Earnings Call Transcript - COMP Q1 2023

Operator, Operator

Good afternoon, my name is Rob and I'll be your conference operator today. I would like to welcome everyone to the Compass Inc. First Quarter 2023 Earnings Conference Call. Richard Simonelli, Vice President of Investor Relations, you may begin your conference.

Richard Simonelli, Vice President of Investor Relations

Thank you, operator, and good afternoon, and thank you, everyone, for joining the Compass first quarter 2023 earnings call. Joining us today will be Robert Reffkin, our Founder and Chief Executive Officer; 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, and you can find the reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in our first quarter 2023 earnings release that just went out and in the case of free cash flow in the presentation each are posted on our Investor Relations website. We will be making 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 second quarter of 2023 and comments related to our continued operating expenses. 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 filed on Form 10-K and quarterly report filed on Form 10-Q filed with the SEC and also all available on our Investor Relations website. You should not place any undue reliance on any forward-looking statements and all information in this presentation today are as of today's date, May 9, 2023. We expressly disclaim any obligation to update this information. So without further ado, I'll now turn the call over to Robert Reffkin. Robert?

Robert Reffkin, CEO

Thank you for joining us today for our first quarter results conference call. We achieved strong financial results for Q1 2023 and revenue and adjusted EBITDA were better than both our guidance and consensus estimates. Compass revenue was just over $957 million in Q1 2023. Our transactions outpaced the industry down 24% compared to 26% for the market. In the midst of a very difficult real estate market, we improved both market share and splits. In each of the last two quarters, we have grown quarterly market share over the prior quarter. We also improved our non-GAAP commissions expense as a percentage of revenue by approximately 27 basis points from Q1 of last year to 81.4%. When excluding the impact of the agent equity program, which we sunset in 2022, adjusted EBITDA was negative $67 million for Q1 2023. This is an improvement of nearly $30 million compared to Q1 2022 despite revenue being down $440 million in the same period. We ended the first quarter with $364 million in cash and cash equivalents and significantly slowed our use of cash in Q1. We expect to be free cash flow positive in each of the three remaining quarters of 2023, and for the full year, as we continue to execute on our plan. This demonstrates our aggressive stance on cost discipline and that the reset of operating expense levels throughout 2022 and continued into 2023 is working. In a moment, Kalani will walk you through the details of our financials. At these levels, we are still able to focus on the future growth of the business and we expect to generate significant profit as market conditions improve. Here are some examples: we continue to grow our agent base, our average agent count grew 6% year-over-year in Q1 2023, and over 1,000 agents have come to Compass since August for no cash or equity signup bonuses. The majority of these agents have told us they're paying Compass more than their previous brokerage. This demonstrates that agents come to Compass for the benefit of the technology platform, the referral network of clients, and strong culture ultimately allowing them to be the best and most profitable agents they can be. We continue to invest meaningfully in the platform to ensure that we maintain our significant technology advantage, having invested over $1 billion in the platform to date. As you know, we offer the only proprietary end-to-end technology platform for agents in the country, and we believe that for the real estate industry. Similar to other industries, end-to-end digital platforms are the best way to monetize transactions and the most scalable way to empower the professionals that execute those transactions. We are adding features to the platform to enhance the revenue and profitability of these transactions. We know from experience that agents are more inclined to use our services when they are directly in the platform, increasing both our attach rates and our take rate per transaction. I'm excited to announce that we successfully integrated Title and Escrow services directly into the Compass platform, an industry-first experience that agents cannot find anywhere. Our agents in Southern California can now seamlessly order Title and Escrow from our owned affiliates directly from the tools they already use every day in the Compass platform. We expect to continue to roll out this valuable feature across our entire Title and Escrow coverage area over the course of the next 12 months. We expect our Title and Escrow integrations to accelerate our path to industry best attach rates and financial performance and look forward to sharing additional metrics over the coming quarters. Looking ahead for the remainder of 2023, we remain cautiously optimistic until we gain more certainty from the unpredictable macroeconomic environment and future actions by the Fed. While we have seen some positive signs with more foot traffic at open houses and the return of multiple offers, inventory remains low and there is still upward pressure on prices. Steady mortgage rates have been helpful, and a future decline in rates would mean we would likely see more transactions. Most importantly, the market performance in Q1 and what we already are seeing for Q2 adds to our confidence that we have set the right OpEx targets to generate positive free cash flow in 2023. I want to emphasize two important points as it relates to OpEx. First, if the market should worsen beyond 25% down, we are prepared to take additional steps to reset OpEx levels lower. Keep in mind, the most recent estimates for the year from NAR, Fannie Mae, and the MBA are for a decline in the range of 12.6% down to 22.5% down. Number two, as I previously said, we are confident that we've set the right OpEx target range of $850 million to $950 million. We have taken permanent actions, not temporary ones. We expect to stay within this range over the next two to three years. We will be just at a $900 million annualized by year-end. And our management team is committed to actioning continued efficiencies with a goal of operating towards the midpoints of our OpEx range over the next couple of years, even as the market improves to more normalized levels. As a result, when the market improves in the future, we will be well-positioned for generating significant long-term profits. As the number one real estate brokerage by sales volume for the past two years in the United States, we have built a highly desirable company for attracting and retaining the best agents in the industry. We provide our agents with a powerful brand, an unparalleled proprietary technology platform, and an inspiring culture where agents are supported by incredible people and technology to grow their business. The best agents are able to shine in difficult markets. In the first quarter, our agents and employees delivered. We are going to 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 achieve historic success in 2023 with the confidence that we have a strong foundation for future success. I'll now turn it over to Greg.

