Earnings Call Transcript
Opendoor Technologies Inc. (OPEN)
Earnings Call Transcript - OPEN Q1 2021
Whitney Kukulka, Investor Relations
Good afternoon, ladies and gentlemen. Thank you for joining us for Opendoor’s First Quarter 2021 Financial Results Conference Call. Joining me on the call today for prepared remarks are Eric Wu, Co-Founder and Chief Executive Officer; and Carrie Wheeler, Chief Financial Officer. President, Andrew Low Ah Kee, will be joining Carrie and Eric for the Q&A portion of today’s call. Full details of our results and additional management commentary are available in our earnings release and shareholder letter, which can be found on the Investor Relations section of our 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 periodic SEC filings, including the quarterly report on Form 10-Q for the period ended March 31, 2021, to be filed with the SEC. 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 metric, please see our website at investor.opendoor.com. Now I will turn the call over to Eric.
Eric Wu, CEO
Thank you, Whitney. And welcome to our 2021 Q1 earnings call. I’m excited to share our results as we significantly exceeded our guidance for Q1 and have strong momentum looking forward to Q2 and the remainder of the year. Everything we do at Opendoor starts and ends with the customer. So let’s start by hearing from one of our recent customers, the Bennett family, about their experience with Opendoor. A special thank you to the Bennetts for choosing Opendoor. These are the stories that inspire us in our pursuit to make it possible to buy, sell and move at the tap of the button. Today, our digital products deliver far greater simplicity, certainty and speed than the traditional process. We always believe that the future of buying and selling a home can and will be as simple as hailing a ride or booking a flight. It seems that future is a lot less distant now. We are seeing increasing consumer demand for digital products in a manner that is permanent. This seismic shift is showing up in our numbers as in Q1, we set a number of records. We set a record number of offers, we saw record real seller conversion and we launched a record number of new markets. Lastly, we did so with a Net Promoter Score north of 80 from our sellers, telling us that customers love what we’re building. Taking a step back, I often get the question of whether Opendoor still resonates in today’s market. We are experiencing the fastest home price appreciation in decades, with stories of homes getting more than 50 offers in the first weekend. It’s certainly a seller’s market. Yet, our results and metrics are saying yes, Opendoor resonates because for our customers, we don’t just stand for a cash offer and we aren’t an iBuyer to them. Opendoor gives our customers the ability to win their next home, select their preferred closing date and transact without open houses, numerous steps and upfront repairs, saving them months of time. What we’ve built is a digital end-to-end experience that delivers confidence and peace of mind at every step. In terms of results, in Q1, we generated $747 million of revenue, up 200% versus Q4 of 2020; $97 million of adjusted gross profit, up 154% versus Q4 of 2020; and an adjusted EBITDA loss of $2 million, down from a loss of $27 million in Q4 of 2020. This performance was driven by the same three areas of focus we discussed last quarter. First, we are driving existing market growth. In Q1, as I mentioned, we saw a record number of offer requests driven by increasing awareness and continued increases in our buy-box. Even with this surge in consumer demand, we are seeing real seller conversion at record levels. These improvements have enabled us to acquire 3,594 homes in Q1, up 78% versus the fourth quarter of 2020. Additionally, in Q1, we sold 2,462 homes. Between our buyers and sellers, this growth in transaction volume continues to drive our flywheel with greater awareness, customer adoption, marketing and operational efficiencies, and ultimately market share. Second, we are increasing our geographic footprint and scaling rapidly to new markets. In Q1, we launched six additional markets, bringing our total markets to 27 at the end of the quarter. Already in Q2, we’ve launched an additional six markets, bringing our total to 33 to date. We are getting better and more efficient at this. And in Q2, we launched four new markets on the same day for the first time. This acceleration in market expansion lays the foundation for years of growth as we march towards our goal to serve every single homeowner nationwide. Third, we are building the digital one-stop shop for real estate. Today, consumers come to Opendoor because they want a better way to move, whether they are buying, selling or both. We started by reimagining the home-selling experience, bringing simplicity, certainty and speed to an otherwise offline, complex, and time-consuming process. We then integrated title and escrow as a critical component of the transaction, substantially improving the customer experience while also opening up an incremental margin opportunity for us. Next, we expanded our suite of products to include Buy with Opendoor and Opendoor Home Loans, knowing that two-thirds of sellers are also buying. Similar to Opendoor, we are investing to make Buying with Opendoor and Financing with Opendoor just as simple, certain, and fast. This past quarter, we launched Opendoor-backed Offers, allowing homebuyers to leverage Opendoor to submit cash bids, doubling their chances of their offer being accepted. Additionally, we’ve integrated our trade-in product into our seller experience, helping customers sell their existing home, buy and finance their next home, close with title and escrow, and move seamlessly, all within the Opendoor suite of digital products. We will continue to leverage our pricing, technology, capital markets, and operational infrastructure to build best-in-class products for movers nationwide. This financial performance is the outcome of the hard work and focus by our teammates that occurs behind the scenes. These teammates obsess every day about how to improve the customer experience, the business, and our culture. We are in the very early stages of this shift to a more digital experience in housing. We are energized by the numerous opportunities ahead, and we will continue to march against our vision to make it possible to buy, sell, and move at the tap of a button. I’ll now turn it over to Carrie.
