Compass Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2024

There are 11 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. My name is Aaron, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Compass Incorporated Q2 2024 Financial Results Call. All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a question and answer session.

Operator

Thank you. I would now like to turn our call over to Richard Simonelli, Senior Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you, operator, and good afternoon, everyone, and thank you for joining the Compass second quarter earnings call. Joining us today will be Robert Refkin, our Founder and Chief Executive Officer and Kalani Rilis, our Chief Financial Officer. Discussing our company's performance, we will refer to some non GAAP measures. You can find the reconciliation of these non GAAP measures to the most directly comparable GAAP measures in our Q2 2024 earnings release, which we posted on our Investor Relations site earlier today. We will be making forward looking statements that are based on current expectations, forecasts and assumptions that involve risks and uncertainties.

Speaker 1

These statements include our guidance for the Q3 of 2024 and full year 2024, including comments related to our operating expenses and free cash flow 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 could affect our results in our most recent annual report on Form 10 ks and quarterly reports on Form 10 Q filed with the SEC, also available on our Investor Relations website. You should not place undue reliance on any forward looking statements and all information in this presentation today is as of today, July 31. We expressly disclaim any obligation to update this information.

Speaker 1

I'll now turn the call over to Robert Refkin. Robert?

Operator

Thank you

Speaker 2

for joining us today for our Q2 2024 results conference call. Today, I will discuss our 2nd quarter results, our thirty-thirty vision to strengthen our structural advantages, an update on the impact of the NAR settlement, and finally, I will discuss our continued commitment to reduce stock based compensation and equity dilution. So let's start with our 2nd quarter results. I'm pleased to say that we had the best performance we have ever had as a company. We achieved our all time high GAAP net income of positive $20,700,000 This compares to a net loss of $47,800,000 a year ago.

Speaker 2

We generated our all time high adjusted EBITDA of $77,400,000 which is more than double adjusted EBITDA in Q2 2023. For the Q2 in a row and for 4 of the last 5 quarters, Compass generated positive free cash flow. We generated $40,400,000 in free cash flow, which includes the impact of the $28,800,000 antitrust litigation settlement payment. So $69,200,000 excluding the cost of the settlement. We grew revenue significantly.

Speaker 2

In Q2 2024, we generated $1,700,000,000 in revenue, an increase of 14% year over year, 9% of which was organic growth. Transactions increased by 11.4% a year ago, as transactions in the overall market declined by 3.3% during the same period. So Compass transactions increased 14.7% more than the market. As additional color, 7% of our transactions that closed in the quarter were likely to sell AI recommendations in the Compass CRM from the prior 12 months. As a reminder, these leads historically convert to listings at an 8% rate more than the typical lead generation sources.

Speaker 2

We grew market share significantly. In Q2 2024, our quarterly market share was 5.13%, an increase of 50 basis points year over year and 37 basis points on a sequential basis compared to Q1 2024. We reduced our OpEx in the 2nd quarter to $217,400,000 an improvement of $20,900,000 from Q2 2023 OpEx of 23 or 238,300,000 dollars Reducing our OpEx with platform investments, an example of this was our transactions operations team. We were able to reduce the cost of this team by 22% in 2023 compared to 2022, thanks to the Compass platform tools we developed to process transactions. From the first half of twenty twenty four, we are down 14% compared to the first half of twenty twenty three.

Speaker 2

We grew our cash balance and our balance sheet is strong. We ended Q2 2024 with $185,800,000 in cash and cash equivalents and no outstanding draws on our $350,000,000 revolving credit facility. Our cash balance increased from last quarter and from the prior year end despite the $28,000,000 antitrust litigation settlement payment and the cash used in acquisitions of Ladder and Bloom and Parks Real Estate. We continue to seek accretive strategic acquisitions as inbound increase from brokerages continue to be robust. In the Q2 of 2024, we closed 2 transactions, which added over 2,000 principal agents.

Speaker 2

We further increased our presence in the Southeast with the acquisition of Ladder and Bloom, the number one agency in Louisiana with nearly 15% market share in New Orleans. In Tennessee, we acquired Parks Real Estate. When combined with our existing operations in Tennessee, we now have over 20 percent market share in Nashville and are the number one agency in Tennessee. We also continue to hire principal agents organically. We hired 543 principal agents organically in the quarter.

Speaker 2

At the end of Q2, 2024, the number of principal agents at Compass was 16,000 997 compared to 13,698 in Q2 2023, an increase of 24% year over year. We also continued the trend of strong agent retention with 97.3% quarterly principal agent retention in Q2, 2024. Our title and escrow business continues to strengthen. We finished Q2 with our highest ever attach rates. Moreover, since January of 2024, we improved our attach rate by 6 percentage points.

Speaker 2

Additionally, we have integrated 6 of our 7 key title and escrow partners into our Compass platform and we'll have all 7 partners integrated into the platform by the end of Q3. And finally, over the next 18 months, we are focused on launching title operations across all of our most mature transaction rich markets, including the San Francisco Bay Area market, New York City, Seattle, Houston, Boston, Chicago and Austin. I now want to talk about our vision for the future, which we are calling our thirty-thirty vision. To realize on average 30% market share in our top 30 cities achieved in 2026. Our thirty-thirty vision unlocks our complementary and compounding inventory based structural advantages that may come as a compelling company for agents, homebuyers, home sellers, employees and investors.

Speaker 2

We are the only brokerage firm that has combined these advantages into one cohesive offering that rests on our technology platform. Most importantly, we believe our structural advantages result in clear financial advantages. Today, I'd like to share with you the sources of our structural advantages, the impact of our structural advantages to date and what we are doing to strengthen our structural advantages going forward. The sources of our structural advantages come from the following four attributes. There is no other brokerage firm that has the combination of these attributes and few brokerages have even 1.

Speaker 2

Our first structural advantage is the integrated nature of our end to end platform. The Compass platform is unrivaled in its ability to drive agent productivity and brokerage company operating efficiencies. We offer the only contact to close platform where an agent can go from first contact with a new client to closing and to commission collection all in one place and where employees can execute the key employee to agent functions like transaction management support, marketing support and title and escrow support for the agents all through the same platform as the agent is using. Our second structural advantage is our national scale. With over 33,000 agents across the United States, we are able to build upon our technology differentiation and continue to invest by amortizing the cost of our investment over more agents.

Speaker 2

This is something that smaller brokerages are unable to do. Our third structural advantage is our top agent network. Per Realtrends more top agents work at Compass than any other brokerage firm. In fact, Compass has 50% more top agents as the next largest brokerage firms per real terms. We have the best agent to agent client referral network in the country and encompasses find an agent tool helps drive agent to agent client referrals.

Speaker 2

Our average agent derives 17.5 percent of their business from agent referrals. Referrals not only result in more revenue for Compass, but act as a recruiting and retention flywheel. Our 4th structural advantage is our depth and breadth of inventory. At Compass, we take advantage of our inventory position to create better financial outcomes for sellers and therefore agents and therefore Compass. The foundation of every entity success in real estate is access to inventory.