Greg Hart, COO

Thank you, Robert. We have just experienced two of the worst quarters in residential real estate in the past 20 years. Against this backdrop, Compass continued to outperform. Our market share for Q1 2023 was 4.5%, up 17 basis points versus Q4 2022 and up sequentially for the second quarter in a row. In the first quarter, we processed nearly 36,000 transactions, a decline of 24% from a year ago, which compares favorably to the 26% decline in transactions for the entire residential real estate market in the first quarter, as reported by NAR. Agents are leaving the business; the industry has lost nearly 75,000 agents since October 2022. In this environment, we saw lower recruiting volume in January and February and saw more agents retiring or leaving the industry altogether as well. Happily, our performance improved in March. For Q1 2023, our average number of principal agents increased to 13,515 principal agents, up 6% year-over-year. Our principal agent retention for Q1 2023 was 96%. One of the things we are really excited about is the number of agents returning to Compass after going through another agency. We call them winbacks; these agents are telling us that they cannot live without the comprehensive Compass technology platform and the integrated search, marketing, CRM, and business tracker capabilities it provides. We also hear that our clients love our collections tool, which automatically delivers new listings in real-time to agents and their clients. Buyers see the newest listings and sellers see how the market is moving, and both are able to collaborate with our agents in real-time. We are also pleased with Compass culture as a key factor in attracting and retaining agents, which is a testament to our entire team. In March, we expanded our footprint entering Arizona by acquiring Launch Real Estate. Launch is a premier luxury brokerage with approximately 300 agents and gives us a strong foundation in a top U.S. market and a key referral location for Compass agents. We see enormous potential for growth and synergies as we grow our network. Critically, we were able to add Launch without any upfront cash or equity consideration. Going forward, we intend to be opportunistic in our approach to adding to our agent base via M&A while using deal structures that allow us to utilize the minimum upfront cash and limit equity dilution. Why are agents coming to Compass? It's the power of our platform, our culture, our brand, and our referral network. In fact, the majority of agents who joined Compass since August 2022, when we stopped using cash or equity sign-on incentives, have told us they're joining for a lower split than they received from their prior brokerage. The majority of the agents coming to Compass also tell us that one of the primary reasons they are doing so is for our technology platform. These agents are attracted by the depth and breadth of Compass's integrated technology platform and believe it can help them run their business more efficiently and help them close more transactions. There's a lot of interest from the agents in AI right now as well. As the leading tech-enabled brokerage, we started investing in AI technology in implementing in our platform years ago. One of the key ways that Compass leverages AI is through our Likely-to-Sell recommendations, which we launched back in 2020. This tool uses AI to predict which contacts in an agent's database are most likely to sell their homes in the next 12 months, allowing Compass agents to engage with the right people at the right time and generate more business more efficiently. Since launching in 2020, we have handed out millions of recommendations that have been attributed to more than $100 million of annual incremental revenue from these recommendations over each of the last two years. In addition to Likely-to-Sell, the Compass platform leverages AI to surface the most relevant suggestion to the top of listings search, to suggest similar homes on our listing pages, to help select the most similar properties for comparative market analysis, to generate image overlay copy in our video studio, and to categorize images for quick comparisons of same type rooms in search and comparative market analysis. We are currently evaluating the possibility of using GPT-like models to save agents time in tasks such as writing listing descriptions, creating marketing collateral, and automating outreach with clients. We've seen tremendous interest in this technology from our agents; our real estate coaching team has had some of the most well-attended sessions focused on ChatGPT technology and embedding it in the agent workflow. Similarly, we see a lot of opportunities for AI to improve our own staff productivity from our engineering team to our transaction operations teams and more. We also 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. As Robert mentioned, we are enjoying early positive returns and feedback from our rollout of the integration of Title and Escrow into our technology platform for agents in Southern California. Anecdotally, agents are commenting positively on how easy it is to use this feature. Since we launched the integration, we're seeing that more than one-third of addressable Title and Escrow orders have been initiated through the platform and that more than 50% of those agents are new customers who are using Compass's Title and Escrow services for the first time. We are very encouraged by the early positive results and plan to roll out this platform feature wherever we offer Title and Escrow in the United States over the next 12 months. I'm proud of the team and excited for our future. We have taken major strides in the transformation of Compass while operating in an unprecedented market environment. I will now turn it over to our CFO, Kalani Reelitz.

