Redfin Corporation
Q2 2019 Earnings Call Transcript

Published: 1 Aug 2019

[Operator:]

Good day, and welcome to the Redfin Corporation Second Quarter 2019 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Elena Perron. Please go ahead, ma'am.

[Elena Perron:]

Thank you, Brad. Good afternoon, and welcome to Redfin's financial results conference call for the second quarter ended June 30, 2019. Joining me on the call today are Glenn Kelman, our CEO; and Chris Nielsen, our CFO. You can find the press release on our website at investors.redfin.com.

[Glenn Kelman:]

Thanks, Elena, and hi everyone. Redfin's second quarter revenues were better than we projected in our last earnings call, up 39% from the second quarter of 2018 to $197.8 million. Our losses at $12.6 million were near the middle of the range we projected in May. In the second quarter of 2018, we are in the $3.2 million profit but in 2019 we are advertising more and investing more in software for new businesses. On our core business of brokering home sales through Redfin agents and through other firm’s agents working as our partners, revenues increased 17% year-over-year, and acceleration from last quarter's growth of 15% and the preceding quarter’s growth of 13%. Our share gains continued with an 11 basis point gain from the second quarter 2018 to the second quarter of 2019. This is an acceleration from the 10 basis point gains we saw in the preceding two quarters. RedfinNow, our business of buying and selling homes on our own account grew revenues from $9 million from the second quarter of 2018 to $39.9 million in the second quarter of 2019. Over that same time, our other businesses, primarily mortgage and title services grew 89%, an acceleration from last quarter's growth rate of 59%. Up till now Redfin has taken a deliberate approach in expanding our new businesses. RedfinNow started in 2017, and is available in eight of our 92 markets. Our title business started in 2012 still only serves 23 markets. Redfin mortgage started in 2017, and now serves 40 markets. Now each is in a more aggressive phase of market expansion. We expect these businesses which already contribute meaningfully to revenues today to contribute meaningful gross profits three to five years from now.

[Chris Nielsen:]

Thanks Glenn. Our year continue to play out as we expected. We again posted healthy top-line trends with second quarter revenue of $198 million, up 39% from last year. Real Estate Services revenue which includes our brokerage and partner businesses grew 17% year-over-year. Brokerage revenue or revenue from home sales closed by our own agents was 18% on a 20% growth in brokerage transactions. Brokerage revenue per transaction was down 2% year-over-year reflecting continued mixed shift towards our listing business and lower home price appreciation as compared with the second quarter of 2018. Revenue from our partner agents was down 1% on a 2% increase in partner transactions as we continue to shift our transaction mix more toward our own agents. Revenue per partner transaction was down 3% year-over-year. The property segment, which consists of homes sold through our RedfinNow program generated nearly $40 million in revenue, up from $9 million from the second quarter of 2018. In July 2019 to support continued growth in investment in RedfinNow, we put in place and asset-backed credit facility, which will provide up to an additional $100 million of borrowing capacity with an initial term of 18 months. We continue to expect that over time more of the capital to buy homes will come from lenders, using the homes we purchase as collateral. Going forward with this facility in place, we won't be updating you each quarter as to our RedfinNow capital commitment. Our other segment, which includes mortgage, title and other services, contributed revenue of $5.3 million a year-over-year increase of 89%. Total gross profit was $48.3 million, up 7% year-over-year. Real Estate Services gross margin was 32.2%, down 260 basis points year-over-year, primarily driven by a 90 basis point increase in home touring and field costs, a 70 basis point increase in occupancy and office expenses and a 50 basis point increase in listing expenses, each as a percentage of revenue. Properties gross margin was minus 2.5%, down 140 basis points from a year ago, primarily due to an increase in personnel costs including stock-based compensation, as Glenn mentioned. Other segment had a gross margin of 2.2%, an improvement of 960 basis points from year ago, as our mortgage and title businesses continue to scale. Total operating expenses increased 42% year-over-year and represented 31% of revenue, up from 30% one year ago, primarily driven by marketing. Marketing expenses increased by 87% year-over-year, driven by our brand advertising campaign that ramped through May. We do not plan to run any additional brand advertising for the remainder of the year. Technology and development, and general and administrative expenses both grew slower than revenue, increasing by 23% and 15% year-over-year, respectively. Our net loss including stock-based compensation and depreciation was $12.6 million, compared to $3.2 million net income in the second quarter of 2018. Diluted net loss per common share was $0.14, compared with the $0.04 diluted net income per common share one year ago. Now turning to our financial expectations for the third quarter 2019. Revenue is expected to be between $223 million and $233 million, representing year-over-year growth between 59% and 66%. We expect our Properties segment to account for $67 million to $72 million of that revenue. We don't typically provide guidance on gross margin components, because those are subject to a variety of business and market factors, but we wanted to comment to what we expect for Real Estate Services gross margin in third quarter 2019, given the headwinds we've seen so far this year. We anticipate that agent productivity will continue to increase year-over-year in the third quarter. We believe, however, the third quarter real estate gross margin will be down slightly to flat year-over-year, given we're seeing strong touring and other customer activity that may not pull through to revenue during the quarter. Net income is expected to be between $3.4 million and $6.4 million, compared with the $3.5 million net income in the third quarter of 2018. Our guidance includes approximately $6.6 million of stock-based compensation and $2.5 million in depreciation and amortization. It assumes, among other things that no additional business acquisitions, investments, restructurings, or legal settlements are included, and that there are no further revisions to stock-based compensation estimates. And with that, we will open up to your questions.

