Recent headwinds in the housing market have forced several companies to rethink their gameplans for the remainder of the year.
Among that list is New York-based Compass, which saw its shares nosedive following a lackluster second quarter performance where its losses grew at a higher rate than its earnings.
Compass’ latest earnings report indicated that it earned $2 billion in Q2—up 4% from last year’s second quarter. Despite an increase in earnings, the brokerage’s net losses surged year-over-year, shedding $101.1 million in Q2 2022 compared to $7 million in Q2 2021.
The company also reduced its annual sales forecast by roughly $1.5 billion, with the current forecast calling for revenue of $6.15 billion to $6.45 billion after the previous guidance stated $7.6 billion to $8 billion.
Company executives attributed Compass’ performance to a “big downturn” market.
“We are preparing for the real estate market this calendar year to be nearly 25% below where industry experts believe it would be just six months ago,” said Compass CEO and Co-Founder Robert Reffkin during a Monday earnings call.
“Never in my time at Compass have we seen such a big downturn in the market in such a short time,” he added.
Looking at the real estate market’s challenges so far this year, Reffkin indicated that further headwinds were likely on the horizon, forcing Compass to tighten up and implement a “significant cost reduction program.”
“We have line of sight into each area that will drive these savings to our expenses, which we believe will enable us to be free cash flow positive in 2023,” Reffkin said in a statement. “We expect to complete all targeted cost reductions by the end of this calendar year.”
Specifically, Compass announced that it would be cutting back on its investment in technology while also eliminating the use of financial incentives—equity or cash incentives—to recruit new agents in the future.
According to Compass COO Greg Hart, the company stopped using equity incentives—or company stock—two months ago, while the “financial incentives” ended last week.
“Over the years, we have been reducing the financial incentives we give to new agents,” Hart said. “As we have highlighted on previous calls, a great many agents have told us that they are coming to Compass for a lower split than they were receiving at their prior brokerage.”
Compass reported that it added 405 principal agents in Q2, bringing its average number of principals to 12,979.
Compass agents managed to increase their transactions during the quarter by 2% year-over-year, tallying 66,846 total transactions with an overall value of $76.8 billion—admittedly flat because of a 2% dip in the average transaction value.
While the company has maintained that agent interest in joining Compass is predicated on its tech platform, RISMedia delved into the inner workings and allure of the company in a recently released analysis of Compass’ business model.
Compass has ruffled feathers in the industry through the years for its recruiting tactics. Specifically, the company has been accused of buying marketshare with higher splits and other financial perks to lure top-tier agents to the brokerage.
Reffkin and company executives indicated during the earnings call that they are confident that Compass would be able to continue reeling in new agents and retaining current ones on the strength of its existing tech platform and presence in markets across the U.S.
“We believe we have created a large competitive moat with an enduring advantage over competitors that are unable or unwilling to build the tools that benefit the agents.”
Reffkin stated that the move has positioned Compass to “pivot during these uncertain market conditions when revenue is under pressure.”
As Compass stock value headed south following yesterday’s earnings call, the industry reacted. In a statement for Bloomberg News, Bess Freedman, the well-known CEO of rival brokerage company Brown Harris Stevens, said, “What they’re doing, it doesn’t make sense. They’re not a technology company. They’re a real estate brokerage company that just spent far more than they were making. The question now is, how is it sustainable?”
Similar sentiments were shared by other real estate leaders as they prepared for RISMedia’s upcoming CEO & Leadership Exchange, one of residential real estate’s most important networking and educational conferences, taking place in Washington, D.C., September 6 – 8.