Earnings Call Transcript - COMP Q1 2022

Operator, Operator

Thank you for being here and welcome to the Compass Inc. First Quarter 2022 Earnings Call. All lines are currently muted to eliminate background noise. Following the speakers' presentations, we will have a question-and-answer session. Rich Simonelli, Vice President of Investor Relations, please go ahead with your remarks.

Rich Simonelli, Vice President of Investor Relations

Thank you, operator, and good afternoon, everybody. Thank you for joining the Compass's First Quarter 2022 Earnings Call. Today's review of our actual financials will address the continuing operations of Compass and certain items that are presented on a non-GAAP basis. The reconciliations between GAAP and non-GAAP measures for first quarter financials, as well as our near-term guidance and long-term targets are included at the back of our Q1 earnings release, as well as the presentation posted on our website. Please also see our disclosure on forward-looking statements, which reflects Compass' current view of future financial performance, which may be materially different from our actual performance for reasons that we cite in our Form 10-K and other SEC filings. Joining us today will be Robert Reffkin, Founder, Chairman of Compass and Chief Executive Officer; and Kristen Ankerbrandt our CFO. Robert will provide a brief overview of Compass' results and a discussion of our strategy and then Kristen will cover the financial results and outlook in more detail. Now I'll turn the call over to Robert.

