Redfin Corporation
Q1 2021 Earnings Call Transcript

Published: 5 May 2021

[Operator:]

Good day, and welcome to the Redfin Corporation Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Meg Nunnally. Please go ahead ma’am.

[Meg Nunnally:]

Thanks Travis. Good afternoon, and welcome to Redfin’s financial results conference call for the first quarter ended March 31, 2021. I’m Meg Nunnally, Redfin’s new Head of Investor Relations. Joining me on the call today is Glenn Kelman, our CEO; and Chris Nielsen, our CFO. You can find the press release on our website at investors.redfin.com. Before we start, note that some of our statements on today’s call are forward-looking. We believe our assumptions and expectations related to these forward-looking statements are reasonable, but our actual results may turn out to be materially different. Please read and consider the risk factors in our SEC filings together with the content of today’s call. Any forward-looking statements are based on our assumptions today and we don’t undertake to update these statements in light of new information or future events.

[Glenn Kelman:]

Thanks, Megan. Hi everyone. Redfin’s first quarter net income and revenues were better than we projected in our last earnings call. Net income increased from a loss of $60 million in the first quarter of 2020 to a loss of $36 million in the first quarter of 2021. Gross profit was $42 million, up 229% from the first quarter of 2020. For our core real estate services business of brokering home sales through Redfin agents and through other firms agents working as our partners, first quarter gross margins increased year-over-year by 1010 basis points to 24%. Because we hire so many new agents and meet so many new customers in advance for the summer home buying season, first quarter margins are usually our lowest of the year. Total revenue increased 40% from the first quarter of 2020 to $268 million with Real Estate Services revenue up 55%. After two quarters of declining sales, our properties business which buys and sells homes through Redfin now grew 17% to $93 million, generating its first gross profits since its earliest months. Our other segments, which consists primarily of mortgage and title services, grew revenue 120% to $9 million. The Bull Housing market has boosted our growth, but we're also gaining U.S. market share with the first quarter increase of 21 basis points to 1.14%. Since we lost share in the second quarter of 2020, due to a furlough of about 32% of our lead agents. Our share gains have accelerated in each of the last three quarters. We've gained shares, we recruited more agents. The number of lead agents Redfin employed on March 31, 2021 was up 26% from the same day a year ago, with partners up 93%. Comparing the first two months of 2022, the first two months of 2021 the rate at which we hired lead agents increased 74% with 12% of lead agents who started in the first quarter coming from Digital ads on Facebook, LinkedIn, and Indeed. Hiring a candidate through online ads is still about 20 times more expensive than traditional recruiting. But we believe our digital campaigns can get much more efficient. We should have enough lead agents to serve forecasted levels of demand in June 2021 just as we promised in the last two earnings calls. Redfins field managers and the demand generated by our site let us develop almost anyone with grit and brains into top producing agents. We still recruit about half our new agents from other brokerages. But recently the other half has included a window salesperson car, salespeople, a Chef, an actor, political canvassers, recruiters and hospitality and restaurant workers. Were also recruiting more stay at home parents who decide to become breadwinners after their partner's lost a job during the pandemic.

[Chris Nielsen:]

