Q1 2024 Opendoor Technologies Inc Earnings Call

Participants

Kimberly Niehaus; IR; Opendoor Technologies Inc

Carrie Wheeler; Chief Executive Officer, Director; Opendoor Technologies Inc

Christy Schwartz; Interim Chief Financial Officer, Chief Accounting Officer; Opendoor Technologies Inc

Dod Fraser; President of Open Exchange & Capital; Opendoor Technologies Inc

Dae Lee; Analyst; JPMorgan Chase & Co

Ygal Arounian; Analyst; Citigroup Inc

Nicholas Jones; Analyst; JMP Securities LLC

Ryan Tomasello; Analyst; Keefe, Bruyette, & Woods, Inc.

Presentation

Operator

Good day and thank you for standing by, and welcome to the Opendoor Technologies First Quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session to ask a question. During the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. For withdraw your question, please press star one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kimberly Ni, house Investor Relations. Please go ahead.

Kimberly Niehaus

Thank you and good afternoon. Details of our results and additional management commentary are available in our earnings release and shareholder letter, which can be found on the Investor Relations section of our website at investor dot Opendoor.com. Please note that this call will be simultaneously webcast on the Investor Relations section of the Company's corporate website.
Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meaning of the federal securities laws. All statements other than statements of historical fact are statements that could be deemed forward-looking, including, but not limited to, statements regarding open-door financial condition, anticipated financial performance business strategy and plans, market opportunity expansion and management objectives for future operations.
These statements are neither promises nor guarantees and undue reliance should not be placed on them. Such forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those discussed here.
Additional information that could cause actual results to differ from forward-looking statements can be found in the Risk Factors section of Oberdorf most recent annual report on Form 10-K for the year ended December 31, 2023, as updated by our periodic reports filed after that 10-K. Any forward-looking statements made on this conference call, including responses to your questions, are based on management's reasonable current expectations and assumptions as of today, and Opendoor assumes no obligation to update or revise them whether as a result of new information, future events or otherwise, except as required by law.
The following discussion contains references to certain non-GAAP financial measures the Company believes these non-GAAP financial measures are useful to investors as supplemental operational measurements to evaluate the Company's financial performance. For a reconciliation of each of these non-GAAP financial measures to the most directly comparable GAAP metric. Please see our website at investor dot Opendoor.com. I will now turn the call over to Carrie Wheeler, Chief Executive Officer, Sarah of Opendoor

Carrie Wheeler

Good afternoon. Also on the call with me today is Chris Schwartz, Interim Chief Financial Officer, and David Fraser, President of capital and open exchange.
Our performance in the first quarter reflects our commitment to the three key operating principles we outlined at the beginning of the year, focus execution and results. Our North Star remains rescaling our business and building towards the future of sustained profitable growth as we drive the business towards positive adjusted net income.
We are making progress along this path with first quarter revenue, contribution, profit and adjusted EBITDA results. All coming in ahead of our expectations. Further, we remain on track to meaningfully ramp acquisitions year on year each quarter in 2024 and deliver contribution margin within our target range of 5% to 7% in the first quarter, we nearly doubled our acquisition volume year over year.
Contribution margin was 4.8% and excluding approximately 50 homes in the old book, our contribution margin was over 5%. Notably, this marks the seventh consecutive quarter that our new book of homes generated contribution margin was in or above our annual target margin range, demonstrating the health of our unit economics across seasons and market environments.
We expect that our acquisition volume growth in 2024 will benefit from further expansion of our partnership channels. For example, at the end of February, our EXP reality partnership went live, enabling EXP. realities agents to easily requests an open-door cash offer for the clients and qualifying properties.
This partnerships to continue to build on our brand awareness amongst the agents and provide another way for sellers to learn about the benefits of working with Opendoor. Earlier this year details began to emerge on the proposed National Association of Realtors settlement. We believe this settlement represents an important positive change for our industry by giving consumers more transparency and choice on how they transact and the housing market. In the near term, we expect the settlement to have a neutral to positive impact on our business.
As you've heard from us before, our business model does not rely on earning revenue from commissions paid to buyers' agents. Rather, those commissions are cost to us today, which we pay when we resell our homes over the long term, we believe the settlement will drive lower transaction costs. And if commissions do decline, Opendoor may be able to pass these cost savings back to consumers in the form of lower spreads, which means more cash for our sellers and more customers saying, yes, we'll generate the same margins.
We also believe the settlement could result in more transactions as commissions decrease, which may encourage more consumers to transact directly, including through the Opendoor platform. Instead of lifting on Amazon. We believe that Opendoor stands to benefit as consumers rethink how they buy and sell homes.
We spent the last decade building for this future. We're off to a strong start in 2024 as you ramp our volumes in a sustainable and durable fashion. And during a time when the industry has the potential to undergo a major change in how consumers are thinking about how to sell or buy a home, we are very well positioned as the largest digital platform for residential real estate transactions. We're empowering consumers with more control and a simple, certain and transparent offering during one of life's most important transactions Kristie will now review our financial results and guidance.

