Opendoor Technologies Q4 2023 Earnings Call Transcript

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February 15, 2024

There are 11 speakers on the call.

Operator

Thank you for standing by, and welcome to Opendoor's 4th Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer I would now like to hand the call over to Kimberly Meehuis, Investor Relations. Please go ahead.

Speaker 1

Thank you, and good afternoon. Details of our results and additional management commentary are available in our earnings release and shareholder letter, which can be found on the Investor Relations section of our 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.

Speaker 1

All statements other than statements of historical fact are statements that could be deemed forward looking, including, but not limited to, statements regarding Opendoor's financial condition, anticipated financial performance, business strategy and plans, market opportunity and expansion and management objectives for future operations. These statements are neither promises nor guarantees and undue reliance should not be placed on Such forward looking statements 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 most recent annual report on Form 10 ks for the year ended December 31, 2023, as updated by our periodic reports filed after that 10 ks. Any forward looking statements made on this conference call, including responses to your questions, are based on management's reasonable current expectations and assumptions as of today, and Opendoor assumes no obligation to update or revise them whether as a result of new information, future events or otherwise, except as required by law. The following discussion contains references to certain non GAAP financial measures.

Speaker 1

The company believes these non GAAP financial measures are useful to investors as supplemental operational measurements to evaluate the company's financial performance. For a reconciliation of each of these non GAAP financial measures to the most directly comparable GAAP metrics, Please see our website at investor. Opendoar.com. I will now turn the call over to Cari Wheeler, Chief Executive Officer of Opendoor.

Speaker 2

Good afternoon. Also on the call with me today is Christy Schwartz, Interim Chief Financial Officer and Dodd Frazier, President of Capital and Open Exchange. For Opendoor, 2023 was a year of focus, execution and results. Despite a dynamic macro environment Marked by the lowest level of home sales since 1995, the team focused on controlling what we could control, and we made meaningful progress. We grew our acquisition volumes sequentially every quarter and tripled our market share from Q1 to Q4.

Speaker 2

Our new book of inventory generated contribution margin of 8.3% in the year, demonstrating the health of our more recent acquisitions. We also made improvements to our tooling, technology and processes to make our platform more efficient, which resulted in a year over year reduction of nearly 30% and adjusted operating expenses in Q4, excluding the reduction in our advertising spend. With these improvements, we now enter 2024 with the foundation in place to rescale the business and build a future of sustained profitable growth. Last month marked Opendoor's 10 year anniversary. Since our founding, we've made it possible to sell your house with a tap of a button, something unthinkable a decade ago.

Speaker 2

We built the largest e commerce platform for residential real estate and have served over 250,000 customers across 50 markets. And we're committed to building a product suite to become the place where every seller can start their home selling journey in a way that the traditional process cannot provide with simplicity and certainty. Looking to 2024, we're excited about our ability to reach and attract more sellers to our platform, namely through increased advertising spend, continued growth of our partnership channels and more attractive spread levels. Last year, we reduced our marketing spend by over 60% versus the prior year as elevated spreads made our marketing investments less efficient. Despite these reductions, we've maintained our aided awareness, a testament to the effectiveness and efficiency of our creative advertising efforts.

Speaker 2

In 2024, we plan to ramp our total marketing spend to widen the top of our funnel and reach more sellers, and we're spending more creatively. Last Sunday during the Super Bowl, we live streamed the Couch family getting an open door cash offer on their home in Atlanta during halftime, proving just how easy and quick it is to sell to us. Acquisitions from our partnership channels, which includes online real estate platforms, homebuilders and agents, continued increase in the 4th quarter, up 35% versus Q3 and up over 140% since Q1. These partnerships have effectively positioned us as the branded cash offer for residential real estate and are a true win win. Our offering enhances the selling experience of our partners' platforms to their customers and also provides us with a source of acquisitions and customers and their attractive fixed spend.

