward with rising rates and do you see any changes in behavior maybe people even rushing to close? Second, kind of a broader question, I know you guys have a pretty comprehensive roadmap for adding more services and building that out. Any kind of update in terms of what the uptake has been in services and any change in that roadmap? Thank you.

Edward, can you repeat the first part of the question? You were breaking up a little bit.

Yes, I was just asking, kind of based on this rising rate environment, have you seen any changes either in top of the funnel behavior or in the consumer kind of moving to close quickly based on rates moving?

Got it. And the second part of the question is about services roadmap?

That’s right.

Got it. Yes. So let me, I’ll address both and Carrie, feel free to comment, as well. But with rates moving and the desire of lock in rates now, is certainly one part of the equation. But again, we see the stronger macro factor of this, the desire to move in a digital way and the work from home policy is changing, so, giving people more geographic mobility. To your question around services, I think we’ve demonstrated a strong track record with title on escrow. We lost that business in 2017 in three years got the 80% and that’s been very healthy margins and that then we knew the consumers want it and integrate it close. And so, we executed pretty well against that opportunity. We often know that the consumers want additional services from us. We see this every single day when we talk to our customers. They do, in fact, want a more seamless integrated experience across multiple product lines. And so, we continue to invest pretty heavily this year in Buy With Opendoor. And as I mentioned, we just launched a new feature called Cash Offers within that product line and then, we are investing in Opendoor home loans this year.

Thank you. And – yes, I have got a question. Can you repeat the second part of your question that you wanted to address the uptake we are seeing in services?

Yes. I just wanted to know if there was anything you could provide in terms of attach rate, kind of quantitative color around the uptake in services.

Probably nothing more than we always have filed in our public filings which is around title and escrow, which is the most mature of our service offering today we were offering – we are attaching a north of 80%.

Okay. Thank you.

Thank you. And we have a follow-up question from the line of Jason Helfstein with Oppenheimer.

Thanks for that. I have one more. Any update on List With Opendoor? Any color that you want to share? And then a housekeeping question, do you capture the homes that are in contract on a balance sheet or not until they close? Thanks.

Sorry. Can you repeat the second part of that question?

Do you capture the homes that are in contracts on a balance sheet or not until they close?

I can do the easy one for us, Jason, which is, we don’t capture homes on the balance sheet until we own them to their close. So, what I would point you towards is the – if you look at the 10-K filing, what’s in inventory that we own, do show homes that are under contract to be purchased. You can track that. So, we had about 1800 homes in inventory. We own those. We have about 1700 homes, rough numbers, under contract to be purchased and I will close but the vast majority of those will. So you can think of those two numbers as more or less out of this.

Great.

And with regards to the List With Opendoor and an update there, maybe I just give you some color to how we are thinking about the products holistically. We do want to be the best place to sell a home online. And a couple of things we care about is, one, we want to be on the customers’ side. So it’s kind of point number one. Point number two is that we do want to ensure that the customer is making a informed decision. And so, by giving them the range of options, whether they want to sell to us to maximize convenience and certainty, or list on the market, we do want to make sure they are informed to have their choices and options and that’s helped them determine what is the best option for their situation. And so, that’s kind of the product thesis. We are seeing such strong convergence in our core offering, which is they sell to us that that’s still the product line that’s chosen the most. But, as we kind of progress, we will continue to invest in List With Opendoor as an alternative to selling to us.

Thank you.

Thank you. I would now like to turn the call back over to CEO, Eric Wu for any closing remarks.

Great. I just want to end this first earnings call by saying thank you to my teammates for their passion and persistence in servicing our customers every day. And I also do want to thank our shareholders for their support and our mission to transform how people buy and sell a home online. Thank you.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. And you may now disconnect.