Compass, Inc. (COMP) Earnings Call Transcript & Summary

All right. Thanks, everybody, for joining. Ross Sandler, Head of the Internet research team here at Barclays. I'm joined by my colleague, Matt Bouley, who covers homebuilders and homebuilder tech. We're super excited to have the Compass team joining us for the first time. Big debut, no pressure guys. We've got Robert, Kristen and the entire Compass team with us today. We're very excited.

So maybe just to kick things off, guys, Robert, how are things going? How is -- any update on the current trends that you're seeing right now with the business in the fourth quarter?

Yes. Look, the business is going great. Every quarter since IPO, we're 3 quarters in, we've been able to beat and raise. And we're very happy with the financial performance. Now in terms of KPIs, the last 2 quarters, we had our highest retention quarters in of the last 2 years. And particularly pleased that last quarter, we also realized 180 basis points of margin improvement year-over-year. The first quarter was an 80% increase in margin improvement, then the second quarter, 100 basis points of market improvement and then 100. So we're seeing constant improvement. Our agent NPS scores are as high as they've ever been. And the completion of the platform -- our platform is complete in our first set of markets, and we're expanding it to all of our markets by the end of spring. And so we're really happy to see the results of that play out in the financials.

Awesome. And you guys -- I mean, I was looking back at some of our own financials on you guys from the initiation. And we were projecting something like 55, 56 markets in terms of your penetration kind of exiting 2021. We're closer to 65 or 70 nationwide, and we're adding new markets every day. So yes, I guess, as we look forward to '22, can you keep that kind of pace of new market entrants as we start going out into the Tier 2 and Tier 3 markets? How do you view that for '22?

Yes. We're going to move more towards the historical average of 8 to 10 markets a year. This year, we'll have launched 23 markets. We really accelerated to be opportunistic and to take advantage of the great movement across the country. What we saw -- in earlier this year, we saw a number of our agents saying, "We need to be in this market, in that market, in that market in order to capitalize on the movement of their clients from 1 market to another." So of course, people from California, moving to a number of markets, places in New York, moving to Raleigh, to Florida, a lot of submarkets. And so that's why we accelerated. It was really to take advantage of that, but we expect to move back to more of the historical average, 8 to 10. It is worth noting though, the majority of our growth is coming from our existing markets, not from the new markets. We don't need to go to new markets to be able to realize our growth expectations.

Yes. On that point, maybe we could just talk about market share. So if you look at -- you guys gave that stat about your share within the top 3 MLSs. So yes, how does that look today? And can you compare like the vintages of markets that were kind of started in 2018 and before versus the market share of these newer markets?

Yes. So the top 3 MLS city stat there, there, it's -- we have 26% market share. At the time of the IPO, in the spring, it was 26% market share. Now on an LTM basis, we have 27% market share. So still moving up despite a highly competitive environment in those MLS cities, we're still gaining market share. In terms of vintages, Kristen, I don't know if you want to take that one?

Sure. The other thing that we've talked about, and we did this a lot in our second quarter shareholder letter on the second quarter earnings call, we looked at our 2018 cohort and provided some insights in terms of how we see market share ramp over the course of the first 3 years once we've launched. And what we see is within the first 2.5 to 3 years, we generally get to double-digit market share. And we actually have seen a pretty consistent trend across small markets and across some of our larger markets. So that really does hold across a variety of markets. The other thing that was interesting, which is somewhat related to your question, Ross, is that within that 2.5- to 3-year period, we're generally seeing a positive market level margin. So profitability to the tune of mid-single digits. And so that gives you a sense also of the profitability ramp associated with some of those newer markets in our portfolio. Anything that we've launched since then is on a similar trajectory, although it's worth noting that as we launch our markets, we historically -- our playbook has gotten even more efficient. We've been able to drive to market share and profitability goals faster. And so we are expecting to see a continuation of that trend going forward.

Same topic, but kind of shifting to the commission splits, but obviously speaking about profitability at a market level. You guys are mixing to more profitable markets, right? And we see the overall commission split. The only thing we could see at the high level is the 80%, right? And you guys speak to this outlook for reducing that split, increasing your margins over time. Clearly, the investor concern is that there's sort of a market rate of split inflation and competitive dynamics out there. Can you kind of speak to that balance of how you reduce the overall commission split while this kind of underlying market dynamic is happening?

