Pop the champagne, Compass hits major financial milestone

After failing to achieve its goal of remaining adjusted EBITDA positive in 2022, analysts were unsure if Compass would make good on its most recent financial goal of becoming free cash flow positive in the second quarter of 2023. But the Robert Reffkin-helmed brokerage has proved the naysayers wrong, at least for now.

During the second quarter of 2023, Compass recorded a free cash flow of $51 million, compared to a free cash flow loss of $59 million the prior quarter. Kalani Reelitz, the firm’s chief financial officer, also noted that Compass repaid the remaining $150 million draw it had taken out form its revolving credit facility in July.

“I am pleased to share that in the second quarter we grew market share, grew agent count and grew margin while delivering positive free cash flow and strengthening our cash position,” Reffkin told investors and analysts listening to Compass’ second quarter earnings call Monday evening. “We achieved strong financial results that were inline with guidance in the midst of a quarter that was impacted by mortgage rates increasing 100 basis points to 7%.”

Executives attributed this success to Compass’ commitment to cutting operating expenses, which came in at $1.54 billion for the quarter. A year ago, its Q2 operating expenses were $2.11 billion.

Compass’ free cash flow win came despite a 26% annual drop in revenue to $1.5 billion, which the brokerage attributed to a 19% year-over-year decrease in transaction sides to 54,207, combined with a decrease in the average home sale price, as the brokerage’s gross transaction value dropped 26% year over year to $56.8 billion.

While Compass may have been free cash flow positive for the quarter, the brokerage still reported a net loss of $46.9 million. However, this is an improvement compared to the $101 million net loss reported a year ago.

Compass executives were also pleased that the firm’s free cash flow success came alongside its third consecutive quarter of market share growth, which came in at 4.6% for the quarter, up 13 basis points from Q1 2023. In addition, Compass also reported an increase of 429 principal agents compared to a year ago and a retention rate of over 90%.

“We are seeing competitors reduce the financial incentives they were using in attempt to recruit Compass agents and a race to the bottom environment where many traditional brokerages that historically competed on value-add and support services,” Reffkin said. “We are now seeing these firms cut back on these areas and many cases are adding themselves to the already crowded low cost, low value brokerage services landscape. Compass is going the other direction. We are trying to widen our competitive advantage as the high value brokerage space is becoming much less crowded.”

Reffkin said that it would not surprise him that in the years to come, Compass being “the only major national brokerage competing to serve agents high value products and services.”

Greg Hart, Compass’ chief operating officer, added: “We continue to grow our principal agent count since we eliminated cash and equity sign on incentives last summer. The vast majority of agents tell us the Compass platform is the number one reason for coming to Compass.”

Compass will continue looking for expansion opportunities through strategic mergers and acquisitions, executives said.

The brokerage’s next goal is to remain free cash flow positive for the full year 2023. Executives said they’ll continue to focus on Compass’ technology offerings, as well as expanding its title and escrow business integration, which recently launched in San Diego.

By the end of 2023, Compass plans to expand this integration into all markets where it offers title and escrow including Philadelphia, Washington, D.C., Maryland and Virginia.

“We are very strong and we are still investing in growth in the platform,” Reffkin said. “We are excellently positioned for the cyclical upturn that will come when the market normalizes.”