Carrie Wheeler, CFO
Thanks, Eric. We provided commentary on our first quarter results in our shareholder letter. So let me quickly cover some of the highlights of the quarter before we move on to questions. As Eric said, we had an exceptional first quarter. Q1 performance demonstrated growing consumer demand for the Opendoor solution. We purchased 3,594 homes in Q1, up 78% versus Q4 and up 24% versus Q1 2020. Acquisition volume was driven by both record levels of offer growth and conversion as well as buy-box expansions and new market launches. As we continue to rapidly scale the business, we expect to surpass all-time highs for acquisition volumes in Q2. On the retail side, we sold 2,452 homes in Q1, generating revenue of $747 million, an increase of 200% over Q4, significantly outperforming our guidance. This sequential growth was largely driven by higher inventory entering the quarter and high transaction velocity. Consistent with what we’re seeing in the overall market, we are selling through our inventory in 21 days from list compared to 65 days in Q1 2020. Average home price is also a tailwind for revenue performance, with revenue per home sold up 4% sequentially and up 19% versus the first quarter of 2020. As Eric has noted, we also launched six markets in Q1 and plan to have nine more by the end of Q2. We’re well on our way to being in 42 markets by year-end. We expect these new markets to contribute to meaningful revenue growth in 2022 and beyond. Our unit economics were strong in Q1, largely driven by a combination of a very fresh book of inventory, strong home price appreciation, and our own inventory management strategies. Contribution profit was $76 million in Q1, up 142% from Q4 and up 97% versus the first quarter of 2020. This represented a margin of 10.2%, down 245 basis points quarter-on-quarter and up 712 basis points versus Q1 2020. Finally, adjusted EBITDA was close to breakeven with a loss of $2 million in Q1 compared to a loss of $27 million in Q4 2020 and a $28 million loss in the year-ago period. Adjusted EBITDA margin was negative 0.3% in Q1 versus negative 10.9% in Q4 2020 and negative 2.3% in Q1 2020. The EBITDA was well ahead of our guidance due to revenue upside, unit margin performance, and the benefits of higher average home prices, all of which provide incremental leverage against our operating expense base. Adjusted operating expenses, as measured by the difference between contribution profit and adjusted EBITDA, were $78 million, up from $59 million in Q4 2020. Adjusted net income was negative $21 million in Q1 or negative 2.8% of revenue. With regard to our balance sheet, we raised approximately $860 million in a primary equity offering in February, ending the quarter with $2.1 billion in cash and marketable securities. We are well-capitalized to fund our growth and product initiatives. I’d also like to touch base on stock-based compensation expense this quarter, which was $239 million. As I noted in our prior earnings call, this expense is much larger than we’d expect in a typical quarter and is primarily related to historical equity awards to employees realized as a result of going public in December 2020. For your modeling purposes, you should expect stock-based compensation expense to be down to $175 million in Q2 and then settle in at approximately $70 million in each of Q3 and Q4. Overall, we feel very good about the year ahead. For the second quarter, we expect revenue to range from $1.025 billion to $1.075 billion, and adjusted EBITDA of negative $5 million to positive $5 million. On the revenue side, the high end of guidance implies approximately 44% sequential growth from Q1 levels. Looking ahead to the second half, we expect Q2 to mark a record number of home acquisitions. As another leading indicator of our momentum, we had a record 4,027 homes under contract to be purchased at the end of Q1 or $1.3 billion in value, which compares to 1,742 homes under contract at the end of Q4. I’d also note that we’ve previously talked about 2021 revenue being weighted to the back half of the year, with roughly one-third of revenue coming in the first half. Notwithstanding the strong performance we anticipate for the first half, we do still expect those same revenue proportions to roughly play out in 2021. With respect to adjusted EBITDA, we expect Q2 unit margins to benefit from similar trends in Q1, and the contribution margins will moderate in the back half of the year as inventory mix normalizes. Furthermore, we expect adjusted operating expenses to increase sequentially throughout the year. The dollar step-up in OpEx in Q1 is a good framework for thinking through sequential trends across the remaining quarters as we make continued investments in marketing, technology, and people. We believe our Q1 results and outlook are reflective of Opendoor’s market leadership and the strong secular shift to consumers increasingly looking for digital-first, integrated solutions to buy and sell a home. We have the team, technology, and operating platform to execute on our mission and deliver long-term value for our customers, our partners, and shareholders. That concludes our formal remarks. I’d like to turn the call back to the operator, and we’ll open up the line to questions. Thank you.
