Earnings Call Transcript - OPEN Q1 2024

Operator, Operator

Good day, and thank you for standing by. Welcome to the Opendoor Technologies First Quarter 2024 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kimberly Niehaus, Investor Relations. Please go ahead.

Kimberly Niehaus, Investor Relations

Thank you, and good afternoon. 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. All statements other than the statements of historical fact are statements that could be deemed forward-looking, including, but not limited to, statements regarding Opendoor's financial condition, anticipated financial performance, business strategy and plans, market opportunity and expansion, and management objectives for future operations. These statements are neither promises nor guarantees and undue reliance should not be placed on them. Such forward-looking statements 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 most recent annual report on Form 10-K for the year ended December 31, 2023, as updated by our periodic reports filed after that 10-K. Any forward-looking statements made on this conference call, including responses to your questions, are based on management's reasonable and current expectations and assumptions as of today, and Opendoor assumes no obligation to update or revise them whether as a result of new information, future events, or otherwise, except as required by law. The following discussion contains references to certain non-GAAP financial measures. The company believes these non-GAAP financial measures are useful to investors as supplemental operational measurements to evaluate the company's financial performance. 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. I will now turn the call over to Carrie Wheeler, Chief Executive Officer of Opendoor.

Carrie Wheeler, CEO

Good afternoon. Also on the call with me today is Christy Schwartz, Interim Chief Financial Officer; and Dod Fraser, President of Capital and Open Exchange. Our performance in the first quarter reflects our commitment to the three key operating principles we outlined at the beginning of the year: focus, execution, and results. Our North Star remains rescaling our business and building towards a future of sustained profitable growth as we drive the business towards positive adjusted net income. We are making progress along this path with first quarter revenue, contribution profit, and adjusted EBITDA results all coming in ahead of our expectations. Further, we remain on track to meaningfully ramp acquisitions year-on-year each quarter in 2024 and deliver contribution margin within our target range of 5% to 7%. In the first quarter, we nearly doubled our acquisition volumes year-over-year. Contribution margin was 4.8%. And excluding approximately 50 homes from the old book, our contribution margin was over 5%. Notably, this marks the seventh consecutive quarter that our new book of homes has generated contribution margin within or above our annual target margin range, demonstrating the health of our unit economics across seasons and market environments. We expect that our acquisition volume growth in 2024 will benefit from further expansion of our partnership channels. For example, at the end of February, our eXp Realty partnership went live, enabling eXp Realty's agents to easily request an Opendoor cash offer for their clients and qualifying properties. This partnership should continue to build on our brand awareness amongst the agents and provide another way for sellers to learn about the benefits of working with Opendoor. Early this year, details began to emerge on the proposed National Association of Realtors settlement. We believe this settlement represents an important positive change for our industry by giving consumers more transparency and choice on how they transact in the housing market. In the near term, we expect the settlement to have a neutral to positive impact on our business. As you've heard from us before, our business model does not rely on earning revenue from commissions paid to buyers' agents; rather, those commissions are a cost to us today, which we pay when we resell our homes. Over the long term, we believe the settlement will drive lower transaction costs. And if commissions do decline, Opendoor may be able to pass these cost savings back to consumers in the form of lower spreads, which means more cash for our sellers, and more customers saying yes will generate the same margin. We also believe this settlement could result in more transactions as commissions decrease, which may encourage more consumers to transact directly, including through the Opendoor platform instead of listing on the MLS. We believe that Opendoor stands to benefit as consumers rethink how they buy and sell homes. We spent the last decade building for this future. We're off to a strong start in 2024 as we ramp our volumes in a sustainable and durable fashion. And during a time when the industry has the potential to undergo a major change in how consumers are thinking about how to sell or buy a home, we are very well positioned as the largest digital platform for residential real estate transactions. We're empowering consumers with more control and a simple, certain and transparent offering during one of life's most important transactions. Christy will now review our financial results and guidance.

