Loss comes just under two years since company went public.
Compass Inc. posted a net loss of $158 million in the fourth quarter amid a backdrop of inflation-induced volatility that has impacted the entire industry.
The loss comes just under two years after the company went public in April 2021. The fourth quarter loss was $4 million more than the previous quarter’s loss but an improvement over the $175 million in losses posted in the comparable period in 2021. Company officials detailed the financial performance during a Tuesday earnings call, noting that the net loss included non-cash expenses such as stock-based compensation and depreciation accounting for a combined $82 million in the fourth quarter.
For the year, the New York City-based real estate broker posted a net loss of $602 million in 2022 – up from $494 million in 2021. In the mix was $281 million in cash expenses, including $49 million going toward one-time restricting costs and another $11 million for litigation fees. Moreover, some $321 million was incurred in non-cash, stock-based compensation expenses and depreciation.
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Robert Reffkin, founder, chairman and CEO, didn’t sugarcoat the challenges: “2022 was a very difficult year in residential real estate, with the industry seeing one of the sharpest declines in transaction volume in decades,” he said.
But he chose to focus on the company’s robust revenues during an earnings call with shareholders. “I am pleased to report that Compass revenue for 2022 was just over $6 billion, down 6% compared to 2021, which was our best revenue year ever and the best year in the industry on a volume basis,” he said. “This is a major accomplishment when you consider transactions declined industrywide 18% year over year.”
He compared the impact to that of the Great Recession: “The 2022 industry decline in units was as bad as the Great Financial Crisis when the number of units fell by 18% year over year from 2007 to 2008,” he said. “While 2022 was a tough year for the housing market, particularly in the fourth quarter, we responded to the challenging market conditions by taking the initiative to reset our cost base.”
What are the ways to reduce expenses?
He described strategies taken to maximize opportunities this year: “We took decisive steps throughout 2022 to reduce expenses and drive operating efficiencies in the business with a very specific goal to become free cash flow positive for 2023, starting with being free cash flow positive in the second quarter of 2023. As the market deteriorate fast, we moved quickly to respond and initiated cost-cutting actions that reduced our non-GAAP operating expenses by $338 million, which is 23% less on an annualized basis from the second quarter of 2022 to the fourth quarter of 2022.
“We shared on our third quarter call that we intend to develop and implement a plan to further reduce our non-GAAP operating expenses to a range of $850 million to $950 million. As we reported in early January, we believe our actions make it possible to achieve below the middle of the $850 million to $950 million range of annualized operating expenses by the fourth quarter of 2023.”
He described further steps the company is taking to mitigate the potential for future losses: “As a result of investments in prior years, even at this reduced level of operating expenses, we continue to invest in growth and technology to further strengthen the company during this downturn in the market. We are seeing industry forecasts for negative volume of 22.6% from Fannie Mae, negative 18.6% from MBA, and negative 12.6% from NAR. We expect to achieve our goal of being free cash flow positive in 2023 at each of these levels. We are confident that this is the right level of non-GAAP operating expenses.”
More cost-cutting measures may be in the offing: “However, as we have demonstrated throughout 2022 and into 2023, we are prepared to move swiftly to implement additional cost cuts if the markets turn out to be worse than expected. Our employees have worked incredibly hard to reset our cost base over the last 12 months. We believe it’s the right cost base. We continue to differentiate ourselves through our technology platform.”
Greg Hart, chief operating officer, offered additional insight: “The challenging economic headwinds facing the residential real estate industry grew stronger in the fourth quarter of 2022. But as Compass has done throughout our history, our core business has continued to outperform the industry based on our ability to continue to add agents, improve our technology advantage and maintain our industry-leading principal agent retention of over 90%. The good news is that with our expense reductions taking hold, we are operating the business more efficiently today, and we’ll continue to drive further efficiencies as part of our everyday go-forward strategy.”
As 2022 deteriorated the industry, Hart said the company took drastic measures to keep costs down: “After a great 2021, unfortunately, and unexpectedly, 2022 turned out to be the worst year for residential brokerages in decades as aggressive Fed actions drove mortgage rates from an all-time low of about 3% to a 20-year high in excess of 7% in a matter of months, bringing transaction activity down sharply. As a result, we had to bring our cost structure in line with reduced top-line revenue, making 2022 a challenging year from a personnel standpoint. When the revenue growth that we and the rest of the industry expected for 2022 did not materialize, we had to make the difficult decision to reduce headcount, taking actions in June, September, and at the beginning of January of this year.”
Additional measures were taken: “When it became apparent early in 2022 that revenue growth could be challenged, we paused our expansion into new markets and also halted all M&A activity,” he said. “As the year progressed, we eliminated cash and stock agent sign-on bonuses of any kind, driving a more profitable approach to growth. We always intended to move deeper into our existing markets by attracting the agents in the top 50% in those markets. This would allow us to evolve the mix of agents over time to improve our gross margins.
“The market conditions of 2022 accelerated that move. Since August, we have been successful in attracting more than 1,000 agents who have come to Compass without cash or stock sign-on bonuses. To put this in perspective, the number of agents in the industry is now contracting according to NAR. Competition for agents is fierce with some of our competitors still willing to pay large incentives to attract agents.
“Yet we also see that in the midst of these difficult economic times, maybe agents are delaying these to new agencies. In Q4 of 2022 in the midst of a very difficult quarter for the industry, our average number of principal agents increased by 112 principal agents. Our average number of principal agents increased to 13,426, representing a 10% growth year over year in the fourth quarter. For the full year, we grew our average number of principal agents by 18% compared to 2021.”