Robert Reffkin, Founder & CEO

Thank you, Rich, and thank you to everyone for joining our earnings call today. I hope everyone is safe and well. Today we are sharing our financial results for the first quarter of 2022 and our outlook for the remainder of the year. Before discussing the numbers and our market perspective, I want to express my gratitude for continuing the journey of growing this amazing business with our incredible team of Compass employees and over 27,000 top-tier agents. Thanks to their hard work, we are now the leading brokerage in the United States based on sales volume in 2021. We achieved this ranking in less than 10 years, surpassing long-established firms that have been in the market for over a century. What makes this achievement even more remarkable is that we reached the number one position with significantly fewer agents than our competitors and serving a much smaller geographic area, covering about half of the U.S. population. We enter these challenging times as the leading agency in the country, and we aim to emerge from this period even stronger. Our strong momentum from 2021 has carried into the first quarter, where we exceeded our revenue guidance by generating $1.4 billion. We also surpassed our expectations for adjusted EBITDA, reporting a loss of $97 million. Kristen Ankerbrandt, our CFO, will detail the numbers shortly. In these turbulent times, maintaining our cash position is a top priority. I am pleased to report that our balance sheet is robust, ending March 2022 with $476 million in cash and access to a $350 million credit facility. We have virtually no debt. As mentioned in our last financial results call, our revenues experience seasonal increases in Q2 and Q3, leading to anticipated positive EBITDA, which reinforces our cash position. We have various strategies to manage our cash expenditures, including controlling the pace of expansion, mergers and acquisitions, and recruitment investments. This allows us to regulate our cash flow as needed. While the outlook for the real estate market is uncertain, we have considered various negative industry scenarios and believe we will maintain significant liquidity while continuing to gain market share. We are managing our business to ensure we do not need additional capital. To reinforce this, we are closely evaluating our strategic roadmap and will slow investment based on our priorities. We aim to do more with less and drive cost efficiencies while adjusting our cost structure, which we believe will further strengthen the company. I view this period as a tremendous opportunity. Our past investments have given us a significant technological advantage over our competitors, creating an even larger barrier to entry in today’s economic climate. Importantly, we can reduce spending while continuing to enhance our cash position as we strive for positive free cash flow. Historically, we’ve demonstrated the ability to be agile and adapt quickly. Agility is part of our identity. Although current market conditions are affecting second quarter revenue, our confidence in our future plans remains unchanged. We are committed to achieving free cash flow positivity in 2023, aiming for an adjusted EBITDA margin of 10% by 2025 and a free cash flow conversion of 8% to 9%. We are dedicated to enhancing margin expansion through cost management while continuing to capture market share due to our competitive positioning. For instance, we have already reduced the average cost to serve our agents by 35% since 2018 and are targeting a further 9% reduction in 2022. By leveraging technology, we plan to decrease our costs even more aggressively across all aspects of our business to meet our objectives. We will continue to invest in enhancing the Compass platform but will prioritize our investment dollars wisely. We are confident in our long-term potential for market share growth, given that we possess the top agents and the leading technology platform in residential real estate. In a potential prolonged market downturn, we believe agents will increasingly seek to join Compass, helping us gain more market share. Agents are coming to Compass and staying because we support their business growth, which in turn drives Compass’s growth. We achieved a market share of 6.1% in Q1 2022 and 5.8% on a Last Twelve Months basis. This reflects an increase from 5.6% in the fourth quarter, driven by the addition of new agents and the growing productivity of the Compass platform. Despite these gains, a large portion of the market remains available for Compass to capture. As I mentioned earlier, we operate in areas covering less than half of the U.S. population, presenting us with ample growth opportunities. We will also grow by welcoming more agents in our current markets. Our confidence in gaining market share stems from historically proven productivity enhancements. I would like to emphasize five key performance indicators related to agents that we focus on daily to drive market share gains while improving operational efficiency towards our margin goals. First, agent recruitment. In Q1 2022, we recruited as much gross commission as in the same period last year, but with better economics and fewer incentives while enhancing our non-GAAP P&L as a percentage of revenue. Notably, 63% of new agents in Q1 2022 made their decision for a less favorable split than they had before, as they believe they can grow their business better at Compass. Their reasons for joining us include our growing reputation in the market, the attractive network for client referrals, and our advanced Compass platform that saves them time and