AGNT, Inc. (AGNT) Q2 2023 Earnings Call Transcript

Good afternoon, and welcome to the eXp World Holdings Second Quarter 2023 Earnings Fireside chat via live stream and the EXPI campus, or Metaverse. My name is Denise Garcia, and I manage Investor Relations for eXp World Holdings. Today, we will begin our earnings fireside chat with prepared remarks from Glenn Sanford, Founder, Chairman and CEO of eXp World Holdings; and CEO, eXp Realty; and Michael Valdes, Chief Growth Officer, eXp Realty, followed by a review of the second quarter 2023 financial highlights presented by Jeff Whiteside, CFO and Chief Collaboration Officer of eXp World Holdings. Following our prepared remarks, we'll open the call to a Q&A session with eXp World Holdings covering analysts and questions submitted to eXp. Let's begin with a review of the forward-looking statements. There are a number of forward-looking statements made today that should be considered in conjunction with the cautionary statements contained in the company's SEC filings. Forward-looking statements are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. Forward-looking statements are based on assumptions as of today, August 3, 2023, and the company undertakes no obligation to revise or update them. They say our filings with the SEC, including our most recently filed quarterly report on Form 10-Q for a discussion of specific risks that may affect our business performance and financial conditions. As a reminder, today's call is being recorded, and a replay will also be made available on expworldholdings.com. Now for a few logistics, and we'll get started. For those of you joining in the eXp campus today to see all 3 screens hit the stage zoom button to the right of your chat box to zoom into a specific screen, you can hit the plus icon above that screen. And if you happen to see no slides or a gray slide, hit the refresh icon on the top right-hand corner of that screen to correct. While in the eXp campus, should you need any help or have questions, please enter your comments in the chat box at the bottom on the left and a member of the team will contact you. For Slido, should you wish to ask a question during our presentation, you could enter your questions by scanning the QR code that's presented on the slide of the screen with your phone or go to slido.com and type event code EXPI. From there, you can submit a question or vote up an existing question by giving a thumbs up. We'd also like that question to be asked. Glenn will remain up on the left-hand side of the stage. Now I'll turn the fireside chat over to our speakers before opening the call to questions. Glenn, please go ahead.