Christy Schwartz, Interim CFO

Thank you, Carrie. Our first quarter results reflect our ongoing commitment to rescaling the business, generating strong unit economics and operating with disciplined cost management. We delivered $1.2 billion of revenue in the first quarter, exceeding the high end of our guidance range. This represents a 36% sequential increase in revenue, driven by our acquisition volume growth last year and coinciding with a pickup in clearance rates as is typical for this time of year. On the acquisition side, we purchased 3,458 homes in the first quarter, up 98% versus first quarter 2023, primarily due to spread reductions made throughout last year, coupled with added contributions from our partnership channels. We delivered a contribution margin of 4.8% in the first quarter, ahead of the high end of our implied guidance range. Contribution margin improved by more than 100 basis points sequentially as there were fewer old book home sales. We continue to expect full year contribution margin within our annual target range of 5% to 7%. Adjusted operating expenses totaled $107 million for the quarter, up from $99 million in the fourth quarter of 2023, driven by increased marketing spend of nearly 60% sequentially and below our guidance of $120 million. Finally, adjusted EBITDA loss was $50 million, outperforming the high end of our guidance range and an improvement from an adjusted EBITDA loss of $69 million in the fourth quarter of '23. Turning to our balance sheet. We ended the quarter with $1.3 billion in total capital, which includes $1 billion in unrestricted cash and marketable securities and $181 million of equity invested in homes and related assets, net of inventory valuation adjustments. We also had $8 billion in nonrecourse, asset-backed borrowing capacity composed of $3.8 billion of senior revolving credit facilities and $4.2 billion of senior and mezzanine term debt facilities, of which total committed borrowing capacity was $2.5 billion. Additionally, this morning, we established an at-the-market or ATM program, which allows us to sell up to $200 million in equity through open market transactions within the next three years. We are making progress towards achieving positive adjusted net income and as we demonstrated with our convertible note repurchases in 2023, which generated over $200 million of shareholders' equity, we are managing our balance sheet with discipline. We feel that putting this program in place provides us the flexibility to fund future growth should we need it. We plan to be prudent and patient in utilizing the ATM to ensure we are optimizing our cost of capital. Looking ahead, we expect our second quarter revenue to be between $1.4 billion and $1.5 billion, contribution profit between $75 million and $85 million, which implies a contribution margin of 5.4% to 5.7%, and adjusted EBITDA loss between $35 million and $25 million. We expect adjusted operating expenses to be approximately $110 million. Additionally, as a result of our increased marketing spend, we have seen an uptick in acquisition contracts in the latter part of the quarter. This, coupled with continued marketing spend and alongside seasonality tailwinds should result in home purchases of over 4,500 homes in the second quarter. Given the selling season can peak during the second quarter, we expect our acquisitions to be flat or modestly lower on a sequential basis in the third quarter. However, the first quarter should be the trough for quarterly purchases this year. We are pleased with our execution during the first quarter. We remain on track to increase acquisitions on a year-over-year basis each quarter in 2024, while delivering annual contribution margin in our target range and operating efficiently, which should substantially decrease our adjusted net income losses for the year. I'd now like to turn the call over to the operator to open up the line for questions.

Operator, Operator

Our first question comes from Dae Lee with JPMorgan.

Dae Lee, Analyst

I have two questions. First, I appreciate the information about acquisitions throughout the year. However, I'm curious about how macroeconomic conditions might alter your expectations for the clearance rate moving forward. Also, how do the increased mortgage rates this week affect your outlook going ahead?

Dod Fraser, President of Capital and Open Exchange

Sure, Dae. Happy to start. It's Dod. I think if you zoom out from a macro perspective and reiterating what we said in the letter, what we are most focused on and have been for the last 18 months is continued price stability. And that really is the key input for us in terms of how we set spreads and how we manage growth and margins. And so we continue to see a balance of supply and demand. We do think even with some rate release in the back half of the year, that should actually be a tailwind for the business in terms of market transaction volumes going up. One of the points and pieces of the shareholder letter that we added this quarter is around seasonality and how that impacts spreads. That is really the primary driver of spread changes right now, which is for this time of the year, we typically do increase spreads, but happy to have Carrie add on as it relates to the volume trajectory for the rest of the year.

