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Slowing transaction volume punched Compass in the pocket during the second quarter of the year as the New York City-based brokerage’s revenues slid 26 percent year over year to $1.5 billion, according to an earnings release Monday.
Despite the downturn in revenue, however, the brokerage’s other financial measures improved.
Compass shrunk its net losses 53 percent year over year from $101 million in Q2 2022 to $48 million in Q2 2023. The company also reached a free cash flow positivity of $51 million and an operating cash flow of $53 million — something Compass co-Founder and CEO Robert Reffkin said is a clear sign the company is on its way to reaching profitability sooner than later.
Robert Reffkin
“I am pleased to say we were free cash flow positive, meaning we generated more cash than we spent on operations in addition to growing market share for the third quarter in a row,” Reffkin said in a statement ahead of a Monday evening live earnings call.
Compass Chief Financial Officer Kalani Reelitz said the company is on track to maintaining its free cash flow positivity for the rest of 2023, as they’ve resolved a $150 million outstanding balance on their revolving credit facility.
“We have made up most of the free cash flow deficit from Q1 2023 and we believe we are in a position to achieve our goal of being free cash flow positive for 2023,” she said. “We ended the second quarter with $335 million in cash and cash equivalents including a $150 million draw from our revolving credit facility. Given our conviction on being free cash flow positive, in July we repaid the entire $150 million balance outstanding on the facility.”
Beyond making financial progress, Compass said Q2 2023 yielded some of its best recruiting and retention results yet despite shuttering some of its landmark cash and stock-based recruiting incentives last year.
The company had an average of 13,633 principal agents during the second quarter of the year — a 5.03 percent increase from Q2 2022 and a 0.87 percent increase from Q1 2023. In addition to its recruiting wins, the report said Compass vaulted its annual retention rate to 90 percent, meaning from July to June, the number of principal agents they lost was less than the month before.
The company also experienced the third consecutive quarter of market share gains, with the national market share increasing 0.45 percent year over year to 4.6 percent. Even with a widening market share, Compass agent closed transaction volume declined 19 percent year over to 54,207. The gross transaction value of those sales also fell, dropping 26 percent year over year to $56.8 billion.
Even with a mixed bag of results, Reffkin remained bullish, saying the company would remain “laser-focused” on optimizing its recruiting, retention and technology strategy, which includes the recent debut of its data-powered Performance Tracker and AI-powered CompassGPT, and the upcoming release of its Client Dashboard, which Compass leaders teased in November 2021.
“We will be rolling out more team workflow functionality for agent teams over the next two quarters,” he said. “And next year, we expect to launch our client portal which over time will become the client’s single destination for everything home before, during and after the transaction for both buyers and sellers.”
“There is a critical shift happening in the brokerage industry that is resulting in structurally weakened competition and a key differentiator for Compass,” he added. “The Compass business model always has been and always will be focused on providing the best tools and services to agents so they can best grow their businesses.”
Reffkin said he believes Compass’ investment in proprietary tech will put them on the cutting edge as the market recovers, and agents begin looking beyond immediate-term financial savings and focus on long-term financial gains from a company that invests in rich office culture and support systems.
“The current pressure on competitors is resulting in two positive trends for Compass,” he said. “One, we are seeing our competitors reduce the financial incentives they were using to attempt to recruit Compass agents. Two, a ‘race to the bottom’ environment where many traditional brokerages that historically competed on value-added support and services — support staff, training, in-person office culture, attempts to integrate third-party tech — are now cutting back on these areas, providing much less and, in many cases, are adding themselves to the already crowded low value, low-cost brokerage service landscape, a model that is defined by charging agents the lowest possible amount and providing them the lowest possible amount.”
“Quite simply, our company is going in another direction,” he added. “We’re strengthening our in-person culture and investing heavily in tools and technology for agents to capitalize on the downturn to widen our competitive advantages as the high-value brokerage space is becoming much less crowded.”
Although they’re anticipating revenues to slide from Q2 2023’s $1.5 billion down to the $1.4 to 1.3 billion range in Q3, Compass is expected to main its free cash positivity and improve its Adjusted EBITDA as Reffkin looks forward to maintaining a lead on the competition in the years to come.
“It would not surprise me to see in the years to come, Compass as the only major national brokerage competing to serve agents with high-value products and services, and universally known for creating more tangible value for agents than any other company.”
