Redfin Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

There are 8 speakers on the call.

Operator

Greetings, and welcome to the Redfin Corporation Q1 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Meg McNunnally, Head of Investor Relations.

Operator

Thank you. You may begin.

Speaker 1

Thanks, Latoya. Good afternoon, and welcome to Redfin's financial results conference call for the Q1 ended March 31, 2023. I'm Meg Nunelly, Redfin's Head of Investor Relations. Joining me on our call today is Glenn Kelman, our CEO and Chris Nielsen, our CFO. Before we start, note that some of our statements on today's call are forward looking.

Speaker 1

We believe our assumptions and expectations related to these forward looking statements are reasonable, but our actual results may turn out to be materially different. Please read and consider the risk factors in our SEC filings together with the content of today's call. Any forward looking statements are based on our assumptions today, and we don't undertake to update these statements in light of new information or future events. On this call, we will present non GAAP measures when discussing our financial results. We encourage you to review today's earnings release, which is available on our website at investors.

Speaker 1

Redfin.com for more information related to our non GAAP measures, including the most directly comparable GAAP financial measure And related reconciliations, all comparisons made in the course of this call are against the same period in the prior year, unless otherwise stated. Lastly, we'll be providing a copy of our prepared remarks on our website by the conclusion of today's call, and a full transcript An audio replay will also be available soon after the call. With that, I'll turn the call over to Glenn.

Speaker 2

Thanks, Meg, and hi, everyone. In the Q1 of 2023, Redfin generated $326,000,000 in revenue, Exceeding the $307,000,000 to $324,000,000 guidance we gave on our last call, largely on the strength of better than expected mortgage and rentals revenues. Our losses were also better than expected with net income buoyed by a $42,000,000 gain from buying $152,000,000 of our own debt at a discount. Setting aside that purchase, profits still exceeded our guidance. Due to stronger mortgage gross profits and lower marketing spending, 1st Quarter adjusted EBITDA was negative $67,000,000 when our guidance for that loss had been $73,000,000 to $84,000,000 Coming out of the Q1 with profits ahead of our plan, we still expect our full year adjusted EBITDA to be breakeven or better in 2023, An improvement of roughly $190,000,000 over 2022.

Speaker 2

We just have a lot of hay to make when the sun shines. Redfin almost always spends more in the spring on ads telling customers about Redfin and on agents to serve those customers. Many of those customers take until the summer to close. With homebuyers nervous about the economy and so many starving agents trying to poach our clients, We can't count on these closings until they come through. We'll stay vigilant about the bottom line from week to week.

Speaker 2

The seasonality of our core business is only one reason we expect profits to improve over the remainder of 2023. Bay Equity earnings should continue to strengthen as we complete our adjustment to sharp rate increases. We also expect rent profits to improve as we recognize revenues from the last 9 months of increased bookings and due to declining marketing expenses through 2023. Redfin as a whole will in future quarters get the full benefit of cost reductions that have continued through April. We expect 2nd quarter adjusted EBITDA to be Between the end of the Q3 of 2022 and the Q1 of 2023, our competitive position has significantly improved.

Speaker 2

We retired $295,000,000 in debt and reduced RedfinNow inventory by $291,000,000 Demand for the agents on our site has strengthened as we've drawn online visitors away from arrivals and more recently increased the rate at which those visitors Ask an agent for service. We expect real estate services gross margins to improve year over year for the first time since the Q2 of 2021 And overall monetization will improve even more as we generate additional profit from redfin.com traffic through rent and from brokerage customers through Bay Equity. We've lowered our cost to breakeven at our current market share, but significant long term profits depend on returning to market share gains. Accounting for the sales closed by our own agents and from the customers we introduced to our partner agents, our share of U. S.

Speaker 2

Home sales declined by 1 basis point the Q1 of 2023. By comparison, we lost 2 basis points of share in the Q4 of 2022. Before then, Redfin had reported year over year share gains every quarter since our 2017 public offering. We expect to return to share gains in the second half of twenty twenty three as we recover from layoffs and the closure of RedfinNow. Shares traffic to redfin.com, which is taking visitors from online rivals and now converting more of those visitors into customers who meet our agents.

