AGNT, Inc. (AGNT) Q3 2023 Earnings Call Transcript

Hi, everyone. My name is Denise Garcia, and I manage Investor Relations for eXp World Holdings. Welcome to eXp World Holdings Third Quarter earnings fireside chat via live stream and EXPI’s campus or metaverse. Today, we’ll begin with our earnings fireside chat with prepared remarks from Glenn Sanford, Founder, Chairman and CEO of eXp World Holdings and CEO, eXp Realty; and Leo Pareja, Chief Strategy Officer, eXp Realty; followed by a review of the third 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 will be 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. Please see our filings with the SEC, including our most recently filed annual report on Form 10-K and quarterly reports on Form 10-Q for a discussion of specific risks that may affect our business, performance and financial condition. We assume no obligation to update or revise any forward-looking statements or information. 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, we’ll get started. For those of you joining in the EXPI campus today, to see all three 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. 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 on EXPI campus, should you need any help or have any questions, please enter your comments in the chat box at the bottom on the left, and a member of the team will contact you. Slido, should you wish to ask a question during our presentation, you could enter your questions by scanning the QR code presented on the screen with your phone or go to slido.com and type in the event code EXPI. From there, you could submit a question or vote up an existing question by giving a thumbs up. We’d also like to have that question asked. This screen will remain up on the left-hand side of the stage. Now I will turn the fireside chat over to our speakers before opening the call to your questions. Glenn, please go ahead. Hey Glenn, I think your mic might be off.

Thank you for joining us today for our third-quarter call. I will first cover some aspects of our business strategy, followed by highlights from the quarter, after which Leo and Jeff will delve into the financials. As you know, we started sharing business segment information in our fourth quarter earnings call last year. This allows you to see the profitability of eXp North America, which helps us invest in growth areas we believe are worthwhile. eXp Realty encompasses the U.S. and Canada, making us the largest real estate brokerage in the U.S. based on transaction volume. I take great pride in the achievements we've made in just 14 years. Our success in North America is facilitating our expansion into international markets, where we are currently active in 24 markets. We view international expansion as a key driver of future growth for the company. This quarter, our revenues grew by 47%, reaching a record $15 million. I want to highlight yesterday's press release regarding homehunter.global, a partnership aimed at enhancing the consumer experience for buyers and sellers navigating the often fragmented website landscape in other countries. We're looking forward to new innovations in this area. Though small at present, Revenos and other affiliated services are gaining traction and are poised to provide significant revenue and margin growth per transaction in the future. Leo will talk about some new programs we've added recently and the momentum they’re generating. These initiatives reflect our strategy for growth and revenue generation. The business areas presented next support our agent value proposition, help us build a cloud-based, asset-light model, and drive the success of both our North American and International Realty operations. We continually work to enhance the agent value proposition by creating a supportive ecosystem that includes personal development resources and media, such as SUCCESS magazine. In the past quarter, we appointed Bryon Ellington as our Chief Learning Officer at eXp Realty, focusing on tailored agent training and coaching while maintaining our commitment to personal development through the SUCCESS brand. Our enabling technology platform, Virbela, which you are currently using, along with our future platform, abr.io, support our cloud brokerage model, allowing us to engage and foster a sense of community while operating entirely remotely. Looking ahead, Frame is reaching enterprise-ready scale. In our next earnings call, we plan to host it in Frame, enabling users to join via their browser or mobile without needing to download Virbela software. We’re excited about these developments and eager to enhance eXp's efficiency further.

I just chatted with Glenn; it looks like he had a technical problem with his computer. He’s rebooting it. Denise, why don’t we just move on to my slides, and then Jeff and I can take over until Glenn returns.

Yes. That sounds good. I think Jeff might be having technical issues. What we might want to do is pause for five minutes and reconvene, and then come back on stage. Let’s go to the green room, and we will be back everyone, in about five minutes.

And if we jump to the next slide around outperforming the industry, we’ve continued to outperform the industry.

Apologies, Glenn, you cut off speaking about Frame. So, agent NPS hasn’t been addressed yet.