Christy Schwartz

Thank you, Carrie. Our first quarter results reflect our ongoing commitment to rescaling the business, generating strong unit economics and operating with disciplined cost management. We delivered $1.2 billion of revenue in the first quarter, exceeding the high end of our guidance range. This represents a 36% sequential increase in revenue driven by our acquisition volume growth last year and coinciding with a pickup in clearance rates as is typical for this time of year.
On the acquisition side, we purchased 3,458 homes in the first quarter, up 98% versus first quarter 2023, primarily due to spread reductions made throughout last year, coupled with added contributions from our partnership channels. We delivered contribution margin of 4.8% in the first quarter ahead of the high end of our implied guidance range. Contribution margin improved by more than 100 basis points sequentially. As there were fewer old book home sales, we continue to expect full year contribution margin within our annual target range of 5% to 7%.
Adjusted operating expenses totaled $107 million for the quarter, up from $99 million in the fourth quarter of 2023, driven by increased marketing spend of nearly 60% sequentially and below our guidance of $120 million. Finally, adjusted EBITDA loss was $50 million, outperforming the high end of our guidance range and an improvement from an adjusted EBITDA loss of $69 million in the fourth quarter of '23.
Turning to our balance sheet, we ended the quarter with $1.3 billion in total capital, which includes $1 billion in unrestricted cash and marketable securities of $181 million of equity invested in homes and related assets net of inventory valuation adjustments.
We also had $8 billion in nonrecourse asset-backed borrowing capacity composed of $3.8 billion of senior revolving credit facilities and $4.2 billion of senior and mezzanine term debt facilities, of which total committed borrowing capacity was $2.5 billion.
Additionally, this morning we established an at-the-market or ATM program, which allows us to sell up to $200 million in equity through open market transactions within the next three years, we are making progress towards achieving positive adjusted net income. And as we demonstrated with our convertible note repurchases in 2023, which generated over $200 million of shareholders' equity.
We are managing our balance sheet with discipline. We feel that putting this program in place provides us the flexibility to fund future growth should we need it. We planned to be prudent and patient and utilizing the ATM to ensure we are optimizing our cost of capital.
Looking ahead, we expect our second quarter revenue to be between $1.4 billion and $1.5 billion contribution profit between $75 million and $85 million, which implies a contribution margin of 5.4% to 5.7% and adjusted EBITDA loss between $35 million and $25 million. We expect adjusted operating expenses to be approximately $110 million.
Additionally, as a result of our increased marketing spend, we have seen an uptick in ACQUISITION contracts in the latter part of the quarter. This, coupled with continued marketing spend and alongside seasonality, tailwinds should result in home purchases of over 4,500 homes in the second quarter. Given the selling season can peak during the second quarter, we expect our acquisitions to be flat or modestly lower on a sequential basis in the third quarter.
However, the first quarter should be the trough for quarterly purchases this year. We are pleased with our execution during the first quarter. We remain on track to increase acquisitions on a year-over-year basis each quarter in 2024, while delivering an annual contribution margin in our target range and operating efficiently, which should substantially decrease our adjusted net income losses for the year.
I'd now like to turn the call over to the operator to open up the line for questions.

Question and Answer Session

Operator

Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one. Again, we exit you please limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster.
Yes.
Our first question comes from the line of David Lee with JPMorgan. Your line is now open.

Dae Lee

Great.
Thanks for taking the question. I have to ask the first one I appreciate the color on the acquisition through the year, but curious how like macro condition kind of change your expectation for Coeur clearance rate going forward and get those mortgage rates ticked up again this week for second half that could that impact? What are your outlook going forward?

