Good day, everyone, and welcome to the Compass Second Quarter 2023 Earnings Call. I would now like to turn the conference over to Richard Simonelli, VP of Investor Relations. Please go ahead.

Thank you, operator, and we appreciate your time today, folks. Good afternoon, and thank you for joining the Compass second quarter 2023 earnings call. Joining us today will be Robert Reffkin, our Founder and Chief Executive Officer; and Greg Hart, our Chief Operating Officer; and Kalani Reelitz, our Chief Financial Officer. In discussing our company's performance, we will refer to some non-GAAP measures. You can find the reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in our second quarter 2023 earnings release posted on our Investor Relations website. We will make forward-looking statements that are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. These statements include our guidance for the third quarter and full year 2023 and comments related to our operating expenses and cash flow levels as well as our expectations for operational achievements. Our actual results may differ materially from these statements. You can find more information about risks, uncertainties and other factors that could affect our results on our most recent annual report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC and available also on our Investor Relations website. You should not place undue reliance on any forward-looking statements, and all information in this presentation today is based upon our time at August 7, 2023. We expressly disclaim any obligation to update this information. I'll now turn the call over to Robert Reffkin. Robert?

Thank you, Rich, and thank you for joining us today for our second quarter results conference call. I'm pleased to share that in the second quarter, we grew market share, grew agent count and grew margin, while delivering positive free cash flow and strengthening our cash position. We achieved strong financial results in line with guidance in the midst of a quarter that was impacted by mortgage rates increasing 100 basis points to 7% and unexpected market trauma resulting from the debt ceiling standoff in Congress. We will continue to take a disciplined approach to our operating expenses and run our business efficiently while still investing in our agents, platform and growth. We continue to launch new products into our platform, such as Performance Tracker, Compass GPT integration and one-click Title and Escrow. We will be rolling out more team workflow functionality for agent teams over the next two quarters. And next year, we expect to launch our client portal, which over time will become the client's single destination for everything home before, during and after the transaction for both buyers and sellers. We are seeing a positive trend on agent retention. Every month in the first half of the year, the number of principal agents we lost was less than the month before. July, while not yet closed, looks to continue the trend, and we believe this trend is being driven by fundamental changes in the competitive landscape where the Compass value proposition relative to competitors is strengthening. There is a critical shift happening in the brokerage industry that is resulting in structurally weakened competition and a key differentiator for Compass. The Compass business model always has been and always will be focused on providing the best tools and services to agents, so they can best grow their businesses. We are seeing many traditional brokerages that historically competed for agents with value-added support and services, now significantly reducing investments in these areas, which, for the most part, was already much less than what Compass provided. We believe this is driven by competitors facing any combination of factors that Compass doesn't face, specifically rising debt service costs, increases in agent departures, declining market share and margin, worsening free cash flow and, for some VC-backed companies, a pullback in the VC funding market. As an example, including equity compensation, we have invested over $1.5 billion in our technology platform over a 10-year period and continue to invest approximately $100 million in R&D a year, which makes it very challenging for competitors to catch up in a meaningful way. In the peak of the pandemic real estate boom, many competitors were talking