Speaker 2

We expect volumes from this channel to continue to grow on an absolute basis in 2024. Finally, as a reminder, Our spreads are an important lever in managing seller conversion and mitigating risk on our platform. We meaningfully reduced spreads during 2023, which resulted in improved conversion and acquisition volumes throughout the year. Looking ahead, based on where we are at today, We expect to see an increase in contract volume late in Q1, which should translate to sequential acquisition volume growth in Q2. Chrissy will speak to our outlook next, but I want to quickly address our goal of returning to positive adjusted net income.

Speaker 2

We have strong tailwinds at our back, but we're still facing ongoing macro uncertainty. Mortgage rates remain volatile. We're acting on lessons we've learned in recent years and taking a prudent approach to balancing growth and profitability while also operating within our risk management framework. We expect to make significant progress in both scaling acquisition and resale volumes and meaningfully reducing our losses this year. However, we don't anticipate reaching positive adjusted net income for a full quarter in 2024.

Speaker 2

We are focused on driving sustainable growth And our entire business is organized around durably getting back to positive ANI. I am proud of what our teams accomplished in the last year. We've emerged smarter, leaner and energized. And we are building a platform that over the long term has the potential to transform the way millions sell and buy real estate. Christy will now review our financial results and guidance.

Speaker 3

Thank you, Carrie. Our 4th quarter results came in above the high end of our outlook across the Board as we continue to increase acquisition volumes while driving margin and cost improvements. As we enter 2024, we remain committed to rescaling our business, delivering healthy contribution margins and operating with disciplined cost management, all while providing a best in class customer experience. We delivered $870,000,000 of revenue in the 4th quarter, above the high end of our guidance range. We continue to make progress selling through our old book of inventory and had less than 75 of these homes not in resale contract as of year end.

Speaker 3

For the full year, we achieved $6,900,000,000 of revenue. As a reminder, we intentionally slowed our home acquisitions beginning in the second half of twenty twenty two, prioritizing risk management and inventory health. This resulted in lower resale volumes in 2023 versus the prior year. As Carey mentioned, we reduced our spreads this year we saw signs of market stabilization, resulting in increasing acquisitions sequentially each quarter. We purchased 3,683 homes in the 4th quarter, up 17% from the 3rd quarter and ahead of our prior expectations of approximately 1,000 homes per month.

Speaker 3

We continued to generate positive contribution profit in the 4th quarter, delivering contribution margin of 3.4%, ahead of the high end of our implied guidance range. While ahead of our expectations, contribution margin declined sequentially for two reasons. First, to maintain our clearance targets, we implemented home level price drops last quarter in response to the amplified seasonal decline in market level sell through rates. 2nd, sales from the tail homes of our old book continued to be a drag on overall performance. For the full year, contribution margin was negative 3.7% driven by sales from our old book of inventory.

Speaker 3

Notably, as Carrie mentioned, the new book of homes generated a contribution margin of 8 0.3% in 2023, demonstrating the health of the more recent acquisition cohorts. Adjusted EBITDA loss $69,000,000 in the 4th quarter, ahead of the high end of our guidance range. We ended 2023 with adjusted EBITDA loss of $627,000,000 versus a loss of $168,000,000 in 2022. Adjusted operating expenses totaled $99,000,000 for the quarter, up from $92,000,000 in Q3 and down from $144,000,000 in Q4 2022. The sequential increase was expected as we continued to rebuild inventory in the Q4.

Speaker 3

For the full year, adjusted operating expenses were $369,000,000 down 47% from $693,000,000 in 2022, which reflects the progress we've made in reducing our cost structure. Turning to our balance sheet. Shareholders' equity decreased by $53,000,000 in the 4th quarter. We ended the year with $1,300,000,000 in total capital, includes $1,100,000,000 in unrestricted cash and marketable securities and $161,000,000 of equity invested in homes and related assets, net of inventory valuation adjustments. We also had $8,100,000,000 in non recourse asset backed Borrowing capacity composed of $3,800,000,000 of senior revolving credit facilities and $4,300,000,000 of senior and mezzanine term debt facilities, of which total committed borrowing capacity was $2,800,000,000 Looking ahead to 2024, we will continue to operate with focus and execution to drive results.