Jason Helfstein, Analyst
I’m going to ask two questions. First, how much of the increase in the average revenue per home was a function of home price appreciation versus greater success in selling attached services? And second, how should we be thinking about the average revenue per home for the remainder of the year? Secondly, you noted the ability to move into more expensive homes, citing a $1.6 million home, I think in Florida or L.A. or something. Historically, many of us have thought about iBuying as limited to homes below around $0.5 million. Can you discuss how the ability to work in that price area opens up a bigger market?
Carrie Wheeler, CFO
Jason, it’s Carrie. Thanks for the question. With respect to what we saw in Q1, the 200% increase in quarter-on-quarter revenue, first of all, the vast majority of that was driven by volume growth. I think of the 200%, more than 190 points of that comes from volume growth. We were the beneficiary of an increase in higher average resale prices. There are two factors to that: one is home price appreciation, as you know; the other factor is continued success in advancing our buy-box. The buy-box incorporates more things than just price, but certainly, price is a key component. The market you referenced was actually Los Angeles. We’re up to $1.4 million, $1.6 million right now in that market. And we’ll continue to edge up across all our markets over time. With respect to the outlook for the balance of the year as it relates to resale prices, I think when you step back, the market right now for housing is very strong. We’re in a trifecta of very low rates, record low inventory, and an incredibly strong pent-up demand for housing. That’s resulted in a very high and fast rate of home price appreciation. Given those inputs, we don’t see those dissipating for the balance of the year, and housing will continue to be strong. Regarding resale price trend, we’re not providing guidance for the back half of the year specifically. I would expect those to continue to be positive quarter-on-quarter for the balance of the year, which again, is a combination of buy-box expansion, our city mix continuing to evolve as we’re in more markets, and lastly is the home price appreciation tailwind.
Eric Wu, CEO
The only thing I’ll add, Jason, is that our aspirations are to service all homeowners nationwide. Our teams are working hard and focused on expanding the buy-box and launching new markets. We’re expanding the types of homes we operate in and the different price points. The goal is to service every home in all the markets we operate in.
Nick Jones, Analyst
Great. First, Carrie, could you remind us what the impact of increasing interest rates might be on the business and Opendoor’s ability to mitigate increasing interest rates and the impact on the bottom line? Secondly, record low inventory levels or multi-decade low inventory levels, have you contemplated the pendulum swinging the other way? When the frenzy is over, will it potentially be a more challenging environment for a different reason?
Carrie Wheeler, CFO
Good to hear your voice, Nick. Thanks for the question. With respect to interest rates and our cost structure, we expect that the impact will be quite modest. For example, a 100 basis point increase in rates would translate to a 25 basis point move in our cost structure, which we find manageable. On the second part of your question, our model is designed to work across all kinds of markets: up, flat, and down markets. You should think of us as a market maker and provider. In a down market where home price appreciation would decline, we can choose to increase spreads to account for that decline. Declines in home price appreciation will be offset by increased spreads. In a down market, which is more uncertain for consumers, we believe that the certainty our product provides will be even more valuable to customers. Overall, we are very focused on current housing macro conditions, but we are also aware of a massive secular tailwind driving digital adoption, and we expect to continue gaining market share across all cycles.
Ed Yruma, Analyst
First, just on the expansion of the buy-box. Is this a process that you can apply systematically to other cities? How quickly can you increase the price range of the homes you’re buying? Conversely, is there an opportunity to target more value-priced homes? My second question is, velocity remains incredibly high. Should we expect that to normalize as we head into the back half of the year?