Speaker 2

Comscore, which lets us compare Redfin's online visitors to those visiting other sites, reported a 4% first quarter increase for Redfin compared to a 17% decline for realtor.com and a 4% decline for Zillow. As a further point of comparison, Google searches on homes for Sales declined 20% in the Q1. This tells us that though there are fewer people looking online, A higher proportion are using Redfin. Over the last half of twenty twenty two, we had an advantage against Realtor, Not Zillow, but for the time being at least, we seem to be competing well against both. These traffic gains should produce more sales.

Speaker 2

The fraction of our online visits that lead to an agent inquiry had been declining since last spring, but that trend reversed in March 2023 after we increase the pace of online optimizations to drive demand. We also redesigned our website and mobile applications to promote Redfin Premier Service to luxury home buyers. This redesign launched on February 15th and since then the growth rate in luxury inquiries to buy a home has been significantly higher and growth in overall demand. This gives us confidence that we can increase demand more broadly through similar design improvements, highlighting the top producing agents On demand service and low fees of our standard service. Our website and mobile applications are the most immediate source of new customers, But the long term arbiter of our success is the quality of our service, which depends in turn on retaining and recruiting the best agents.

Speaker 2

To that end, we're focusing more of our resources on the sales people who directly serve our customers. On April 11, we laid off approximately 200 Mostly in the brokerages support organization. From June 30, 2022 to April 30, 2023, The ratio of brokerage managers to lead agents declined by 28%. The ratio of support staff to lead agents declined by 15% and the ratio of trainers to lead agents declined by 55%. By eliminating our photography department in favor of vendors, We also project that we'll reduce our cost to photograph a listing by 17%.

Speaker 2

In aggregate, for 2023, these structural changes This should reduce our cost to close the transaction to nearly 10%, excluding the money spent on our lead agents and on the contractor network of associate agents Coupling these cost reductions with increases in revenue per transaction will improve real estate services profitability This year and long term, because it can take months to close on a home, especially if it's still being built, it won't be until the summer We get the full benefit of our December 1, 2022 decision to eliminate the commission refund we once offered homebuyers. Another way to increase revenue per brokerage transaction is by more narrowly focusing our agents on the transactions that drive the most profits, leaving the rest for partners. This is part of a larger strategic shift toward revenues with the digital margin, where Redfin doesn't bear many personnel costs. Redfin.com routed 40% of customers' 1st quarter requests for service to our partner agents compared to 39% in the Q1 of 2022. Since we usually shift demand to partners in a boom, not a boom, a small shift toward partners now should get much bigger as the market recovers.

Speaker 2

This shift will improve Redfin's corporate income and we hope our agents' personal income. Already among the U. S. Top 20 Largest Brokers, Redfin rose from number 4 in agent retention in the Q4 of 2022 to number 2 in the Q1 of 2023. What makes this comparison especially impressive is that at times about 20% of the Redfin agents who leave are asked to do so for performance reasons, which is unheard of at many traditional brokers.

Speaker 2

And even though we've mostly Stop hiring agents until the housing market recovers. We've launched a new program to hire at least 50 experienced agents over the course of 2023, each with 20 or more sales in the last 2 years or 50 lifetime sales. Learning how to compete for the most sought after salespeople in our industry Can in future years, let us hire hundreds of agents who can quickly drive profits. As of May 1, we've hired 39 agents at this level of seniority. The increasing quality of our sales force is one reason that for the Q4 in a row, we've had year over year gains in customer attention.

Speaker 2

Of the Redfin customers who started with Redfin in the Q4 of 'twenty two and went on to buy a home, we project that about 1 in 3 stuck with Redfin for the purchase, When a year before that number had been closer to 1 in 4. The sales impact of this service improvement has been offset by market driven factors like longer sales cycles and more customers who have had to give up their home search due to higher rates. But for customer excuse me, but customer retention is the best measure we have of improving sales execution In a deteriorating market, these gains should improve gross margins as the market stabilizes. Our first quarter sales execution improved on one other crucial front. The rate at which our brokerage homebuyers use Bay For a mortgage increased from 17% in the Q4 of 2022 to 20% in the Q1 of 2023.