about investing significant dollars in R&D. But with the shift in the market, we are not seeing that come to fruition. The current pressure on competitors is resulting in two positive trends for Compass: one, we're seeing competitors reduce the financial incentives they were using to attempt to recruit Compass agents; two, a race to the bottom environment where many traditional brokerages that historically competed on value-added support and services, for example, support staff, training, coaching, in-person office culture, attempts to integrate third-party tech. We are now seeing them cut back on these areas, and in many cases, are adding themselves to the already crowded low-cost, low-value brokerage service landscape, a model defined by charging agents the lowest possible amounts and providing them the lowest possible amounts. Quite simply, Compass is going the other direction. We are strengthening our in-person culture and investing heavily in tools and technology for agents, capitalizing on the downturn to widen our competitive advantages, as the high-value brokerage space is becoming much less crowded. It would not surprise me to see in the years to come, Compass as the only major national brokerage competing to serve agents with high-value products and services and universally known for creating more tangible value for agents than any other company. Our financial results demonstrate that our aggressive stance in cost discipline and a reset of operating expense levels throughout 2022 and continued into 2023 is working. In a moment, Kalani will discuss the details of our second quarter results, but here are some important highlights. We generated our second best quarter of adjusted EBITDA in company history with adjusted EBITDA of $30 million. We delivered on our commitment to be free cash flow positive in the second quarter with $51 million of free cash flow. This almost completely makes up for the first quarter of free cash flow deficit and positions us to achieve our goal of being free cash flow positive for all of 2023. We ended the second quarter with $335 million in cash and cash equivalents. Given our ability to generate strong free cash flow, ongoing improvement in operating expenses and positive free cash flow outlook, we repaid the $150 million draw on our revolving credit facility in July. With the exception of the $30 million used to fund our very successful Compass Concierge program, we have no corporate debt. The business is on extremely solid footing with over $450 million of liquidity today. For the third quarter in a row, we improved market share. Our market share is now 4.6%, an increase of 45 basis points over the last three quarters. I want to emphasize that we have successfully improved operating expenses by $500 million on a run rate basis in the last 12 months. We said we would cut OpEx from an annualized run rate of over $1.4 billion to $950 million, and we did it. We said we would be free cash flow positive in Q2, and we did it. We are very strong, and we are still investing in growth and the platform. We are excellently positioned for the cyclical upturn that will come when the market normalizes. And when the market returns, we will work to ensure that our OpEx does not. Specifically, we expect to exit 2023 at a $900 million OpEx run rate and are committed to a path we have outlined to maintain our OpEx at $900 million in 2024 and are focused on maintaining that level in 2025 as well. We are confident that this approach ensures ongoing operating discipline, while enabling us to continue to invest in the future growth of our business, growing and retaining agents and building upon our competitive advantage with the only proprietary end-to-end technology platform for agents in the industry. When the market improves in the future, we believe the company will be well positioned to generate substantial free cash flow over the long term. We continue to be laser-focused on what we can control and remain diligent in our desire to achieve positive free cash flow in 2023. I remain incredibly excited about the future, and I want to end by thanking the entire Compass team of employees and agents. Their incredible dedication in these difficult times has allowed us to make it through the first half of 2023 with the confidence that we have a strong foundation for future success. I'll now turn it over to Greg.