Speaker 2

The source of success for all players in the industry whether MLSs, aggregators, buyer agents or listing agents is access to inventory. Without inventory, agents have nothing to help their clients sell or buy and the MLS and aggregators have nothing to list. Listing data is valuable and belongs to our listing agents. We believe that in any market where Compass has number one market share, we have a clear path over the near term to have more publicly searchable listing than any other public site, which will send a signal to the consumer that they need to search compass.com. The combined effect of each of our 4 structural advantages is bigger than the sum of the parts.

Speaker 2

All Compass constituents, agents, sellers, buyers and Compass can reap the powerful benefits from this combination of attributes. For agents, that means helping them generate more revenue in less time with lower third party costs to operate their business. For sellers, it means selling their homes for more money in less time with less cost to market and prepare their house for sale. For buyers, it means helping them access the most inventory to find the best house for them at the best price in the least amount of time. For Compass, it means growing brokerage and integrated revenue while integrated services revenue while creating a lower cost to serve, and a lower cost to serve agents than any traditional brokerage firm.

Speaker 2

We have 3 key initiatives to strengthen our structural advantages and we expect them to drive search traffic, leads, agent recruiting, agent retention, gross margin improvement and market share gains. The first initiative is creating the largest inventory of homes for sale in the country. As previously mentioned, our thirty-thirty vision is to have on average 30% market share in our top 30 cities in 2026. We plan to add on top of our active inventory a larger pool of passive inventory. Think of passive inventory as homeowners who have a price in mind that they would accept for their home, but haven't listed in the open market.

Speaker 2

Agents may know these prices for some of their clients, but the challenge is that information doesn't live in one central place or the entire agent network of agents to access. However, since Compass is the only platform that combines where agents search listings and their CRM contact In the same place, we have the unique ability to add aspirational make me move prices to the almost 100,000,000 contacts that currently reside in the Compass CRM. We own with only 1,000,000 single family homes on the market today, I expect that in 2025 Compass will have a combined off MLS and make me move inventory that is many times more than the publicly searchable active market. This will further make clear to buyers that they need to work with a Compass agent to see the market. As of this week, our agents are able to add make me move prices to their clients in their Compass CRM.

Speaker 2

The second initiative is making Compass the required destination for real estate. Our goal is to make it clear that Compass agents in compass.com have more inventory than 3rd party sites, sending a strong signal to buyers that if you aren't working with the Compass agents or aren't searching Compass, you are not seeing all the inventory. With more web traffic comes more leads, we can send to our agents. Transactions that results from leads that are given to our agents at approximately a 50% margin. Our 3rd initiative is launching the Compass client dashboard.

Speaker 2

Only Compass can provide a true engine experience for agents and clients because only Compass offers all of the products and features agents and clients need in one platform. Launching in 6 months, the client dashboard will put all the key agent to client interactions in one place, including agent client communication, transaction timeline, task, documents, CMA, valuations, listing marketing, listing insights, buyer search results, offers and negotiations, buyer tours, open house feedback, title and escrow and more. Over time, we plan to incorporate the key service providers, interactions into the client dashboard as well, such as loan officers, home inspectors, home appraisers, photographers, videographers, home insurance and home security providers, as well as ongoing home improvement vendors. With these three initiatives, I expect Compass to be in a place where any agent is at an undeniable advantage by being a Compass agent and any home buyer or home seller is at an undeniable advantage of being a Compass client all within 2025. Ultimately, these structural advantages drive our KPIs, cash flow generation and shareholder value creation.

Speaker 2

Moving on to the NAR settlement, Compass entered into a nationwide settlement agreement covering all of the sell side interest claims against us and that settlement has been preliminary approved by the court. We expect final approval of our settlement in late October 2024. It has been 4.5 months since the announcement of the NAR settlement and we have not seen a noticeable change from before the settlement in either the percentage of sellers that offer a buyer's agent commission or in the average commission amount they are paying the buyer's agent. To be clear, the fears many had about commissions going down or buyer compensation disappearing has simply not materialized. Over the month of May June, in the markets generating the majority of our revenue, more than 99% of new listings on the MLS, not just Compass listings included offers to pay the buyer agents.

Speaker 2

Furthermore, about 96% of new listings on the MLS during that time period included offers to pay 2% or more and more than 80% are offering to pay 2.5% or more. We do not expect the actual rule change requiring a buyer visitation agreement on August 17 to impact the commission to buyer agents for three reasons. First, as seen from the data, after the unprecedented press attacking agent commissions, which we saw as the biggest risk and the subsequent unprecedented questions from sellers about whether or not they should pay buyer commissions. The data clearly shows that sellers continue to value incentivizing the buyer agent. 2nd, after August 17th, the seller will continue to determine the buyer agent commission And we don't believe the seller will be influenced by the buyer representation agreement since the buyer agreement is shared only with the buyer.

Speaker 2

3rd, buyer representation agreements have already been required in half the states come to operate them. We have not seen them impact commissions and this has been for many, many years before the NAR settlement. Now, on to stock based comp. Over the last 2 years, we created in our DNA the muscle to bring down annualized operating expenses by close to $600,000,000 while still growing our business. As we move forward, we continue to identify opportunities to create shareholder value.

Speaker 2

We fully recognize that OpEx is not the only cost we have in our control. And over the past few years, we have significantly reduced the annual dollar amount of stock based compensation with 6 straight quarters of decreases. Importantly, our stock based compensation expense is expected to be about $130,000,000 for 2024, which is over $100,000,000 less or 44% less than the $234,000,000 we reported just 2 years ago in 2022. And our stock based comp expense in Q2 was the lowest in our history as a public company. I am committed to reducing dilution from stock based comp and increasing free cash flow and free cash flow per share.

Speaker 2

Palani will provide more detail on what we've done to date and what we plan to do in his prepared remarks. In closing, we see the industry consolidating around the winners. Compass is the number one brokerage for 3 consecutive years. We are delivering excellent financial results and we have a strong balance sheet given the fiscal responsibility we have exhibited by moving to being free cash flow positive with no draw on our credit facility, no convertible debt and ample liquidity allowed through our revolver. I want to end by thanking the entire Compass team of employees and agents.

Speaker 2

See their commitment to making Compass successful with their incredible dedication and determination. I will now pass it over to Kluane.

Speaker 3

Thank you, Robert. Before I go into details of our Q2 performance, I wanted to start my prepared remarks by acknowledging and thanking our Head of IR, Richard Simonelli. As many of you know, Rich is moving on from Compass, but leaves Compass in a much better place than when we started. Rich is a professional's professional, a pro's pro and has helped Robert and I tell the Compass story through some of the most exciting and turbulent times in company's history. Rich, thank you personally and from all of us at the Compass team, thank you for all the great work you've done.

Speaker 3

Now, before I get into the results for the quarter, I want to add to Robert's comments about achieving a 30% market share in the top 30 cities. Let me share how we're going to get there. It will be through a mix of organic growth and accretive M and A. We believe many of the 1,400,000 prospective agents can grow their business and improve their quality of life by joining Compass. Compass gives agents a comprehensive offering of technology, people and network that no one else has.

Speaker 3

This is why the pace of brokerage firms seeking to join Compass has increased during the downturn. We've capitalized on this by making strategic accretive acquisitions. We are being very selective. We're interested in and talking to premium, blue chip, local and regional brokerages. However, the financials have to make sense.