Kalani Reelitz, CFO

Thanks, Greg. Today, I'm going to review our first quarter financial results in more detail. Then I'll provide an update on our guidance expectations for the second quarter. As I shared with you on our investor call last quarter, in the midst of this historically low housing market, we are controlling what we can control. Namely our cost base and our ability to attract and retain the best agents. Our Q1 results show a strong focus on controlling our cost base allowed us to exceed our expectations on adjusted EBITDA and free cash flow. During the first quarter, we implemented additional actions that further reduce our cost base. Through our actions taken, we have reduced our run rate expense, and at the middle of our 2023 OpEx range, we will have reduced OpEx by $550 million from the second quarter of 2022. As we sit here today, we exit Q1 with a new cost base and we remain disciplined and focused on our operating expense, and as Robert mentioned, we are committed to primarily maintaining our new cost structure. Turning to our financial results. First quarter revenue was $957 million exceeding the high end of our revenue guidance range of $850 million to $950 million. This compares to $1.4 billion of revenue in the prior-year period, representing a 31% reduction year-on-year. Gross transaction value was $36.6 billion in the first quarter, a decline of 32% from a year ago, reflecting a 24% reduction in total transactions as well as a decrease in average selling price of about 10%. Our non-GAAP commission expense as a percent of revenue improved by approximately 27 basis points from Q1 of last year to 81.4% when excluding the impact of the agent equity program on the year-ago period. As previously announced, 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 16 of the Q1 investor deck includes additional details on the agent equity program's impact on the commission line. We will continue to see this differential through each quarter in 2023 until we anniversary the sunset of the agent equity program in Q1 of 2024. Our total non-GAAP operating expenses, excluding commissions were $243 million for the first quarter, or $973 million on an annualized basis. As we've 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 $243 million of OpEx for the first quarter reflects a $120 million reduction from an OpEx of $363 million in the same period a year ago. As a reference point, the non-GAAP operating expenses we referred to include the expense categories of sales and marketing, operations and support, research and development, and G&A; and to exclude stock-based compensation expense and other expenses that included from adjusted EBITDA. We've included tables on Pages 14 and 15 in our Q1 investor deck that reconcile these amounts. Our adjusted EBITDA for the first quarter was a loss of $67.1 million, which favorably exceeded our guidance range of a loss of $70 million to $90 million that we provided in February. As a result of managing our operating expense in line with expectations, the favorable revenue in Q1 had a direct impact on adjusted EBITDA as well. Our GAAP net loss for the first quarter was $150 million compared to a loss of $188 million in the same period a year ago. Included in the GAAP net loss for the quarter are noncash charges, which included $45 million of non-cash stock-based compensation expense and $25 million of depreciation and amortization expense. Additionally, during the first quarter, we incurred a restructuring charge of $10 million, which primarily reflects severance and related termination benefits from employees impacted by the previously announced reduction in force in January 2023, and to a lesser extent some exit costs related to certain of our operating leases. Consistent with prior quarters, included in the press release issued today, is the schedule that reconciles GAAP net loss to adjusted EBITDA. Free cash flow during the first quarter was negative $59 million, which compares favorably to negative $132 million of free cash flow a year ago, driven in part by the improvement in adjusted EBITDA, lower capital expense, and other favorable changes in working capital. We had $364 million of cash and cash equivalents on our balance sheet at the end of March, which includes an additional drawdown of $75 million from our revolving credit facility that we made during the quarter. We took this additional drawdown in March following the collapse of Silicon Valley Bank and Signature Bank out of an abundance of caution given the unprecedented market conditions at the time. While we've