Opendoor Technologies Inc. (OPEN) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to Opendoor's Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce Whitney Kukulka with Investor Relations.

Thank you, operator. Good afternoon, ladies and gentlemen. Thank you for joining us for Opendoor's Fourth Quarter and Full Year 2020 Financial Results Conference Call. Joining me on the call today are Eric Wu, Founder and Chief Executive Officer; and Carrie Wheeler, Chief Financial Officer. Full details of our results and additional management commentary are available in our earnings release which can be found on the Investor Relations section of the website at investor.opendoor.com. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website. Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meaning of the federal securities laws, including but not limited to, statements regarding Opendoor's future financial results and management's expectations and plans for the business. These statements are neither promises nor guarantees and involve risks and uncertainties that may cause actual results to differ materially from those discussed here. Additional information that could cause actual results to differ from forward-looking statements can be found in the Risk Factors section of Opendoor's annual report on Form 10-K for the year ended December 31, 2020 and Opendoor's other SEC filings. Any forward-looking statements made in this conference call, including responses to your questions, are based on current expectations as of today, and Opendoor assumes no obligation to update or revise them whether as a result of new developments or otherwise, except as required by law. The following discussion may contain non-GAAP financial measures. For a reconciliation of each of these non-GAAP financial measures to the most directly comparable GAAP metric, please see our website at investor.opendoor.com. Now I will turn the call over to Eric. Eric?

Thank you, Whitney. Welcome, and thank you all for joining our first earnings call. Before we get to the results and momentum we're seeing, I'd like to take a few moments to ground us in the importance of the problem we're solving. At Opendoor, our first core value is to start and end with the customer, and we are relentlessly focused on improving the customer experience. We share a customer story at every Board meeting and every all-hands. And I want to extend that same tradition today with a story about the Cummings family and their experience with Opendoor in their own words.

Hi. My name is [ Rhonda Cummings ] and this is my husband, [ Dominic ]. We're from Jacksonville, Florida. We found ourselves in a situation where we needed to sell our home quickly. This happened because of the placement and subsequent adoption of our fund. We were a family of 4 in a 3-bedroom house. And when we got our son, we realized that we had quickly, and I mean quickly, outgrown our 3-bedroom to bet. And I knew as the Chief Mom Officer of this family, it was hard to get moving. We didn't necessarily have the time or the patience to find a realtor list our home, do repairs and everything that comes with it. And that's why Opendoor was absolutely essential in getting my family into a home that was going to grow with our growing family and our needs. They saved us time, they saved us money, and that is absolutely invaluable. My husband is going to explain to you some of the details that he found helpful as he is the Chief Financial Officer of this family.

I also didn't have to worry about hiring a contractor to fix things around the house, nor did I have to worry about listing the home or showing the home around with 3 toddlers and a teammate. So with that being said, this process provided us so much means, and we're very thankful for that.

So from a Chief Mom Officer and the Chief Financial Officer, thank you, Opendoor.

Thank you.