money. Ultimately, agents aim to boost their profits, and we believe that in challenging times, more agents will seek to strengthen their business by coming to Compass. Second, agent retention. Our robust technology platform, the strength of the Compass brand, and positive feedback from our network support our ability to successfully recruit and retain agents. As reported last quarter, our principal agent retention rates consistently exceed 90% in an industry averaging 68%. Third, technology adoption. Increasing agent use of the Compass platform is a focus for 2022, as adoption enhances retention and revenue. Our technology is crucial for future agent productivity and margin growth. We initiated two new coaching programs in Q1 2022, with one-third of our agents participating and dedicating three hours weekly to learning how to leverage the Compass platform for business growth. A key focus was our AI-powered “likely to sell” tool, which generates over 14,000 recommendations weekly, helping agents reach out to potential clients they may have not contacted in a while. Our technology gives us a competitive edge that enables us to monetize our Compass platform more effectively, widening the gap between us and competitors. Fourth, improving our cost to serve agents. Now that we are close to supporting the entire transaction on our platform, we are focusing on using our technology to lower the cost to serve agents and enhance our margins, driving better leverage from our tech investments. No one else in the industry is attempting this at such scale. We aim to deliver high efficiency by automating and standardizing processes, allowing us to serve more customers with the same workforce. Our organizational design is being simplified to reduce management layers and streamline customer interactions. Fifth, adjacent services. We have just begun to establish our adjacent services business, which currently represents a small portion of our revenue. Thus, the downturn in the refinancing market isn’t materially affecting our financials. We continue to see strong attachment rates for our title and escrow services, and I am excited about our recent acquisition of Consumer's Title, providing coverage across all of California’s counties. We are also expanding our mortgage operations by adding markets and loan officers. We believe that a company that increases profitability for agents will ultimately succeed in the real estate industry. Our Compass platform is designed with the agents’ needs in mind, and we’ve listened to their requirements. We are confident that we excel at enhancing agent sales while minimizing their operating costs, benefiting agents and driving profits for Compass. While revenue growth has remained modest due to market conditions, we are optimistic that our market share will continue to increase as we attract more agents, enhance their productivity, and expand our reach across the United States. This is why agents choose Compass, stay with us, and consistently outperform the industry. They join Compass believing they can accelerate their business growth more effectively than anywhere else. As a result, our total agent count has more than tripled since Q4 2018. We added nearly 400 principal agents and approximately 1,100 total agents in Q1 2022, just as we had anticipated. I have great faith in Compass and our agents' ability to thrive in various market conditions, as they have brilliantly demonstrated in the past and continue to do so today. Our employees are committed to developing and providing the most comprehensive agent-focused platform in the history of the U.S. We are dedicated to driving revenue growth, delivering positive adjusted EBITDA, and generating free cash flow for our investors. We will achieve this by equipping our agents with the tools and technology they need to boost their productivity, which will consequently drive profitable revenue for Compass. Lastly, as many of you have seen in today’s press release, we are making some leadership changes in the coming months. Greg Hart will expand his role as our Chief Operating Officer, adding oversight of the operations organization to his current leadership of the Compass product organization, enhancing collaboration between the teams that interact with customers daily and those developing tools and platforms to support customer success. Greg joined Compass two years ago after a 23-year career at Amazon, where he led the launch of Echo and Alexa, managed significant retail businesses, and oversaw Prime Video globally. Together with Chief Technology Officer Joseph Sirosh, he has guided the development of Compass’s integrated technology platform aimed at helping agents grow their businesses. Additionally, Kristen has decided to leave Compass in September. I want to thank her for her incredible leadership and impact on Compass. She has been instrumental in helping us grow the business, move toward profitability, and manage through COVID and our IPO. Her efforts have laid the groundwork for our 2025 margin targets and established a strong financial foundation. Kristen’s leadership over the past four years is a key reason we are well-positioned to continue growing, outperforming the industry, and taking market share while fulfilling our commitments to profitability and cash flow, regardless of market circumstances. Kristen has a long-standing ambition to start and lead her own company, and as the founder and CEO, I fully support her passion. We have engaged one of the world’s top search firms to assist in finding our next CFO, and Kristen will work with us on that process. Now, I will hand it over to Kristen.