Can you hear us? I apologize. That was my bad. Everyone, thank you so much for coming today. Just as a quick review, eXp Realty is our cloud-based brokerage, and we have 88,000 agents in 24 countries. We also have Success Enterprises, which we invested in in 2020, and which is continuing to build out our coaching and training ecosystem. Porbella is our Metaverse platform, along with a number of metaverse-related entities inside of that company, which supports all of the things that we do as a company. We run with no physical offices, and we've been able to grow all of our businesses without having to be dependent on bricks-and-mortar since inception, and Babel has been a big part of that story since we started using their platform in 2016. I'll take you through some of those highlights before turning the call over to Michael Valdes to speak about growth in ancillary services and then Jeff Whiteside for a more detailed review of the financials. But in the second quarter of 2023, we continued to grow in a number of different parts of the business. But most importantly, we always work on the agent value proposition. That is, eXp Realty being our largest business and the business that started almost 14 years ago with 24 agents. We've now grown to 88,000 agents worldwide. Our net income and adjusted EBITDA were both positive, and we continue to have a solid financial profile with strong cash flow generation and a significant cash balance with zero debt. Our international segment also posted another record quarter, increasing 35% over Q2 last year and 42% year-to-date. Our core North American Realty business continues to be strong and profitable with unit growth and agent growth outperforming the industry. In North America Realty, which includes the U.S. and Canada, we delivered $34 million of EBITDA in the quarter and $55 million year-to-date. This enables us to grow what we're doing at eXp and continues to strengthen our overall value proposition. I believe this is also what's driving a meaningful increase in our quarter's NPS score, which increased from 68% in the second quarter of last year to 72% this year. We've continued to invest in our agents, and that's really the big driver. When we think about what has been taking place over the last year or so, we switched from cost-cutting to actually more investment in growing out the ecosystem of eXp. I think you're seeing that in both our agent Net Promoter Score, and you're also seeing it in our employee Net Promoter Score, which has also been improving. It really revolves around the whole idea of delighting the agent and supporting the agent. We've also invested in a lot of traditional support services for our agents. Now we have 24-hour support for agents, whether it be transaction, new agent onboarding, etc. So there's a ton of support available 24/7. We've also added technology like Luna, which is our first AI-enabled tool that's built into a number of our different platforms, including our workplace platform by Meda. Agents can get tons of support with a generative AI platform, which is performing admirably at providing first-level support for agents. The accuracy and support have been impressive given the short time we've been able to implement it. Additionally, we've focused a lot on agent payouts and getting agents paid faster in some markets, especially in Canada, where we've been working on getting agents paid before even the company gets paid. We are bringing those fast-pay features throughout the eXp ecosystem. From an NPS perspective, we have a 48-hour follow-up system in place. If you're a detractor, meaning you've given us a score of 0 to 6, we're following up with you very quickly. We've built out any themes from that feedback to ensure we're providing top-notch service. Our operations team is also proud of the addition of what we call the 'No Busters Hotline.' If you received a 'no' from a part of the organization, our team is incentivized to help turn those 'no's into 'yes's. We have 24-hour check-ins and a premier support desk for our agents, especially our icons and top producers. Now, let's discuss attrition. We’ve been focusing on attrition metrics for about a year. Approximately 75% of our attrition has historically been in the 0 to 2 transaction category, and this quarter is no different. However, it's interesting to note that our platform is actually improving for top producers. We've become stickier for agents doing over 21 sales—our Icon agents. We are now 4.4 times stickier for top-producing agents than for bottom-producing agents. This is based on our agent count in that category that shows the churn in that area is significantly smaller than for other groups. With that, let me turn it over to Michael Valdes to discuss what we’re doing to drive the agent value proposition and ancillary services.

Glenn, thank you so much. It's amazing to be here and to hear our story of starting this 14 years ago with 24 agents. It's extraordinary to think about where we've gone in such a short period of time. It's my pleasure to talk about our last quarter with ancillary services and growth. Our team is focused on solutions that help our agents increase their value proposition and create amazing customer experiences for their clients through products like home warranty, utility services, signing and home renovation pre-listing services. We're also in the process of a cost-conscious build-out of our mortgage business and we're well-positioned for growth. We're now licensed and operating in 42 states, and Success Lending has actually tripled in funded units and loan volume in Q2 of 2023 over the same period last year. We’ve launched our first local level EXP-endorsed title partnership with our top producing agents and already have 2 to 3 other joint ventures in the near-term pipeline, so stay tuned for those announcements. On our growth team, we're focusing on scaling across all segments of our business. We launched a couple of programs in Q2 to further drive the agent value proposition. The first is the BOOST program, which provides financial incentives to qualifying independent teams and brokerages that join eXp Realty. The program just launched on June 29. Currently, applicants represent over 1,500 potential agents and over $3 billion of potential production. These candidates are moving through our approval process quickly, and we have over 50 others in various stages of our due diligence pipeline. Secondly, we've reduced revenue share criteria to accelerate agent rewards at a time when other companies are raising their barriers to entry for agents. We're committed to putting agents first and helping them focus on driving production. On the next slide, we'll discuss our growth-led events. One key initiative has been our top agent masterminds. Our Chief Strategy Officer Leo Prihar and I have been on a bit of a roadshow, following what Glenn has done with his masterminds at our key events. We've met with our top-producing agents, facilitating deep discussions on core topics focused on driving growth, which has been an amazing experience. We’re also proud to announce our very first eXp Canada, the first Canadian conference aligned with the country’s strong growth trajectory. We have over 6,000 agents in Canada, and this event will take place in Vancouver on September 6 through 8. Our speakers will focus on production, technology, and growth. Additionally, we are hosting our eXp Con in Las Vegas on October 2 to 5, with a focus on AI, which has been a key priority for us. We’re excited to announce the new deliverables coming out for agents, particularly in production, mindset, and growth. Finally, our regional rallies, agent-led events planned for November across the country, will build community, celebrate milestones, and deliver education and training. Last year, about 3,000 agents were touched during those rallies. So the growth story remains strong. Now, I’ll turn it over to our CFO, Jeff Whiteside, to discuss our financial numbers.

