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

Great. Thank you for joining us for the 2021 Citi Technology Conference. We're pleased to be joined here by the CEO, Eric Wu; and CFO, Cary Wheeler from Opendoor. They'll do a brief presentation, and then we will answer some questions at the end. Eric, thank you so much for joining.

Keith, thanks for having me. I was told to pause on this slide, so that we don't have to go back and read this off word for word. So memorize this, and I'll quiz it very [indiscernible]. But I'm excited to be here. It's really a pleasure to present the company. My name is Eric Wu, as Keith mentioned, CEO and Co-Founder of Opendoor. I spent nearly 20 years at the intersection of technology and real estate and have been obsessed with simplifying the consumer experience in real estate. In 2014, I founded Opendoor and invented this category called iBuying or Internet buying, which effectively eliminates all the inefficiency, time and hassle from the real estate transaction. Within 7 years, we've launched 41 markets, now 43 actually as of today. We serviced over 100,000 homeowners. We have a Net Promoter Score of 80-plus. We sold over $13 billion of real estate, reaching nearly $4.8 billion in revenue run rate this past quarter. We've acquired 8,000 homes this past quarter, and we're doing it alongside 2,000 dedicated and focused teammates on this mission. Our vision at the company is to unlock homeownership for millions of Americans. Said another way, our goal is to make it possible to buy and sell a home at the tap of a button. We're making it possible to buy and sell a home at the tap of a mobile device. It's as simple as booking a flight or hailing a ride. We've attracted a deep bench of executives from companies such as Square, Netflix, Uber, Lyft, TPG, Citadel, Airbnb and Google. So as I mentioned, we're transforming 1 of the largest markets in the U.S. Two-thirds of Americans live in the home they own with over 5 million homes sold each year, and residential real estate is 2x larger than used autos and 1.5x larger than food. Secondly, the market is highly fragmented, controlled by incumbents, delivering an inefficient experience. For a huge significant portion of realtors, this is their side job, and they're doing it for friends. And this transitory and part-time nature of realtors creates missed line incentives, a lack of expertise and is a failing in the system. Specifically, the transaction is complex. It's uncertain. It's time-consuming, and it's off-line. Nearly 90% of consumers use an agent, and this is the process to go through. They have to go through a dozen of steps, multiple counterparties and uncertainty in months of time. And on top of this, there's a tremendous amount of unexpected costs. People typically think about the cost as just the broker commission. But homeowners spend thousands of dollars on closing, repairs, warranty, home insurance, totaling nearly $30,000 just to move down the street. So instead, with Opendoor, homeowners can simply go online, answer a few questions about their home and receive an instant quote and offer. This means we buy the home from the customer in cash with no financing contingencies, no listings and no open houses. They can select their preferred closing date, click and sign. So we've taken this 100-day process full of hassle and uncertainty and made it a few simple steps online. After we buy the home, we've built a new experience for homebuyers. We enable our consumers to simply download our app, discovering for all homes themselves, get financing and make an offer, all with just their mobile device. This is a seamless on-demand buying experience for home shoppers. And most importantly, something we're really proud of is that we have a culture focused on the consumer experience, resulting in a best-in-class Net Promoter Score of greater than 80. While the consumer experience is clearly a focus and a passion area for us, we spent 7 years rebuilding the infrastructure of the transact. We vertically integrated and built world-class capabilities in product, pricing, operations and customer service. Starting with pricing, this has been one of our most significant areas of investment. We've built a hyper-local data set, having collected proprietary, off-line and feature-specific data for hundreds of thousands of homes in a structured way, and this collectively underpins our pricing engine and pricing accuracy. As a result, you can see on the right, we've built -- we've been able to materially improve our automation with over 80% of our offers model-driven now, and this enables to scale the business quite efficiently. We've also invested heavily in building the lowest cost platform. We've built our infrastructure for scale, driving centralization and automation at every step. The result is a per-person productivity that is 15x more efficient than a traditional agent. Additionally, we'd be able to reduce our spend per home by 50%, which reduces our cost adds directly to the bottom line. As an example, we made this possible by making big investments in technology with Opendoor Scout, our internal home services platform. We've also demonstrated a track record of launching new markets. We run essentially with customer ops. We pollinate pricing data across markets, and we built systems to launch that do not require large field teams. If you look at the chart on the right, we are accelerating market share gains for each one of our markets, demonstrating the scalability of our systems and playbooks. As a tangible example, we launched 6 markets in a single day this past quarter. Thus, we've achieved both breadth and depth. And again, we've announced that we launched 3 new markets this morning, bringing the total market footprint to 44 markets nationwide. Additionally, we reached $8 billion in acquisition GMV in our first 5 markets. And we're seeing an acceleration of the business across all markets. We are now a full 2 years ahead of plan across almost every key metric. So just by running this playbook, we believe we can be in 100-plus markets with meaningful market share. And we view this as just the start with real estate in the early stages of moving online. We believe, just like e-commerce, just rides, just like used autos, real estate will be transformed like a consumer-focused technology company. So in summary, as of today, we've transformed how people sell a home. And up next, we're building a digital one-stop shop, tying in closing, buying and financing to transform how people move. We are the consumer-centric, data-first, end-to-end real estate platform, and we have line of sight into building a category winner. With that, I'll turn it back to Keith to cover some questions.

