Redfin Corporation
Q3 2020 Earnings Call Transcript

Published: 5 Nov 2020

[Operator:]

Good day, and welcome to the Redfin Corporation Third Quarter 2020 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Chris Nielsen, Chief Financial Officer. Please go ahead, sir.

[Chris Nielsen:]

Good afternoon, and welcome to Redfin’s financial results conference call for the third quarter ended September June 30, 2020. Joining me on the call today are Glenn Kelman, our CEO. 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 Chris and hi everyone. Redfin’s third quarter net income and revenues were better than we projected in our last earnings call. Net income increased from $6.8 million in the third quarter of 2019 to $34.2 million in the third quarter of 2020. Gross profit was $93 million, up 74% from the third quarter of 2019. Third quarter gross margins for Real Estate Services increased year-over-year by 870 basis points to 43.8%. Revenue declined 1% from the third quarter of 2019 to $237 million, but this was due to a pandemic driven shortfall in the number of RedfinNow homes we could sell. Our RedfinNow business of buying and selling homes has an outsized impact on revenue, because we have to account for the entire home value, not just the transaction fees we get from a brokerage sale. In our core business of brokering home sales through Redfin agents and through other firms agents working with our partners, revenues increased 36% compared to the same quarter last year. After a first ever year-over-year decline in market share of one basis point in the second quarter, our share increased 8 basis points year-over-year in the third quarter to 1.04%. The game was even larger have we recruited more agents as Redfin employees or as Redfin partners. In September, we gain 14 basis points year-over-year, our greatest monthly share gains since December 2019. Keeping pace with demand as Redfin’s number one challenge. Year-over-year growth and customer inquiries for Redfin agents or partner agents increased from 38% in July to 58% in October. If October’s year-over-year demand growth remains at the same level to start 2021 will have to increase our agent capacity 13%. In our last call, we said it would take until the end of 2020 to hire enough employees and partner agents to serve our customers. But it is now likely that we won’t be able to match supply with demand until the second quarter of 2021. This will limit share gains through the first half of 2021. From July 1 through October 31. The team recruiting employees and partners as agents is more than doubled. Beyond the nearly 500 lead agents who returned from an April furlough we added 278 employees as lead agents, these new hires increase our lead agents census by 17%.

[Chris Nielsen:]

Thanks, Glenn. As we continue to deal with the impacts of COVID-19. A third quarter results exceeded our revenue and profit projections. Third quarter revenue was $237 million down 1% from a year ago. Real Estate Services revenue which includes our brokerage and partner businesses increased 36% year-over-year. Brokerage revenue or revenue from home sales closed by our own agents was up 33% on an 18% increase in brokerage transactions. Revenue from our partners was up 93% on a 48% increase in partner transactions. The property segment, which consists of homes sold through our RedfinNow program generated $19 million in revenue down to 76% from one year ago. As Glenn mentioned, this decline was a result of having halted RedfinNow purchases in April and May, so we just didn’t have much inventory as we started the third quarter. Our other segment which includes mortgage, title and other services, contributed revenue of $8.5 million, an increase of 65% year-over-year. Total gross profit was $93 million dollars up 74% year-over-year. We will say to services gross margin was 43.8% of 870 basis points year-over-year. This is primarily attributable to a 350 basis point decrease in personnel costs and transaction bonuses. A 300 basis point decrease in home touring and field expenses, a 60 basis point decrease in listing expenses and a 40 basis point decrease in occupancy and office expenses as a percentage of revenue. Properties gross margin was down 680 basis points year-over-year to minus 7.7%. This is primarily attributable to a 900 basis point increase in personnel cost and transaction bonuses as a percentage of revenue and was partially offset by a 430 basis point decrease in home purchase costs and related capitalized improvements as a percentage of revenue. We bought and sold homes better than we did in 2019, but we just didn’t have enough volume to cover our fixed costs in the RedfinNow business. Other segment gross margin was 30.8%, an increase of 2990 basis points from a year ago. This was primarily attributable to a 1480 basis point decrease in personnel costs and transaction bonuses. a 960 basis point decrease in outside services costs and a 220 basis point decrease in personal technology expenses, each as a percentage of revenues, Glenn mentioned mortgage continues to scale very well. Total operating expenses were up 22% year-over-year, and represented 24% of revenue up revenue from 19% of revenue one year ago. Technology development expenses increased by 19% as compared with the same period in 2019. The increase was primarily attributable to an increase in personnel costs and hosted services expenses. Marketing expenses increased by 49% from last year, driven entirely by an increase in marketing media costs as we expanded advertising. General and administrative expenses increased by 13% year-over-year, primarily attributable to an increase in personnel costs due to increased headcount. Achieving a higher target level for our performance based restricted stock units, an increase in hosted services expenses. Our net income, including stock based compensation and depreciation was $34.2 million, compared to a net income of $6.8 million in the third quarter of 2019. We also recorded a dividend on convertible preferred stock of $1.5 million. Diluted income per common share was $0.30 compared with diluted income of $0.07 per share one year ago. Now turning to our financial expectations for the fourth quarter of 2020. Revenues expected to be between $226 million and $233 million, representing a year-over-year decrease between 3% and zero percent. We expect our property segment to account for $31 million to $34 million of our revenue, representing a decrease between 69% and 66%. On October 20, we close an offering of convertible senior notes due in 2025. We received proceeds of approximately $648 million from the notes offering after accounting for the initial purchasers discount but not offering costs. The accretion of the 2025 notes will be reflected in our fourth quarter financial results. We also repurchased approximately $117 million principal amount of our convertible senior notes due 2023 using approximately $107 million of the proceeds from our 2025 notes issuance and approximately $2.1 million shares of our common stock. For the fourth quarter net income is expected to be between $2 million and $5 million compared with the $7.8 million net loss in the fourth quarter of 2019. Yet again, this quarter we expect for Real Estate Services gross margin to increase as compared with the same quarter in 2019. Our guidance includes approximately $10.5 million of stock-based compensation $4.2 million in depreciation and amortization and $7.5 million of interest expense associated with our convertible senior notes and other credit obligations. The guidance also includes approximately $8.1 million for the one-time non-cash expense associated with the repurchase of the 2023 notes that I mentioned. In addition, we expect to pay a quarterly dividend of 30,640 shares of common stock or preferred stock holder. 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 it up for your questions.

