Earnings Call Transcript - OPEN Q4 2020

Operator, Operator

Thank you for joining us. Welcome to Opendoor’s Fourth Quarter 2020 Earnings Conference Call. All participants are currently in listen-only mode. After the presentation, we will have a question and answer session. I am pleased to introduce Whitney Kukulka from Investor Relations.

Whitney Kukulka, Investor Relations

Thank you, operator. Good afternoon ladies and gentlemen. Thank you for joining us for Opendoor’s fourth quarter and full year 2020 financial results conference call. Joining me on the call today are Eric Wu, Founder and Chief Executive Officer, and Carrie Wheeler, Chief Financial Officer. All details of our results and additional management commentary are available in our earnings release, which can be found on the Investor Relations section of the website at investor.opendoor.com. Please note that this call will be simultaneously webcast on the Investor Relations section of the company’s corporate website. Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meaning of the Federal securities laws, including but not limited to statements regarding Opendoor’s future financial results and management’s expectations and plans for the business. These statements are neither promises nor guarantees and involve risks and uncertainties that may cause actual results to differ materially from those discussed here. Additional information that could cause actual results to differ from forward-looking statements can be found in the Risk Factors section of Opendoor’s annual report on Form 10-K for the year ended December 31, 2020 and Opendoor’s other SEC filings. Any forward-looking statements made in this conference call including responses to your questions are based on current expectations as of today and Opendoor assumes no obligation to update or revise them whether as a result of new developments or otherwise, except as required by law. The following discussion may contain non-GAAP financial measures. For a reconciliation of each of these non-GAAP financial measures to the most directly comparable GAAP metrics, please see our website at investor.opendoor.com. Now, I will turn the call over to Eric. Eric?