Great. Thanks, Eric, so much for the presentation. That was excellent. The first question I have just revolves around, I guess, some investor misperception or understanding about the housing market. But there's some out there who might -- who still not fully understand or appreciate the iBuyer opportunity. So curious, what gives you confidence that this can be a mainstream product, drive a transformational shift in the residential real estate market? And what percentage of the market you think can migrate online longer term?

Yes, it's a good question. I really think about it in kind of 3 ways. The first thing, what is the end state of the product and experience? Number two is, where are we today in that evolution? And then three, what are the constraints between where we are today and actually where we want to be as an organization? In terms of the end state, I'm fairly certain that there's unbounded demand for a simple, certain and fast transaction. So in my opinion, where the experience ultimately ends up is similar to e-commerce, where you sell or buy from a trusted platform. It's mostly digital. It's fast, and it's low cost. For us, we're focused on building the best e-commerce experience for homes. And I think the adoption will be the majority of transactions over time. In terms of where we are today, we see NPS at 80 plus, as I mentioned, the top of funnel interest and demand is accelerating, and conversion is at an all-time high, actually far north of the 30% for true sellers. So these are the inputs that give us a ton of confidence and conviction that there'll be continued growth and tailwinds for years to come as we move up this adoption curve. I would say the last thing is, in terms of constraints, for sellers, we view pricing and cost as the primary constraint for mainstream adoption. And we've built the best experience. And if we can deliver it at a lower cost over time, I don't see any reason why everyone doesn't start their journey with an Opendoor quote. Last thing I mentioned is that -- actually it's on a marketplace, so we obviously saw -- we service sellers, but we also service home buyers. So first, having homes for customers to visit is critical. And then next, making the experience for home shoppers, again, simple, certain and fast is the next step for us. In the long term, I'm confident that a fully digital transaction will be the majority of transactions. And by investing in that future, we'll be well positioned to gain market share.

That's interesting. And by majority, you're saying over 3/4 of the market is -- that be a rough guesstimate, something along those lines, I mean, that's pretty huge.

We see the conversion of true sellers even without additional modifications as it stands today, approaching 50%. And it means that like whenever someone is a real seller in the market and receives an offer from us, 1 in 2 say yes. You can imagine if we can lower the cost and bundle things together and improve the experience, that can exceed 50%. Then it's just about raising awareness, right? So if the vast majority of home sellers know about Opendoor and then actually request a quote and we improved the acuity of the pricing model and the cost structure and bundle things together, I really do believe that the majority of transactions will move digital.

That makes a lot of sense. And the point you made about consumers going to Opendoor for their first price or first bid makes a ton of sense, right? And I guess, the question is, there's some -- some may believe that they may not get the "market price" or best price. How should consumers and investors think about that? I mean what's the dynamic of the pricing on their offering?

