Opendoor Technologies Inc (OPEN) 2022 Q2 法說會逐字稿

Good day. Thank you for standing by, and welcome to the Opendoor's Second Quarter 2021 (sic) [2022] Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Elise Wang, Head of Investor Relations. Please go ahead.

Thank you, and good afternoon. Full 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.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, including, but not limited to, statements regarding Opendoor's financial condition, anticipated financial performance, business strategy and plans, market opportunity and expansion and management objectives for future operations. These statements are neither promises nor guarantees and 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 Opendoor's most recent Annual Report on Form 10-K for the year ended December 31, 2021. Any forward-looking statements made in this conference call, including responses to your questions, are based on management's current expectations and assumptions as of today, and Opendoor assumes no obligation to update or revise them, whether as a result of new developments 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.opendoor.com.

I will now turn the call over to Eric Wu, Cofounder, Chairman and Chief Executive Officer of Opendoor.

Good afternoon. On the call with me is Carrie Wheeler, our Chief Financial Officer, and Andrew Low Ah Kee, our President.

At Opendoor, we strive to empower our customers to make life-changing moves. To that end, I'd like to start our call with a story of Julie Damavandi, a recent customer of ours.

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Against the backdrop of the macro and housing market uncertainty, our product that delivers simplicity, certainty and speed is needed for our customers like Julie now more than ever. As such, in the second quarter, we helped over 14,000 homeowners move with peace of mind and delivered revenue of $4.2 billion, growing over 250% year-on-year, with record contribution profits of $422 million, adjusted EBITDA of $218 million and adjusted net income of $122 million.

In addition to our financial performance, we took important steps towards our goal of servicing home sellers nationwide and building a better home buying experience. We entered 6 new markets, bringing our total footprint to 51 markets and expanding our underwriting capabilities to cover nearly 30% of U.S. home transactions. We have also just announced our multiyear partnership with Zillow to give their hundreds of millions of monthly visitors, the ability to instantly request an Opendoor offer and sell their home online. It's rare that 2 market leaders come together and align on a vision and we believe this partnership will fundamentally change how people buy and sell a home.

For homebuyers, we went live with our new Opendoor financing app in California, enabling our customers to get prequalified in less than 60 seconds. With the adoption that suggests we will achieve our highest attach of financing within just a few months of going live. And finally, we've officially launched Opendoor Exclusives, a first-of-its-kind marketplace that lets home buyers purchase an Opendoor home premarket via an e-commerce-like experience. In the words of a recent exclusive customer, "I felt like I was shopping for home on Amazon. The process was seamless and uncomplicated."

So it's no surprise that we've already seen tremendous momentum and positive feedback of Opendoor Exclusives.

While we are pleased with these results, the current market volatility is requiring us to be highly dynamic and rigorous in managing risk and overall inventory health. As most of you are aware, the housing market has moved rapidly over the second quarter. We saw a steep slowdown in home transaction velocity and home price appreciation from all-time highs, caused by a spike in interest rates and subsequently a change in mortgage rates at a speed we have not experienced in 40 years.

As a result, these macro shifts have led to a faster slowdown in housing than we had forecasted. To navigate this market movement, we have substantially increased our spread since May, which position our acquisition cohorts to meet or exceed our margin expectations.

Second, we are prioritizing inventory health and selling down our existing inventory with price reductions that are in line with the speed, at which the market is moving. While this will lead to sequentially lower contribution margins in the second half of the year, these are disciplined actions that will enable strong financial performance beyond this transition period.

We will balance short-term risk management with long-term transformational investments such as Opendoor Exclusives and our Zillow partnership and continue to build the experience that addresses the consumer needs better than anyone else out there. Importantly, we know this is our opportunity to improve our systems, strengthen our position, and emerge as the best marketplace to buy and sell a home.

I will now turn the call over to Carrie to discuss our financial performance in more detail.

Thanks, Eric. Q2 was another outstanding quarter. We delivered $4.2 billion in revenue, double-digit contribution margin and $122 million of adjusted net income, our best proxy for operating free cash flow. We also ended the quarter with a fortress balance sheet with $2.5 billion in cash, another $700 million in equity invested in homes, and over $11 billion of financing capacity. These results completed a record first half of 2022, as we leaned into an exceptionally strong housing market and captured additional earnings in anticipation of greater macro volatility in the second half of the year.