Kristen Ankerbrandt, CFO

Thank you, Robert. These past four years at Compass have been an incredible journey, managing the company through outstanding growth to become the number one broker in the US delivering on our commitment to profitability, effectively managing the business through COVID and guiding the company through the IPO. As Robert mentioned, I have long had a passion to start and lead my own company and that conviction has only gotten stronger in my time here at Compass. I intend to launch my own investment funds, building on my 20-year career as an investor prior to Compass. It is rare to work at a company that aligns such a powerful mission with unbounded market opportunity. It's been a privilege to work with Robert and our talented executive team, who pushed me and the company to move further and faster every day. Between now and September, I look forward to partnering with Robert and the Compass team on a smooth transition plan that will allow Compass to continue to deliver for our agents, our employees and our investors. Now, let's turn to our Q1 results. We delivered strong first quarter results that exceeded our expectations, beating our guidance range for both revenue and adjusted EBITDA. We continue to gain market share and add more agents and transactions to the platform, despite inventory at record lows in the market. Our first quarter revenue was $1.4 billion, up 25% compared to Q1 2021, as we beat our guidance range of $1.28 billion to $1.36 billion. Q1 2022 transactions grew 18% to just over 47,000 and our gross transaction volume was $54 billion, up 23% compared to the prior year. The growth in GTV reflects strength in both units and our average sales price. Note that this transaction and GTV growth was achieved despite inventory being down over 20% across the industry in Q1 2022 versus the prior period. Transactions per principal agent were 3.8 in the quarter, down from 4.1 transactions in Q1 of 2021. This is not surprising since inventory for the first quarter was historically low, combined with the late start to the spring season. Despite this, our agents captured 6.1% market share in the quarter, up 90 basis points year-over-year. Right now the market is highly competitive for agents as they work with sellers and buyers to win listings and close transactions. In today's competitive market, the best agents tend to win and I firmly believe the best agents are Compass agents. Our adjusted EBITDA loss was $97 million as we beat our guidance range of a loss of $100 million to $110 million. This loss was larger than the prior year as a result of two key factors; first, our revenue in Q1 2021 had the benefit of a robust post-COVID market, while in Q1 2022 we saw a return to more normal seasonal trends. Second, our expense base increased in Q1 2022 compared to a year ago, driven by the annualization of investments we made last year to drive profitable growth in the long-term, namely in our platform, adjacent services and our new expansion markets. Our non-GAAP operating costs have remained relatively stable in recent quarters with Q1 OpEx flat with the fourth quarter. During the first quarter of 2022, we incurred a GAAP net loss of $188 million, compared to a net loss of $212 million in the prior year. Included in GAAP net loss is stock-based compensation of $64 million in Q1 2022, compared to $168 million in Q1 2021. The higher expense a year ago is related to a one-time acceleration of stock-based compensation expense in connection with our IPO. Now before getting to our guidance, I want to discuss what we are seeing in the market. The macroeconomic and geopolitical environments are applying a significant amount of pressure to our economy. Record inflation, the unprecedented pace of mortgage rate increases, the conflict in Ukraine, supply chain delays, continued COVID outbreaks and significant stock market declines have all contributed to a difficult environment. The first six weeks of the second quarter have resulted in tougher times across all industries. These headwinds along with constrained inventory contributed to a slower start to the second quarter than we expected. As a result, our Q2 revenue outlook was affected as you will see in our second quarter guidance. But despite uncertainty in the current macro environment, we still expect market growth in our markets in 2022 as a result of strong continued demand and historically low inventory that is driving prices higher. Home prices would have to reverse their current upward trend and fall dramatically to turn market growth negative. We do not believe this will occur, particularly with prices in our markets continuing to increase. I want to be explicit that we are actively managing our expenses and are prudent with our cash. With ample cash on our balance sheet as of the end of March and a $350 million credit facility, we do not see the need for additional capital to fund our current business plan. We believe we will have more than enough liquidity and can still continue to gain market share in 2022. We remain committed to getting to positive free cash flow in 2023 and 8% to 9% free cash flow margins in 2025 as we move towards our target of 10% adjusted EBITDA margins. And we have the control to quickly ratchet up or down our cash investment through a number of different levers as we demonstrated in the early days of the COVID pandemic. Already we found savings by slowing M&A, slowing expansion into new markets and allocating resources and prioritizing our investments as needed. We welcome the opportunity to accelerate some of the cost savings initiatives that were already planned for 2023 as we march toward our 2025 targets. This is a unique moment for us to execute on these initiatives sooner than we had originally planned. Now let me turn to guidance. As a result of the global economic and political uncertainty and in spite of our first quarter beat on both revenue and adjusted EBITDA, we believe it is prudent to take a measured approach to our full year 2022 outlook at this time. Turning to our second quarter 2022 guidance, we expect revenue of $2 billion to $2.2 billion and an adjusted EBITDA range of breakeven to $40 million. The revenue guidance, which is below our original expectations, reflects the dynamic macro backdrop in which we are operating the business. We believe our first quarter revenue number received some benefit from the pull-forward of transactions as consumers sought to finalize deals at lower rates when it became clear that mortgage rates were increasing at a record pace. In early Q2, we saw a short-term market shock as consumers were orienting themselves to the new higher cost of purchasing a home. Simply put, the purchasing power of the average buyer has decreased. However, we have already seen an increase in pending transactions that we expect to close before the end of the quarter, pointing to buyers and sellers finding a new equilibrium as price expectations align. Our Q2 guide was also impacted by the extremely low inventory levels in California, which makes up a significant portion of our revenue. But there are some positive data points indicative of a healthier market in the remainder of the year. The California Association of Realtors reported in April that inventory has already started to unlock, and there are similar reports of increasing inventory across the country. In addition, new home delivery, which has been delayed due to supply chain issues, is expected to increase later in the year, which should also add inventory across our markets. And mortgage applications increased for the second week in a row last week. Homebuyers continue to show signs they will not be deterred by the current interest rate environment. Given the trends we are seeing in our second quarter and the broader macro uncertainty, we feel it is prudent to lower our full-year 2022 guidance numbers at this time. As a result, our current outlook for 2022 is revenue of $7.6 billion to $8 billion, down from our prior outlook of $7.9 billion to $8.1 billion. This revenue range reflects year-over-year growth of 18.5% to 25%. In our model, the top end of our revenue range assumes a 7% market growth rate in our markets while the bottom end of the range assumes a 1% market growth rate. For 2022, we expect adjusted EBITDA to be at least breakeven, reflecting a reduction to our prior expectations of $40 million. Adjusted EBITDA and free cash flow continue to be our top financial priorities and we are committed to managing the expenses in our business to ensure that we can deliver profitability in 2022. But the reality of the current market conditions and uncertain outlook across companies and industries as we head into the second half of the year means we want to be conservative. As 2022 continues to unfold, we believe we will have more insight into the direction of the market and can adjust accordingly. Overall, we are pleased with the continued improvement in our financial profile since the IPO. Despite macro uncertainty, we believe we will continue to grow our agent base, increase our market share and continue our path to profitability. We remain committed to our path to our 2025 targets and are laser-focused on continuing to deliver solid results in 2022 through strong financial discipline. We remain committed to generating free cash flow in 2023 and beyond. With that, let me turn it back to the operator to start the Q&A portion of the call.