Thank you, Robert. We believe Compass has the best, most experienced connected and supported agents in the industry. As a result, they have been able to capitalize in a tight inventory environment, allowing Compass to continue to outperform our competitors by growing market share for the third consecutive quarter. In the second quarter, we processed just over 54,000 transactions, a decline of 19% from a year ago, which compares favorably to the 21% decline in transactions for the entire residential real estate market in the second quarter as reported by the National Association of Realtors. Although many agents have left the industry, as evidenced by declining NAR membership since its peak in October 2022, our market share for Q2 2023 was 4.63%, up 13 basis points versus Q1 2023 and up 45 basis points from Q3 2022. Our growth team is having increasing success, and we continue to grow our principal agent count since we eliminated cash and equity sign-on incentives last summer. The vast majority of agents tell us the Compass platform is their number one reason for coming to Compass. For Q2 2023, our average number of principal agents increased to 13,633 principal agents, up 3% year-over-year and an acceleration from Q1. We also saw more agents returning to Compass from other brokerages than in Q1. We call these win backs, and the primary reasons these agents cite for returning to Compass are our technology platform, our culture and the caliber of our agent network and the referrals it drives. These factors also contribute to our strong agent retention as agents are staying at Compass at higher rates. For Q2, we continue to maintain high levels of retention of principal agents with over 90% annualized retention in the second quarter of 2023. And when agents have left Compass, most of this attrition has come from agents who are less productive in terms of both transaction count and gross transaction volume, as some agents have decided to leave the industry entirely during this prolonged market downturn. Going forward, we will continue to be opportunistic in our approach to adding to our agent base via selective M&A, while pursuing deal structures that allow us to utilize minimum upfront cash and limit equity dilution. We are proud of the fact that the majority of the agents coming to Compass tell us that one of the primary reasons they are doing so is for the platform, and we continue to invest to make this platform better. We recently released Compass Performance Tracker, a powerful addition to our integrated platform that helps agents and team leaders to be more productive by allowing them to better monitor their activity and how that translates to business performance. This comprehensive but simple-to-use dashboard helps agents to set goals and create activity targets for actions like texts made, calls placed and emails sent to achieve those goals. They can then monitor that activity and track production in one place. This enables agents to use data-driven insights to help them make more efficient decisions and take more intentional action to improve their business performance. Like the rest of our platform, Performance Tracker is fully integrated with the other tools within the platform, which increases efficiency and accuracy by eliminating the need for agents to pay for third-party tools or manually enter redundant data on their production. Our Title and Escrow business has been outpacing our internal targets throughout the first half of 2023 as the business is generating positive adjusted EBITDA and increasing attach rates after our successful launch of Title and Escrow integration in the Compass platform in Southern California. Since that March launch, platform integration has delivered new and repeat users, resulting in an acceleration in our attach rate at Chartwell Escrow and Consumer Title, our two T&E entities in Southern California. At Chartwell Escrow, the platform is driving increased users and contributing to the highest attach rate on record in Q2. And since launching, 28% of Chartwell's Compass transactions opened in Southern California originated on the Compass platform. At Consumer Title, 48% of their Compass orders originated on the platform, resulting in a significant increase in our attach rate. We continue to focus on strategically expanding market coverage for our Compass platform integration to accelerate the margin accretion driven by our T&E portfolio. We expect to add Title and Escrow integrations in Philadelphia, Washington, D.C., Virginia and Maryland by the end of the year. The Compass platform is built to save our agents' time and to help them achieve better business results, and we leverage AI to help accomplish both objectives. As the leading technology-enabled brokerage and the number one brokerage in the U.S., our agents have been benefiting from our investments in artificial intelligence for a number of years. This isn't a new area for us. As I mentioned on our Q1 call, we've been leveraging AI across our platform since 2020 through features like our likely to sell recommendations, search suggestions, similar homes, our CMA generation tools and in our video studio. We recently launched the beta for our integration of OpenAI's ChatGPT-4 capabilities directly into the Compass platform to help agents save substantial time with tasks such as writing listing descriptions, creating marketing collateral and automating outreach with clients. We have seen tremendous interest in this technology from our agents and have had a very positive response to our beta. We're excited to roll these capabilities out to all our agents over the coming months. We believe that we'll see an outsized return on our AI investments because of our integrated platform that AI tools can build upon and enhance. By its nature, all artificial intelligence depends on data to drive its performance. Our end-to-end platform provides more touch points where we can apply machine learning to improve the tools our agents use, and our platform delivers more data to help us enhance the performance of those machine learning models. This, in turn, drives more usage as agents see better results, which then generates more data to improve the models. Compass is unique in this regard. Brokerages that don't offer their agents an integrated platform won't benefit from this virtuous cycle. In June, we launched a global affiliate referral program with BARNES International Realty. This will enable our agents to place luxury listings in front of a global affluent audience. We've seen strong interest in this program from Compass agents across the country, and dozens of referrals have already been made, ranging from a $25 million referral to a $20,000 monthly rental. I am proud of the major strides we've taken in the transformation of Compass in what has been a very challenging market over the past 12 months. Our agents and our employees continue to demonstrate that they are the best in the industry, which is why Compass is the number one brokerage in the country. I will now turn it over to our CFO, Kalani Reelitz.