Speaker 3

These acquisitions become more attractive when we build in the benefits of synergies including lowering the overall operating costs for our agents by leveraging the Compass platform including our technology, real estate footprint and back office processes that already exist. In 2023, we added 3 brokerages in Arizona, California and Texas. And in 2024, we added 2 brokerages in Louisiana and Tennessee. Now let me provide you with some detail on our operations for the quarter. In the second quarter, we processed 60,390 transactions, an increase of 11.4% from a year ago, which compares very favorably to the 3.3% decline in transactions for the entire residential real estate market in the Q2 as reported by the National Association of Realtors.

Speaker 3

Our market share for Q2, 2024 was 5.13%, up 50 basis points year over year and up 37 basis points sequentially from Q1 of 2024. As of June 30, 2024, we had 16,997 principal agents compared to 13,600 and 98 as of June 30, 2023, an increase of 3,299 year over year or 24%. This increase was driven by 2,375 principal agents that we acquired through the Ladder and Bloom acquisition in Louisiana and the Parks Real Estate acquisition in Tennessee. Additionally, on an organic basis, our team recruited 543 principal agents in the 2nd quarter, which was a strong recruiting quarter for us. Our quarterly retention in the 2nd quarter was 97.3%.

Speaker 3

Turning to our financial results for the quarter, our 2nd quarter revenue was $1,700,000,000 an increase of 14% from the year ago period, which was at the high end of our guidance range of $1,600,000,000 to $1,700,000,000 Gross transaction value was $65,000,000,000 in the Q2, an increase of 14% from a year ago, reflecting the 11% increase in total transactions combined with an increase in average selling price. Our commission expense as a percent of revenue was 82.6 percent, an increase of 70 basis points from Q2 of last year, While we continue to see the long term structural tailwinds related to Compass expense commission expense, in the quarter about 2 thirds of the increase in commission expense as a percent of revenue is attributable to changes in geo mix in the markets in which we operate and from brokerage acquisitions we closed since the year ago period that were made in markets with lower average splits than our overall brokerage rate. Our total non GAAP operating expenses excluding commission and other related expenses were $217,000,000 for the 2nd quarter. This reflects a reduction in expenses of 21,000,000 dollars or 9% from Q2 a year ago. Even after considering the added expenses we assumed related to each of the 2 brokerage acquisitions we completed in Q3 of 2023, the Florida Title acquisition this past January and 2 brokerage acquisitions we closed this past quarter.

Speaker 3

As a reminder, the non GAAP operating expenses we refer to amidst expenses that we exclude from the calculation of adjusted EBITDA, including stock based compensation and depreciation and amortization. And as always, we've included tables on Page 1213 in our Q2 investor deck that reconcile these amounts to our GAAP operating expense. Our adjusted EBITDA for the Q2 was $77,000,000 which was slightly better than the high end of our guidance range of $55,000,000 to $75,000,000 this adjusted EBITDA level reflects an improvement of 157 percent over the year ago results and importantly it reflects a new company record as the highest level of adjusted EBITDA we reported as a company. In addition to a new all time record of adjusted EBITDA, we also achieved a new record as it relates to GAAP net income. During the Q2, our GAAP net income was $20,700,000 which is the first time in the company's history that we are reporting a quarter with positive GAAP earnings.

Speaker 3

This is an incredible milestone for us as it validates that at the right levels of operating expenses the financial model works. It's important to note that the achievement of positive GAAP net income was made possible by our relentless focus on reducing our operating expenses, but was also assisted by reducing some of the expense lines traditionally excluded from the calculation of adjusted EBITDA. Most notably, stock based compensation expense was $31,000,000 during the 2nd quarter, which reflects a reduction of 21% from a year ago and reflects the lowest level of stock based compensation expense that we've reported as a public company. As Robert mentioned, we are constantly focused on creating value for our shareholders. We have put a focus on bringing down stock based compensation with the same approach and discipline that allowed us to successfully reduce our operating expenses by nearly $600,000,000 It's important to highlight that we've already accomplished several action items over the last 18 months to manage stock compensation.

Speaker 3

1st, we sunset our agent equity program in December of 2022, which allowed agents to convert a portion of their cash commission into Compass Equity. 2nd, we eliminated the use of equity as an incentive to recruit agents in the Q3 of 2022 around the same time that we eliminated the use of cash as a sign on recruiting incentive for agents. 3rd, we greatly reduced the workforce over the several reductions in force during 20222023, including reduction in the size of our product and engineering team, which consumes the largest portion of our employee based equity grants. And 4th, we've shifted a considerable amount of labor to low cost offshore markets through the use of contractors. In addition to this helping to reduce cash expenses, this also reduces the use of equity as we don't issue equity to contractors.

Speaker 3

These measures have resulted in significant reduction in our stock based compensation expense. And in 2022, our stock based compensation expense was $234,000,000 In 2023, our stock based compensation reduced by $76,000,000 or 30 2 percent to $158,000,000 and we expect our stock based compensation will reduce to approximately $130,000,000 for the full year of 2024. This will reflect a reduction of 44 percent or over $100,000,000 for the 1st 2 years since 2022. Going forward, we will continue to offshore work through our low cost labor efforts where OpEx is reduced and equity compensation is not utilized. Also, stock compensation will gradually reduce as the higher priced shares issued at the time of our IPO will vest out over the next 1 to 2 years since the stock based compensation expense is determined based on the share price at the time of grants.

Speaker 3

In addition to the reduction in stock based compensation expense, we are focused on minimizing dilution in other ways as well. One example of this is the way we net settle employee RRUs when they vest. Through this net settlement, Compass based the cash for employees' payroll, withholding taxes and withhold an equal amount of shares at the time of vesting. The share holdback from taxes reduces dilution from stock compensation by about 40% and effectively operates like a regular share buyback program during the year. Further, any issuance of equity for M and A going forward will continue to be made through a strict framework that allows that applies to accretive deals at favorable multiples that grow revenue and EBITDA and ultimately shareholder value.

Speaker 3

While we believe stock based compensation is an important tool to align the actions of our team members to the outcomes of Compass, we also understand it represents a real cost. In the exact same way we delivered operating expenses, expense reductions, Robert, myself and our full management team are focused with action plans to continue to bring down stock based compensation. As the housing market recovers and revenue growth occurs, we do not believe there is a need to materially increase the absolute dollar amount of stock based compensation in the future. As we have done with our OpEx efforts, we look forward to showing progress on this commitment in upcoming earnings calls. Turning back to our financial results.

Speaker 3

Free cash flow during the Q2 was positive $40,400,000 As previously disclosed, the first payment of our class action legal settlement was made in the 2nd quarter, which reduces the cash flow in the quarter by 29,000,000 dollars Excluding the effect of that payment, free cash flow would have been 69,000,000 dollars which would have meant an improvement of 36% over the free cash flow of $51,000,000 in Q2 of last year. As a reminder and consistent with my comments last year, it's important to note that our positive cash flow in the first half of twenty twenty four is partially due to a couple of timing items that will have offsetting effects later in the year. First, many of these fees that are many of the fees that are billed to our agents occur at the beginning of the calendar year. So our cash flow in the early part of the year is aided by timing of when the fees are paid and it will have an offsetting effect later in the year. 2nd, we tend to see seasonal impacts to working capital that are favorable in the 1st two quarters of the year when cash collections from our brokerage commissions are higher at the end of these quarter each of these quarters compared to the beginning of these quarters.