Yes. I guess there's 2 points there. One is we mentioned was like we really do want to see this behavior where people start their journey with an Opendoor quote. And part of the psychology is that people want to understand the equity they have in their home. This is like their largest financial investment, and they want to understand how to unlock that quickly. And part of the calculus is understanding what they can afford when they size up or size down, right? So the vast majority of our consumers are buying another home. So that was one piece of it. The other piece is what is market price, as you mentioned, and are we offering a competitive price? I think it's important to note that our stated goal is to build the best experience at the lowest cost, which means that whenever we make improvements, we're putting more money in the pockets of our sellers. And so there's a couple of things to keep in mind here. One is, what our customers are paying for is simplicity, certainty and speed. We've actually historically referred to this as a customer's liquidity premium, which is basically what percent over a realtor fee, plus all the other costs of selling is a seller willing to pay for complete convenience and certainty. And a couple of things we've talked about historically is it's like allowing someone to fly first class direct to their destination versus having 2 layovers and doing it at a competitive price or even cheaper. And so it's just a far superior experience. Second, we've put a ton of energy and work into approaching or even beating the cost to list and sell on the market. Our cost structure is nearing the point where it can be cheaper actually to sell to us than to list. And again, hence, why the conversion is so high, why this could be a mainstream product. And the third is really we invested a ton of resources and energy and focus on improving the pricing, and we're confident that our offers are very competitive. Ultimately, what it comes down to is consumer demand, conversion and NPS. So if sellers are coming to us, if they're converting, if they're happy with the experience, by definition, it means that we're providing value above and beyond what we're charging.

That's great. Yes, I can't wait to see you guys in New Jersey. Next question, I think, is really a critical one. And I'm curious to hear how you're thinking about this. But I think the housing market is clearly very strong right now, given the unprecedented rate environment. So curious, how does the potential for the rate environment to change? How would that impact supply for Opendoor? And what do you think that could do for your carrying costs?

I'll take that.

Carrie, will you take this? Yes.

Yes, happy to. I'll answer your second one first, which I think is easier one. So with respect to our own carrying costs, you think about the fact that we turn our inventory roughly 4x a year, 100-basis-point move in rates would translate to about 25 basis points move in our cost structure on a single home transaction. So pretty manageable in the grand scheme of things. The bigger question you asked at the macro question is like how does Opendoor respond to changing housing environment? And what I would say is our model is really designed to work in up and flat and down markets. I think of us as a market maker and liquidity provider. So if interest rates were to rise or home price appreciation, HPA, moderates, we charge a fee. I think of that as our spread, and we may look to increase spreads to account for that decline. So any declines in, say, home price appreciation could be offset by increased fees that we charge to customers. And if you think about the things that Eric talked about, convenience and certainty, in a down market, in more uncertain times, we believe that the certainty we provide would be even greater value to customers. So that's sort of the macro point. I would like -- I'd also comment that with respect to how we respond every day to changing supply dynamics. One is we're recalibrating our view of pricing every single day; two, we always operate with a margin error and how we underwrite homes; and three, we had the benefit of operating in the portion of the real estate market, which is very liquid. These are sale-ready homes that we can move through at pretty good velocity given the structure of our resell system. So that's the question on housing. The minute point I made, though, is that notwithstanding all the conversations around where we are in housing today and how the cycle is going to change, for us, the biggest macro driver that drives our results certainly today and long term is really that secular shift that Eric was talking about, right, from off-line to online for real estate. Today, we're only 1% of the total market as a category, and that's really been the driver of our results over time. And as we deliver a better experience and as we continue to be lower cost, we should be a share gainer. We believe we will be share gainer through any cycle.

And I guess, just 1 follow-up for that. In terms of the turnover you mentioned, I think it was fourfold. What's the average days today, I mean, if you put that in terms of days? And if you kind of think about stress testing that in the future, how much do you think that could expand in terms of days? Or how can -- how should investors think about that? If you can share that.

Yes. I mean I'd say, normalized items for housing. If you think about our average hold period from the day we acquired to the day we actually sell through and no longer own that home, 90-ish to 100 days on average. Today, the market is much faster than that. It doesn't -- it's a much shorter time period to list a home and then get into contract. And so we've been the beneficiaries of that. But when I talk about 4x, it's more on a normalized environment.

Great. That's very helpful. I guess speaking about the geographies we touched on earlier, you mentioned you're in 44 markets today. Congrats on the 3 new additions. I believe there's about 300 metro markets that have been commonly designated. How should you think about your entry into new regions and the speed going forward? I don't know if you're able to share kind of which regions of the country you're most focused on. But why not move faster than you are today?