Speaker 2

Attach rates have now increased in 3 out of the last four quarters. What's even more encouraging is Bay Equity's improving margins. From the Q4 of 2022 to the Q1 of 2023, gross margins improved from negative 9% to 20% And net income improved from negative $12,000,000 to negative $1,000,000 but all of these measures had declined from quarter to quarter throughout the 2022 downturn. Part of the reason for improving profits is Bay Equity's expense reductions carried out every quarter since the acquisition closed on April 4. More recently, competition has started to ease, especially from mid market banks, which can no longer afford We expect Bay Equity to earn full year net income in 2023 and to become a major source of profits in future years.

Speaker 2

Our title businesses had similar improvements with year over year revenue growth of 51% in the Q1 and rising margins. Our larger ambition is to increase the gross profit we earn from each online visit to our websites and mobile applications. This depends not only on improving monetization from Redfin's brokerage customers, but also on building new digital businesses. In the past year, We've launched ads on redfin.com and built a mortgage marketplace for redfin.com visitors to meet direct to consumer lenders. These new digital businesses doubled year over year, albeit off a still small base.

Speaker 2

The centerpiece of our strategy to improve online monetization Rent, which in the Q4 of 2022 had its Q1 of year over year revenue growth since 2012. That year over year growth accelerated from 5% in the Q4 of 2022 to 13% in the Q1 of 2023. We now Anticipate 2nd quarter revenues to grow at a rate between 18% 20%. Revenue gains can be slow to reflect the value of new longer term contracts. So the best measure of our sales momentum is net bookings, Which are the annualized revenues rent added through sales to new customers, less the annualized revenues lost from departing customers.

Speaker 2

From the Q4 of 2022 to the Q1 of 2023, net bookings increased 18 In the year spanning the Q1 of 2022 to the Q1 of 2023, net bookings grew by a factor of 10. We expect sales to keep growing on the strength of products for property managers to market their communities on Google, Facebook and TikTok, but also Because a new partnership with realtor.com has broadened the reach of our own marketplace. Our rental listings went live February 28 on realtor.com. According to Comscore data, our March rentals traffic was 39% higher than it would have been without realtor.com. Realtor.com's rentals audience was already well established from its long CoStar partnership, which ended in 2022.

Speaker 2

The RENT partnership with rentrealtor.com should increase sales as our property management customers have expressed early excitement about accessing a broader audience. Surfacing listings from rent onto redfin.com has already increased the average number of online visits we can deliver to a customer's listing. Even without realtor.com's contribution, Rent and Redfin together grew rental traffic 29 from the Q4 of 2022 to the Q1 of 2023 per comp score data. This was faster growth than any major listings marketplace. As rent revenues accelerate through 2023, we expect the losses from the rental segment to narrow in each of the next three quarters, leading to positive adjusted EBITDA for the Rental segment in the Q4 of 2023.

Speaker 2

Before we turn the call over to Chris, let's discuss The housing market. When we last spoke, we said that sales volume would decline significantly from 5,000,000 Existing home sales in 2022 to $4,300,000 in 2023, but that prices would hardly decline at all. Our overall outlook is unchanged. In March, sales volume fell 22% year over year to an annualized rate of $4,400,000 existing home Sales and the median home price dropped only 3%. Inventory increased by about 5% compared to Calamitously low levels of March 2022, but is it roughly 2 thirds the levels from this time of year in 2016, In 2017, 2018 and 2019, homeowners have been careful about giving up a 30 year mortgage below 3%.

Speaker 2

Some couldn't afford to buy the home they live in now, let alone a larger home. Others don't want to sell when so few homes are available to buy. 1 of Redfin's LA customers delisted her home after getting a full price offer because she couldn't find another home to buy. Low inventory begets low inventory. The unsurprising result is that sales are slow and bidding wars are still common in many parts of the Especially the Southeast, demand from both buyers and sellers modestly improved in April, but most of this is seasonal.

Speaker 2

Our experience from past housing downturns is that the public usually sours on housing altogether. But this time around, it seems that folks still want to move. Demand for affordable turnkey homes is the one constant in the U. S. Housing market.