Dod Fraser

Sure.
They are happy to start us.com. I think in the sort of maybe just zoom out from a macro perspective and reiterating what we said on the letter from what we are most focused on and have been for the last 18 month plus is continued price stability.
And that really is the key input for us in terms of how we set spreads and how we manage growth end markets. And so we continue to see a balance of supply and demand. And we do think even with some rate relief in the back half of the year, that should actually be a tailwind for the business in terms of market transaction volumes going up.
And one of the points and pieces of the shareholder letter that we added this year or this quarter sorry, is around seasonality and how that impacts spreads. And so that is really the primary driver of spread changes right now, which is for this time of year, we typically do increased spreads, but happy to have carry out on as it relates to the volume trajectory for the rest of the year

Carrie Wheeler

To put acquisitions in context. So as we said in our remarks, almost doubled acquisitions year on year in the first quarter and then a guide for Q2, which would be up beyond, call it over 70% year on year. I'm sort of doubled. We doubled Q1 year on year, up 70% in the guide year on year. So the macro has not been and tailwind for us certainly day. It's been it's been a headwind but in terms of focus what we control, we're really pleased with the fact that many in a quarter where new listing for the market in our bylaws was up only 6%. We showed 98% acquisition growth and feel good about where we ended the quarter. We're up 24% in contracts sequentially in Q1, and that's feeding into what feels like a really solid Q2 guide in terms of acquisition growth. So we're going to focus on what we can control in this moment. And it's just proof of what we're doing in terms of share gains and acquisition momentum.

Dae Lee

Okay, great.
And then as a follow-up, it sounds like your first quarter adjusted OpEx didn't increase as much as expected sequentially, mostly due to more direct hiring. So does that mean I guess, twofold, like is your marketing ramp going according to plan? And two was the more moderate hiring because there was a change in view on volume? Or was that because you guys think you can do more than that?

Christy Schwartz

Thanks for the question, Dave. This is Christie here. So you know, as a reminder, our adjusted OpEx is composed of three main pieces. Our fixed costs, our marketing, our variable SG&A, are fixed costs. We are continuing to make meaningful reductions and take costs out of our system and continuing to refine and on some of that is what you're seeing in the outperformance. Our marketing that we did increase it as we had indicated, it went up $10 million quarter over quarter, and we don't expect meaningful increases to our marketing spend for the remainder of the year and then are variable G&A is the part that will vary with volume. And so of [107] is where it was in Q1, and we've guided to one [110] for Q2.

Dae Lee

Okay. Understand.
Thank you.

Operator

Thank you. Our next question comes from the line of Yigal Arounian with Citi. Your line is now open.

Ygal Arounian

Hey, good afternoon, guys. I suppose they start on following up on the first question on acquisition strategy in rates. And it sounds like no change really to your strategy here. But the just thinking with the recent rate spike aligning with kind of what starts the heart of the buying and selling season, if that's impacting how you're thinking about things at all? And then is that and maybe just an update on your kind of current market and buy box expansion strategy or path how you're thinking about that?

Carrie Wheeler

If you go to Carrie, can you just be a little bit more your first question, I wasn't quite following that of branded seasonality.
Questioner, Walt or.

Ygal Arounian

Yes, a little bit more on the recent rates Sligro we've seen over the past couple of weeks, it's been a pretty meaningful increase in mortgage rates and that's coinciding with at the heart of the buying and selling season and any expectations that that might soften the market in the core key part of the market or the key part of the seasonal market and if that's impacting how you're thinking about things, it sounds like it's not, but just curious if you're taking any of that into consideration.

Carrie Wheeler

I mean, certainly we're taking all those signals all the time. And we're watching very closely kind of what the market is telling us in terms of clearing rates, nice trending and prices we did talk a little bit in the shareholder letter about this is the time of year where we do start to increase spreads a bit because we expect that the homes that we're offering on today, we'll be sold in a post the spring selling season. So we'd expect those homes to have less of a gain to them have reflected in slightly higher spreads. So those are adjustments we make every day every week with the team and we certainly are reflecting what we have coming down the pike given recent rate increases.
Doug, you want to add under?

Dod Fraser

Yes, they go in and out on it. If you look at some of the charts in the back of the chart where you can see what we're observing from a new lithium perspective from And although there's a slight lag there, we really haven't seen a sort of a meaningful change on the back of the recent rate changes in terms of lifting volumes, which is really the key driver and input to our acquisition targets.

Ygal Arounian

Okay. That's helpful. And and maybe just a little bit more color on the ATM equity offering, a little more detail on how it works. Why now can you do more of this? How should we be thinking about that?

