AGNT, Inc. (AGNT) Q4 2020 Earnings Call Transcript

Good afternoon, everyone. Thanks for joining this fireside chat to discuss the fourth quarter earnings results for eXp World Holdings. We have eXp World Holdings' CEO, Glenn Sanford, and CFO, Jeff Whiteside, with us today. My name is Tom White, and I am a research analyst at D.A. Davidson, which is a full-service investment bank. I have had the distinct pleasure of being the first analyst to cover the stock since early 2018. It has been exciting to watch the business grow and to get to know the team. In terms of the format for the call, Jeff and Glenn will provide some introductory comments, after which I will help moderate a fireside chat before we open it up for questions. Let's begin, Jeff. Would you like to go first? It seems you have some slides prepared to give a quick overview of the quarter.

Yes. I do, Tom. Thanks very much, and thanks very much for hosting. Welcome, everybody. Good afternoon, good evening, and thank you for joining us in our Q4 2020 summary. So just to get started, I've got a few slides. It won't take too long. We're very excited to report a strong fourth quarter in 2020. I am very proud of our results in the full year of 2020, especially considering the crazy year it was with COVID. We're really excited about going into 2021. Looking at the fourth quarter revenue, the revenue increased in the fourth quarter by 122%, going from $274 million in Q4 2019 to $609.3 million in Q4. For the full year, our revenue increased by 84%, from $980 million to $1.8 billion. That was a great year. As I said before, we had a great Q1, and a growth rate of 33% in Q2. The second half of the year was extremely strong for us from a revenue standpoint. Our revenue is based primarily on the agent count in the business. We saw rapid agent growth in Q4, with the number of agents and brokers who joined us increasing 15% to 41,313, compared to 35,877 at the end of Q3. That was a net add of 5,436 agents. For the full year, our number went from 25,423 to 41,313, representing an increase of 63% year-over-year in agent count. Our net income for Q4 increased to $7.7 million from $0.8 million in Q4 of 2019, and for the full year, our net income was $31 million, compared to $9.6 million in 2019. We also achieved record transactions in Q4, going from 38,611 to 82,055 in Q4. For the entire year, we did 135,322 transactions in 2019, which was up 77% to 238,981 in the full year. Finally, we finished with an annual transaction volume that increased 89% from $38.2 billion to $72.2 billion. These are great numbers across the board. A couple more highlights: this year, the company remediated all of our material weaknesses in the business, which you will see in our 10-K. We rebranded and updated our eXp Realty and eXp Corporation brands. We launched five new countries, increased our stock buyback to offset dilution, and we still have zero debt on the balance sheet. We also completed acquisitions in Showcase IDX, and we continue to build a great product in VirBELA in the commercial front end. We significantly strengthened our leadership team across the entire business, especially in brokerage, international, marketing, commercial, finance, and technology. Those are some opening comments, Tom. Glenn, would you like to say a few words?

Yes. I'll touch on a few points. Q4 was a really good quarter for us. We made a lot of progress on multiple fronts. Earlier in the year, we acquired Showcase IDX, and they activated our Canadian portal, exprealty.ca, in Q4. Early this quarter, exprealty.com was turned on. They are in the early stages of developing our community portal, allowing us to take control of our future regarding building a robust consumer experience and agent experience when it comes to lead generation and integration of services like affiliate services and our Express Offers platform into one, unified consumer and agent platform. That was really strong on the eXp Realty side. As many of you know, we purchased SUCCESS magazine, and that acquisition has been quite interesting for us. We were the largest single customer of SUCCESS magazine and have been mailing the magazine to our agents and brokers for about two years. Sales, in general, including real estate sales, do lean on personal development, whether that’s learning sales scripts or handling rejection. So for us, SUCCESS magazine represents an extension of a moat around eXp, giving us proprietary resources. We’ve seen a lot of teamwork, reflected in our internal Net Promoter Scores, employee Net Promoter Scores, Glassdoor scores, and everything else. We have a team that enjoys building this company together, an essential metric for our future success. So obviously, Michael will discuss the international side, and Q4 was great for us. We crossed 48,000 agents with a net addition of about 7,000 agents so far year-to-date. That is incredible considering our continued acceleration of growth and how our value proposition resonates with agents, brokers, and staff. VirBELA is another platform we're continually improving, connecting with iconic clients, enabling scaling, collaboration, and building community, ultimately delivering results for our agents, brokers, and staff, which translates to the impressive numbers you reviewed.