Speaker 3

The opposite is generally true in Q3 and especially in Q4 when seasonality impacts working capital in a negative way. These timing items should be neutral for the full year, but can create choppiness for individual quarters within the year. We expect to be free cash flow positive for the full year even after considering the $29,000,000 legal settlement payment made in Q2. However, we expect that free cash flow will be only slightly positive in Q3 and free cash flow will be negative in Q4. We ended the Q2 with $186,000,000 of cash and cash equivalents on our balance sheet and we have no outstanding draws on our revolving line of credit.

Speaker 3

We believe we are well positioned to react to continued market challenges. Now turning to our financial guidance. For Q3 of 2024, we expect revenue in the range of $1,425,000,000 to $1,525,000,000 and we expect adjusted EBITDA to be in the range of $30,000,000 to $50,000,000 The midpoint of each of these revenue and adjusted EBITDA ranges reflect increases of 10% 83% compared to Q3 of last year. Let me provide a few additional data points as it relates to financial modeling you may be doing for the second half of twenty twenty four. First, consider our commissions as a percent of revenue for Q2 was 82.6%.

Speaker 3

We would expect this margin to remain around this level for the balance of the year, which reflects the integration of our recent M and A transactions that have commission rates that are higher than our core brokerage. 2nd, as it relates to OpEx, we have updated our OpEx range for the year 2024 of $876,000,000 to 896,000,000 As we laid out last quarter, this range starts with our core company OpEx of $850,000,000 and adds in $15,000,000 for 2023 M and A OpEx, $12,000,000 of OpEx for Ladder and Bloom acquisition that closed in April and an additional $9,000,000 for the balance of 2024 from the Park entities that we just acquired in May. For modeling purpose, you should expect an additional sequential increase to OpEx in Q3 and Q4 as the partial quarter impact of our Q2 acquisitions of Ladder and Bloom and Parkes contribute to a full quarter's worth of OpEx in Q3 and Q4. Finally, as I stated earlier, we are reiterating our expectation to be free cash flow positive for the full year. However, on a quarterly basis, we expect free cash flow to be marginally positive in Q3 and negative in Q4 given the seasonality of our business.

Speaker 3

As I wrap up my prepared remarks, I'd just like to recap some of the highlights that we made made the Q2 such a standout. First, we grew revenue by 14% versus a year ago with market share increasing 50 basis points to over 5%. We delivered an 11% increase in transaction volume from a year ago compared to a 3% decline in transaction volume for the overall industry. The number of our principal agents increased by 24% versus a year ago, an increase of nearly 3,300 principal agents. We achieved an additional OpEx reduction of $21,000,000 versus Q2 of last year or $83,600,000 on an annualized basis even after considering the additional OpEx assumed for recent acquisitions.

Speaker 3

We delivered a new record level of adjusted EBITDA of 77,000,000 despite revenue being down by 250,000,000 compared to Q2 of 2021, which was a quarter of our prior adjusted EBITDA record. We completed 2 M and A transactions through which we became the number one brokerage by sales volume in the Nashville and New Orleans market. We reduced over $40,000,000 we produced over $40,000,000 of free cash flow and increased our cash position despite paying out over $28,000,000 in legal settlements. And finally, we reported GAAP net income of $21,000,000 which marks the first time as a public company that we've ever reported positive GAAP net income. Results like these don't happen without the incredibly hard work and dedication of our team members, and I'd like to say thank you again to our agents and employees for all that you do for Compass.

Speaker 3

I would now like to turn the call over to the operator to begin Q and A.

Operator

Thank you. Our first question for today comes from the line of Matthew Bouley with Barclays. Your line is live.

Speaker 4

Good afternoon, everyone. Thank you for taking the questions. I'll ask around the thirty-thirty strategy. Understanding the wide array of competitive advantages that you have supporting recruiting and retention. The question is kind of mechanically speaking getting to a 30% share in your top 30 markets.

Speaker 4

I know you mentioned it would be a combination of organic and M and A. So from a starting point, I guess, where are you today in those markets? And is there kind of a clear pipeline around M and A to get you there? Or should we think kind of returning to a few years ago that there could be some kind of uptick in competition to kind of go after some of the agents you may need around that organic share gain piece? Thank you.

Speaker 2

Yes. On the organic side, we don't expect to be going back to the old days of cash incentives and equity incentives. That's not needed given the strength of the platform. We and we are seeing an increased interest in coming to Compass. I think historically there's unbalanced desire for agents to be part of small in boutiques.

Speaker 2

I think when the NAR settlement has helped accelerate is the understanding of the benefits of being part of a bigger company. And not just agents are seeing that, Brickwood CEOs are seeing that as well. And so, yes, it will be a mix of organic and brokerage M and A And the M and A, as Connie said, will give a very disciplined framework to make sure that it's always accretive on an EBITDA multiple basis before the benefit of cost synergies. And so it becomes even more accretive when you include the cost synergies.

Speaker 4

Got you. Okay. Well, thank you for addressing that. Super helpful. Maybe secondly, just kind of zooming into the market.

Speaker 4

Obviously, interest rates have come down a bit. You kind of look at some of the high level data with Mortgage Bankers Association, etcetera, as maybe not fully reflected that move in rates yet. Kind of what are you seeing around availability of inventory coming back online? I'm also curious if around what it is and is not doing around commission rates. But is it creating any uncertainty in terms of transactions that may be getting pushed to the right?

Speaker 4

So just kind of overall market color and then and sort of what you're seeing around how the settlement may be actually impacting the market? Thank you. Yes.

Speaker 2

So let's do the latter part first. It's a little more straightforward. The NAR settlement has not impacted from anything I've seen buyer or sellers desires to transact. It has impacted certain agents' desire to be in the business and those aren't really Compass agents, but I think newer agents, people that don't have as much experience and that haven't really been committed or that we're going to start being joining the industry may decide not to because of the headlines. But it's not impacting transactions.

Speaker 2

It's just I think impacting certain agents and their desire or fear around the industry. But the fear for agents that are actually in the business that are professionals, I would tell you when I go around all the different offices, I travel regularly to offices across the country. There are more agents that think that this will help their business than hurt their business. When I say this, I mean revenue, their money. In the beginning, people were concerned, but now that people are actually practicing and out there with buyer procedure agreements.

Speaker 2

Remember, some of the MLSs have already made the buyer facilitation agreements, they've mandated them earlier. Not everyone's waiting until August 17th. So there are data points that are out there. In terms of what's happened to overall real estate market, look, it has been somewhat of a confusing market. However, I'm modestly optimistic about the fall.

Speaker 2

This last quarter, we saw an existing home sale seasonally adjusted annual rate of home sales average of 4,050,000 That compares to $4,090,000 for the full year last year. So what that means is this last quarter was actually worse on a seasonally adjusted annual rate of home sales than all last year. And last year, we know, was the lowest level of transaction since 1995, 28 years ago, and the population now is more than 2010 larger than it was back then. So clearly, the market is depressed. It's also on the upside creating pent up demand.