Thanks, Greg. Today, I will review our second quarter financial results in more detail, and then I'll provide an update on our guidance expectations for the third quarter. We continue to perform with focus and discipline in the midst of this historical low housing market. We continue to be focused on controlling what we can control, namely our cost base and our ability to attract and retain the best agents. As our Q2 results show, the strong focus on controlling our cost base resulted in the generation of adjusted EBITDA and strong free cash flow despite this extremely challenging market. For the fourth quarter in a row, we continue to reduce our operating expenses. Turning to our detailed financial results. Our second quarter revenue was $1.5 billion, falling within our guidance range of $1.45 billion to $1.6 billion. This compares to $2 billion of revenue in the prior-year period, representing a 26% reduction year-over-year. Revenue came in on the lower end of our expectations as we saw pressure from continued increases in mortgage rates since the time we put out our guidance back in May. Gross transaction value was $56.8 billion in the second quarter, a decline of 26% from a year ago, reflecting a 19% reduction in total transactions as well as a decrease in average selling price of about 9%. Our non-GAAP commission expense as a percent of revenue improved by approximately 38 basis points from Q2 of last year to 81.93% when excluding the impact of the Agent Equity Program on the year-ago period. As a reminder, 2022 was the last year we offered the Agent Equity Program, which allowed our agents to exchange a portion of their cash commission for equity. Page 14 of the Q2 investor deck includes additional details on the Agent Equity Program's impact on the commission line in the prior-year periods. You will continue to see this differential through each quarter in 2023 until we anniversary the sunset of the Agent Equity Program in Q1 2024. Our total non-GAAP operating expense, excluding commissions, was $238 million for the second quarter or $953 million on an annualized basis. As we talked about previously, many of our non-commission-based operating expenses are somewhat fixed in nature and have historically increased sequentially from quarter to quarter as opposed to varying in line with revenue. However, due to our cost reduction initiatives implemented over the past year, the $238 million of OpEx for the second quarter reflects a $128 million reduction from our OpEx of $366 million in the second quarter of last year. On an annualized basis, this reflects a reduction of over $0.5 billion compared to the same quarter just one year ago. Our management team remains disciplined and focused on our operating expenses. And as Robert mentioned, we are focused on maintaining our operating discipline that allows us to sustain our new cost base. As a reference point, the non-GAAP operating expenses we refer to include the expense categories of sales and marketing, operations and support, research and development and G&A, and excludes stock-based compensation expense and other expenses that are excluded from adjusted EBITDA. We've included tables on Page 12 and 13 in our Q2 investor deck that reconcile these amounts. Our adjusted EBITDA for the second quarter was $30.1 million. While within our guidance range, it was at the low end of our expectations, primarily due to the challenging market conditions, which negatively impacted our second quarter revenue and the resulting flow-through effect to adjusted EBITDA. Our GAAP net loss for the second quarter was $48 million compared to a loss of $101 million in the same period a year ago. Included in the GAAP net loss for the quarter are non-cash charges, which include $39 million of non-cash stock-based compensation expense and $22 million of depreciation and amortization expense. Additionally, during the second quarter, we incurred a restructuring charge of $16 million related to continued efficiency improvements. Free cash flow during the second quarter was positive $50.7 million, which compares favorably to a negative $29.9 million of free cash flow a year ago, driven primarily by the improvements in adjusted EBITDA, lower capital expenditures and other favorable changes in working capital. In particular, capital expenditures were just $2.6 million in the current quarter compared to $20.6 million a year ago, driven by our cost discipline and the intentional slowing of expansion to new markets and new offices. Cash flow can be impacted by the timing of cash collections from our clients and the payments of cash to our agents and vendors and the timing of our payroll cycles in relation to the calendar quarter-end. We had $335 million of cash and cash equivalents on our balance sheet at the end of June, which reflects the payback of $75 million of our revolver during the quarter. And therefore, as of June 30, the outstanding balance on our revolver was $150 million. Given the continued relative stability in the market and our strong cash flow during the second quarter, we made the decision to repay this remaining outstanding balance of our revolver of $150 million in July to save on interest costs. We have access to liquidity of over $450 million to the cash on our balance sheet and the capacity on our revolving credit facility, and therefore, we believe we are well positioned to react to continued market challenges. Now turning to our financial guidance. Our results for the first half of 2023 confirmed that our operating expense discipline creates meaningful performance improvement. As we look forward to Q3, we continue to see mixed signals in the market. And while some trends have improved, we've also seen additional market risks. For Q3 of 2023, we expect revenue in the range of $1.3 billion to $1.4 billion, and positive adjusted EBITDA of $15 million to $35 million. We do expect a revenue lift from the impact of net new agent additions over the last year, however, similar to the first half, we anticipate this will be offset by mix drag, particularly from declines in California, which is our largest market and experienced record sales last year. Importantly, we are on schedule to be free cash flow positive again in the third quarter, given our continued cost discipline, assuming transactions stay in line with industry expectations for the year, we remain on schedule to be free cash flow positive for the full year. Additionally, we are reaffirming our expectations for our full year non-GAAP operating expenses to be in the range of $850 million to $950 million. We expect to be at the midpoint of this range on a run rate basis by year-end. For the last year, we've spoken about our commitment to reduce our cost base and have proven that commitment through our results. It is clear to us that our strong commitment to cost control is working and led directly to our solid adjusted EBITDA results in Q2, despite declining revenue. And we expect our continued commitment to cost control to drive favorable results over the remainder of the year and beyond. While we are excited with the results to date, we are even more committed today to our cost discipline as we maintain our operating expense levels over the next couple of years. Thank you again to our agents and team members for all you do for Compass. I would now like to turn the call over to the operator to begin Q&A.