You sound like Eric, who want to move faster. Now I would say, first of all, our goal is to serve every single nation -- every single homeowner across the nation, right? That's ultimately where we want to get to. We made great strides this year. We're super proud of the team, more than doubling our market footprint in the first half of this year. So we're well on our way to do that. And our playbook is working great. So we're going to keep on running that playbook. And what's enabled us to do that is we have built this centralized operating platform that allows us to launch new markets with fairly de minimis investment. When people think of market launches, I think they often think of, oh, my, goodness, a lot of people in the field and a lot of fixed overhead. I mean for us, it's a very leveraged way to launch into a new city. So it's largely about making the marketing investment. And to go into any 1 market, we're able to launch in what I call the low -- quite low single-digit millions of dollar kind of range, and markets pay back pretty quickly from that de minimis investment. So 6 to 8 quarters of payback and sort of be in the money. And then we can think about that point how we really dial up volume, how we can decide how to invest our marketing. So it's a very leveraged new market model. Our focus has been on increasing our market footprint, and we'll continue to be on increasing our market footprint over time and be nationwide. We've been equally focused on this year on just increasing share in our existing markets, and we talk a lot about our buybox. The fact that we've expanded our buybox this year, sort of our market coverage within a market by 50% has been a really important driver. So it's really those 2 factors that are driving growth for us, buybox expansion and new markets this year.

That's great. And I guess, just along those lines, how are the season markets that you've been in for the longest performing today on a per unit basis versus some of the newer markets? Any surprises there?

Yes. So all of our existing markets that we're in as of the end of last year, all of them operate with positive contribution margins. And those margins are all fairly consistent across all markets. It's graph I love looking at. There's no outliers there. They're all solo performers. Our newer markets are pretty new. And I think it's a little early to call the results given that most of it happened in the first half of this year. And we're pretty deliberate in terms of how we sort of leg into those markets over time, given that we have a lag in our business from when we acquire to when we sell in. But directionally, awareness is increasing for the category, and certainly, awareness for Opendoor is increasing. So we expect that adoption curve in newer markets to be better than what we've seen historically, and we're encouraged by the early results.

Great. And so I guess, can you -- in terms of the buybox, can you speak of -- to what the range is today? And what some of the factors that might prevent you from going higher or even lower, perhaps?

Yes. So the range, it varies very much by market. We operate in where the vast majority of transactions are being done in the United States in terms of home prices. And across all of our markets, we can offer on the majority of homes. So if you pick Market X, more than half of those homes in that market are homes that would fit within our underwriting capabilities. So we talk about buybox. I think about that as like sort of what fits within the algorithm, what can we reasonably offer on. And there are a lot of things going to determine that. It's not just price point of home. But it's things like home type and gated community, a condo, lot size and also just how many comparables are available to us. We're looking at adjacent ZIP codes. It really varies by market. There are certain markets like Los Angeles, we can be as high as $1.4 million, $1.5 million. But the core of what we do is really where the vast majority of transactions get done. And the reason we've been so focused on buybox this year is it just drives that flywheel. So as more and more request us come in, we can convert them into offers. It drives greater awareness and adoption. Marketing efficiency has been a beneficiary this year, higher buybox and certainly market share as follows. It's been great.

Excellent. One topic you touched on briefly is the ancillary revenue opportunity into new products. And just curious what you can share in terms of potentially timing of that and which products make the most sense, which was attractive today and how you think about the potential rollout. You mentioned, I think, title or escrow in your slide deck, but anything you can share, that would be really helpful.

Yes. I'll opine on this. For me, I believe it has to start with what consumers want and need. We can sit here and try to build business models on top of anything we want. But it does really start with what is the consumer demand for these types of products. And our view is that they want all the services to be digital, simple and fast and not just selling to us. The other thing we've uncovered through some of the early tests is that they want to work with 1 company and not 3 to 4 different brokers. And if you think about how the transaction happens today, it's actually cobbled together through multiple services, which creates coordination costs. It creates infusion. It creates complexity. And so I think this, from a business standpoint, presents a very large and uncaptured opportunity to be a digital one-stop shop for movers. So we already have seller experience that's best-in-class. Title and escrow have performed better than our expectations. And we're investing heavily in a few new areas, which is Buy with Opendoor, which is helping home shoppers. Again, 2/3 of our customers who are selling to us are just buying another home. And we handle title escrow for them. And so we think it's a very logical step to handle the other transaction for them. And then financing, which is a natural attach point when you're buying a home. We view it as payments. It'd be like Amazon not having the capabilities to accept Visa or Mastercard. It's just part of the e-commerce experience to pay for things. And so I think the thing we're excited about is to continue to leverage technology to build the connective tissue between the services and make the holistic experience seamless and then ultimately lower the price for the consumer. And if we're able to do that, Opendoor will be a very important and very large company.