Speaker 2

If rates ease by late in the year without causing a recession, we may see a break in the stalemate between buyers and sellers. 1 of our Boise agents, Shauna Pendleton said that if rates end 1 week down, buyers come out of the woodwork, but if rates tick up the next week, buyers just disappear. Right now, there's no seasonality, Shauna said. All activity is based on rates. Redfin isn't planning for a second And the fall, especially since bank failures, the debt ceiling and consumer confidence are this year's are this economy's lions, tigers and bears.

Speaker 2

But it's common now for our managers to talk to their teams about being ready for a rebound whenever it may come, whereas in the winter, We were mostly gnawing on bones and worrying about our survival. It's good to be alive. It will be even better to go back on the attack, leaner, hungrier and in many ways better than ever. Take it away, Chris.

Speaker 3

Thanks, Glenn. 1st quarter financial results were better than we planned, Giving us confidence we've taken the right steps in what continues to be a choppy housing market. 1st quarter revenue was 3.20 $1,000,000 down 45 percent from a year ago. Total gross profit was $56,000,000 down 23% year over year With total gross margins of 17.3%. I'm going to walk through results by segment before turning back to consolidated results and second quarter guidance.

Speaker 3

Real Estate Services revenue, which includes our brokerage and partner businesses, generated $127,000,000 in revenue, down 28% year over year. Brokerage revenue or revenue from home sales closed by our own agents was down 29% on a 31% decrease In brokerage transactions and a 3% increase in brokerage revenue per transaction, with the elimination of our homebuyer Commission refund more than offsetting an 8% decrease in average home prices for brokerage transactions. Revenue from our partners decreased 14% on a 7% decrease in transactions and mix shift to lower value houses. Partner transactions represented 24% of total real estate Without this, partner transactions would have represented 21% of the total and market share would have declined 3 basis points compared to the Q1 of 2022. Real Estate Services gross margin was 12.4%, down 100 basis points year over year.

Speaker 3

This was driven by a 230 basis point increase in costs from our in person company event, offset by 130 basis point decrease in personnel costs and transaction bonuses. We've already made several changes to the business that will result in improved profitability as we move through 2023, including eliminating the refund we provide to homebuyers and rightsizing the business to match brokerage staff with demand. Beyond the layoffs previously announced in June November of 2022, We laid off an additional 200 employees in April 2023, which represented 4% of total employees. The April layoff obviously did not have an impact on Q1 results, but reflects our commitment to running the business for full year profitability. Total net loss for Real Estate Services in the Q1 was $58,000,000 down from a net loss of $57,000,000 in the prior year.

Speaker 3

And adjusted EBITDA loss was $44,000,000 down from $43,000,000 in the prior year. The decrease was primarily attributable to lower revenue and gross margins, Partially offset by $7,000,000 year over year decrease in operating expenses. The property segment, which consists primarily of homes sold through RedfinNow generated $113,000,000 in revenue, down 70% year over year. As we're winding down this segment, gross profit losses were $2,000,000 slightly below our guidance of flat gross profits. Total net loss was $3,000,000 and adjusted EBITDA loss was $3,000,000 We're making excellent progress on the wind down of RedfinNow.

Speaker 3

As of the 1st week in May, we have just 5 homes remaining in inventory and all are under contract to sell. As Glenn mentioned, we've been applying excess cash The sale of RedfinNow inventory to reduce our convertible debt. During the Q1, we reduced the aggregate principal amount on our 2025 And we're pleased with the progress we made in the Q1. Rentals posted double digit revenue growth of 13 With revenue of $43,000,000 Total net loss for rentals is $23,000,000 slightly worse than the net loss of $18,000,000 in the prior year As higher gross profit was offset by higher operating expenses, total adjusted EBITDA for the Q1 was negative $10,000,000 and we still expect our rentals business to generate positive adjusted EBITDA by the Q4 of 2023. Our mortgage segment generated $36,000,000 in Revenue in the Q1 compared to $3,000,000 in the prior year.