Yes. So let me highlight some of the tailwinds that we have behind this. We -- when -- one, we're going to markets that have favorable splits. Two, the initial contracts in a number of these markets are more favorable to the agent, but then they go into a policy after 1 or 2 years, which is more favorable to the company. The reason they get in [ incented ] upfront is because when you have no name in the market or brand in the market, no operation in the market. They are taking an increased risk. And instead of spending a bunch of money on billboards, we spend virtually no money on marketing if you invested in an agent and they have put hundreds of listings in The Street. So it makes much more marketing sense dollar for dollar. But though -- the second benefit is they go to initial -- to policy contracts. Third, in every 1 of our markets, we start by hiring the top end agents with the biggest brands. And then you get more to, over time, move towards an industry average, similar to our public company comps. If we had the exact same distribution of agents as our public company comps, our splits would be -- for the contracts we have today, our splits would be another 700 basis points higher, right? So there's a huge tailwind just as we move into a more normalized distribution of agents. An example -- I gave you this before, last year, we never hired agents that made less than $100 million of GCI. Now we're down to -- up 75,000 GCI and above. But as we move down, that's where more economics are. The -- one of the things that's important for investors to understand is the way that these split -- these ICA's initial independent contract agreements work is they're tiered payments based off how much you make. So you make about $1 million a year, you pay, let's make it up, 15% in the market. If you make 0 to $50,000, you pay 50% to the market. And so that's a huge tailwind as we have a more even distribution because in, let's say, Los Angeles MLS, our -- we have 2.5x, 2.57x as many agents in our population relative to the public company -- the large public company comp of agents that do above $500,000 as they do. And that's why the splits are different. So that's number three. And I guess 1 data point, in New York City, we charge over 30% on a weighted average basis. And we've had margin improvement, of course, over time. That's our oldest city.

Got it. No, that's great color. So on that 70-30 in New York City, again, the 80% is the only number we can see on our end. And I think I heard you just say that that's -- I think you heard you say 700 basis points around founder incentives.

No, no, no. I said -- If we have the exact same distribution of agents, of production type of agents in the same weighting across the company, as our largest public company comp, that applied our policy against those agents, that would be 700 basis points of margin improvement.

Okay. Understood. Thank you for clarifying that. So the question I was getting to was, look, there is -- there are founder incentives. And clearly, as you said, New York is your most mature market. So what do you do after that initial package rolls off? What happens to those agents? How do you kind of incentivize them to not jump ship again?

So that's a great question. One of the big narratives out there is, hey, when people go on policy or go off their initial contracts, they're all going to leave. In New York, 85% of our agents are off their initial policy agreements. We charge over 30% -- it's not 30%, over 30% and -- which is premium in that market relative to the best companies. That's a market where we have the best companies with -- that are the most well financed with the most well-financed offers. Both of the companies have new development to offer agents just where they say, "I can change your career and give you -- listening to an entire building to come here." But in that market, we still have a mid-90s agent retention. And so I think that's the best data point that I can give you that people stay for the value that our platform gives them.

No, that's great color. So mid-90s retention there. Obviously, you've talked about broader retention numbers have been very strong, right, these -- as you've been reporting them publicly. Is that kind of the structural maximum? Or can you -- there's just always some higher guns that are always going to go to the next bidder? Or can you actually push that even higher?

I'm glad you asked. What's really important to know about our retention numbers is that they're incredibly high-integrity numbers. They include people that retire, they include people that were fired, right? So let's -- I mean you can guess what percentage of people should naturally be retiring every year, right? If it's a 20-year career, 5%, right? If they're working 30 years -- you know the math. And so, yes, in a number of our markets, we -- if you adjust that out, it would be high, high 90s. And so yes, I don't know if there's as much movement we can do on retention given that fact. Now the average brokerage firm maintains -- their retention numbers are in the 70s. So we're massively outperforming there, which gives me a lot of confidence that we're providing value as anyone can incent to get someone to move to a platform. But the real test is do they stay? And our agents, who are our customers, are getting encouraged every day financially to go to the places but they're still staying with Compass because of the value.