Thanks, Glenn. Our first quarter results exceeded our expectations as we continue to benefit from a robust housing market. First quarter revenue was $268 million up 40% from a year ago. Real Estate Services revenue, which includes our brokerage and partner businesses increased 55% year-over-year. Brokerage revenue or revenue from home sales closed by our own agents was up 53% on a 33% increase in brokerage transactions. Revenue from our partners was up 94% on a 59% increase in partner transactions. Revenue per partner transaction continues to benefit from rising home prices. The property segment which consists primarily of home sold through RedfinNow generated $93 million in revenue up 17% from one year ago. Our other segment, which includes mortgage titled and other services, contributed revenue of $9.4 million, an increase of 120% year-over-year, primarily driven by growth in our mortgage business. Total gross profit was $42 million, up to 129% year-over-year. Real Estate Services gross margin was 24.0%, up 1010 basis points year-over-year. This was driven by a 450 basis point decrease in personnel costs and transaction bonuses, a 270 basis point decrease in travel and entertainment and a 120 basis point decrease in listing expenses. Properties gross margin was up 200 basis points year-over-year to 1.7%. The improvement was primarily attributable to a 760 basis point decrease in home purchase costs and related capitalized improvements. This improvement was offset by a 290 basis point increase in personnel costs and transaction bonuses. Other segment gross margin was 3.9% up from minus 46.9% one year ago. As a reminder, our mortgage business negatively impacted by market volatility in the first quarter of 2020, which contributed to prior year margin weakness. The year-over-year improvement was driven by a 3,100 basis point decrease in personnel costs and transaction bonuses and a 990 basis point decrease in outside services costs. Total operating expenses were up 9% year-over-year and represented 28.6% of revenue down from 36.8% one year ago. Technology and development expenses increased by 37% or $7 million. The increase was primarily attributable to a $6.7 million increase in personnel costs. Marketing expenses decreased by 54% or $14 million. The decrease was attributed below $14.4 million decrease in mass media marketing costs. As we're shifting the launch of our annual television commercial from the first quarter to the second quarter, general and administrative expenses increased by 54% or $13 million. Of this amount, $3.1 million was due to increase the legal expenses, largely due to a rejected settlement offer for a threatened claim, and $2.1 million was for transaction expenses from the RentPath acquisition. These increases were offset by a $4.1 million reduction in company meals and events primarily due to our annual companywide kick-off event going virtual this year. The remaining increase was primarily attributable to an increase in personnel costs due to increased headcount and recruiting activity. Our net loss, including stock-based compensation and depreciation was $36 million, compared to a net loss of $60 million in the first quarter of 2020. We also recorded a dividend on convertible preferred stock of $2.3 million. Diluted loss per share attributable to common stock was $0.37, compared with diluted loss of $0.64 per share one year ago. Now turning to our financial expectations for the second quarter of 2021. Consolidated revenue is expected to be between $446 million and $457 million representing year-over-year growth between 109% and 114%. We expect our properties segment to account for $151 million to $156 million of that revenue representing year-over-year growth between 109% and 116%. Our consolidated guidance also includes post acquisition results for our recently acquired RentPath business. For the second quarter RentPath revenue is expected to be between $41 million and $42 million representing a year-over-year decline between 14% and 16% and contribution to net loss of $10 million to $9 million. This guidance includes approximately $6 million of cost of revenue, $12 million of technology and development expenses, $23 million in marketing expenses and $10 million in general and administrative expenses. Included in these RentPath costs is approximately $6 million of depreciation and amortization. For prior year comparative purposes RentPath’s full year 2020 revenue is $194 million. RentPaths business is not typically subject to large seasonal variations, but revenue did decline through 2020 by approximately $2 million per quarter. We expect to file pro forma financials for the combined companies by June 18. And going forward, we'll be reporting RentPath as a separate rentals segment. Turning back now to our consolidated guidance for the second quarter. Our net loss is expected to be between $38 million in $32 million, compared with the $7 million net loss in the second quarter of 2020. For the eighth straight quarter, we expect real estate services gross margin to increase as compared with the same quarter in the prior year. We’ll incur approximately $6 million of onetime transaction fees associated with the RentPath acquisition. As Glenn mentioned, we've kicked off our 2021 television campaign and expect $33 million in mass media and $2 million in campaign production expenses during the quarter. Including Rentpath, this guidance includes approximately $13 million of stock-based compensation, $10 million of depreciation and amortization and $3 million of interest expense associated with our convertible senior notes and other credit obligations. In addition, we expect to pay a quarterly dividend of 30,640 shares of common stock to our preferred stock holder. We are currently evaluating the tax impact of the RentPath acquisition and therefore we are not including any potential tax gains associated with it. This guidance assumes, among other things that no additional business acquisitions, investments restructurings, or legal settlements are concluded that there are no further revisions to stock-based compensation estimates. And with that, let's open the line for your questions.

[Operator:]

Thank you. Our first question comes from Ygal Arounian, Wedbush Securities.

[Ygal Arounian:]

Hey good afternoon guys. Thanks for taking the question, I want to circle back to the hiring stuff in the comments there around your hiring has grown. You've seen now market share really expand faster than you've seen in a long time. So can you talk about how those two things might be connected? And then maybe a little bit more clarity around the attrition piece. So with attrition so high, but hiring, speeding up and what you're seeing with market share gains? Where do you see market share going and you consider hiring success or is attrition more of a headwind for what you were expecting? Thanks.