Speaker 3

We expect our Q1 revenue to be between $1,050,000,000 $1,100,000,000 contribution profit between $40,000,000 $50,000,000 which implies a contribution margin of 3.8% to 4.5 percent and adjusted EBITDA loss between $80,000,000 $70,000,000 We expect adjusted operating expenses to be approximately 120,000,000 a sequential step up as we re ramp marketing and rebuild inventory levels. Additionally, we expect 1st quarter home purchases to be approximately flat from Q4 and up over 100% year over year. We expect home acquisitions will increase sequentially in line with typical seasonality into Q2 as we enter the spring selling season in earnest. As we begin 2024, we are focused on rescaling our business in a sustainable fashion. We have the benefit of a book of inventory that is generating healthy margins and the steps we took last year position us well to accelerate volumes throughout the year with an improved cost structure and a line of sight to achieving our annual contribution margin target range of 5% to 7%.

Speaker 3

I'd now like to turn the call over to the operator to open up the line for questions.

Operator

Thank Our first question comes from the line of Dai Li of JPMorgan. Your question please, Dai.

Speaker 4

Great. Thanks for taking the question. I guess the first one on reaching adjusted net income profit, appreciate the color and the timing, but Just curious to hear like what needs to happen to reach this target. Is it just a matter of day to day ramp in your acquisition volume? Or do you need to see Industry's transactions will cover to certain levels.

Speaker 2

Hey, Deyel, it's Carrie. I'll take that. Couple of things. One is we're highly focused on rescaling the business, but we're intent on doing it in a sustainable way. So right now what we're managing to is what I'd call macro neutral environment.

Speaker 2

We're not willing to lean into spreads. We're not willing to lean into excess marketing to drive growth at the expense of margin or risk. Certainly, if there are macro tailwinds, say second half of this year, we are well positioned to take advantage of those. But our objective is to meaningfully ramp our acquisitions this year and to do so within our contribution margin target range we talked about, all of which will substantially reduce our NII losses year on year. So this is about when, not if.

Speaker 4

Got it. And I guess I've got a follow-up. Like where are these spread right now, I guess relative to like exiting 2023 and I guess early part of 2023 and does the spread kind of set a level to be at the higher end of your contribution margin target? Is that the right way to think about it?

Speaker 2

Yes. When we made substantial improvements last year in our cost structure, much of which we fed back into durably reducing spreads. So the combination of cost structure improvements and home price stabilization allowed us to take those down throughout the year and we like where they are today, which is why we're ramping advertising spend by 50% in Q1 and why we are leaning into acquisition contract growth.

Speaker 4

Understand. Thank you.

Speaker 2

Welcome.

Operator

Thank you. Our next question comes from the line of Benjamin Black of Deutsche Bank. Your question please, Benjamin.

Speaker 5

Hi, this is Jeff on for Ben. Thank you for taking my questions. I noticed that You exited 3 markets this quarter. What are you seeing there that led to the decision to exit those markets and change your strategy around market expansion going forward?

Speaker 6

Yes, happy to take that. It's certainly not an indication of our forward plans. These were 3 small markets that represented less than 1% of our volumes. And really, it's more just a cost structure question given the size of those markets and where they're physically located, they weren't next to one of our other markets. So it was more just a cost and efficiency question.

Speaker 5

Got you. I guess and just as a follow-up then. So as you think about expanding your buy box in a given region, is there sort of a contribution margin impact to doing that? Or Is it simply a matter of adding the capability to kind of expand your addressable market and you'll see similar contribution margins to other homes in the similar region? Or does that come at the expense of Some gross margin cost too.

Speaker 6

Our goal in expanding buy box is more about pricing accuracy. And so we expand our buy box as our pricing system improves and we believe we can price accurately, so that we can deliver, the same contribution margin across the expanded buy box.

Speaker 5

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Nick Jones of JMP Securities. Your line is open Nick.

