'It's going to be a long night,' CEO says in bracing for more market woes
Top officials at Redfin – which this week announced it would lay off 13% of its workforce – detailed the company’s woes during an earnings call scheduled after its announcement of the massive cuts.
Chris Nielsen, the company’s chief financial officer, broke down the numbers during the earnings call:
Third quarter revenue was $601 million, up 11% from a year ago and within Wall Street expectations between $590 million to $627 million guidance range, Nielsen explained. Real estate services revenue, which includes brokerage and partner businesses, generated $212 million in revenue, which was down 18% year over year. Brokerage revenue or revenue from home sales closed by Redfin agents was down 17%, driven by transaction volume decreases of 17%, the CFO said.
Revenue from partners was down 37% on a 26% decrease in transactions and mix shift to lower-value houses, according to Nielsen. Overall, real estate services revenue per transaction was up 1% year-over-year. The property segment, which consists primarily of homes sold through RedfinNow, generated $300 million in revenue, up 26% from a year ago and driven by a 37% increase in homes sold.
The company’s rentals business generated $39 million, down 4% from a year ago, but up slightly from the second quarter of 2022, marking the company’s second consecutive quarter of sequential rentals revenue growth.
The mortgage segment generated $48 million in revenue. The firm’s other segment, which now includes title and other services, contributed revenue of $7 million, an increase of 122% year over year, driven by increased attach rates for its title and closing services. Total gross profit was $58 million, down 54% year over year with a total gross margin of 9.7%. Total operating expenses were down $4.1 million or 3% year over year.
The company’s CEO, Glenn Kelman, said the 13% reduction of force disclosed this week – largely via closure of the of the RedfinNow unit – follows earlier cuts that began on April 30. Collectively, both series of reductions account for the elimination of 27% of the company’s workforce, Kelman noted.
While one previous round of layoffs was reactive, the latest one is proactive amid projections of further market challenges, Kelman suggested: “Our June layoff was a reaction to slowing 2022 home sales,” he told investors and financial journalists during the earnings call. This week’s layoffs, on the other hand, “…assumes a housing downturn that lasts at least through 2023, letting us earn adjusted EBITDA next year even if home sales declined at the levels of the great financial crisis when the U.S. population was 10% smaller,” the CEO explained.
Despite losses, Kelman pointed to positive signs for the future – including the fixing of a computer glitch that prevented would-be clients from securing information: “In each of these areas, our performance is improving even as housing demand is fallen,” the CEO said.
“We increased our share of listing search traffic in the third quarter and expect those gains to accelerate now that we fixed a bug in our software that from April 25 to August 30 precluded new online visitors from getting listing recommendations. This bug was the main reason that in the third quarter of 2021 to third quarter of 2022, redfin.com visitors declined by 5%. Fixing the bug boosted our traffic in the final month of the third quarter and beyond.”
Read more: Redfin to lay off 862 workers amid housing market softening
And yet, they still beat Realtor.com in terms of visitors, Kelman noted in pointing to another positive sign for the future: “Even with the bug, Redfin's year-over-year decline in third quarter visitors was nine points better than realtor.com, which we seek to overtake as America's No. 2 real estate site,” the CEO said. “By September, the magnitude of our year-over-year decline was 1 point better than the top incumbent, zillow.com. We now expect listing search share, which we measure by comparing our visitor growth to that of zillow.com and realtor.com to accelerate.”
He pointed to analytics as further barometer of better times ahead: “Our gains in search engine ranking will probably raise our fortunes more than any other development we discuss today,” Kelman said. “The improving sales execution can have a compounding effect on search share gains. Until recently, our sales force has struggled to overcome a change in customer behavior.”
He showcased further data centered on Redfin agents as another hopeful sign: “Since the great financial crisis, homebuyers have become more casual and convenience-driven and asking for service from the array of agents they can now meet online,” he said. “To yield the same number of sales, our website and mobile applications have had to generate more and more customers, both for Redfin agents and especially for partner agents, but that started to change this year.
“In a 2020 pilot that didn't expand all of Redfin until the 2022 home buying season, we reduced the number of customers each agent serves and close rates start up. Of the Redfin customers who end up buying a home, 37% stuck with the Redfin agent for purchase of the Redfin customers who end up buying a home, 37% stuck with the Redfin agent for purchase in the second quarter of 2022, up from 28% in the second quarter of 2021.”
Read next: Redfin halts iBuying program in response to COVID-19
The focus now is on so-called loyalty deals as the company hopes for a brighter tomorrow: “This was the first significant year-over-year gain across a full quarter since 2019 when we started measuring how many Redfin customers who end up buying a home stick with Redfin for the sale,” the CEO said.
“Loyalty deals, which we define as repeat referral customers, as well as customers from a Redfin agent's personal network, also kept growing as a fraction of our brokerages’ total deals, up from 31% in the third quarter of 2021 to 33% in the third quarter of 2022. A new discipline of managing agent performance should bolster both loyalty sales and specialty close rate. This, in turn, can develop the brokerage into a second engine of Redfin's growth, with redfin.com's traffic gains as our first engine.”
He ended on a philosophical note: “It's going to be a long night, but Redfin can still thrive in the darkness, and when the sun rises, we'll be stronger than ever.”