Good. Terrific. Appreciate it, guys. Thanks for the comments there. First off, congrats on a great end to the year. It was a crazy year, it was a challenging year, but it seemed to be a pretty transformational year for the real estate industry overall and specifically for you guys. Maybe just to kick things off, Glenn, I'd be curious to hear your high-level perspectives on how you feel about the business's performance last year given the pandemic. It seemed like a new kind of inflection point in your growth, and I’d be curious about what you think is driving that.

Yes. So first and foremost, the pandemic and lockdowns in Q1 and Q2 of 2020 obviously impacted our model positively because our company doesn't rely on physical offices. Our virtual office model allowed our agents and brokers to collaborate effectively. Additionally, we reached a critical mass of high-quality agents, which has contributed to our ongoing growth. Early on, we established a brokerage model capable of pivoting as needed, allowing us to scale down quickly during downturns and scale back up, resulting in a strong Q2 after the initial pandemic challenges. This flexibility gives us an advantage that larger competitors may lack, as they face fixed expenses that are harder to adjust during downturns. We built this model on purpose after initially launching in 2009 during a tough market, allowing us to be agile in good and bad economies.

Makes sense. There's a ton of stuff I want to dig into here about the business. But quickly, let's start with questions about the broader housing market and the macro backdrop. Last year was surprisingly strong for residential real estate volumes. Hardly anyone expected the market to bounce back as robustly after the pandemic's initial effects. Can you share your thoughts on what drove that snapback and how you see the market entering 2021?

Yes. The drop in interest rates to historic lows played a significant role. I think we’re still below 3% on 30-year fixed mortgage rates. Even during the Great Depression, rates didn’t drop that low. So consumers can purchase more home for the same monthly payment, encouraging them to buy homes at these low rates. The stimuluses from the Fed also contributed positively to the housing market. Looking ahead, I do anticipate some rising interest rates and moderate stimulus down the line, which could suggest a cooling in the housing market later this year. But the combination of low interest and stimulus significantly contributed to the strong housing market in 2020.

What about seasonality in residential real estate? Last year was atypical regarding seasonality, particularly given your robust fourth quarter, which typically isn't strong in the industry. Do you think we'll see less seasonality as the work-from-anywhere trend persists, or might we return to normal seasonality?

Yes. I expect Q1 and Q2 to show strong year-over-year growth, given the comparative quarters. Q3 was notably strong last year while Q4 was robust not just for us but for the housing market overall. However, I anticipate some moderation in growth for Q3 and Q4 this year as we compare against last year's exceptional growth. Looking ahead, while we cannot predict precisely, I wouldn't be surprised if Q4 is once again less than Q3.

Great. Now let's dig into your operational metrics. Agent growth has been strong, and it seems to inflect upwards again in Q1. You've mentioned surpassing 48,000 agents. Can you discuss early 2021 growth dynamics? Is international expansion significantly contributing to this growth, and how do you expect the agent count to develop this year?

Certainly, international growth is playing a role in this surge. More importantly, however, our business model is recognized as a viable model across the industry now. We've seen some small competitors trying to replicate elements of our model, but the truth is that our success has shifted the narrative. International markets are poised to be a pivotal aspect of our growth. We currently have about 2.5% of the U.S. agent market and could experience significant growth year-over-year, particularly with international expansion.

What is the profile of a typical new eXp agent? Are there regions or brokerages particularly fruitful for you in attracting agents lately? And are we seeing growth in the overall U.S. agent population due to market strength?