Speaker 7

Thanks for taking the questions. So the new book, has delivered contribution margins of 8.3%, but you're still kind of targeting 5% to 7%. I guess, what gets you comfortable maybe increasing that range beyond 5% to 7% and maybe being North of 8 over time, I guess just some clarity as to why not expanding that range yet? Thanks.

Speaker 2

Hey, Nick, it's Carrie. I'd say at a very high level, last year's 8.3% Centimeters on the new book, which was great, was about last year's spreads And we realized that 8.3%. I mean, this year, given where we set our spreads, that's why we're reaffirming our 5% to 7% contribution margin target. So Again, we're balancing that, interplay of gross margin risk and we've reduced the spreads to a level where we want to deliver within that 5% to 7% for the year.

Speaker 7

Got it. Helpful. And then on the homes that are kind of listed over 120 days, you took that to 18% versus I think it was 21% of the markets those homes are in. So you're kind of outperforming the market. Given the model over time, like what kind of outperformance can we expect in terms of the homes you're selecting and how long it's on the market versus kind of the average in those markets.

Speaker 7

I guess ultimately where does that kind of percentage go over time and maybe what's kind of the standard hold time today as the markets kind of neutral as we head into 2024.

Speaker 6

Yes. So we I think from a business portfolio management perspective, we really think about For the homes that we are shorter in the hold period, so early days on market, we want to be slower. And then as homes sit on our balance sheet longer, we want them to be selling faster than market. So our goal is to outperform market on that older cohort of homes. We think that's appropriate portfolio management and sort of disciplined risk management.

Speaker 6

But there's not a specific target, to your specific question of we're trying to get to X number. It's much more about for homes that are 90 to 120 days on market. We want to be outperforming market.

Operator

Thank you. Thank you. Our next question comes from the line of Yigal Arunyan of Citi. Your question please, Yigal.

Speaker 4

Hi guys, Max on Free Golf. I was wondering if you could walk us through how you think about the pace of acquisitions through the rest of the year, Getting your market neutral comment on the macro, how your expectations are for home acquisitions and Anything you're seeing kind of as we head into the spring season?

Speaker 2

Hey, Max, it's Carrie. So At a high level, you should see a meaningful increase in acquisitions 2024 over 2023. I'll repeat some of our guidance, which was Q1 being up 100% year on year, so we're going to see good acquisition growth in the Q1. What we're seeing right now, As we'd expect to see for this time of year, just given seasonality, people kind of getting back into thinking about selling post Super Bowls, we're seeing a ramp in contracts month to month. So February higher than January, March higher than February.

Speaker 2

And we're going to see those contracts turn into closes in Q2, which is why we indicated like you should expect to see from us sequential acquisition growth Q2 over Q1. So that's what I can tell you in terms of acquisition pacing for the first half of the year.

Speaker 4

Okay, great. And then, as a follow-up, just is there any updates on the 3P model As we look into 2024, or are you more focused kind of on the core business?

Speaker 2

I'd say We're focused on both. But I would say our plan to get back to positive cash flow is all about the current core business today, our sell direct model that gets us back there. Our cost structure and our balance sheet will allow us to deliver on that. Marketplace for us, certainly important long term strategic. We're 1 year into it, right?

Speaker 2

We're about connecting buyers and sellers, but we're doing it in a single market. We've said consistently we want to make sure that we focus on having great product market fit before we scale it. I would say that this has been a tough year for experimentation against a low market supply like record low market supply that's challenging. But that's short term. Long term, we remain committed to continue to evolve the marketplace product.

Speaker 8

Okay, great. Thanks guys.

Speaker 2

Welcome.

Operator

Thank you. Our next question comes from the line of Curtis Nagle of Bank of America. Please go ahead, Curtis.

Speaker 8

Terrific. Thanks very much. Let's see. I guess the first one would be, in terms of the there's a I think like a $20,000,000 delta in the operating expenses in 4Q, positive that is. What accounted for that?

Speaker 8

And guess, how should we think about quarterly operating adjusted expenses in 2024, assuming that should be maybe something a little bit above $100,000,000 given higher marketing costs or what's the right way to think about that?