Thank you for that. To return to Frame, this quarter we experienced a minor issue with Virbela and my connection. In the next quarter, when we present our financials, we will actually host it in Frame, allowing you to experience it via mobile and desktop without needing to download anything. I’m looking forward to that in the coming year. We are also continuing to focus on the NPS side of the business, which is a key driver. I frequently mention NPS, and we have recently added Fred Reichheld to the Board, who developed the Net Promoter Score. We take this very seriously, and it contributes to our consistent solid financial results and growth. This quarter, we have broken out a few segments visually: the U.S., Canada, and global, all of which are showing positive trends. Our NPS score is 74, reflecting our ongoing investment. Our operations team, led by Patrick O’Neill, has done an outstanding job of creating a strong connection with our agents. Our leadership team is actively engaging in the field, conducting numerous events. We have regionals happening across the country this week and next week, and I will be attending several of them. We are persistently investing in our agents, which ultimately strengthens our long-term value proposition. It is well-known that we face challenges in the market. U.S. residential transactions are under pressure from rising mortgage rates, which recently went over 8%. Overall, real estate transactions decreased by more than 15% year-over-year in the third quarter, and nearly 20% year-to-date. However, eXp Realty’s U.S. residential transactions declined only 8.6% in Q2, which is 43% better than the industry average. While the overall industry transactions have fallen year-over-year and in the third quarter, we maintained a market share of 4.2% in the U.S., marking an 8.7% increase in market share in terms of transactions. This success is largely attributed to our ability to improve loyalty scores with our agents, also known as our Net Promoter Score, and to retain our productive agents, which I will address next. As in previous quarters, we began presenting the churn rate based on cohorts. Most of our attrition occurs with agents who have few to no transactions, particularly in the zero to two transactions per year category. This group tends to have the shortest tenure within the business and on the eXp platform. Many new agents do not successfully complete their first license renewal. However, if you look at our most productive agents, they are 4.5 times less likely to leave the platform compared to our least productive agents, showing a clear relationship. The higher the agent productivity level, the more likely they are to stay with the platform. I’ll now hand the call over to Leo, who will discuss how we continue to enhance the agent value proposition and drive growth through new programs and additional services.

Thank you, Glenn. Thanks everybody for joining me today. One of the things I’m most excited about is our ability to retain our most productive agents, because we listen to them. I take great pride in that three of the C-suite members running this business were highly productive agents, including Glenn, Michael, and myself. When agents present ideas, we can iterate and launch quickly. We’re launching two programs at the beginning of the fourth quarter, and I’m excited to discuss those because they drive potential for enhancing the agent value proposition and consequently revenue. These programs show that we’re leaning in while other companies are exiting, and we offer the best solutions for independent brokers and large teams. We recently announced Thrive, a new program designed to incentivize teams to join eXp through equity participation. This initiative helped attract Justin Havre & Associates, Canada’s number one RE/MAX team for five consecutive years, bringing an impressive $4 billion in sales since 2016 to eXp Realty along with his team of 60 agents and 18 support staff. We also launched Boost in September, which has been phenomenal. Our first Boost recipient is the Bean Group in Boston, founded by Michael Bean in 2003. The group grew into an independent brokerage of over 20 offices with hundreds of agents and more than $2 billion in annual sales before joining us. In the last 45 days, 425 of his agents have transitioned with more to come. We’ve also announced our second Boost recipient, EQTY Forbes Global Property Affiliates, owned by Mike and Tara Shapiro and Karen Weinberg. They were the second largest Sotheby’s affiliate by volume in Southern California, doing about $7 billion in business. Following their transition about a month ago, 65 agents have moved with them from Side. We are thrilled with what the Boost program is achieving as we had envisioned. The second program I’m eager about is eXp Exclusives, launched on October 3rd, which has already seen thousands of downloads from our agents. I firmly believe that the highest form of marketing a property is exposing it to as many potential buyers as possible through the MLS and syndicating to portals. Nonetheless, we recognize that there are instances where sellers may not want their property in the MLS due to restrictions. For example, a new construction property that’s not safe to enter or a tenant-occupied property where the seller wants to avoid disruption. Our agents have frequently requested this feature, and eXp Exclusives is our rapid response to ensure we serve our agents and their clients. Regarding Revenos, our corporate referral program introduced last year, it continues to gain fantastic momentum. While still early on, we’ve noted extraordinary traction, with an 84% year-over-year growth in closings and a fivefold increase at the top of the funnel in referrals. Revenos is helping us monetize our transactions better, adding incremental margin. Most of the topics I covered remain in their early stages, but it’s encouraging to see we’re starting to receive the recognition that reflects our size and scale. In the first chapter of our story, we have been associated with organic growth, often perceived as just recruitment. However, we are now leading in multiple categories. We rank as the top growth leader in year-over-year sales volume, transaction volume, and agent count according to key 360. We hold the recognition as the number one independent brokerage per RealTrends 500 and lead brokerage in transactions and sales volume by the Power Broker list. Recognition from our industry for our hard work excites me, and we welcome new agents, teams, and independent brokers joining us, contributing to our momentum and building during this crucial period for our growth. With that, I’ll turn it over to Jeff to discuss our third quarter financials before opening the call for Q&A.