Andrew Low Ah Kee, President
Ed, it’s Andrew here. I’ll take the first part of that, and then I’ll turn the second piece over to Carrie. Yes, we believe that expanding the buy-box is a repeatable process. The team has done a great job building that into a systematic capability, and we’re constantly looking for places where we can provide our offering to more consumers. Our aspiration is that every seller in the United States can take advantage of what Opendoor offers. The team is hard at work identifying features and tuning our pricing models so that we can acquire those homes. Importantly, it’s about more than just pricing. It also involves dimensions like the age and condition of a home enabling us to drive continuous improvement against that buy box. Carrie, would you take the second point?
Carrie Wheeler, CFO
Certainly. As I previously mentioned, the housing market is strong due to various factors, including rates, constrained inventory, and pent-up demand. We expect those factors to persist through the rest of the year. As for velocity, there’s a chance it might slow, but I don’t believe it will materially affect our model or results.
Ygal Arounian, Analyst
First, regarding the improvements in real seller conversion reaching a record, can you elaborate on some of the strategies you’ve taken to improve conversion and your thoughts on pricing and offers in the current environment, especially with the expected continued home price appreciation? Secondly, what is your inventory philosophy? There’s pushback from investors about holding meaningful levels of inventory in case of market downturns. With the significant purchases and sales in Q2, should we expect purchases and sales to equal out over time while maintaining stable inventory levels?
Andrew Low Ah Kee, President
Sure. In terms of conversion strength, we’re seeing record real seller conversion. There are two key factors driving that: first, consumers value a best-in-class experience that is simple, certain, fast, and trusted. We’ve invested significantly in that experience and continue to make improvements. The second factor is that consumers care about net proceeds, and we can deliver more thanks to our improved cost structure, pricing engine, and inventory management, alongside strong home price appreciation and market velocity.
Carrie Wheeler, CFO
Regarding inventory, in today’s inventory-constrained market, we have not encountered issues acquiring homes. In Q1, we acquired 3,594 homes, up from 2,000 last quarter. Moreover, we currently have over 4,000 homes under contract. Thus, despite the market constraints, we have not faced limitations in acquiring homes. In a more normal market, I suspect our job will be even easier.
Eric Wu, CEO
Thank you for the question regarding Opendoor-backed Offers (OVO). This feature is simply an option for the customer. We’re excited as customers are choosing to work with Buy with Opendoor because of this feature, though it’s not a requirement. We have two major customer groups: hundreds of thousands of sellers requesting offers and countless home shoppers browsing our listings. This dual customer base allows us to promote Buy with Opendoor and Opendoor-backed Offers actively.
Yoni Yadgaran, Analyst
I have two questions. First, regarding ramping new markets, you've been aggressive in the last few quarters and are more than halfway toward your full-year goal. As you enter new markets with strong home price appreciation and expanding buy-boxes, are you seeing a faster ramp in those new markets than expected? Can you provide insights on how those new markets are performing relative to historical levels? Second, on suppliers of lumber and service providers, have these constraints impacted your holding days or your ability to resell homes quickly?
Andrew Low Ah Kee, President
With regards to market launch, we’re well on track to hit our goal of doubling our market footprint. We’ve seen strong capability in our launches this year, and we can now execute multiple launches in a single day, reflecting the hard work of the team. Our focus is on accurate pricing and scalable processes. The current impact of new markets is small this year, but it establishes a growth foundation for the future. As for your second question about building supplies impacting our rental or repair days, we are experiencing some supply chain challenges like others in the industry. However, we are not heavily dependent on lumber specifically, and while we see shortages across various components, it hasn’t materially affected our timeline so far.
Jason Helfstein, Analyst
Thanks. Just to follow up on the topic of OVO, how exactly does the flywheel work? If you opt for OVO, do you have to sell your home through Opendoor? Can you clarify this newer product for us?
Eric Wu, CEO
Yes, Jason, it’s Eric. OVO provides an option for the customer but does not require them to sell their home through us. We are enthusiastic about the customer interest in Buy with Opendoor facilitated by this feature. We are targeting two large customer segments: sellers seeking offers and home shoppers visiting our homes. This dual approach bolsters our ability to market Buy with Opendoor and Opendoor-backed offers. Great. I just want to thank everyone for joining our Q1 earnings call. Before I sign off, I’d like to thank our customers who choose Opendoor to help them with their life transitions and my teammates for their dedication to our customers every single day. Thank you.
Operator, Operator
This concludes today’s conference call. Thank you for participating. You may now disconnect.