Compass trims losses, improves cash flow despite Q3 revenue dip

Publish Date: November 06, 2023

Written by Jim Dalrymple II

- Originally published at Inman News - Jim Dalrymple II

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A slowing housing market dragged down revenue for high-profile brokerage Compass in the third quarter of this year, but didn’t stop the company from trimming losses and improving cash flow.

In total, the brokerage earned $1.34 billion in revenue between July and September of this year, according to a newly published report. That’s down 10 percent compared to the third quarter of 2022.

Despite the dip in revenue, however, Compass did see a number of other metrics move in a positive direction. Perhaps most notably, the company reported a Q3 net loss of $39 million, which represents a significant improvement over the $154 million loss the company experienced in the third quarter of last year.

Also, significantly, Compass had a positive free cash flow of $12 million, an operating cash flow of $15 million, and it remains on track to be free cash flow positive for the entirety of 2023. Those metrics are particularly important because CEO Robert Reffkin had predicted in several previous earnings reports that the company would be free cash flow positive this year.

The latest numbers consequently bear out that prediction and demonstrate that the company is hitting one of its most prominent goals.

Robert Reffkin

Reffkin touted these numbers in Monday’s report.

“In the third quarter, for the second quarter in a row, Compass is free cash flow positive as we continue to execute our plan to drive operating expenses down while continuing to grow our agent count and expanding the features on our technology platform, the industry’s only proprietary first-contact to close platform,” he said.

During a call with investors Monday afternoon, Reffkin also spoke of a housing market defined by “macroeconomic uncertainty,” though he was bullish about his own firm’s position, noting that it was poised “for even greater success” when the market improves.

“Although the market has not improved over the last year, Compass is a much stronger company,” Reffkin added.

Monday’s report further shows that the company saw a net increase of 511 principal agents during the third quarter of the year. That figure is significant because it was just over a year ago that Compass cut stock- and cash-based recruiting incentives. The incentives had previously helped draw in new agents, and cutting such perks raised questions about the brokerage’s ability to keep growing.

However, the latest numbers show that Compass is in fact still growing — notable given that the broader industry is losing members.

Speaking of agents, Reffkin noted in Monday’s report that in Q3 “Compass reached its second highest quarterly retention rate since going public, and our national market share was up 26 basis points year-over-year.”

Reffkin added during the call that the company’s growing agent count “proves that our cost reductions are not compromising our agent experience.”

Monday’s report also shows that Compass agents closed 48,134 during the third quarter. That represents a 12 percent year-over-year drop, but the report notes that it beat the broader market that “declined 20 percent for the same period.”

Compass reported earnings less than a week after a jury sided with a group of homeseller-plaintiffs in the bombshell Sitzer | Burnett lawsuit. The suit focused on the way agents get paid, and specifically challenged the practice of having sellers pay buyers’ agents. The jury ultimately agreed with the homesellers that major industry entities — the National Association of Realtors and various big-name franchisors were defendants in the case — conspired to keep commissions high.

Compass was not involved in that case but has been named as a defendant in a similar and newly filed lawsuit from the same legal team.

During the investor call, Reffkin declined to comment on the cases themselves but argued that Compass is “well positioned and prepared” for any changes that might come to the real estate industry. Reffkin explained that his optimism stems from several factors: Compass tends to operate in the luxury space where buyers are likely to still want agents; Compass agents typically have clients sign buyer-broker agreements; and Compass provides a variety of specialized tools and technology for both agents and their clients.

Reffkin additionally pointed to the Seattle region, where sellers have not been required to offer buyers’ agent commissions since 2019. Despite that change, commissions in the area remain in line with the rest of the U.S. — an outcome that suggests the bombshell lawsuits may not radically upend real estate’s status quo.

“I don’t think there’s any evidence to suggest that there will be pressure on commissions,” Reffkin said at another point during the call. He added that the lawsuits have the potential to “further professionalize the industry” and force companies “to create a buyer presentation at the same level as we create listing presentations.”

Heading into Monday’s earnings report, Compass shares were in the $2 range. That was down for the day and returns the stock to the range where it was one year ago — despite having several notable rallies over the last 12 months. As was the case with other real estate companies, Compass shares slipped last week in the wake of the Sitzer | Burnett verdict as investors fretted about the impact of the case on real estate companies’ bottom lines.

However, in Compass’ case, shares rose again at the end of last week and by Monday were trading in the same range as they were before the verdict.

In after-hours trading, Compass shares fluctuated — but rose slightly compared to the day’s closing price — once the company published its earnings report and held the investor call.

Credit: Google

Compass had a market cap of about $988 million when markets closed Monday afternoon.

Compass last reported earnings in August. At the time, the company revealed that during the second quarter of this year, it brought in $1.5 billion, a 26 percent year-over-year dip. Despite the downturn in revenue, however, the brokerage’s other Q2 numbers improved. For instance, Compass shrunk its net losses in Q2 by 53 percent year over year to $48 million.

Reffkin also discussed Compass’ upcoming initiatives during Monday’s investor call, saying the company is launching a client portal in 2024. The portal will give consumers a way to track and better understand their transactions, with Reffkin adding that it should be “a repeat and referral gold mine.”

During the investor call, Reffkin noted that demand has fallen thanks to high mortgage rates, and he repeatedly mentioned “uncertainty” in both the present and near future. However, he also said the market is currently behaving much the way it was last year at this time. And he added that “we’re all holding tight” and hoping mortgage rates become more “reasonable.”

“The fall market,” Reffkin also said, “is not falling off a cliff.”

Update: This story was updated after publication with additional details from Compass’ earnings report, a call the company held with investors, and other background. 

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