Speaker 2

There is a the must move market has been moving, which we kind of believe is around $4,000,000 but the want to move market has been continuing to build up demand. I think what happened in Q2, while it was down 3% year over year, I think it's all around mortgage rates. The consumer buyers, they react more to the change in mortgage rates than the absolute mortgage rates itself. And so the mortgage rate in last fall, it went up 100 basis points and that's why I stopped the market from 7 to 8. The mortgage this last quarter or the spring, we started off with a boom because of that mortgage rate start off at 6.5%, but then it went up to 7.5%.

Speaker 2

So it went up 100 basis points. And again, it's not just the absolute rate, it's the change in the rate. What we just saw in June, as data came out today, is that the pending transactions were actually up 3.5% year over year. And so we actually see June as a reversal of the trend, which makes on a not closed, but on a pending more real time basis. And that makes sense because June versus April, mortgage rates went down from 7.5% back to 7%.

Speaker 2

And now because of what's happening in the broader market, mortgage rates just hit 6.7%. And so what will the fall look like? I continue to believe it's more about what's going to happen in mortgage rates. If you believe that this fall will have a lowering of the Fed funds rate, then in a subsequent lowering of mortgage rates going not just to 6.7% where they are right now, but below 6.5%, anywhere in this kind of 6.7% to below range, I think we're going to see an increase year over year, particularly given that last year was defined by 7% going to 8% mortgage rates, the highest mortgage rates that we've had in over 20 years. In terms of inventory, yes, we have single family inventories up 40% year over year, total inventories up 23%.

Speaker 2

That's still and it sounds optimistic, but it's still relative to 2019, it's 33% less. And so we're still below the pre pandemic levels. And last thing to note, I'd say is on price, prices are up 3.5%. And so when I say it's confusing, you have more inventory, so more sellers, which is great. And almost every week this year, inventory has grown.

Speaker 2

And so that's good because you can't buy what you can't sell. And so it's good that we have more inventory going to this fall. But it's also confusing because the existing home sales numbers have been so low last couple of months. I know the fact that more that the actual price is 3.5% up is a data point that there's more buyers and sellers, right. If it would be hard for there to be less buyers and sellers and have the price of homes be at an all time high, which is what they are at right now.

Speaker 4

Got it. Well, thanks for addressing everything I asked and good luck guys.

Operator

Thank you. Our next question is from the line of Jason Helfstein with Oppenheimer. Your line is live.

Speaker 5

Thanks. Hi, everyone. Just a bunch of questions around kind of M and A. So Robert, what's the primary reason an agency sells the COMPASS? Do you expect further M and A this year?

Speaker 5

Do you have any capital constraints for M and A from a cash standpoint? Potentially, do you look at 100 percent earn out deals? And then just, Collyn, just housekeeping, I don't think you gave it out, but what was the acquisitions impact on transactions or transaction growth? You gave it for revenue, but I don't think for transactions. Thanks.

Speaker 2

So the primary reason that CEOs are selling to Compass, which I remember these CEOs, they're great people, they're great entrepreneurs, they work really, really hard. Many of them are family businesses. Even if they're not family businesses, they treat their companies as families and they care as much about their agents that I care about mine. And so, but the call when I'm calling people now, what I'm saying is, I'm speaking 1st and foremost to what Compass, what coming together can do for their agents. At the top of the list, what I say is, would you be interested?

Speaker 2

And so, there's someone that may not even know that well at all. I'd say, I think I have an opportunity to give your agents our technology and our private exclusives, which are the off MLS inventory, the unique inventory. And any CEO who hears that in a market where we have market share shows a level of interest. I actually don't start with but merge. It's just more of just the overall conversation.

Speaker 2

If there's a way for us to give your agents our technology in our off, MLS, private exclusive listings, would you be interested? And then from there, we have a broader conversation about many different ways that we can achieve their objectives, of helping their agents in what's been in the market for now almost 3 years of a lot of pain, that meet their personal financial life goals. I mean, they mean the CEO. In terms of the multiple, we're aspiring to multiples that are on average, we target 4 times EBITDA, again that's pre synergy. So after post synergies, that number goes down significantly.

Speaker 2

But I'll let Kehlani discuss, how I get more of the question around capital.

Speaker 3

Yes. Thanks, Robert. Jason, thanks for the question. Look, I would it's right around just north of 2 thirds of our transaction counts came from M and A. Just a reminder, the recent acquisitions of Parks and Ladder and Bloom and even some of the 2023 have a bit lower and at times significantly lower ASP.

Speaker 3

And so that's how you square the math there.

Speaker 2

Thank you.

Operator

Thanks for your questions. Our next question comes from the line of Bernie MacKaren with Needham and Company. Your line is live.

Speaker 6

Great. Thanks for taking questions. Maybe just to start on the 30 for 30 just to level set, what is your current market share in those top 30 markets? And maybe how much of the overall GTV does it represent? And just trying to get some framework in terms of how big of a revenue step up this could be if you're able to reach this goal?

Speaker 3

Robert, I think you might be on mute.

Speaker 2

Let me start with It's not getting to that number in every market, but having on average 3rds in market share of volume, not units, closed in our top 30 markets. There we do have more than 30% market share in some markets today. We have more than 20% market share in many markets today. And we're in between 10% to 20% in most of and many more. And so I would say we're more than halfway there, but just marginally.

Speaker 2

And but we the structural advantages, they aren't just advantages for Compass. Every one of these advantages are advantages for agents as well. And so client dashboard, that's obviously for agents and their clients, having more inventory like what we've dealt with in the last 3 years is one of the key issues for agents is there's just not enough inventory. So we're we are creating a platform, that they can go to agents and say, we can help you better serve your clients because we can give you better access to inventory, not just the on MLS inventory, the off MLS inventory, the make and move inventory, which we launched this week, and more and making all of that searchable into the platform along with all of your clients' contacts, all of your clients in your CRM and their address is. And so we have like, again, 100,000,000 addresses in our contacts from our CRM.

Speaker 2

And all those addresses, they have a profile, number of beds, neighborhood, etcetera. And so allowing agents to be able to search that, we're moving to a world where the Compass platform helps explain to an agent the benefits of being part of the bigger company that has a platform. And I believe that as this all comes out and this isn't all coming out in a year, 2 years, this is all coming out of months. As these things are coming out, I think it's going to dramatically accelerate our ability to bring on agents organically and dramatically accelerate our ability to align with CEOs or brokerage firms because they see the benefits in it for them.

Speaker 6

Understood. And then Robert, I know you partially answered it in a previous question, but just trying to think about understand that right now there might not be a significant or there isn't a significant impact or a material impact from the NAR settlement. But do you think there will be will there be any change like if it is like once we hit August 17, does that change anything? Or do you really think no, it's just going to be overblown still?

Speaker 2

I think from transaction side, the buyer is not buyers and sellers I don't think the buyer and seller are even it's not top of mind anymore. And there's not going to be like national headlines in August 17 saying anything around this. And if there was, it would be a fraction of what happened after the NAR settlement. And so I don't think it's going to change transactions, A. B, I don't think it's going to change the kind of buyer seller mindset around what I around how they think about paying different parties.