Operator, Operator

Your first question comes from Trevor Young with Barclays. Your line is open.

Trevor Young, Analyst

Great, thanks. First one for Robert. I guess just a bigger picture one. Looking at the potentially softer transaction environment, the macro worries rising interest rates and so forth. In that environment, do you see an opportunity to actually lean in and seed some more markets and take even more share, go out to new markets, get those founder agents that maybe weren't looking to make a move previously? How do you balance that potential share gains amid this disruption versus preserving cash?

Robert Reffkin, Founder & CEO

Yes, preserving cash needs to be our top priority. If there is a significant downturn, we would halt expansion. However, our existing markets still offer considerable opportunities for growth, and founding agents in new markets would likely be interested in joining Compass during a prolonged downturn. Existing agents would be similarly impacted. Cash preservation is crucial, but we can also acquire agents more efficiently and cost-effectively in our current markets. The current competitive landscape is advantageous for us, as capital will not be supporting new competitors. This situation positions us well, as we continue to invest in our platform while others may not have the resources to do so. Consequently, over the next one to two years, the value of our platform will increase relative to the competition.

Trevor Young, Analyst

That's really helpful.

Kristen Ankerbrandt, CFO

Yes, Trevor, I might weigh in with just an additional comment. We were pretty aggressive in terms of our expansion plan last year, so expanded over the last year to roughly 27 markets. And so we don't necessarily need to expand into new markets in order to be able to continue to bring agents onto the platform and to continue to gain meaningful share. There's a good opportunity this year for us to just look to really further penetrate those markets that we moved into over the course of the last year. So this is actually not so different from our original plan to look to leverage the investment, the infrastructure we have in our existing markets and be able to drive profitable growth by just going deeper in the markets where we already have operations.

Trevor Young, Analyst

That's really clear. Thanks. And then just on adjacent services, I think one of the slides alluded to a Compass affiliated home insurance. I know we're still early stages in mortgage launch, but anything you can share there on timing for home insurance products. I think Robert on the last call you alluded to maybe another adjacency launching before year-end, but not sure if that was insurance or something else?

Robert Reffkin, Founder & CEO

Yes. Home insurance is the third product that we're evaluating very closely. We don't have definitive plans, but yes, yes, you're correct. That's the third product that we are currently considering launching later this year.

