Earnings Call Transcript - REAX Q3 2021

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Real Brokerage third Quarter Earnings Call. At this time, all participants are in listen-only mode and the floor will be open for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, James Carbonara with Hayden Investor Relations. Sir, the floor is yours.

James Carbonara, Host, Hayden Investor Relations

Thank you. And once again, welcome to Real’s third Quarter twenty twenty one earnings call. With me on the call are Tamir Poleg, Chief Executive Officer; and Michelle Ressler, Chief Financial Officer. This morning Real filed its financial results and management discussion and analysis for its third quarter ended September thirty, twenty twenty one on SEDAR. These documents, along with the accompanying news release, can be found on SEDAR. The content of this conference call should be considered in conjunction with and is qualified in its entirety by reference to such documents. I'll now read the forward-looking safe harbor statement. This statement is made pursuant to the safe harbor for forward-looking statements described in the Private Securities Litigation Reform Act of nineteen ninety five. All statements made on this call, with the exception of historical facts, may be considered forward-looking statements within the meaning of Section 27a of the Securities Act of nineteen thirty-three and Section twenty-one (a) of the Securities Exchange Act of nineteen thirty-four. Although the company believes that expectations and assumptions reflected in these forward-looking statements are reasonable, it makes no assurances that such expectations will prove to have been correct. Actual results may differ materially from those expressed or implied in the forward-looking statements due to various risks and uncertainties. For a discussion of such risks and uncertainties, which could cause actual results to differ from those expressed or implied in the forward-looking statements, please see risk factors detailed in the company's annual report, which contains subsequent filed quarterly reports, as well as in other reports that the company files from time to time. Any forward-looking statements included in this earnings call are made only as of the date of this call. We do not undertake any obligation to update or supplement any forward statement to reflect subsequent knowledge, events, or circumstances, unless otherwise mandated. All references in this call reflect currency in U.S. dollars. This conference call will include references to adjusted EBITDA, which is a non-International Financial Reporting Standards, IFRS financial measure. Non-IFRS measures are not recognized measures under IFRS. They do not have standardized meaning prescribed by IFRS, and therefore are unlikely to be comparable to similar measures presented by other companies. Adjusted EBITDA is used as an alternative to net income by removing major non-cash items such as amortization, interest, stock-based compensation, current and deferred income tax expenses, and other items management considers non-operating in nature. Adjusted EBITDA has no direct comparable IFRS financial measure. The company uses non-IFRS measures solely to provide investors with added insight into Real's financial performance. Listeners are cautioned that such non-IFRS measures may not be appropriate for any other purpose. Non-IFRS measures should not be considered in isolation or as a substitute for measures or performance prepared in accordance with IFRS. Now, I'd like to turn the call over to Tamir Poleg, Chief Executive Officer of Real. Tamir, please proceed.