Speaker 2

And we've already remember half our markets already have been using biopsies agreements. The change in some of those markets is doing it a little earlier, but you should also know that there are a number of states that are coming out, with viewpoints, with their regulators coming out and saying that it should not that it's too early to have a buyer's decision agreement before the showing and that it should be before negotiation and offer, but not before showing. So I think time will still tell even if in some of these markets, if the states will even allow it to be that early. But again, I don't see there being a change.

Speaker 3

Got it. Thanks. Yes. Bernie, I would add just internally though, we're using as opportunity to continue to train our agents to continue to show the agents the tools we have to trade value. So in the end, I don't think there's a ton macroly, but I think internally, a good opportunity for us to continue to show and train on value.

Speaker 6

Got it. Thanks, Bonnie.

Operator

Thank you. Our next question is from the line of Soham Bansal with BTIG. Your line is live.

Speaker 7

Hey, guys. Good evening. Robert, just following up on that last question, I guess. It doesn't sound like you're concerned about commission rates, but I think there's still a fair amount of debate amongst investors. So maybe just talk about sort of some of the contingency planning that you have done in this situation where there is pressure.

Speaker 7

And if you could just focus specifically on commission split on your side and how you sort of intend to defend that line going forward if we were to see split pressure?

Speaker 2

Well, look, I think on the split side that's in relation to the overall market competitive dynamics and the value that you provide relative to that. My view is on the competitive dynamics, I don't think splits can go much lower. And so I think that pressure will it's hard for me to see that creating more pressure. And I think the value that we're providing is going to dramatically because of the things I said earlier on the call, the structural damage that we're giving to the agents. In terms of what look, I know that investors have there are some investors, actually there are many investors by the way that aren't worried about this anymore.

Speaker 2

But yes, but there are some that say, okay, what will go to happen on August 17th and afterwards. Again, my belief is that the buyer's decision agreement doesn't change the conversation that a listing agent has with the seller. And so the listing agent the seller is going to sit down with the listing agent. We're going to talk about how much the seller wants to incentivize the buyer agent. On August 17th versus the week before, that conversation is going to have be the same framework.

Speaker 2

And so I don't see how it's going to change what the seller does. What it does is it lets the buyer agent actually negotiate for themselves, right? So, when I say like the best agents are actually happy with this, because the best agents are saying, oh, now I can actually negotiate for myself. Now I can I don't before the buyer agents were actually historically just taking whatever the listing agent negotiate for them is actually kind of interesting? And now the best buyer agents, many of them come to mind, who I meet across the country, they're asking their buyers for more than what the listing agent was negotiating on their behalf historically.

Speaker 2

And so, time will tell, but I can see things being flat. I can see them maybe going down modestly, but I haven't talked to that yet. So you can also see it going up and time will tell.

Speaker 7

Got it. Okay. And then curious on the Make Me Move tool, it sounds like a pretty interesting way to source some unique inventory. But I'm just trying to understand this a little bit. So if the seller indicates that they're interested in selling and there's a buyer in your system that sort of raises their hand, will that inventory remain just on the Compass platform or do you intend to sort of market that home on the MLS as well to get sort of broader syndication over time?

Speaker 2

Yes. All right. So let me try to be very clear here. We have 100,000,000 people in, more than 100,000,000 contacts in our CRM. I went out to all the agents this week and I put gave them a challenge.

Speaker 2

I said, go to your clients and ask them if they want to list their home. Ask them if they want a private exclusive. If they say no, say, is there a price that you would sell at? Is there an aspirational price that you would sell at? My wife, as an example, would never sell her home.

Speaker 2

But when asked, there is a price. Everyone has a price, right? So this is if nothing else, is an opportunity to get our agents in front of clients to engage, to build relationship and build business. But at a minimum, finding out that price and putting in the compit CRM. And so, it's just only so it's only internal.

Speaker 2

The only person will know the make and move price is the agent that put it in there. However, what we're building over the months ahead is the ability and this was the number one remember how we say everything that we do comes from our agents. The number one request that from voted up by our agents in the history of Compass is this idea. And that's why we're working on it. It is when you're searching, let's just call it 5 bedroom penthouse San Francisco, can we not just have what's available on the MLS, what's a private exclusive to, what's a private exclusive, which is off the MLS?

Speaker 2

Can you also because Compass, this is what the agent put in this request, because our CRM is in the same place where people search, it's the same platform and likely to sell has the addresses of all these contacts, Can you make it so the 3rd line would be in my CRM? So in Robert, in Robert's CRM, I have 3,000 contacts on average. I hear 2 people, let's say, that have a 5 bedroom penthouse in Soho in San Francisco. So that would be the 3rd line of what's available. And then the 4th line, there are only 5 lines.

Speaker 2

The 4th line are the the other agents at Compass. It will show 17 other agents as an example, who they have people in their contact who have 5 bedrooms in so in San Francisco that our penthouse is. I will not know the names the names of those people or their actual addresses. I will only have a confidential reference number. So I can say, Hey Jane, Hey John.

Speaker 2

I have a buyer who wants to spend $10,000,000 on a 5 bedroom penthouse in San Francisco. It looks like you have 2 contacts. Here are their reference numbers. Would they want to buy? We have top agents that do this today already, but it's 1 on 1, it's off platform.

Speaker 2

We're making it we're just taking the real estate world and bringing it to the platform. And the 5th and last line is for what's in those contacts in my CRM and in the other agents CRM adding to making new prices. So it gives even a better signal of would these people be willing to sell and at what price. And so, that is what when I say making new prices, that is how they will be surfaced in every search that the agent makes. Okay.

Speaker 2

So that sounds exclusive

Speaker 7

to the platform. And then just last one, Kalani, as we think about the 30 for 30 strategy and fully appreciating that you're not in all markets across the U. S, do you have a sense for what that sort of translates to market share in, call it, sort of a normalized $5,000,000 existing home sales kind of environment if you were to sort of achieve those levels? Thanks.

Speaker 3

Yes, sure, Sohrab. As Robert mentioned, we're probably half of the way there already. And so I don't know that I'll estimate an exact number, but obviously, we're at 5%. We just reported 5% plus this quarter. So somewhere in the high single digits, low teens would be kind of the math estimate, but it will depend on markets.

Speaker 3

Like Robert said, the goal here is really about driving inventory and our structural advantages to make sure that we are advantaging our agents. And so it will depend on the market and how fast we get there, but that's how I think about it at this point. Great. Thanks a

Operator

lot, guys. Thank you for your questions. Our next question is from the line of Michael Ng with Goldman Sachs. Your line is live.

Speaker 8

Hey, good afternoon. Thanks for the question. I just have 2. First, this one's for Kehlani. On the commissions and expenses point 82.6 percent around that level for the rest of the year.

Speaker 8

Is that something that is just higher for the year given the M and A and does it normalize down lower? Or is that a level of commissions that should be sustained higher even beyond 2024? And then I have a separate follow-up.

Speaker 3

Sure. Yes, sure. So as it relates to gross margin and commissions, I think we mentioned, right, we saw that 70 basis point decline, about 2 thirds of it is driven mainly by the market mix as well as the M and A related. I think for the year, we see it relatively kind of consistent to this quarter. I do think and we are actively working, and I think there's lot of tailwinds, as it relates to gross margin.