Trevor Young, Analyst

And would that possibly be like a JV type model?

Robert Reffkin, Founder & CEO

We're looking at a few different scenarios.

Operator, Operator

Your next question comes from the line of Justin Ages with Berenberg Capital Markets. Your line is open.

Justin Ages, Analyst

Hi. Thanks for taking my question. First, can you dive a little deeper into the programs to get more agents using the Compass platform more to kind of get those gains that you see the more time agent spend on the platform?

Robert Reffkin, Founder & CEO

More on the programs that are driving adoption of the platform or that are driving the recruitment of new agents? Just to make sure I understand.

Justin Ages, Analyst

Yes, not the recruitment. So as agents that are already done now having…

Robert Reffkin, Founder & CEO

Absolutely. Absolutely. Yes. This has been our biggest new initiative of the year, it's coaching for agents. The way I would describe it, I think, the historical strategy was training agents on how to use tools. So you're an agent, hey, come forth and how we learn our CRM. And then we learned the hard way that no one wants to learn new tools, they want to learn how to grow their business. And it just so happens that tools can be a strategy to grow your business. So instead of come spend an hour or two to learn our CRM the message is learn how to grow your business or learn how to acquire new listings in a tight inventory market. And then it just so happens that the entire way that we train it is within the context of our tools. And so that's just like a high-level shift in strategy and how we think about it. We created a team called a Customer Success Team, which is led by some of our best real estate sales managers and coaches that we already had in the company. And they're scaling the training across all of our different markets and all of our agents and there's both national and regional training. We called it the Compass 10/10 where there have been 10 weeks over three different types of training of an hour for each training. There's one training that is about learning the actual tools, one training that is about how to grow your repeating business and better relationships with your clients. Yes, and then there's one regional training, but the current training is called Compass Core that we have expanded from 10/10. And one-third of our agents are currently doing it one hour a week. It's a 10-week program. But this is one of the things that we're most excited about and we can see in the data that agents that go through the program are using the tools more and we also have the historical relationship that agents that use our tool. The tool is more to grow their business more. And so we're really excited to see the results of this new focus.

Justin Ages, Analyst

Yes, that's great. Real thorough. Thanks for the answer there. And then second, if I may, you mentioned a total transaction value kind of went up that part of the reason that transaction for agent went down was because of low inventory even as you gained market share. Should we expect that trend to continue? So recruitment is strong and the embedded kind of market share growth and market share gains in your guidance, but deals per agent to be at similar levels that we saw in 1Q?

Kristen Ankerbrandt, CFO

As we evaluate transactions per principal agent, we typically analyze it on a last twelve months basis. Over the past few years, this figure has increased from 12.5 to around 17 and then close to 20. This trend was notably influenced by 2020 and 2021. Currently, on an LTM basis, we're still in that range. Several factors contributed to the decline in transactions per principal agent. It's important to note that the first quarter of 2021 had a stronger post-COVID market. Additionally, this year's spring selling season began more slowly than usual, and there's been lower inventory. The figures from Q1 were exceptional, and I don't anticipate that decrease to persist. The decline, from 4.1 a year ago to 3.8 this quarter, is not significant. Looking ahead, we expect to see a slight uptick in the LTM transactions per principal agent as the year progresses.

Justin Ages, Analyst

All right. That’s helpful. Thank you very much for taking the question.

Operator, Operator

Your next question comes from the line of Ryan McKeveny with Zelman & Associates. Your line is open.

Ryan McKeveny, Analyst

Hi. Thanks very much. Robert just to parlay a little on the first question you were asked about balancing, kind of, the cash versus expansion. And I guess maybe just to get a little finer point on the agent count side of things. I guess within the 1Q results or maybe the near-term kind of 2Q outlook is the market shift that we're seeing thus far already altering any plans around agent adds or recruitment generally? Or were those comments more about just kind of staying prudent and having that as a lever to pull if the market shifts more dramatically?

