Compass, Inc. — Q3 2022 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022. Compass operates a technology-enabled residential real estate brokerage; substantially all revenue comes from transaction commissions.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $1,493.7 million | $1,743.6 million | $4,910.8 million | $4,808.9 million |
| Operating loss | $(151.8) million | $(100.5) million | $(436.6) million | $(320.9) million |
| Net loss attributable to Compass | $(154.2) million | $(99.8) million | $(443.4) million | $(319.3) million |
| Net loss margin | (10.3%) | (5.7%) | (9.0%) | (6.6%) |
| Adjusted EBITDA | $(42.2) million | $12.2 million | $(134.7) million | $52.9 million |
| Adjusted EBITDA margin | (2.8%) | 0.7% | (2.7%) | 1.1% |
Commissions and related expense was 81.5% of Q3 revenue, versus 82.0% a year earlier. Total operating expenses were $1,645.5 million in Q3, including $29.0 million of restructuring costs. Nine-month stock-based compensation was $173.1 million, compared with $292.9 million in 2021; the prior period included a $148.5 million one-time IPO-related charge.
Cash flow and liquidity: Nine-month operating cash flow was $(173.9) million, versus $48.3 million provided in 2021. Investing cash flow was $(86.9) million and financing cash flow was $(2.6) million; cash declined $263.4 million to $354.9 million. At September 30, current assets were $541.8 million and current liabilities were $443.9 million. The company reported $318.2 million available under its revolving credit facility, with no borrowings outstanding and $31.8 million of letters of credit. It was in compliance with facility covenants.
Debt: The Concierge facility had $36.5 million outstanding, at a 5.95% interest rate as of quarter-end. The facility was amended in August 2022, including extension of its revolving period and transition from LIBOR to Term SOFR. The separate $350 million revolving credit facility matures in 2026.
Material changes versus prior comparable periods
- Q3 revenue fell 14.3%; nine-month revenue rose 2.1%. Management attributed the quarterly decline to the residential market slowdown, while year-to-date growth reflected agent additions and transaction activity before and during the slowdown.
- Q3 transactions declined 12.4% to 54,606 and Gross Transaction Value fell 17.1% to $57.3 billion. For the nine months, transactions were nearly flat at 168,819 and Gross Transaction Value declined 1.1% to $187.8 billion.
- Average principal agents increased 14.6% in Q3 to 13,314 and 21.2% for the nine-month period to 12,956. Reported U.S. market share was 4.2% in Q3, versus 4.3% in Q3 2021; the filing notes NAR’s revised home-price methodology changed previously reported share.
- Q3 net loss widened by $54.4 million, and Adjusted EBITDA shifted from positive to negative. Nine-month net loss widened by $124.1 million, and Adjusted EBITDA also shifted from positive to negative.
- Cash decreased from $618.3 million at December 31, 2021. Nine-month operating cash flow swung from positive to negative.
Outlook, commentary, risks and unusual items
- Management expects annual cash operating expense levels of $1.05 billion to $1.15 billion for 2023, excluding commissions and related expense, depreciation and amortization, and stock-based compensation. This is an expense target, not revenue or earnings guidance.
- Cost actions include workforce reductions, lower hiring and vendor spend, reduced agent incentives, office cost reviews, winding down Modus, and a planned pause in acquisitions and new-market expansion. Restructuring charges were $47.9 million for the first nine months, plus $7.1 million of related non-cash charges in depreciation and amortization.
- Management said cash, available credit and expected operations should support the business for at least the next 12 months and beyond, while warning that losses and negative operating cash flow may continue. It cited inflation, rapidly rising mortgage rates, reduced affordability and consumer demand, and potential further market deterioration as risks.
- The company recorded a $10.5 million Q3 expense related to the Realogy litigation matter; the parties executed an agreement to resolve it on September 28, 2022. Acquisition-related contingent consideration had a maximum undiscounted payment of $15.5 million at quarter-end; future acquisition-related compensation could reach an additional $37.2 million.
- Compass Concierge receivables were $60.2 million net of a $15.6 million allowance; approximately 98% related to properties not yet sold. The company substantially ceased new payments under its Concierge Classic program during Q3.
- Management concluded disclosure controls were not effective at September 30, 2022 because of previously identified material weaknesses in internal controls over financial reporting. Remediation was ongoing; management said additional post-close procedures supported fair presentation of the reported statements.
- The filing gives no clear quantified forecast for revenue, operating loss, cash flow or profitability. Results are also subject to seasonality, residential market cycles, agent retention and execution of cost reductions.
Investor verification priorities
- Track transaction volume, Gross Transaction Value, revenue and agent productivity as mortgage rates and housing demand evolve.
- Assess cash burn, remaining cash, access to revolving credit, and compliance with liquidity and revenue covenants.
- Verify whether restructuring delivers the stated 2023 expense target and whether further one-time costs arise.
- Monitor internal-control remediation and the company’s progress toward effective disclosure controls.
- Review Concierge receivable collections and allowance adequacy, litigation resolution terms, and acquisition-related obligations.