Compass, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Compass operates a residential real estate brokerage supported by a technology platform; revenue is primarily commissions on completed home transactions. Financial statements are unaudited.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $1,743.6 million | $1,188.5 million | $4,808.9 million | $2,490.5 million |
| Net loss | $(99.8) million | $(13.5) million | $(319.3) million | $(230.4) million |
| Operating loss | $(100.5) million | $(13.3) million | $(320.9) million | $(233.1) million |
| Net loss margin | (5.7)% | (1.1)% | (6.6)% | (9.3)% |
| Adjusted EBITDA (non-GAAP) | $12.2 million | $11.0 million | $52.9 million | $(147.5) million |
| Adjusted EBITDA margin (non-GAAP) | 0.7% | 0.9% | 1.1% | (5.9)% |
- Q3 revenue grew 46.7% year over year; nine-month revenue grew 93.1%. Growth reflected more agents, higher transaction volumes, geographic expansion and modestly higher average transaction values.
- Q3 commissions and related expense were 82.0% of revenue versus 82.4% a year earlier. Excluding stock-based compensation, the rate was 80.5% versus 82.4%. Despite revenue growth, GAAP operating loss widened, with higher costs and substantial IPO-related stock compensation among the drivers.
- Q3 transactions were 62,349 (+35.8%); gross transaction value was $69.1 billion (+44.6%); average principal agents were 11,616 (+31.3%). The company served 67 markets in 28 states at quarter-end and reported 5.4% U.S. residential transaction-value share, up from 4.1%.
- Cash and cash equivalents were $791.4 million at September 30, 2021, versus $440.1 million at December 31, 2020. Total assets were $1.947 billion and total liabilities were $917.3 million. Accumulated deficit was $1.420 billion.
- Nine-month operating cash flow was positive $48.3 million, compared with negative $88.1 million in 2020. Investing cash outflow was $160.9 million, including $127.3 million for acquisitions and $33.6 million in capital expenditures. Financing provided $463.9 million, primarily from the IPO.
- Debt: $18.7 million was drawn on the $75 million Concierge facility; the $350 million revolving credit facility had no borrowings and approximately $16.3 million of letters of credit outstanding. The company reported compliance with both facilities’ covenants. Lease liabilities totaled $538.0 million.
Material changes and unusual items
- The April 2021 IPO generated $438.7 million in net proceeds. Preferred stock converted to common stock; common shares outstanding rose substantially. The IPO triggered $148.5 million of one-time stock-based compensation expense. Total stock-based compensation was $71.1 million in Q3 and $292.9 million for the nine months.
- Q3 and nine-month general and administrative expense included a $21.3 million charge for a settlement in principle in the Dorfman/RentJolt litigation. The agreement was reached October 25, 2021; the company said finalization would lead to dismissal with prejudice.
- Acquisitions included title and escrow businesses, Glide Labs and brokerages. Cash paid for acquisitions, net of acquired cash, was $127.3 million during the nine months. Acquisition-related goodwill increased by $62.7 million.
- Compass and Guaranteed Rate formed OriginPoint, a mortgage joint venture owned 49.9% by Compass and 50.1% by Guaranteed Rate. It was consolidated because Compass directs key activities; the filing said it had not yet commenced operations.
- The founder/CEO’s Class C shares carry 20 votes each. The filing reported approximately 48% of voting power held by the founder and affiliated entities as of November 9, 2021, potentially rising to approximately 68% if specified RSUs vested, settled and exchanged.
Outlook, risks and controls
- No specific revenue, earnings or margin guidance is provided. Management said existing cash, cash equivalents and available credit facilities were expected to meet working-capital and capital-expenditure needs for at least 12 months, while noting operating losses and negative operating cash flow could recur as investment continues.
- Management highlighted continued investment in technology, agent recruitment and support, geographic expansion and adjacent services. Residential real estate seasonality, market cycles, mortgage rates, housing activity and COVID-19 developments could materially affect results.
- Key disclosed risks include persistent losses and uncertain profitability; dependence on agents and transaction volumes; competition and commission-rate pressure; acquisition integration and joint-venture execution; regulatory and litigation exposure; cybersecurity and privacy risks; and potential cash needs, including RSU tax-withholding settlements.
- Disclosure controls and procedures were deemed ineffective as of September 30, 2021 due to previously identified material weaknesses in financial-reporting oversight, accounting processes and IT controls. Remediation was underway but not complete; management stated additional analyses and procedures supported the fair presentation of the reported financial statements.
- Other notable exposures: escrow and trust deposits administered for clients totaled $205.7 million and are not company assets, but Compass is contingently liable for their disposition. The company could not reasonably estimate a loss range for the Realogy litigation.
Important facts for investors to verify
- Whether revenue and agent/transaction growth can continue without weakening unit economics or materially increasing operating losses.
- How much of reported and future expense reflects recurring stock-based compensation, and the cash and dilution effects of ongoing RSU settlements.
- Progress in remediating material weaknesses and whether controls operate effectively over sustained reporting periods.
- OriginPoint’s launch, economics and ability to deliver expected benefits, alongside the performance and integration of acquisitions.
- Developments in the Dorfman settlement and Realogy litigation, plus any regulatory changes affecting commissions, brokerage, title, escrow or mortgage activities.