That's really helpful color. Ross?

Okay, yes. Just a question on overall, like you touched on a little bit at the beginning in terms of your platform. But transaction volume, like overall demand for your business, it skews a little bit more towards the high end, and you have a little bit more of the heavy weight on coastal cities. So yes, I guess just relative to the industry, how are trends holding up in terms of volume in the New York, L.A., San Fran, some of your big markets?

On an absolute basis there, it's still very strong in New York, L.A., Florida, in all of those markets, including San Francisco. In Seattle, we're seeing multiple offers, low inventory. The international buyers was invited back a few weeks ago in 33 countries, which is a big opportunity for these markets. The new COVID variant is continuing to create a work-in-home environment. It feels like every quarter we talk, like we're supposed to be going back to work as a country. Then it gets pushed back. And of course, when people are working from home more and they see that more part of the future, they're going to have more second homes. Second homes matter more because you can use it more. And second homes don't just have to be in those places we talked about, right? There -- it can also be in Raleigh or North Carolina. So we see things continuing to be strong. Seasonality is coming back a little bit compared to historical seasonality, but it's still flatter relative to the historical seasonality. This winter will be busier than it would have been on a seasonal basis historically. But we definitely feel like there are a lot of the right trends. We did see of course, in Q3, the low end really ticked off relative to high end. And that was -- we believe that's because they were trying to take advantage of interest rates before the interest rates rose. And so it's actually a pretty a smart decision for -- as a community as they did rise afterwards, but the high end is still very strong.

Yes. Yes, Compass is definitely doing well in the Bay Area and the Lake Tahoe area. I see it every day. So going back to the retention -- agent retention stat, 90%. I mean it's pretty off the chart. And you guys have like the founder incentive program for opening these new markets, and then you kind of have like the existing or agents that are after the founders' program. As either of those roll off, the retention stays high. And so can you just walk us through like the compensation versus the tools and the productivity gains? What's driving that 90%?

Look, what's driving it is a proven track record of growing their business, and you can see it in the numbers. And so the numbers I would look at are 3x in 19%. 3x is the -- year-to-date, our agents have grown their business 3x faster than market, just looking at transaction accounts and not looking at price, not benefiting from price as well, which may have helped that even further. So it's 37% year-to-date for our agents versus 13% for the market. Our agents can see that. They can see that they're growing faster. And so why leave something that's helping you in that way? We're also benefiting a lot from referrals across the country as our agents client -- our agents are sending clients back and forth to other agents. And so that gets in a different level of stickiness. The -- another number, 19%, we talked about this in an IPO, but I want to add a little clarity to it because I think it's -- people didn't see the full snapshot. The average agent that came to Compass in the 3 different years of cohorts, pre-pandemic boom, pre-IPO, they grew between year 1 and year 2, 19%, on a transaction unit basis, excluding the benefit of price. And the market during that time declined, on average, 1% each year. And so those are -- that's just -- they are seeing that growth relative to the market, and that's what they're paying for and staying for.

Got it. Matt?

So you talked adjacencies. A couple of questions. Obviously, you're ramping T&E. There's a bunch -- a lot of M&A you recently did, the mortgage JVs on the come here. Any color around kind of attach rates unit economics? Any sort of goals along those lines?

Kristen, why don't you take this?