Definitely. With the thriving housing market, there’s an influx of individuals obtaining their real estate licenses. In January and February, we converted between 14 and 17 independent brokerages to the eXp model. While we typically pull agents from mainline brands like Keller Williams and RE/MAX, we're now seeing many independent brokerages recognize they can't offer the same benefits we can. We believe this trend will lead to greater growth in 2021.

I want to touch on the Net Promoter Score and its significance in your business operations. There has been an uptick in this metric. Can you discuss what this improvement signifies and how you use it in your decision-making?

Yes. The Net Promoter Score measures how likely individuals are to recommend eXp Realty to their colleagues or friends on a scale from 0 to 10. From this score, we can identify strengths and weaknesses in our agent experience, allowing our team to make collaborative decisions for improvements. We’ve achieved historical highs in our scores, and we have found that scores above 70 correlate with accelerated growth and retention in our agent base. We aim to maintain a score above 70 across the business, as falling below this threshold signals potential issues requiring attention.

I'd like to add that we apply the same mantra to our employee Net Promoter Score (eNPS). Our employee score exceeds 80, and our Glassdoor rating stands at 4.8. We utilize this metric for continuous improvement in both employee satisfaction and operational efficiency, ensuring we are mindful of agent and employee needs.

Glenn, you've previously outlined some internal targets for domestic agent counts over short- and long-term horizons. Any updates on your current projections for agent growth in the coming years?

I anticipate that our model will grow at least 50% year-over-year for quite some time, which we strive to maintain. This year, I estimate domestic growth at approximately 60% to 70%. Internationally, we expect exponential growth considering many of the new opportunities available. Our aspirational goal for internal targets is to reach 100,000 agents by year-end. While this may appear ambitious, I acknowledge we're closer to this possibility than before. Securing around 80,000 agents seems more plausible as we move through 2021.

You had a tremendous expansion into new international markets despite travel constraints last year. Can you discuss the new geographies that you're most excited about and why they look appealing?

Absolutely, Tom. We opened South Africa, India, Mexico, Portugal, and France in just two months, all without travel. This achievement underscores our model's viability on a global scale. The markets we entered, like India, Mexico, and Brazil, have large agent counts and are adopting our platform robustly. We are excited about entering all these markets, but Brazil, India, and Mexico remain particularly promising due to their size and healthy real estate markets.

Can you talk about your strategy for expanding in these new markets? Is it similar to what you’ve done in the U.S., or do you need a tailored approach?

Our strategy combines global branding with local execution. eXp is recognized across our existing markets, allowing us to scale rapidly. The core model includes substantial commission splits and stock options, but we adapt numbers for each country to ensure local competitive advantages. Our agility helps us maintain success as we enter new markets.

I'd like an update on what proportion of our agent count could become international by year-end 2021 and how that might evolve over the next few years.

In a five-year timeframe, we could realistically see a 50-50 agent mix between domestic and international. We're working towards surpassing the 20% mark for international agents, and the response has been overwhelmingly positive. We're just getting started and energy remains high as we expand.

Turning to gross margins, they improved year-over-year but declined slightly in Q4. Glenn, can you elaborate on the factors influencing this trend and your outlook for gross margins in 2021?

Our gross margins are greatly influenced by sales volume and agent capping. A combination of strong Q3 and Q4 put many agents in a position where they paid the maximum fee for their annual capping, which exerted pressure on gross margins. That said, as we integrate services like mortgage and title, we should see margin expansion. By Q3, we expect to have some of these services built into our platform, driving margin growth./nThe extraordinary volume in Q4 increased our overall sales volume significantly, affecting margins as well.

Given the ongoing market strength, how should we anticipate agent cap year resets influencing margins, and how confident are you in reaching potential gross margin targets?

We have revised our expectations for gross margin. Achieving 10% gross margin for core operations is less likely unless we significantly change our model, which we aren't inclined to do. The core brokerage model remains attractive and is designed for competitiveness. We are instead focused on expanding gross margins through ancillary services, ensuring we can reach closer to 4% on a net basis. This approach feels far more viable as we move forward.

There's a question on G&A and how you plan to manage that line item given increases recently. What’s the outlook there?