Carrie Wheeler, CEO

To provide context on acquisitions, we nearly doubled our year-on-year acquisitions in the first quarter. For Q2, we anticipate an increase of about 70% year-on-year. The macro environment has not benefited us; rather, it has posed challenges. Nevertheless, we are encouraged that despite new listings in our target market only rising by 6%, we achieved 98% acquisition growth and feel positive about our quarter's conclusion. We also saw a 24% sequential increase in contracts in Q1, which contributes to our optimistic outlook for acquisition growth in Q2. We will concentrate on what we can manage at this time, which reinforces our progress in gaining market share and maintaining acquisition momentum.

Dae Lee, Analyst

Okay, great. As a follow-up, it seems your first quarter adjusted operating expenses increased as expected, mostly due to more moderate hiring. Does this mean that your marketing ramp is progressing as planned? Also, is the moderate hiring a result of a change in expectations on volume, or do you believe you can achieve more with fewer resources?

Christy Schwartz, Interim CFO

Thanks for the question, Dae. This is Christy here. So as a reminder, our adjusted OpEx is composed of three main pieces: our fixed costs, our marketing, and our variable SG&A. Our fixed costs, we are continuing to make meaningful reductions and take costs out of our system while continuing to refine. Some of that is what you're seeing in the outperformance. Our marketing, we did increase it as we had indicated. It went up $10 million quarter-over-quarter, and we don't expect meaningful increases to our marketing spend for the remainder of the year. And then our variable SG&A is the part that will vary with volumes. So $107 million is where it was in Q1, and we've guided to $110 million for Q2.

Operator, Operator

Our next question comes from the line of Ygal Arounian with Citi.

Ygal Arounian, Analyst

Just let me start by following up on the first question on acquisition strategy and rates. It sounds like no change really to your strategy here, but just thinking with the recent rate spike aligning with kind of what's the heart of the buying and selling season, is that impacting how you're thinking about things at all? And then maybe just an update on your kind of current market and buy box expansion strategy or path, how you're thinking about that.

Carrie Wheeler, CEO

Hey, Ygal. It's Carrie. Can you just say a little bit more on your first question? I wasn't quite following that. Is it a brand and seasonality question or?

Ygal Arounian, Analyst

There has been a significant rise in mortgage rates recently, which coincides with the peak of the buying and selling season. Are you expecting this to soften the market, particularly in the core areas or seasonal segments? Is this affecting your perspective in any way? It seems like it might not, but I'm interested in whether you're considering this at all.

Carrie Wheeler, CEO

Yes. I mean certainly, we're taking in all those signals all the time, and we're watching very closely kind of what the market is telling us in terms of clearance rates and trending in prices. We did talk a little bit in the shareholder letter about this is the time of year where we do start to increase spreads a bit because we expect that the homes that we're offering on today will be sold post the spring selling season. So we'd expect those homes to have less of a gain to them and reflected in slightly higher spreads. So those are adjustments we make every day, every week with the team. And we certainly are reflecting what may be coming down the pipe, given recent rate increases. Dod, do you want to add on to that?

Dod Fraser, President of Capital and Open Exchange

Yes. I think the only thing to add on is if you look at some of the charts in the back of the shareholder letter, you can see what we're observing from a new listing perspective. Although there's a slight lag there, we really haven't seen sort of a meaningful change on the back of the recent rate changes in terms of listing volumes, which is really the key driver and input to our acquisition targets.

Ygal Arounian, Analyst

Okay, that's helpful. And maybe just a little bit more color on the ATM equity offering, a little bit more detail on how it works. Why now? Can you do more of this? How should we be thinking about that?