Sure. Happy to. So we focus -- there are a number of opportunities in the adjacent services space, and we look at that total market opportunity as a $140 billion opportunity. That's on top of the $100 billion of commissions that are paid in the U.S. each year. So in the U.S. alone, a $240 billion opportunity for Compass. When we were making decisions about where to prioritize our efforts as we launched adjacent services, we focused on Title and Escrow and mortgage first, because those were the largest markets. Title and Escrow is a $35 billion opportunity; mortgage is a $50 billion opportunity. And with all the transactions that we have flowing across our platform, over 200,000 transactions over the course of the last 12 months and that number continues to grow, we see a big opportunity to attach Title and Escrow and mortgage services. From an attach perspective on the Title and Escrow side, we think that we can achieve attach rates in excess of the industry average, which is right around 30%. And as you mentioned, we are relatively early in this, but we're seeing some good traction. We've got a presence in 10 states across the U.S. We have a strategy where we've employed both organic growth and growth via M&A. And the thought behind some of the growth that we've done via M&A as it relates to Title and Escrow is really around speed; getting access to licenses; and of course, targeting opportunities where there already is some good significant embedded attach with our agents. So we've got 1 example is a company we acquired called KVS Title in the D.C., Maryland, Virginia area. That was a company where our agents were already doing a lot of business, and they were thrilled when we were able to announce that KVS was coming under the Compass umbrella. And we think over time, we'll be able to achieve attach rates in excess of the 30% because, first of all, we have agents who are really trusted advisers with their clients. And we'll be able to embed those services into our platforms that we're able to serve up the referral at exactly the right moment within the transaction to maximize the opportunity for conversion. So we think that is going to be a really great opportunity for us. And looking ahead to 2022, you should expect to see us both continue to penetrate our existing markets and also expand Title and Escrow into new markets as well. Turning to -- and it's important to note, actually, Title and Escrow has a, we think, at scale, 25%-plus EBITDA margins. Turning to mortgage. We think that's an interesting opportunity, although we're a little bit earlier in terms of our mortgage services. Mortgage, we decided to employ a different strategy as we were pursuing this $50 billion opportunity. We decided to form a joint venture with Guaranteed Rate, who is really well known in the space. And I think some people think of them as the Compass of the mortgage space. We thought they'd be a great partner with whom we could team up. Our joint venture is called OriginPoint. And the concept was to be able to give us speed and expertise as we went after this opportunity. So we have launched our first mortgage market just this week, which is very exciting. And we are continuing to stand that business through the course of 2022. Throughout the course of 2022, we expect that we'll have our mortgage service launched across the majority of our markets. In mortgage, we -- the industry average for attach is about 20%. We think we can do at least as well as that. When you think about mortgage, part of the reason the mortgage attach is generally 20% versus 30% is that fewer people have a title person who they can call on demand in their phone, whereas you can understand -- some of our buyers already have pre-existing relationships with other financial partners who may be able to provide mortgage services. So we think the attach rate -- the industry average is 20%. And we think we'll be able to outperform that over time. And again, that's really a reflection of our ability to embed the mortgage offering into our platform in a number of ways. Now unlike some of our competitors, we have a consumer search site. You can envision us putting in the option for a buyer right on the listing page to be able to apply for a mortgage right there. So we think that's 1 example of many that will allow us to potentially be able to bring that attach rate even higher over the course of the next several years. The long-term EBITDA margins at scale for that mortgage business are 30% plus. So it will take us a little time to get there, but we think that margin profile of that business is also very, very interesting.

Got it. No, that's great color. So 2 sort of margin-accretive adjacencies there where you're early on, and they're big markets. So if I just go ahead and skip ahead to even beyond the next couple of years, as you just mentioned, you've got sort of an infrastructure to get all this in front of consumers. Are there any additional adjacencies that become part of the longer-term vision? Any other sort of pain points that you would address, whether it's helping agents or consumers?

Yes. Absolutely. So there are 3 buckets of spend: agent spend; listing marketing spend; and then client spend. The agent spend includes things like buying leads, whether externally or -- we are -- for the first time, we are going to start -- we are just starting to monetize leads from our sites. We have a lot of traffic, a lot of people were requesting and were now giving those referrals to our agents in the form of leads, and we'll do more of that over time. Other examples of listing marketing spend would be digital ads to market listing. They would include brochures, postcards, videos, 3D Matterport. Our platform integrates with 3D Matterport through API. You can schedule through our platform and make a 15% margin off of that, 50% margin off of digital ads whenever anyone books through our platform. And then, of course, there's client spend. Client spend is mortgage, title, home insurance, home security, home warranty. Across these different buckets, not everything has to be built with investment through Compass. There's -- build yourself -- there's JV, and then there are just referred. And so for things like home security, we'll have a referral partnership where we -- or whenever your agents refers a client to them, you get a referral.

