Compass, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; filed November 7, 2023. Unaudited. Compass operates a residential real estate brokerage platform and derives substantially all revenue from transaction commissions.
Financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $1,337.4M | $1,493.7M | $3,788.6M | $4,910.8M |
| Operating loss | $38.9M | $151.8M | $231.9M | $436.6M |
| Net loss attributable to Compass | $39.4M | $154.2M | $237.6M | $443.4M |
| Net loss per share | $0.08 | $0.36 | $0.52 | $1.04 |
| Adjusted EBITDA (non-GAAP) | $21.8M | $(42.2)M | $(15.2)M | $(134.7)M |
| Adjusted EBITDA margin (non-GAAP) | 1.6% | (2.8%) | (0.4%) | (2.7%) |
Q3 operating loss margin improved to 2.9% from 10.2%; net loss margin improved to 2.9% from 10.3%. Revenue fell 10.5% in Q3 and 22.9% year to date, principally due to fewer real estate transactions in a weak housing market. Total transactions declined 11.9% in Q3 and 18.1% year to date; Gross Transaction Value declined 11.2% and 23.2%, respectively. Average principal agents rose 3.8% in Q3 and 4.2% year to date under a revised tracking methodology.
Operating expense reductions helped narrow losses: research and development fell 43.8% in Q3 and 52.8% year to date; sales and marketing fell 28.0% and 25.2%. Commission expense remained high at 82.0% of Q3 revenue, versus 81.5% a year earlier. Management attributed improved Adjusted EBITDA primarily to cost reductions outpacing the effects of lower revenue. The Q3 result also included a $7.2M benefit in general and administrative expense from revised estimates of certain prior-year state taxes.
Cash, liquidity and debt
- Cash and cash equivalents were $220.0M at September 30, 2023, down from $361.9M at December 31, 2022.
- Nine-month operating cash flow was positive $12.8M, compared with negative $173.9M in 2022. Investing used $8.2M and financing used $146.5M; cash declined $141.9M overall.
- Concierge Facility borrowings were $27.9M at 8.90% interest. No borrowings were outstanding on the $350M Revolving Credit Facility; the company reported $303.4M available to draw. Both facilities are subject to covenants, and the company reported compliance at quarter-end.
- Total liabilities were $786.2M, including $530.3M of current and non-current lease liabilities. The filing states the company believes cash, facilities and future operations will meet needs for at least 12 months and beyond, while warning that operating losses and negative operating cash flow may recur.
Outlook, risks and notable items
- No numerical revenue, earnings or cash-flow guidance is provided. Management expects challenging residential market conditions may persist through Q4 2023 and 2024, and says further expense reductions may be needed; success is not assured.
- Management cites elevated mortgage rates, inflation, reduced affordability, limited inventory and slower consumer demand as risks to transaction activity and results. Real estate seasonality typically weighs on Q1 and Q4.
- Two putative antitrust class actions were filed after quarter-end, on October 31 and November 2, alleging industry agreements concerning buyer-broker compensation. Compass says it cannot predict outcomes or estimate potential losses and intends to defend itself. Separately, the filing notes a $1.8B jury verdict in litigation to which Compass is not a party.
- Disclosure controls and internal control over financial reporting were deemed ineffective at September 30 because of material weaknesses involving control environment and oversight, business-process controls, and IT general controls. Management reported no resulting material misstatement, described remediation work, and said remediation is not complete.
- In an August strategic transaction, Compass received $32.3M for issuing about 9.0M Class A shares and recorded a $2.3M liability for a contingent payment capped at $5.5M. Shares outstanding rose to 477.8M at quarter-end from 438.1M at year-end 2022.
- Contingent acquisition consideration had an estimated undiscounted payment of $34.2M. Escrow and trust deposits administered for customers totaled $153.5M and are not company assets, but Compass is contingently liable for their disposition.
Important facts for investors to verify
- Whether housing transaction volumes, revenue and agent productivity stabilize, and whether cost reductions can sustain positive quarterly Adjusted EBITDA.
- Cash burn, available revolver capacity and continued compliance with liquidity and revenue covenants.
- Developments and potential financial or business effects of the antitrust cases and broader changes to broker compensation practices.
- Progress in remediating material weaknesses and whether controls operate effectively over a sustained period.
- Further equity issuance, contingent transaction payments and the reconciliation of non-GAAP Adjusted EBITDA to GAAP results.