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

Good afternoon, everyone. We are thrilled to have Compass here. Both Robert and Kristen are both here, the CEO and CFO of Compass to talk through their story, how they think about the overall real estate space, and we're also going to sort of talk through some of the variable debate on the space. So it's good to see you in 3D live in person.

Yes. Likewise.

Let's start with the disclosures. Please note that all important disclosures, including personal holdings disclosures and Morgan Stanley disclosures appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures, or they're also available at the registration desk. Some of the statements made today by Compass may be considered forward-looking. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. Any forward-looking statements made today by the company are based on assumptions as of today, and Compass undertakes no obligation to update them. Please refer to Compass' Form 10-K for a discussion of the risk factors that may impact actual results. Okay. Covered.

Let's sort of get started. I think it's a really interesting model. Just sort of a jump ball for either of you, maybe talk to us just sort of level set for everyone in the room, how do you think about Compass' value proposition and the difference between what you do and what traditional real estate brokerages do.

Maybe I'll take that one. Compass, were a tech-enabled brokerage firm, investing in R&D to impact the financials through a tech. And so we're investing $300 million in run rate R&D. Our largest traditional brokerage from competitor is investing $10 million a year. So there's a big difference. We are targeting that R&D on 3 buckets of money. There is the $100 billion of commissions that agents make. There's our expense base, and then there's $140 billion of adjacent services, mortgage, title, home insurance, home security, home warranty in addition to agent spend. The first bucket has been 99% of our focus to date, and we have a number of great results to show the success there. Our market share went from 1% 5 years ago to 5.6% as of now, 4% last year. So we're the share gainer in the industry. And we have proven to drive agent productivity faster than the market. So whether on a principal agent level or an average agent level, our agents are growing their business, their units of sold transactions faster than market over each of the last 3 years, ranging from 2 to 5x faster. And that's why we have industry-leading agent retention. The industry retained to agents had a 68% rate. We're in the 90%s, there's only one market that we're in that's not in the 90%s. And so that's really that first bucket. We're starting to move our focus to lowering our cost to serve with the agent service functions as well as driving attach of adjacent services.

Okay. You've really posted outsized agent and transaction growth since coming public. One of the common investor pushbacks and narratives that myself and my team here about it as well, it's because the real estate market was so hot last year that as the real estate market slows, home values can go down. We're going to see Compass really slow down. So I'm curious to hear your response to that, how you're thinking about growth even through different scenarios from a macro perspective?

So maybe I'll give an overview of the market, the view of our market and then maybe you can walk through the -- our growth even assume market neutral.

Sure.

So every market we're in and we're in 67 major markets covering half the country and we're in over 400 submarkets. This -- the big area would be considered one market, as an example, with a number of submarkets. Every market we're in has multiple offers, incredible buyer demand. We are actually seeing, given the recent drop in mortgage rates, an increased push in buyer demand, which is all further worsening the inventory story. Inventory is the issue. I will tell you, we're starting to see some signs of life of new -- of reasonable amounts of inventory coming in California. That's important because California has -- is a leading indicator for the country because their spring market is earlier than the rest of the country. But we're also seeing, and this is meaningful, is the shadow inventory of off-market listings. More off-market listings are being sold today than they were a year ago. And so that's inventory that the public can't see. But with that, maybe you want to walk through the scenarios.

Sure. I think one of the things that is somewhat underappreciated about our business is actually the growth that's embedded in our business independent of the market. So if you take 2022, for example, we have a whole host of agents who actually came on to our platform through the course of 2021. And we only recognized a portion of their revenue in 2021. So we'll have the annualized or full year benefit of that revenue in 2022. In addition, we will have agents who come on to our platform through the course of 2022. And this is something we know how to do. We are best-in-class at bringing these very talented agents to our platform, helping them understand the Compass value proposition. And so we look at that 2022 ability to bring agents onto our platform as something that we can control. And by the way, we're getting better and better at it, reducing that customer acquisition cost over time. And then the final piece is the list that we generally see in terms of agent productivity, that transactions per agent number that Robert talked about. And over the course of the last couple of years, we've seen a really nice improvement in both transactions per agent and transactions per principal agent. And we expect to see that continue, although at a slightly lower rate in 2022. So if you look at all of those factors together, we see a clear path to 18% revenue growth for 2022 independent of what may happen in the market. Now our guidance is for at the midpoint at $8 billion of revenue for 2022, and that includes a very modest 6% market growth rate. I could see a path for potentially more over time.

Okay. That's helpful. The recent disclosures you gave at the fourth quarter earnings, you shared some new stats about market share by region sort of showcasing the share gains you've delivered to date, even in some of your most mature markets. Maybe talk to us a little bit about what factors drove those share gains? And now as you look ahead in your older markets before we talk about new markets, what drives the share gains from here?