And it's worth noting the way that we think about adjacent services, the ultimate strategy here is to increase the revenue per transaction and the profitability per transaction. So if you look at a hypothetical sale of a $1 million home on our platform, after we pay our agent commissions, we are keeping about $5,000 of that -- of the commissions on that home sale. When we add Title and Escrow services, we're able to add an incremental $3,000 to $5,000 of revenue on to that base of $5,000 for the core transactions. So that brings the revenue associated with that transaction up from $5,000 to $8,000 to $10,000. On the mortgage side, it's similar, but the dollars are even a little bit bigger. That core $5,000 transaction can go up by $15,000 to $20,000 with the addition of mortgage. So that $5,000 transaction can become more like a $20,000 to $25,000 revenue transaction. And once you take into account the 25%-plus margins on the Title and Escrow business at scale, the 30%-plus EBITDA margins on the mortgage business at scale, you can see how that drives profitability per transaction as well. All these other adjacent opportunities that Robert talked about have a similar effect, really allowing us to increase both the revenue and the profitability per transaction.

And it's worth highlighting like where advantage comes from and help highlighting the benefits of the platform. The average -- what we are doing as a company is we're taking proven models of agent productivity, proven models of software that drive [ income and profitability ] into the Compass platform, building in-house into 1 place. The average agent in the country logs into 9 different companies to do that job for third-party software providers, which means they'll log in 3 times, 3 different user names, 3 -- 9 times, 9 different user names, 9 different passwords, put their credit card in 9 times. That overwhelms them and prevents them from optimizing and utilizing things because they get overwhelmed. And by building it in-house, it is seamless. It is simple. You only have to do every single thing once, not multiple times. And that drives up the attach -- of the adoption of the -- of our tools. So examples would be the average agent in the country does -- 19% of them do digital ads. For us, it's 40%. Average agents in the country, 30% of them are actually just CRM. At Compass, it's 85%. For staging, there are ranges between single digits to 20% of people are doing staging and home preparation. For us, it's -- it's in the low 40s percent. And so we've proven ability to drive attach of systems and tools that grow agents' businesses, and we're going to do that. The same thing will apply to adjacent services. An example of some -- the problem relative to traditional brokerage is they don't have a platform. I know they're all saying, "We have technology, too." But it is not theirs. The example -- the evidence is in R&D spend, right? So we've invested [ $600 ] million in R&D over our time at Compass, and our run rate is currently $300 million in R&D. If you look at one of the largest public company comps with 75,000 agents, they have $10 million in R&D. We have -- there's 1.5 million agents in the country, so if you extrapolate that, assume everyone is paying the same ratio, then it's $200 million. But by the way, the majority of brokerages are like true boutiques, so they're definitely not. So it's definitely much less than $200 million. So we have a huge R&D advantage, a technology and platform moat around this space. And the -- when everything is on your platform, you know -- not only do you create simplicity, now it gets easier to do, where an agent doesn't have to write down this -- the same thing again and again and again. Like how many times do they write down their address in the on top of the platform, right? They write down their address a different time for the title company, different time for the mortgage company, different time for the digital ad, different time for the brochure, different time for the newsletter, different time for the MLS, different time for your own site. I could talk on and on and on, how many times they write it. But here at Compass, you can do it once. And -- but that's same for credit card, same for your personal name. That's the benefit of the platform that creates simplicity. And again, the proven results that we have on the agent productivity adoption, which is the reason why you have the 19% in the 3x, that is the reason. Any company that can get 85% of their agents to use -- actually use the CRM versus the average 30% will see growth. And we're just going to take that exact same approach and bring it over to adjacent services. And I'm excited to see the results going through the financials.

Really well said.

Great color.

Yes. I like the answer. Okay, guys, we're up on time. So I've got to get you off to your next meeting, but this has been awesome. We look forward to seeing your progress in '22 and look forward to maybe doing this in person next year and hearing all about it. So thank you...

Well, the fact that you say amazing is so crazy to me. Maybe in 4 years.

All right. Thank you, guys.