Compass, Inc. — Q1 2021 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended March 31, 2021, compared with Q1 2020. Compass operates a residential real estate brokerage and technology platform; substantially all revenue comes from transaction commissions. It reported nearly 21,000 agents and served 47 markets at quarter-end.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $1,113.9 million | $619.9 million |
| Operating loss | $(212.6) million | $(134.2) million |
| Net loss | $(212.4) million | $(132.7) million |
| Net loss per share | $(1.67) | $(1.22) |
| Adjusted EBITDA (non-GAAP) | $(30.6) million | $(102.1) million |
| Net cash used in operating activities | $(47.3) million | $(167.7) million |
- Revenue grew 79.7% year over year. Total transactions rose 67% to 40,268 and Gross Transaction Value rose 75% to $43.8 billion.
- GAAP net loss margin improved to 19.1% negative from 21.4% negative. Adjusted EBITDA margin improved to 2.7% negative from 16.5% negative.
- Q1 2021 included $167.5 million of stock-based compensation, including $148.5 million related to IPO-triggered vesting. This was a significant non-cash expense and contributed heavily to the GAAP loss.
- Cash and cash equivalents were $329.6 million at March 31, down from $440.1 million at December 31, 2020. Total assets were $1,367.2 million; total liabilities were $775.4 million. Accumulated deficit was $1.3 billion.
- Debt included $10.2 million drawn on the $75 million Concierge Facility; no borrowings were outstanding on the $350 million revolving credit facility. The facilities have covenants, including a minimum liquidity test on the revolving facility; the company reported compliance at quarter-end. Lease liabilities totaled $515.1 million.
- Investing cash outflow was $69.2 million, including $59.2 million for acquisitions and $10.0 million of capital expenditures. Financing cash inflow was $6.0 million.
Material changes versus the prior comparable period
- Growth reflected additional agents, higher transaction volume, geographic expansion and a modest increase in average transaction value. Average principal agents increased 20% to 9,812.
- Operating expenses rose to $1,326.5 million from $754.1 million. Commissions and related expenses grew 85.2%; excluding stock compensation, they were 80.6% of revenue versus 81.4% a year earlier.
- Research and development and general and administrative expenses increased substantially in reported dollars, partly due to IPO-related stock compensation. Excluding stock compensation, management cited higher personnel costs, while these expenses declined as a share of revenue.
- Operating cash use improved year over year, partly reflecting the large non-cash stock-compensation adjustment and changes in working capital. Acquisition spending increased sharply from the prior-year quarter.
Outlook, commentary, risks and unusual items
- No specific revenue, earnings or margin guidance was provided. Management expects operating losses and negative operating cash flows to continue as it invests in growth, technology, recruitment and expansion. It stated existing cash, credit facilities and potential financing sources should cover needs for at least the next 12 months.
- The April 2021 IPO, completed after quarter-end, sold 26.3 million shares at $18 per share and generated $449.7 million net of underwriting discounts but before approximately $11 million of offering costs. Preferred stock converted into common shares in April; these transactions are not reflected in March 31 balances.
- Q1 acquisitions included KVS Title and two brokerages, for consideration of $72.2 million, including contingent amounts. Goodwill increased by $34.7 million. Glide Labs was acquired in May, after quarter-end.
- Residential real estate is seasonal and cyclical. Management cited a strong housing market and recovery in activity after pandemic-related disruption, but warned that COVID-19, interest rates, affordability, inventory and economic conditions could adversely affect transaction volume and results.
- Material weaknesses in internal control over financial reporting remained unremediated, and management concluded disclosure controls were not effective as of March 31. Remediation, including staffing and systems/process improvements, is ongoing.
- Legal matters include the Dorfman dispute, with a trial scheduled for September 2021, and Realogy litigation for which Compass said it cannot estimate any potential loss. The Washington insurance regulator ordered revocation of a title subsidiary’s license; the company appealed, staying the revocation pending appeal.
- The company has a dual/multiclass share structure. The CEO’s Class C shares carry 20 votes each; the filing said he held approximately 47% of voting power as of March 31. The company also reported $238.7 million in customer escrow and trust deposits for which it is contingently responsible; these are excluded from company assets.
Important facts for investors to verify
- Progress and testing of remediation for the disclosed material weaknesses, and whether future filings report effective controls.
- Post-IPO cash, offering costs, fully diluted share count and the dilutive impact of outstanding options, RSUs and future equity awards.
- Whether revenue growth and improved adjusted EBITDA persist without relying on a strong housing market, and how commission expense and agent incentives evolve.
- Acquisition integration, goodwill and contingent consideration exposure, plus outcomes of the Dorfman and Realogy matters and the Washington title-license appeal.
- Liquidity and covenant headroom, including the revolving facility’s minimum liquidity and revenue tests, and management’s expectation of continued operating losses and cash outflows.