Yes. So the key number to focus on is how much are agents growing their business, their transactions faster than the market? Because as we are -- that's what allows them to gain share in our market, but also allows us to be able to bring on agents at a faster rate and retain them at a faster rate. What we're doing now to recruit agents, which is different than we had done in the past, is we're showing them the market -- we have a page, Page 5 of our investor deck, which walks through how at a company level our agents going fast in the market. We're doing that in an office level. So let's say, you're in the Beverly Hills office of a competing brokerage walking through all of your agents in that office, how much their market share has gained year-over-year year versus our agents in the directly comparable market with names. All of this information is very publicly available through the MLS. So we found that's one of the most convincing ways to bring agents on and it highlights that it doesn't just help gain share, helps bring on new agents and retain them.

Okay. On new markets, last year, you added 25 new markets to the platform. One, are there markets where you've seen steeper or flatter adoption and sort of any learnings from those so far? And the second part is, as you sort of look into that 2022 guide, how do you think about new market expansion?

So I'll start with the latter question first. We had a big expansion year last year. We added 25 new markets last year. And going forward, I think we'll return to a more normalized pace of roughly 8 to 10 new MSA markets per year going forward. That should really be the expectation. In terms of some of the trends that we've seen with the new markets, it's generally early to -- for us to pick up on any specific trends there. We did prioritize part of the reason that we ended up launching so many markets last year is because we saw 2 things. First, some pent-up demand from expansion that we ended up choosing not to do in 2020 in the midst of COVID where there was some uncertainty. And 2, we also started to see some different migration patterns. And so our agents are actually really good sources for where we might want to expand, right? They give us a really good sense as to where they're seeing some of their clients want to move. And so that helps us to prioritize where we look to launch new markets. Other things that we look at is just good old-fashioned overall market size, and we also look at the market economics. And so we really try to prioritize those markets where the market structure is most favorable to our business.

That's helpful. Can you talk to us a little bit about the profitability of these markets over time? Maybe as you sort of think about you open 20, 25 new markets, walk us through how the profitability of some of your more mature markets like New York, D.C., et cetera, how do those compare to sort of some of your mid-life markets? And then sort of walk us through like the lifecycle of your 1, your 2, your 5 of your markets, you think about the profitability profile?

Sure. So we've actually put out a ton of disclosure on this. So I'll reference some of our disclosure, but I'll walk you through the specifics here. So for our markets that we launched prior to 2018, we're generally seeing those markets on average generate 9% market level margin. All that is, is the profitability of the market before G&A, before R&D and excluding a small portion of centralized costs that we -- that just aren't easily allocated to the market. So for those most mature markets, we're seeing those average out at about 9%. Now we have a number of markets that were several years old in 2018, which means that there are markets that are actually performing at a margin that is better than the 9%, but those would be our oldest, most mature markets. We put out a lot of disclosure also about our 2018 cohort of markets that we launched a few years ago. And what you see there is within 2.5 years to 3 years, we're generally getting our markets to 10% market share, so double-digit market share and mid-single-digit market level profitability. Now year 0, year 1, you're going to see those markets be a drag on the margin. But within that 2.5-year to 3-year period, for that 2018 cohort, we saw those margins in the mid-single digits. I would say between 2018 and today, we've continued to improve our expansion playbook. So I would expect that from markets that have been launched since 2018, you should see those markets get to double-digit market share sooner and get to mid-single-digit profitability sooner.

How big of a factor do changes in commission splits play in sort of the improving profitability of the markets? And as you sort of look at the -- all the markets, how much wiggle room do you have to sort of further adjust the commission splits without impacting retention of the agents?

Well, we outlined our 2025 guide. And in that we have 250 basis points of margin improvement coming from split. Of that 60 basis points is coming from getting gains versus existing split towards our policy. But 190 basis points is just by going down market, not in average price point of home, but in how much an agent makes in a year in revenue because the way that splits work in real estate is there by the tier of your revenue that you bring into a company, your split will go up and up and up. And so as an example, 60% of our agents are $1 million-plus revenue producers. While if you look at the industry overall, only 14% of agents are $1 million-plus. So we started with the top revenue producers in these markets, and we have a tailwind behind us as we go down to a more normalized mix. The 3.6% of our agents are making -- generating revenue of less than $150,000. For the industry, it's 34%. And again, showing how off-weighted we are towards these top end producers. If we have the same mix as the industry, which our major competitors are very aligned with the industry, we would have another we would have another 584 basis points of margin improvement. And that's because the difference in split that a $150,000 producer pays versus $1 million-plus producer is 900 basis points more to the company. And so that's really the primary driver of what we're going to see over the course of the next few years. Also, it's important to note that lower-end producers do not necessarily drive a worse brand. Brands for agents is driven by -- I want to be around people that are ethical, that are experienced and that are full-time. That is the defining care to the brand and there are unethical agents that are in the most unethical agents. There are a greater percentage of agents in the top-end producers versus the bottom end. And these younger producers want technology more. They help the toppings do their open houses and they bring energy to the office. And so there's a misconception out there that will hurt the brand when actually it could be accretive.