Speaker 3

The increase was due to the acquisition of Bay Equity, which occurred last April. This result was better than our guidance range of $29,000,000 to $32,000,000 Mortgage gross margin was 19.9%, up from a negative 80 The improvement reflects the performance of Bay Equity in contrast to our legacy mortgage business as well as stabilizing fundamentals in the mortgage industry. Total net loss for mortgage was $1,000,000 and total adjusted EBITDA was $1,000,000,000 There's still a long way to go to get back to a normalized environment, but it's reassuring to see the great work the team has done increasing attach rates and aggressively scaling the business having an impact on bottom line results. The second segment that generated positive adjusted EBITDA in the first quarter Our other segment, this segment includes title, digital revenue and other services. Segment generated revenue of $7,000,000 in the first quarter compared to Other segment gross margin was 26.3 percent, up from a negative 6.9% a year ago.

Speaker 3

Total net loss was 0.2 $1,000,000 compared to a net loss of $2,000,000 in the prior year and adjusted EBITDA was positive $400,000 compared to a negative $1,500,000 in the prior year. Turning back to consolidated results, total operating expenses were $160,000,000 up $2,500,000 year over year. Bay Equity, which we acquired last April, contributed $8,000,000 Excluding this, operating expenses decreased by $6,000,000 year over year. The decrease was primarily and $4,700,000 in lower restructuring expenses. These reductions were offset by $5,900,000 in costs Associated with the in person company event, which we held in the Q1 of 2023, but did not hold in 2022 and do not expect to hold next year.

Speaker 3

Total net loss for Redfin of $61,000,000 beat the better end of our $15,000,000 to $105,000,000 guidance range. Net loss includes a $42,000,000 gain on the extinguishment of notes and only $7,000,000 of this was anticipated in our guidance. Our adjusted EBITDA of negative $67,000,000 was better from the high end of our negative $84,000,000 to negative $73,000,000 guidance range. Diluted loss per share attributable to common stock was $0.55 compared with diluted loss per share attributable to common stock of $0.86 1 year ago. Now turning to our financial expectations for the Q2 of 2023.

Speaker 3

We expect total revenue between 2 $68,000,000 $281,000,000 representing a year over year decline between 24% 20% compared to the Q2 of 2022. Included within total revenue are real estate services revenue between $175,000,000 $183,000,000 Rentals revenue between $45,000,000 $46,000,000 mortgage revenue between $38,000,000 $41,000,000 And other revenue between $10,000,000 $11,000,000 We expect to report our Properties segment as discontinued operations in the 2nd quarter, and these results are not included in total revenue. It's also worth noting that real estate services revenue includes $5,000,000 in concierge revenue And new activity within our brokerage business that helps customers fix up their home prior to listing. This offering attracts Listing customers and adds incremental revenue per transaction, but has low incremental gross margins. As such, we expect Concierge activity to be a 2.0 percent tailwind on real estate services revenue growth in the 2nd quarter and a 100 basis point headwind on gross margins.

Speaker 3

Even with this headwind, we still expect real estate services gross margins to increase by 100 to 2 50 basis points as compared with the Q2 2022. Total net loss is expected to be between $44,000,000 $35,000,000 Compared to a net loss of $78,000,000 in the Q2 of 2022. Discontinued operations are included in net loss, but are expected This guidance includes approximately $31,000,000 in total marketing expenses, down from $57,000,000 in the Q2 of 2020 The decrease reflects our decision to pull back on the mass media campaign that typically runs in the first half of the year. Our guidance also includes $17,000,000 of stock based compensation, dollars 17,000,000 of depreciation and amortization, dollars 5,000,000 in restructuring And $4,000,000 of gains on extinguishment of convertible senior notes. The gain assumption reflects the repurchase of $17,000,000 of Compared to adjusted EBITDA of negative $29,000,000 in the Q2 of 2022.

Speaker 3

Furthermore, we expect to pay Quarterly dividend of 30,640 shares of common stock to a preferred stockholder. The guidance assumes, among other things, That no additional business acquisitions, investments, restructurings, convertible note or stock repurchases or legal settlements are concluded and that there are no further revisions to stock based compensation estimates. And with that, let's open the lines for your questions.

Operator

Thank you. We will now conduct a question and answer A confirmation tone will indicate your lines in the question Our first question comes from John Campbell with Stephens. Please proceed.

