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July 30, 2020, 6:45 p.m. EDT

10-Q: REDFIN CORP

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements, the accompanying notes, and other information included in this quarterly report and our annual report for the year ended December 31, 2019. In particular, the disclosure contained in Item 1A in our annual report, as updated by Part II, Item 1A in this quarterly report, may reflect trends, demands, commitments, events, or uncertainties that could materially impact our results of operations and liquidity and capital resources.

The following discussion contains forward-looking statements, such as statements regarding COVID-19's anticipated impacts on our business, our future operating results and financial position, our business strategy and plans, our market growth and trends, and our objectives for future operations. Please see "Note Regarding Forward-Looking Statements" for more information about relying on these forward-looking statements. The following discussion also contains information using industry publications. Please see "Note Regarding Industry and Market Data" for more information about relying on these industry publications.

When we use the term "basis points" in the following discussion, we refer to units of one-hundredth of one percent.

Overview

We help people buy and sell homes. Our primary business is a residential real estate brokerage, representing customers in over 90 markets throughout the United States and Canada. We pair our own agents with our own technology to create a service that is faster, better, and costs less. We meet customers through our listings-search website and mobile application.

We use the same combination of technology and local service to originate mortgage loans and offer title and settlement services; we also buy homes directly from homeowners who want an immediate sale, taking responsibility for selling the home while the original owner moves on. Our mission is to redefine real estate in the consumer's favor.

COVID-19 Impact and Associated Actions

built and enhanced technology to allow our agents to virtually tour customers through homes, instead of touring homes in person, while significant parts of the country were subject to stay-at-home or similar isolation orders; and during April, 31% of our tours were virtual, compared to 8% during March; the percentage of our tours that were virtual declined to 12% during June, which we believe correlates to the resumption of in-person activities across the country;

shifted demand across our markets to our lead agents, instead of having our partner agents serve some of the demand;

ceased most performance and mass media advertising campaigns to the extent possible;

with respect to our RedfinNow business:

temporarily paused making new offers to purchase homes on March 17;

beginning in mid-March and continuing through mid-May, regularly evaluated inventory levels to reasonably avoid extended holding periods for owned properties, due in part to significant economic uncertainty at the time; this evaluation resulted in a relatively shorter holding period for certain properties;

sold $110 million in capital stock, consisting of $70 million of our common stock and $40 million of our convertible preferred stock, on April 1;

to ensure that our workforce numbers and compensation levels reflected declining demand, we

reduced, in April, our number of employees by approximately 400 people, which represented approximately ten percent of our employees, and placed approximately an additional 1,000 employees on furlough; as a result of these actions, as of April 30, we had 1,123 lead agents; and

moved to further reduce compensation expenses by (i) reducing our chief executive officer's salary for 2020 to $0, effective from March 17, (ii) temporarily reducing the salary of our employees earning above a certain threshold by 10% or 15% depending on their compensation structure, effective from April 12, (iii) canceling executive bonuses and bonuses for our technology and development, marketing, and general and administrative teams, and (iv) eliminating cash compensation for our board of directors for 2020. We recorded the incremental and non-recurring costs associated with these actions as restructuring charges and are included in our general and administrative expenses. See Note 1 to our consolidated financial statements and "-Results of Operations" for further information. Our Actions since the Beginning of May

shifted demand across our markets to partner agents, if we did not have enough lead agents to serve some of the demand;

restarted most performance and mass media campaigns, including beginning to run a new television commercial in early June; accordingly, we expect our marketing expenses for the third quarter of 2020 to increase from the second quarter of 2020; Ta ble of Contents

resumed making offers to purchase homes in ten of 13 RedfinNow markets;

returned approximately 815 employees from furlough and, in some cases, began hiring for new positions; as a result of these actions, as of July 27, we had 1,738 lead agents;

eliminated, effective June 7, employee salary reductions that went into effect on April 12, and reinstated bonuses for our technology and development, marketing, and general and administrative teams effective July 1. Our Outlook