Dod Fraser, President of Capital and Open Exchange

Yes. I mean I think I'd just start with level setting on where we are from a balance sheet perspective. As you can see from our financials, we've got over $1 billion in cash, $1.3 billion total capital, and $8 billion debt capacity. I think we feel very good about executing our business plan with our current capital base. Really, the ATM for us gives us the ability to opportunistically raise equity over the next three years. I think it's really important to note it's a three-year program. Because of how they're structured, we do that at a lower fee and at market, so there's no discount to market. We really view it as a tool in our toolkit to opportunistically fund future growth. This is one of many ways we could implement that, but we wanted to get it out there. It's interesting. These programs are very common in capital-intensive businesses like the REIT sector or biotech, but there is actually a growing list of technology companies putting these in place, especially post-COVID. I think people sort of realize how useful they can be. Carvana has one, Zillow has one, Tesla has one. To Christy's point earlier, we were opportunistic last year in repurchasing the convertible notes, creating over $200 million in equity. We do not plan to utilize the ATM immediately; we'll be patient with this and we don't plan to use it this quarter.

Operator, Operator

Our next question comes from the line of Nick Jones with Citizens JMP.

Nicholas Jones, Analyst

I guess maybe one on the path to positive adjusted EBITDA and mentioning net income. It's been a nice cadence over the last few quarters. As we kind of think about shaping the rest of the year, is it right to think of Q4 maybe being a weaker quarter throughout the year, but maybe not as weak as Q1? And then are we on a linear path from here? Are you confident that we can get to positive adjusted EBITDA, maybe even this year or next year?

Carrie Wheeler, CEO

Hey, Nick, it's Carrie. I'll take that. What I would say at a high level is what we are indicating is that we are on this path of increasing acquisitions year-on-year for every quarter for 2024. We feel good about delivering within our 5% to 7% contribution margin target. All of that goes together to substantially reduce the losses we've seen in the system. So without giving you specifics or guiding to where EBITDA is going to fall in subsequent quarters, I just say that we're feeling good about the path we're on to substantially improve the bottom line of the business.

Nicholas Jones, Analyst

Got it. Helpful. And then maybe a higher-level question, Carrie. You mentioned the NAR settlement and some headlines that the DOJ might be taking a closer look at the NAR. I think you said in your comments that folks might bypass the MLS. At a high level, the NAR and the MLS, while it was kind of the original marketplace over 100 years ago, there are complaints that they create this sense of urgency that potentially damages the selling-and-buying experience. Do you think this is the start of their dominance in the ecosystem potentially starting to wane? And is that kind of a long-term secular tailwind for Opendoor?

Carrie Wheeler, CEO

Yes. It's a good question. I just want to clarify my comments. We think this is net positive, first of all, for consumers. Anything that's good for consumers is good for Opendoor. This is all about giving more choice, transparency, and agency in the hands of homebuyers in terms of how they want to engage with an agent. The reason I think we're so set up well in this context is because we have this direct platform. I wasn't talking about homes going off the MLS. There's been some talk about that. We think the MLS is a great thing because it's democratic. Everyone can understand what's available for sale. But it really says to certain homebuyers or sellers, I may decide I don't need an agent in this transaction or I can dial in the amount of advice I need to get. The only place you can sell your home directly today and the only place you can buy a home directly with an e-commerce-like transaction is Opendoor. We have the only direct platform in the industry. No matter how the real estate ecosystem evolves, we're really set up well to take advantage of that. There's a lot of talk about touring and having to get a buyer representation agreement beforehand; you could still tour our homes. We want to give the consumer total agency to do what's right for them in whatever way they want to do it, including if they want an agent to come with them. So my comments were not about going off the MLS. We're supportive of the MLS, but really about enabling consumers to go direct.

Operator, Operator

Our next question comes from the line of Jason Helfstein with Oppenheimer.

Charles Larkin, Analyst

This is Chad standing in for Jason. Home purchases were slightly down from the previous quarter, but there was a notable increase in homes under contract compared to the prior period. Can you shed some light on this? Is it a typical seasonal trend, or is there something else that’s boosting your confidence in the buying process? I have another question as well.