[Operator:]

Thank you. . And our first question comes from Jason Helfstein from Oppenheimer.

[Jason Helfstein:]

So great color Glenn, thank you very much. So kind of two questions, maybe dinging a bit more on the Opendoor partnership? I mean, it would seem you would kind of save a lot on fixed cost to do that. It totally makes sense why you would still compete in markets. Well, it’s still offering markets where they -- where you both don't compete. But I guess everything about that. So the point of getting your agents to present those offers, really like that idea. But again, there's significant cost savings if you partner with Opendoor. So maybe just kind of rationalize that a bit more, because I think people like the idea of the synergy with Opendoor? And then, one of the things that we all struggle with is how to think about margins long-term and apologize long with a question, you talk agents productivity improving. How are you thinking about agent hiring for the rest of the year and maybe into next year? And yet, we saw marketing, G&A was lower this quarter. Just help us give us some more color on your thoughts about how to think about, I don't know, margins next year, and maybe longer term, if you want to give us color by business line that'd be better? But I'll stop there.

[Glenn Kelman:]

Yes, Jason, we always laugh because the operator says one question and then you immediately say only two questions. But they're both good ones. So first of all, the Opendoor partnership is not a replacement for RedfinNow in any market. And the reason is, is because there's too much demand for that business, to let us outsource it to anyone else. We want to understand it better. We want to own that inventory. We want to be responsible for selling it. We have 14 years of history selling homes better than anyone else. We think we can build a better marketplace for those listings, if we own those listings. So there's plenty of good, bad between those two companies. We really like one another. And we know that we're going to need one another for a long time to come. But we've got to be in this properties business. And we're making a long-term commitment too to that business because it's so strategic and because it works so well with all the pieces of the puzzle. And I can't even believe you started trying to get us to talk about 2020 because you know, we avoid forward-looking guidance like crazy. We are happy with the increase in agent productivity, but we're also seeing significant increases in demand. We are not ready to talk about how many agents we're going to hire in the fourth quarter of this year, or the first quarter of next year to prepare for 2020 just because we don't see how much demand there will be next year. And because we just want to avoid forward-looking guidance on this call.

[Chris Nielsen:]

Just one other color commentary piece related marketing expenses that in the second half of the year on a year-over-year basis those marketing expense will not be increasing significantly. We talked a little bit earlier about the fact that we won't be running offline advertising in the second half of the year and so we provided just that one additional piece of information relative to the marketing.

[Operator:]

Thank you. Our next question comes from Mark Mahaney with RBC.