[Operator:]

Thank you. The first question will come from Edward Yruma with KeyBanc Capital Markets. Please go ahead.

[Unidentified analyst:]

Hi, thanks for taking the question. This is Casey for Ed. Could you provide an update on the seasonality trends you are seeing in the business on? Do you expect this to normalize in 2021? And then my second question, can you click down a little bit more on RedfinNow, do you have any target number of homes you are aiming for 2021 as you expect that business to start growing again. Thank you.

[Glenn Kelman:]

Thanks, Casey. So first of all, seasonality has been strange this year, we had some demand deferred from the spring into the fall. But then we also have had such a strong boom, that there has been almost no break in the action heading toward Thanksgiving. So it is really hard to say if things will slow down over the next few months. But we expect there will at least be a brief break in the action for the holidays before things roll back to life in January. The bigger factor is whether interest rates are going to stay low and the economy stay strong. As for RedfinNow we are not publishing 2021 targets. That team is trying to staff up very quickly as trying to expand to new markets. We want to be disciplined about our pricing, but we are going to be more aggressive than we have been in the past, so I would expect volume to increase.

[Operator:]

Thank you. The next question will come from Soham Bhonsle with SIG. Please go ahead.

[Soham Bhonsle:]

Hey, good afternoon, guys. In the last quarter, you guys noted some challenges around yourself had business not having enough opportunities, since given the low inventory in the marketplace. So I’m just hoping if you can maybe help us parse out the market share gains that you had in this quarter on your sell side versus buy side on the business.

[Glenn Kelman:]

We don’t segment sell side versus buy side share gains in our reporting. But our buy side business is growing faster than our sell side business. We built a listing search site that appeals to home buyers. And increasingly, we are going to have to recruit sellers by talking to people about the home they want to buy and then the home that they need to sell in order to pay for that. We just don’t have as natural of a demand channel for home sellers. People come to check the price of their home or what it would get by looking at the Redfin estimate. But we don’t have as an appealing conversion channel, which would be something like on demand tours. We have done better because we are now letting people look at what their home would be worth through a conversation with a real estate agent over the phone and we are also giving them an instant offer. So broadening the product range, and talking to people about their options through a call center has been more effective, but we still have more work to do.

[Operator:]

Thank you. The next question will come from Ygal Arounian with Wedbush Securities. Please go ahead.