And special thanks to [ Dominic ] and [ Rhonda ] for sharing their story with us, and we are inspired by the impact we can have for families just like the Cummings and Chief Mom Officers nationwide. That being said, for the vast majority of the 5.6 million people who buy and sell a home every year, this process is still far too complex, stressful and time consuming. Less than 1% of transactions are online, involve dozens of steps and span multiple months. So I founded Opendoor in 2014 to build what consumers crave and deserve, a simple, certain and fast online experience. We are making it possible to buy and sell a home at the tap of a button. As the inventor and leader in this category, we have helped over 80,000 families move, totaling over $20 billion in transaction volume. And as we have scaled to over 20 markets, we have done so with profitable unit economics. We pride ourselves on doing the hard things first, vertically integrating the entire experience and rebuilding each component from the ground up is not easy. But it is necessary to remove the friction and cost that exists in the transaction today and deliver on what we believe to be the best customer experience. So for the past 7 years, we've done the hard work to refine the product, pricing engine, technology platform and operational systems so homeowners can buy and sell in just a few taps. As I reflect on 2020, it was a turbulent and unprecedented year. But I'm proud of how our teammates supported each other, focused on our mission and continued to invent and build for our customers. In terms of results, we finished 2020 with $2.6 billion of revenue. While this was lower than our 2019 levels due to our pausing acquisitions at the onset of COVID, we saw strong margins with adjusted gross margins of 8.2% and contribution margins of 4.3% in 2020. In Q4, we delivered $249 million of revenue with gross margins at 15.4% and contribution margins at 12.6%. As we enter 2021, I feel like we've been building Opendoor for many years behind the scenes for this very moment. First, COVID has reset how consumers think about their home. Home is now also the office, the gym, the school, and if you're lucky, your favorite restaurant and date night. Before the pandemic, 12% of full-time employees worked from home. That share is now up to 42%. Additionally, in a recent survey, 28% of respondents decided to leave their city as a result of COVID-19 and an additional 25% are accelerating their plans to move for the same reason. The ability to work from almost anywhere, wanting additional space and low interest rates has created historical demand for residential real estate. Second, the adoption of digital products is rising sharply. While the impact on food delivery, transportation and e-commerce is most visible for us day-to-day, real estate is no exception. In a recent survey we conducted, 71% of sellers said they would consider selling their home to an iBuyer. These 2 seismic shifts have created significant tailwinds for us. First off, more and more home sellers are coming to Opendoor to request an offer to sell online. So far this year, we were spending over 50% more offers per month compared to this time last year and exceeding previous highs. What's more exciting is that we are converting more and more of these home sellers. A question we often get is if homeowners will choose Opendoor when the markets are hot, like we're seeing right now. The answer to that is yes. Our seller conversion is exceeding historical highs. And most importantly, this year, our seller Net Promoter Score is trending over 80, which is up 10 points from 2020. We believe this is the future of real estate and is coming faster than expected. Next, let's talk about our upcoming plans. Our goal is to be the best place to sell a home online and seamlessly move. That means we are focused on: one, driving market share of sellers in our existing markets; two, expanding to many more markets nationwide; and three, building our digital one-stop shop to seamlessly move. First, we continue to expand our ability to address a wider range of sellers in our existing markets. In Q4, we expanded our buy-box by 35%, increasing coverage in price, ZIP code and home type. These buy-box improvements plus the increasing offer requests, plus record-high conversion, give us confidence in our ability to exceed historical market share levels. Second, we plan to double our market footprint this year from 21 to 42. Our operational systems, pricing models and launch playbooks have been tested at scale and are underpinned by our technology platform that automates and centralizes the transaction. Thus, we are positioned to rapidly and profitably expand nationwide. And we are well on our way with 6 markets launching in Q1, including recently announced Asheville and San Diego. Long term, we plan on being live in more than 100 markets and servicing over 70% of the homes in the U.S. Finally, we will be making progress on our goal to build the digital one-stop shop to move. We've already enabled homeowners to sell online in a few minutes and provide tech-enabled title insurance, escrow and mortgage services. Yet, we know that 2/3 of sellers are also buyers. So we are building a one-tap buying experience so customers can buy and sell seamlessly. Accordingly, we recently launched cash offers for homebuyers, which enable home shoppers to submit an all-cash offer backed by Opendoor, select their preferred closing date and line up their move. We know the market is competitive. We know buyers want to improve their chances of getting their dream home. And we know sellers want certainty and speed. This feature and more to come, demonstrate our ability to innovate quickly based on what we're seeing in the market and leverage our expertise in technology, pricing and operations. In closing, we are relentlessly focused on building a frictionless and digital experience for consumers. It is this focus, coupled with our technology platform, operational scale and seasoned team, that will enable us to be the pacesetter and deliver an online delightful experience for millions of homeowners nationwide. With that, I'll hand it over to Carrie.