[Mark Mahaney:]

Alright. Thanks. So I think I countered three questions by Jason so I'm going to do three questions too. Glenn, bigger picture, what percentage of homes in 10 years do you think will be bought via iBuying? Secondly, I got the point about what you're not going to grow brand advertising in the back half year, but did you explained the why, it seems like that was relatively successful for you in terms of traffic, it gives a couple of really good brand awareness data points so why not in the back half year? Is that just purely for seasonal reasons? And third is, can you just talk about the attach rate you think you could get for these things like title and insurance or that you are seeing in your best markets, what percentage of sales you think have you been able to attach those services or customers that wanted those services attached so we could think about how big that opportunity could be long-term? Thanks a lot.

[Glenn Kelman:]

Wow! That was fast. Well done, Mark in rapid fire. I think it’s between 10% and 20% of all sales will be through iBuying but that is a wild guess in part because we don't know what the cost of capital will be as such and a historical cost of capital today that is created this market, Middle Eastern money, Far East money, all sorts capital coming in at almost no cost, so we can easily provide liquidity to a consumer who has no other way to get it. I'm not sure that will always be the case. So, we need to see the margins of this business that allow and understand the true cost to the consumer, because right now there is so much money been thrown around but it’s hard to say what the value proposition will be two years from now. No brand advertising in 2019. For the remainder it is seasonal. You pay a lot to advertising in Q4 especially because there's so much holiday shopping and people forget the ads that you ran and home buying comes around the next year. I would comment that we think most of our traffic growth is unrelated to advertising because the ads focus so much on the brokerage, but also because we don't see significant traffic lift in the markets that run ads. It is a broader phenomenon on the net. And then the final question was about attach rates for title and mortgage. We feel a little cagey about that. But I would think of them separately because title is something where consumers have almost no preference. They don't do much price shopping. We do offer the best deal of course, because of our consumer advocacy. So we think that attach rates can be above 50% whereas mortgages it really depends on how efficient we can get because we have to compete on price. We have seen encouraging results there, but nowhere near 50% for mortgage and none of our models have that baked in.

[Operator:]

Thank you. Our next question comes from Brent Thill with Jefferies.

[Unidentified Analyst:]

on for Brent. Just on the market share gains in the quarter, anything specific to call out as to what drove the acceleration there, mostly driven by the marking campaign or may be an improvement in agent efficiency? And then Glenn just wanted to get your thoughts on the recent partnership between Amazon and Realogy whether you think that signifies a bigger push by Amazon into real estate may be how those dynamics may play out?

[Glenn Kelman:]

Sure, I don’t think our market share gains are driven by efficiency. I think they're driven by increased demand. So we're having more people come to our website and more of those people signing up for home tours, the only challenge we really have is getting them to stick with the brokerage and buy a house because there's an affordability crisis. And because people just hit a button on their phone and see a property without thinking a thing of it. So the market share gain just has to do with our increasing presence online and an increasing affinity for the service. I wouldn't attribute much to mass media, it's sort of like a Delayed Blast Fireball, if you've ever played Dungeons and Dragons, we get more of the benefit in following years. We get some now, but really, there was just a very broad lift in mass media markets and outside those markets. So the Amazon and Realogy deal, nobody is more afraid of Amazon than me. I mean, those guys are animals. What they're doing here I'm not sure is a really serious move into the real estate market. They're giving away merchandise that some people will want that some people won't care much about. I don't think a senior executive who is really involved in that deal. I don't think there are major demand channel for people seeking real estate services. You see deals like this from USAA and Costco or big retailers, or insurance companies, they will save you a few bucks if you sign up their real estate agent through us. And I see this deal is similar to that. If Amazon were to get out of putting goods in boxes and shipping them to your doorstep to deliver soft services like real estate, I think that would be a different kind of challenge. But it is well outside their strikes zone.

[Operator:]

Our next question comes from Keith Terry with Goldman Sachs.