seen additional collapse of First Republic a week ago, the actions of the Fed seem to avoid an expansive impact on the banking system. As a result of the relative stability seen following the initial fallout of SVB, we have since paid back this additional $75 million drawdown in April and we are back to the $150 million level that we drew down in Q4 of last year. The proceeds from the drawdown remain unused and are primarily invested in treasury bills to minimize the interest cost, which is approximately 2% on a net basis and an expensive form of capital. We expect to pay down these funds once we have generated sufficient free cash flow. Now turning to our financial guidance. Our results from Q1 show that our operating expense discipline creates meaningful performance improvement. As we look forward to Q2, we continue to see mixed signals in the market, and while some trends have improved, we've also seen some additional market risks. For Q2 of 2023, we expect revenue in the range of $1.45 billion to $1.6 billion and positive adjusted EBITDA of $30 million to $50 million. We do expect a revenue lift from the impact of net new agent additions over the last year. However, similar to Q1, we anticipate this will be offset by a mix drag, particularly from California, which is our largest market, which experienced record sales in the first half of last year. Importantly, we are on schedule to be free cash flow positive in Q2, given our continued cost discipline and 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 with all remaining quarters expected to be free cash flow positive. Additionally, we are reaffirming our expectation 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 high end of this range on an annualized basis by the June quarter and at the midpoint of this range 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. We are even more committed today through 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 that you do for Compass. I would now like to turn the call over to the operator to begin Q&A.

Operator, Operator

Your first question comes from Jason Helfstein from Oppenheimer & Company. Your line is open.

Jason Helfstein, Analyst

Thank you. I have two questions. First, regarding the macroeconomic environment, are you significantly adjusting your full-year expectations for the macro factors that support the model, or are those expectations largely the same as what you've discussed previously? Secondly, as you consider the nationwide rollout of the Title and Escrow services, how do you believe that will positively affect CNO margins? Thank you.

Robert Reffkin, CEO

Hello. I'll start and then I'll pass it on to Kalani. No, we're not changing our view of what we expect for volume to be this year, still in that call it 15% to 20% down range. In terms of the macro, we're not out of the woods yet. The market can still demonstrate volatility and its choppy road ahead likely. But we saw in early spring market more foot traffic at open houses, multiple offers are back, more buyers and sellers in almost all of our markets. So there is not a demand issue. Buyers have accepted 6% mortgage rate as a new normal. We've been pretty steadily in the mid-60s for quite some time, relatively speaking. In terms of price, prices are down around 1% year-over-year, but sequentially over the last three months, it's been up each month. And prices generally increased further in the spring market. The issue we have, if you talk to any agent in the country, is there's just not enough inventory. The reason why is 30% of homeowners are locked in mortgage rates at 3% or below, 72% of homeowners are locked in the mortgage rates at 4% or below, 85% of homeowners are locked in mortgage rates of 5% or below. And if you have a 3% mortgage rate, you consider that a financial asset and you don't want to lose it. So you see some people that have to move instead of selling their home, they're actually renting it out. And so, we were cautiously optimistic, but I think the real change in the transaction curve will result when mortgage rates come down to somewhere between 5% to 5.5%. In that range, not only will we get a lot more demand, but even more importantly for our industry it will unlock a tremendous amount of inventory. And that's the moment that we're looking forward to, and until then, we're just continuing to keep our costs low and we'll keep them low even through that period and the delta will be EBITDA that we can share with our investors. But in terms of your second question around attach rates, I'll pass it on to Kalani.