Thanks, Eric. As Eric just discussed, we had a solid finish to 2020, and we're pleased with our momentum going into 2021. We reported revenue of $249 million and an adjusted EBITDA loss of $27 million for Q4. And revenue of approximately $2.6 billion and an adjusted EBITDA loss of $98 million for the full year, exceeding the targets we provided last fall when we went public. As we've discussed, our results for fiscal 2020 were materially impacted by COVID. The onset of the pandemic caused us to pause home acquisitions beginning in March due to unprecedented uncertainty and safety concerns. And to actively manage our balance sheet and sell in the vast majority of homes we owned over the second and third quarters, we sold almost $1 billion of inventory in that time at constant margins, demonstrating the agility and resiliency of our resale systems. However, given that REIT inventory is the fuel for revenue, that sell down impacted our top line in Q4. Declines notwithstanding, we did exceed revenue expectations that we put out for the year. Q4 revenue performance was driven by strong market demand for housing and the strength in our resale processes. Q3 marked our low form for inventory, and we have been aggressively acquiring homes since that time. We purchased more than 2,000 homes in Q4, which reflected a strong acquisition ramp throughout the quarter. We ended the year with $466 million of inventory, representing 1,827 homes, which is up over 3x on September's balance. On the margin front, both adjusted gross profit and contribution profit were strong for the full year and particularly strong for the fourth quarter. Adjusted gross margins were 8.2% for 2020, up 190 basis points from 6.3% in 2019. Contribution margins were 4.3% for 2020, up 230 basis points from prior year. And on a per home basis, we generated adjusted gross profit per home of $21,000, contribution profit per home of approximately $11,000. For Q4, we saw adjusted gross profit per home of approximately $45,000, contribution profit per home of $37,000. These higher margins were largely driven by having a healthy inventory mix weighted to recently acquired homes as well as from strong home price appreciation in our markets. From an adjusted EBITDA perspective, we had a loss of $27 million for the quarter and a loss of $98 million for the year. We saw gains in adjusted EBITDA driven primarily by the increase in contribution profit, but also as a result of the cost controls and expense reductions we undertook in response to the pandemic. Our operating expenses, which comprised the delta between contribution and adjusted EBITDA were $59 million in Q4 and $208 million for the full year, down 24% and 33%, respectively. While absolute spend declined, we did see deleveraging of OpEx in both periods given the lower revenue base. I'd also note that Q4 OpEx, while down year-over-year, did grow 43% sequentially as we resumed operations across all of our markets and accelerate investment into sales and marketing, operations and product development to support our 2021 growth objectives. I'll now turn to our quarterly guidance. We are not providing updated annual guidance. However, I can say we're comfortable with our previous outlook for 2021. We've also previously talked about the cadence for this coming year. As we rebuild our inventory, we expect our top line to follow, meaning that our revenue will be weighted to the back half of the year. For Q1, we expect revenue of $600 million to $625 million. Adjusted EBITDA losses are expected to range from negative $33 million to negative $28 million. On the revenue side, we're encouraged by volume trends in our business due to both our increasing acquisition pace and increasing top of funnel demand. In addition, we expect a strong market home price appreciation, or HPA, will continue to positively impact revenue in Q1. With respect to unit economics, the strong margin performance we realized in Q4 should be considered [ temple ]. While we do expect margin tailwinds to persist into Q1, they will moderate throughout the year beginning this next quarter. Let me tell you about why. First, as we build up our inventory balance, our resale mix of homes will normalize throughout the course of this year. Second, while our pricing models were responsive to the very strong housing macro we saw in Q4, we did realize upside relative to our underwriting, particularly for homes that we underwrote in Q2 and early Q3 and subsequently sold in Q4. Going forward, we expect that our margins will moderate as we move throughout the year. I also want to note that we do expect to see a significant increase in noncash stock-based compensation expense in Q1, estimated at approximately $235 million. This is much larger for us in a typical quarter and is due to our recent public offering. The expense is primarily related to historical equity grants to employees as well as for additional performance-based equity grants. We expect to continue to recognize additional stock-based compensation expense going forward over the remaining time-based vesting period for these awards. Now turning to the balance sheet. As of the end of Q4, we had approximately $1.5 billion of cash and marketable securities. The follow-on offering we did added another $860 million, bringing us to approximately $2.3 billion. We are well capitalized and have substantial firepower to invest in market expansion and other opportunities we see to accelerate our business and product road map. In conclusion, while 2020 certainly presented many challenges, we're proud of how our team managed through a very difficult year, and we're pleased with how we wrapped up Q4. In addition, we're encouraged by the momentum we're seeing going into Q1, propelled by this undeniable shift in real estate from offline to online. We'll continue to build upon our track record of posting positive unit economics as we drive growth over the course of the coming year. And with that, operator, we could please open up the lines for some Q&A. Thank you.