Eric Wu, CEO

Thank you, Whitney. Welcome and thank you for joining our first earnings call. Before discussing the results and the momentum we are experiencing, I want to emphasize the significance of the problem we are addressing. At Opendoor, our primary value is to prioritize the customer, and we are dedicated to enhancing the customer experience. We share customer stories at every Board Meeting, and I’d like to begin this tradition with a story from the Coming family about their experience with Opendoor. I want to extend special thanks to Dominic and Rhonda for sharing their story, and we are motivated by the impact we can have on families like theirs and Chief Mom Officers across the country. It’s important to note that for the vast majority of the 5.6 million individuals who buy and sell homes each year, this process remains overly complex, stressful, and time-consuming. Less than 1% of transactions occur online, involve numerous steps, and can take several months to complete. I founded Opendoor in 2014 to create what consumers desire and deserve: a simple, certain, and quick online experience. We have made it possible for people to buy and sell homes with just a tap. As the pioneer and leader in this sector, we have assisted over 80,000 families in moving, amounting to over $20 billion in transaction volume, and as we have expanded to over 20 markets, we have done so while maintaining profitable unit economics. We take pride in tackling challenging tasks first. It’s not easy to vertically integrate the entire experience and rebuild each component from scratch, but it is essential to eliminate the friction and costs involved in current transactions and to provide what we believe to be the best customer experience. Over the past seven years, we’ve worked hard to refine our product, pricing engine, technology platform, and operational systems, enabling homeowners to buy and sell with just a few taps. Reflecting on 2020, it was a challenging and unusual year, but I am proud of how our team supported each other, remained focused on our mission, and continued to innovate for our customers. In terms of results, we ended 2020 with $2.6 billion in revenue. Although this was lower than our 2019 figures due to pausing acquisitions at the start of COVID, we reported strong margins with adjusted gross margins of 8.2% and contribution margins of 4.3% for the year. In Q4, we generated $249 million in revenue with gross margins of 15.4% and contribution margins of 12.6%. As we enter 2021, I feel we’ve been preparing Opendoor for this moment for many years. COVID has changed how consumers view their homes. Homes are now also places for work, fitness, schooling, and, if fortunate, dining out. Before the pandemic, 12% of full-time employees worked from home; that figure has since risen to 42%. A recent survey showed that 20% of respondents decided to leave their city because of COVID-19, while an additional 25% are expediting their moving plans for the same reason. The ability to work remotely, the need for more space, and low interest rates have driven unprecedented demand for residential real estate. Additionally, the adoption of digital products is rapidly increasing, and while the effects are most visible in food delivery, transportation, and eCommerce, real estate is not exempt. In a recent survey we conducted, 71% of sellers expressed they would consider selling their homes to an iBuyer. These two significant shifts provide us with strong advantages. More home sellers are approaching Opendoor to receive offers for online sales. This year, we are sending out over 50% more offers each month compared to this time last year and surpassing previous records. Additionally, we are successfully converting a greater number of these home sellers. A common question we receive is whether homeowners will prefer Opendoor when the market is thriving, as it is now. The answer is yes; our seller conversion rates are exceeding historical highs. Most importantly, this year, our seller net promoter score is over 80, an increase of 10 points from 2020. We believe this is the future of real estate, and it’s coming sooner than anticipated. Now, let’s discuss our future plans. Our objective is to become the best place to sell a home online and facilitate seamless moves. This involves; first, increasing our market share among sellers in our current markets; second, expanding to many more markets nationwide; and third, developing our digital one-stop shop for moving. Firstly, we are enhancing our capacity to cater to a broader range of sellers in our existing markets. In Q4, we expanded our buy box by 35%, broadening our coverage in terms of price, zip code, and home type. These improvements, along with increasing offer requests and record high conversion rates, boost our confidence in exceeding past market share levels. Secondly, we aim to double our market presence this year from 21 to 42. Our operational systems, pricing structures, and large playbooks have been validated at scale and are supported by our technology platform that automates and centralizes transactions. Consequently, we are positioned to expand rapidly and profitably across the country, with six new markets launching in Q1, including recently announced Asheville and San Diego. Long term, we intend to operate in more than 100 markets and serve over 70% of homes in the U.S. Lastly, we will continue to advance our objective of building digital one-stop shops for moving. We have already enabled homeowners to sell online in just minutes and offer tech-enabled title insurance, escrow, and mortgage services. We recognize that two-thirds of sellers are also buyers, so we are creating a one-tap buying experience allowing customers to buy and sell with ease. Recently, we introduced cash offers for home buyers that allow them to submit all-cash offers backed by Opendoor while providing flexibility on their preferred closing dates to facilitate their moves. We understand the market is competitive, buyers want to enhance their chances of securing their dream homes, and sellers seek certainty and speed. This feature and others to come reflect our ability to innovate rapidly in response to market trends and leverage our expertise in technology, pricing, and operations. In conclusion, we are committed to creating a seamless and digital experience for consumers. This commitment, along with our technology platform, operational scale, and experienced team, enables us to set the pace and deliver a delightful online experience for millions of homeowners nationwide. I will now hand it over to Carrie.