Robert Reffkin, Founder & CEO

The comments are focused on how we can respond to a significant or prolonged downturn in the market. In the early months of the year, our results were positive. However, with interest rates rising at an unprecedented pace over the last month, we want to prepare for various scenarios cautiously. Therefore, the comments addressed the potential impacts of a prolonged downturn and the strategies we have in place. While we are moderating our expansion outlook, our hiring outlook remains strong. Recruiting in existing markets continues to be more profitable, as there is still a demand for Compass and opportunities available. Given the recent interest rate hikes and the uncertainties for the second half of the year, we believe it is wise to prioritize profitable growth over expansion. As Kristen noted, we expanded significantly in over 20 markets last year, which allows us to take this approach while still achieving our goals.

Ryan McKeveny, Analyst

Perfect. Thanks very much. And one on the C&O expense I think this quarter up 20 basis points year-over-year. I know that's modest but maybe help us square the near-term trend in C&O as a percent of revenue relative to the long-term targets. I know we're expecting over time to have better leverage there. So I guess, should we think that 2022 in total could be a year that sees some better leverage C&O percent of revenue versus 2021? Or should we think that that's more over time as we get closer to 2025, maybe some more of that leverage comes through?

Kristen Ankerbrandt, CFO

Yes. In response to your question, we observed a 20 basis point increase in C&O as a percentage of revenue, as you noted. However, if you examine the brokerage split, there was actually a 36 basis point improvement. This aspect is likely the most crucial when considering that calculation. Several factors contribute to this. Another significant element is the growth pace of our adjacent services. As we continue to expand in that area, it will greatly enhance our capacity to improve that margin as we work towards our 2025 margin targets. We anticipate some progress this year, but as the adjacent services business scales up throughout 2023 and 2024, you'll likely see more substantial changes as a direct result of that growth.

Ryan McKeveny, Analyst

Got it. That's helpful. Thank you very much.

Operator, Operator

Your next question comes from the line of Mike Ng with Goldman Sachs. Your line is open.

Mike Ng, Analyst

Hey, good afternoon. Thanks for the question. I just have two. First, could you just talk a little bit more about your expectations for market share for the rest of the year? The company clearly has a lot of market share momentum, but it sounds like it might be balanced by some things like the California inventory tightness and maybe the pace of agent additions. I'm just wondering if you could just clarify that a little bit and I have a follow-up.

Robert Reffkin, Founder & CEO

We anticipate that our market share will continue to grow, as Kristen mentioned earlier. We're noticing significant positive developments in California regarding unlocked inventory. Although the market dynamics remain uncertain for the remainder of the year, there are still encouraging signs. Prices remain robust, and there is no indication that they will decrease year-over-year. Typically, we see price increases ranging from 10% to 13%, and this year’s price trends align with the early months of last year. In terms of inventory, we're observing an increase not only in California but across other markets too. Regarding demand, while purchasing a home has become more costly and affordability is a concern, the demand compared to inventory remains strong enough to support both prices and units. People appear to be adapting to the current environment, and we believe that demand is still present. Our guidance projects market growth between 1% and 7% for the year, which reflects double-digit price growth alongside a modest decline in units. Even at zero market growth, we project an 18% increase in our top line. Furthermore, even in a scenario with no market growth, no new agents, no new markets, and no growth in T&E or mortgage, we expect to achieve a 15% top line growth. Thus, we remain confident in our ability to gain market share.

Mike Ng, Analyst

Great. Thank you. Robert. That's very helpful. And separately, it was encouraging to hear about the upcoming completion of the end-to-end platform. Could you just talk a little bit about how you're expecting certain KPIs or financial metrics to potentially change once that's live? Whether that's increased productivity on the agent side or perhaps lower levels of investment spending? Thank you.