Moving from the second quarter and looking ahead, as Eric mentioned, we've seen the macro environment evolve rapidly over the course of Q2. With the Fed's aggressive response to curb inflation, resulting in the largest quarter-on-quarter increase in mortgage rates in 40 years. This led to a market change in housing market momentum and a faster than typical seasonal shift as weaning affordability sidelined many homebuyers.

We had long anticipated a slowdown in transaction volumes and in HPA from record levels. However, the pace with which this occurred was faster than anticipated. While the absolute level of transactions has moved slower, it remains in line with 2018 and 2019, and above the 2014, 2017 levels. In other words, homes are still selling, but at a slower pace than the record high sell-through rates seen in Q1 and early Q2.

In terms of HPA, there's usually a consistent seasonal month-over-month pattern to home price changes throughout the course of the year. HPA sharply accelerates in mid-February, peaks at the end of the first quarter, and then gradually moves to around 0 during the third quarter, resulting in low to no HPA in the second half of the year. In contrast, the speed with which HPA moved from peak levels early in Q2 was faster than our expectation and sharper than typical seasonal home price declines.

We saw 1 month rolling HPA move from approximately 300 basis points in early May to negative 100 basis points as of mid-July. We are beginning to observe a flattening out of the month-over-month change in HPA and may continue to see HPA trend in line with normal seasonal patterns for the remainder of the year.

Our performance for the second half of the year will reflect this transition in the housing market to lower transaction velocity, lower HPA and longer holding times beyond normal seasonal trends. As discussed in our shareholder letter, we've taken and are continuing to take swift and decisive actions to; one, adjust pricing to sell homes expeditiously; and two, adjust new acquisition home pricing to reflect market conditions, and enable those cohorts to perform in line with our target expectations. Our focus on inventory health and risk management inform 3 key pricing decisions we made in the quarter.

First, we substantially increased spreads embedded in our acquisition offers beginning in May. However, given how quickly our spreads increased and the time lag we have between making an offer and when an acquisition closes, we saw a gap between spreads at offer versus close time for specific cohorts of homes during the quarter. We made the decision to close on those homes and not to reprice or cancel contracts. We believe that this is a critical brand investment that will pay dividends for years to come.

Second, we have adjusted down listed prices on our inventory to stay in line with the market to drive sell-through. While these price reductions will impact our contribution margins in the second half beyond the impact of seasonality, our decision to prioritize earnings in the first half gives us flexibility to take such actions.

Finally, we are continuing to operate with sustained higher spread levels for the new acquisitions we're making. The combination of these higher spreads and lower marketing spend will reduce our acquisition pace. This, in turn, will shift our resale mix in the coming quarter to longer-dated homes that are usually at lower margin. Our plan is to resume a higher acquisition pace as the housing market stabilizes.

Our Q3 guidance contemplates the impact of these actions as well as a broader range of outcomes that could arise given uncertain market conditions. Therefore, guidance has a wider range than what we've provided in past quarters.

Our revenue outlook is for $2.2 billion to $2.6 billion, which reflects expectations for fewer homes sold in the quarter, given a slower resale pace, as well as the impact of a lower acquisition pace that subsequently impacts resale volumes.

EBITDA guidance for negative $175 million to negative $125 million reflects this revenue range, the impact of our decision not to cancel offers in Q2, price reductions we're taking on inventory to clear, and anticipated resale mix. We are managing adjusted operating expenses down versus Q2 at approximately $190 million for Q3. Expense reductions will be driven primarily by ramping down third-party capacity built into our operations and focusing marketing spend on our most efficient channels.

Finally, our guide implies a contribution margin of approximately 1.7% at the midpoint of our range.

In summary, we recognize that market conditions will continue to be fluid in the second half of the year. We will continue to be nimble and responsive, leveraging our dynamic pricing, operational expertise and low cost structure. We have a very strong balance sheet by design, with cash and marketable securities totaling $2.5 billion and $11 billion of financing capacity.