Thank you very much, Michael, and good afternoon all. Thank you for joining us today for our second quarter 2023 earnings call. Before I take you through the financials, I want to share a couple of data points regarding the current operating environment in residential real estate. As we all are aware, it continues to be under pressure. In terms of unit sales, Fannie Mae forecasted that Q2 2023 total home sales declined 17% year-over-year. By comparison, we reported a minus 9% year-over-year decline in our ESP North American Realty business. As for agent count, our reported U.S. residential real estate agent numbers declined by 1.1% from June year-over-year 2022 to 2023, while our North American agents increased by 4% within our ESP North American Realty group. The total agent count for eXp grew 7% to 88,248, and we're now operating in 24 global markets year-over-year. At a higher level, the key highlights for eXp World Holdings include a net income of $9.4 million, an increase of 1% year-over-year compared to the second quarter of 2022, even as our revenue declined 13%. Operating income reached $11.1 million, reflecting an 8 basis points year-over-year operating margin expansion. Significant adjusted EBITDA of $24.7 million was primarily driven by North America Realty, which generated an adjusted EBITDA of $34.1 million, showcasing the resilience of our business model in a down market. Adjusted operating cash flow, excluding customer deposits, was $64.6 million at the end of the second quarter of 2023. On the next slide, you'll see our Q2 2023 segment revenue and adjusted EBITDA for our four business segments and a breakout of our corporate allocations. Our North American Realty segment remains the primary driver of revenue at $1.2 billion. As noted, it remained profitable with $34 million in adjusted EBITDA. International Realty had another record quarter, increasing revenue by 35% year-over-year to $12 million. Gabella contributed a modest amount of revenue and improved its EBITDA loss by approximately $1.5 million year-over-year in the quarter. Our affiliate services segment also contributed a modest amount of revenue. With corporate eliminations, we consolidated to $1.232 billion in revenue and $24.7 million in adjusted EBITDA in Q2. Moving to our financial details on a consolidated basis, we've improved our agent NPS from 68 to 72 quarter-over-quarter versus 2022, all while adding agents in a tougher macro environment. Unit sales were $137,199, representing a 9% drop against the 17% drop in the industry. We observed our price per unit drop 8% to $354,000. Revenue was $1.232 billion, down 13% year-over-year. Gross margin dollars decreased 10%, while the gross margin percentage increased 30% due to lower transaction volume. SG&A decreased 11% due to a slowdown in hiring, decreased marketing spend, and a reallocation of agent growth incentive stock compensation expenses discussed in detail in Q1. Net income grew 1% to $9.4 million, and we generated $24.7 million in adjusted EBITDA. Our cash flow stood at $64.6 million, with $124.7 million in cash and cash equivalents at quarter-end. Finally, we raised our dividend 11% in the quarter to $0.05, effective in the next payout. For year-to-date results, North American Realty revenue is down 15% from the first half of 2022, exceeding $2 billion in revenue and $55 million in adjusted EBITDA. International Realty revenues are up 42% year-to-date, achieving a record $22.7 million in revenue. We are also investing in International Realty. Belle is up 3% year-to-date compared to last year and improved its EBITDA loss by approximately 55%. Other segments are up 46% on a year-to-date basis to $2.7 million, with an adjusted EBITDA down 17% to $1.8 million. This is where we are investing again. As noted, the final slide shows agent and revenue growth over a rolling 5-year period. The story remains consistent: we have historically grown agents and revenue. Despite recent market conditions affecting revenue, we continue to increase eXp's agent count, growing 7% year-over-year this quarter. We pride ourselves on maintaining zero debt on our balance sheet, delivering results for investors over the short, medium, and long term. Although our revenue decreased year-over-year due to a volume slowdown across the industry, we outperformed the industry while continuing to invest in future growth priorities, delivering profitability comparable to the second quarter of 2022. With that, I’ll turn it over to Denise for Q&A.