Carrie Wheeler, CFO

Thanks, Eric. As Eric just discussed, we had a solid financial 2020 and we are pleased with the momentum going into 2021. We reported revenue of $249 million and an adjusted EBITDA loss of $27 million for Q4 and revenue of approximately $2.6 billion and an adjusted EBITDA loss of $98 million for the full year, exceeding the targets we provided last fall when we went public. As we’ve discussed, our results for fiscal 2020 were surely impacted by COVID. The onset of the pandemic caused us to pause some acquisitions beginning in March with unprecedented uncertainty and safety concerns and to actively manage our balance sheet and sell down a vast majority of homes we owned over the second and third quarters. We sold almost $1 billion of inventory in that time at constant margins demonstrating the agility and resiliency of our resale systems. However, given that, inventory is the fuel for revenue; that sell down impacted our top-line in Q4. Declines notwithstanding, we did exceed revenue expectations that we put out for the year. Q4 revenue performance was driven by strong market demand for housing and the strength in our resale processes. Q3 marked our low point for inventory, and we have been aggressively acquiring homes since that time. We purchased more than 2,000 homes in Q4, which reflected a strong acquisition ramp throughout the quarter. We ended the year with $466 million of inventory, representing 1,827 homes, which is up over 3 times from September’s balance. On the margin front, home-adjusted gross profit and contribution profit were strong for the full year and particularly strong for the fourth quarter. Adjusted gross margins were 8.2% for 2020, up 190 basis points from 6.3 in 2019. Contribution margins were 4.3% for 2020, up 230 basis points from the prior year. And on a per-home basis, we generated adjusted gross profit per home of $21,000, and contribution profit per home of approximately $11,000. For Q4, we saw adjusted gross profit per home of approximately $45,000, and contribution profit per home of $37,000. These higher margins were largely driven by having a healthy inventory mix weighted to recently acquired homes, as well as some strong home price appreciation in our markets. From an adjusted EBITDA perspective, we had a loss of $27 million for the quarter and a loss of $98 million for the year. We saw gains in adjusted EBITDA driven primarily by the increase in contribution profit, but also as a result of the cost controls and expense reductions we undertook in response to the pandemic. Our operating expenses, which comprise a delta between contribution and adjusted EBITDA, were $59 million in Q4 and $208 million for the full year, down 24% and 33% respectively. While absolute spend declined, we did see the leveraging of OpEx in both periods given the low revenue base. I’d also note that Q4 OpEx was down year-over-year, but grew 43% sequentially as we resumed operations across all the markets and accelerated investment in sales and marketing, operations, and product development to support our 2021 growth objectives. I’ll now turn to our quarterly guidance. We are now providing updated annual guidance. However, I can say we are comfortable with our previous outlook for 2021. We’ve also previously talked about the cadence for this coming year; as we rebuild our inventory, we expect our top-line to follow, meaning that our revenue will be weighted to the back half of the year. For Q1, we expect revenue of $600 million to $625 million. Adjusted EBITDA losses are expected to range from negative $33 to negative $28 million. On the revenue side, we are encouraged by volume trends in our business due to both our increasing acquisition pace and increasing top-of-funnel demand. In addition, we expect that strong market home price appreciation, or HPA, will continue to positively impact revenue in Q1. With respect to unit economics, the strong margin performance we realized in Q4 should be considered to improve; while we do expect margin tailwinds to persist into Q1, it will moderate throughout the year beginning this next quarter. Let me tell you why. First, as we build up our inventory balance, our resale mix of homes will normalize throughout the course of this year. Second, while our pricing models were responsive to the very strong housing macro we saw in Q4, we did realize upside relevant to our underwriting, particularly for homes that we underwrote in Q2 and early Q3, and in terms of homes we sold in Q4. Going forward, we expect that our margins will moderate as we move throughout the year. I also wanted to note that we do expect to see a significant increase in non-cash stock-based compensation expense in Q1, estimated at approximately $235 million, which is much larger for us in a typical quarter and is due to our recent public offering. The expense is primarily related to historical equity grants to employees, as well as for additional performance-based equity grants. We expect to continue to recognize additional stock-based compensation expense going forward over the remaining time-based vesting periods. Now, turning to the balance sheet. As of the end of Q4, we had approximately $1.5 billion of cash and marketable securities. The follow-on offering added another $860 million, bringing us to approximately $2.3 billion. We are well capitalized and have substantial firepower to invest in market expansion and at our opportunities we see to accelerate our business and product roadmap. In conclusion, while 2020 certainly presented many challenges, we are proud of how our team managed through a very difficult year, and we are pleased with how we wrapped up Q4. Additionally, we are encouraged by the momentum we are seeing going into Q1, propelled by this undeniable shift in real estate from offline to online. We’ll continue to build the product track record of posting positive unit economics as we drive growth over the course of the coming year. And with that, operator, would you please open up the lines for some Q&A? Thank you.

Operator, Operator

And our first question comes from Yoni Yadgaran with Credit Suisse.

