Redfin - Q1 2021

Transcript

Speaker 0

Good afternoon, and welcome to Redfin's Financial Results Conference Call for the Q1 Ended March 31, 2021. I'm Meg Nunally, Redfin's Head of Investor Relations. Joining me on the call today is Glenn Kelman, our CEO and Chris Nielsen, our CFO. You can find the press release on our website at investors. Redfin.com.

Before we start, note that some of our statements on today's call are forward looking. We believe our assumptions and expectations related to these forward looking statements are reasonable, but our actual results may turn out to be materially 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. During the call, the financial metrics will be presented on a GAAP basis and include stock based compensation as well as depreciation and amortization expenses. In the event we discuss any non GAAP measures today, we will post the most comparable GAAP measure and a reconciliation on our website.

All comparisons made in the course of this call are against the same period in the prior year unless otherwise stated. We will be providing a copy of our prepared remarks on our website by the conclusion of today's call, and a full transcript and audio replay will also be available soon after the call. With that, let me turn the call over to Glenn.

Speaker 1

Thanks, Meg, and hi, everyone. Redfin's 1st quarter net income Revenues were better than we projected in our last earnings call. Net income increased from a loss of $60,000,000 in the Q1 of 2020 to a loss of $36,000,000 in the Q1 of 2021. Gross profit was $42,000,000 up 2 29% from the Q1 of 2020. For our core real estate services business of brokering home sales through Redfin agents and through other firms' agents working as our partners, 1st quarter gross margins increased year over year by 10 10 basis points to 24%.

Because we hire meet so many new customers in advance of the summer home buying season, 1st quarter margins are usually our lowest of the year. Total revenue increased 40% from the Q1 of 2020 to $268,000,000 with real estate services revenue up 55%. After two quarters of declining sales, our properties business, which buys and sells homes through RedfinNow, grew 17% to $93,000,000 generating 1st gross profit since its earliest months. Our other segment, which consists primarily of mortgage and title services, grew revenue 120 percent to $9,000,000 A bull housing market has boosted our growth, but we're also Gaining U. S.

Market share with the 1st quarter increase of 21 basis points to 1.14%. Since we lost share in the Q2 of 20 due to a furlough of about 32% of our lead agents, our share gains have accelerated in each of the last three quarters. We've gained share as we've recruited more agents. The number of lead agents Redfin employed on March 31, 2021 was up 26% from the same day a year ago, with partners up 93%. Comparing the 1st 2 months of 2020 to the 1st 2 months of 2021, The rate at which we hired lead agents increased 74%, with 12% of lead agents who started in the Q1 coming from digital ads on Facebook, LinkedIn And indeed, hiring a candidate through online ads is still about 20 times more expensive than traditional recruiting, but we believe our digital campaigns can get much more efficient.

We should have enough lead agents to serve forecasted levels of demand in June 2021, just as we promised in the last two earnings calls. Redfence field managers and the demand generated by our site Let us develop almost anyone with grit and brains into top producing agents. We still recruit about half our new agents from other brokerages, But recently, the other half have included a window salesperson, car salespeople, a chef, an actor, political canvassers, recruiters and hospitality and restaurant workers. We're also recruiting more stay at home parents who decide to become breadwinners after their partners lost a job during the pandemic. Our challenge has been retaining newly hired agents.

Most of our new agents start out serving buyers, not sellers. But with competition so intense to buy almost any home on the market, it's hard for these agents to earn their first bonuses. Among agents with less than 12 months of experience, Redfin's annualized rate of attrition in the Q1 of 2021 was 53%. A year ago, this number was 26%. This is likely an industry wide trend, but that's hardly consolation for Redfin or the people we've hired.

In April 2021, we started paying a $1500 retention bonus for newly hired agents who guide customers to the point of bidding on homes, regardless of whether those bids win. We expect this bonus and training programs preparing agents to compete in this crazy market to bring attrition rates for new agents under 35%. And we're pleased to see that even in such a competitive market, we're retaining tenured agents as well as ever. Among agents with at least 1 year of tenure, attrition was 15% both last year and this year. Our recruiting success has given us the capacity to handle the demand increase from mass media ads.

On April 19, we started running our new ad called Redfin World, which introduces Redfin's on demand tours This groovy magical portal to a better life. We plan to spend $52,000,000 on media for the ad, double the amount budgeted 2020 before the pandemic cut our campaign shirt and 33% more than our previous high in 2019. Because sales have grown so much since then, our mass media investment can increase in absolute terms, but decrease as a percentage of revenue. And because Redfin is the only major brokerage to use technology for giving customers better results at a lower fee, telling the world who we are is a worthwhile investment. The ad should drive more customers and more traffic to a website that's still growing fast.