Great. Thanks, Jeff. So let me kick it off with a question for Glenn before we open the call to our covering analysts. The first question, regarding NPS, we had a significant increase this quarter. What do you think has had the biggest impact on driving NPS?

I think there's been a number of factors. One, we've been making an investment in growth since the beginning of Q1, which has been really helpful. But more importantly, our brokerage operation and organization has really come together to support agents in real-time. With our steep growth, we were previously focused on throwing bodies at challenges rather than systematically solving agent concerns. The market slowdown has allowed us an opportunity to retool and effectively think about how to best support agents who are out there selling homes, providing them with the services they need in real-time. This has worked exceptionally well. Getting this down to individual brokerage units for states, regions, and cities has been key in understanding what it really means to empower those teams. We've also had to make some changes to our staffing to bring in people who are not just confident but are also engaged with agents positively. Sometimes it takes a few personnel changes to ensure we have the right people in the right seats on the bus.

Great. That makes sense. All right, let's present up. Why don’t we take our first question from John Campbell from CVS. John, go ahead.

Good afternoon. Thanks for having us. I want to touch on the lower revenue share criteria. I know you guys are pretty committed to enhancing the agent value proposition, and we can see the positive effects reflected in the agent NPS. I get why you did it, but my question is what led up to this change or why now? Also, I want your latest thoughts on the potential impact this could have on gross margins.

Yes. So we're continuing to listen to our agents, and they are committed to a long-term relationship with us as a brokerage platform. Some of the feedback we received indicated things we could do to improve the model from their perspective. Jeff can comment on the financial impact, but one point of clarity is what we put in place in late 2019: 50% of the whole company dollar is paid out in the form of revenue share. We adjust the revenue share payout such that every month, we pay out exactly $0.50 of company dollar in revenue share, regardless of minor tweaks we make. That’s the primary commentary on this.

Got you. That makes sense. Okay. And then I have a question about the AI work you've begun. It sounds interesting. For now, it seems that Luna will focus more on internal agent support. I'm curious what you envision Luna could eventually become. Do you see agents directly utilizing it, or will it exist somewhere between agents and consumers?

Yes, there are elements of AI interacting between agents and consumers, especially for those in real estate. We've got innovation work happening inside of Zucasa involving AI. Significant components of AI will enhance transaction processing and brokerage review of contracts in the future. We'll still have individuals required by law to be involved in transactions, but their roles will be significantly improved by AI. We’ve already seen AI catching legal issues at a higher rate than humans reviewing contracts. So AI will be of immense benefit in the transaction process workflow over time, simplifying both the agent and brokerage management sides. While AI development is experimental presently, we are working across different teams on numerous AI initiatives.

Glenn and Jeff, could you provide more details on your recent initiatives aimed at attracting larger broker teams, including the types of teams you're interested in, the associated offer terms, and what this might mean for agent growth in both the near and long term?

Yes. We touched on the Boost program, and what we’ve done with it is formalize many of the actions we already took with brokerages looking to convert. When brokerages consider transitioning, we often had to negotiate terms. We've now implemented a cultural questionnaire that broker owners must answer to proceed. This addresses our desire for leadership continuity during transitions. The leader they onboard must align with our mission and vision and commit to the growth of eXp. If they're not committed to that growth story, they're not culturally aligned. We have significant experience recognizing when a culture aligns or misaligns and will only attract brokers that genuinely want to contribute to our growth—this is part of our overall strategy. Consequently, we can present solid financial agreements to prospective owners. Michael alluded to the pipeline, which is substantial.

What we have in the active pipeline is about 1,500 potential agents and close to $3 billion of production from all potential recruits. In a tightening market, independent brokerages function on thin margins. Our platform represents a viable solution since we offer a global perspective allowing them to grow their businesses. This is expected to be a vital part of our growth strategy.