Yoni Yadgaran, Analyst

Hey guys. Thanks for the question. So, two from me. The first is around just the cadence in getting factors for the rollout of maybe new services and as well as potentially expanding your footprint within home loans, et cetera. How are you thinking about that? What are the main factors that go into that between investing in the engineering, etc., versus getting licenses or anything else that might be involved on the partners’ side to roll out incremental services? Secondarily, with respect to your, what are the puts and takes that might impact the quarterly cadence of gross margins in particular throughout the year, particularly on your comments around appreciating home prices? How much of that is a factor when you look back historically versus maybe new market rollouts and initial services and how you price homes when you go into a new market? Thanks.

Eric Wu, CEO

Thanks, Yoni. Hey, this is Eric. So, I’ll address the first part of your question, and then I’ll let Carrie address the second part. As I mentioned in the remarks, we are really focused on investing in three big areas. So the first is to deepen our market penetration and expand in our existing cities. The second is to expand nationwide, and we are launching six cities in Q1, and we are aiming to be at 42 by the end of this year. The third big vector is building the one-stop shop. We know that two-thirds of sellers are also buying their house, and we want to make that transaction extremely seamless online and digital. In terms of added resources, we have the capabilities and the staff to invest in all three vectors, and we are going to be driving additional improvements down all three this year.

Carrie Wheeler, CFO

Okay. And if I can take the second part of that question, just around expectations for the cadence of margins over the course of 2021 I think was the question you asked. If you think about what drove margins, first of all, in Q4, it will help us talk about what’s going to happen for the coming year. Really, there are two main drivers of margins; one was having a very fresh book of inventory, consisting almost entirely of newly acquired homes, that was one. The second driver of margin in Q4 was around a combination of the underlying market trends we are seeing today, coupled with the timing of home acquisitions. So, the homes that we sold in Q4, just as a reminder, are actually homes that we offered on and we acquired in Q2 and in early Q3, and so that gap in timing drove we realized better than anticipated home price appreciation gains. You are seeing that benefit in margins. Both those drivers will not persist at the same rate for the balance of 2021, which is why our caution in my comments was to call it the fact that we expect margins to moderate over the course of this year. Certainly, as we acquire more inventory throughout the year, that distribution of homes in terms of aging will just look more normal. Additionally, there are underwriting today of homes that reflect what we are seeing in the market. We weren’t moved and are intentionally conservative in our underwriting late last year just given the volatility in the market due to COVID and other reasons. Today, we’ve adjusted to the environment we feel very good about the drivers to home price appreciation that we are seeing right now, and our underwriting reflects that. So you will see that margins that will come down over the course of the year from where we are today.

Yoni Yadgaran, Analyst

Got it. Appreciated. Thanks guys.

Carrie Wheeler, CFO

Thanks.

Operator, Operator

Thank you. And our next question comes from the line of Jason Helfstein with Oppenheimer.

Jason Helfstein, Analyst

Thanks. Two questions. And I apologize in advance for the comparison with Zillow. You should be compared – or you should be analyzing on an absolute basis. But we are living in a very relative world right now in the stock market. So, when I think about your first quarter revenue guidance, very similar to Zillow, should we be thinking about this as a duopoly? And just generally, when you – if you think about the experience you are giving consumers versus Zillow, do you see differences today? And then, I guess, second, your margins are much better than Zillow. Could you grow faster if you extended losses or pushed down margins? And just how are you thinking about margins versus growth over the next two years? And I know, we have obviously your previous guidance. So maybe just give us some color about how you are thinking about the balance between those two? Thank you.

Eric Wu, CEO

Yes. Appreciate the question, Jason. Maybe I’ll start by reminding you that less than 1% of transactions are online. When categories are performing, raising consumer awareness is a net benefit, especially when the product is much better, and we do see really great conversion right now. So, my view and our view is that as more and more transactions go online, just given what we’ve built to-date in our personal properties and the platform we’ve built, we feel very well positioned to be a market share gainer in the coming years. With regard to competition, where we need to compete over time, sure. But again, we are focused on building the best consumer experience and very confident in our ability to compete. Carrie, do you want to speak about the margin?