Speaker 4

Hey, guys. Good afternoon. Hi. I know on the market share, I mean, we're just talking single bps, so it's Splitting hairs to some degree, but in 4Q or excuse me, in this quarter, I mean, you actually declined share at a little bit lower rate than you Last quarter, that's despite having 7% less lead agents. It sounds like the elimination of the rebate was probably a Pretty big driver there.

Speaker 4

Was there anything else you'd call out for the better underlying results at least relative to last quarter?

Speaker 2

Redfin now would be the other factor, John. So I'm not sure how much the price increase affected demand. We've tested that and it hasn't had a major impact, maybe on returning customers, but not on new customers. RedfinNow, when it could offer near market value, instantly drove many listing inquiries. And now that we're not offering that on our site, we don't have as much listing demand.

Speaker 2

It's been hard to replace And even when we have an Opendoor partnership, the offers just aren't as compelling because the cost of capital is priced into those offers and consumers don't You should just remember that most of the people who asked for an immediate cash offer ended up listing their home. So this was a great way to meet homeowners, but doesn't work in a non zero rate environment.

Speaker 4

Makes sense. And then on the EBITDA profitability goal this year, obviously, everybody is paying close attention to that. So for 1Q, obviously, it's $67,000,000 loss here. And then on the guide, you're assuming roughly $7,000,000 loss here. And then on the guide, you're assuming roughly flat.

Speaker 4

Even if you do a little bit better than that, you've got a pretty big hole to fill in the back half. If you look back at second half of twenty twenty, you actually put up that kind of EBITDA gain. So it's not it doesn't feel like too much of a stretch, but Glen or Chris, Whichever one of you guys want to take this. You guys have talked to some detailed bridge work in the past. I'm hoping we might be able to revisit that if you guys can kind of unpack what you're expecting in the back half.

Speaker 2

Why don't I start, Chris, and then you can follow. So first of all, it's a seasonal business. We have front loaded costs and back loaded revenues. We Pay agents to host tours with customers. We pay for marketing campaigns, then those customers close in the summer.

Speaker 2

So that's part of it. But the other part is that unlike in 2020, we now have these 2 other businesses, Rent and Bay Equity, both of which Are rapidly improving their profitability. So we expect rent profits to improve every single quarter over the course of the And we have the same expectation with Bay Equity. Bay Equity has already demonstrated that progress from the Q4 of 2022 to the Q1 of 20 So if you couple that with the fact that we're going to start improving revenues in our core business At a higher gross margin and we get the full benefit of some cost reductions that extended through April of this year, There's a lot of leverage in the back half of twenty twenty three. We haven't put a number out there that we've missed.

Speaker 2

This one is a doozy, but we feel good.

Speaker 3

I'd maybe add just 2 more comments there. We do think we'll continue to see the other revenue segment come on during the course The year, including Tidal, which is expanding its service, and we're really pleased with the progress made on display advertising. Those are relatively small revenue dollars, but from a profitability standpoint. And then beyond that, it's also typically the pace that operating expenses in the form of marketing expenses fall during the course of the year because it's just less valuable to advertise in the second half than it is in the first half. So lots of work to do, but feel good about the efforts and how we have things set up.

Speaker 4

Okay, great. Thank you, guys.

Operator

Thanks, John. The next question comes from Diego Arunyan with Citigroup. Please proceed.

Speaker 5

Hey, good afternoon guys. I think the first question is Glenn, a follow-up on the macro a little bit. We've talked about the seasonality. I think the way it phrases, you're not really seeing regular seasonality. It just depends on rates.

Speaker 5

At the same time, prices aren't dropping. So it sounds like Really, the only swing factor that gets the market to open up again is lower rates. Is that how you're seeing it? Do you think there's other things that can get the market moving a little bit more? Really just from here on out, the toll rates come back closer to where everyone's locked in right now.

Speaker 5

It's not the only thing that can open up the market. And Are you guys seeing any impacts from some of the issues with the regional banks Yes. I have a hard time getting mortgages.