Kalani Reelitz, CFO

Yes. Jason, thanks for the question. I mean, overall, I think we're really excited about our ancillary businesses. As we think about the impact to margin as we scale those businesses, we do expect margin lift, primarily probably about 100 to 150 basis points at maturity. And it's really driven by those businesses T&E, mortgage, etc. kind of operating at about 25% to 30% margins. So obviously as they grow and scale, they lift our channel margins. So we're really excited about what it does for our agents, but also on the margin line.

Jason Helfstein, Analyst

And just to clarify that, mortgage will sell down below while T&E is going to show up in revenue, correct?

Robert Reffkin, CEO

Correct, Jason. Yes, correct. Overall, though, as we think about and we're kind of relentlessly focused on profit margin overall, I think mortgage will show up below, T&E will show up on kind of the commission line, but ultimately all get us to increase the operating margin.

Operator, Operator

And your next question comes from the line Bernie McTernan from Needham and Company. Your line is open.

Bernie McTernan, Analyst

Great, thank you for taking the questions. Maybe to start and just following up on Greg's comments on AI, obviously, Compass spent a lot of time and money building technology tools for agents. How do you view generally that AI relative to your positioning versus the rest of the industry? You've commented before, I think you have a large head start or lead relative to the rest of the industry; is generally AI going to increase that or narrow the gap in your view?

Greg Hart, COO

It's a great question. Thank you, Bernie. So as the leading technology-enabled brokerage and the number one brokerage in the U.S., our agents have been benefiting from our investments in AI for a number of years, so it's not a new area for us, I don't think that that's something that many of our competitors can say. Second, I think a really critical point is that AI is really dependent on data to drive its performance; that is the nature of AI. And so, our integrated end-to-end platform provides more touch points that we can apply AI to, to improve the tools that our agents use. And because it's integrated and end-to-end, it delivers more data to help us enhance the performance of those tools, which in turn drives more usage as agents see better results, and that in turn generates more data to improve our AI models. And so, I think we're pretty unique in this regard. Other brokerages that don't offer their agents an end-to-end integrated platform are not going to benefit from that virtuous cycle. So we believe that will enhance our competitive differentiation over time and certainly already has with what we're doing with Likely-to-Sell.

Bernie McTernan, Analyst

Got it. Understood and very helpful. For Kalani, I think the guidance suggests that gross margins will decrease slightly in the coming quarters, but I would like to hear any thoughts on how the commission rate or gross margin is expected to trend throughout the year.

Robert Reffkin, CEO

Yes, Bernie. Thanks for the question. I think generally speaking, on an apples-to-apples basis in the first quarter, we had our commissions go up about 30 basis points. We're going to continue on an apples-to-apples basis to see improvement, obviously driven by some of the mix shift that we're working through, some of the incentives burning off. So we expect, on an apples-to-apples basis, kind of like-for-like business, the margin to increase. What is going to drag, and we talked about it, is the agent equity program. And so that is going to be kind of an overhang for us this year as we made the decision to stop that at the end of the year 2022. So that's the overhang, but we will continue to see, on a like-for-like basis, margin expansion.

Bernie McTernan, Analyst

Got it. Lastly, regarding agent count, I understand there are various perspectives on agent growth. If we focus on the average principal agent net additions, they have been decreasing. When do you think we will reach the lowest point for agent net additions?