Clearly, we have the resources and are well positioned to successfully navigate this transition in the housing markets, and we remain steadfast in our pursuit of our long-term mission and goal of building a profitable generation company.

I will now open up the call for questions. Thank you.

(Operator Instructions) Our first question comes from Jason Helfstein with Oppenheimer.

So I guess, like a few thoughts. So one, it seems that this is a hard business to forecast on a quarterly basis, just given the near-term volatility, but as you play this out over bigger numbers, it's more predictable. So I guess, one, would you think about potentially maybe shifting to annual guidance? And then two, obviously, there's a fixed cost base you need to cover and when you slow down as you're guiding to in the second quarter, you don't cover that. That being said, this partnership with Zillow is obviously pretty significant, what it could save you on marketing. So maybe if you can opine as to how fast that can get up and running and maybe like a magnitude of what you think that can mean for savings on the sales and marketing side.

Jason, it's Carrie. I'll take the first part of that. I mean I think what's hard to forecast is a 40-year move in mortgage rates over a single quarter. I mean that's ultimately what we've been navigating here. And that has really been the challenge as opposed to an ability to forecast quarter-to-quarter. I mean what we're navigating is a very different macro forecast than what we have been embedding in our expectations.

We had been building spreads and increases in those for a long time, as you know, in anticipation of a housing slowdown that would be in line with other past slowdowns. But what we saw with this very large and very fast moving rates in a single quarter, again, it's a 1 in 40-year type scenario. And so we've been navigating a much steeper slope.

Outside of that, I think our systems are doing exactly what they're designed to do, which is responding very, very quickly, adjusting prices to market, and we've been raising spreads on new acquisitions.

And then, Jason, it's Andrew. With respect to the Zillow partnership, we're excited about what's ahead there. We do think it has the potential to help us serve meaningfully more customers over the midterm. The teams, given that we just announced the deal today, are hard at work putting that together, and we expect it to be live in the coming months. For us, it's a major milestone on our journey to have every homeowner in the country start to move with an Opendoor offer. We're combining Zillow's category-leading audience over 200 million monthly uniques with our leading platform and solution. And we're excited about the potential that, that offers.

And our next question comes from the line of Robert Zeller with Truist.

This is Robert Zeller on for Naved Khan from Truist. So if we're just comparing the environment and volatility today versus 3Q of 2021, I think when you guys first started widening your spreads. I think you mentioned in the letter you're starting to see flattening out of the month-over-month changes in HPA. So would you say the highest volatility period is likely now behind us and you think it might be easier to forecast rate changes, HPA, inventory levels heading into the back half of the year or into 2023?

And then sticking with mortgage rates, I mean, we've seen them starting to come down recently. So do you think that, that could provide a catalyst or a tailwind to that homebuyer demand starting to come back in the back half of the year or early 2023?

Robert, I'll take that as well. I mean, with respect to the spread increases, again, as you mentioned, we have been increasing spreads going all the way back to last fall, but we moved them up to what has been record levels really starting in May on the heels of all the changes we saw in mortgage rates. We moved them up quickly and we moved them up materially. And we continue to operate today at those sustained higher levels of spreads, in part because the housing market continues to be quite fluid, and we want to make sure that we're building substantial conservatism, and we're appropriately managing for risk over the back half of the year.

The second part of your question about mortgage rates, would they be coming down? Again, I love the forecast that I think what we want to do right now is focus on clearance, risk management and build into fresher inventory. And as we acquire new homes, we're doing that with substantially higher spreads and feel very good about our ability to create new cohorts that will perform in line with our expectations. And I would say the spreads we're operating with now, would embed, frankly, a more negative macro outlook than what we're seeing in this very moment. But again, that's a risk management decision.

And our next question comes from the line of Dae Lee with JPMorgan.

So the first one, kind of following up on the prior question of demand. So this pullback in demand, are you seeing this across all of your markets? And do you think this is a temporary pullback? And if it is, like what do you think could get the demand flowing again?

And then secondly, could you talk a little bit more about Opendoor Exclusives? What's your long-term vision for this product? And how large do you think this could be as a percentage of homes that you sell?

