Opendoor Technologies Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
Opendoor operates a digital platform for buying and selling homes, including home resale, title and escrow, Buy with Opendoor, and Opendoor Home Loans. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2021. The company operated in 44 markets and reported approximately 612.6 million common shares outstanding as of November 3, 2021.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $2.266 billion | $338.6 million | $4.199 billion | $2.334 billion |
| Gross profit | $202.5 million | $35.8 million | $458.4 million | $181.4 million |
| Gross margin | 8.9% | 10.6% | 10.9% | 7.8% |
| Loss from operations | $(68.4) million | $(44.9) million | $(465.9) million | $(119.7) million |
| Net loss | $(56.8) million | $(80.9) million | $(471.1) million | $(199.0) million |
| Net loss per share | $(0.09) | $(0.91) | $(0.80) | $(2.32) |
| Adjusted EBITDA | $34.5 million | $(21.0) million | $57.9 million | $(70.9) million |
| Adjusted EBITDA margin | 1.5% | (6.2)% | 1.4% | (3.0)% |
Q3 home sales were 5,988, compared with 1,232 in the prior-year quarter. Nine-month home sales were 11,931, compared with 9,064 in the prior-year period. Contribution profit increased to $169.7 million in Q3, with contribution margin of 7.5%, compared with 5.9% in Q3 2020. Adjusted gross margin was 10.3% in Q3, compared with 9.8% in the prior-year quarter.
Cash flow, liquidity, assets, and debt
- Cash and cash equivalents were $1.359 billion, restricted cash was $484.5 million, and marketable securities were $481.1 million at September 30, 2021.
- Total assets were $8.969 billion, including $6.268 billion of net real estate inventory representing 17,164 homes. Inventory increased from $465.9 million at December 31, 2020.
- Net cash used in operating activities was $5.904 billion for the nine months, primarily reflecting a $5.806 billion increase in real estate inventory and a $119.9 million increase in escrow receivables.
- Net cash used in investing activities was $431.8 million, including purchases of marketable securities, the $20.1 million acquisition of Pro.com, and $15.1 million of strategic investments.
- Net cash provided by financing activities was $6.673 billion, including asset-backed debt proceeds, the February 2021 equity offering, and convertible-note proceeds.
- Non-recourse asset-backed debt had a carrying value of approximately $5.418 billion, while other secured borrowings were $19.7 million. The company also had $952.4 million of convertible senior notes outstanding, net of issuance costs.
- In August 2021, the company issued $977.5 million principal amount of 0.25% convertible senior notes due 2026 and purchased $118.8 million of capped calls intended to reduce potential dilution.
- Reported undrawn capacity under senior credit facilities was $930.2 million, of which $101.8 million was fully committed. The company stated that cash, marketable securities, expected operating cash flows, and borrowings should be sufficient for at least 12 months.
Material changes versus the prior comparable period
- Q3 revenue increased 569% year over year, driven by substantially higher home-sale volume, inventory rebuilding, higher average revenue per home, home-price appreciation, and buybox expansion.
- Q3 gross profit increased 465%, but gross margin declined to 8.9%, principally because of $31.6 million of inventory impairment on homes remaining in inventory at quarter-end.
- Adjusted gross margin, contribution margin, and Adjusted EBITDA improved, reflecting better repair and renovation efficiency and lower direct holding and selling costs relative to revenue.
- Operating expenses increased materially, including sales, marketing and operations expense of $153.5 million, general and administrative expense of $90.1 million, and technology and development expense of $27.3 million.
- Nine-month general and administrative expense included $405.0 million of stock-based compensation; total nine-month stock-based compensation was $465.1 million, compared with $9.2 million in the prior-year period.
- Other income included a $51.0 million fair-value gain on marketable equity securities in Q3, materially reducing the reported net loss.
- Debt expanded substantially as the company rebuilt inventory. Total outstanding asset-backed debt and other secured borrowings increased from approximately $486.3 million at December 31, 2020 to $5.443 billion at September 30, 2021.
Guidance, outlook, commentary, risks, and unusual items
- Management expected sequential revenue growth to continue in the fourth quarter of 2021, but the filing does not provide formal numerical revenue, earnings, or margin guidance.
- Management planned continued investment in new markets, technology, pricing capabilities, and adjacent services. The company launched 23 markets during the first nine months of 2021 and expected new-market investments to affect contribution margin and Adjusted EBITDA as markets mature.
- The business is highly working-capital intensive and dependent on continued access to asset-backed financing. Borrowings are collateralized principally by real estate inventory, restricted cash, and equity interests in property-owning subsidiaries.
- Interest-rate exposure is significant. Management estimated that a one-percentage-point increase in LIBOR would increase annual interest expense by approximately $36.2 million based on September 30, 2021 borrowings.
- As of September 30, 2021, the company was contractually committed to purchase 6,231 homes for an aggregate purchase price of $2.260 billion.
- The company was in compliance with its financial covenants and reported no events of default at quarter-end. However, aged inventory may become ineligible for financing, potentially requiring sales at unfavorable prices or additional capital.
- The company disclosed material weaknesses in internal control over financial reporting involving information-technology general controls and accounting for significant and unusual transactions. Management had begun remediation, but the weaknesses were not considered remediated as of the filing date.
- The company corrected prior-period accounting for Sponsor Warrants, recording a $47.3 million warrant liability at December 31, 2020 and related adjustments to additional paid-in capital and accumulated deficit. Management concluded the prior error was immaterial, individually and in aggregate.
- The FTC was pursuing potential enforcement related to advertising claims concerning Opendoor offers, repair costs, and seller proceeds. Settlement negotiations were ongoing; the company had accrued an immaterial amount but could not estimate any incremental loss, and a settlement could result in material monetary remedies or compliance requirements.
- Subsequent to quarter-end, the company entered into a $3.0 billion mezzanine facility, of which $2.3 billion was committed, and reported aggregate non-recourse asset-backed borrowing capacity of $9.6 billion, including $6.7 billion fully committed. On November 3, 2021, it paid $12.5 million to acquire RedDoor, a California mortgage brokerage.
Most important facts for investors to verify
- Whether inventory growth and the 17,164-home portfolio can be converted into sales without additional material impairments or margin deterioration.
- The sustainability of positive Adjusted EBITDA and improving contribution margins after excluding substantial non-GAAP adjustments and stock-based compensation.
- Availability, commitment levels, maturity dates, covenants, and refinancing terms of the company’s asset-backed financing.
- Exposure to home-price declines, slower transaction volumes, higher interest rates, LIBOR replacement, and inventory aging.
- Progress in remediating the disclosed material weaknesses and whether future filings identify additional control deficiencies or restatements.
- The outcome and potential financial or operational consequences of the FTC matter.
- The effect of the $2.260 billion home-purchase commitment and subsequent financing and acquisition activity on liquidity.