Robert Reffkin, CEO

That's a great question, Bernie. I want to emphasize a couple of points I made earlier. First, we're seeing a 6% year-over-year increase in principal agents in Q1, despite a significant number of agents leaving the industry. Trends affecting the broader agent community are also affecting ours. In Q1, we observed two notable trends. Firstly, more of our solo principal agents at Compass are opting to join other teams within the company, which means they are not counted in our principal agent tally. Secondly, more principal agents are retiring and transitioning to referral directors at Compass. These individuals wish to continue referring clients, but since they are not actively closing transactions, they won't be included in our principal agent count. We observed these trends more frequently in Q1 than historically. Additionally, our principal agent retention rate stood at an impressive 96% in Q1, a level of loyalty that many businesses would envy. Most agents who left Compass in Q1 earned less than $250,000 in gross commission income last year, indicating they were less productive compared to our average agents. Given the current market conditions, many of these individuals might exit the industry entirely. On a more positive note, we saw an increase in recruitment momentum as the quarter progressed, a trend that has continued since the end of Q1. In Q1, our principal agents brought on four strategic growth managers responsible for recruiting agents to join Compass, matching the recruitment level from Q1 2022, even though last year we had sign-on incentives in place. Despite cost reductions initiated through 2022 and January 2023, we currently have about half the number of strategic growth managers compared to a year ago, and we recognize the need to expand that team, which we are actively working on. My hope is that this quarter represents the lowest point for agent numbers, and while we don't have formal guidance on our agent count, that's an optimistic outlook based on our observations.

Greg Hart, COO

Yes. And I would just add that the total number of agents matters, but really is a proxy for market share, and our market share grew sequentially over both the last two quarters, and these were the most two challenging quarters in real estate in years upon years. There's a saying in real estate that in a challenging market, the best agents gain market share; in a challenging market, the worst agents leave the business, and the best agents compare business. And I think our market share proves that we're a company for the best agents.

Operator, Operator

And your next question comes from the line of Matthew Bouley from Barclays. Your line is open.

Matthew Bouley, Analyst

Hi, good evening, everyone. Thanks for taking the questions. So the comment that you could maintain OpEx in the $850 million to $950 million range over the next couple of years even if the market recovers. I'm just curious how do you think about, to what degree are there variable expenses in there that would have to come back with a better market and how would you think about sort of fixed cost inflation? And the results would be, what's the implication to any additional fixed cost reductions, you would have to make in order to maintain in that range as the market recovers? Thank you.

Kalani Reelitz, CFO

Yes, Matthew, it's Kalani. I believe the significant effort put forth by the team over the past year is lasting. We have established a new operating structure and are confident in our target of maintaining expenses in the $850 million to $950 million range. We are committed to exploring efficiencies and will continue to seek out opportunities related to operational models and cost-effective labor. Our goal is to drive efficiency annually to support our growth. This includes assessing our operating systems, real estate, and vendors to ensure ongoing efficiencies, which should help offset costs and support the growth we anticipate. We are optimistic about staying within our target range over the next few years, which will enable us to create substantial value in the future.

Matthew Bouley, Analyst

Got it. Okay, that's helpful. Thank you for that. And then I guess zooming into the near-term. The other comment you made that you expect to be free cash flow positive in the next three quarters. And please correct me if I get any of these numbers wrong, obviously, Q4 is seasonally you would think of it's tougher to be free cash flow positive. I think based on the comment you made that you'd be at a $900 million run rate by Q4, maybe you'd have something like a $60 million OpEx tailwind year-over-year, and I think you had a free cash usage of $130 million in Q4 2022. So not to throw out too many numbers around, but just any help on the bridge there on kind of what gives the confidence in positive free cash flow in Q4?

Kalani Reelitz, CFO

Yes, I will continue discussing Colonic. First of all, we are guiding for EBITDA in Q2 to be around $30 million to $50 million. As a result, we expect to generate positive free cash flow for the full year. I want to remind everyone that Q2 and Q3 are typically our strongest quarters, with an improving cost base. We anticipate revenue to be higher than in Q1 and Q4, and as you mentioned, we are progressively improving our operating expenses each quarter. Additionally, when we look at the overall situation, we are managing our operating expenses carefully. The speed of the market's recovery is the key variable. Currently, we are seeing markets at 15% to 20%. Even with a further decline at this level, we will still be free cash flow positive. When considering revenue and the decreasing costs, we are also taking several actions on the cash flow side, including M&A activity and adjustments to the incentives we previously offered, which will help bridge this year with last year.