[Glenn Kelman:]

We're thrilled with the progress we've made in hiring people, the recruiting team has worked so hard, and we have just brought people in hand over fist. The reason that market share is up is because we had so much demand coming through the site in the second half of 2020 that we could not serve for lack of agents. And now that we have those agents we've been able to take share. I think there will be some headwinds on market share. As we go into the latter half of the year, just because inventory is so low, that is the constraint not just on sales volume at Redfin, but sales volume in the industry. As far as attrition among newly hired agents, this also is an industry wide trend. You just have more agents than houses right now in the industry. And as a result, all these people who have brought into the industry are really struggling to get their footing. We have tried to mitigate that, first of all by connecting them with customers, and then second by giving them better training and now a new bonus. So we expect new higher attrition to go down. It has always been higher among new hires, than it has been among the broader aging population at Redfin. Some people just realize that real estate isn't for them or that the way Redfin practices it, isn’t for them. But we can do better. And so that's just going to be our focus. We want to outpace the industry at retaining new talent in real estate.

[Ygal Arounian:]

Thanks. And just a quick follow up on that. So your transaction, your own brokerage transactions were up meaningfully quarter-over-quarter, year-over-year. But the department transaction growth is still outpacing that meaningfully as well. When What can we expect to get to the point where you're able to meet an upright demand and talk about June as a point where hiring gets to where you needed to be, but is that when your own transaction growth can start outpacing partner growth again, next?

[Glenn Kelman:]

June, that's what we've been saying now, for three quarters, the past two quarters and this one, that we expect to be fully staffed in June. And when we are fully staffed, we would expect the partner business and the brokerage to grow at similar rates. As website traffic increases, and as more people from the website contact us for service. So that's our expectation. It's just been easier to recruit partners than it has been to recruit employees. But we're finally getting caught up.

[Ygal Arounian:]

Thanks, Glenn.

[Glenn Kelman:]

Thanks.

[Operator:]

Our next question comes from Ed Yruma with KeyBanc Capital Markets.

[Edward Yruma:]

Hey, thanks for taking the question. Let's unpack here, I guess first on RentPath. You know, as you guys sit in assess the state of the business, I know that it's obviously gone through bankruptcy and had its issues what, what type of investments do you think are necessary to kind of have help regain its footing and kind of what would the timing be thinking in terms of an improvement. And then as a follow up within the offers business, just any sense as to kind of how you think about home price appreciation, how that's factoring into the, the price, and that you're that you're doing today? Thanks.

[Glenn Kelman:]

I'll comment on RentPath, and then turn it over to Chris to talk about the property segment. So the key investments we need to make are, first of all, just in the Salesforce. We want to make sure that Salesforce has the data showing that we give great value to our property management customers. And that's always a challenge because you send someone, people who are interested in renting the place that you need to track whether they end up signing a lease, and whether you were the reason that they sign that lease. And so being able to make that case effectively. And just rebuilding the Salesforce generally, is going to be our first execution challenge. Long term, we want to explore different pricing models to make sure that our interests are aligned with the property management customers who list their properties. Because even before revenue and profit, the first order of business is just getting more customers onto the platform. That is the key to building any kind of online marketplace is having more high quality inventory on the site. And so it's going to take us about six months to work through that, especially since we're still hiring a long term leader. And we just need to give that woman or that man a chance to settle in, to figure out what his or her plan is, and then to go out and nail it. But the good news is that the traffic is growing very fast. And even as we've pulled back some of our digital marketing we're still getting good organic traffic growth. So the digital asset is valuable. We just need to pair that with a great Salesforce selling a great value proposition and for the longest time that Salesforce has just had this headwind that the company's been in bankruptcy, its future is uncertain. CoStar was thinking of buying the company and so many times customers wondered if they would just get RentPath leads through a CoStar deal. And now, the future is brighter. We're going to integrate listings on to redfin.com and get some real sales growth in 2022. Chris, you want to talk about properties?