All right. Thank you, Leo. Thank you, Glenn and Denise. I appreciate it, and thanks to everyone for joining us today. I will take you through our business financial highlights for the third quarter and provide more details on the third quarter by business segment before we open up the call to questions. So if we stay with the first page, in the third quarter, we continued to grow agents and now have over 89,000 agents worldwide. As Glenn mentioned, our NPS score increased to 74 from 71, which is significant for us as a company, and that’s what we pay close attention to. International had a record quarter, growing 47% over Q3 last year, and we made further progress towards achieving breakeven in the international segment, which is becoming more profitable. Adjusted EBITDA was up 53%, and we generated positive GAAP net income during the quarter. We continue to operate the business with zero debt, ending the quarter with $120 million in cash, consistent with our starting figure for the year. We had a much lighter year from a volume standpoint, and we still maintain that $120 million cash number. Turning to our North American Realty segment, adjusted EBITDA was up 21% year-over-year to $27 million. As we’ve frequently discussed, we are fortunate to have such a strong business that enables us to grow the platform and continue to enhance our agent value proposition. They’re still performing exceptionally well and continue to grow. Overall, we are proud of the company’s results amidst a challenging market. On the next page, let’s look at some market conditions. For comparison, in Q3 2023, total home sales declined 15%. In contrast, our U.S. residential sales transactions only saw a decline of 9%. When evaluating our North American business, which includes the U.S. and Canada, our decline was only minus 6% compared to the minus 15% industry average. We want to return to a higher growth rate, but we are outperforming the market. Additionally, the NAR reported a 1.3% decline in agent count, while we experienced a year-over-year increase of 2% in the U.S. and a global increase of 5%. At the eXp World Holdings level, net income stood at $1.3 million, reflecting a 69% year-over-year decrease from last year's Q3 due entirely to a tax benefit in the previous quarter; last year we were essentially break-even. This year, our net income at $1.3 million and operating income was $1.9 million, showing a 15 basis points year-over-year operating margin expansion. We also generated $19 million of adjusted EBITDA in the quarter, driven by our North American Realty segment, and adjusted operating cash flow was $56.7 million for the quarter. Now, I will review our quarterly financials by segment. On the slide, you can see our Q3 2023 segment revenue and adjusted EBITDA for each of the four business segments, along with our corporate allocations on the far right. Our North American Realty segment remains the primary driver of revenue at $1.2 billion. This segment remained profitable with an adjusted EBITDA of $27 million. International Realty, as mentioned before, had another record quarter, increasing revenue by 47% year-over-year and a positive 43% year-over-year variance in adjusted EBITDA, showing progress towards breakeven. Virbela contributed modest revenue amounts and improved its EBITDA loss by approximately $1.9 million. The other segment, primarily SUCCESS, also generated modest revenue and continues to develop its programs. On the next slide, I’ll review our consolidated financial details. As noted earlier, our NPS increased from 71 to 74. Our units sold were up 1% year-over-year at 139,480, though our price per unit and volume decreased by 4%. Our revenue totaled $1.214 billion compared to $1.239 billion, indicating a 2% year-over-year decrease. Gross margin dollars decreased by 10%, and the gross margin percentage dropped by 8%. SG&A costs decreased by 12% due to the reallocation of agent growth incentives we’ve discussed in previous quarters and a slowdown in hiring. Net income decreased, as mentioned, entirely due to a tax benefit received in Q3 of ‘22. We generated $19 million of adjusted EBITDA and adjusted operating cash flow of $56.7 million, ending the quarter with $120.1 million in cash and cash equivalents. Additionally, we repurchased $55.9 million of stock during the quarter. Now, let’s look at our 2023 year-to-date results by segment on the next slide. This year-to-date chart includes the same four segments and corporate eliminations. It shows that our North American Realty is down 10% compared to the first nine months of 2022, with over $3.2 billion in revenue and $82.5 million of adjusted EBITDA. International Realty revenue is up 44% year-to-date to a record $37.6 million. We continue to invest in International Realty as it is our primary growth area. Virbela’s revenue is down 8% year-to-date compared to the same period of 2022, but it has improved its EBITDA loss by about 56% year-over-year. The revenue in our other segments is up 13% year-to-date, totaling $3.7 million; however, our adjusted EBITDA has decreased by 29%, showing a loss of $2.8 million as we invest in these growth-driving programs. The final slide before we move to questions details our agent revenue growth over a rolling five-year period. While the market has been challenging for everyone, we’ve managed to grow our agent count by 5% as we discussed earlier. Overall, it has been a strong quarter for us in a very challenging environment. I’ll turn it back to Denise for Q&A.