We'll take our first question from Bernie McTernan with Needham.

Great. Thank you for taking the questions. Maybe to start, we'd just love to get your thoughts in terms of what the guidance contemplates to the broader real estate market in 3Q? And when you think the industry can get back to positive year-over-year growth?

Yes. In terms of the overall market, we continue to see an increase in both buyers and sellers. Buyers have started to accept the 7% mortgage rates as the new normal. This is evident in the monthly price increases we've observed this year. We are noticing a rise in cash offers, particularly in Manhattan where 65% of offers are cash, compared to around 40% nationally, which is historically about 25%. However, there remains a significant inventory shortage. Therefore, we believe that the market will decline by approximately 20% this year. We previously indicated a decline of 15% to 20%, but it now seems more aligned with the 20% mark, given the current inventory to sales ratios and the pace at which homes are coming to market.

Understood. That was helpful commentary. Thanks, Robert. You provided some useful insights on agent retention and churn. It appears you experienced significant agent acquisition towards the end of the second quarter and early third quarter. I would appreciate your thoughts on how you're planning for gross additions for the remainder of the year.

Yes. We did see some positive momentum. I sort of referenced that in my scripted remarks, and we've been really encouraged by the team's performance in the second quarter. It was one of our most productive quarters we've ever seen in terms of the number of principal agents that we recruited per recruiter, strategic growth manager. And we hope to continue that. And so the challenge for the team is to how to not just continue at that level, but to take that up over time. In terms of net agent adds on a go-forward basis, we don't have a formal and haven't ever provided a formal forecast for net agent adds, but we definitely expect the trends that we've seen to continue, and we're trying to use them to be even more positive, and that's the challenge we've set for the team.

Great. I have one last question for Kalani. Considering the seasonality of operating expenses, should we anticipate any? You mentioned that you're preparing for 2024. If you achieve the $900 million run rate by the year's end, can we assume that quarterly operating expenses will simply be $900 million divided by four? Or should we factor in any seasonality?

Yes. Thanks for the question. We are a business that kind of move sequentially by quarter versus, say, that variable kind of in line with revenue. So I would expect, Bernie, there'd be some small seasonality aspects to it, but overall, we should keep relatively the same amount of OpEx. So materially, I think it should look the same. There might be some give and take, especially with Q2 as a kind of a higher revenue quarter. But overall, we tend to be more of a kind of straight line through the year versus a variable in line with revenue.

We'll take our next question from Soham Bhonsle with BTIG.

Hey, good evening, everyone. Thanks for taking the question. Kalani, maybe, I wanted to dive in a little bit on the underlying assumptions for the guide in 3Q. So the $1.35 billion midpoint, is it fair to say that you're assuming sort of flattish ASP next quarter and assuming similar market share there take, I guess, on a year-over-year basis? And then on EBITDA, the $25 million, the midpoint it sort of looks like it would take your non-GAAP OpEx to that $900 million range by 3Q. So, does that mean that there's potential to maybe go below that $900 million run rate by 4Q?

Yes, I'll address the last question. We are working our way down from $950 million to $900 million. We have already identified and started implementing most of the necessary actions to reach that target. It's primarily about the timing of vendor contracts. We expect to adjust to the fourth quarter run rate smoothly. We are continuously seeking cost-saving opportunities and looking for ways to enhance efficiency. We believe our guidance of reaching $900 million by the end of Q4 is appropriate and reflects the correct level of operating expenses at this time.

Okay. And then, a word on recruiting, thanks for the color earlier. But just wondering on the competitive environment. I guess, could you maybe bifurcate what are you seeing for full-service models versus other cloud-based or discount-based models? Because one of the things that we're hearing is agents might be moving to some of these cloud-based models because they can just keep more of their sort of their split today. But I just wanted to hear from you what you're seeing on the ground.

Yes. What we're observing is a divide in the market. On one end, there are discount brokerages that charge low fees and offer minimal services. On the other, there are traditional brokerages that have charged more historically and provided greater value. However, many of these traditional firms, which used to attract and retain agents through valuable support services, culture, training, and coaching, are now pulling back significantly by closing offices and reducing support. As a result, agents are questioning the high fees when there's no office or adequate support and are considering switching to discount brokerages unless fees are lowered. This trend signals a potential downward spiral for some traditional competitors as they shift towards a discount brokerage model. While discount brokerages have always existed alongside Compass, I believe it's a zero-sum game, as only a limited number of top agents will choose a discount model. Generally, the best agents prefer to align with the best support to enhance their performance, which is where Compass comes in.

Great. Thank you.

We'll take our next question from Jason Helfstein with Oppenheimer.

Thanks. First, for Kalani, could you explain why the revenue is closer to the lower end of the guidance rather than the midpoint? Was it due to market share coming in lower than expected, a decline in industry trends later in the quarter, or a combination of factors? For the second question, Robert, continuing to focus on market share, how should we view your share gains? You are gaining share, but at a slower rate compared to last year. Is there a possibility of acceleration to levels more in line with what we saw last year? Additionally, how are you approaching your strategy for market expansion moving forward? Thanks.

Yes. When we provided our guidance for the second quarter, mortgage rates were around 6%. However, we faced an unexpected situation with the debt ceiling standoff and mortgage rates rising to 7%. This was unforeseen. The key factor affecting our revenue was the change in the real estate market, not market share trends. Kalani, would you like to address the second question?

Yes. Sure, Jason, can you just repeat the second question to make sure I heard it right?

Yes. I mean either one of you guys, but basically, I think like investors are trying to look at kind of share, and obviously, that we look at volume, you look at GMV or gross transaction value. But I mean the share gains that you're seeing this year are less than the share gains that you saw last year, like if you're looking on a year-over-year basis. Do we think that share gains can accelerate more to the levels that you saw last year? And then how much of that is a function of kind of continuing market expansion?