This is Andrew. I can take the first part of that, and then Eric can speak to Exclusives. In terms of what we're seeing across markets, we are absolutely seeing different performance and trajectory across our market footprint. On the East Coast, our markets are tending to perform well, particularly in the Southeast and Florida. Our central markets are a bit more mixed and our Western markets notably Phoenix, Vegas, Sacramento, Tucson are a bit more challenged. Broadly, I think it highlights the importance of having a 50-plus market footprint and the geographic diversification that, that offers. Eric, do you want to talk to Exclusives?

Yes. With regards to the long-term vision around Exclusives, what I can say is that we know how broken the process is to buy a home, and it feels more like Craigslist and Amazon. And we're going to change that. We're going to make it a simple, seamless experience. And we really believe this is a win for customers and a win for Opendoor. A few features that we launched are; one, there's a buy now price, and this really removes multiple counterparties and the need for negotiations, and you probably bought a home, it's a lot of back and forth and a lot of uncertainty. We've provided appraisal price match guarantee, which removes the issue around price and gives our customers peace of mind that they're paying a fair price.

And then lastly, we built an e-commerce like experience, and it's really magical. Opendoor, we actually found that by providing these homes exclusively on Opendoor, it drives us audience. So said another way, we're using our unique supply to aggregate direct buyer demand. And this can have a significant positive impact on unit economics, obviously, because with a direct demand funnel, we can look at transaction costs, decrease close times and increase services attach.

So we think the impact can be substantial over time. I would say that to the party question, how big can this get? I do view this as an important start of a fundamental shift in why and how direct buyers work with Opendoor and it does unlock a tremendous amount of opportunity in the medium term for us.

And our next question comes from the line of Nick Jones with JMP Securities.

I guess just revisiting the Zillow partnership. It sounds like that's going to attract a significant amount of volume. I mean how do you think about managing the amount of -- I mean, I guess, people requesting quotes versus what you can fill. And then I guess the second question on that, with kind of Zillow's upper funnel, does that change the pace at which you'll enter new markets from here?

Sure. So we are excited about the potential volume. I think 1 of the things that is unique about the Opendoor platform and that we've built is the flexibility we've embedded in it. We've obviously been able to scale up significantly over the last 24 months. And equally, as we're looking at the third quarter on lower volumes, we're able to take some of that flexible capacity out of the system. And so our ability to support a meaningful partner like Zillow is absolutely there, and it's 1 of the things that differentiates our platform.

In terms of the pace of market launch, we're in 50-plus markets across the country, covering 30% of all transactions. So we feel very good about that footprint. We are still opening markets, but our focus, given the dynamic market environment right now, is really on managing the existing footprint that we have.

And our next question comes from the line of Justin Ages with Berenberg.

Just looking ahead and given the volatility, I understand that this might be difficult to answer. But as the kind of market transitions to more of a buyer's market, is there an opportunity for you guys to see this through and increase the inventory, because you have the ability to buy what are good houses, just not at the right time to sell them?

Yes, Justin, it's Eric. I mean the short answer is, yes. We fundamentally believe that we're providing a tremendous amount of value for sellers, and we've built that experience in the system over the course of 8 years, and we're best-in-class at that. And we're also becoming very good at servicing buyers and understanding how to resell homes efficiently, improving that experience for agents and buyers, and launching Exclusives on top of that. And so if you take a step back, it's the marketplace for managing. We want to make sure that we have sellers coming to the platform and delighting them, and we have buyers coming to the platform and delighting them, and really touched around Opendoor homes.

And so to your question, do we view this as an opportunity to grow inventory? The answer is yes. We're managing that growth with proper spreads to ensure that we hit our contribution margin targets while also managing risk. And so those are the dynamics at play, and we're continuing to invest in our platforms so we can grow.

Great. And then 1 follow-up, if I could. Can you give us any insight into the early returns in the Northeast markets? There's been a few questions bouncing around of how translatable the model is to markets where the homes maybe aren't as similar.

We're still in early days in the Northeast markets. All of those markets launched relatively recently over the course of the first half of this year. And so it's early days. And our playbook for market launch is very focused early on making sure we feel really good about the quality of our underwriting. And as we're proactively managing against the dynamic macro that we've been talking about, we're looking at each and every market. But as you'd expect, in our more complex markets, we're slowing our pace as we manage that book of inventory.