[Heath Terry:]

Great, thanks. I was wondering if you give me a sense here, as we look at the declines in gross profit this quarter in the core business, any expectation or anything that you can sort of give us in terms of what's driving that particularly as we see the improvements in agent efficiency, just feel like those two things are potentially a bit counter. And as we look towards the second half, obviously see the leverage coming out of the changes in marketing spend but wondering if we should expect to see anything on the growth line as well there?

[Chris Nielsen:]

So on the gross margin line, if you're looking at the second quarter, the biggest headwind was related to home touring and field costs. And the way to think about that is that we do have a lot of top of the funnel customer demand, people who are interested in particular in purchasing homes, that has us incurring an expense, the two of those customers through homes. And as Glenn mentioned on the call, we're still not seeing the kind of close rate improvement we would like over time. So we're incurring the expense of not getting all of the revenue that we would like to over time. And so that's the biggest, single headwind that we have in the second quarter as it relates to gross margin, specifically in the Real Estate Services portion of the business. And then I did provide a little bit of commentary on the call as it relates to what to expect in the third quarter. We do expect to see some of that continued headwind. And what we would like investors to think about and our best view on the third quarter is that real estate gross margin will be slightly down to flat year-over-year as we get into the third quarter.

[Glenn Kelman:]

And I just want to add that there's two components for that. And Chris has described the main one, which is that it’s harder for people to buy a house, they have to see more properties than they did before and some of them get turned off by the high prices. I think also when you have some acceleration and demand, you're paying it forward, where you're paying more for tours one quarter and hoping it closes in the other quarter, but we want to temper some of those expectations around how many closes we'll get, usually we’re very happy to pay high touring cost because those chickens are going to come home to route. It is just the every year we are seeing it gets harder and harder especially in coastal cities for people to pull the trigger.

[Operator:]

Thank you. Our next question comes from John Campbell with Stephens.

[John Campbell:]

Hey guys. Congrats on a great quarter. Glenn, thanks for updates on Redfin Direct that seems like one of the kind of more compelling long-term opportunities for you guys. But you made some comments around I guess just further expansion, I'm curious about the pace of expansion and maybe if you could one or two key metrics you guys are going to tracking in this pilot markets that help influence or kind of drive the expansion pace?

[Glenn Kelman:]

Sure, we think we can expand this business much more quickly than other businesses, because we don't have to hire people to do it. This is technology that can easily scale across the country. We do have to train the system to understand the vagaries of different markets because we have different data sets and different offer forms about whether to include this contingency or that contingency, but we can scale it pretty fast. And all we are looking for is, a homeowner who has hired us to sell a house being absolutely thrilled that they got an unrepresented buyer. And therefore, we're able to put more money in their pocket. We have just begun to fight on optimizing the forms. If you have got a 55 question form that you haven't optimized, I guarantee you the drop-off is going to get much better over time, avoid words like guaranteeing future results, let me temper that. I'm pretty damn confident anything can happen. But I just feel like, we put something up to see if they would work. We got a better response than we expected. We're scaling it fairly quickly. But at the same time, we are going to go back and put a bunch of data science to figure out exactly where people drop off, what they're getting nervous about and how we can comfort them, so that more and more folks feel comfortable buying a house over our website. Not everybody is going to do that. I want to be clear on that point but more and more people will.

[Operator:]

Thank you. Our next question comes from our Ygal Arounian with Wedbush securities.

[Ygal Arounian:]

Hey guys. Thanks for taking the question. I just wanted to parse into revenue guidance for next quarter little bit. It's up, the revenue growth is up meaningfully over 2Q and looks like the RedfinNow revenue is also stepping up meaningfully. So is the strength in overall revenue coming more from RedfinNow revenue? Is it strength from both -- Glenn you’ve always given really detailed commentary on the overall market strength or weakness, may be just how we could think about where the overall strength is coming from? And then kind of related as RedfinNow is getting traction and you're seeing a lot of demand for it, you've talked about being a little more afraid of stepping deep into the iBuyer business and you've been more measured there I think most certainly than some of the biggest players. How do you think about that plan, accelerating that business as we go forward and particularly as it relates to the Opendoor partnership that you can accelerate and step into it more or kind of lean back and work the Opendoor partnership as you continue to steadily rollout…