        Key Business Metrics
        In addition to the measures presented in our consolidated financial statements,
        we use the following key metrics to evaluate our business, develop financial
        forecasts, and make strategic decisions.
                                                                                                                            Three Months Ended
                                       Jun. 30, 2020         Mar. 31, 2020         Dec. 31, 2019         Sep. 30, 2019         Jun. 30, 2019         Mar. 31, 2019         Dec. 31, 2018         Sep. 30, 2018         Jun. 30, 2018
        Monthly average visitors (in
        thousands)                          42,537                35,519                30,595                35,633                36,557                31,107                25,212                29,236                28,777
        Real estate services
        transactions
        Brokerage                           13,828                10,751                13,122                16,098                15,580                 8,435                 9,822                12,876                12,971
        Partner                              2,691                 2,479                 2,958                 3,499                 3,357                 2,125                 2,749                 3,333                 3,289
        Total                               16,519                13,230                16,080                19,597                18,937                10,560                12,571                16,209                16,260
        Real estate services revenue
        per transaction
        Brokerage                     $      9,296          $      9,520          $      9,425          $      9,075          $      9,332          $      9,640          $      9,569          $      9,227          $      9,510
        Partner                              2,417                 2,535                 2,369                 2,295                 2,218                 2,153                 2,232                 2,237                 2,281
        Aggregate                            8,175                 8,211                 8,127                 7,865                 8,071                 8,134                 7,964                 7,790                 8,048
        Aggregate home value of real
        estate services transactions
        (in millions)                 $      7,576          $      6,098          $      7,588          $      9,157          $      8,986          $      4,800          $      5,825          $      7,653          $      7,910
        U.S. market share by value            0.93  %               0.93  %               0.94  %               0.96  %               0.94  %               0.83  %               0.81  %               0.85  %               0.83  %
        Revenue from top-10 Redfin
        markets as a percentage of
        real estate services revenue            63  %                 61  %                 62  %                 63  %                 64  %                 64  %                 66  %                 66  %                 68  %
        Average number of lead agents        1,399                 1,826                 1,526                 1,579                 1,603                 1,503                 1,419                 1,397                 1,415
        


Monthly Average Visitors

The number of, and growth in, visitors to our website and mobile application are important leading indicators of our business activity because these channels are the primary ways we meet customers. For a Ta ble of Contents

Real Estate Services Transactions

We record a brokerage real estate services transaction when one of our lead agents represented the homebuyer or home seller in the purchase or sale, respectively, of a home. We record a partner real estate services transaction

Increasing the number of real estate services transactions is critical to increasing our revenue and, in turn, to achieving profitability. Real estate services transaction volume is influenced by, among other things, the pricing and quality of our services as well as market conditions that affect home sales, such as local inventory levels and mortgage interest rates. Real estate services transaction volume is also affected by seasonality and macroeconomic factors.

Real Estate Services Revenue per Transaction

Real estate services revenue per transaction, together with the number of real estate services transactions, is a factor in evaluating revenue growth. We also use this metric to evaluate pricing changes. Changes in real estate services revenue per transaction can be affected by, among other things, our pricing, the mix of transactions from homebuyers and home sellers, changes in the value of homes in the markets we serve, the geographic mix of our transactions, and the transactions we refer to partner agents and third-party institutional buyer. We calculate real estate services revenue per transaction by dividing brokerage, partner, or aggregate revenue, as applicable, by the corresponding number of real estate services transactions in any period.

We generally generate more real estate services revenue per transaction from representing homebuyers than home sellers. However, we believe that representing home sellers has unique strategic value, including the marketing power of yard signs and digital marketing campaigns, and the market effect of controlling listing inventory. To keep revenue per brokerage transaction about the same from year to year, we expect to reduce our commission refund to homebuyers if more of our brokerage transactions come from home sellers.

Aggregate Home Value of Real Estate Services Transactions

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U.S. Market Share by Value

Increasing our U.S. market share by value is critical to our ability to grow our business and achieve profitability over the long term. We believe there is a significant opportunity to increase our share in the markets we currently serve.

We calculate the aggregate value of U.S. home sales by multiplying the total number of U.S. existing home sales by the mean sale price of these homes, each as reported by the National Association of REALTORS(R). We calculate our market share by aggregating the home value of brokerage and partner real estate services transactions. Then, in order to account for both the sell- and buy-side components of each transaction, we divide that value by two-times the estimated aggregate value of U.S. home sales.

Revenue from Top-10 Markets as a Percentage of Real Estate Services Revenue

Our top-10 markets by real estate services revenue are the metropolitan areas of Boston, Chicago, Denver (including Boulder and Colorado Springs), Los Angeles (including Santa Barbara), Maryland, Northern Virginia, Portland (including Bend), San Diego, San Francisco, and Seattle. This metric is an indicator of the geographic concentration of our real estate services segment. We expect our revenue from top-10 markets to decline as a percentage of our total real estate services revenue over time.

Average Number of Lead Agents

The average number of lead agents, in combination with our other key metrics such as the number of brokerage transactions, is a basis for calculating agent productivity and is one indicator of the potential future growth of our business. We systematically evaluate traffic to our website and mobile application and customer activity to anticipate changes in customer demand, helping determine when and where to hire lead agents.

We calculate the average number of lead agents by taking the average of the number of lead agents at the end of each month included in the period.

Components of Our Results of Operations

Revenue

We generate revenue primarily from commissions and fees charged on each real estate services transaction closed by our lead agents or partner agents, and from the sale of homes.

Real Estate Services Revenue

Brokerage Revenue-Brokerage revenue includes our offer and listing services, where our lead agents represent homebuyers and home sellers. We recognize commission-based brokerage revenue upon closing of a brokerage transaction, less the amount of any commission refunds, closing-cost reductions, or promotional offers that may result in a material right. Brokerage revenue is affected by the number of brokerage transactions we close, the mix of brokerage transactions, home-sale prices, commission rates, and the amount we give to customers.