And our next question comes from the line of Ryan Tomasello with KBW.

Can you provide some color around the impairment, how many homes is that related to and if that was concentrated in specific markets? And then a follow-up question on your spreads. Can you say where your service fee stands on average today? And if you feel like stronger expected conversion that you mentioned could actually can tell you to take those service fees higher, as you look to take your foot off the gas this year in terms of the acquisition piece?

Sure. I'll take that, Ryan. So on the impairment, we don't break out it by geography or by month of cohort. But I would say it is just meant to reflect as of June 30, our expectations for forward HPA and resell policies at the time. Certainly, since then we continue to respond to what is a rapidly changing macro environment, and we have and will continue to adjust our pricing to reflect that.

With respect to your second question around conversion and fee and I think 1 of the things we've been talking about for a little while and has become, frankly, more significant as of late is that notwithstanding higher spreads. We have seen conversion, outperform our expectation on a spread adjusted basis. So just to unpack your comment, we have a service fee that's static in all our markets, it's 5%. We manage spreads via value we provide to the customer. And that is what have we have increased measurably, particularly in May on the heels of the mortgage rate move.

So notwithstanding the fact that spreads have increased, I'd say we still see conversion performing quite nicely on a spread adjusted basis. And importantly, as we see the housing market start to stabilize, our expectation is that we can start to adjust spreads over time and that's 2 way door for us. We'll be able to grow back into acquisition volumes.

And if I can just squeeze 1 more in on the expense levers you're pulling in relation to, I think, the $190 million you're guiding to for 3Q. How much more room is there for efficiencies to the extent the market does continue to deteriorate? And if we should expect an additional sequential moderation into the fourth quarter in the expense base?

We're aggressively managing down our costs. The $190 million that you referenced is, call it, a high single-digit quarter-over-quarter decrease. And we expect to exit the quarter on a run rate at an even lower level than that. There's really 3 main levers we're pulling to do that. The first is we're flexing down our third-party capacity pretty aggressively, as we scaled up.

We're very deliberate about leveraging third-party labor versus hiring. So for example, in the first half, nearly 40% of our home operations passed were carried out by third-party labor and we're in the process of dialing that capacity back.

Second, we're focusing our marketing spend on our most efficient, highest return channels given the high spread environment. And then finally, the team is really scrubbing every aspect of our spending, and we expect that to continue to come down over the course of the year.

And our next question comes from the line of Jason Weaver with Compass Point.

As it pertains to just broad consumer adoption trends, I wonder what you are seeing regarding offer request rate as a percentage of your average site visitors. Is that rising given the uncertain environment?

In Q2, I think we talked about seeing record offers, which was obviously good to see. We've made meaningful investments in our brand. And what we know is that as we grow awareness of our solution, we grow the business ultimately over time. And so certainly, we're seeing those investments move the needle.

Okay. And if I could follow up with just 1 more. Bridging off 1 of the prior questions, the $82 million mark. I'm curious about that against the language that you've stated that you may look to reduce prices to be able to clear out some of this inventory going forward. So should we expect to see valuation marks of similar like magnitude in fourth -- in third and fourth quarter?

I can't sit here today and give you a forecast for 9/30 in terms of impairment, but we will go through that same methodology again. My comment was just we impair homes, we revalue them based on what we know at the time, based on a forward expectation of where home prices are going and the resale policies we have in place. But given how dynamic the market is right now, we're going to continue to adjust pricing and resell policy, as we work to drive clearance across the target portfolio. And that will be the basis for where we mark homes as of 9/30. But I can't sit here today and give you a number or direction.

And I'm showing no further questions. And I would like to turn the conference back over to Eric Wu for any further remarks.

Thank you. To close this out, I want to say that we're focused on the long term, and I do want to remind us of a few things. We spent the past 8 years improving and making efficient how we buy homes. And this has made us best-in-class at that. We have shifted a tremendous amount of resources and focus and now becoming the best seller in the world of homes. We are the only company vertically integrated as a principle with the incentive alignment to improve and optimize that system. This means we will become the best buyer and the bestseller of homes, and this capability will underpin our platform.

Thank you for attending.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.