[Chris Nielsen:]

Sure. So this is Chris. With regards to revenue guidance I really would think about it as two pieces. One is the set of businesses excluding RedfinNow. And there are really the years playing out the way we expected it to, which is the contributions from the mass media that Glenn talked about, continued traffic growth, those things would set up a period of time in the second half of the year where our revenue growth would accelerate. And that's exactly what we're seeing as we're getting to that moment. So we're really pleased to see things pulling through on that chunk of the business in the way we had planned for it to happen. And then the second piece is it relates to RedfinNow Glenn can comment more but what this reflects in terms of our guidance is the kind of pickup that we're seeing from the combination of having purchased homes and then turn around and put those back on the market, but it seems really just across the whole set of markets where we're operating that business have seen good customer involvement in both sets of activities and service reflected in the numbers.

[Glenn Kelman:]

And I just wanted to talk about my attitude or our attitude towards iBuying. As we tried to make clear over the past six months, the demand is real, and it's very strong. So we are quite committed to this business, but anyone in this business should be scared. And if they aren't scared, you should be scared, because we are taking significant capital risk. And most of the folks in the space are losing tons of money. And you have to have a clear path to profit, you have to know exactly how scale is going to let you renovate homes more efficiently, you have to know exactly how you're going to be able to market those homes more directly to the buyer. And it's hard to pull apart. Because when you're growing really fast, you're paying forward some of your growth, and that limits your margins. But you're also trying to get more efficient. And whenever you're trying to get more efficient and grow at the same time it’s just a real challenge. And so we're just trying to be eyes wide open about those risks. And I think that's the way you would want us to be. And what drives me crazy about this space is that almost everybody in the space accounts for their margins differently, which makes it harder for you to get an apples-to-apples comparison of who's really making money and who's losing money and how much money they're losing. That's the reason we invented accounting principles. I wish we would use them more consistently.

[Ygal Arounian:]

Okay, but just as follow up as you think about expanding into new markets, do you see the pace of that accelerating as kind of see the demand pick up?

[Glenn Kelman:]

Yes, so we're expanding as fast as we can. That isn't as fast as we would like. And what's limiting this is how operationally intensive business is. So clearly being able to use our own sales force from the brokerage to present RedfinNow offers makes it easier to expand faster. We already have 500 listing agents in 50 plus markets and we're going to put them to work presenting these offers. But there's also a renovations capability that I think is probably the toughest not for us to crack. We started using third-party software and switched over to homegrown systems so that we can really have someone walk through the property and say exactly what's wrong with it using an iPhone, and then have a centralized call center, manage all the vendors to have to get replaced fixed up. And just getting that right has been hard. But the primary signal you should have heard from the call I just probably wasn't as clear about it is that we're trying to hit the gas in almost all these businesses that mortgage was really in purgatory late last year where we couldn't figure out what our margins were going to be and where we should price the product. We couldn't figure out whether to have centralized mortgage advisors or people out in the field and now we've got good product market fit. With RedfinNow, we really have been questions about margin. We haven't answered all of those but we've answered more and more and we've figured out a really good distribution system through our own agents. So, we're going to tried to expand more quickly than we have before and what’s going to be gating it isn't by courage or anything like that but our operational capacity. We know the demand is there.

[Operator:]

Thank you. . Our next question comes from Naved Khan from SunTrust.

[Unidentified Analyst:]

Thank you for the time. This is Robert on for Naved. Where do you guys think you are in your efforts to optimize lead agent efficiency, to specify you guys mentioned the benefit of increasing customer loads but that conversion rates may be negatively impacted? So, just how should we be thinking about agent efficiency by total transactions or any more color on conversion rates would be greatly appreciated? Thank you.