Regarding Success Lending, I know it has been a more expense-driven line as you enhance capabilities, and market conditions are challenging. When do you anticipate it could become accretive, and how many loans are currently being processed monthly? We expect Success Lending to become accretive likely next year in 2024. Loan applications have seen a 2 to 3 times increase compared to earlier this year. We are currently processing around 500 units year-to-date through this platform, with most loans in differing stages. Earlier this year, we were doing around 10 loans per month.

For analysts who couldn't be on stage today, Tom White from D.A. Davidson emailed in a question asking whether we should expect a similar uptick in G&A expenses for the remaining quarters of this year, or is this a good level to model for Q3 and Q4?

To answer that question, Tom, two factors drove the G&A increase from Q1 to Q2. The primary driver was the shareholders’ event we had, leading to increased costs. The second factor was merit increases that hit in Q2. We recorded $85.4 million in SG&A, which is generally the level we expect to see for the rest of the year. As always, if we find an opportunity to invest cash for growth, we will do so, but this SG&A level is where we are projecting. The most significant investments we currently have are allocated internationally, which exceeds what we invest in our core brokerage. We plan to ensure our core business is supported and has the right resources in place while we strategically invest beyond that.

As a reminder, if you'd like to ask a question via Slido, the code is displayed on the left-hand side of the screen. We also have another question from one of our newest covering analysts, Soham Bosley at BTIG. He emailed in and asked about agent productivity. He's seeing a decline in this metric in line with transactions. What steps are you taking to enhance agent productivity moving forward?

We're investing significantly in technology and tools. On the Success side, we've partnered with several top coaches and trainers incorporating them into our ecosystem. We’ve conducted masterminds for our agents focused on improving productivity. Our regional rallies emphasize production. We now offer roughly 80 hours of available training online each week for agents in various aspects of the business. Podcasts hosted by various members of our team, alongside agent productivity podcasts by our agents, help support our agents. We've developed detailed programs addressing various agent needs—there's a ton of coaching and training available, and it's up to agents to choose to engage actively in these offerings to improve their business. Additionally, we have a structured 30-, 60-, and 90-day program as well as a kickstart program for new agents—both to set them on a productive path.

I have a follow-up related to what you just addressed. On agent productivity, I actually observe that from a transactions per agent standpoint, you appear to have outperformed the market significantly this quarter. While it's down year-over-year, your metrics suggest you are doing well compared to your peers. Given that you cite around 75% of attrition occurring with agents doing 0 to 2 transactions, the mix shift seems beneficial for overall productivity. However, how long do you anticipate this heightened attrition in the lower tier will persist? Typically, renewal periods might represent a pivotal timeframe for those transitioning away from platforms.

Historically, about one-third of our agents have been brand new agents, and around 80% of them generally do not last to their first renewal. This automatic churn reflects a significant portion, and it will continue. However, our stickiness is increasing, especially among our productive agents. Overall, as we support agents effectively, our numbers will improve over time, provided we are the best environment for top-producing agents. Since Q1 of 2022, more individuals in the 0 to 2 cohort came from agents who previously sold 3 to 4 homes but are now struggling to perform. When the housing market rebounds, those in the borderline category will find it easier to complete additional transactions. Currently, the overall situation remains challenging; therefore, the attrition is not as reflected and we foresee a bit more in the near future. Some agents are driven to leave based on a slew of reasons, including a robust economy where part-time agents indecisively choose to retain their licensure without needing to hang up their licenses. I predict that we will see a reduction in industry agents over the next 12 months.

Thank you for that insight. I'd like to remind everyone that our first eXp Con Canada will take place in Vancouver, September 6 through 8 this year, along with our annual eXp Con event in Las Vegas, from October 25. Please register at exponcanada.com or expecon.com to join us. Additionally, stay connected by visiting expworldholdings.com for the latest updates on eXp news, results, and events. You will also find a recording of this call and our latest investor presentation in the Investors section of the site. Thank you for joining us today; this concludes eXp World Holdings second quarter 2023 earnings fireside chat. Thanks, everyone.