Carrie Wheeler, CFO

Yes. No. Yes, Jason, your question is about the trade-offs between growth and margin. What I would say, at a high level is, really first and foremost, our focus is on maximizing the growth we have right in front of us and to take advantage of the enormous market opportunity. That’s a number one objective. And we want to invest aggressively behind that growth objective. As evidence of that, I’d point to the fact that we just recently announced we are going to double the markets we will be in 2021. But we will continue to do as we have historically with a disciplined approach to unit economics in building a sustainable, durable business. This continues to be important to us. So, I am going to achieve a little bit and say the answer to your question is again, a question for us; growth is number one, but always in light of making sure that we are disciplined on our margin objective at the same time.

Jason Helfstein, Analyst

Thank you.

Operator, Operator

Thank you. And our next question comes from the line of Ygal Arounian with Wedbush Securities.

Ygal Arounian, Analyst

Hey. Good afternoon, guys. Thanks for taking the questions. I wanted to ask, Eric, on your comments about conversion. Conversion being stronger now than it has been historically, I think that question makes a lot of sense. So, maybe we could talk a little bit more about what’s driving that and where home sellers can kind of go and expect to sell their homes much quicker than they normally would. We see the bidding wars and selling above the asking price. So, maybe just some of the dynamics there. And then, second, we’d love to hear your comments on, there has been some commentary in the market that you paused listings for about a month from mid-November to mid-December. So, just is there any accuracy to that? And if that is, what happened? Maybe just some insights into why you made those decisions? Thanks.

Eric Wu, CEO

Got it. Appreciate the question. So, with regard to your first question about what’s driving conversion, I’ll let Carrie speak to the second part of your question. But from what we are seeing is really two things. There are some macro factors on I mentioned, and then some things we are doing on our side. The macro factors, as I mentioned, are a strong desire for a digital, contactless experience, and I’ll talk about why in a second, and there is also just more demand to move. So if we can reduce that friction from the experience, and you can go forward, there is a demand to move. But the other thing, we are seeing an increase in organic sellers coming to the site; as I mentioned, we are seeing strength in our partnership channels, and those have grown nicely. We are lowering our fees to the market conditions and we continue to make confident improvements on our seller experience and products, and those things are driving the increase in conversion. When you think about the behavior itself, this is why your seller is selling to Opendoor versus listing on the market. I would highlight two things: one is that, even if it’s a hot market, you still have to list the home, put in capital for repairs, have open houses, and wait for time. That timing can be not necessarily flexible; and the second piece is that again, two-thirds of sellers are going to buy another home. So, they need to be ready to move on the next home at a moment’s notice. Having an Opendoor offer in their back pocket gives them flexibility to buy the next home on their timeline. Those are the two driving factors into the increase in conversion.

Carrie Wheeler, CFO

Part two of your question, just around the pause we took in listing late last year. Without getting into the specifics, what I could say is, we actually did that. We took that opportunity at that time to experiment with some of our owned homes in terms of listing and some of the good times, and frankly, we were doing it just given seasonality. You can expect us to periodically experiment with the cadence of when we list and how we list, but nothing that I would over rotate on with respect to that short time that we took.

Ygal Arounian, Analyst

Thanks so much.

Operator, Operator

Thank you. And our next question comes from Edward Yruma with KeyBanc Capital Markets.

Edward Yruma, Analyst

Hey. Good afternoon guys. Thanks for taking the questions. I guess, first, just any commentary on any kind of change in behavior that you are seeing going forward with rising rates? Do you see any changes in behavior, maybe people even rushing to close? Second, kind of a broader question, I know you guys have a pretty comprehensive roadmap for adding more services and building that out. Any kind of update in terms of what the uptake has been in services and any change in that roadmap? Thank you.

