[Transcript + Audio] Opendoor Q1 2024 Earnings Conference Call, May 2nd, 2024

Transcript

Operator

Good day, and thank you for standing by. Welcome to the Opendoor Technologies First Quarter 2024 Earnings Conference Call. 

I would now like to hand the conference over to your speaker today, Kimberly Niehaus, Investor Relations. Please go ahead.

Kimberly Niehaus

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

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 3 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

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 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 3 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

Our first question comes from the line of Dae Lee with JPMorgan.

Dae Lee

I have 2. So the first one, I appreciate the color around acquisition through the year. But curious how like macro conditions kind of change your expectations for the clearance rate going forward. And I guess those mortgage rates, which picked up again this week, how that impact your outlook going forward?

Dod Fraser

Sure, Dae. Happy to start. It's Dod. I think in the sort of -- if you are to zoom out from a macro perspective and reiterating what we said on -- in the letter, what we are most focused on and have been for the last 18 months plus 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. And one of the points and pieces of the shareholder letter that we added this year -- or this quarter, sorry, is around seasonality and how that impacts spreads. And so 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

To put acquisitions in context. So as we said in our remarks, almost doubled acquisitions year-on-year in the first quarter. And then a guide for Q2, which would be up, call it, over 70% year-on-year -- sorry, up double -- we doubled Q1 year-on-year, up 70% in the guide year-on-year. So the macro has not been a tailwind for us, certainly, Dae. It's been a headwind.

But in terms of focusing with control, we're really pleased with the fact that in a quarter where new listings for the market in our buy box was up only 6%, we showed 98% acquisition growth and feel good about where we ended the quarter. And we're up 24% in contracts sequentially in Q1, and that's feeding into what feels like a really solid Q2 guide in terms of acquisition growth. So we're going to focus on what we can control in this moment, and it's just proof as to what we're doing in terms of share gains and acquisition momentum.

Dae Lee

Okay. Great. And then as a follow-up. Sounds like your first quarter adjusted OpEx was an increase as much as expected, sequentially mostly due to more moderate hiring. So does that mean -- I guess, twofold, like is your marketing ramp going according to plan? And two, was the more moderate hiring because there was a change in view on volume? Or was that because you guys think you can do more with less?

Christy Schwartz

Thanks for the question, Dave. This is Christy here. So as a reminder, our adjusted OpEx is composed of 3 main pieces: our fixed costs, our marketing, our variable SG&A. Our fixed costs, we are continuing to make meaningful reductions and take costs out of our system and continuing to refine. And 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. And so $107 million is where it was in Q1, and we've guided to $110 million for Q2.

Operator

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

Ygal Arounian

Just let me start on following up on the first question on acquisition strategy and rates. And it sounds like no change really to your strategy here, but the -- just thinking with the recent rate spike aligning with kind of what's the heart of the buying and selling season, if that's impacting how you're thinking about things at all? And then is that -- and 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

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

Well, yes, a little bit more on the recent rate spike we've seen over the past couple of weeks has been a pretty meaningful increase in the mortgage rates, and that's coinciding with the heart of the buying and selling season. And any expectations that, that might soften the market in the core -- key part of the market or the key part of the seasonal market? And if that's impacting how you're thinking about things? It sounds like it's not, but just curious if you're taking any of that into consideration.

Carrie Wheeler

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

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. And 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 sort of key driver and input to our acquisition targets.

Ygal Arounian

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

Yes. I mean I think I'd just start with level setting on where we are from a balance sheet perspective. So as you can see from our financials, we've got over $1 billion in cash, $1.3 billion total capital, $8 billion debt capacity. So I think we feel very good about executing our business plan against with our current capital base.

Really, the ATM for us gives us the ability to opportunistically raise equity over the next 3 years. I think it's really important. It's a 3-year program. And because of how they're structured, we do that at a lower fee and at market, so there's no discount to market. So we really view it as a tool and toolkit for us as a business 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.

And so 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

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

Nicholas Jones

I guess maybe one on path to positive adjusted EBITDA and I guess adjusted 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 kind of think of 4Q maybe being a weaker quarter throughout the year, but maybe not as weak as Q1? And then are we kind of on a linear path from here? Are you confident that we can kind of get to positive adjusted EBITDA, I guess, maybe even this year or next year?

Carrie Wheeler

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. And we feel good about delivering within our 5% to 7% contribution margin target. And all of that goes together to substantially reduce the losses we've seen in the system. So without giving you specifics or guiding to kind of where EBITDA is going to fall in subsequent quarters, I just said that we're feeling good about the path we're on to substantially improve kind of the bottom line of the business.