Thanks, Jeff. I’ll kick off with a question for Glenn before we open the call to our covering analysts. First, Glenn, can you share your initial reaction to the ruling on the sides of the Burnett lawsuit that was announced on Tuesday?

Yes. Well, it’s certainly been a significant part of everything happening within the real estate industry. It’s a matter we’re still processing, as we comprehend the initial ruling. We established a unique business model back in 2009, now 14 years old. I began as a buyer’s agent for my first five years in the business, which is interesting, as I view buyer agency as a valuable tool for buyers. I’m genuinely concerned about what this could mean for buyers who may not be able to afford representation if the landscape shifts too much. It’s definitely top of mind for us, as I’ve championed buyer agency throughout my career. However, it’s a competitive industry with constant changes and disruptions. At the end of the day, our focus is on enabling real estate agents to build rewarding careers. We aim to ensure that we furnish the necessary tools, systems, training, and coaching while representing consumers to the best of our abilities. Navigating these changes will be a priority moving forward.

Great. Okay. Thank you. I will now go to the analysts. I think Matt Filek, you had a question from William Blair.

Hey Glenn, Jeff, and Leo, you have Matt Filek on for Stephen Sheldon. Thank you for taking my questions. I wanted to start with one on gross profit. Gross profit and gross margins came in a little lighter than we had expected, and I was wondering if you could expand on the driving factors behind that along with how we should think about gross margins looking ahead.

It was a bit lower than we forecasted. One of the things that happened during the quarter was that we accelerated some of our icon awards, resulting in a one-time event that brought the percentage down to 6.9%. We were anticipating a higher margin; last year we had approximately 7.5% at this point. We believe it’s a one-time event, and we expect it to rebound in the fourth quarter to 7.5% or higher. That’s what we are forecasting as of now.

Okay. Got it. That’s very helpful. And then one more quick question on modeling. I think in the past, you had mentioned an $85 million run rate for SG&A; it came in a bit lighter than that. Should we expect that to be consistent going forward, or how should we think about that line item looking ahead?

Yes. I believe the number is light, but in a favorable way for us. In Q4, we will book our EXPCON expenses, which is our biggest event of the year. That number is set to increase in Q4. However, on an ongoing run rate basis, $85 million is a reasonable figure to use.

Perfect. Thank you, Jeff. One last question if I may. I wanted to quickly ask about the recently announced partnership with HomeHunter. Can you talk about what that partnership entails and how HomeHunter differs from other search portals? Also, do you plan on bringing HomeHunter's capabilities to the United States at some point?