I actually want to -- that's a good dovetail to one of the other -- the misperceptions that I get investor pushback from and say the Compass is designed for agents who sell million-dollar homes. You're not going to be able to scale down. I know you've shared some data on this, maybe just your response to that and sort of like data do you have to sort of repeat that?

Yes, Compass, it is easy agents that are in the highest price points need Compass less than the agents that tend to be in the more normalized $500,000-odd price. I mean here's why. So the platform that we have built is a platform that drives agent productivity. Productivity tools are needed for people that have the most interactions with the most people and generally have teams. So teams -- the individual agent in a vacation market doing $20 million transaction is the last person that needs to Compass platform. But the middle of the country where there's a lot of teams and in major markets where there's a lot of teams, they need software to help them be efficient, [indiscernible] efficiently work with each other. And we built a CRM networks for teams, business track works for teams, marketing solutions that work for teams, [indiscernible], transaction management work for team, collaborative search works for teams. And so that -- and the data points to highlight that the price point of homes isn't the driver, it's in, I think, Page 12 of our investor deck or maybe the latter page, where it highlights all of our major markets by ASP and you look at places like Philadelphia and Nashville, both below $300,000 average ASP, average sales price. And both of those markets, we had 10% market share within 3 years. And so there's not a correlation between price points.

Great. I commented earlier, I was doing a fireside chat with another real estate company, how -- I don't think there's any online real estate company that doesn't talk about adjacent services, attach and all the incremental revenue streams are going to come with every transaction. So from you all's perspective, what are the areas where you've made the most progress on the adjacent services? And then what about ones that are sort of taking longer? And what are those executional hurdles you have to jump over?

Well, yes, I personally believe that the company that can most monetize the transaction with the most adjacent services will be the future of real estate because they'll have a profit advantage relative to the combine, they'll make it impossible to effectively compete against and they'll be able to reinvest that into more platform success. I think the -- in the world of misconceptions that you kind of alluded to earlier, I think one of the questions are like, why are you investing so much in R&D when your competitors aren't they say can use third parties. One, I believe to drive the most productivity, it has to be in one place. Otherwise, it limits the -- it creates a barrier for adoption of these proven productivity tools. If they have to go find it themselves and it's on an Internet and there's 30 real estate terms to choose from. And it's not integrated and the insights you can't put on mobile. It won't be as most effective. But there is another reason, which is a bigger reason. The only -- the companies that are winning in every space are the ones that can monetize the transaction the most is the customer the most times with at least additional customer acquisition cost. The way they are doing that is they can -- they're getting that customer to embed their workflow on the platform. For me, like it's Google, right, or Uber or Amazon, they can see a lot of my activities, and they're recommending me things all the time. In real estate, you have to get the agent and then ultimately, the client to have their full activity on the platform in order to know when to market them the right activity in the right way and on top of that, to create a one-click opportunity for them to either refer to a client or to purchase it. So that's the real advantage we have on attach. The success to date is -- we've been able to get 5% attach for Escrow in South California, 40% attached for title in Washington, D.C. We had -- we acquired a company called KBS with 17% attach day 1, and then we moved it to 39% over the course of the year. And so that's a proof point of success in those. But that's using traditional methods and our inside sales team, there's much more upside to that as we have more platform-driven attached. An example that I would give you to make it very simple. Any time an agent has a client that is -- that changes the mortgage calculator on the listing page, they should recommend them our mortgage. But if you're at a competing brokerage firm where there is no proprietary platform to do any of that, then they're not going to be able to recommend, that's just like one of countless examples of where you could recommend the right thing at the right time.

Yes.

And I think ultimately, looking at our progress in title and escrow, we think we can get to 50% attached for title and escrow exactly like leveraging what Robert talked about in terms of embedding that offering into the platforms that our agents offer at exactly the right time in the transaction. And that's really a unique element for us. And we have those proof points already that 50% attached in Southern California for escrow, the 40% attach in for title and D.C. So we see a clear path to getting there over time. And now it's just about making sure we've got those title and escrow offerings available across as many of our markets as possible. On mortgage, we're a little bit earlier but we originally actually expected to launch our mortgage business in the middle of 2022. We saw an opportunity and pulled that forward. So we launched our first mortgage market in Chicago in December. We think, ultimately, there will be able to drive 35% attached. And we're going to be able to expand our mortgage offering to cover the majority of our markets by the end of 2022. So I think the progress that we see there in terms of just expanding that mortgage offering should be faster than what you've seen on the title and Escrow side, although we've done a really good job of attacking that opportunity as it is. And we are, of course, evaluating a whole host of additional adjacent services all the time. So as soon as we have settled on the right next adjacent service, trust me, we'll make sure to let you know.

