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This post has been republished with permission from Mike DelPrete.
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Compass’ second quarter results are in with a higher than expected cash burn rate for the quarter, but paired with a robust set of new cost-cutting initiatives.
Why it matters: Compass has a cash burn problem (it spends more than it makes) and it needs to significantly reduce expenses to remain solvent — which is exactly what it’s doing.
- Management’s top goal is “generating free cash flow” as it announces a new, $320 million cost reduction program.
- Compass’ CEO took the unusual step of asserting that “Compass will not run out of cash.”
Go deeper: Compass’ challenge is that it burned through another $45 million in Q2, typically the most profitable quarter of the year for real estate brokerages.
- Last year, Q2 was the only quarter when Compass generated free cash flow with a $41 million gain.
- Cash burn was higher in Q1 than last year, and higher in Q2 than last year; in a rapidly cooling market, the pressure is on for the rest of the year.
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Between Q1 and Q2, Compass grew its brokerage revenue in line with its peers (except Douglas Elliman for some reason).
- The cooling market appears to be affecting all brokerages evenly, regardless of brand, tech platform, agent compensation, or anything else.
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Compass is retaining its agents; there has yet to be a noticeable decrease in agent growth, a positive sign for the company.
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After layoffs earlier in the year, Compass is cutting deeper with a $320 million “cost reduction program.”
- These cuts will target technology spend and agent incentives (remember, Compass has a 1,000-person tech team).
- For reference, Compass is on track to spend $360 million on technology in 2022 (excluding stock-based compensation expense) — the cuts will likely hit its tech team hard.
The bottom line: Compass continues to have a cash burn problem, but running out of cash would be a weird outcome.
- To become cash flow positive, Compass is making major cuts — the question is, can it do so while still remaining attractive to, and providing the same value to, its agents.
Mike DelPrete is a strategic adviser and global expert in real estate tech, including Zavvie, an iBuyer offer aggregator. Connect with him on LinkedIn.