Opendoor Technologies Inc.
Q4 2020 Earnings Call Transcript

Published: 4 Mar 2021

[Operator:]

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. It is now my pleasure to introduce, Whitney Kukulka with Investor Relations.

[Whitney Kukulka:]

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.

[Eric Wu:]

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. 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.

[Carrie Wheeler:]

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.

[Operator:]

And our first question comes from the line of Yoni Yadgaran with Credit Suisse.

[Yoni Yadgaran:]

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.

[Eric Wu:]

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.

[Carrie Wheeler:]

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.

[Yoni Yadgaran:]

Got it. Appreciated. Thanks guys.

[Carrie Wheeler:]

Thanks.

[Operator:]

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

[Jason Helfstein:]

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.

[Eric Wu:]

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?

[Carrie Wheeler:]

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.

[Jason Helfstein:]

Thank you.

[Operator:]

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

[Ygal Arounian:]

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.

[Eric Wu:]

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.

[Carrie Wheeler:]

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.

[Ygal Arounian:]

Thanks so much.

[Operator:]

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

[Edward Yruma:]

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.

[Eric Wu:]

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

[Edward Yruma:]

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?

[Eric Wu:]

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

[Edward Yruma:]

That’s right.

[Eric Wu:]

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.

[Carrie Wheeler:]

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?

[Edward Yruma:]

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.

[Carrie Wheeler:]

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%.

[Edward Yruma:]

Okay. Thank you.

[Operator:]

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

[Jason Helfstein:]

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.

[Eric Wu:]

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

[Jason Helfstein:]

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

[Carrie Wheeler:]

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.

[Jason Helfstein:]

Great.

[Eric Wu:]

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.

[Jason Helfstein:]

Thank you.

[Operator:]

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

[Eric Wu:]

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.

[Operator:]

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