I'll let Greg take the first part of that. I think you're the right one.

Yes. So it's a great question, Jason. The way that I think about that is if you think about our market share last year, the first two quarters reflected the strength of our business in California, and California has been substantially impacted for everybody in the industry over the last year. And because we were very heavily weighted towards California, our share gains relative to that have moderated, but we continue to gain share over the last two quarters despite that. So I would expect that over time, particularly as the market recovers and California recovers, that you'll see our market share gains over time, hopefully increase rather than just stay at the current levels. We continue to grow share through two primary drivers: one, continuing to grow our agent count; and two, our agents outperforming their competitors in all of their markets. And we believe our platform is a huge driver of their ability to outperform their competitors, along with the fact that our agents are typically among the best agents in their markets. The caliber of our agents is a big asset for us from a market share perspective.

Any thoughts about market expansion?

Yes. I don’t anticipate any significant new market expansions, but we are making moves into new areas within our existing regions. For instance, we are increasing our presence in certain parts of the Bay Area more than before. We expect to see more expansions into these submarkets and additional investments.

We'll take our next question from Matthew Bouley with Barclays.

Good afternoon, everyone. Thanks for taking the questions. Maybe just on the commission split, the $81.9 million non-GAAP expense as a percentage of revenue. It's obviously down year-over-year, as you've been alluding to, maybe sneaking up a little bit sequentially, which I think is normal seasonally. Is that the kind of peak commission split for the year? Or how do you think about that metric trending going forward, given everything what you're seeing on the competitive side? Thank you.

Yes. Hey, Matthew, it's Kalani. To clarify, the commission split will decline throughout 2023, mainly due to the non-comparable nature of our Agent Equity Program. Without the Agent Equity Program, there's about an 80 basis point impact. Excluding that, over the last two quarters, we have gained market share between 30 and 40 basis points. I expect this trend to persist. I believe Slide 12 in our presentation shows the reconciliation, which illustrates the impact of the Agent Equity Program on last year's commissions, so you can calculate that accordingly. I would say, on a direct comparison, we should see a margin increase of 30 to 40 basis points on a quarterly basis this year.

All right. Got it. Thank you for that, Kalani. And then secondly, super high level on the topic of generative AI. Great color at the top around sort of Compass' head start. Are you worried at all that some of that could actually level the playing field a little bit? And I guess really my question is, how do you kind of stay ahead of the pack to the extent some of your competitors could have access to some of that?

Well, our competitors, for the most part, don't actually have their own platforms. So the tools that their agents use are going to be spread across a diaspora of third-party licensed software. And so, while each of those individual vendors might leverage AI to improve what they do, it's not all integrated into one platform. So, an agent could use AI to do something for marketing in one place. But the benefit of that is limited to that take. If they want to get at another part of their business, they have to then copy it, paste it, put it into the app. And so the benefit of our platform is it's all together in one place. And so, as an example, for the integration that we've done with ChatGPT-4 in Compass, you can create a listing description. The listing description is pulling all the information from the MLS data that we have. So, it's leveraging all of the metadata that we have and pulling that directly in. The way that we've talked about it with our agents is because one of the other questions that people sometimes ask is, "Will AI disenfranchise or disintermediate agents?" And my perspective is absolutely not. It will make the best agents better. The ones who leverage AI will get better at what they do. They will save time and they'd be better able to focus on where they truly provide value to their customers. Listing descriptions don't get you to perfect. They don't do the job for you, but they do 80% of the job in one second. And then the agent can put the final touches on it to have it reflect their brand and the way that they want to present themselves and their client's listing to the market. So, my belief is that AI will actually increase the differentiation that Compass offers versus others. We've seen that was likely to sell. No other brokerage has anything like likely to sell. It's generated more than $100 million of incremental revenue in the last two years. You only get that benefit because our agents are using our CRM on a daily basis. The contact information is in there. We're able to create an AI-driven model that scores all of that and then recommends to agents, the past clients they should reach out to because we believe that, that home has a higher likelihood of going on the market in the next year. And we've had amazingly positive responses from agents. So my perspective is it will actually increase our competitive differentiation over time.

It's great color. Thanks, Greg. Good luck, everybody.

Thanks, Matthew.

We'll take our next question from Matthew Cost with Morgan Stanley.

Hi, everybody. Thanks for taking the questions. I have two. Just starting with the commentary at the beginning of the call about launching a consumer-facing portal next year. I guess, can you talk through what do you think will distinguish that offering from your competitors and some of the key execution hurdles to building that? And then, secondly, just on the expansion of the T&E business outside of Southern California, you mentioned a couple more markets coming by the end of the year. Do you see that driving a measurable margin impact, if not this year, then, in '24 at the company level? Thank you.