Speaker 3

Hi Curtis, it's Christie. Thank you for the question. So the performance of 99 versus our guidance of 120 is a reflection of us continuing to make meaningful progress throughout P and L. We saw continued strong execution from our teams in the Q4, which allowed us to smooth the timing of some hiring from 4Q out to 1Q as we're re ramping, and we continue to realize some cost saving initiatives. We guided in Q1 to $120,000,000 and that just to unpack that change, it's about roughly half is marketing and advertising and the other half is increasing our operations and we expect that increase from Q4 to Q1 to be the biggest bump for the year.

Speaker 8

Okay. That's very helpful. Maybe staying on the marketing. Brett, so you guys obviously made a big push with the Super Bowl this year. I guess is that indicative of sort of plans for Redmarket for us to the year?

Speaker 8

Like, can it be like a one and done, right? Is that sort of kind of a first shot? And We'd love to see here like any metrics that you have in terms of lift in traffic or Perhaps people inquiring about offers post the ad this week?

Speaker 2

Hey, Curtis, this is Carrie. I mean, I think you're ask are you asking a marketing mix question?

Speaker 8

Well, I just quite a bit question was, right, so you gave your first Super Bowl ad, right, that's a very splashy form of brand marketing. Is that indicative of big ramp up, right, as we've kind of been talking about in brand marketing? And just kind of how to think about that for the rest of the year? And then again, just did you What you see in terms of response in the 1st week from that ad?

Speaker 2

Yes. I mean, all credit to our creative marketing team. We actually didn't buy a Super Bowl ad to be clear. This has been a year of cost discipline as you know, as we were not spending

Speaker 8

Fair enough. Okay.

Speaker 2

Yes, we were by the way, we did want to be part of the Super Bowl pre run and part of the conversation. And I think our team did a good job of putting us in that room and we did a lot of stuff in and around Super Bowl before the game and then we had a live ad during Halftime in Atlanta. So, I'd say it's too early to tell the impact of that. We definitely saw a big pickup in traffic and awareness in Atlanta specifically. I think time will tell in terms of what the impact of that is.

Speaker 2

I would say the higher level though, if you think about How we think about marketing spend, I mean, last year we took down spend substantially. That was in response to where our spreads were because some spend became less efficient. As you think about this year, we have really leaned into some of our more efficient marketing channels, brand being 1, the Super Bowl thing is evidence is one of those. But what we found is that Brand lifts all boats for us. So we increase our brand spend, and we're finding that increases conversion across all avenues.

Speaker 2

And actually, even though we had lower spend last year, we actually maintained our brand awareness, something we're really proud of. And then partnerships will continue to lean into because they're very efficient from a customer acquisition cost perspective and then there's paid. So, you should expect to see more creative from this. You just got to see more brand, but we're going to do within making sure we manage the overall envelope.

Speaker 8

Okay. That makes sense. Thanks very much.

Speaker 2

Welcome.

Operator

Thank you. Our next question Comes from the line of Ryan Tomasello of KBW. Please go ahead, Ryan.

Speaker 9

Hi, everyone. Thanks for taking the questions.

Speaker 4

It seems like one of the

Speaker 9

more important variables you focus on from a macro perspective is not necessarily the absolute level of rates, But the volatility in rates, is that an accurate statement? And if so, it'd be helpful if you can just elaborate on how you define rate volatility, if there is a difference between upward versus downward volatility, if that makes sense. And just generally, how that plays into your willingness to ramp volumes?

Speaker 6

Yes, happy to cover that, Ryan. Yes, I think rate volatility really flows through and impacts the overall market by keeping sellers and buyers on the sidelines. So I think that is why, and you can see in the numbers and the metrics that we have in the back of our shareholder letter as well, you look at where you've seen rates come down and you've seen increases in supply and demand. And so I think really for us at least, We care most about the balance of sellers and buyers, the balance of supply and demand. And so that's really where we stay focused.

Speaker 6

And Based on what we're seeing right now and what we've seen year to date, we continue to see a balance between the sellers and buyers and that is leading to relative price stability and in line with what we've seen historically.