Dod Fraser

Yes. I mean, I think I'd just start with level setting on where we are from a balance sheet perspective. So as you can see from our financials, we've got over $1 billion in cash, $1.3 billion, total capital, $8 billion of debt capacity. I think we feel very good about executing our business plan again with our current capital base. Now, really the ATM for us gives us, the ability to opportunistically raise equity over the next three years, I think is really important. It's a three-year program.
And because of how they're structured, we do that at a lower fee and that market. So there's no discount to market. So we really view it as a tool and toolkit for us as a business to opportunistically fund future growth. It is one of many ways we could implement that, but we wanted to get it out there.
Visiting these programs are very common in capital-intensive businesses like the rig sector or biotech but there is actually a growing list of technology companies putting these in place, especially post-COVID. I think people will sort of realize how useful they can be. Carvana has one Zillow has one, Tesla has one. And so to Chris's point earlier, we were opportunistic last year in repurchasing the convertible notes created over $200 million of equity. We do not plan to utilize the ATM immediately. We'll be patient with this, and we don't plan to do that this quarter.

Ygal Arounian

Got it.
That's really helpful. Thank you.

Operator

Thank you. Our next question comes from the line of Nick Jones with Citizen's GMP. Your line is now open.

Nicholas Jones

Great.
Thanks for taking the questions. I guess maybe one on a path to positive adjusted EBITDA on the but I mentioned net income has been a nice cadence over the last few quarters as we kind of think about shipping the rest of the year. Is it right to kind of think of 14 maybe being a weaker quarter throughout the year, but maybe not as big as Q1. And then are we kind of on a linear path from the are you confident that we can kind of get to positive adjusted EBITDA, I guess, maybe even this year or next year?

Carrie Wheeler

Nick, it's Carol. I'll take that. And what I would say at a high level is what we are indicating is that we are on this path increasing acquisitions year on year for every quarter for 2024. And we feel good about delivering within our 5% to 7% contribution margin target.
And all of that goes together to substantially reduce the losses we're seeing in the system. So without giving you specifics or guiding to kind of where EBITDA is going to fall in subsequent quarters. I just had a very feeling good about the path we're on. You substantially improve kind of the bottom line of the business.

Nicholas Jones

It is helpful. And then maybe a higher level question. Carrie, you mentioned with the NAR settlement. I think there's some headlines the DOJ might be taking a look or a closer look at the NAR on, I think you said in your comments that folks might bypass the MLS on at a high level, the NAR. and the ML. as well as kind of the original marketplace, whatever 100 plus years ago.
And there are components that they create the sense of urgency that the potential damages the selling and buying experience? And do you think this is the start of kind of their dominance in the ecosystem to potentially starting to wane? And is that kind of a long-term secular tailwind for Opendoor?

Carrie Wheeler

Yes. It's a good question, and I just want to clarify my comments. I think this is now positive. First of all, for consumers and it's good for consumers. That's good for Opendoor municipal about giving more choice and transparency and agency in and of homebuyers in terms of how they want to engage with an agent The reason I think we're so set up well in this context is because we have this direct platform.
I wasn't talking about homes going off the MLS. There's been some talk about that. We think the MIF is a great thing because it's democratic everyone can understand kind of what's available for sale, but it really says to certain buyers or sellers and they decide I don't imagine this transaction or I can dial in the amount of advice.
I need to get the only place you can sell your home directly today and the only place you can buy down directly with an e-commerce transaction is Opendoor, but we are the only direct platform in the industry. So no matter how the real estate ecosystem evolves we're really set up well to take advantage of that. And there's lots of talk about touring and having to get out, you know, buyer representation agreement for and sell turnarounds.
We want to give the consumer like total agency to do what is right for them in whatever way they wanted it, including if they wanted to convert them. So my comments were not about like off the MLS. We're supportive of the MLS. It's really about enabling consumers to go direct.

Nicholas Jones

Got it. Really helpful. Thanks, Gary.

Operator

Well, thank you. Our next question comes from the line of Jason Helfstein with Oppenheimer. Your line is now open.

Hey, thanks. This is Chad on for Jason. So on homes purchased were down slightly sequentially, but there was a nice increase increase in the sequential homes under contract. So just framing like what's going on there? Is that just normal seasonality or is there something that's just giving you more confidence to lean back into buying.

Carrie Wheeler

And then I'm not yes, I mean, that's sort of the market has slowed enough. And also we offer the customer a great deal of choice about when they close their home. So I focus less on like the quarter to quarter because the contract in one quarter may close may slip to close another quarter. This is about, I think the focus should be on like the year-over-year growth we're proposing for showing up.
And to your point, Chad, like we had really nice. We ended the quarter with a really nice number of contracts in the Q2 of 24% versus Q4. So just nice momentum going through the quarter. And that really feeds into that contract momentum really feeds into what is a strong guide for over 45 hundred and acquisitions in Q2.