[Glenn Kelman:]

I think we are in the middle of it. I wish we were at the end of it, but in all candor this is a problem we have been working on for a long time. It affects everyone in the industry. How take someone off a website, click the button and deliver them into the right home, six months later efficiently, has just become a challenge of our times. And we're much better at it we think than anyone else. But we still need to get even better, because the consumer is changing over the past few years. She's much more fickle, more worried about prices, struggling harder to be able to buy the home, but also just more casual about ordering a service where you don't have to pay to get a real estate agent to show up. So, I think we are going to be building significant new systems over the next year and half to make that better that there is some opportunity for leverage in 2020, you've already seen a little bit here, up to 6% productivity increase. But already thinking about 2021, 2022, it's a long-haul and I’m really confident that we're going to make progress on this, but I don't want you expect overnight miracle.

[Operator:]

Thank you. Our next question comes from Tom White with D. A. Davidson.

[Tom White:]

A quick on guidance and then a bigger picture one for Glenn. So, may be a question and a half. Just on third quarter net income, the midpoint implies a low increase year-over-year despite I guess homes and Properties business kind of ramping up pretty quick, and now it sounds like real estate gross margins are sort of flattish to down maybe a little bit versus your prior expectations of maybe up. So, could you maybe just help to kind of bridge what are the other factors that are contributing to that uptick in net income? Is it other OpEx et cetera? And then just a bigger picture thing, Glenn, I was hoping you could share your current thinking on kind of the positioning of the real estate brokerage space or maybe the vulnerability from lawsuits like the Moerhl versus NAR lawsuit around anti-competition and stuff like that? And then specifically, how do you think you guys are sort of positioned there? Thanks.

[Chris Nielsen:]

I am not sure they will provide a whole lot more in terms of the segregate in the guidance. As we indicated we do think that the chunk of business excluding RedfinNow will continue to grow pretty significantly year-over-year. The gross margin on the Real Estate Services business may be slightly down to flat. And I think maybe just the third component to call out is that in the second half of the year, we don't believe that marketing expenses will be meaningfully up from the dollar values that were in the second half of 2018. And when we put all those things together, you end up with a mix that looks a lot like our guidance. So, I think that's probably, the best information to provide there.

[Glenn Kelman:]

And the lawsuits that you referenced are going to have one effect, which is the websites like Redfin are going to be able to publish how much the homeowner is offering to pay a buyer's agent. And this has been a battle we've been fighting for a long time, because we refund part of our commission, and it only confuses consumers who think the buyer's agent is free. So we're offering a refund of the service that they think is free, and it limits the appeal of our pricing power. And so our hope is that once people realize how much a buyer's agent is paying, they're going to think twice about how much they should get from that buyer's agent. And also, I think it's going to increase the number of people who consider buying a home unrepresented. So just showing where the money goes will always help the people who save the customer money.

[Operator:]

Thank you. Our next question comes from Jason Deleeuw with Piper Jaffray.

[Jason Deleeuw:]

So on the RedfinNow business have you expanded the buybacks at all or is the demand just strong and you kind of kept your buying criteria of the types of homes that's still the same? And then in terms of home sellers that turned down the RedfinNow offer. How many were -- what percentage or any help you can give us in thinking of what percentage of them then want to use the Redfin agents? And then also, who are the typical sellers to RedfinNow? Are there any categories that you can kind of call out? Thank you.

[Glenn Kelman:]

Got it. So we haven’t expanded the box much. We're fairly disciplined about the kind of homes that we buy and sell, the name of the game here is to make sure you can flip it. Once we get margins right, then we can start experimenting with properties. But the best way to really make money in this business is to know the kind of homes you can sell for more. As for the upsell question, it's such a good question. We know that most people turn down an offer and end up listing the property. The only challenge we have is that we come in with a low offer from RedfinNow, we told them their baby is ugly, and they're less likely to turn that baby over to us for any other reason. So, I think that we have to get better in that area. They often choose another broker instead of Redfin to list the house. And today, we don't have many returns from this integrated listing consultation, it used to be that the RedfinNow offer would with and then a few days later we talk about listing the property. But now it should be one meeting where we can say, look, this is what we will give you for the house now in cash, but we think we can sell this house for more money and put more of it in your pocket. And that should be a more complicated conversation. And I think the customer should view it as a benefit. Certainly it has already helped RedfinNow offer acceptance to have a real estate agent present that offer and say look, I know the market is a good offer or it’s not. Oh! And then you asked about the typical RedfinNow seller. Most of them are move-up buyers. We came into this business with the premise that there was more distress or investors where people had gone through a divorce or had a death in the family and they just didn't care about the proceeds or it was an investor who wanted to sell the property from 12 states away. That happens but more of them are move-up buyers, and that particularly suits us well because we have a lot of buyers agents that are helping people to buy houses and then we see the home of their dreams and say, oh my gosh I got to sell my other place right now so I can have the cash to win this bidding war and then RedfinNow suits them and gives them a liquidity to compete.