Speaker 9

Okay, thanks. And then just on the capital structure, It looks like borrowing capacity came down by a few $100,000,000 quarter over quarter and you remove the language from the shareholder shareholder letter around sufficient capacity to hit the breakeven targets. Just to clarify that commentary and that move in the capacity. And second, Just how you're thinking about longer term capacity beyond the $10,000,000,000 in volume, especially as you have to dip into the higher cost floating rate debt. Obviously, buybacks, some of the convert, just any updated thoughts there on capital allocation to the convert?

Speaker 6

Yes. Not trying to signal any change. So we're comfortable with our current capital base both in the equity and debt side. We can get to that ANI breakeven point. We are and always have, you saw us do this in COVID, modulating how much past that we have lenders don't like just to have unused capacity.

Speaker 6

So I think that is something we've been working with our lenders on and they We'd like to reduce unused capacity and they've been there for us in the past. I think really for the near term, we're very focused on the fact that we have these term debt facilities that are fixed through the full year. And we feel very comfortable about our ability to use those facilities and cash on hand to sort of finance our business. And so really feel quite comfortable on the capital side. I think if you sort of zoom out a bit and think about Your last question there, look, we obviously don't talk about future capital decisions.

Speaker 6

But we as you alluded to, we did convertible note buybacks last year, we will always be opportunistic on the capital front.

Speaker 9

Great. Thanks, Todd.

Operator

You bet. Thank you. Our next question comes from the line Mike Ng of Goldman Sachs. Please go ahead, Mike.

Speaker 10

Hey, good afternoon. Thank you very much for the question. I just had a follow-up on the Earlier question regarding OpEx and marketing spending. I was just wondering if you could talk a little bit more about Any of the direct benefits that you see from increasing marketing spending, is there a direct relationship between marketing and your pace of acquisitions? And then said differently, Should the pace of acquisitions increase because of your step up in marketing spend, why is it only Flat sequentially, I'm assuming the top of funnel would widen because of that incremental spend.

Speaker 10

Thank you.

Speaker 2

Hey, Mike, it's Carrie. So a couple of things. First of all, marketing will not be flat sequentially, right? It's going to be up 50% in terms of advertising expense in Q1. That is Part of the fuel to drive acquisition growth we've been talking about for the first half of the year.

Speaker 2

That's one. There definitely is a correlation between advertising spend and how we volumes. It's not all the story. I mean things like partnerships are fixed and brand is less directly correlated certainly, but as a longer term investment that we're seeing the payoff things like brand awareness. So as Christy said, the step up from Q4 to Q2, a good chunk of that, but half of that was in marketing.

Speaker 2

Probably the biggest chunk up we'll have. We're always going to evaluate our marketing budgets over the course of the year, but we're comfortable with what she just told you, which is that should be the biggest step up for the year. And we tend to see we spend into the 1st part of the year. We tend to get quieter in the very back half of the year because sellers are quiet. So, yes, we feel good about given where our spreads are today, we feel good about the marketing investment we sized.

Speaker 6

One added point. I think, and Carey alluded to this earlier, If you think about how things flow through our business, we spend advertising dollars. And so what we've seen is an uptick in offers and acquisition contracts each month in the Q1. And so really the impact of that dollar spend flows through the closes in the second quarter, which as we said is that we expect to be sequentially up from the Q1.

Speaker 10

Great. Thanks for the thoughts.

Operator

Thank you. I would now like to turn the conference back to Kerry Wheeler, CEO for closing remarks. Madam?

Speaker 2

Hi, thanks. First of all, thank you everyone for joining us today. I just want to say we're excited about how we're set up 2024 and beyond. Hopefully, you can hear from us. We've done the hard work in 2023 to be leaner, to be more agile and to be able to rescale the business in a sustainable fashion.

Speaker 2

As I said, it's when, not if. So heading into 2024, we'll be deploying the same operating principles, focus, execution results. We're looking forward to speaking with you next quarter. Thank you.

Operator

This concludes today's conference call.

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