And would that be presumably through a partnership with a bank, for example, or a mortgage company? Or is that something you're thinking about developing organically?

I think there's a bunch of different routes we could take. We're actually a correspondent bank today. I think as we perfect that experience, and one of the things we love about it is that by being vertically integrated, we can deliver a great customer experience. But the volume of leads is there, and we would consider partnerships in servicing those leads as well insofar as actually delivers a great customer experience.

Great. One topic that I'm not as familiar with that might be helpful for investors to hear about is Opendoor Backed Offers. And can you just help investors understand what that product is and why it's important in terms of, I guess, speed to closure and so forth? And I guess, what percentage of consumers utilize that tool?

Yes. So we launched Opendoor Backed Offers earlier this year, and we're seeing great adoption of the product. It's really just a good example of how we can leverage what we've already built, which is our platform, identify consumer needs and then launch products on top of that. And to give you a summary of what the product is, the prime use case is that we know sellers want certainty and speed. So by providing homebuyers with the power of Opendoor, we can give sellers on the market the features they want, while helping our home shoppers massively improve their chances of winning the home or even getting the home for less. As an example, Opendoor Backed Offers has nearly 2x the success rate in winning a home than a traditionally financed offer. So to summarize, we help the home shopper actually pay in cash effectively with no financing contingencies, allowing the seller to move on their time line with certainty and convenience. And it's a win-win for both customers. And so within 6 months, we reached over $1 billion of GMV run rate just in that 1 product line.

Wow, that's impressive. And certainly in this market, it seems like a compelling offering. In terms of contribution margin, just hoping you can share some -- shed some light there on the key drivers. Is it speed to sale, leverage in reconditioning? Kind of just if you can touch on a couple of the key drivers, that would be really helpful.

Sure, I'm happy to do that one. If you think about the inputs, first of all, to gross margin, fundamentally, it's how we perform relative to pricing, right? It's that spread between what we bought and sold the home for. Two, it's renovation and repairs, which is relatively small for us, and that's something we manage. And then three is services that gets you down to gross margin. And then in between gross margin and contribution are all the expenses driven by selling costs. And then the next big lever is like holding costs. Selling costs for us really are largely driven by broker commissions we pay out to the buyer's agent. So maybe in the future, as we continue to ramp all the things we were just talking about, Eric, around Buy with Opendoor and customers are increasingly willing to buy directly, that would unlock a pretty meaningful portion of our cost structure. It's that 2.5% or so that's going out the door in terms of selling costs. Holding costs are impacted by how many days we own the home. So as you might imagine, just given the market we're operating in right now, which is pretty hot, holding periods are shorter than we'd expect than in a normalized environment. The thing we can really manage is from the day we acquire it, the day we list it, is that's when we're touching the home, we're engaging in renovation repairs. So we manage that piece of the time frame pretty quickly, and we're pretty good at that. And then we go from list until close. Less control over that, but there are some things we do -- still do to manage over our home ownership. So holding costs are pretty efficient right now.

Great. And I guess, regarding fee structure, I believe it's 5% for a seller. Why is that the right level? And I believe the industry standard has been about 6% for years for real estate brokers. But some -- obviously, some of the other earlier disruptors are charging less. Where do you see that number going for you over time? Kind of what do you think is the right sweet spot or equilibrium?