Speaker 2

No. That bad news is good news for us both because Sorry, there's an echo. But that bad news is good news for us, mostly because we have less competition for jumbo loans and it So, it encourages the Fed to just go easy on interest rate increases. But having said that, We have factored into our business the assumption that there will be 4,300,000 existing homes sold in the United States This year, which is a conservative assumption, it's about the same number of homes that were sold at the bottom of the great financial crisis when the population was 10 That's smaller. So we don't need the housing market to get better.

Speaker 2

When it does, and at some point, it will as the Fed steps back from these rate increases. We have tremendous leverage as we get more revenues, We'll hold our costs steady and we'll have a more efficient real estate operation, so it should fall to the bottom line.

Speaker 5

Right. As expected and more within your control. So Right now, when the whole iBuying proposal was listening to that, we just talked about drove demand and now it's not there and that's You have been a little bit of a headwind for you guys. Do you think about ways to offset that, Something you can plug in place to drive demand. Again, you talked about the improvements in the site and share gains from these competitors.

Speaker 5

So how do we kind of supplant what we've lost there? Is there anything you could do or just kind of have to work with what you have? Thank you.

Speaker 2

Good question. I wouldn't characterize the loss of Redfin Now demand As massive, it's a significant factor. We'll be glad when we're a year out from that, because There are just so many ways that Chief Capital subsidizes demand creation for new real estate companies. And the fundamental way that we want to create demand is just by offering consumers a better deal. Listing a home for a 1% fee and really Explaining to consumers that we sell that property for more money, that we're more likely to sell it than traditional brokers, that we sell it faster than our competition.

Speaker 2

That's the case that we have to make. And every real estate portal, whether it's realtor.com or Zillow or Redfin Has always had more traffic from buyers than sellers. So our other challenge is just to make sure that when we meet somebody who wants to tour a property That we figure out if they have a home to sell and that we execute well on the entire customer relationship, not just The opening transaction. So my guess is that we'll continue taking share because we just have a fundamentally better proposition, better results for a lower price and we just need to make that case better on our site. It was so easy to sell a cash offer.

Speaker 2

It's harder to explain the 1% fee because people worry about the trade offs. And we're just going to get better and better at that. We've already seen This improvement in conversion after months of decline in March of 2023, and we've also seen that when we started marketing to luxury customers,

Operator

comes from Curtis Nagle with Bank of America. Please proceed.

Speaker 6

Great. Thanks very much. So the first one, I'm Just kind of curious about the luxury business. It sounds like that's going pretty well. I think that's a pretty competitive and fairly entrenched business in terms of Existing brokerages, so I guess what specifically in terms of, I guess, the service levels or maybe the marketing is driving that progress?

Speaker 6

And What is the threshold in terms of, I guess, defining luxury homes in terms of price point?

Speaker 2

Well, the threshold varies by market. So a $1,000,000 home is a middle class home in San Francisco, whereas in South Carolina, it can be a mansion. But generally, you should think about $1,000,000 and up as a good boundary for most of America. And I wouldn't say It's going well. I would say that we have encouraging early data that we can drive more demand from luxury buyers.

Speaker 2

And the reason I say that is that we're just at the beginning. We haven't really made our case. There are other very entrenched brands who have far more equity with But the case that we're making is that we have some amazing agents and we've taken the best of the best already. There are more top producers at Redfin on a population adjusted basis than any other brokerage. We've taken the best of those agents, We have an agent who sold homes at this price point in these neighborhoods has made a difference, and it should be no surprise.

Speaker 2

But To think that we're going to become Sotheby's overnight, that isn't our ambition. There are big incumbent brands who trade Just on name, they're on defense. We're on offense and we're going to go get them and we're going to spend the next 10, 20

Speaker 3

years trying to take share.

Speaker 2

That's a good place for us to be in.

Speaker 6

Got it. Okay. And then, Glenn, just another follow-up for you. Curious just how The continued inventory crunches is factored into assumptions for home volumes for the back half of the year and your EBITDA targets. I guess any concern that once we get past the spring selling season, demand may fall off again?

Speaker 6

Or do you think that just because unrealized demand is so high and I Maybe rates start to fall that, that should be an offset. How should we think about that?

