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Compass Misses Free Cash-Flow Goal But Remains Optimistic

Although Compass failed to achieve its much publicized goal of being free cash-flow positive in 2023, brokerage executives were still positive about the company’s performance over the past year.

“Even at these new op-ex [operating expense] levels, we continue to invest in agent growth, increasing market share, expanding our technology advantage with approximately $100 million in annual R&D, and continue our integrated services expansion,” Compass CEO and founder Robert Reffkin told investors and analysts during the firm’s fourth-quarter 2023 earnings call Tuesday evening.

“We have successfully navigated two consecutive years of very large declines in industrywide transactions. Despite these massive headwinds, we have positioned Compass for significant upside when the market begins to recover.”

Despite being free cash-flow positive in both Q2 2023 and Q3 2023, Compass recorded a free cash-flow loss of $41 million in Q4, which contributed to a full year 2023 free cash-flow loss of $37.1 million. While this outcome was not what Compass was aiming for, it is still a marked improvement over its free cash-flow loss of $361.8 million in 2022.

Compass attributed some of these struggles to the slower housing market of 2023, which saw Compass close 178,848 transactions, down 15.5% annually. But executives noted that Compass outperformed the industry, which reported nearly a 19% decline in transactions sides in 2023.

“We believe that 2023 was the bottom of the downturn and we are constantly prepared for a better 2024,” Reffkin said. “Eventually the real estate market will get to more levels of transactions in the mid-cycle.”

Executives also noted that the brokerage began 2023 in the middle of its operating expense reduction journey, which was at least partially to blame for the firm’s $59 million free cash-low loss during the first quarter of 2023.

Compass’ other financial results also showed improvements over 2022. Even though the firm reported a 1% annual decline in revenue during Q4 2023 to roughly $1.1 billion, its net loss of $83.8 million was an improvement over the $158 million net loss in Q4 2022.

Additionally, while Compass reported a 19% year-over-year decline in revenue for full year 2023 to $4.885 billion, its net loss for the year ($320.1 million) was nearly half of what it was in 2022, at $601.5 million.

As Compass looks ahead to 2024, executives said the focus remains on prudent management of operating expenses.

“I want to be clear that our target op-ex in 2024 is a reset of op-ex, not a temporary reduction of expenses,” Reffkin said. “Importantly, our future success is not reliant on new product offerings or expanding into new markets.”

With this strong management, executives said the firm will again aim for being free cash-flow positive in 2024, which he said he is confident the firm can achieve.

“While cash flow in any period can be impacted by the timing of cash collection from transactions and the timing of payments for agents, vendors and employees, the relation to each quarter and the magnitude of improvement in free cash flow over the past year is directly attributable to the impact of our cost discipline,” said Kalani Reelitz, the firm’s chief financial officer.

While Reffkin was happy to discuss Compass’ performance in 2023, he told investors and analysts during his prepared remarks that he would not be answering any questions about the commission lawsuits during this call or any calls in the future. Despite this assertion, Reffkin was happy to field questions about the firm’s use of buyer agency agreements during the question and answer portion of the call.

He noted that the company has implemented its “largest training program” ever, which saw 20,000 agents go through training on buyer representation agreements. This has resulted in buyer agency agreements becoming standard practice for Compass agents.

“From what I have seen of the successful use of those agreements within Compass, it alleviated my concern on any financial risk related to the topic,” Reffkin said.

He also noted that Compass began helping agents create buyer presentations this past fall, noting that agents have long created listing presentations for sellers but have struggled to clearly articulate their value proposition to buyers.

“One of the reasons that I think we are in the place we are, where not all buyers understand the value, is that as an industry we created listing presentations for sellers, but we did not create buyer presentations for buyers,” Reffkin said.

Looking ahead to 2024, Reffkin and Compass remain optimistic about the future, highlighting Compass’ technology platform as a continued draw for many agents across the industry.

“Assuming we continue to add agents annually, maintain or modestly improve our agent economics, and keep out $600 million of cost savings with minimal inflationary growth of 3% to 4%, we believe that Compass will generate hundreds of millions of dollars of EBITDA and free cash flow, and the market recovers to a more normalized mid-cycle home sales level,” Reffkin said.

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