Tamir Poleg, CEO

Thanks, James, and thanks everyone for joining today. I would like to start by thanking the hundreds of agents who joined Real in the past few months and our community of agents who have contributed to the growth we are experiencing. I will now continue by highlighting some top-level financial results, then I will provide some operational updates before turning it over to our Chief Financial Officer, Michelle Ressler, to dive deeper into our financials. After that, we will open up the call for Q&A. Let's start with the financial results. Q3 revenue was thirty-nine million, an increase of eighty-five percent year over year. Driving that growth was a one hundred thirty-two percent increase in real estate agents joining Real, as well as a three hundred twenty-five percent increase in revenue per agent to thirteen thousand dollars. Now, turning to operating highlights. When we consider what is supporting our growth, it is based on a number of operational factors and strategies, mainly geographical expansion, agent referral, retention, product focus, the amazing culture that attracts more and more agents, and the efficiency of our team, beginning with geographical expansion. During the third quarter, we announced Real’s expansion into Canada with the launch of Real Brokerage in Alberta. We also expanded into Indiana, North Dakota, Minnesota, and Montana. After the quarter ended, we announced expansion to Iowa and Michigan, bringing our tally to thirty-eight states, the district of Columbia, and the Province of Alberta in Canada. We look forward to growing our business in Canada, and in each of our operating states. Our focus closing out the year and for twenty twenty-two will be North America. The intention is to go deeper in the U.S. rather than expanding horizontally. In terms of agent referrals, our agent attraction has always been correlated to our existing agents. We will be rolling out more tools for current agents to attract more agents. Every agent that joins the company has the potential to attract more and more agents. As a reminder, agents are incentivized to recruit other agents because Real agents earn revenue share through five years of referrals, creating a network growth effect. We also believe that our story resonates with a lot of people. The culture that the agents we are attracting is also attracting other like-minded agents. Just as an example, this is what attracted Red Line Brokerage and its eighty-five agents into Real in October. They saw our platform, technology network, and further by joining Real, they can both maintain the momentum that they are proud to have achieved and provide greater benefits to their agents. We are proud to say that we are now part of the Real team, and we look forward to having them play an integral role in our operations. Moving to retention, at Real, we offer an equity incentive plan to both attract and retain agents. Agents can purchase stock at a discount with their commissions. They can earn stock by capping and attracting other agents. Agents can also earn elite agent stock awards if they reach specific production benchmarks. The majority of agents join and opt into the equity incentive plan; it is a huge incentive to join and stay. Moreover, we believe that the equity incentive plan has allowed us to attract and retain more agents and more high-producing agents. It has also allowed us to attract top-tier talent to our management team. In fact, in the last two weeks, we made two important appointments. Firstly, just last week, we announced that Katharine Mobley will join our management team as the Chief Marketing Officer. Kathy is an award-winning executive with more than twenty years of experience. Her focus has been on delivering strategic and data-driven strategies for growth, venture-backed and private equity companies. Previously, Kat led global marketing at First Advantage; prior to her role at First Advantage, she served as the Chief Marketing Officer at several technology firms and managed a range of global brands for accounts at several Fortune 500 companies. Secondly, earlier this week, we announced Raj Naik will join our management team as Chief Operating Officer. Raj has been an entrepreneur in technology for over twenty years. He joins Real from Workrise, previously known as RigUp. Workrise is a workforce management platform for the skilled trades, where he served as Managing Director for its construction business unit and was a member of the executive leadership team. Raj also spent nearly four years at Uber, holding senior leadership positions in the rides, vehicle solutions, and Uber Eats business units. Prior to Uber, he held executive and founding roles at startups in electronic software, family safety technology, and business performance and compliance software. Raj founded his first company with friends while studying at the University of North Carolina at Chapel Hill, later sold to Oracle. Clearly, we further bolstered our management team with two driven, accomplished, and leading executives in Kat and Raj. They’ve joined Real and will provide enormous value in supporting our growth ambitions. We welcome them to the family, and at Real, we believe they will fit right into our culture and team. Turning to our product focus, I’ll start with Instant Payments, which we launched a couple of weeks ago. Instant Payments is intended to change the way agents are paid in the real estate industry. With the first-of-its-kind model, agents will have the option to be paid at the time a transaction is executed rather than at closing. We are doing something that we believe no other brokerage has done before or has the ability to do in terms of the data they collect and process. I really hope that other brokerages will follow us because this is what is fair for agents. I encourage other brokerages to do the same because I want more agents in this country to benefit from it, and I think that this is what’s fair for every agent in this country. Having said that, I think that very few brokerages can actually execute a program like this because some do not simply have the data processing capabilities or the vast majority do not have the cash to actually support and finance that program. Agents work hard for months without payment. Our number one priority is our agents, and we want to be there to help them and reward them for their efforts. This new program is changing the industry by assisting agents, new and experienced, to build and grow their business by getting paid faster. We are really excited to provide instant payments to our agents. Other items on our product focus include our new agent app that gives our agents better visibility into the business in real-time and provides more services to enable them to serve their clients better. We have a new internal system that allows us to scale to one hundred thousand agents without needing additional substantial investment in technology infrastructure. One of the takeaways from the termination of their I-buy program is that you cannot solely rely on software. Real will be basing its consumer-facing experience on a combination of software solutions that provide convenience, transparency, and speed on one hand and a human agent who will be able to guide the client and understand their needs and emotional journey. We believe that by building a digital experience that puts agents at the center of the transaction, we can dramatically improve the way people buy and sell homes. I think that in a few years, when people talk about yield or think about yield and who we are competing with, the first answer will not be traditional or technology brokerage, but rather larger online real estate companies. Finally, moving on to the efficiency of our team, we continue to have growth in the number of full-time employees, which has led to a positive correlation to the volume of our real estate transactions. This has been done very efficiently. In fact, as of September thirty, twenty twenty-one, our current efficiency ratio, which is full-time employees divided by the number of agents that are currently on our team, remains high, right around one to sixty. I think that this is excellent because we are at that phase of growth where we are adding more resources at a fast pace. Even though we are hiring and putting a lot of resources to work in anticipation of building future products, we are still at a very good ratio. One to sixty is similar to Q2 and higher than Q1, which was one to fifty-six. We are at a long-term target of one to seventy-five. For context, most companies in our field have a ratio closer to one to twenty-five. We view this as a competitive advantage in terms of how quickly and efficiently we can scale and it provides the benefit for future profit margin. To sum up, we are focused on continued growth through geographical expansion, agent referral, retention, product development and the efficiency of our team. Powering it all is our mission of having a positive impact on as many real estate agents and homebuyers as possible. At this point, I will now turn it over to Michelle Ressler for a more in-depth view of our financials. Michelle?