Okay.

Carrie Wheeler

I think I would make you I guess I want to say I wouldn't make too much of the, you know, the down slightly versus Q4?

Yes.
Fair enough. And then just on the EXP. partnership, just on <unk>, anything else you can share there and how meaningful could that be not kind of over the long run?

Dod Fraser

Yes. Happy to give a little more context there, but it's still very early. So we just launched in February, we're seeing sort of steadily steady weekly growth and launch. But just in February, it's like low end. So I think the sort of key piece there is it really helps broaden our reach into the agent community of DXC has 70,000 agents in their network and we're growing.
And so we are actually quite excited about the sort of brand expansion opportunities, the understanding of our product and as well, the specific application of the XTI.s were embedded directly into their workflows and doing, but we made it really simple and easy for EXD. agents to you utilize our product and going back to what Carrie said earlier, like we're on the side of transparency and choice for customers. This is another option for them and when they're talking to their customers.

Got it.
Thanks.

Operator

Thank you. As a reminder, to ask a question at this time, please press star one one on your touchtone telephone.
Our next question comes from the line of Ryan Tomasello with KBW. Your line is now open.

Ryan Tomasello

Hi, Ron. Thanks for taking the questions. I'm just trying to parse through the different comments on the seasonal cadence of purchase volumes. I think in your prepared remarks you said you expect purchase volumes to increase sequentially in every quarter, but in the shareholder letter, you say on page 12 that you actually are expecting purchase volumes in 3Q to be flat to decline modestly. So am I missing something there? And can you just clarify that commentary and then beyond.
Yes, I think just from a seasonal perspective, how should we be thinking about 4Q volumes with normal seasonality?

Dod Fraser

Yes.
Let me trying to parse it any flat quarter over quarter versus year over year is the piece that I think was the different.
Brian, to your specific question on 3Q. So year over year were increasing every quarter. What we are, what we have also been letter is over 45 hundred in the second quarter, flat to slightly down in the third quarter. And then we did say the first quarter would be the lowest of the year.
So 4Q will be above the first quarter given where we are and sort of given how fourth 4Q tends to unfold but you've got some headwind on market volumes and marketing spend, marketing spend, but you've got some great tailwinds around low spreads. And so that was what we were thinking year over year was quarter over quarter.
That essentially right.

Ryan Tomasello

Okay.
Got it.
That's really helpful. And maybe just to entertain for a moment on a more extreme scenario with respect to the NAR settlement and industry structure. Clearly the consensus opinion, at least from most folks you talk with expect commission rates to decline. But even then I think the international comparisons again in a more extreme scenario would suggest something that could be substantially worse in terms of fewer homebuyers using agents, perhaps compression on the listing side, I guess again, just to entertain a scenario is there is there a if lower is there a clearing rate in terms of commission rates and all in transaction costs where the Opendoor model perhaps needs to pivot in terms of the value proposition that it's providing relative to the benchmark rate that is prevailing commissions.

Carrie Wheeler

I guess a couple of things. One is we provide something that you can't get in a traditional transaction. So we provide most certainty, no fall through rates and almost simplicity, no listings, no during repairs on spec, no doing open houses like all the incredible amount of friction.
And certainly that goes with traditional listing, we're just providing something very different. And today we charge a premium to the traditional listing for that through our spreads, right? We have now the service fee and there's an incremental spread, and that's in part to some margin targets. And it's just we're paying if people are paying a premium for this or the simplicity that we provide.
And I think in the event that there is more spread compression, I'm sorry, more fee compression to the point you're trying to bring across, right. We will adjust with the market. And I right and don't worry a lot about our ability to continue to like have an incredible value prop because again, it provides something that is just so different and where there's a premium in it like there's a lot of value, just why we have such a high converting product when we can deliver at a reasonable price the extent of higher broker commissions come down. Likewise, we've said that ultimately it's probably a pass through to probably neutral.
There may be some interim benefits gas. So the real question will be like how do you seller listing fees change over time, and we'll see how the market responds post July will be with Spirit prepare to responding.
Correct.

Ryan Tomasello

Appreciate that color.
Thanks, Carrie,

Operator

Thank you. And I'm currently showing no further questions at this time. I'd like to hand the call back over to Carrie Wheeler for closing remarks.

Carrie Wheeler

Just thanks, everyone. For joining us today and hope you heard we are pleased with the results to kick off this year. The housing market's challenging for sure, but we are staying focused on you can see that our team is executing really well, and we are driving results, and we look forward to updating you on further progress next quarter.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.