[Ygal Arounian:]

Thanks for taking the question. Just first, I was trying to maybe look at gross margins a little bit more closely, specifically on the brokerage side. So some of that coming from – account, but Chris, you also highlighted a few others areas within gross margins. So it is kind of cycle through this hiring catches up, maybe demand slows down a little bit. Trying to understands how much of what we are seeing is structural from things that you guys have implemented to structurally make the margins higher versus things that might settle back down when hiring is more normalized, and environments a little bit more normalized. That is the first one.

[Chris Nielsen:]

I think it is really hard to parse between those two things right now. We do think that we have implemented some programs, made some improvements that have made fundamental differences on gross margin that should drive through going forward. But because things have been so disrupted in some ways with regard to how customers are acting this year, that it really is hard to pull that apart right now. So we do believe there is some of those. And I think the best way for us to see that actually is just as we get into next year, and get into what is probably a little bit more of a normal, but still very busy environment.

[Ygal Arounian:]

Okay. Thanks, that is helpful. And then Glenn, did a lot of good color on Redfin Now and iBuyer model, and kind of what is happening or not, how markets having to pay higher fees and all that. So if we are kind of in an extended market, where housing market is strong and sellers are getting multiple offers and selling their home quickly, and the kind of consumer value proposition of iBuyer model just isn’t as strong. A, does that change how you feel about the iBuyer model, do you think that it gives you Redfin an advantage because of the way that fits within the rest of model and have synergies with the listings part of the business? Obviously, a lot of focus on eye buyer these days, so just wanted to get your take on what happens to our model is to have a real extended period of strength in the housing market. Thanks.

[Glenn Kelman:]

It is great question. We don’t need to own the house, we don’t need to win the offer. If the market is roaring, and people want to test their luck on the market by listing the home, we are fine. The only thing we want to be sure of is that the customer calls us to understand all their options. So we do think that being a standalone iBuyer and having all your eggs in one basket forces you to chase the market in a way that isn’t necessary for us. And that limits our risk during an extreme time of volatility. And right now, I would say that 14% year-over-year growth in home prices in September is extreme volatility.

[Operator:]

Thank you. The next question will come from Tom Champion with Piper Sandler. Please go ahead.

[Unidentified Analyst:]

Hi, thanks. This is (Ph) on for Tom. I think the first question I have, so I guess we saw the sort of mix between brokerage and partner shift towards partner. I’m just curious how you can kind of think about that makes going forward. And then I just had one more follow-up. Thanks.

[Glenn Kelman:]

I don’t like the mix. We want to hire more Redfin agents and give people service from our own agents, we make more money that way, not on a percentage basis for gross margin, but in absolute dollars of gross profit. And we win that customer hopefully for life. So, the reason the mix has shifted is because we can’t hire fast enough and it improves gross margins as a percentage. But I think we will take more share when we serve those customers ourselves. Because we have a higher close rate when we meet to customer ourselves, we deliver what I believe is a better product for most customers.

[Unidentified analyst:]

There is the follow up. Awesome. That is helpful. And then I guess with RedfinNow, I have been curious if COVID has kind of changed your approach at all when looking at markets to enter into with RedfinNow? Thanks.

[Glenn Kelman:]

I don’t think COVID ha affected as much. I understand the argument for contactless sale where you don’t have people tromping through the house as the owner and instead we vacate and let Redfin handle for another iBuyer. What influences us more is just the success of our efforts to up sell. It used to be that when we got to RedfinNow offer, if the customer didn’t take it, we lost that customer. But now increasingly, the customer calls us about RedfinNow offer decides against it, wants to list the home because the markets moving so fast, and they want to take advantage of that. And we are able to be their listing agent. If you coupled that with some of the challenges we have had at converting website visitors for listing customers, we now have a product that is very effective at converting people off the website into inquiries who are looking to liquidate their home, and most of them are going to choose to liquidate it through a brokerage sale. So I think that experiment more than anything else has made us bullish about RedfinNow not just as a standalone product, but as part of this complete solution. And COVID hasn’t been as relevant of a factor. Early in the pandemic, some sellers were really wary of having people walk through the house, there is still some of that. But I think they are just greedy too now where they think Gosh, I can probably sell it in a week, people are going to be walking through the house, but that extra $20,000, $30,000, $50,000 of upside is going to be in my pocket and not somebody else’s.

[Operator:]

Thank you for the question. I’m showing no further questions at this time. This concludes today’s conference. You may now disconnect your lines. Enjoy the rest of your day.