And our first question comes from the line of Yoni Yadgaran with Crédit Suisse.

So two for me. The first is around just the kind of cadence and gating factors for the rollout of maybe new services as well as potentially expanding your footprint within home loans, et cetera. How are you just thinking about that? What are the kind of the main kind of factors that go into that between investing in the engineers, et cetera, versus getting licenses or anything else that might be involved on the partner side to kind of roll out incremental services? Secondarily, we just love to hear what are the kind of puts and takes that might impact the quarterly cadence of gross margins, in particular, throughout the year? Particularly on your comment around appreciating home prices, how much of that is a factor when you look back historically versus maybe new market rollouts and taking initial -- a bit more conservatism in how you price homes when you go into a new market.

Thanks, Yoni. This is Eric. So I'll address the first part of your question, and then I'll let Carrie address the second part of your question. Yes, as I mentioned in the remarks, we're really focused this year on investing in 3 big areas. So the first is to deepen our market penetration and expand in our existing cities. The second is to expand nationwide. And we are launching 6 cities in Q1, and we're aiming to be at 42 by the end of this year. And the third big vector is building the one-stop shop. We know that 2/3 of sellers are also buying another house, and we want to make that transaction extremely seamless online and digital. In terms of edge resources, we have the capabilities and the staff to invest in all 3 vectors. And we're already driving additional improvements down all 3 this year.

Great. Eric, and if I can take the second part of that question, just around expectations for the cadence of margins through the course of 2021, I think was the question you asked. If you think about what drove margins, first of all, in Q4, that will help us talk about what's going to happen for the coming year. There are really 2 main drivers of margins. One was having a very fresh book of inventory consisting almost entirely of newly acquired homes, that was one. Second driver of margin in Q4 was around a combination of the underlying market strength we're all feeling today, coupled with the timing of home acquisitions. So the homes that we sold in Q4, just as a reminder, actually homes that we offered on and we acquired in Q2 and early Q3. And so that gap in timing drove -- realized better-than-anticipated HPA gains. And you're seeing that benefit in margins. Both those drivers will not persist at the same rate for the balance of 2021, which is why our caution in my comments was just to call out the fact that we expect margins to moderate over the course of this year. Certainly, as we acquire more inventory throughout the year, that distribution of homes in terms of aging will just look more normal. And then in addition to that, the underwriting today of homes really reflects what we're seeing in the market. Well, we may have been intentionally conservative in our underwriting rate last year just given the volatility in the market due to COVID and other reasons. Today, we've adjusted to the environment. We feel very good about the drivers to HPA that we're seeing right now. And the underwriting reflects that. So you'll see that in margins that will come down over the course of the year from where we are today.

And our next question comes from the line of Jason Helfstein with Oppenheimer.