[Operator:]

Thank you. Our next question comes from Jack Micenko with SIG.

[Jack Micenko:]

I guess maybe one question for each of you. Chris, the sort of delta between the $3.4 million and the $6.4 million, what are the swing factors there that would drive that differential? And then, Glenn, in the past, we have seen a lot of commentary from you publicly that talks about how iBuyer is maybe not a lead generation tool and just thinking on the call it sounds like your mind has changed a bit. Am I interpreting that correctly? Thanks.

[Chris Nielsen:]

The variation on the net income guidance is primarily related to volume, related to the revenue that we would earn in the quarter. We do have a set of fixed costs associated with our agents and our staff. And so as we have different volume levels that’s placed through to the bottom-line.

[Glenn Kelman:]

As for RedfinNow is lead generation tool, I think if you are offering to buy someone's house, you can't bluff. You actually got true intent to buy the house and you have to able to deal with the consequences. So, I would never be so cynical as to say it’s a lead generation tool. We earnestly when we make an offer want the customer to accept it if it’s in the customer's best interest. But we think that every customer should have a choice and to make an informed choice. If we're just pitching one product to the other -- I have met too many homeowners who list their property and can't get the place cleaned because they got a dog and three kids because they've anxiety disorder and they worry about where it’s going to sell today or tomorrow and they should not just listing. They should take an instant offer but I have also -- got also with the people who need the money and you don’t want to be taking advantage of anyone with an offer, unless it's really in their best interest. So my real position on this is that everybody is going to want to know before listing our house what they could get from a cash offer. If you've got an envelope with a cheque inside of it, in the middle of the a listing consultation, you're not going to able to talk about anything else until people said, what's inside that envelope. And usually what's inside that envelope is a discount to it because of all the risk that we're taking and some people are going to want to take that risk down themselves and some people are going to grab the money.

[Operator:]

Thank you. Our next question comes from Brad Erickson with Needham & Company.

[Brad Erickson:]

Just a couple. I guess Glenn and I apologize I know you’ve been over this a few times already, I just think it still needs some clarification. You made some comments on the impact of the marketing. It seemed a little bit odd with itself. So, can you clarify which piece wasn't as good as what you thought versus some of the more positive comments you seem to be describing looking at the next year? And then second for Chris. Just as we evaluate cash burn, can you help us the impact what's going out with the cash flows in the quarter relative to the core business versus the investments being made in the Properties business? Thanks.

[Glenn Kelman:]

Sure. So, there are three phenomena. Number one, Redfin generally somewhat unrelated to the marketing is growing traffic. It's growing traffic in markets with media, in markets without media, we generally have more demand than we would have hoped for. Number two, the marketing has increased customer demand in year. But it has not increased it as much as we could have hoped. It's been good but not great. And then number three, the awareness gains have been wonderful. And the whole way we tried to set up the marketing investment, we're not selling an ab cruncher where we're trying to get you to pick up the phone right now and order three of them. We know that most people think a long time about whether to buy a house. And so we have a multi-year model for ads being profitable, where awareness is extremely important. So we wanted to be candid with you and say the in-year contributions, the first response from some customers has been good, but not great. And the awareness gain has been great.

[Chris Nielsen:]

And just in terms of cash, you do see us using our cash in the second quarter to buy homes, to buy inventory recorded on the balance sheet. As I mentioned on the call, we do now have a facility in place that we will use for funding some of those purchases going forward. And so that should reduce our cash utilization there. There's just one more call out I wanted to make related to the cash flow statement in the second quarter. And that's that we did set up a set of investments that are recorded as short and long-term assets, where we have funds that were previously in cash invested. And so you see that influencing the way that statement looks?