Speaker 3

So I think it's more of a period of time to answer your question directly. I think as you think about some of the tailwinds we have organic recruiting team is bringing on about 500 to 600 agents per quarter. These are agents kind of in that top 50%, but not at the top 10%, right. So the economics of our agents that we're bringing on are beneficial to our overall fleet. And we'll continue to do that.

Speaker 3

The team is doing a really good job there, 540 plus this quarter. Additionally, we are seeing and we'll continue to see for a little bit more some of the incentives that we stopped incentives in the second half of twenty twenty two. As incentive burns off, we'll see some tailwinds there. And then lastly, you'll see us continue to talk about our opportunity to grow our reach and depth of our integrated services, particularly title and escrow. Our T and E business has abnormally favorable impacts on our gross margin.

Speaker 3

And so as we grow and continue to grow, and I think we have a really aggressive growth plan to be kind of on par with our peers. As that continues, you'll see significant gross margin improvement from that as well. So I do think it's more of a period of time as we lap some of the M and A and lap some of the kind of the market dynamics. But overall, I think we are well positioned to grow our commission rates.

Speaker 8

Great. Thank you, Kehlani. And I just had a follow-up on the passive inventory Make Me Move. Could you just talk a little bit about how that fits within, I guess, the confines of like the NAR's clear cooperation policy and why that may or may not apply? Thank you.

Speaker 2

Yes. So first, I think Clear Corporation will end. I've now and it's a top priority of mine, top focus, speaking with a lot of MLS leaders and others in the industry. It has already been effectively eliminated in a number of the largest MLSs by allowing the restrictions to no longer be restricted. And so even if it wasn't, what clear corporation is?

Speaker 2

I believe Clear Corporation is anti homeowner. I believe that, I believe that too much of the way the system works today isn't for the homeowner. And so what I'll give you a couple examples. Days on market is the killer of value. Price drop history is the killer value.

Speaker 2

The reason why private exclusives at Compass are so popular is because they do not have days on market when they go updating on a price drop history. When you go to Mercedes Benz lot or any other luxury good, you don't see on every Mercedes Benz the price drop or the days on market. And so there are some markets where we have over 20% of the market share, where the majority of our listings come on as a Compass driver who's a first, because those homeowners, they want to be able to test the market without then what do you call negative marketing. Now the aggregators in the United States have negative marketing price drop history days on market, AVMs, these valuation estimates, crime, all these kinds of things. These are things that in many other markets in the world that don't exist.

Speaker 2

So if you go into Australia, REA, which is owned by News Corp, there's no negative insights of any kind. And so I'm sharing all this because it helps highlight why it is actually pretty easy in the construct of the United States system, which took inventory, gave it to aggregators to put negative insights on to get more buyers searching, why it's so easy to go to homeowners and say, we can protect you from those negative insights through these different tools. We can test the market privately or test the market without having the negative insights on them. And clear cooperation, what it's doing and what is it the problem with it is it's forcing homeowners into negative insights. It's there is it's saying anyone who has an agent, any single one has an agent after one day of public marketing where with no negative insights on a place like Convis or through your agents, you have to put it in the MLS and then go through the system, which the homeowner doesn't have choice on.

Speaker 2

And so as we're now this is a top priority for us, and we're talking with leaders in the industry, I'm very confident that clear cooperation will go away as it is currently known. And even if it were not, then making new prices because they're not public marketing, and they're only searchable in the CRM when you're talking to your agent. That's why it even in the context of Clearco operation is not an issue.

Speaker 8

Great. Thank you for all the color, Robert. That's really helpful.

Operator

Thank you. Our next question is from the line of Ryan McKeveny with Zelman and Associates. Your line is live. Line of Ryan McKeveny, your line is live. Are you there?

Speaker 9

Yes. Sorry about that guys. I was on mute. Nice job in the quarter. Thanks for taking the questions.

Speaker 9

Kehlani, just wanted to come back to you on the revenue less P and O margin. So I think your commentary was confidence over time there can be some leverage there. Know you called out the ancillaries and that makes a lot of sense. Anything you can share more on the opportunity for margin improvement on the agent economics over time? Would that be something that maybe just comes from the mix of agents?

Speaker 9

Geography obviously plays a role. But as you expand all of these new products and offerings, is there upsell potential to agents? Just curious how you bridge that gap to get to margin improvement on CNO over time? Thank you.

Speaker 3

Yes, sure, Ryan. I'll start, Robert, if you have anything to add. A few things, just noting again that the headwinds we're seeing currently are more around mix, right. And so it's not kind of structural on an agent per agent basis, it's just a mix. And so that's why I have confidence that we have some opportunity to continue to move our economics.

Speaker 3

I think every time we're renegotiating deals, we're bringing folks off of some of the incentive plans that we were on in prior. And I think as you hear us today, we're really confident and excited about those structural advantages we're talking about. And when we have those, those are the kind of conversations where we are having with agents, how we can help agents. So it's not just commission, but it's how do we make sure they're making the most money when we can do that. We obviously can have better, more productive conversations.

Speaker 3

So I do think the short term is more around resetting the mix. I think there is opportunity as we bring more agents on to bring kind of fill out the portfolio, if you will, which will improve our commission rates. And then I think individually, our teams are working every day really hard to make sure we're showing the value of Compass, and that positions us well for continued economic improvement.

Speaker 2

Yes, I'll just add to what Clani said. I think we have the benefit of hiring agents at better margin, we have the benefit of more T and E, which is helping margin. But I think what we're seeing is our really our acquisitions of market end markets with lower splits, has offset the kind of things that I was just mentioning. I think over time, we will be there'll be an M and A strategy that will be more balanced. And so it won't hurt us.

Speaker 2

And I think the unbalanced will even help us. I think so I think that's one, just the M and A strategy. And the markets where I referenced those transactions, those are some of the lowest the most, some of the more challenged split markets that we're in. 2, that's why I referenced on the call, we're going to be expanding T and E to a number to all of our largest cities over the course of next 18 months. And there's multiple 100 of base points per transaction when you add T and A.

Speaker 2

And so expanding T and A, we're in 7 markets now, but there's many more markets to go to. And then 3, I believe with the things that we just mentioned on the call, coming to fruition that there will be an undeniable advantage to every agent has an advantage at Compass and their clients do as well. And I believe that will help, with the margin conversations.

Speaker 3

Yes. Hey, all of that, right? Ryan, I would just add, I forgot to add. I also think if you look so we're talking about commissions. If we look at our total kind of the economics of the agent, which includes marketing, which includes some of the prior stock comp.

Speaker 3

But if you look at those total agent economics, we are actually improving over time. That's part of the cost OpEx, etcetera. So I think on the commission side, everything Robert and I just said, I would also point us to that total kind of company dollar that the agent has in that economics. We are improving that with each of the steps we've made over the last 2 to 3 years. That's already a metric that's improving.

Speaker 9

Got it. That makes a lot of sense. Thanks for all that color. And Robert, I guess, the listing side of things is obviously getting a lot of attention. The Make Me Move is very interesting.