Yes. That’s a great question. HomeHunter addresses the challenge present in most international markets outside the U.S. and Canada, where there isn’t an MLS-type relationship. This issue has become especially relevant in light of recent legal developments, leading to fragmentation in these other countries. Agents are often required to pay significant advertising costs to promote their listings across numerous real estate websites, making it cumbersome for consumers who may miss a property ideal for them if they are not aware of all the available listings. HomeHunter serves as a browser extension for consumers, enabling them to organize searches across multiple portals in different markets and save and share their inquiries with agents. This tool aims to simplify searches for local consumers and has been recognized as a much-needed resource through initial focus groups with our agents in various markets. Currently in the U.S. and Canada, most properties are accessible from nearly every website, diminishing the necessity for a tool like this. However, it is vital internationally. I realized its potential many years ago at Inman, and while it may not be crucial for the U.S. and Canada now, given the challenges abroad, it is a fitting solution.

Our next question comes from Soham Bhonsle from BTIG. Go ahead.

Good afternoon, everyone. Can you hear me?

Yes, we can hear you.

Thanks for taking the questions. I have a housekeeping question to start. Can you provide your mix of buy-side versus sell-side transactions historically, if you have that, just an approximate range?

We are somewhat skewed toward the sell side. Jeff may provide a more accurate figure, but you can estimate about 55% to 60% being list-side transactions, with the balance being buy-side.

Yes, that’s about right.

And Glenn, historically, you’ve stated your aim is to target around 250,000 agents in the U.S. Given recent events, does this shift your perspective on the growth algorithm? Are you focusing more on agent recruitment than profitability, or are you shifting your emphasis more towards increasing profitability to drive growth?

One crucial observation is that when examining our segmented financials, we broke out North America due to its profitability. Our lack of immense profit mainly stems from international activities. The path to 250,000 agents in North America is feasible. These are our target numbers, considering that achieving this would represent around 15ish percent of the industry, four times our current position. This target seems plausible to me based on our historical growth. The higher interest rates leading to departures may prolong this goal. Nevertheless, there will always be opportunities in the housing market; if we can assist agents in building their businesses, they will be present.

And Jeff, regarding the lawsuit that was announced on Tuesday, does this affect your appetite or thought process around buybacks?

We are currently discussing that internally. No decisions have been made yet, but it’s definitely something we are considering.

Our next question comes from our analyst John Campbell from Stephens.

On agent count growth, could you provide insights into the moving parts? Let's start by looking at U.S., Canada, and international growth and how recent trends seem somewhat variable. It appears you’re proficient in converting independent brokerages while also adding larger teams. What’s your expectation moving forward, particularly as the market rebounds?

We're focused on retaining and attracting high-performing agents, especially via programs like Boost and Thrive, targeting brokerages and large teams. The majority of our churn comes from new agents with minimal transactions, contributing pressure on our numbers. Even if our overall figures remain static through Q4, the churn is predominantly from lower-performing agents. However, we’re confident that by prioritizing high-performing agents, we will continue to grow our market share. The Boost program is instrumental in attracting brokerages that may wish to switch due to the challenging housing market. Our existing conversion framework has been effective, making the process more transparent and ensuring cultural alignment from the beginning.

That's helpful. Could you also offer any details on agent growth by region?

Jeff, do you have the numbers for U.S. agent growth? I believe we saw growth around a thousand this last quarter; international growth is relatively flat, with Canada performing well.

Yes, most of the growth during this quarter originates from the U.S. International figures are quite flat, and Canada showed strength. In summary, John, the U.S. is primarily driving our growth this quarter.

Regarding the class action lawsuit you’ve been discussing, it feels like we’re witnessing a situation where buyers may need to pay for their agents if listings aren't organized well. This could lead to a loss of market efficiency. Glenn, you previously mentioned HomeHunter. I'm interested in your perspective on eXp Exclusives. It might become more relevant if market conditions change accordingly.

