Compass, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Compass operates a technology-enabled residential real estate brokerage, generating substantially all revenue from transaction commissions. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $1,397.0 | $1,113.9 |
| Commissions and related expense | $1,146.4 | $942.2 |
| Loss from operations | $(185.5), or (13.3)% of revenue | $(212.6), or (19.1)% |
| Net loss attributable to Compass | $(188.0), or (13.5)% | $(212.4), or (19.1)% |
| Adjusted EBITDA (non-GAAP) | $(96.7), or (6.9)% | $(30.6), or (2.7)% |
| Net cash used in operating activities | $(111.0) | $(47.3) |
| Cash and cash equivalents, at period end | $475.9 | $329.6 |
Cash declined $142.4 during the quarter. Investing activities used $29.6, including $20.8 of capital expenditures and a $5.0 contribution to OriginPoint; financing activities used $1.8. Stock-based compensation was $63.8, compared with $167.5 in Q1 2021, which included a $148.5 one-time IPO-related expense.
At March 31, 2022, total assets were $1,726.5, total liabilities $921.0, and stockholders’ equity $805.5. Accumulated deficit was $1,783.0. Current liabilities included $18.3 outstanding under the Concierge credit facility. The separate $350.0 revolving credit facility had no borrowings outstanding; letters of credit of approximately $31.0 were issued under it. The Concierge facility is $75.0 and matures in January 2023; both facilities were in covenant compliance. Lease liabilities totaled $595.4, including current and non-current amounts.
Business performance and changes versus prior period
- Revenue rose 25.4% to $1,397.0. Management attributed growth to agent additions, more transactions, geographic expansion, and a modest increase in average transaction value.
- Total Transactions increased 17.6% to 47,367; Gross Transaction Value increased 22.6% to $53.7 billion; and Average Number of Principal Agents increased 28.1% to 12,574. Compass reported more than 27,000 agents and 71 markets at quarter-end.
- Commissions expense grew 21.7%, slower than revenue, but was 82.1% of revenue versus 84.6%. Excluding stock-based compensation, it was 80.8% of revenue versus 80.6%.
- Operating loss narrowed year over year, while net loss was broadly similar. The comparison is affected by the unusually high IPO-related stock compensation in Q1 2021. Adjusted EBITDA loss worsened to $96.7 from $30.6; management cited first-quarter seasonality and operating expenses growing faster than revenue as the company invested in technology and expansion.
- Sales and marketing, operations and support, and research and development expenses increased in dollars. General and administrative expense fell, largely reflecting lower IPO-related stock compensation.
Outlook, risks and unusual items
- Outlook: The filing provides no quantified revenue, earnings, or cash-flow guidance. Management expects operating losses and negative operating cash flows may continue in some periods as it invests in growth, adjacent services, research and development, and sales and marketing. It believes cash, the Concierge facility, and the revolving facility will be sufficient for working capital and capital expenditures for at least the next 12 months.
- Market and seasonality: Residential transactions are typically strongest in spring and summer and weaker in the first and fourth quarters. Results are exposed to housing-market cycles, interest rates, inflation, mortgage conditions, and changes in home values and transaction activity.
- Capital and dilution: Management says additional financing could be needed if existing and anticipated liquidity proves insufficient; financing may not be available on acceptable terms. The 2021 Agent Equity Program issued 13.6 million shares in February 2022, and the filing reports 426.97 million shares outstanding at March 31, up from 409.27 million at year-end.
- Internal controls: Disclosure controls and procedures were deemed ineffective at March 31 because of previously identified material weaknesses in financial reporting controls, accounting processes, and IT general controls. Remediation is ongoing; management performed additional review procedures and stated the financial statements fairly present the company’s results in all material respects.
- Legal and contingent matters: Compass cannot predict the outcome or estimate a possible loss in the Realogy/Corcoran litigation alleging unfair competition and other claims; discovery was ongoing. Acquisition-related contingent consideration had a $22.8 fair value and a maximum undiscounted payment of $23.8. The company also expected up to $46.5 of future retention-based compensation tied to acquisitions.
- Other exposures: Compass administered $271.3 of escrow and trust deposits, which are not company assets but for which it is contingently liable. Letters of credit totaled $54.3. The company reported no material COVID-19 impact in the quarter but cautioned that future effects remain uncertain.
Important facts for investors to verify
- Whether revenue and transaction growth can continue if housing activity slows or mortgage rates rise, and how seasonality affects quarterly results.
- Whether operating expenses, cash burn, and Adjusted EBITDA improve as expansion and technology investments continue; note that Adjusted EBITDA is non-GAAP.
- Available liquidity and facility covenant headroom, including the Concierge facility’s January 2023 maturity and the company’s ability to fund ongoing losses.
- Progress in remediating material weaknesses and whether controls are tested and shown to operate effectively over sustained reporting cycles.
- Potential dilution from equity compensation and agent programs, plus developments in the Realogy litigation and acquisition-related obligations.