Yes. What, again, I would say is a macro point. What we've found really is that customers ultimately care about net proceeds: at the end of the day, when I'm all down, what I walk away with. So we -- I wouldn't over rotate too much on fee presentation. But to your point, we do charge a 5% fee across our markets today. Really, we're trying to keep fees simple for consumers, and we're charging a fee today that's at or below what most traditional brokers would charge, and that's really resonated with consumers. So over time, how might that evolve, I mean, having a low cost structure and continue to invest in that cost structure will, in turn, let us continue to charge lower fees. And then having the pricing capabilities we talked about earlier, what lets us price accurately, that's ultimately in services higher net proceeds back to customers. So 5% fees is working really well so far.

Yes. The only thing I'd say is that the Holy Grail is if we're able to deliver an online digital simple experience and actually net you more money than you could have received selling the traditional way, there's -- again, it's not hard to imagine -- the thing about squinting to assume that everyone will want that service. And so we're excited on delivering that.

That's really exciting and certainly something as a consumer would love to see happen faster. In terms of your financing and securitization collateral, can you just speak to, I guess, the -- how that's gone, size -- potentially sharing some size of those deals that you've done? And how smoothly you see that market for you in the future?

Thanks. I'll take that one, if I can. So a couple of things. One, we're very well capitalized today. We feel fortunate to be where we're positioned. And we feel good about our ability to continue to scale our balance sheet as our inventory purchases increase. As you probably know, we recently tapped the convertible note market for the first time. It's our first public issuance of that kind of security and raised approximately $900 million. But we look to optimize our cash balance. We have about a little over $2 billion, $2.6 billion, actually, now to date, given the convertible note. And we have a little over $4 billion of debt facilities. What's unique about our capital structure is we leverage a lot of nonrecourse facilities, ABS loans and those support up to 100% loan to cost against our homes. As you might imagine, we are in the process of upsizing our facilities commensurate with our increases inventory balances, but we feel really good about our ability to continue to do so. We've had a good track record on driving down the cost of capital over time and tapping into other sources of liquidity. Longer term, you mentioned securitization, that's certainly on the road map for us in the future.

Excellent. And I guess, the last question really is around the core of the company and the concept of iBuying. It's new for a lot of consumers. And just curious how you think about the competitive landscape. Obviously, there's other players like Zillow, for example. How would you compare yourself to them? What do you think are kind of the key qualities that you would want to differentiate yourself from them? And what is it maybe that maybe misunderstood by investors or consumers?

Yes. Maybe starting with what's misunderstood. One is that our competition today or where we're gaining market share is the off-line experience. Listing a home the traditional way is 99% of transactions, and we're just feeling tremendous tailwinds in this shift to online. People want things that are more digital, more convenient, faster. And honestly, we've been largely unimpeded by competition, just given the category itself is growing so quickly. Again, we think that we're building this modern digital transaction, and we're taking market share from the traditional process. A couple of things that we feel confident about as we compete there. One is that operating at massive scale in a fragmented market gives us economies of scale. Again, we touched about the low-cost platform we're building. We're getting more efficient every day, every month, every quarter as we scale. Second piece is that we're a technology consumer-first company. This means that we build products for consumers that are better for consumers. And that's our objective. And by leveraging technology, we can lower the cost of the transaction as well. And then the last thing I'd mention is that as competitors, especially large ones, have entered the category, it's actually been a net tailwind for us. It's raised awareness of the category, and it raised awareness of our offering. So we feel excited and well positioned to gain market share versus the traditional process for the next decade. And then after that, we feel very well positioned to compete across the investments we're making today.

Well, that's excellent. We really appreciate the time you've taken here today, and wish you the best of luck in the future. I don't know if there's any closing remarks you want to make or share. I think we've got a couple of minutes left here. Feel free to chime in if there's anything else or we can end it here, whatever is...

Yes. The only thing I would say is that as we've kind of evolved the organization, which has been interesting to go from 7 years ago, it was a bold bet, if you want to call it that. People didn't believe this was possible. We went from charging 12% to consumers when we started the company and investing for 7 years to lower that cost. Now we're charging 5%. And it's the hard work over years of iteration and investment and focus that gives us the opportunity to be a market leader. And so I think that the next 7 years, 8 years or 10 years of investment will also have the same impact on our trajectory and our ability to actually serve consumers and gain market share.

That's excellent. Carrie, Eric, thanks so much for your time. Really exciting story, and wish you both the best of luck.

Thanks, Keith.

Thanks, Keith.

Be well. Thank you.