[Brad Erickson:]

And just maybe just a quick follow if I could. Is there any disclosure in terms of like the homes you bought and sold or held in the quarter? Thanks.

[Chris Nielsen:]

There's no further disclosure on details on the numbers associated without beyond the inventory dollar values.

[Operator:]

Our next question comes from Brad Berning with Craig Hallum.

[Brad Berning:]

Can you compare and contrast the factors that are driving in markets where you're gaining market share faster than the company average? And what are the key attributes that drive the inflection points when markets start to accelerate?

[Glenn Kelman:]

So I think the factor that we haven't completely addressed is just operational excellence. And we have someone running that market really well with a crackerjack team of agents. There's no way to really characterize that in the earning scripts, but it makes a difference. Other than that, it's traffic, media and conversions. And there are markets where we do better in terms of traffic, there are markets where we're spending more on media, conversion is fairly consistent. So it's just a combination of things. And of course, you have to understand the vantages of our markets, the places where we've been the longest have the highest share. But because it's a retail business combined with an online business, the markets that we opened five to 10 years after other markets that have lower share, and I'm assuming that most folks on the call understand that.

[Brad Berning:]

Yes, no, I mean, the pace of share gains, I think some of the markets have been in the longest not just have the largest share but they're also growing the fastest share. So I'm just wondering if there's a repeat and referral component to an inflection point of time in a market, if that's part of the factor, as well?

[Glenn Kelman:]

Yes, I think there is two components to critical mass and one is that, you get credit for time served as a brokerage. It can be hard business to cold start unless you're doing a rollup of some kind. So, eventually you have customers who bought a home from you five or six years ago who come back and certainly you have customers to refer and that has been a major driver of our growth. The second part of critical mass is just brokerages are intrinsically viral that you cannot sell one customer’s house without that customer running an ad for your brokerage to sell other houses, that's the yard sign. And what we have seen is that the media is more effective. Once there is some validation, you see the billboard or hear the radio jingle, but then notice the yard sign in the neighbourhood or hear from friends that she went on a tour and it was fantastic. So, we do think that there's some compounding effects that have been the reason that instead of kind of growing really fast and then tailing off, we've been able to sustain strong share growth even in markets where people are sort of feeling or reach some kind of asymptote we haven't.

[Glenn Kelman:]

One more question. This is it. You get to close the show.

[Operator:]

Ladies and gentleman, as we are out of time, we will take our final question from Tom Champion with Cowen.

[Tom Champion:]

Thanks guys. I guess the question is around agent productivity and the 6% increase year-over-year that's really positive but falls below I think it was 12% or 13% increase in the customer aging cap. And I'm just curious if that delta represents something that's kind of structural or the declining success rate that you've talked about or whether or not you can kind of chip away that delta going forward. Any thoughts on that would be really helpful?

[Glenn Kelman:]

I should be clear just because we are candid about our challenges doesn't mean we are confident about addressing them. We think that agent productivity gross margins are on inexorable march up. There will be some bumps in the road that we think they are going out. And you're right, the challenge is that there is a change in the homebuyer, and that homebuyer is more fickle. They’re having hard time affording the house. They have a different relationship with any kind of service that they order online, where they just kind of shrug and hit the button. And that's the reality that we're working we are going to better each year. So, it won't be a short journey, it will be a long journey, but it is a journey headed up. And the fact that agent loads have increased more than agent productivity it’s indicative of the fact that you’ve just got more and more people clicking this button to go see a house and more of them realizing holy-molly, I don't have to go to buy it.

[Glenn Kelman:]

So, that's it. Guys I just wanted thank you, they are brilliant questions. It was so fun answering them. We are going to go work our fanny off to kill it in Q3. Thank you, everyone.

[Operator:]

Ladies and gentleman, this concludes today's presentation. You may now disconnect your phone lines.