Compass, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022; unaudited. Amounts are in U.S. dollars, in millions unless noted. Filed August 15, 2022.
Business context and operating performance
Compass operates a technology-enabled residential real estate brokerage, earning substantially all revenue from transaction commissions. Adjacent services, including title, escrow and mortgage, represented a smaller portion of revenue. Results are exposed to housing-market cycles and seasonal transaction patterns.
- Q2 revenue was $2,020.1, up 3.5% year over year; first-half revenue was $3,417.1, up 11.5%.
- Q2 closed transactions increased 1.7% to 66,846, while Gross Transaction Value was nearly flat at $76.8 billion. First-half transactions rose 7.7% to 114,213 and Gross Transaction Value rose 8.0% to $130.5 billion.
- Average principal agents increased 22.1% in Q2 to 12,979 and 25.0% in the first half to 12,777. The company reported more than 28,000 agents on its platform at quarter-end.
Financial results and liquidity
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Revenue | $2,020.1 | $1,951.4 | $3,417.1 | $3,065.3 |
| Operating loss | $(99.3) | $(7.8) | $(284.8) | $(220.4) |
| Net loss attributable to Compass | $(101.2) | $(7.1) | $(289.2) | $(219.5) |
| Net loss margin | (5.0%) | (0.4%) | (8.5%) | (7.2%) |
| Adjusted EBITDA (non-GAAP) | $4.2 | $71.3 | $(92.5) | $40.7 |
| Adjusted EBITDA margin | 0.2% | 3.7% | (2.7%) | 1.3% |
- Commissions and related expense was 81.8% of revenue in Q2 and 81.9% in the first half, versus 81.5% and 82.6% in the comparable 2021 periods. Excluding stock-based compensation, the ratios increased year over year, which the company attributed primarily to agent commission and geographic mix.
- Cash and cash equivalents were $430.5 at June 30, down from $618.3 at year-end 2021. First-half operating cash flow was $(120.3), compared with $44.1 provided in the prior-year period. Investing cash outflow was $68.9; financing cash inflow was $1.4.
- At June 30, the company had $30.4 outstanding under its $75 million Concierge facility. The $350 million revolving credit facility had no borrowings; letters of credit of approximately $31.5 were outstanding under it. The company reported covenant compliance under both facilities.
- Total liabilities were $959.6, including $583.2 of current and non-current lease liabilities. Accumulated deficit was $1.9 billion. The filing reports no other funded debt outstanding under the revolving facility.
Material changes, outlook and notable items
- Management cited rising mortgage rates, inflation, volatility and slowing housing demand as headwinds, particularly in Q2. It warned that further market deterioration could significantly affect results in the second half of 2022 and beyond.
- On June 14, Compass announced a workforce reduction of approximately 450 positions, about 10% of its workforce, and a wind-down of Modus Technologies. Q2 included $18.9 of restructuring costs; total expected costs for the actions and other restructuring activities were $28.1, with $3.0 remaining to be incurred at June 30. The company also recorded non-cash asset charges.
- The broader transformation plan includes reduced U.S. hiring, office-cost review, and a pause in M&A and new-market expansion for the rest of 2022. In August, the company announced additional second-half cost reductions, mainly in technology spending and agent acquisition incentives.
- Management said existing cash and available facilities were expected to meet working-capital and capital-expenditure needs for at least 12 months, while also noting operating losses and negative operating cash flow may continue. The filing provides no specific revenue or earnings guidance.
- After quarter-end, the Concierge facility was amended on August 5, 2022: its revolving period was extended to August 4, 2023, its benchmark changed from LIBOR to Term SOFR, and its margin rose from 1.85% to 2.35%. Principal, if any, is payable in February 2024.
- Stock-based compensation was $59.2 in Q2 and $123.0 in the first half. The 2021 first-half comparison includes a one-time $148.5 IPO-related compensation charge, affecting period-to-period expense comparisons.
- Compass reported disclosure controls and procedures were ineffective at June 30 because of previously identified material weaknesses in financial reporting controls. Remediation was ongoing; management said the financial statements fairly present results after additional procedures.
- A Realogy-related lawsuit remains in discovery, with settlement discussions ongoing but no definitive agreement. Compass said it could not reasonably estimate any potential loss. Escrow and trust deposits of $259.0 are not company assets, but Compass is contingently liable for their disposition.
Important facts for investors to verify
- Whether housing-market weakness, transaction volume and commission mix further pressure revenue, margins and cash flow.
- Whether announced cost reductions produce sustained expense savings and progress toward profitability and positive free cash flow, including the costs and execution of restructuring.
- Cash burn, facility availability and compliance with liquidity-based covenants; confirm the impact of the August facility amendment.
- Progress in remediating the material weaknesses in internal controls and any subsequent auditor or management updates.
- Developments in the Realogy litigation and any eventual settlement, as the potential loss was not estimable in the filing.
- Potential dilution from equity awards: 59.7 million RSUs and 49.9 million options were outstanding at June 30, with additional shares available under equity plans.