Matthew Bouley, Analyst

Got it. Makes sense. All right, thanks, Kalani, and good luck, guys.

Operator, Operator

And your next question comes from the line of Ryan McKechnie from Zelman Associates. Your line is open.

Ryan McKechnie, Analyst

Thank you, and congrats on the results and progress. I wanted to dig in on launch real estate. So, you referenced the deal structure without upfront consideration. So I wanted to dig in a little on that. Does that imply it's more of like an earn-out structure over time or more of a franchise-type agreement or something else? And I guess just aside from maybe a unique or different deal structure, does that alter the way that business will flow through the P&L at all? Or just the volume that flows in from Launch ultimately compare the model, the same way as existing business?

Robert Reffkin, CEO

I'll start in the first half of the question, I'll pass on to Kalani for the second. Well, there's some companies that were the entrepreneurs that are running and want to get all the upside upfront. Some companies want to have typical earn-out structure where have to be upfront and have to be an earn-out spread over multiple years. This is a structure where there's nothing upfront, and in the out years, there is an agreed-upon multiple applied. They've already agreed on an upfront will be applied to future years EBITDA and will be using consideration at that time at that valuation. And so, it's a way to kind of win-win for both parties. It differs the expense for us for a couple of years, and it gives the entrepreneur more upside. Kalani?

Kalani Reelitz, CFO

Yes, Robert. I would just add that, as Ryan mentioned, it will flow through our P&L in the usual way; it's mainly about the timing of when our consideration is distributed, but it shouldn't affect the P&L in any way that we're not accustomed to.

Ryan McKechnie, Analyst

Okay, perfect. Super helpful. And then within the ancillaries, the T&E integration sounds encouraging for sure, but I'm also curious on OriginPoint, any status updates or milestones you've either achieved or are pushing towards? And also on the mortgage side, there has been some commentary in the industry that there has been some tightening within the jumbo mortgage market, given some of the banking turmoil. I guess I'm curious if you're seeing that, if there's been any impact on kind of buyer or seller activity with your agents or just any commentary if you're seeing it impact at the consumer level from some of the banking dynamics that have been going on? Thank you.

Robert Reffkin, CEO

We are enthusiastic about the launch and potential of our mortgage business, OriginPoint, which is a joint venture between Compass and Guaranteed Rate. We expect to be serving most of our markets by the end of this year, and things are progressing well so far. Regarding jumbo mortgages, First Republic had been offering significant discounts on mortgage rates to attract deposits from clients, but they are now reducing that approach for clear reasons. This shift is creating opportunities for other banks. While we're still offering fairly attractive rates, they are not the same as the substantial discounts provided by First Republic. However, this situation benefits OriginPoint, as it allows us to be more competitive, considering First Republic's prior discounts had led to unsustainable pricing in the market.

Operator, Operator

And your next question comes from the line of Lloyd Walmsley from UBS. Your line is open.

Lloyd Walmsley, Analyst

Thanks for the Scottsdale deal with Launch. It seems to be more about a long-term earn-out structure rather than being truly asset-light. For now, it might be considered asset-light. How do you view the potential for more pure licensing and referral-type deals? Is that something you are currently working on or considering in the near term, or is it more of a medium to long-term possibility?

Greg Hart, COO

Yes. We're looking at other ways to have an asset-light structure. It's not the top priority at this time; there are different ways to do it. The focus right now has been bringing our cost down for all the obvious reasons, we feel good about that. Then creating more profit per transaction with adjacent services and ensuring that our agents have the support they need to grow their business. But after those types of areas, we will be thinking more on asset-light ways to expand. Yes, exactly. So that's the priority.

Operator, Operator

And there are no further questions at this time. I will now turn the call back over to our CEO, Robert Reffkin, for some final closing remarks.

Robert Reffkin, CEO

And I just want to thank everyone for joining the call. Again, I want to thank all the employees and agents at Compass. It's been a challenging 12 months behind us. But I believe that the golden age of Compass is ahead of us and I look forward to building the future of real estate with everyone. Take care. Bye.

Operator, Operator

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