Michelle Ressler, CFO

Thank you, Tamir. So, I'll start by assessing some of our key financial results for the quarter. Our Q3 revenues grew eighty-five percent year over year to thirty-nine million, compared to three point nine million last year in the same quarter. This increase was mostly driven by agent growth, which was up one hundred thirty-two percent and revenue per agent, which grew three hundred twenty-five percent year over year. This growth is further supported by our proprietary technology platforms, which allows us to continue expanding our agent count and geographic footprint at an accelerated pace. If we look at gross profit, our gross profit grew three hundred forty-eight percent to three million in Q3 twenty twenty-one versus seven hundred forty-one thousand in Q3 twenty twenty. Our margins are affected by the increase in the number of agents, capping, the increase in volume and rising unit prices, resulting in downward pressure as we continue to attract high-producing agents. We expect the release of instant payments, which Tamir touched on previously, to help offset this pressure, as well as future projects in our product focus. Our net loss for the quarter was one million dollars compared to four hundred twenty-two thousand last year. This change was primarily the result of investments in building our team of agents, key management personnel, as well as our technology infrastructure. We place great importance on our management team and on hiring top talent across the board and look forward to the enormous value Kat, Raj, and the rest of those who have joined us this quarter will add. We view each and every one of our hires and investments in infrastructure as key contributors to our growth and necessary to support this accelerated team. Adjusted EBITDA for the quarter was recorded at seven hundred forty-four thousand in comparison to two hundred sixty-one thousand for the prior year. Management believes that adjusted EBITDA provides useful information about our financial performance and also helps identify our underlying trends in our business, but otherwise obscured by the effective expenses we excluded adjusted EBITDA. In particular, we believe the exclusion of stock-based compensation expenses provides a useful supplemental measure for evaluating the performance of our operations and also provides better transparency into our results of operations. Overall, our operating expenses were four point three million, compared to one point one million last year. On an adjusted EBITDA basis, operating expenses were approximately four million and that’s compared to one million last year. The change is primarily due to increases in headcount, improvements in our technology infrastructure, stock-based compensation expenses, and other one-time expenses, such as those related to our listing on NASDAQ capital market. General and administrative costs were two point one million in comparison to nine hundred eighty thousand dollars in the prior year. That increase is mostly driven by the cost related to being a public company, increases in headcount, and further efforts to support our growth. G&A expenses are expected to increase going forward as we continue to scale rapidly. However, we continue to actively monitor our spending and its impact on our bottom line. Marketing costs were one point six million compared to eighty-eight thousand last year, and the change is primarily due to the revenue share paid to agents that Tamir touched on previously as part of our incentive model. Just as a reminder, agents can earn revenue share for the new agents that they personally refer to Real, and we do expect the costs associated with our revenue share programs to continue to translate into significant year-over-year growth and also believe it to be a fruitful contributor to the long-term goals and success of the company. As a percentage of revenue, our sales, general and administrative costs were ten percent in the current quarter, and as a reminder, they were twenty-seven percent last year. This is highly representative of our level of efficiency and ability to scale. We have a technology infrastructure that enables us to continue scaling rapidly as we continue on the path forward to one hundred thousand agents with minimal impact on our operational costs. We ended Q3 strong with forty-five million dollars in cash and investments, which is a significant increase from the total cash balance of one point nine million in the prior year. Cash flows from operations increased by five hundred eighty-one percent in comparison to Q3 last year, and the company holds no debt. The company continues to strengthen its balance sheet and industry footprint, as well as demonstrate significant year-over-year growth. We expect this acceleration to continue to ramp up as we expand our focus not only on our agents but on the consumer journey as well. This concludes my financial remarks. I will now ask the operator to open up the lines for Q&A. Operator, can you please poll for questions?

Operator, Operator

Certainly. Your first question is coming from Darren Aftahi with Roth Capital Partners. Your line is live.