[Chris Nielsen:]

Sure. So for Redfin now, we always want to offer the customer a fair price for their home and give that customer the choice between selling it to Redfin now, and then selling it on the open market. So that's our objective. And that's how we approach the situation. And the team has done a really good job of trying to, stay on top of what's been a pretty, pretty dynamic market over the last six months or so in that way. I do think in the last quarter, we've benefited from probably even more home price appreciation than we originally expected as we purchased those homes. So there's probably a little bit of upside on the margin front from that additional amount of home price appreciation. But our -- is not as a standalone business but it's giving customers that choice between an open market sale. And then for those who really value that convenience selling it to Redfin.

[Edward Yruma:]

Thank you.

[Operator:]

Our next question comes from John Campbell, Stephens Inc.

[John Campbell:]

Hey, guys, good afternoon. Just a question for you. Hey, and this is a bigger picture kind of two part question. I know you love those. But could you just talk about how you envision or maybe what you expect RentPath to look like maybe five years or so out. And then separately, where you think the Redfin and RentPath marriage has kind of structural advantages, relative to CoStar as a low.

[Glenn Kelman:]

Well, our long term vision is to make the consumer proposition better because that's just the mission of Redfin to redefine real estate and consumers favor. And so the idea that we can let somebody lease an apartment in 30 minutes flat, where they can use their iPhone to get into the unit, and tour it themselves, so they can get a virtual tour, the idea that they can sign the lease digitally, that they can go through the whole process, using some of the infrastructure that we built for purchase transactions on a rental is really exciting to us. And we just want to pair that with a real commitment to getting long tail inventory. Because of course, everybody's focused on the big property management companies that have these huge high rises in the center of every American City. But we also want to focus on the homes for rent, where we've got a customer who decides not to list their house after moving up, but instead rents it out. That is a natural fit for a company that already has lots of house inventory on our website. So that is our long term vision, we want to make renting better, we think that the value proposition to these enterprise customers to these property management companies is not just that we're going to sell you a bunch of leads, but also that we're going to lower your sales costs because if we can automate that transaction, we can lower the cost of leasing a unit and lower the costs that you have in employing salespeople and all the rest. So that's where we stand, we think we've got a great competitive advantage against a company that doesn't have a huge for sale presence. I know that CoStar is building that fast, it's very well run. So they're going to give us a run for our money. But, we've got only only up to go. It's just the beginning of a very long path of convergence. And we think we've got great consumer talent at Redfin and at RentPath.

[John Campbell:]

Okay, helpful. And one last little question on RentPath. I think you just alluded to this earlier. But to make sure I'm clear, it sounds like you're the paid marketing is not fully turned on at RentPath. Is that right?

[Glenn Kelman:]

No, we're just turning it down some, because when RentPath was in bankruptcy, and then it was going to be acquired by CoStar. They were really, in this sort of cryogenic suspension, like consolo at the end of Empire Strikes Back, they couldn't change anything, even though they knew that some of their paid marketing wasn't very profitable. And so we had traffic going up organically. We also had these very large paid advertising campaigns, even as sales were declining. And so the number of leads you're generating was through the roof. And some of these ad campaigns weren't even profitable. So now, what we're doing is really focusing on recruiting more property management companies taking advantage of organic traffic and just right sizing the ad campaign, it's finatus. Profitable, we're still going to do it. But if it's not, we don't have to anymore, so we won't.

[John Campbell:]

Makes sense. Thanks for all the color. Thanks, guys.

[Operator:]

Our next question comes from Tom Champion, Piper Sandler

[Tom Champion:]

Hi, good afternoon, guys. Glenn, it sounds like you're adding a lot more data to the site and to listings. And I'm wondering if you could talk about that, generally, and then, especially with respect to the commission data, that that you're putting in the listing and how that may change the business. And then, Chris, I'm wondering if you could just talk a little bit more about the properties guidance, the revenue guidance looks quite strong. And just maybe if you could talk to some of the assumptions underlying that, and maybe the number of markets and how you're thinking about market expansion going forward. Thanks a lot.