I will begin by discussing the client portal, and then Greg or Kalani can contribute on travel and entertainment. Regarding the client portal, the primary reason agents return to Compass is that their clients miss collections, which is a collaborative tool that allows agents to work with buyers on the listings they are reviewing. This tool provides real-time updates on pricing and status changes, eliminating the need for agents and clients to sift through emails for updates. All comments, including those from multiple clients involved in the search, are consolidated in one place. When an agent departs, clients often feel at a disadvantage, having to restart their search and deal with fragmented communication. Additionally, clients desire more tools like tour sheets that enhance collaboration between agents and clients. Historically, much of what we have developed for agents remains invisible to clients, as it is only accessible through the agent's view. The objective is to centralize all communication and resources that agents share with their clients in one accessible location dedicated to home-related matters. For instance, sellers have access to a digital comparative market analysis that currently exists in a static format and isn't easily viewable in one location. They need to rely on agents for updates. Another example for sellers includes digital marketing efforts such as ads on various platforms and engagement metrics across multiple sites, which are typically communicated to clients individually. By consolidating what we've created for agents into a unified platform, we can offer visibility into transaction timelines and the Title and Escrow processes. For buyers, we intend to enhance collections by integrating negotiation elements such as form files and e-signatures into this single platform. Our aim is for buyers and sellers to utilize the client portal throughout the entire transaction process. Ultimately, we aspire to incorporate additional services, such as mortgage, title, home insurance, home warranty, and home security, into the client portal to enhance monetization opportunities.

Great. And maybe just to build, Robert, on that slightly, one of the key things that we think the client portal can do in addition to providing value to the client as they're working with an agent on a transaction, whether they're buying or selling a home is to also provide value to the client after that transaction and in the time that they own their home, but always in a way that reinforces the value of the Compass agent who assisted them with that transaction. And so, Title and Escrow integration is actually an interesting thing to talk about with respect to that because Title and Escrow are important parts of transactions. There's a lot of stuff that happens that you need to track, you'd have to have dates, you have to try documents, etc. We want the client portal to be a repository for all of those things, but the dates and tracking that and who owns the next step on them, but also all the documents that get created. So the clients can always access them, like for tax season, etc., after they've purchased or sold a home. And the integration that we've done right now within business the business tracker area of our platform is just an agent-facing integration. But the goal over time is to have pieces of that open up to the client and to other third parties, obviously, always in a secure fashion. So that's one of the reasons that we're excited about the Title and Escrow integration, not just for the incremental attachments driving, but also for the opportunity to continue to improve the client experience as well. With that, I'll pass it to Kalani to speak to the integrations and what impact we might see from a margin perspective over time.

Yes. Thanks, Greg. And Matthew, I think just to finish it off, I think from the financial side of it, we are excited about our adjacent services. All of our adjacent services come with very favorable margins to us and to our run rate. I think what you should expect is over the next few years, say, two to three years as we continue to grow our adjacent services and spread beyond where we are today, you'll start to see it become a more meaningful percent of our total dollars and then you'll start to see. So I think you should expect over the next few years for it to start to help and add some margin accretion.

We'll take our next question from Ryan McKeveny with Zelman.

Hey, thank you for taking the question. Also on the T&E side, you called out reaching positive adjusted EBITDA and the accelerating attach in Southern California. I think Philly, D.C., Maryland makes sense. I think you've got a pretty good footprint there already, so maybe the natural extension of where to go next. Any thoughts on expansion beyond those markets? And at a high level, I know that OpEx and cash flow is the target that's most important at the moment, but it does feel like the success you're seeing in SoCal could justify a faster rollout to drive more attach, try more EBITDA contribution with the T&E. So maybe just talk to us about bigger picture roadmap of the puts and takes behind how quickly you want to kind of ramp T&E into more markets going forward? Thank you.

In the new year, we will expand the title integration into our Colorado operation as well as our Texas operation. And we expect to be able to launch title likely in Florida as well over the course of this year. With the OpEx reality, we have to make trade-offs. And so, we're moving as fast as OpEx discipline allows.

That's helpful. And Robert, just California, recognizing the share gains you're seeing despite that headwind is obviously good. I guess just any thoughts more recently on how California generally is performing? We've all seen some of the headlines around the home insurance companies pulling back. I guess any incremental impact there or just your high-level view on California?