2 questions. And I apologize in advance for the comparison to Brazil. You should be compared -- you should be analyzed on an absolute basis, but we're living in a very relative world right now in the stock market. So when I think about your first quarter revenue guidance, very similar to Zillow, should we be thinking about this as a duopoly? And just generally, when you think about the experience you're giving consumers versus Zillow, do you see differences today? And then, I guess, second. Your margins are much better than Zillow. Could you grow faster if you extended losses or pushed down margins? And just how are you thinking about margins versus growth over the next 2 years? And I know we have, obviously, your previous guidance. But maybe just give some color how you're thinking about the balance between those 2.

Yes. I appreciate the question, Jason. Maybe I'll start by reminding us that less than 1% of transactions are online. And when categories are forming, raising consumer awareness is a net benefit, especially when the product is much better and we do see really great conversion right now. So in my view and our view is that as more and more transactions move online, just given what we built to date and our operational processes and the platform we've built, we feel very well positioned to be a market share gainer in the coming years. With regards to competition, will we need to compete over time? Sure. But again, we're focused on building the best consumer experience and very confident in our ability to compete. Carrie, do you want to speak about the margin?

Yes. No, and Jason, your question is about those trade-offs between growth and margin. What I would say at a high level is really, first and foremost, our focus is on maximizing the growth we have right in front of us and to take advantage of the enormous market opportunity. That's the #1 objective and we want to invest aggressively behind that growth objective. As evidence of that, I'd point to the fact that we just recently announced we're going to double the markets we're going to be in, in 2021. But we will continue to do that as we have historically with a disciplined approach to unit economics. Building a sustainable durable business is -- continues to be important to us. So I'm going to cheat a little bit and say, and, to your question. It's an and question for us, I mean growth #1, but always in light of making sure that we are disciplined on our margin objectives at the same time.

Our next question comes from the line of Ygal Arounian with Wedbush Securities.

I wanted to ask, Eric, on your comments about conversion. Conversion being stronger now than it has been historically and kind of improving there. And I think that question makes a lot of sense. So maybe we could talk a little bit more about what's driving that in an environment where home sellers can kind of go and expect to sell their homes much quicker than they normally would and likely receive a bidding war on it and sell it above the asking price. So maybe just some of the dynamics there. And then second, I'd love to hear your comments on -- there's been some commentary in the market that you guys paused listings for about a month from mid-November to mid-December. So just -- is there any accuracy to that? And if that is, what happened, maybe just some insights into why you made those decisions?

Got it. I appreciate the question. So your first question is, what's driving conversion? I'll let Carrie speak to the second part of your question. But from what we're seeing is really 2 things. There's some macro factors I want to mention and then some things we're doing on our side. The macro factors, as I actually already mentioned was, there is just a strong desire for a digital contactless experience. I'll talk about why in a second. And there's also just more demand to move. So if we can reduce the friction from the experience, then you can pull forward latent demand to move. But at Opendoor, we're seeing an increase in organic sellers coming to the site, as I mentioned. We're seeing strength in our partnership channels, and those are growing nicely. We're lowering our fees due to the market conditions. And we continue to make constant improvements on our seller experience and product. And those things are driving the increase in conversion. When you think about the behavior itself, why your sellers selling to Opendoor versus listing on the market? And I would highlight 2 things. One is that even if it's a hot market, you still have to list the home, putting capital for repairs, have open houses and wait the time. And that timing can be not necessarily flexible. And the second piece is that, again, 2/3 of sellers are buying another home. And so they need to be ready to move on the next home at a moment's notice. So having an Opendoor offer in their back pocket gives them flexibility to buy the next home on their time line. And so those are the 2 driving factors into the increasing conversion.

Part 2 of your question, just around the pause we took in listing late last year. I mean without getting into the specifics, what I could say is, yes, we did that. We took the opportunity, at that time, to experiment with some of our own homes in terms of their listing. It seemed like a good time to frankly be doing it, just given seasonality. And I think you can expect us to once in a while experiment with the cadence of when we list and how we list. But nothing that I would over rotate on with respect to that short time move that we took -- short-term move.