Comparing the 1st quarters of 2021 2020, The average number of Redfin monthly visitors grew 30%. This is a deceleration from the 4th quarter when traffic grew 44%. Much of this deceleration is a market wide trend. Comscore and SimilarWeb show traffic growth slowing for nearly all the major housing sites. With the number of homes for sale at record lows, there's just less to look at online and in person.

The good news is that Redfin is making the most of every visitor. Compared to a year ago, Q1 visitors were 13% more likely to subscribe to a search, to participate in a shared search or to download our mobile application. And visitors are still asking for service at high rates with service requests for our agents and our partner agents up 55% over last year. But to improve our competitive standing, we need to keep taking search share by adding more data about a home, more local search criteria and more predictions about home values and demographic trends. Already in the last 4 months, we've added flood risk data and 6 new search filters, with more local data coming later in 2021.

We also need to get more listings. Because of our Commitment to local listing data and local service, redfin.com has been the only major U. S. Real estate site that doesn't show listings nationwide. In the Q1, we added support for 4 new areas in Florida and for Ottawa, Canada.

We also increased the number of listings on our site by 8%, adding listings from the outlying areas of markets we already serve. We now cover 85% of the U. S. Population, up from 79% in the 4th quarter and 27% of the Canadian population, up from 23% in the prior quarter. We expect to add a total of at least 30 new markets In 2021.

The other source of new listings is RentPath, the network of rentals websites whose acquisition we announced on February 19 and closed on April 2. Already, we've linked the sites together, boosting our authority with search engines. In our last earnings call, we said that we published RentPath listings on redfin.com in the second half of twenty twenty two, but we now expect that to happen as early as March 2022. This integration will broaden redfin.com's authority as an all purpose real estate destination, especially among consumers under 30. It will also give RentPath property management customers access to a larger audience of potential residents for their rental listings.

But a subscription business can be slow to rebuild. Even if more customers sign up to promote their properties through RentPath this summer, It might take months to offset a year of canceled subscriptions and longer if more customers pay only when a lease is signed in lieu of an upfront subscription. RentPath revenues declined 19% year over year in the Q1 of 2021, and we expect a similar decline in continued losses at least through the 2nd quarter. We knew when we bought RentPath for 3 times its 2020 revenues that we would have to invest in both sides of this online marketplace to get more rental listings And more renters looking to live in those listings. RentPath websites last year kept growing traffic, but uncertainty from RentPath's bankruptcy And Arrival's year long effort to buy the company rattled our property management customers.

Of the 299 salespeople RentPath employed when it entered bankruptcy on February 12, 2020, 38 percent quit over the next 12 months, more than half of whom still haven't been replaced. Its CEO resigned in December 2020 with a longstanding Board member, Diren Fonseca, stepping in as an interim leader. Our priorities are to hire a long term RentPath leader and to recruit more property management customers to list their homes on RentPath sites in the second half of twenty twenty one. We aim to be the partner that property management companies love by aligning our products and pricing to their needs and by offering better value than any other Internet lifting service. Our long term challenge is to digitize the process of renting a home for both the consumer and the property manager.

Once the new RentPath leader starts, he or she will need 6 months to develop this plan. The good news is that RentPath customers and employees are already enthusiastic about the acquisition. All but one of RentPath's 6 80 employees signed their Redfin offer letters, and many customers seem excited to gain access to redfin.com's audience. Our investment in a rentals marketplace and other new business This will be paid for in large part by our brokerage, which keeps getting larger and more efficient. For lead agents with at least 6 months of tenure, 1st quarter Tivity increased 13% year over year.

And regardless of tenure, pay for agents who worked in the 1st full quarter this year increased 22% over agents who worked the 1st full quarter of 2020. We're just now getting data on the success rate for homebuyers who first met our agents in the Q3 of 2020, which shows a 15% year over year increase. Success rate is a measure of how many buyers close on a sale with Redfin within 6 months of meeting their Redfin agent. These gains are bolstered by the pandemic driven surge in housing demand, but a pilot to assign fewer customers to an agent has mostly continued to produce significant success rate gains over and above the increases driven by the housing market. Since a similar 2018 initiative to increase success rate failed in part due to an interest rate increase, we're being careful this time around to run an experiment for a year before making any decisions.