Speaker 2

Well, there are puts and takes there. First of all, we have assumed that there will still be a seasonal decline in the back half of the year And home buying demand, that's what typically happens. These little patterns have been disrupted for so long during the pandemic We've had the baseline 2019 to 2023, and that makes the analysis more speculative. But I think there are several factors to consider. The first is that people just haven't soured on real estate the way They did in 20,008.

Speaker 2

I was here then. People just didn't want to hear about housing. There is still in 2023 A deep appetite to move. There are so many people who want to move to a more affordable part of the country. That is unfinished business in America And there is this demographic bump from millennials and just prevailing interest in looking at pretty houses.

Speaker 2

So that feels really different. And then the other factor is just talking to our agents somewhere in the office today for a Seattle City meeting. And they've just met so many customers who say, I'm going to sit it out right now. I have no real sense of If rates come down, I want to move. Call me then.

Speaker 2

Maybe that will happen in the back half of twenty twenty three, maybe it will happen next year, but it's going to At some point and until then, we're going to plan on lower volumes, 4,300,000 units is based on this crude assumption that shelter is 1 of the 3 fundamental human needs and that is kind of the bare bones number of people who will move in the United States this year.

Speaker 6

Okay. Thanks very much. Appreciate the answer.

Operator

Our next question comes from Ryan McKeveny with Zelman and Associates. Please proceed.

Speaker 7

Hi, guys. Thanks for taking the question. Sorry if I missed some of the detail about this, but I wanted to dig in a little on the Real Estate Service Our revenue guidance, I think the midpoint of guidance is down 29% year over year Versus 1Q down 28%. And I know the macro is uncertain, but I think there's at least some indications that year over year declines will probably lessen for the industry in Total in 2Q versus 1Q. So, hoping you could maybe unpack the trends that you're expecting and I'm sure there's moving pieces, but Is the increase in waiting to partner business driving some of that?

Speaker 7

Is it the listing headwinds you talked about or geographic mix or the market Generally, yes, just hoping you can maybe unpack that a bit.

Speaker 3

Sure. So the way we set our guidance is based on what You can see in terms of revenue bookings into the 1st month of the quarter, the 2nd month of the quarter. And then, as you can imagine, we have Less visibility into the last month of that quarter. And so it's always a little difficult for us to tell what's happening in the broader market over that same period of time. But what you see in our guidance is what we think the whole picture will look like.

Speaker 3

And I do think that You were mentioning that their expectations in the 2nd quarter looks a lot better than the Q1 in terms of overall housing volume. I'm not sure we've seen a lot of evidence of that for all the reasons that Glenn just mentioned. And so, we haven't made a specific And about market conditions, but what you see reflected in the guidance is what we've seen in terms of bookings.

Speaker 7

Got it. Okay.

Speaker 2

If I could add just one piece of color there, Ryan.

Speaker 1

Sure.

Speaker 2

January demand was Really strong because rates were close to 6% and then February March demand was much weaker. And this isn't just at Redfin, This has to be industry wide. And if you just do the math around the length of the sales cycle, It's just hard to imagine that at least the 1st 2 months of Q2 are going to be boom months because That's when people were first adjusting to rates ticking back up into the 7th.

Speaker 7

Yes. No, that's helpful commentary, Glenn. That makes sense. I guess maybe one other question just Tying to the mortgage side of things, given the share you guys have within California and some of the West Coast markets, I guess just Any turbulence you're seeing with your customers due to some of the banking dynamics and as There is some of this turmoil in the regional banks. Is that potentially helping pay equity capture some business that maybe otherwise would have gone to First Republic as an example to get a mortgage.

Speaker 7

Any commentary there?

Speaker 2

It's been an advantage for us that First Republic isn't issuing loans at a loss in order to acquire high net worth customers. But there are still so many bigger banks who covet those high net worth customers. The competition for jumbo business is savage. We've gotten more sharp elbow about it, which will put some pressure on margin for that product. But we want to compete on rate because the loan officers at Bay Equity don't have to work Quite as much to meet those customers and that sales and marketing cost savings will be passed on to the consumer.

Speaker 7

Got it. Thank you very much.

Operator

Thank you. There are no further questions in queue at this time. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.

Speaker 2

Thank you.

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Earnings Conference Call
Redfin Q1 2023
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