[Glenn Kelman:]

Sure, so I'll address just the data that we're adding to the site. For the longest time Redfin have the structural competitive advantage and that we were one of the only major real estate sites that had complete MLS access. Over time, that advantage is being mitigated and we just have to keep continue to invest. It's not just a presentation. You can get really precious about your design when building a consumer site, but consumers have to find information on your site that they don't see anywhere else. And some of this is a real localization challenge, because we work really well in Seattle, our site traffic is not as strong in Tulsa, Oklahoma. And so we just need to make sure that we support the kind of search filters, the kind of neighborhood boundaries that come from having real experience in Tulsa. And of course, our agents have that experience. And so we just have to bring some of that information for our field organization on our site so that it really feels like a Tulsa, Oklahoma site. But we also just have to add new layers of data about forest higher risk about flood risk, so that Google and the consumer herself can see that we have more information about local real estate than anybody else. And it's just a constant arms race, and we're going to keep fighting it. And one of the areas where we're really excited to publish more information is just about Commission's because of course, the iBuyers have been paying lower commissions for a long time Redfin is one of them. And most consumers who are listing their home don't realize that the iBuyers are paying a much lower fee. But that secret is going to come out as we publish front and center. Now the Commission's that are paid on every house, you can see that 25% of the inventory in a place like Atlanta, is paying a lower commission to the buyer's agent. And that will give you permission when it's time to list your home to do the same. Everyone assumes that the fee structure that iBuying is comparing itself to in the brokerage industry is static. We are just going to stay put and be at 5% or 5.5% or whatever it is. Of course Redfin is committed to changing that. We think that iBuying fees are going to come down, but brokerage fees are going to come down too and that the spread is probably going to be pretty static.

[Chris Nielsen:]

So on our properties, guidance, really, that's reflective of the actions we've been taking now for months. And really, that starts with expanding to new markets. And then having teams out there purchasing more homes, putting more offers in front of customers. And you can see that reflected in our balance sheet as of the end of the first quarter where we were at that point up to nearly $100 million in inventory, nearly double where we were at the end of December. So we do want to continue to expand to more markets going forward with Redfin now, but mostly what's reflected on the guidance is what's already baked into the inventory that we've purchased, the homes that we're renovating and putting back on the market. So we do think the business has a lot of growth going forward. But again, our primary objective is to get that offer in front of as many customers as we can so they can make the choice between selling to Redfin now and that open market sale.

[Tom Champion:]

Thank you.

[Operator:]

Our next question comes from John Egbert, Stifel.

[John Egbert:]

Great, thanks for taking my question. On RentPath, following up there, aside from setting a business strategy, which you're obviously waiting on a new leader to help develop. Do you talk about the low hanging fruit in terms of cost synergies are technology driven optimizations you think you can offer to that organization pretty quickly after the deal has closed here? Whether it's -- sharing developer resources, migrating overhead functions to existing teams to lighten their load, like any kind of quick, low hanging fruit type fixes that you can think of?

[Glenn Kelman:]

I mean, I can think of plenty but we're not taking any near term cost synergies. The first order of business is to get RentPath listings on redfin.com because redfin.com can double the audience of renters, that are available to Rentpath customers. And when we do that, it should be much easier to recruit more customers. And if we don't do that, none of the cost optimizations matter. The way to make more money here, yes, is to run efficiently. But mostly, it's to grow this marketplace. And we think there's a massive opportunity to do that, or we wouldn't have invested in this business.

[John Egbert:]

Okay, great. And so I mean, I guess could you characterize kind of the R&D investment that you plan to build around that to help kind of push that forward?

[Glenn Kelman:]

While some of its going to be sponsored by Redfin, so we had planned on adding rental listings before we bought RentPath through redfin.com. And we started building a team that could add that data. And we just realized how daunting it would be to go from one property management company to another and try to get 20 or 30 or 40,000, property management customers to list the property. So my guess is that the cost is going to be split between Redfin and RentPath. We need to invest in a mobile application or a better mobile application for RentPath. You know, two thirds of traffic is mobile at this point, at least, and RentPath has a mobile application that is not strong enough. And then we need to build all these tools long-term to revolutionize the consumer experience of renting a home. Redfin is just very consumer first, it's very transaction oriented. We are not just about putting pretty pictures of housing on a website, we want to do the whole freakin deal. And so that's going to take us a while, but it's going to unlock massive value for our customers and for the consumer.

[John Egbert:]

Great, thank you.

[Operator:]

Okay, we have no further questions in the queue. At this time. I would now like to turn the call back over to Meg Nunnally.

[Meg Nunnally:]

Great. Thanks, Travis. And thanks to all of you for joining the call today. We look forward to talk to you again next quarter. Have a good day.

[Operator:]

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.