Eric Wu, CEO

Edward, can you repeat the first part of the question? You were breaking up a little bit.

Edward Yruma, Analyst

Yes, I was just asking, kind of based on this rising rate environment, have you seen any changes either in top of funnel behavior or in the consumer kind of moving to close quickly based on rates moving?

Eric Wu, CEO

Got it. And the second part of the question is about services roadmap?

Edward Yruma, Analyst

That's right.

Eric Wu, CEO

Got it. Yes. So let me, I’ll address both, and Carrie feel free to comment as well. But with rates moving, the desire to lock in rates now is certainly one part of the equation. But again, we see the stronger macro factor of this, the desire to move in a digital way; the work from home policies are changing, giving people more geographic mobility. To your question around services, I think we’ve demonstrated a strong track record with title and escrow. We launched that business in 2017 and in three years got to 80% market penetration, and that has been very healthy margins. We knew that the consumers wanted it and integrated it close. We often know that consumers want additional services from us. We see this every single day when we talk to our customers. They do, in fact, want a more seamless integrated experience across multiple product lines. So, we continue to invest pretty heavily this year in 'Buy With Opendoor,' and as I mentioned, we just launched a new feature called Cash Offers within that product line, and then we are investing in Opendoor home loans this year.

Carrie Wheeler, CFO

Thank you. And – yes, I have a question. Can you repeat the second part of your question that you wanted to address the uptake we are seeing in services?

Edward Yruma, Analyst

Yes. I just wanted to know if there was anything you could provide in terms of attach rate, kind of quantitative color around the uptake in services.

Carrie Wheeler, CFO

Probably nothing more than we always have filed in our public filings which is around title and escrow; which is the most mature of our service offering today we are offering – we are attaching a north of 80%.

Edward Yruma, Analyst

Okay. Thank you.

Operator, Operator

Thank you. And we have a follow-up question from the line of Jason Helfstein with Oppenheimer.

Jason Helfstein, Analyst

Thanks for that. I have one more. Any update on List With Opendoor? Any color that you want to share? And then a housekeeping question, do you capture the homes that are in contract on a balance sheet or not until they close? Thanks.

Eric Wu, CEO

Sorry. Can you repeat the second part of that question?

Jason Helfstein, Analyst

Do you capture the homes that are in contracts on your balance sheet or not until they close?

Carrie Wheeler, CFO

I can do the easy one for us, Jason, which is, we don’t capture homes on the balance sheet until we own them to their close. So, what I would point you towards is the – if you look at the 10-K filing, what’s in inventory that we own, do show homes that are under contract to be purchased. You can track that. So, we had about 1,800 homes in inventory. We own those. We have about 1,700 homes, rough numbers, under contract to be purchased and that will close but the vast majority of those will. So, you can think of those two numbers as more or less out of this.

Jason Helfstein, Analyst

Great.

Eric Wu, CEO

And with regard to the List With Opendoor and an update there, maybe I just give you some color to how we are thinking about the products holistically. We want to be the best place to sell a home online. A couple of things we care about are; one, we want to be on the customers’ side. So that’s kind of point number one. Point number two is that we do want to ensure that the customer is making an informed decision. By giving them the range of options, whether they want to sell to us to maximize convenience and certainty or list on the market, we do want to make sure they are informed to have their choices and options, and that’s helped them determine what is the best option for their situation. That’s kind of the product thesis. We are seeing such strong conversion in our core offering, which is selling to us, that that’s still the product line that’s chosen the most. As we progress, we will continue to invest in List With Opendoor as an alternative to selling to us.

Jason Helfstein, Analyst

Thank you.

Operator, Operator

Thank you. I would now like to turn the call back over to CEO Eric Wu for any closing remarks.

Eric Wu, CEO

Great. I just want to end this first earnings call by saying thank you to my teammates for their passion and persistence in servicing our customers every day. I also want to thank our shareholders for their support of our mission to transform how people buy and sell a home online. Thank you.

Operator, Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. And you may now disconnect.