Starting the year at 10.3% of revenue, we ended the year at 7.1%, achieving around 24% productivity in SG&A. The rate dipped in Q4 as we onboarded more personnel, but we expect an SG&A rate of 7% to 7.5% moving into 2021. We are committed to operational efficiency while ensuring we support our agents and maintain high NPS scores.

There’s a question about expanding into new business areas aside from the existing segments. Have you considered creating a global MLS?

The concept of a global MLS is intriguing and could be explored once we achieve critical mass. While we plan to enhance internal marketplaces and manage our listings across multiple regions via exprealty.com, our focus is on our primary businesses—VirBELA, SUCCESS, Showcase IDX, and eXp Realty. We're not pursuing significant expansions outside this scope for now, but we will consider mortgage, title, and escrow services related to realty.

Is there a specific date for integrating Showcase IDX into your platform, and what will that integration entail?

Showcase IDX provides consumer-facing MLS websites to eXp members in the markets we serve. This integration allows us to utilize MLS data effectively, creating consumer-friendly property search experiences on our platforms. The integration already exists, enhancing existing functionalities for agents and consumers. We aim to refine and expand these capabilities.

Glenn, could you share your insights on the recent NAR-DOJ settlement and its implications?

I don't anticipate significant changes. The players most likely to benefit from any MLS disruption may not revolve around consumer advantage. The change in displaying buyer agency commissions is becoming standard practice. Although I'm not closely tracking the REX lawsuit against Zillow, there seems to be an effort to litigate entry into the industry, which may not yield the desired results.

There’s been a lot of discussion about the stock in recent weeks coinciding with the stock split. Do you have any insights there, Glenn?

Regarding the stock split announcement, adjusted metrics showed the stock was trading lower than its current price. Post-announcement selling often occurs as investors reallocate shares. Our intent with the split was to ensure that agents received meaningful stock when awarded for various contributions, maintaining reasonable share prices, especially given previous increases nearing $80.

How do you plan to grow margins over time and enhance net income? I believe you've touched on some aspects already.

We've covered much about expanding ancillary revenue streams, including services from SUCCESS magazine, which operates in a $14 billion personal development market. This represents a significant opportunity for high margins. Beyond the core brokerage, we believe there are promising avenues to explore as we grow.

How do you view your capital deployment strategy regarding cash reserves? Are M&A or share buybacks a consideration?

We're pleased to report zero debt on our balance sheet. This year, we have ample capital for our needs while ensuring a buyback strategy to mitigate equity dilution. Our focus remains on supporting our agents and enhancing NPS scores. We’re well-positioned to engage in major acquisitions if necessary, but we see no urgent need for additional capital this year.

Can you provide insights on the financial impact of Showcase IDX and SUCCESS on your overall model?

Showcase will incur short-term investments as we expand our engineering team. We expect these investments to allow investment reductions in external platforms like kvCORE, aligning expenses. Once fully implemented, the system is poised to generate substantial leads—anticipated to be hundreds of thousands per month.

How does Showcase contribute to ancillary service attach rates? Is educating agents about mortgage and title offerings necessary, or is it more about conditioning consumers?

There’s a twofold requirement; good products are essential, and agent buy-in matters. Providing great pre-approval services and mortgage options on our platforms, along with educating agents on the values of these offerings, will help in securing consumer loyalty.

Great, we’ve got about three minutes left and I see a few interesting questions remaining. Glenn, I think we've got just enough time for a brief speed round.

Sure! Let's dive right in.

Yes, we continue to evaluate the VirBELA platform industry growth and revenues. We are approaching $1 million monthly and still have work ahead of us to enhance our offerings. But the potential remains extraordinary.

With rising interest rates, the market will be affected, but our model, which is consistently growing agents, will help stabilize revenues. Even in prior downturns like Q2, we succeeded despite competitor declines. Our strategy involves improving consumer experiences while maintaining our agent relationships, prioritizing agent support and driving engagement. I appreciate everyone for attending. We'll reconvene for the next quarterly investor call. Thank you, Tom, and thank you, participants.

Thank you.