Nicholas Jones

Got it. Helpful. And then maybe a higher-level question, Carrie. You mentioned with the NAR settlement and I think there's some headlines that the DOJ might be taking a look or 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 whatever, 100-plus 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 kind of their dominance in the ecosystem to potentially starting to wane? And is that kind of a long-term secular tailwind for Opendoor?

Carrie Wheeler

Yes. It's a good question. And I just want to clarify my comments. Like we think this is net positive, first of all, for consumers. And anything that 's good for consumers, that's good for Opendoor. I mean this is all about giving more choice and transparency and agency in the hand 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 kind of 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. Like we have the only direct platform in the industry. So no matter how the real estate ecosystem evolves, we're really set up well to take advantage of that.

And there's lots of talk about touring and having to get a buyer representation agreement forehand, you self-tour our homes. We want to give the consumer like total agency to do what is 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 like off the MLS. We're supportive of the MLS, but really about enabling consumers to go direct.

Operator

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

Charles Larkin

This is Chad on for Jason. So homes purchased were down slightly sequentially, but there was a nice increase in the sequential homes under contract. So just anything -- like what's going on there? Is that just normal seasonality? Or is there something that's just giving you more confidence to lean back into buying? And then I have another one.

Carrie Wheeler

Yes. I mean I said the market has slowed enough, and also we offer the customer a great deal of choice about when they close their home. So I focus less on like the quarter-to-quarter because the contract in one quarter may close -- may slip and close in another quarter. This is about, I think, the focus to be on like the year-over-year growth we're proposing for showing.

And to your point, Chad, like we had a really nice end of the quarter with like really nice number of contracts in the Q of 24% versus Q4. So just nice momentum going through the quarter, and that really feeds into that contract momentum, really feeds into what is a strong guide for over 4,500 acquisitions in Q2. I wouldn't make too -- I guess what I'm saying is I wouldn't make too much of the down slightly versus Q4.

Charles Larkin

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

Yes. Happy to give a little more context there. It's still very early. So we just launched in February. We're seeing sort of steady weekly growth since launch, but just in February, it's like low end.

So I think the sort of key piece there is it really helps broaden our reach into the agent community. eXp has 70,000 agents in their network and growing. And so we are actually quite excited about the sort of brand expansion opportunities. The understanding of our product and as well the specific application with eXp is we're embedded directly into their workflows. And so we made it really simple and easy for eXp agents to utilize our product.

And going back to what Carrie said earlier, like 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

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

Ryan Tomasello

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 are expecting 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

Yes. Let me talk and parse it. I think quarter-over-quarter versus year-over-year is the piece that I think with the distinct, Ryan, to your specific question on 3Q. So year-over-year, we're increasing every quarter.

What we have also said in the letter is over 4,500 in the second quarter, flat to slightly down in the third quarter. And then we did say the first quarter would be the lowest of the year. So 4Q will be above the first quarter.

Given where we are and sort of given how 4Q tends to unfold, you've got some headwinds on market volumes and market marketing spend, but you've got some great tailwinds around low spreads. And so that was what we were -- I think the year-over-year versus quarter-over-quarter is the distinction, Ryan.

Ryan Tomasello

Okay. Got that. That's really helpful. And maybe just to entertain for a moment, a more extreme scenario with respect to the NAR settlements and industry structure. Clearly, the consensus opinion, at least from most folks you talk with, expect commission rates to decline. But even then, I think the international comparisons, again, in a more extreme scenario, would suggest something that could be substantially worse in terms of fewer homebuyers using agents, perhaps compression on the listing side.

I guess, again, just to entertain the scenario, is there a lower -- is there a clearing rate in terms of commission rates and all-in transaction costs where the Opendoor model perhaps needs to pivot in terms of the value proposition that it's providing relative to the benchmark rate that is prevailing commissions.

Carrie Wheeler

Well, I guess a couple of things. One is we provide something that you can't get in a traditional transaction. So 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 amount of friction and uncertainty that goes with traditional listing. We're just providing something very different.

And today, we charge a premium to the traditional listing for that through our spreads, right? We have analogous service fee, and there's an incremental spread, and that's in part to meet margin targets. And it's just -- people are paying a premium for the certainty of simplicity that we provide.

I think in the event that there is more fee compression. I think that's the point you're trying to bring across, Ryan. We will adjust with the market. And I don't worry a lot about our ability to continue to like have an incredible value prop. Because again, I think we're providing something that is just so different, and whether there's a premium in it, like there's a lot of value, which is why we have such a high converting product when we can deliver at a reasonable price.

To the extent the buyer broker commissions come down, like as we've said, ultimately, it's probably a pass-through. It's probably neutral. There may be some interim benefits to us. So the real question will be like, how do seller listing fees change over time. And we'll see how the market responds post July, and we'll be prepared to respond in kind.

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

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. And we look forward to updating you on further progress next quarter.

Operator

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