Carrie Wheeler, CEO

Yes, I mentioned that the market has slowed down, and we give customers a lot of flexibility regarding when they close on their homes. Therefore, I pay less attention to quarter-to-quarter comparisons since a contract in one quarter might be delayed and close in another. The focus should be on the year-over-year growth we are showing. To your point, Chad, we had a strong ending to the quarter with a significant increase in contracts in Q1, which rose by 24% compared to Q4. This momentum carried through the quarter, leading to a strong forecast for over 4,500 acquisitions in Q2. I wouldn’t read too much into the slight decline compared to Q4.

Charles Larkin, Analyst

Yes. Fair enough. And then just on the eXp partnership, just anything else you can share there? And how meaningful could that be kind of over the long run?

Dod Fraser, President of Capital and Open Exchange

Yes. Happy to give a little more context there. It's still very early. So we just launched in February. We're seeing steady weekly growth since launch, but just in February, it's like low end. The key piece there is it really helps broaden our reach into the agent community. eXp has 70,000 agents in their network and growing. We are quite excited about the brand expansion opportunities. The understanding of our product and as well as the specific application with eXp is we're embedded directly into their workflows. We made it really simple and easy for eXp agents to utilize our product. And going back to what Carrie said earlier, we're on the side of transparency and choice for customers. This is another option for them when they're talking to their customers.

Operator, Operator

Our next question comes from the line of Ryan Tomasello with KBW.

Ryan Tomasello, Analyst

Just trying to parse through the different comments on the seasonal cadence of purchase volumes. I think in your prepared remarks, you said you expect purchase volumes to increase sequentially in every quarter. But in the shareholder letter, you say on Page 12 that you actually expect purchase volumes in 3Q to be flat to decline modestly. So am I missing something there? And can you just clarify that commentary? And then beyond Q2, just from a seasonal perspective, how should we be thinking about 4Q volumes with normal seasonality?

Dod Fraser, President of Capital and Open Exchange

Yes. Let me clarify that. I think the distinction lies in comparing quarter-over-quarter to year-over-year regarding the third quarter. Year-over-year, we're seeing growth each quarter. As mentioned in the letter, we had over 4,500 in the second quarter, which is flat to slightly down in the third quarter. We indicated that the first quarter would be the lowest of the year. So, the fourth quarter will be above the first quarter. Given our current position and how the fourth quarter typically develops, we face some challenges with market volumes and spending, but we also benefit from favorable conditions like low spreads. The key point is the difference between year-over-year and quarter-over-quarter comparisons.

Ryan Tomasello, Analyst

That's really helpful. To consider a more extreme scenario regarding the NAR settlements and industry structure, the general consensus suggests that commission rates are likely to decrease. However, international comparisons indicate that the situation could become significantly worse, resulting in fewer homebuyers utilizing agents and potentially compressing listing activity. Hypothetically, is there a minimum commission rate and total transaction cost at which the Opendoor model might need to adjust its value proposition in relation to the prevailing commission rates?

Carrie Wheeler, CEO

Well, I guess a couple of things. One is we provide something that you can't get in a traditional transaction. We provide utmost certainty, no fall-through rate, and utmost simplicity—no listings, no doing repairs on spec, no doing open houses, like all the incredible friction and uncertainty that traditional listings entail. We're just providing something very different. Today, we charge a premium to traditional listings through our spreads. We have now this service fee, and there's an incremental spread, and that's in part to meet margin targets. People are paying a premium for the certainty and simplicity that we provide. In the event there is fee compression, that's the point you're trying to bring across; we will adjust with the market. I don't worry a lot about our ability to continue to provide an incredible value proposition because again, we offer something that is different. There may be some interim benefits to us. The real question will be how seller listing fees change over time. We'll see how the market responds post-July, and we'll be prepared to respond in kind.

Operator, Operator

And I'm currently showing no further questions at this time. I'd like to hand the call back over to Carrie Wheeler for closing remarks.

Carrie Wheeler, CEO

Just thanks, everyone, for joining us today. Hopefully, you've heard we are pleased with the results to kick off this year. The housing market is challenging for sure, but we are staying focused. Hopefully, you can see that our team is executing really well, and we are driving results. We look forward to updating you on further progress next quarter.

Operator, Operator

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