We're also now tracking which customers close with other brokerages, so we can set aside market effects when measuring if our service improved. For 5 of the last 6 months, the results have favored lowering customer loads, but we still need to make sure the success rate gain is large enough to be profitable. We'll decide whether to extend that pilot nationwide this summer before our big 2022 hiring campaign. Many other service improvements that we developed and tested in prior years are paying off now. The most important of these, especially in today's cutthroat markets is speed.

We increased the percentage of tours we booked completely automatically with no telephone calls between brokerages from 4% in February to 16% in April. Instant tour scheduling increases the likelihood that a customer will stick with Redfin's brokerage rather than calling around to see which agent answers the phone. More important in this competitive market, it helps Redfin homebuyers get into homes first. Our investments in locally licensed desk based agents to respond immediately to online and telephone inquiries have also started to pay off. For redfin.com visitors who contact us with a home valuation request, we increased the rate at which we schedule listing consultations.

For online inquiries about a RedfinNow cash offer, the rate at which those inquiries led to a listing consultation was more than twice as high in March as it was in 2020. These service improvements extend beyond the first customer call to the long term relationships our agents are building with customers. As we train more of our agents to handle both sides of the sale, the percentage of brokerage customers who both buy and sell a home with Redfin increased from 11% in the Q1 of 2020 to 13% in the Q1 of 2021. Over that same time, the percentage of brokerage sales from repeat and referral customers increased from 17% to 21%, driven by new bonuses for agents with a loyal customer following. In February, we updated Redfin Premier, our listing service for customers with homes above $1,000,000 to include high definition video tours, a luxury advertising campaign, preferential access to our top agents and a fancy new sign.

We still need to promote this service on our own site and in the wider world, but already since the launch, listing consultations with these customers have grown almost 3x faster than listing consultations Overall, it will take us years to build our reputation in the luxury market and years too to pair Redfin Premier with our concierge service For renovating and staging high end homes, but as we deliver better results for our customers, we're going to take share. The final change in the brokerage has been in its leadership. After 14 years of building our brokerage from a few $1,000,000 in annual revenue to more than 600,000,000 Our brilliant President of Real Estate Operations, Scott Nagel, is planning to retire. He has been my friend and partner through Thick and thin, and once he's completely retired, chainsawing tiny helpless trees that is off the grid cabin in the Badlands of Northeast Washington, I'll miss him terribly. Scott will spend the next year working on a strategy to let our business grow faster than we can hire employees.

Adam Weiner, who joined Redfin just 3 months after Scott, will own the brokerage and title businesses Scott ran, along The mortgage and RentfinNow businesses Adam started. Adam and Scott are like minded about our humble service culture and our strategy, By uniting all the components of a complete real estate solution under Adam should over time make us better at helping customers with their whole move. To give customers a one stop shop, we've developed RedfinNow's cash offers as an alternative to a brokered sale. Our iBuying business has grown since the start of the year on almost every front, purchases, sales, gross margins, gross profits, number of markets served and range of homes served within each market. We said in the last earnings call that we expected RedfinNow's 1st quarter revenues to be about the same as the Q1 of last year.

But in fact, we grew revenues 14% because the homes we had purchased sold so quickly. Properties gross margin improved from negative 0.3% in Q1 of 2020 to 1.7% last quarter. Some of our progress is due to rapidly rising home prices. But as with the brokerage, RedfinNow is also executing better too. The most promising development is the success of our integrated sales force.

We launched RedfinNow with a specialized sales force separate from the brokerage. Then in July of 2020, we asked the desk based agents who support our brokerage to respond to RedfinNow inquiries. We've already discussed their success at persuading people who reject RedfinNow offer consult with a Redfin agent about listing the home instead. But this sales force has also improved RedfinNow's offer acceptance rate, in part by reducing the time it takes for customers to get an offer by more than a third. Their customer communications have doubled the capacity of the investment specialists to decide how much we can pay for a home.

We've not only gotten more efficient at buying properties, but it's selling those properties too. 83 percent of our first quarter sales paid the agents a commission below the commission typically offered by brokerage is in the market compared to 16% in the Q1 of 2020. The magnitude of the commission reduction was 43 basis points last quarter compared to 16 basis points in the same quarter last year. Over the next year, we hope to persuade more of our listing customers to learn from RedfinNow's And pay a lower commission to the buyer's agent. If individual homeowners follow iBuyer's lead more broadly, lowering commissions industry wide, it would favor a brokerage like Redfin, which is already structured to thrive on a lower fee.

We're also offering better service to the Homeowners who accept RedfinNow offers were 12% more likely to close on a purchase mostly because we stopped charging customers for minor