Robert Reffkin, Founder & CEO

Yes. There is an immediate key performance indicator and a more medium-term one that will drive the most impact. The immediate one is the Net Promoter Score of agents, which is influenced by the productivity gains they achieve by reducing the time it takes to complete their tasks. An agent's most valuable asset is time, and time can jeopardize deals. No agents claim to have enough time in the day to perform their jobs. By consolidating everything in one platform, agents no longer need to log into multiple software systems to do their work. The data flows seamlessly from start to finish, eliminating the need to repeatedly enter the listing address for different tasks like listing presentations, Comparative Market Analysis, brochures, payment processes, open house apps, and digital ads. This streamlined experience allows agents to reclaim their time, which in turn positively affects the Net Promoter Score. A higher NPS helps attract agents at lower incentive levels. This is the key factor behind our consistency in Q1 additions compared to the previous year, but with improved economics, higher margins, and reduced incentives thanks to the NPS. The primary driver of the NPS is the platform. As the rollout of the platform is completed across our markets, already present in some today, we expect an increase in NPS, leading to lower incentives and more profitable growth. In the medium term, the opportunity lies in reducing our cost to serve, as the platform facilitates the delivery of our agent services through standardization and optimization, allowing us to outsource key roles to lower-cost countries, which will impact our financials. That summarizes the short-term and medium-term KPI outlook.

Kristen Ankerbrandt, CFO

We expect the benefits of our platform to be reflected in our financials. In its simplest form, it should enhance retention because agents have their workflow integrated into our platform, potentially leading to improvements in commissions and other financial lines. Regarding recruitment, we believe this enhanced value proposition will enable us to attract agents at more favorable economics, which should positively impact commissions and the sales and marketing budget.

Mike Ng, Analyst

Great. Thank you, Kristen. Thank you, Robert. I appreciate your thoughts.

Operator, Operator

Your next question comes from the line of Jason Helfstein with Oppenheimer. Your line is open.

Jason Helfstein, Analyst

Thanks. Just one question, so Rob you talked about, kind of weak hands potentially getting flushed out, if we do go through a more extended kind of recession, on top of just what is a slowing industry already. When you talk about that, do you mean specifically other brokerage firms? Is it technology providers that others are using? Just maybe go into a little more detail on who do you think are the weak hands that kind of wash out that ultimately benefit Compass? Thanks.

Robert Reffkin, Founder & CEO

I don't see the market being bad enough to eliminate many traditional brokerage firms. It might reduce spending on third-party tools that they provide to their agents, but not on investments as they will be developing their own tools. The impact will be more on stand-alone third-party software providers for agents. I don't anticipate new ones entering the space, and existing providers will struggle to achieve the financial success they had hoped for. Consequently, they will likely scale back investment in creating integrated, comprehensive solutions for agents. The most significant concern is the disruptive brokerage models. A notable disruptive broker recently went out of business. Over the past couple of years, several ideas have emerged to transform the brokerage model, but many of those companies may not survive a significant downturn. Even if they do, they may lack the capital necessary to make meaningful investments that could have impacted the industry positively. As a result, their presence in the ecosystem will be much diminished compared to what it could have been.

Jason Helfstein, Analyst

And then just real quick with the depressed equity price, how does that play into agent retention as far as either new agents or existing agents? Thanks.

Robert Reffkin, Founder & CEO

I'm glad you raised that point. As we noted in our last call in January, less than 9% of our agents were receiving the equity that we are introducing. We plan to phase that out over time to nearly zero, and it hasn't affected our recruiting efforts. On the retention front, our Q1 retention rate this past quarter was 1%, which is consistent with the previous year. Given all the challenges we've faced this past year, maintaining retention at 1% highlights the company's strength.

Operator, Operator

There are no further questions. I'll turn the call back to Kristen for closing remarks.

Kristen Ankerbrandt, CFO

Thank you all for your time on the call today. We look forward to speaking with you next quarter.

Operator, Operator

This concludes today's conference call. Thank you for joining. You may now disconnect.