I haven't noticed any effects from the home insurance situation in California or Florida on transactions yet. I've heard the concerns, and it is a significant issue, but there hasn't been any impact on transactions as of now. This might be due to the high number of buyers and sellers. Time will tell. In California, and really across the country, most agents describe the current market as the most inconsistent they've experienced. There are instances where one property received no offers and no visitors for three weeks, while a similar property just a few miles away had a crowd at the open house and multiple offers. There is no consistent narrative right now, but it remains an opportunity market where any agent, buyer, or seller can find success if they are innovative. Typically, the best agents gain market share in these conditions, and we are grateful to be a company that has always prioritized top agents. They will weather this challenge and increase their market share as a result.

We'll take our next question from Mike Ng with Goldman Sachs.

Hey, good afternoon. Thank you for the question. Robert, Kalani, it was encouraging to see the cost initiatives and commitment to maintain $900 million of OpEx in 2024 and 2025. I just have two related questions. First, I was just wondering if you could talk a little bit about the confidence level in that $900 million of OpEx. Are there other areas where you can continue to cut if needed to fund inflation or respond to competition? And then second, I can appreciate the free cash flow outlook as macro dependent, but is it also your current assumption that free cash flow will be positive in '24 and '25? Thank you.

Hey Mike, it's Kalani. Let me start with the first point. We are confident we will end this year with a $900 million run rate. As I've mentioned before, we have taken many steps to reach this goal. We are also focused on finding ways to improve efficiency and ensure we provide the best platform at the right cost. Looking ahead to 2024, we see opportunities such as low-cost labor and improvements in operating efficiencies to enhance the service we provide to our agents while being more efficient. We believe we can maintain the $900 million run rate and have a strategy in place for this. As we look to 2025, we will continue to explore similar avenues, including low-cost labor, vendor expenses, and how we utilize our office space effectively, which may involve consolidation. Overall, we’ll keep examining these options. Regarding our free cash flow for next year, our main focus is on managing costs. The key factor for reaching the $900 million will be revenue and how quickly the market recovers. As we've discussed, the $900 million figure is both a strategic position for our future and a way to prepare for a stable market. We will keep striving to control costs and work towards improving free cash flow. I feel optimistic about our cost structure for 2024.

We'll take our next question from Lloyd Walmsley with UBS.

Thanks. Two questions. First is, appreciate the color on California. Can you share any color on other big markets where you guys over-indexed geographically or maybe by price point, like what are some things going on in those markets or at those price points relative to the broader market that impact the business, positive or negative, I guess, especially with rates doing what they're doing? And then, second one, just you guys have been, I think, exploring some more asset-light sort of deals and potential for technology licensing, anything moving on that front that could help bring in new high-margin revenue streams without a lot of investment? Anything you could share there would be great.

Yes. In different regions, the markets that experienced the most growth during COVID are now facing significant declines. Over the last quarter, we continue to have a strong presence in the D.C., Maryland, Virginia area, where we are the clear leader. The debt ceiling issue has notably affected that market because many residents will feel its repercussions. While it’s good to see that situation stabilizing, it was a challenging time. Florida and other low-tax warm weather states are still performing well, and markets that have been proactive in returning to the office tend to be faring better than those that haven’t. For instance, when Amazon brought its workforce back to downtown Seattle, we saw prices increase as demand surged. However, this market remains unpredictable, according to both agents and my observations. The main constraint we face isn’t buyer demand but rather a lack of inventory, as many homeowners are locked into low mortgage rates—30% at 3% or below, 70% at 4% or below, and 85% at 5% or below. The difference between 4% and 7% impacts decisions significantly. I believe that once mortgage rates fall below 6% sustainably, we’ll see not only an increase in demand but also a rise in inventory, as there’s a backlog due to homeowners being rate-locked. Concerning our asset-light tech licensing expansion, there are always opportunities, but we are concentrating on our core focus. Our priority remains supporting our agents, ensuring we provide them with excellent service, building an optimal platform, and reinstating our in-person culture to historic levels while our competitors lag in this respect. Thus, initiatives around tech licensing aren't a priority for us right now.

Thank you. And that does conclude the question-and-answer session. I'd like to turn the call back over to Robert Reffkin, CEO, for our closing remarks.

Yes. Well, thank you, everyone, for joining today's call. I want to take these final moments of this call to thank all of the Compass employees and agents for their hard work and commitment to making Compass the number one real estate brokerage in the U.S. for the second year in a row. Together, we are proving that in the worst of times, Compass can generate free cash flow. The real estate market will come back. And when it does, I'm excited to show how much free cash flow we generate as we keep our cost base at these new levels. I'm confident that Compass is well positioned for the cyclical upturn that will come when the market normalizes. Thank you.

Thank you. That does conclude today's presentation. Thank you for your participation, and you may now disconnect.