[Operator Instructions] And our next question comes from the line of Edward Yruma with KeyBanc Capital Markets.

I guess first, just any commentary on any kind of -- with the funnel change in the behavior that you're seeing a little with kind of [indiscernible] rising rates and if you're seeing any changes in behavior, maybe people even rushing to close. Second, kind of a broader question. I know you guys have a pretty comprehensive road map for adding more services and building that out. Any kind of update in terms of what the uptake has been in services and any change in that road map?

Ed, can you repeat the first part of the question, you're breaking up a little bit.

Yes. I was just asking, kind of based on this rising rate environment, have you seen any changes either on top of the funnel behavior or in a consumer kind of moving to close quickly based on rates moving?

Got it. And the second part of the question is about our services road map?

That's right.

Got it. Yes. So let me -- I'll address both, and Carrie, feel free to hop on as well. But with rates moving and the desire to lock in rates now is certainly one part of the equation. But again, we see the stronger macro factors is the desire to move in a digital way. And the work-from-home policy is changing, so giving people more geographic mobility. To your question around services. I think we've demonstrated a strong track record with title and escrow. We launched that business in 2017, and in 3 years, got to 80% attach to very healthy margins. Back then, we knew that consumers wanted an integrated close. And so we executed pretty well against that opportunity. We also know that consumers want additional services from us. We see this every single day when we talk to our customers. They do, in fact, want a more seamless integrated experience across multiple product lines. And so we continue to invest pretty heavily this year and buy with Opendoor. And as I mentioned, we just launched a new feature called cash offers within that product line. And then we're investing in Opendoor home loans this year.

Yes. Edward, can you repeat the second part of your question? Do you want to address the uptick we see in services?

Yes. I just wanted to know if there's anything you could provide in terms of attach rate, kind of quantitative color around the uptake in services.

Probably nothing more than we already supplied in our public filings, which is around title and escrow, which is the most mature of our service offerings. Today, we're offering -- we're attaching a north of 80%.

And we have a follow-up question from the line of Jason Helfstein with Oppenheimer.

I figured I'd ask one more. So any update on the list with Opendoor? Any color that you want to share? Then a housekeeping question, do you capture the homes that are in contract on the balance sheet or not until they close?

Sorry, can you repeat the second part of that question?

Do you capture the homes that are in contract on the balance sheet or not until they close?

I can do the easy one first, Jason, which is we don't capture homes on the balance sheet until we own them until they're close. So what I would point you towards, if it's helpful, if you look at the 10-K filing, with the inventories that we own, we do show homes that are under contract we purchased, you can track that. So we had about 1,800 homes in inventory, we own those. We have about 1,700 homes, rough numbers, under contract to be purchased. They may not all close, but the vast majority of those will. So you can think of those 2 numbers as being more or less additive.

Great. And with regards to the listing at Opendoor and an update there, maybe I just give you some color as to how we're thinking about the products holistically. We do want to be the best place to sell a home online. And a couple of things we care about is, one, we want to be on the customers' side. So that's kind of point #1. Point #2 is that we do want to ensure that the customer is making an informed decision. And so by giving them the range of options, whether they want to sell to us to maximize convenience and certainty, or list on the market, we do want to make sure they're informed of their choices and options and then help them determine what is the best option for their situation. And so that's kind of the product thesis. We're seeing such strong conversion in our core offering, which is to sell to us. That -- that's still the product line that's chosen the most. But as we kind of progress, we will continue to invest in list to Opendoor as an alternative to selling to us.

Thank you. I would now like to turn the call back over to CEO, Eric Wu, for any closing remarks.

Great. So I just want to actually end this first earnings call by saying thank you to my teammates for their passion and persistence in servicing our customers every day. And I also do want to thank our shareholders for their support and our mission to transform how people buy and sell a home online. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.