We've done some work on it, but I'd love to hear your perspective of how those adjacent services, whether it's title escrow or mortgage, how do they impact the revenue per transaction? And then what about the margin profile of those services relative to the core commission revenue?

Yes. So if you look at an individual transaction, just hypothetically speaking, to keep the math easy, on a $1 million transaction, let's say, there's a 2.5% commission rate. And so that's $25,000 of revenue. To keep the math easy, we keep 20%, our agents take 80%. And so that individual transaction, the core sale transaction or buy side transaction itself, we keep about $5,000 of that revenue. If we add title and escrow on top of that, that's an incremental $4,000 on that transaction. And the margins on that business at scale will be about 40%. So that's a really nice lift. On the mortgage side, the economics are also very interesting. That core $5,000 transaction has an incremental $15,000 of revenue attached to it. Now we are pursuing the mortgage opportunity with a 50-50 owned JV with guaranteed rate. And so that revenue won't necessarily be reflected on our P&L. But what will be reflected is 50% of the EBITDA associated with that transaction. And so that will be 35% margin at Origin Point, which is the name of our JV, and we'll recognize about 50% of that on our P&L. So I think as you look ahead at mortgage, it's not -- we're going to be really focused in 2022, as I talked about in terms of expanding that offering across the majority of our markets. I wouldn't expect for it to be a huge EBITDA contributor in 2022, but I think 2023 and beyond, you'll really start to see the benefits of that business as it starts to ramp.

You've built an incredible tool for agents to improve their productivity, to drive share in the markets that you're in to expand into new markets, expensive homes, lower-priced homes, et cetera. As you sort of look into '22 and '23, what are the next friction points you're most focused on to solve for agents to even make them more productive or continue the productivity cycle improving?

Yes. So we will have completed the core of the agent platform by early summer, which means an agent will be able to complete the entire transaction from first contact, lead first contact, nurturing all the way through to close and all the buy-side activities, all the sell-side activities through Compass. And so with the -- and the way that we have gone about building the Compass platform is we look at the agents that are in the country and what tools that they are using and paying for that are third parties, there are 700 software providers that are selling to agents every day, and we observe very closely what are the things that are driving the most agent productivity. And we've rebuilt those from tranche into Compass. Now the -- that means that the opportunity for us is less and less building new software for agents. It's more and more how do you help an agent know how to use a new tool, like in Excel spreadsheets like what percentage of Excel do we all know how to use. What percentage of our iPhone do we know how to use, right? So it's more about it. It is about adoption than anything else. We have finally cracked that not, I guess, the term would be. But the way that we do it -- when we launched a month ago was something called 10/10. It is basically a big contest in a way of to work 10 in consecutive weeks with an outside coach, there are real estate coaches that are best in the world, also go to thousands of them out there. Then we had 10 consecutive weeks hour-long sessions with our internal coach and 10 consecutive weeks, but all in the same 10. So that's, 3-hour meetings a week. But 10 with what we call them an agent experience manager, think about the genius bar in Apple. And they are coaching our agents not how to use technology because no one wants to know how to use technology. That was the mistake. They want to know how to grow their business. And it just so happened, the weighted group business is we'll guide you through this tool and how to do that. So it's business first and technology is the method and it's having a huge impact on adoption. We can see our numbers, but also a huge impact on their -- on growing their number of listings and interacting with their clients to drum up business because we know which activities are CRM-driven new business activities and which ones are efficiency, which activities embed their business with their people on their team and checklist and automated checklist flowing through the entire pipeline of activity. And so that's -- we just need to do more – we are going to get better and better and better at coaching agents on how to grow the business. And again, it just so happens that the tools are the pathway to maximize that.

And it is worth noting the top quartile of users on our platform exhibit some pretty interesting sort of trends. First of all, the top teams who are in that top quartile are using the platform for over 4 hours per day. The top individual agents in that category are using the platform 2 hours and 15 minutes a day. And what that means, that is truly with that level of usage, our platform is part of their workflow. What does that mean? It means it's very difficult to leave. And we see that in the retention numbers for those top quartile users as well, right? The top quartile has retention rates of 98% versus 86% for the bottom quartile of users. And that top quartile of users is actually growing their business 2.6x faster than the bottom quartile. So the more we can get all of our agent base using the platform, realizing the benefits, unlocking incremental transactions and productivity, the better we think it will be for them in terms of growing their business. By the way, when they grow their business, we grow our business and the better it will be from a retention perspective as well.

Great. Well, we can't wait to watch the productivity continue. Thank you so much for taking the time, both of you.

Thank you.

Thanks, everyone.

Thank you.