Partner Revenue-Partner revenue consists of fees paid to us from partner agents or under other referral agreements, less the amount of any payments we make to customers. We recognize these fees as revenue on the closing of a transaction. Partner revenue is affected by the number of partner transactions closed, home-sale prices, commission rates, and the amount we refund to customers. If the portion of customers we introduce to our own lead agents increases, we expect the portion of revenue closed by partner agents to decrease.







        Ta    ble of Contents
        


Properties Revenue

Properties Revenue-Properties revenue consists of revenue earned when we sell homes that we previously bought directly from homeowners. Properties revenue is recorded at closing on a gross basis, representing the sales price of the home. RedfinNow is our primary properties offering.

Other Revenue

Other Revenue-Other services revenue includes fees earned from mortgage origination services, title settlement services, Walk Score data services, and advertising. Substantially all fees and revenue from other services are recognized when the service is provided.

Intercompany Eliminations

Intercompany Eliminations-Revenue earned from transactions between operating segments are eliminated in consolidating our financial statements. Intercompany transactions primarily consist of services performed from our real estate services segment for our properties segment.

Cost of Revenue and Gross Margin

Cost of revenue consists primarily of personnel costs (including base pay, benefits, and stock-based compensation), transaction bonuses, home-touring and field expenses, listing expenses, home costs related to our properties segment, office and occupancy expenses, and depreciation and amortization related to fixed assets and acquired intangible assets. Home costs related to our properties segment include home purchase costs, capitalized improvements, selling expenses directly attributable to the transaction, and home maintenance expenses.

Gross profit is revenue less cost of revenue. Gross margin is gross profit expressed as a percentage of revenue. Our gross margin has and will continue to be affected by a number of factors, but the most important are the mix of revenue from our relatively higher-gross-margin real estate services segment and our relatively lower-gross-margin properties segment, real estate services revenue per transaction, agent and support-staff productivity, personnel costs and transaction bonuses, and, for properties, the home purchase costs.

Operating Expenses

Technology and Development

Our primary technology and development expenses are building software for our customers, lead agents, and support staff to work together on a transaction, and building a website and mobile application to meet customers looking to move. These expenses primarily include personnel costs (including base pay, benefits, and stock-based compensation), data licenses, software and equipment, and infrastructure such as for data centers and hosted services. The expenses also include amortization of capitalized internal-use software and website and mobile application development costs. We expense research and development costs as incurred and record them in technology and development expenses.

Marketing

Marketing expenses consist primarily of media costs for online and offline advertising, as well as personnel costs (including base pay, benefits, and stock-based compensation).

General and Administrative

General and administrative expenses consist primarily of personnel costs (including base pay, benefits, and stock-based compensation), facilities costs and related expenses for our executive, finance, human resources, and legal organizations, depreciation related to our fixed assets, and fees for outside services. Outside services are principally comprised of external legal, audit, and tax services. General and administrative expenses also include expenses related to actions taken in response to COVID-19, as these costs were determined to be direct and incremental and not related to revenue generating activities.







        Ta    ble of Contents
        


Interest Income

Interest income consists primarily of interest earned on our cash, cash equivalents and investments.

Interest Expense

Interest expense consists primarily of interest payable and the amortization of debt discounts and issuance cost related to our convertible senior notes, which we issued in July 2018. Interest is payable on the notes at the rate of 1.75% semiannually in arrears on January 15 and July 15.

For the six months ended June 30, 2020, interest expense also includes interest on borrowings and the amortization of debt issuance costs related to our secured revolving credit facility. Borrowings under the facility prior to March 24, 2020 generally bore interest at a rate of one-month LIBOR (subject to a floor of 0.50%) plus 2.65%. For borrowings under the facility on and after March 24, 2020, each new borrowing generally bears interest at a rate of one-month LIBOR (subject to a floor of 0.50%) plus an agreed upon additional rate.







        Results of Operations
        The following tables set forth our results of operations for the periods
        presented and as a percentage of our revenue for those periods.
                                                                                                                   Six Months Ended June
                                                       Three Months Ended June 30,                                          30,
                                                         2020                  2019               2020                  2019
                                                                                    (in thousands)
        Revenue                                    $     213,665           $ 197,780          $  404,660          $    307,922
        Cost of revenue(1)                               167,626             149,434             345,742               256,821
        Gross profit                                      46,039              48,346              58,918                51,101
        Operating expenses
        Technology and development(1)                     17,961              16,063              38,235                31,620
        Marketing(1)                                       9,482              27,050              35,190                60,250
        General and administrative(1)(2)                  23,022              17,654              47,349                39,102
        Total operating expenses                          50,465              60,767             120,774               130,972
        Loss from operations                              (4,426)            (12,421)            (61,856)              (79,871)
        . . .
        


Jul 30, 2020

COMTEX_368668942/2041/2020-07-30T18:44:46

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