Both HomeHunter and eXp Exclusives can potentially become significant long-term assets as fragmentation in the market develops, depending on how the legal landscape unfolds. It’s crucial to maintain efficiencies for the benefit of agents and consumers alike. To recap, we are the largest brokerage in the U.S. in terms of transactions. Our goal is to ensure that even in a changing landscape, our tools enhance the experience for agents and consumers.

Understood. Finally, we received inquiries regarding your legal engagements, particularly the case in which you've been named personally. Could you comment on this as much as you're able?

There certainly is a lawsuit that’s been ongoing. As you mentioned, there’s a New York Times writer pursuing various individuals for some time. The situation is unclear as to precisely what the angle may be. Nonetheless, from our perspective, we believe we had two agents among our 89,000 who acted inappropriately, and we took immediate action. We let them go upon discovering charges related to their misconduct. While our company maintains a strong stance against wrongdoing, we recognize that biased behavior among agents occurs. We emphasize that any credible evidence leading to legal infractions will result in agent expulsion. We are committed to upholding integrity across our operations.

Tom White at D.A. Davidson, who couldn’t be here, asked, you’ve launched a variety of new initiatives over the past several months to enhance the value proposition for agents. Can you discuss the impact of these initiatives on domestic net agent additions and margins going forward?

We are still in early stages with these initiatives. As previously stated, even before we announced Boost, we were running some version of the program for every brokerage that transitioned—a model that just wasn’t as visible before. The economics haven’t changed considerably with these conversions. We’ve implemented Accelerate, which facilitates agents reaching their level 2 and 3 milestones early in their careers. However, for the revenue share model, 50% of company dollar remains as retained income to cover our expenses while allowing us to turn a profit and invest in growth—all of which ultimately benefits agent revenue share organizations. Lastly, while Thrive may yield some additional benefits for large teams, our efforts have largely been reactive to assist larger teams financially regarding signs or breaking office leases. Overall, while there are investments in these initiatives, we do not expect substantial shifts in our financial performance.

I concur. The adjustments to our revenue share pool will not impact margins significantly, especially since much of what we offer now was informally addressed previously. Therefore, we don’t anticipate any material changes to margins going forward. Nonetheless, we expect to see growth.

Absolutely. One factor that hasn’t been mentioned is how the current tough environment affects smaller independent brokerages, with tight margins. The situation creates an interesting opportunity for these businesses experiencing declining margins while operating without legacy systems. We see a growing interest in bringing larger cohorts of independent brokers into our ecosystem, especially if the housing market continues to pose challenges. Thus, our concerted efforts toward attracting and converting larger independent brokerages could alleviate some headwinds we’re facing. From a transactional unit count perspective, economists predict 2024 will mirror 2023, given the climate of high interest rates. This presents us an intriguing opportunity to focus on the productive agents we are gaining market share from. Even if overall agent numbers remain flat, we are continuing to capitalize on high-performers. This will strengthen our position as shifts within the market occur.

Thank you, Glenn. Can you elaborate on the strategies eXp Realty intends to employ to capitalize on the emerging global real estate opportunities? How will technology shape the company's future?

It’s challenging to predict the landscape. We recognize that international real estate is quite fragmented. Homehunter.global excites us as it helps simplify the home search for consumers. We’re also exploring avenues such as assisting with international mortgages and many more. Technological advancement is critical; we have made significant investments in AI and have secure enterprise accounts with OpenAI, which we’re enthusiastic about. Our focus on big data has begun integrating with our NPS methodology, which is part of our commitment to making real-time informed decisions. We envision a future wherein our brokerage operates in a highly algorithm-driven manner. Despite the involvement of humans in many areas, all developments encourage embracing technology as fundamental for providing agents and consumers with a competitive advantage while enhancing operational efficiency. Thus, we remain committed to global technological investments as we grow.

Great. Thank you, Glenn. Thank you everyone for joining. Please stay connected by visiting expworldholdings.com for the latest updates regarding eXp News, Results, and Events. Additionally, you will find a recording of this call and our latest investor presentation in the Investors section of that site. Thank you for attending, and this concludes the eXp World Holdings third quarter 2023 earnings fireside chat.

Thank you very much.