Compass, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Amounts are in U.S. dollars; financial statement figures are unaudited and in millions unless otherwise noted.
Business context
Compass operates a residential real estate brokerage supported by a cloud-based technology platform. Revenue is primarily commissions earned when agents complete home transactions; title, escrow and other adjacent services are a smaller contributor. The company completed its IPO in April 2021, raising approximately $438.7 million net of offering costs, and converted its outstanding preferred stock into common stock.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $1,951.4 | $682.1 | $3,065.3 | $1,302.0 |
| Operating loss | $(7.8) | $(85.6) | $(220.4) | $(219.8) |
| Net loss | $(7.1) | $(84.2) | $(219.5) | $(216.9) |
| Net loss margin | (0.4%) | (12.3%) | (7.2%) | (16.7%) |
| Adjusted EBITDA | $71.3 | $(56.4) | $40.7 | $(158.5) |
| Adjusted EBITDA margin | 3.7% | (8.3%) | 1.3% | (12.2%) |
- Q2 revenue increased 186.1% year over year; six-month revenue increased 135.4%. Management attributed growth to agent additions, more transactions, geographic expansion, modestly higher average transaction values and a strong housing market.
- Q2 operating expenses were $1,959.2 million, just above revenue. Commissions and related expense were 81.5% of revenue, versus 82.0% in Q2 2020. The company remained GAAP-loss-making despite positive Adjusted EBITDA; Adjusted EBITDA is a non-GAAP measure.
- For the six months, operating cash flow was positive $44.1 million, versus negative $159.9 million a year earlier. The company reported a net loss of $219.5 million, with cash flow aided substantially by non-cash charges, including $221.8 million of stock-based compensation.
- Six-month investing cash outflow was $123.9 million, including $103.8 million net cash paid for acquisitions and $20.1 million of capital expenditures. Financing cash inflow was $450.4 million, primarily from the IPO. Cash and cash equivalents were $810.7 million at June 30, up from $440.1 million at year-end 2020.
- Current assets were $998.6 million and current liabilities $351.4 million. Total liabilities were $836.1 million, including $517.6 million of lease liabilities. Debt included $11.1 million drawn on the $75 million Concierge facility; the $350 million revolving credit facility had no borrowings outstanding. The company reported compliance with both facilities’ covenants.
Material changes and unusual items
- The IPO and related vesting conditions triggered $148.5 million of one-time stock-based compensation expense in Q1. Total stock-based compensation was $221.8 million for the first half, compared with $24.1 million in the prior-year period. Q2 stock-based compensation was $54.3 million.
- Q2 total transactions rose 140.3% to 65,743; gross transaction value increased 186.2% to $77.0 billion. Average principal agents increased 24.5% to 10,629. Compass reported nearly 23,000 agents, 62 markets served, and 6.2% U.S. residential transaction market share for the quarter.
- Acquisitions completed in the first half included KVS Title, Glide Labs and four smaller brokerages. The company reported $57.6 million of acquisition goodwill and up to $87.4 million of undiscounted maximum contingent-consideration payments across acquisition arrangements.
- At June 30, 2021, 55.3 million RSUs and 59.8 million options were outstanding. The filing said the company expected to settle vested employee RSUs in October and estimated approximately $66 million of cash tax withholding for the initial settlement, based on specified share-price and tax-rate assumptions.
Outlook, risks and contingencies
- No numerical revenue, earnings or cash-flow guidance is provided. Management said it expects operating losses and negative operating cash flow may continue in some periods as it invests in expansion, technology, research and development, and sales and marketing. It believed cash, the Concierge facility and the revolving facility would cover working capital and capital expenditure needs for at least 12 months.
- Management cited real estate market cyclicality and seasonality, mortgage rates, housing supply and demand, competition, agent recruitment and retention, and the uncertain continuing effects of COVID-19 as key uncertainties. The company noted that unusually strong housing demand and pandemic-related disruptions could make historical comparisons and seasonal patterns less predictive.
- Disclosure controls and procedures were deemed ineffective at June 30 due to previously identified material weaknesses in financial reporting controls, accounting processes and IT controls. Management reported remediation efforts were ongoing; the financial statements were stated to fairly present the periods shown after additional review procedures.
- Two significant lawsuits were disclosed: Dorfman v. Reffkin/Compass, with trial rescheduled to January 2022, and Realogy v. Compass, where discovery was ongoing. Compass said it could not predict the Realogy outcome or reasonably estimate a possible loss. The filing did not provide a clear loss estimate for these matters.
- The company administered $282.5 million of escrow and trust deposits at quarter-end, excluded from its balance sheet but subject to contingent liability for their disposition. Letters of credit totaled $57.3 million.
- Subsequent events included a July agreement with Guaranteed Rate to form OriginPoint, a mortgage joint venture, and a July acquisition of the Randall Family of Companies. Management cautioned that the venture might not launch as planned or deliver expected benefits.
Important facts for investors to verify
- Whether revenue growth, transaction volume and agent productivity can persist if housing demand, prices or mortgage-rate conditions change.
- How much of the improvement in Adjusted EBITDA reflects sustainable operating performance versus non-GAAP exclusions, acquisition-related items and unusual IPO compensation.
- The cash impact and share dilution from employee and agent RSU settlements, including actual tax-withholding costs and shares issued.
- Progress in remediating material weaknesses and the effectiveness of financial reporting controls over subsequent reporting periods.
- Developments and potential financial exposure in the Dorfman and Realogy litigation, and any implications of the disclosed escrow deposits and letters of credit.
- Acquisition integration, contingent consideration and retention-payment obligations, as well as OriginPoint’s launch, economics and regulatory constraints.
- Governance and dilution implications of the multi-class stock structure: the CEO held approximately 45% of voting power at June 30, potentially approximately 69% if specified equity awards were vested, settled and exchanged.