Speaker 9

I guess in the here and now today, it seems what's happening is that Compass agents are having success winning listings, let's call it at a faster rate than peers and ultimately that translates to share gains. In February, you had made a comment that I think you said seller activity on your platform was up something like 40% year over year. And at that time, inventory and new listings had just started to rise. So kind of an indication that seemingly Compass agents were having early signs of success as listings overall started to expand. I guess any updates you can share on just the amount of seller activity you're seeing on the platform today or just those trends generally in listings taken by Compass agents versus agents overall?

Speaker 9

Thank you.

Speaker 3

Yes. I remember early in

Speaker 2

the year, we saw on the platform because traditional brokerage doesn't know when their agents doesn't know systematically through a platform if their agents are how many of their agents are having listing presentation conversations with their clients and when it's happening. But the listing presentations come through the Compass platform, which we build, not a third party platform, so we know, as well as the CMAs, the comparative market analysis, the market reports. And so we can see the full pipeline of an agent's activity from first contact on the buy side and the sell side all the way through. And so, yeah, early in the year, we could tell that the listing presentation conversations were up directionally on 40%. And then, as I mentioned earlier on the call, actual inventory is now up 40%.

Speaker 2

And so it's, we do have the insight. I don't have an updated view of that number, I'm looking presentations now going into the fall. And so I don't have that. But what we do have is that what I shared earlier on the call that our likely to sell recommendations are in our CRM. Whenever you go in an agent, it's a there's a button in your CRM that says LTF likely to sell.

Speaker 2

And it's a recommendation that, for anyone that's in your contact database from the advertising has around 3,000 people and their addresses attached to these, it's a recommendation of if they're highly like VSL or medium like VSL or and if they're not one of those 2 things, it's not a recommendation. It's looking at it's a weighted model looking at a bunch of factors. Some key ones are details about the property, bedrooms, square footage or time since the last sale, and frequency of past transactions for the platform, home value appreciation or people moving data, percent of owners, renters, how can they move. And so it's based on those types of factors. And what we saw is of the Compass transactions that closed in Q2, it was 7% of those addresses were recommended through the Compass likely to sell in the prior 12 months.

Speaker 2

And so, when we look at the likely to sells, we're actually not seeing an increase in the number of likely to cells necessarily going forward versus what we've seen in the past. And so that's an indication that I think it would that the market that we're not I don't think we're going to see a big boom in new inventory. I don't think it's declining either. I think inventory in the fall will actual inventory will have to be more do with buyers coming to market versus new sellers.

Speaker 9

Got it. Very helpful. Thank you, guys.

Operator

We have a final question today from the line of Ben Black with Deutsche Bank. Your line is live.

Speaker 10

Hi, this is Jeff Steiner on for Ben. Thanks for squeezing me in. Just one quick one on you mentioning inventory as structural advantage, a lot of the talk on that. And you mentioned the clear cooperation policy potentially going away and maybe some of the NAR rules that are about to go into effect. Does any of that allow you to lean into kind of private exclusives in a bigger way and maybe more broadly?

Speaker 10

Will any of that potentially push the industry to more of a decentralized listing structure?

Speaker 2

It's a really good question. It's a question that a lot of analyst leaders are asking, which is if agents aren't forced to put listings in the MLS, which I believe that is not a I believe that's inevitable that they can't be forced because that's not the world that we live in. And the DOJ publicly, and this is all public, but they're actively looking at clear cooperation, right? And so then they reopened that case. So again, I think it will go away.

Speaker 2

And there are another one of the judges recently reopened a case from I believe it's Top Agent Network on Clear coverage. There's a lot going around Clear coverage. And at the heart of it is, are you forcing people? And when you have and that's a problem when you're forcing someone to do something. And so I believe the forcing mechanism will go away, but it will be fine, but not from an MOS standpoint, it will be fine because we already have data points.

Speaker 2

There is no clear cooperation in the state of or in MLS 10, which is, it's brokered under NAR and that's Massachusetts. There is no clear cooperation in Marin, Napa, Sonoma County, which is Barris. And there are a number of other examples. And things work just fine. And so I think there's a fear from some stakeholders like what will happen, how decentralized will it get.

Speaker 2

What it will mean is that, I believe is that the vast majority of inventory will end up coming to a centralized place, but it won't it probably not as much will be like instant. And there are reasons for homeowners for it not to be instant. There are many homeowners that believe that it's not always that forcing marketing into the MLS isn't always in their favor. What if they're a CEO?

Speaker 3

What if they're getting married? What if

Speaker 2

they're getting divorced? What if they're a celebrity? What if they want to test the market and the aspirational price, what if they're they need to develop the property for and paint and stage it, they want to test the market beforehand before the days of market restart. There are so many reasons why people want choice. And so I think that choice will happen.

Speaker 2

But when the choice happens, we already have the data point that the system will still work, because there are many MLAs that don't have clear cooperation. But I do believe that Compass will be able to show that where there's more inventory on compass.com, as well as more inventory for our agents than any other public sites.

Speaker 10

Great. Thank you. That's very helpful.

Operator

Thank you for your question. And ladies and gentlemen, that will end today's Q and A session. I'd like turn the call back over to Robert Refkin for closing remarks.

Speaker 2

Well, first of all, thank you for joining our call today. As you can tell, I'm very excited by where we are and where we are going as a company. Our excellent financial results in the midst of a very difficult market really demonstrate that we are on the right track to avail. And when the market does return to normal, we will be well positioned to capitalize. I just want to say how grateful I am to all the amazing agents, all the amazing employees who have persevered through difficult times, and always with their eyes on delivering great results for their clients and for the company and say thank you.

Speaker 2

Thank you for joining this call.

Operator

Thank you. Ladies and gentlemen, that does conclude today's call. Thank you for joining. You may now disconnect. Have a great day.

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Key Takeaways

  • Compass delivered a record Q2 with GAAP net income of $20.7 million (versus a $47.8 million loss last year), adjusted EBITDA of $77.4 million (more than double Q2 2023), 14% revenue growth to $1.7 billion, and positive free cash flow of $40.4 million ($69.2 million excluding a $28.8 million litigation payment).
  • The company unveiled its “Thirty-Thirty Vision,” targeting 30% market share in its top 30 cities by 2026 through four structural advantages: an end-to-end technology platform, national scale, the largest top-agent referral network, and expanded proprietary inventory including a new “Make Me Move” off-MLS feature.
  • Following the NAR settlement’s preliminary approval, Compass has seen no meaningful drop in buyer-agent commissions (over 99% of listings still offer buyer agent fees), and does not expect the new buyer representation agreement rule to materially alter incentive levels.
  • The company continues to drive cost discipline, cutting non-GAAP operating expenses by 9% year-over-year to $217.4 million, and reducing stock-based compensation for six straight quarters; full-year 2024 SBC is guided at ~$130 million (44% below 2022).
  • Compass strengthened its balance sheet and market footprint with cash of $185.8 million, no revolver draws, and closed two accretive acquisitions—Ladder & Bloom in Louisiana and Parks Real Estate in Tennessee—adding over 2,000 agents and boosting local market share.
AI Generated. May Contain Errors.
Earnings Conference Call
Compass Q2 2024
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